First Busey Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. First Busey operates banking, remittance-processing and wealth-management businesses; comparisons reflect Pulaski Financial, acquired April 30, 2016, so year-over-year growth is not solely organic.
Financial performance and condition
- Q2 earnings: Net income was $16.5 million, up from $12.4 million a year earlier; diluted EPS was $0.43 versus $0.35. Pretax income was $25.2 million.
- Q2 revenue and margins: Net interest income was $42.4 million, up 11.6%; noninterest income was $20.1 million, up 8.0%. Tax-equivalent net interest margin rose to 3.47% from 3.32%. The efficiency ratio improved to 56.3% from 61.7%.
- First-half results: Net income was $31.6 million versus $22.8 million; diluted EPS was $0.82 versus $0.71. Net interest income was $84.4 million and noninterest income $40.1 million. Tax-equivalent net interest margin was 3.50%, compared with 3.23%.
- Expenses: Q2 noninterest expense increased 1.2% to $36.8 million; first-half expense rose 16.2% to $74.4 million, primarily reflecting the Pulaski acquisition and other operating-cost changes.
- Balance sheet at June 30: Assets were $5.53 billion; portfolio loans were $3.92 billion gross ($3.87 billion net); deposits were $4.39 billion; and stockholders’ equity was $613.1 million. Versus December 31, 2016, assets rose 2.0%, gross portfolio loans about 1.1%, and deposits 0.5%.
- Liquidity and cash flow: Cash and cash equivalents were $294.1 million, up from $166.7 million at year-end. First-half operating cash flow was $135.1 million versus cash used of $57.9 million in 2016; investing used $75.9 million and financing provided $68.1 million. Operating cash flow was affected by mortgage-loan originations and sale proceeds.
- Credit quality: Nonperforming loans were $20.1 million, or 0.5% of portfolio loans, versus $22.8 million and 0.6% a year earlier. The allowance was $49.2 million, or 1.3% of portfolio loans. First-half net recoveries were $0.4 million, compared with $4.2 million of net charge-offs in first-half 2016.
- Debt and capital: In May, the company issued $40 million of 3.75% senior notes due 2022 and $60 million of 4.75% subordinated notes due 2027; the latter qualify as Tier 2 capital. At June 30, consolidated total capital, Tier 1, common equity Tier 1 and leverage ratios were 16.18%, 13.60%, 11.86% and 10.98%, respectively. The company and bank met applicable well-capitalized requirements.
Changes, outlook, risks and notable items
- Q2 improvement reflected higher net interest income and growth in trust fees and customer-service fees. Mortgage revenue declined 17.8% year over year in Q2, and management said mortgage activity slowed in 2017 amid market influences and lower origination volumes.
- Management said the March and June 2017 rate increases were expected to be modestly favorable to net interest income in 2017, while rising rates could reduce mortgage purchase and refinancing demand. Management expected near-term loan losses to remain generally low, but noted credit measures can fluctuate with local economic conditions.
- First Community acquisition closed July 2, 2017, after quarter-end; its results are excluded from this report. It had $1.4 billion of assets, $1.1 billion of loans and $1.1 billion of deposits at June 30. The Mid Illinois acquisition was expected in Q4 2017, subject to approvals and customary conditions; Mid Illinois reported $661.9 million of assets at June 30.
- Management cited expansion opportunities from acquisitions and expected future operating efficiencies, while noting acquisition costs and added intangible-asset amortization could weigh on 2017 expense and efficiency. Illinois corporate and replacement tax rates increased effective July 1, 2017, with an expected effect on future tax expense.
- First-half notable items included $1.1 million of acquisition costs and $0.2 million of restructuring costs. Excluding these items and related tax effects, management reported non-GAAP operating earnings of $32.5 million, or $0.84 per diluted share, versus GAAP net income of $31.6 million, or $0.82 per diluted share.
- Risks include interest-rate and prepayment changes, local and broader economic conditions—including Illinois fiscal pressures—credit losses, competition, technology and cybersecurity, and acquisition execution and integration. The filing reported no material change in previously disclosed risk factors and no material pending litigation beyond ordinary business matters.
Investor verification priorities
- Assess how much reported earnings growth reflects Pulaski and subsequent acquisitions versus underlying organic performance, and review purchase-accounting impacts.
- Track integration costs, expected cost savings, and the final purchase accounting for First Community; monitor Mid Illinois closing conditions and timing.
- Monitor mortgage volumes and revenue, funding costs, deposit mix, and net interest margin as rates change.
- Review loan grades, nonperforming and potential problem loans, allowance adequacy, and the effect of acquired-loan discounts on reported credit costs.
- Confirm liquidity and capital remain adequate after acquisition funding, note proceeds deployment, and planned capital distributions; evaluate the impact of Illinois tax changes.