First Busey Corporation — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2017. First Busey is a regional banking and financial-services company with Banking, Remittance Processing and Wealth Management segments. Results include First Community from its July 2, 2017 acquisition; they exclude Mid Illinois, acquired October 1, 2017. Balance-sheet comparisons with December 31, 2016 therefore reflect acquisition-related growth as well as ongoing business activity.
Financial results and position
Amounts below are in millions of dollars unless otherwise stated. Year-over-year comparisons are for the same period in 2016.
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Net interest income | $55.9 | $140.3 | $44.1 / $110.0 |
| Non-interest income | $20.8 | $60.9 | $20.7 / $56.2 |
| Net income | $18.8 | $50.4 | $15.4 / $38.2 |
| Diluted earnings per share | $0.41 | $1.23 | $0.40 / $1.11 |
| Tax-equivalent net interest margin | 3.60% | 3.54% | 3.51% / 3.34% |
| Non-interest expense | $46.9 | $121.3 | $39.4 / $103.5 |
- Q3 total revenue, calculated as net interest income plus non-interest income, was $76.8 million; nine-month total was $201.2 million. Q3 income before taxes was $28.3 million; nine-month income before taxes was $77.4 million.
- Q3 net income rose about 22% year over year; nine-month net income rose about 32%. Acquisition-related costs affected reported results. Management’s non-GAAP operating earnings were $20.6 million for Q3 and $53.1 million year to date, versus GAAP net income of $18.8 million and $50.4 million, respectively.
- At September 30, total assets were $6.91 billion, up 27.4% from year-end 2016. Portfolio loans were $5.09 billion, up 31.4%, and deposits were $5.37 billion, up 22.8%; much of the increase reflected First Community. Loans held for sale declined to $139.7 million from $256.3 million.
- For the nine months, operating cash flow was $179.4 million, compared with cash used of $31.6 million in 2016. Investing activities used $88.7 million and financing activities used $42.9 million. Cash and cash equivalents ended at $214.4 million, up $47.7 million from year-end. Mortgage loan originations and sales materially affect operating cash flows.
- Period-end borrowings included $219.1 million of repurchase agreements, $212.9 million of short-term borrowings, $50.0 million of long-term debt, $39.4 million of senior notes, $64.7 million of subordinated notes and $71.0 million of junior subordinated debt. Senior and subordinated notes were issued in May 2017; the latter qualify as Tier 2 capital.
- Consolidated regulatory capital ratios were 14.38% total capital, 12.26% Tier 1, 10.92% Common Equity Tier 1 and 10.18% Tier 1 leverage; the company and its subsidiary banks met applicable “well-capitalized” requirements. Management said liquidity was adequate.
- The efficiency ratio was 58.9% in Q3 versus 58.0% in Q3 2016, and 58.1% for the first nine months versus 60.0% in 2016. Dividends declared were $0.18 per share for Q3 and $0.54 year to date.
Material changes versus prior periods
- First Community added $1.4 billion of assets at acquisition, including $1.1 billion of loans and $1.1 billion of deposits. The acquisition also added $116.0 million of goodwill; purchase accounting values remained subject to refinement.
- Interest income and net interest income increased with larger average earning-asset balances and modestly higher rates. Q3 tax-equivalent net interest margin improved to 3.60% from 3.51%; management attributed some benefit to 2017 Federal Reserve rate increases.
- Non-interest expense rose 19.1% in Q3 and 17.3% year to date, including acquisition, restructuring and conversion costs, added staff and acquired operations. Q3 acquisition-related and other notable pre-tax costs were approximately $3.0 million; year-to-date costs were $4.4 million.
- Trust fees and customer-service fees increased year to date, while mortgage revenue fell 7.3% to $8.4 million, reflecting lower mortgage volumes and delivery efficiency. Management also cited higher mortgage rates and declining purchase inventory.
- The allowance for loan losses was $51.0 million, or 1.00% of portfolio loans, versus $47.8 million, or 1.23%, at year-end 2016. Nine-month provision expense declined to $2.5 million from $4.1 million; net recoveries were $0.7 million versus net charge-offs of $3.7 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected generally low near-term loan losses and anticipated operating efficiencies in future years from integration, while noting acquisition-related expenses could weigh on the efficiency ratio through the remainder of 2017.
- Management described the company as well positioned for the remainder of 2017 and into 2018, citing capital, core funding, credit quality and growth opportunities. These are forward-looking statements, not assured outcomes.
- Credit metrics included $27.9 million of non-performing loans, 0.55% of portfolio loans, and $29.0 million of non-performing assets at September 30. Potential problem loans were $56.4 million. Management considered the allowance adequate but warned that further losses could be identified as new information becomes available.
- Illinois fiscal and pension challenges could affect local customers and state-funded employers, including universities and health-care organizations. Other stated risks include interest-rate and prepayment changes, competition, technology and cybersecurity, regulatory changes, acquisition integration and failure to realize expected benefits, litigation and economic conditions.
- Off-balance-sheet commitments included $1.27 billion to extend credit and $33.3 million of standby letters of credit. No liability was recorded for potential obligations; commitments may not be fully drawn. Legal proceedings were described as ordinary-course matters not expected to have a material effect.
- On October 1, 2017, the company completed the Mid Illinois acquisition, not reflected in these financial results. Mid Illinois had $656.7 million of assets, $370.0 million of loans and $505.6 million of deposits at September 30. A $40.0 million capital distribution from Busey Bank to the holding company was executed October 12 with regulatory approval; management expected to seek further approvals while the bank remained in a retained-earnings deficit.
Important facts for investors to verify
- How much of revenue, earnings and balance-sheet growth is organic versus attributable to First Community and other acquisitions, and whether expected integration savings materialize.
- Whether credit quality remains stable as acquired loans season, including non-performing and potential problem loans, charge-offs, recoveries and allowance coverage.
- Deposit pricing, funding mix and liquidity trends as short-term borrowing and interest expense rise, and the effect of further rate changes on net interest margin and mortgage activity.
- The final purchase accounting valuations and goodwill implications for First Community, plus the financial and capital effects of the post-quarter Mid Illinois acquisition.
- The sustainability of non-interest revenue, particularly mortgage revenue, and the level of acquisition, restructuring and conversion costs compared with management’s non-GAAP adjustments.
- Regulatory capital and dividend capacity, including the subsidiary bank’s retained-earnings deficit and any further capital distributions requiring approval.