First Busey Corporation — Q1 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2018. First Busey is a regional bank holding company with Banking, Remittance Processing and Wealth Management segments. Results include First Community, acquired in July 2017, and Mid Illinois, acquired in October 2017; comparisons with Q1 2017 are therefore affected by acquisitions. South Side Bank, acquired with Mid Illinois, was merged into Busey Bank in March 2018.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Net interest income | $59.8 million | $42.0 million; up 42.2% year over year |
| Non-interest income | $22.5 million | $20.0 million; up 12.4% |
| Net income | $21.9 million | $15.2 million; up 44.5% |
| Diluted earnings per share | $0.45 | $0.39 |
| Net interest margin, tax-equivalent | 3.52% | 3.53%; 3.32% excluding purchase-accounting effects |
| Efficiency ratio | 59.7%; adjusted 55.4% | 58.8%; adjusted 57.3% |
| Operating cash flow | $93.3 million | $186.6 million |
Net interest income after the $1.0 million loan-loss provision was $58.7 million. Non-interest expense rose 35.7% to $51.0 million, reflecting acquisitions, integration and restructuring costs, higher staffing and data-processing costs. The effective tax rate fell to 27.4% from 36.5%, principally reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act and other tax effects. Dividends declared were $0.20 per share, versus $0.18.
At March 31, 2018, total assets were $7.78 billion, down 1.0% from year-end. Portfolio loans were $5.53 billion, up 0.2% from year-end; deposits were $6.33 billion, up 3.3%. Cash and cash equivalents were $367.5 million. Total stockholders’ equity was $942.1 million. Accumulated other comprehensive loss widened to $9.7 million from $2.8 million at year-end, primarily reflecting unrealized securities losses.
Period-end borrowings included $235.3 million under repurchase agreements, $50.0 million of long-term FHLB debt, $39.4 million of senior notes, $64.7 million of subordinated notes and $71.0 million of junior subordinated debt. Short-term borrowings were zero, down from $220.0 million at year-end. Financing cash outflow was $93.6 million, including repayment of short-term borrowings; investing cash inflow was $14.5 million.
Regulatory capital remained above well-capitalized thresholds: First Busey’s total capital ratio was 14.32%, Tier 1 ratio 12.32%, common equity Tier 1 ratio 11.07%, and Tier 1 leverage ratio 9.89%. Management stated liquidity was adequate to meet projected cash-flow obligations.
Material changes and asset quality
- Q1 2018 earnings increased year over year, but the comparison includes the acquired businesses and should not be interpreted as wholly organic growth. Average interest-earning assets increased 42.3% year over year.
- Non-performing loans rose to $33.6 million from $27.4 million at December 31, 2017. Management attributed the increase in part to two large former First Community commercial relationships newly placed on non-accrual after credit-process integration.
- Net charge-offs were $1.9 million, compared with $0.3 million in Q4 2017. The allowance was $52.6 million, or 0.95% of portfolio loans, versus $53.6 million, or 0.97%, at year-end. Potential problem loans increased to $88.2 million from $70.4 million.
- Available-for-sale securities declined to $822.1 million from $872.7 million at year-end; held-to-maturity securities increased to $459.0 million from $443.6 million. The company reported $14.4 million of gross unrealized losses on available-for-sale securities and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Mortgage revenue declined 23.0% year over year to $1.6 million, amid lower origination volumes and the prior-quarter sale of certain mortgage locations. Wealth-management and remittance-processing revenues grew.
Outlook, commentary and risks
The filing provides no formal numerical earnings guidance. Management expected the March 2018 interest-rate increase to be modestly favorable to net interest income in 2018, while noting that higher rates could reduce mortgage purchases and refinancing. It expected operating efficiencies from acquisitions, including South Side integration benefits beginning in Q2 2018, and described organic growth, commercial banking and wealth management as priorities. Management cautioned that results are not necessarily indicative of full-year performance.
Key risks include credit deterioration and uncertain collateral values; acquisition integration and failure to realize expected benefits; sensitivity to interest rates and mortgage prepayments; competition and technology/security risks; and local economic conditions. Management specifically noted Illinois’ fiscal challenges and potential effects on markets dependent on state funding. Commitments to extend credit were $1.35 billion and standby letters of credit were $35.5 million; these are off-balance-sheet exposures and do not necessarily represent future cash requirements. Routine legal matters were not expected to materially affect results. The company reported no material change to the risk factors in its 2017 Form 10-K.
Management identified fair values of securities and acquired assets and the allowance for loan losses as estimates requiring judgment. The expected-credit-loss accounting standard (CECL) was expected to take effect for the company in Q1 2020; implementation was still being evaluated. The revolving credit facility was amended after quarter-end, on April 30, 2018, extending its maturity to April 30, 2019 and reducing its maximum from $40 million to $20 million.
Investor verification priorities
- Assess how much earnings and balance-sheet growth reflects the 2017 acquisitions versus organic performance, and whether projected integration efficiencies materialize.
- Review the two newly non-accrual commercial relationships, rising non-performing and potential problem loans, charge-offs, and the adequacy of loan-loss reserves.
- Track deposit pricing, funding mix, net interest margin and the company’s performance under changing interest-rate scenarios.
- Evaluate securities valuation and accumulated other comprehensive losses, including whether liquidity needs could require securities sales.
- Monitor acquisition-related expenses, restructuring costs, mortgage revenue trends and the sustainability of adjusted results; adjusted measures are non-GAAP.
- Confirm capital-distribution capacity: the filing says Busey Bank remained in a retained-earnings deficit and had not paid dividends to the parent since 2009, with future distributions subject to regulatory approval.