Vice President: Luca Moretto
Analysts: Jia Sheng Loh, Nazmi Imtiyaz, Abhishek Gopinath, Yuenshii Lim
Deal Overview
Mergers: First Busey Corporation & CrossFirst Bankshares
Deal Size: $916.8M
Busey Advisors: Raymond James & Associates, Inc., Sullivan & Cromwell LLP (Legal)
CrossFirst Advisors: Keefe, Bruyette & Woods, Inc. A Stifel Company, Squire Patton Boggs (US) LLP (Legal)
Introduction
First Busey Corporation has announced a significant merger with CrossFirst Bankshares in an all-stock deal valued at approximately $916.8 million. This merger is set to close in the first half of 2025. It will create a combined bank with a robust presence across 10 states, including Kansas, Oklahoma, Texas, Arizona, Colorado, and New Mexico. The new entity will operate under the First Busey name and is expected to have around $20 billion in total assets, $17 billion in deposits, and $15 billion in loans (Reuters).
CrossFirst stockholders will receive 0.6675 shares of Busey common stock for each share they own. CFB’s common shareholders, who do not currently receive a dividend, will be eligible to receive Busey's continued dividends as declared following the merger.
Upon closing of the deal, the fully diluted shares of the combined business, which will continue to list on the Nasdaq under the "BUSE" stock ticker symbol, will be owned by about 36.5% of CFB’s shareholders and nearly 63.5% of Busey's shareholders (Financial times).
Company Overview
First Busey
Founded in 1868 and headquartered in Champaign, Illinois, First Busey Corporation (Nasdaq: BUSE) operates as the bank holding company for Busey Bank, providing a wide range of retail and commercial banking products and services to individual, corporate, institutional, and governmental customers across the United States. The company is led by Mr. Van A. Dukeman, who serves as Chairman and CEO of First Busey Corporation and Busey Bank, as well as a director of FirsTech, Inc.
As of June 30, 2024, First Busey Corporation reported $11.97 billion in assets and $13.02 billion in assets under care. The company as of August 11th is trading at 26.16$ per share, with an annual revenue of 436.32 million dollars.
The company operates through three primary segments:
Banking: This segment offers services to individual customers, including demand and savings deposits, money transfers, and safe deposit services, while also providing tailored banking solutions to corporate clients.
Wealth Management: This division provides a comprehensive suite of investment and asset management services, designed to help clients manage and grow their financial portfolios.
FirsTech: Specializing in payment technology solutions, this segment offers services like online, mobile, and voice-recognition bill payments, credit card networks, money management, and direct debit services.
Cross First
CrossFirst Bankshares, Inc. (Nasdaq: CFB) is a Kansas-based corporation and a registered bank holding company for its wholly owned subsidiary, CrossFirst Bank. Headquartered in Leawood, Kansas, CrossFirst Bank operates as a full-service financial institution, providing products and services to businesses, professionals, individuals, and families.
The bank operates as a regional financial institution offering a range of deposit and lending products to both commercial and consumer clients. It focuses on several loan categories, including commercial loans, commercial real estate loans, construction and development loans, multifamily real estate loans, energy loans, and consumer loans.
In addition to its branch locations across Kansas, Missouri, Oklahoma, Texas, Arizona, Colorado, and New Mexico, CrossFirst Bank also provides private and commercial banking solutions. Its deposit products include personal and business checking and savings accounts, international banking services, treasury management services, negotiable order of withdrawal accounts, ATM access, and mobile banking.
As of July 1, 2024, CrossFirst Bankshares reported total assets of $7.6 billion, with its stock trading at $15.60 per share as of October 10, 2024.
Industry Overview
Commercial Banking Industry
The US commercial banking market is estimated to reach USD 226.44 billion in 2024, with an expected increase to USD 269.28 billion by 2029, growing at a CAGR of over 2%. Business lending is the primary source of revenue for most banks, contributing approximately 60% to overall revenue, particularly for regional and smaller institutions. Commercial and corporate banking revenue in the US has grown at twice the rate of economic growth, driven by increased demand for financial services and the strength of banks' loan portfolios.
Innovation and Digital Transformation
Several leading US banks are focusing on innovation as a key growth driver. In today’s digital banking landscape, technology investments are crucial, not only for customer-facing portals and mobile applications but also for back-office operations. These IT initiatives are expected to have a significant impact, enhancing efficiency and supporting growth.
Partnerships between FinTech firms and digital lending companies for payment collections are anticipated to rise, reshaping the competitive environment. Additionally, open banking is set to further influence competition, allowing banks that invest in technology to position themselves well in a rapidly evolving market.
Competitive Landscape
The commercial banking industry in the US is becoming increasingly competitive. Corporate customers often diversify their banking relationships across multiple institutions, intensifying competition for wallet share. The market share of the top 10 commercial and industrial lenders has declined from 59% in 2010 to 49% in Q2 2022. In the commercial real estate sector, the top 10 lenders' market share fell from 40% in 2010 to 23% in Q2 2022.
Challenges from Non-Bank Lenders
Non-bank lenders are also increasing their presence, particularly in funding leveraged buyouts by private equity firms, which has traditionally been a domain of banks. This has contributed to a shift in the syndicated leveraged loan market, with banks losing share to these non-bank entities.
Source : Deloitte
Financial Analysis
Residual Income Model
The Residual Income Model (RIM) uses the future residual income in evaluating the equity value. This model is particularly useful for companies that do not pay dividends and have negative Free Cash Flow. In the case of CrossFirst Bankshares, they do not pay dividends.
The RIM is done by first projecting the beginning book value per share (BVPS) and earnings per share. To calculate the residual income per share, the earnings per share less the equity charge is taken. Equity charge is equal to the product of the beginning BVPS for that year and the cost of equity. Under the Implied Stock Price section, the Terminal Value of Residual Income is obtained by taking the residual income per share of the final year and dividing it with the difference between cost of equity and terminal growth rate. The present value of the terminal value and the residual income per share are obtained by discounting it back using the cost of equity. Finally, equity value per share is calculated by adding the present value of the terminal value of residual income, the present value of residual income throughout the projected period, and the beginning BVPS for the first year of the projected period.
Using the RIM, the implied share price is $18.96, which is a 21.6% upside from the share price as of 10 October 2024. Compared with the DCF model below, the RIM returned a lower valuation by $2.14. According to a paper by Penman and Sougiannis, valuation errors are more likely to rise when using cash flow discounting techniques as opposed to accrual earnings techniques like the RIM.
Discounted Cash Flow
For the DCF valuation, the Free Cash Flow to Equity (FCFE) is taken. EBT is taken as the equivalent of EBIT since it is typical for banks to include their interest payments in their operational costs. The change in Net Working Capital only consists of change in Accounts Receivable due to banks not having Accounts Payables. On top of D&A, provisions for net losses are added to net income as this is a non-cash expense atypical to banks. Change in net borrowings is obtained from adding debt issued, other financing activities minus debt repaid and increase in loans originated. This is added since FCFE reflects the cash available to be distributed to shareholders. As for the discount rate, the cost of equity calculated using the Capital Asset Pricing Model (CAPM) is used. The reason being that FCFE is levered free cash flow, i.e. cash available to equity investors after debt obligations in the corresponding financial year are settled. This is the reason why the Gordon Growth Method (GGM) is used to calculate the terminal value of the FCFE as the cost of capital is now taken as solely the cost of equity.
From the DCF valuation, using the underlying assumptions, the implied share price is equal to $21.01, which is 34.7% higher than the $15.60 share price as of 10 October 2024.
Comparable Companies Analysis
In our Comparable Companies Analysis, CrossFirst Bankshares Inc was compared to 4 banks with similar size and operations, those being First Community Bankshares Inc (FCBC US), Premier Financial Corp (PFC US), Coastal Financial Corp (CCB US) and Heritage Financial Corp (HFWA US). According to the data provided by Bloomberg and CapIQ, CrossFirst is trading at a P/E of 11.2x, slightly above the group minimum of 10.4x, while being below the peer group median of 15.7x, indicating that the stock may be undervalued based on its latest earnings. Furthermore, its price to tangible book value ratio is at 1.1x, again below the median of 1.7x compared to peers, which in part could be attributed to it having the highest total tangible book value relative to peers at $698m, compared to the peer mean of just $486m. Overall, CFB seems to be relatively undervalued by the market. With the purchase price of $18.28 per share compared to its implied value of $23.16, First Busey is set to acquire the company at a discount of around 16.7% to 24.7% relative to its actual value.
Precedent Transactions Analysis
In the Precedent Transactions Analysis, the First Busey and CrossFirst Bankshares deal was compared to a set of completed acquisitions with comparable structures and rationale from the past few years. When looking at the Implied Equity Value / Book Value multiple, the mean multiple of 1.3x aligns well with the actual multiple of the transaction (1.3x), suggesting it was appropriately priced by the market relative to prior deals. Additionally, the 25.5% deal premium paid by First Busey is slightly below market average (31.2%) for this type of transaction in comparison to previous mergers and acquisitions, highlighting a value play and timely merger by the company. Overall, the analysis again suggests that the purchase price of $18.28 per share was at a 10.5% discount compared to the implied value of the CrossFirst Bankshares at around $20.42 per share, and even potentially a 20.9% discount with an implied price of $23.11 per share when comparing mean premiums from the deals listed in the table.
Deal Rationale
Expansion of Market Presence and Cultural Synergies
The merger will strengthen Busey's relationship with commercial banks and present new avenues by extending its regional operating model into the rapidly expanding metro areas of Kansas City, Wichita, Dallas/Fort Worth, Denver and Phoenix. This deal also taps into diverse customer segments that are increasingly seeking personalized banking solutions as both institutions share a commitment to community-focused banking. This cultural alignment not only facilitates a smoother transition, it also helps maintain existing relationships, ensuring that customers feel valued and understood.
Strategic Focus on Wealth Management and Payments
The merger is poised to significantly bolster First Busey's wealth management and payment technology solutions capabilities through its subsidiary FirsTech. By integrating CrossFirst's established wealth management services with First Busey's existing offerings, the combined entity can provide a more comprehensive suite of financial products tailored to meet the needs of high-net-worth individuals and businesses. This also creates numerous cross-selling opportunities. For instance, existing commercial clients of both banks can be introduced to enhanced wealth management services, leading to increased client satisfaction and retention.
Busey’s subsidiary, FirsTech specializes in payment processing solutions, particularly for businesses. The merger allows First Busey to leverage FirsTech's technology to streamline payment solutions This would also position Busey as a more competitive player in the digital payments market that has been increasingly important in the banking landscape.
Risks
CrossFirst has experienced rapid loan growth, which raises concerns about credit quality. The combined company will have a high concentration of commercial real estate loans, projected at 250% of risk-based capital. This level of exposure can heighten the risk of defaults, especially in economic downturns or if market conditions change. Analysts have expressed concerns regarding CrossFirst's credit quality due to its aggressive loan growth strategies. If these loans underperform, it could lead to increased provisions for loan losses and negatively impact profitability.
Given the current environment of heightened regulatory scrutiny in the banking sector, there is a risk that regulators may impose additional requirements or delays in approval. Meeting regulatory requirements during and after the merger could incur significant costs, impacting the financial performance of the combined entity.
Conclusion
The merger between First Busey Corporation and CrossFirst Bankshares represents a significant strategic alignment that is well-positioned to capture growth opportunities in key metropolitan markets. By combining their resources, both entities will form a stronger bank with approximately $20 billion in assets, creating a powerful presence across 10 states. The deal is structured to allow CrossFirst stockholders to benefit from First Busey's dividend policies, while also taking advantage of enhanced wealth management and payment solutions through FirsTech.
From a financial perspective, the analysis suggests that CrossFirst Bankshares is being acquired at a favorable price, with a discount to its implied value of up to 24.7%. The DCF analysis indicates an implied share price for CrossFirst of $21.01, above the transaction price, supporting the view that First Busey is securing a value play in this deal. Comparable company analysis and precedent transaction data further corroborate this, showing that the pricing of the merger is aligned with market expectations and slightly below average premiums for similar transactions.
The strategic rationale behind this merger is clear. First Busey is expanding its footprint into fast-growing metro areas, strengthening its wealth management and payment solutions offerings. The cultural synergies between the two banks, with their shared focus on community-centric banking, will likely ensure a smooth transition for customers and employees. However, potential risks remain, particularly surrounding CrossFirst's high concentration of commercial real estate loans, which could pose challenges if economic conditions deteriorate.
Overall, this merger is poised to create significant shareholder value by enhancing the combined entity's market presence, technological capabilities, and service offerings, while maintaining a disciplined focus on integration and risk management.
Sources:
Ennis, Dan. “Busey, CrossFirst to merge in $916.8M deal.” Banking Dive, 27 August
2024. Available at: https://www.bankingdive.com/news/busey-crossfirst-merger-916-million/725388/.
Pixabay.com. (2020). Pixabay. [online] Available at: https://pixabay.com/users/andreasvolz-11813577/ [Accessed 21 Nov. 2024].
Refna Tharayil. “First Busey to merge with CrossFirst Bankshares in $917m deal.” Future Banking, 28 August 2024. Available at: https://www.banking-gateway.com/news/first-busey-to-merge-with-crossfirst-bankshares-in-917m-deal/.
Zacks Equity Research. “Is First Busey's Merger Deal With CrossFirst a Strategic Move?” 28 August 2024. Available at: https://finance.yahoo.com/news/first-buseys-merger-deal-crossfirst-160500240.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAENXjHqV_670MoQkhqYHP69skrwqjcmmlqQryJRczwWBD79YKYvWRsLNiliOUHwg2hWO9LQFlTerGG7_yCse-6BYBX7c9.
The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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