First Busey Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 27, 2019. The filing also reports unaudited fourth-quarter results. First Busey is a financial holding company operating banking, remittance processing and wealth management businesses, primarily in Illinois, Missouri, southwest Florida and Indiana.
Business context and key financial metrics
- Profitability: Net income was $98.9 million, up 57.7% from $62.7 million in 2017. Diluted EPS rose to $2.01 from $1.45. Adjusted net income, a non-GAAP measure, was $103.5 million, or $2.10 per diluted share, versus $75.7 million, or $1.75, in 2017.
- Fourth quarter: Net income was $25.3 million and diluted EPS was $0.51, versus $12.3 million and $0.25 in fourth-quarter 2017.
- Revenue and margins: Net interest income increased 18.7% to $241.4 million; non-interest income increased 6.5% to $90.0 million. Tax-equivalent net interest margin was 3.45%, down from 3.58%; excluding purchase-accounting accretion, the reported non-GAAP margin was 3.30%, versus 3.36%. The efficiency ratio improved to 56.2% from 58.3% (adjusted: 54.5% versus 55.6%).
- Revenue mix: Trust fees were $27.2 million, remittance processing revenue $14.3 million and customer service fees $28.9 million. Mortgage revenue fell 50.2% to $5.5 million, reflecting lower market volumes and the sale of certain origination offices.
- Costs and taxes: Non-interest expense rose 10.7% to $193.0 million, including acquisition, restructuring and impairment costs. The effective tax rate fell to 26.1% from 42.0%; 2017 included an $8.1 million non-cash charge related to the Tax Cuts and Jobs Act (TCJA).
- Balance sheet and funding: Year-end assets were $7.70 billion, down 2.0% from $7.86 billion. Portfolio loans were $5.57 billion, up 0.9%, and deposits were $6.25 billion, up 2.0%. Cash and cash equivalents were $240.0 million. Average deposits funded 91.3% of average liabilities, and average noninterest-bearing deposits were 24.1% of average deposits.
- Debt and liquidity: At year-end, borrowings and debt included $185.8 million of repurchase-agreement borrowings, $50.0 million of FHLB long-term debt, $39.5 million of senior notes, $59.1 million of subordinated notes and $71.2 million of junior subordinated debt. Operating cash flow was $202.5 million, compared with $253.4 million in 2017. Management stated that liquidity was adequate for projected obligations.
- Capital: First Busey reported total risk-based capital of 14.83%, CET1 of 11.77% and Tier 1 leverage of 10.36%; Busey Bank reported 14.19%, 13.35% and 10.64%, respectively. Both were above applicable “well-capitalized” thresholds.
Material changes versus 2017
- Higher average earning assets, primarily reflecting acquisitions and loan growth, supported higher interest income; rising rates and deposit growth also increased interest expense substantially, from $20.9 million to $44.6 million.
- Non-interest income growth was led by wealth management and remittance processing. Mortgage revenue declined sharply, while total non-interest expense increased with acquisition-related costs and operating scale.
- Asset quality weakened by several measures: non-performing loans increased to $36.6 million from $27.4 million, or 0.66% of portfolio loans from 0.50%. Net charge-offs were $7.4 million, compared with net recoveries of $0.5 million in 2017. The allowance fell to 0.91% of portfolio loans from 0.97%.
- Total assets declined despite modest organic loan and deposit growth. Cash and cash equivalents fell to $240.0 million from $353.3 million; short-term FHLB advances declined from $220.0 million to zero, while repurchase-agreement borrowings fell by $118.8 million.
Outlook, commentary, risks and unusual items
- Management expected interest-rate increases to be modestly favorable to net interest income in 2019, while noting that higher rates could reduce mortgage and refinancing activity. Management expected near-term loan losses to remain generally low but acknowledged that asset-quality measures can fluctuate.
- First Busey completed its Banc Ed acquisition on January 31, 2019, after the reporting date. Banc Ed’s results are excluded from FY 2018. Banc Ed had reported $1.8 billion in assets, $902.1 million in gross loans and $1.5 billion in deposits at December 31, 2018; Busey planned to merge its bank subsidiary into Busey Bank later in 2019. Preliminary goodwill was estimated at $48.5 million.
- 2018 unusual items included approximately $3.7 million of pre-tax acquisition costs, $0.8 million of fixed-asset impairments and $1.1 million of other restructuring costs. The company also recorded an $0.8 million impairment associated with closed Peoria-area banking properties.
- Key disclosed risks include credit deterioration and real-estate concentration, interest-rate and funding-cost changes, Illinois fiscal and economic conditions, acquisition integration, competition and technology disruption, cybersecurity and third-party service-provider exposure, and the transition away from LIBOR after 2021. The company said its commercial real estate lending did not exceed cited supervisory concentration guidelines.
- The company was approaching the $10 billion asset threshold for enhanced regulatory requirements; the Regulatory Relief Act exempted it from mandatory company-run stress testing that otherwise would have applied above that threshold. The company was implementing the expected-credit-loss standard (CECL), then scheduled to take effect in 2020.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The filing disclosed no material pending litigation outside ordinary-course matters.
Most important facts for investors to verify
- Whether the Banc Ed integration, expected cost savings and preliminary purchase accounting values—including goodwill—develop as planned.
- Whether non-performing loans, criticized loan balances and net charge-offs stabilize, and whether the allowance remains adequate.
- Whether deposit pricing and funding costs continue to pressure net interest margin as interest rates and competition evolve.
- Whether mortgage revenue weakness persists and growth in wealth management and remittance processing offsets it.
- How CECL adoption affects the allowance, earnings and regulatory capital, and how the company manages LIBOR-linked contracts through the transition.
- Whether the company sustains capital, liquidity and dividend capacity after the Banc Ed acquisition and related financing.