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Oct 104 min read

Byline Bancorp Inc: Undervalued Stock Presents Opportunity Post-Acquisition Announcement


SUMMARY

  • Byline Bnacorp announced a merger with First Security Bnacrop, expected to strenght BY's position as Chicago's largest community bank with under $10 B in assets, adding $7.3 B in loans, $7.8 B in deposits, and 45 branches post-merger.

  • The deal includes a mix of stock and cash, with BY issuing 2.1794 sahres per First Security Share, valuing the offer at $55.14 per share, alongside cash redemption for preferred shares totaling approximately $2.6 million.

  • Baoro Research estimates Byline Bancorp's (BY) post-merger share price at $31.95, initiating a strong buy recommendation.


The Announcement 

Byline Bancorp, Inc. (BY) announced after market close on September 30, 2024, that it has entered into a definitive merger agreement with First Security Bancorp and its wholly owned subsidiary, First Security Trust and Savings Bank ("First Security"). The merger, structured as a cash and stock transaction, is expected to strengthen BY’s position as the largest community bank in Chicago with assets under $10 billion. Upon completion, (BY) will have approximately $7.3 billion in loans, $7.8 billion in deposits, and a network of 45 branches across the greater Chicago metropolitan area. [1]


Transaction Details 

The merger deal between Byline Bancorp, Inc. (BY) and First Security Bancorp includes both stock and cash components. On the stock side, (BY) will issue 2.1794 shares of its common stock for each outstanding share of First Security Bancorp common stock. The approximate offer price is $55.14 per share for First Security Bancorp. According to the press release, this will result in the issuance of around 1.5 million shares, with a total implied offer value of $37.9 million. [1]

Additionally, (BY) will redeem all outstanding First Security Bancorp preferred shares for cash at closing, with an estimated total value of approximately $2.6 million. [1]


Analysis 

Outline of Approach

We begin by establishing a "reference price" and "reference date" to apply an added-value approach. The reference is set to be the closing price of (BY) on September 30th, which was $26.77 per share—typically considered the closing price closest to time prior to the deal's public disclosure. This price is assumed to reflect all information efficiently priced in prior to the announcement, providing a clean baseline for assessing the deal’s impact.

Next, we assess the dilution effect by modeling (BY)’s expected shares outstanding post-transaction. We then evaluate the impact on (BY)’s book value and its pre-merger price-to-book multiple. By adjusting the book value to account for the merger’s projected expansion, including the cash payment component, we can forecast the effect of the deal on the acquirer's intrinsic valuation.

Lastly, we present a range of scenarios based on various price-to-book multiples, illustrating that the current price has already factored in the dilutive impact and associated expenses from the merger announcement. This supports a robust long thesis for (BY), with limited downside risk based on current market conditions.


Setting the Table

The release states that First Security Bancorp, Inc. possesses total assets of $354.8 million, total loans of $201.4 million, and total deposits of $321.8 million as of June 30, 2024. The company has a 75-year operating history and is headquartered in Elmwood Park, IL, where it operates a single branch. [1]


The details of the deal can be succinctly summarized as follows:

Based on the reference price and date established above, and taking into account the most recent 10-K filing of Byline Bancorp, Inc. (BY), we arrive at the following historical metrics [2]:

  


Scenario Analysis:


First Approach - No book value expansion 

In the first approach, we exclude any potential book value expansion resulting from the merger. While this is not a realistic scenario, it provides us with the most conservative estimate. We utilize a constant price-to-book (P/B) ratio based on the previously established reference P/B ratio.

This analysis begins with the previous aggregate book value of Byline Bancorp, Inc. (BY) derived from its latest annual filing. We adjust this figure to account for the expected cash payment related to First Security's preferred securities. Following this, we estimate the expected book value per share using the adjusted pro-forma share count.

  

Based on the first approach, the adjusted price reflecting the acquisition is calculated to be $25.82 per share.


Second Approach - Adjusting for book value expansion 

In the second approach, we maintain the same analytical framework but incorporate the expected book value expansion. This involves adding First Security's total assets and total loans while netting out the total deposits to account for book value changes on a pro forma basis. The details of this analysis are presented below.

  

Taking the balance sheet expansion into account, the price that would reflect the potential outcome of the merger is estimated to be $31.95 per share.


Third Approach - Different book multiples 

Thus far, we have assumed a constant book value multiple for the sake of simplification. In this section, we present a straightforward data table illustrating the price at various book value multiples, in addition to the net book value expansion adjustments.


The price-to-book multiple intervals are set to demonstrate deviations of the multiple by ±5%. Furthermore, it is important to note that the probability of multiple expansion (multiples exceeding 1.2x) increases when accounting for the total book value expansion and the potential for accelerated growth resulting from the merger. 


Concluding Thoughts:

Based on the current price of Byline Bancorp, Inc. (BY), there is considerable upside potential with limited downside risk regarding the share price impact from the merger disclosure. This is particularly evident as the share price is currently below the scenario we established for a situation without any book value expansion. Considering both book value expansion and the potential for multiple expansion, we present a compelling case for a strong long thesis.


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