KBRA Affirms Ratings for First Busey Corporation Following Acquisition Announcement

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Champaign, Illinois-based First Busey Corporation (NASDAQ: BUSE) ("the company") following the recently proposed merger announcement with CrossFirst Bankshares, Inc. (NASDAQ: CFB). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its wholly-owned subsidiary, Busey Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

On August 27, 2024, First Busey Corporation and CrossFirst Bankshares, Inc. announced that they have entered into a definitive agreement under which BUSE will acquire CFB. The pending deal will create a pro-forma institution with $20 billion of assets, $17 billion of deposits, and $15 billion of loans. The combined entity will operate 77 bank locations – expanding BUSE’s upper-Midwest centric presence further west – with the company acquiring CFB’s operations in several higher growth MSAs including Kansas City, Dallas-Fort Worth, Denver, and Phoenix. Importantly, the proposed acquisition expands BUSE’s relatively mature markets into markets with a growth profile greater than the national average and is coupled with opportunities to cross-sell its wealth management and payment technology solutions.

With respect to deal terms, the all-stock transaction is valued at approximately $917 million, or 1.3x P/TBV. Pro-forma ownership is estimated to be composed of roughly 64% BUSE shareholders vs. 36% for CFB, and the combined company’s Board will reflect a similar composition. BUSE is recognizing a 1.9% ($119 million) gross loan credit mark on CFB’s loan portfolio – a conservative mark, in our view, given CFB’s 2Q24 LLR of 1.2%. Elsewhere, the deal includes a 1.4% ($88 million) interest rate mark on CFB’s, largely floating rate, loan book. Transaction due diligence appears to be adequate, with BUSE’s team highly experienced in the process, completing seven whole bank acquisitions (aggregating $7 billion in assets) since 2015. An independent third-party loan review comprised ~80% of CFB’s portfolio, and 87% and 76% of all C&D and other CRE loans, respectively. The review also covered 86% of all watch, criticized, and classified loans and was augmented by BUSE’s internal credit team, which reviewed 95% of all watch, criticized, and classified credits and conducted a targeted review of newly originated loans. The transaction is expected to close in 1H25.

KBRA views the proposed transaction favorably; BUSE is acquiring a regionally scaled institution (~$8 billion in assets) and expanding its footprint into attractive markets ripe with cross-selling opportunities into its wealth management (currently $13 billion AUM/AUA) and payment technology business lines. CFB offers a diversified (by region and asset class) commercial loan portfolio that provides solid risk-adjusted returns and has the potential to deliver meaningful top-line growth for the company. CFB has exhibited a largely clean credit history, notwithstanding slightly elevated credit losses in the 2019-2020 period which were isolated to a select few idiosyncratic loan relationships in verticals to which CFB no longer has exposure. The branch-lite (15 bank locations) and commercially oriented deposit base at CFB contributes to a more costly funding mix, which will slightly weaken BUSE’s granular, low-cost deposit base. While CFB has operated with largely spread-reliant earnings, BUSE’s entrance into CFB’s higher growth markets could serve as a catalyst for regional wealth/private banking expansion which could also garner solid deposit growth and potential fee income expansion over time. All in all, BUSE’s earnings power is expected to be enhanced (assuming a successful integration and the full achievement of, in our view, conservative anticipated cost saves), with the company modeling a 1.3% 2026 ROA and an efficiency ratio of 54%. The combined entity will also be on solid footing from a liquidity perspective, at least as measured by the loan-to-deposit ratio, with a pro-forma metric of 86%.

The proposed deal does mark a sizable decline in BUSE’s strategically elevated CET1 capital ratio with a forecasted pro-forma ratio of 11.0% at deal close vs. 13.2% as of 2Q24. Historically, KBRA has viewed BUSE’s capital management favorably, recognizing that core capital metrics have trended above similarly rated peers recently. In this sense, the expected 240 bp decline in CET1 marks a deviation from BUSE’s 5-year average CET1 ~12.2%; however, solid earnings accretion and a conservative growth outlook (5% projected pro-forma loan growth, per management) should contribute to a quick rebuild of capital levels. Additionally, while the combined entity’s loan portfolio will be more heavily comprised of CRE (pro-forma CRE concentration increasing to 250%) than BUSE’s legacy book has reflected historically, KBRA views CFB’s CRE segmentation favorably, with only 11% of the portfolio (~4.5% of total loans) in the challenged office sector – a portfolio that is predominantly comprised of suburban and single tenant office space with a weighted average LTV of 63%. While KBRA believes there is an inherent level of integration risk involved with any bank M&A transaction, such risk is somewhat mitigated by BUSE’s demonstrated track record as a successful acquirer. Management also mentioned that it held discussions with the FDIC and Federal Reserve regarding the proposed transaction prior to entering into the definitive purchase agreement.

Rating Sensitivities

The ratings and Stable Outlook reflect our continued favorable opinion of the company’s conservatively managed balance sheet, strong funding profile, and well-managed credit quality. Most important to maintenance of the Outlook for BUSE is the expectation of a smooth closing and well-executed integration of its proposed acquisition of CFB, and subsequent to closing, a rebuild of CET1 capital towards historical levels and more closely in line with similarly rated peers. Over the longer-term, successful integration of the merger, which has the potential to produce peer leading returns, combined with growth in fee income, a return to an above average capital position, and improvements in the pro forma deposit base could altogether generate positive rating momentum. Conversely, if the pro forma institution encountered any material credit issues, pursued a more aggressive stance with capital management, encountered profitability challenges, or experienced any degradation in the funding base, negative rating action could occur.

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