First Busey Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Comparisons are with 2017 or December 31, 2017, as applicable. First Community and Mid Illinois acquisitions affect period-to-period comparability.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $60.8 | $55.9 | $180.9 | $140.3 |
| Provision for loan losses | $0.8 | $1.5 | $4.0 | $2.5 |
| Non-interest income | $21.9 | $20.8 | $67.1 | $60.9 |
| Non-interest expense | $45.9 | $46.9 | $144.3 | $121.3 |
| Net income | $26.9 | $18.8 | $73.6 | $50.4 |
| Diluted EPS | $0.55 | $0.41 | $1.50 | $1.23 |
- Q3 net income increased about 43%; nine-month net income increased about 46%. Management reported Q3 adjusted net income, a non-GAAP measure, of $27.0 million, or $0.55 per diluted share; nine-month adjusted net income was $77.5 million, or $1.58 per diluted share.
- Tax-equivalent net interest margin was 3.41% in Q3 versus 3.60% a year earlier; nine-month margin was 3.47% versus 3.54%. Excluding purchase-accounting accretion and amortization, the respective margins were 3.29% and 3.31% in 2018.
- Q3 efficiency ratio improved to 53.5% from 58.9%; nine-month ratio improved to 56.0% from 58.1%. These are company-reported measures; adjusted ratios were 53.3% and 54.2%, respectively.
- Q3 return on average assets was 1.37%; nine-month return was 1.28%, versus 1.15% in 2017. Nine-month return on average tangible common equity was 15.34%, versus 13.15%.
Financial position, liquidity and capital
- Total assets were $7.89 billion at September 30, up 0.4% from year-end 2017. Net portfolio loans were $5.57 billion, up 1.9%; deposits were $6.20 billion, up 1.1%.
- Cash and cash equivalents fell to $160.7 million from $353.3 million at year-end. Nine-month operating cash flow was $147.1 million, investing cash outflow $305.4 million, and financing cash outflow $34.4 million.
- Period-end funding included $255.9 million of repurchase agreements, $200.0 million of short-term borrowings, $50.0 million of long-term debt, $39.5 million of senior notes, $59.1 million of subordinated notes and $71.1 million of junior subordinated debt. Brokered time deposits were $351.1 million, up from $247.7 million at year-end.
- Management said liquidity was adequate for projected cash-flow obligations. The Company and Busey Bank met regulatory capital requirements and were classified as well-capitalized. Company ratios included 14.34% total capital, 12.50% Tier 1 capital, 11.29% common equity Tier 1 and 10.17% Tier 1 leverage.
- Stockholders’ equity was $972.1 million, up 4.0% from year-end; accumulated other comprehensive loss widened to $13.0 million from $2.8 million, principally reflecting securities valuation changes.
Material changes and operating drivers
- Year-over-year earnings benefited from the 2017 First Community and Mid Illinois acquisitions, organic loan growth and higher fee income. Average interest-earning assets rose 13.5% in Q3 and 30.3% year to date.
- Rising funding costs pressured spread: Q3 interest expense increased to $12.0 million from $6.6 million; nine-month expense increased to $30.8 million from $13.1 million. Higher deposits and borrowings, acquisition effects and rising rates contributed.
- Wealth-management and remittance-processing revenues grew. Mortgage revenue declined 63.9% in Q3 and 46.8% year to date, attributed to lower origination volumes and the sale of certain mortgage offices in late 2017.
- Q3 non-interest expense decreased 2.2% year over year, but nine-month expense rose 18.9%, reflecting acquisitions, restructuring and other cost changes. The Company recorded $0.8 million of property impairment in Q2 and $4.7 million of non-operating expenses in the first nine months.
- Portfolio credit indicators weakened in Q3: non-performing loans rose to $40.8 million, or 0.72% of portfolio loans, from $26.4 million at June 30. Management attributed the increase primarily to two commercial credits and said specific reserves were established. Potential problem loans were $89.6 million, versus $70.4 million at year-end.
- The allowance was $52.7 million, or 0.94% of portfolio loans, compared with 0.97% at year-end. Lower-grade loans totaled $279.0 million, up from $193.8 million at year-end. Management considered the allowance adequate but noted additional losses could emerge as information develops.
Outlook, risks and unusual items
- Management expected 2018 interest-rate increases to be modestly favorable to net interest income, while warning that higher rates could reduce mortgage purchase and refinancing activity. Its September 2018 simulation showed estimated net-interest-income declines under both rising and falling rate shocks; results depend on model assumptions and exclude management actions.
- The pending Banc Ed acquisition, announced August 21, was expected to close in Q4 2018 or early Q1 2019, subject to regulatory and shareholder approvals and other customary conditions. Banc Ed reported $1.8 billion of assets, $914.5 million of loans and $1.6 billion of deposits as of September 30. Proposed consideration was approximately 70% stock and 30% cash; its results are not included in this filing.
- Management cited Illinois fiscal and pension challenges, potential state-funding effects on local customers, trade tariffs and retaliation, competition, technology and cybersecurity, interest-rate changes, credit quality, and acquisition integration as risks. It also identified economic, regulatory, litigation, weather and accounting risks in its forward-looking-statement disclosures.
- Off-balance-sheet commitments included $1.30 billion to extend credit and $33.2 million of standby letters of credit; management noted commitments may expire undrawn. Routine legal proceedings were not expected to have a material effect. The filing reports no material pending litigation.
- Subsequent events included a $40 million return of capital from Busey Bank on October 12 and the November 1 merger of Busey Trust Company into Busey Bank; management stated these had no impact on the quarter-end financial statements.
Most important facts for investors to verify
- Whether the rise in non-performing and potential problem loans is contained, and whether specific reserves for the two commercial credits prove sufficient.
- Whether deposit repricing, brokered-deposit reliance and higher funding costs continue to compress net interest margin.
- Whether mortgage revenue remains under pressure and whether growth in wealth management and remittance processing offsets it.
- Whether the Banc Ed transaction closes on expected terms and timing, and whether expected synergies justify integration costs and added balance-sheet scale.
- How actual liquidity, capital and net-interest-income sensitivity compare with management’s estimates as rates and funding conditions change.