First Busey Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. First Busey is a bank holding company with banking, remittance processing, and wealth management businesses.
Financial performance
- Q3 revenue: Net interest income was $73.5 million and non-interest income was $30.9 million, totaling $104.4 million, up from $82.6 million in Q3 2018. Interest income benefited from larger average loan balances; fees and mortgage revenue also increased.
- Q3 earnings: Net income was $24.8 million versus $26.9 million; diluted EPS was $0.45 versus $0.55. Adjusted net income, a non-GAAP measure, was $30.5 million versus $27.0 million, with adjusted diluted EPS of $0.55 in both periods. Reported results included acquisition and restructuring costs.
- Nine-month earnings: Net income was $74.4 million versus $73.6 million; diluted EPS was $1.35 versus $1.50. Adjusted net income was $86.6 million versus $77.5 million, and adjusted diluted EPS was $1.57 versus $1.58.
- Margins and expenses: Q3 tax-equivalent net interest margin was 3.35%, down from 3.41% a year earlier and 3.43% in Q2 2019. Q3 non-interest expense rose 48.3% to $68.1 million; the reported efficiency ratio was 62.7%, versus 53.5% a year earlier. Adjusted Q3 efficiency ratio was 55.4%.
- Credit costs and asset quality: Q3 provision for loan losses was $3.4 million versus $0.8 million; nine-month provision was $8.0 million versus $4.0 million. September 30 non-performing loans were $33.1 million, or 0.50% of portfolio loans. The allowance was $53.0 million, equal to 0.79% of portfolio loans and 160.0% of non-performing loans. Potential problem loans totaled $82.8 million.
Financial position, cash flow, and liquidity
- Balance sheet at September 30: Total assets were $9.75 billion, up 26.6% from December 31, 2018. Portfolio loans were $6.67 billion, up 19.8%; deposits were $7.93 billion, up 26.9%. Cash and cash equivalents were $525.5 million, compared with $240.0 million at year-end.
- Funding and debt: Total liabilities were $8.54 billion. The balance sheet included $202.5 million of repurchase agreements, $29.7 million of short-term borrowings, $85.1 million of long-term debt, $39.6 million of senior notes, $59.2 million of subordinated notes, and $71.3 million of junior subordinated debt. A $60 million term loan funded part of the Banc Ed acquisition; $55.5 million was outstanding at September 30. The unused revolving credit facility was $20 million.
- Cash flow, first nine months: Operating activities provided $52.3 million, versus $147.1 million in 2018; investing activities provided $19.7 million, versus $305.4 million used; financing activities provided $213.5 million, versus $34.4 million used. Cash and equivalents increased by $285.5 million to $525.5 million. Acquisition-related activity and changes in securities and loans affected these flows.
- Liquidity and capital: Management said liquidity was adequate and reported additional borrowing capacity of $1.1 billion at the FHLB and $479.4 million at the Federal Reserve. The consolidated total capital ratio was 13.71%, CET1 was 11.20%, and all reported company and bank ratios exceeded applicable well-capitalized thresholds.
Material changes and unusual items
- First Busey acquired Banc Ed, parent of TheBANK, on January 31, 2019, issuing approximately 6.7 million shares and paying $91.4 million cash. Banc Ed contributed $53.7 million of revenue and $9.5 million of net income after acquisition through September. TheBANK merged into Busey Bank on October 4, 2019; management said it expected integration synergies to contribute in future quarters.
- The company acquired Investors’ Security Trust Company, a Florida wealth management firm, on August 31, 2019. The firm had $471.1 million in assets under care; management did not expect an immediate material earnings impact.
- Acquisition-related pre-tax expenses were $7.0 million in Q3 and $12.2 million for the first nine months, including Banc Ed and IST costs. Management also identified restructuring costs, a mortgage servicing rights valuation impairment, and core-conversion costs among non-operating items.
- Adopting hedge-accounting guidance led to a $573.6 million transfer of securities from held-to-maturity to available-for-sale in Q1. The company also entered cash-flow hedges with $70 million notional to manage interest-rate variability on trust-related debt.
- After quarter-end, the company began operations of a captive insurance subsidiary on October 15, 2019. It also reported that the Federal Reserve cut its target rate by another 25 basis points on October 30.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management reported $137.3 million of Q3 organic loan growth and expected to see the full contribution and synergies of TheBANK in future periods.
- Management said rate cuts and faster repricing of assets than liabilities pressured Q3 net interest margin. Funding costs had also risen as time deposits reset to market rates and acquisition financing increased. Further rate changes, deposit pricing, loan growth, and integration execution may affect results.
- Management expected near-term loan losses to remain generally low, while cautioning that credit measures can fluctuate with local economic conditions. The filing identifies Illinois fiscal and credit-rating challenges and geographic concentrations as considerations.
- Other disclosed risks include economic conditions, competition, technology and cybersecurity, regulatory changes, interest and prepayment rates, acquisition integration, litigation, and changes in consumer spending. The company said there were no material changes to the risk factors in its 2018 Form 10-K; routine litigation was not expected to materially affect results.
- The company was preparing for the expected 2020 adoption of the current expected credit loss standard (CECL); management was still assessing its effect, which will depend on portfolio composition, credit quality, and economic conditions.
Important facts for investors to verify
- Whether Banc Ed integration, core conversion, and anticipated expense synergies deliver the expected benefits, and how acquisition costs trend.
- Whether net interest margin stabilizes as rates and deposit costs change, especially given the disclosed asset-liability repricing sensitivity.
- Credit trends, including potential problem loans, non-performing loans, charge-offs, and the adequacy of the allowance as acquired loans renew.
- Deposit mix and funding costs, liquidity capacity, and debt levels following the acquisition and related borrowing.
- The eventual CECL transition impact and any changes to capital, credit-loss provisions, or reported earnings.