First Busey Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. First Busey is a financial holding company operating banking, remittance processing and wealth management businesses. The April 30, 2016 acquisition of Pulaski materially affected year-over-year comparisons; Pulaski’s results are included from the acquisition date. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $154.7 | $111.8 |
| Provision for loan losses | $5.6 | $1.6 |
| Non-interest income | $75.2 | $64.8 |
| Non-interest expense | $147.9 | $115.3 |
| Net income | $49.7 | $39.0 |
| Net income available to common stockholders | $49.7 | $38.3 |
| Diluted earnings per share | $1.40 | $1.32 |
| Net interest margin, tax-equivalent | 3.42% | 3.10% |
| Efficiency ratio | 61.8% | 62.8% |
- Fourth quarter: Net income was $11.5 million and diluted EPS was $0.30, compared with $10.7 million and $0.36 in Q4 2015. Net interest income was $44.6 million versus $29.6 million; the quarterly net interest margin was 3.63% versus 3.23%.
- Balance sheet at year-end: Total assets were $5.43 billion, up 35.7%; gross portfolio loans were $3.88 billion, up 47.6%; and deposits were $4.37 billion, up 33.0%. Management attributed the substantial growth primarily to Pulaski.
- Funding and debt: Cash and cash equivalents were $166.7 million, down from $319.3 million. Deposits remained the principal funding source. Reported borrowings included $189.2 million of repurchase agreements, $75.0 million of short-term borrowings, $80.0 million of long-term debt and $70.9 million of junior subordinated debt.
- Cash flow: Operating activities used $20.9 million in 2016, compared with providing $61.5 million in 2015. Investing activities provided $149.7 million and financing activities used $281.4 million. Mortgage-loan origination and sale activity, acquisition-related cash flows and funding changes affected reported cash flows.
- Credit quality: Non-performing loans rose to $21.6 million, or 0.56% of portfolio loans, from $12.8 million, or 0.49%. The allowance was $47.8 million, equal to 1.23% of portfolio loans, down from 1.81%; net charge-offs increased to $5.2 million from $1.6 million. Potential problem loans totaled $50.2 million, versus $29.2 million.
- Capital: First Busey reported regulatory capital ratios of 14.04% total capital, 12.92% Tier 1 risk-based capital, 11.22% common equity Tier 1 and 10.45% Tier 1 leverage. Busey Bank was also reported well-capitalized.
- Shareholder returns: Cash dividends were $0.68 per share for 2016, versus $0.62 in 2015. The company reported no share repurchases in Q4 and 333,334 shares remaining under its authorization.
Material changes and unusual items
- Annual net income increased 27.4%, while diluted EPS increased from $1.32 to $1.40. Results include Pulaski only from its April 2016 acquisition; Pulaski contributed $40.2 million of revenue and $10.5 million of net income from acquisition through its bank merger into Busey Bank in November.
- 2016 included $10.0 million of pre-tax Pulaski acquisition expenses. Management also identified $2.8 million of notable pre-tax costs, including wealth management restructuring and branch impairments, partly offset by $1.5 million of favorable items, including a gain on sale of other real estate and a securities gain. Excluding the specified items, management reported non-GAAP operating earnings of $56.5 million, or $1.60 per diluted share.
- Net interest margin improved, supported by loan growth and $7.1 million of Pulaski purchase-accounting accretion. Mortgage revenue rose to $12.0 million from $7.2 million, principally due to Pulaski’s mortgage operations. Trust fees and brokerage commissions together were slightly lower year over year.
- Non-interest expense grew 28.2%, reflecting acquisition costs, added employees and branches, and $5.3 million of software-conversion expense. The efficiency ratio nevertheless improved to 61.8% from 62.8%.
- Net charge-offs and non-performing loans increased, while the allowance-to-loans ratio declined. Management said near-term loan losses were expected to remain generally low, but noted asset-quality measures can fluctuate with local economic conditions.
- The filing reports no material pending litigation beyond ordinary routine matters. The financial-statement auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Outlook, risks and contingencies
- Management expected the December 2016 federal funds rate increase to be modestly favorable to net interest income in the following year, while warning that higher rates could reduce mortgage purchase and refinancing activity. No quantified earnings or margin guidance is provided.
- Management expected Pulaski to provide continuing core-earnings accretion and acquisition expenses to decline, but anticipated additional integration costs from the planned First Community transaction could weigh on 2017 expenses and efficiency.
- On February 6, 2017, First Busey agreed to acquire First Community Financial Partners, which had year-end assets of $1.3 billion, loans of $991.6 million and deposits of $1.1 billion. Completion was anticipated in mid-2017, subject to shareholder, regulatory and other customary approvals.
- Material risks include economic and fiscal conditions in Illinois, interest-rate and funding sensitivity, commercial real estate and other loan concentration risk, rising credit losses, acquisition integration and execution, mortgage repurchase claims, regulatory costs, cybersecurity and operational failures, and potential effects from accounting changes such as CECL.
- Liquidity was described by management as adequate. However, Busey Bank was in a retained-deficit position and could not pay ordinary dividends; holding-company distributions from the Bank required regulatory approval. The Bank’s most recent such distribution was $30.0 million in October 2016.
- Commitments to extend credit and standby letters of credit totaled $895.2 million at year-end. Management expected available funds to be sufficient for current commitments. The filing also identifies mortgage-loan repurchase obligations; the recorded liability was $2.2 million, with possible losses above the estimate difficult to quantify.
Important facts for investors to verify
- Separate Pulaski’s acquisition-driven growth and purchase-accounting accretion from sustainable organic growth and recurring earnings.
- Review quarterly credit trends, particularly non-performing loans, potential problem loans, net charge-offs, and allowance coverage after portfolio expansion.
- Assess the quality and cost of deposits, the decline in cash balances, borrowing levels and maturities, and the Bank’s ability to upstream capital subject to regulatory approval.
- Track First Community’s approval, closing, integration costs, expected synergies and any resulting share dilution.
- Reconcile management’s non-GAAP operating earnings with GAAP results and evaluate whether the excluded acquisition and other notable items are truly non-recurring.