First Busey Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
First Busey is a bank holding company with Banking, Remittance Processing and Wealth Management businesses. Results and balance-sheet comparisons were significantly affected by the April 30, 2016 acquisition of Pulaski Financial Corp. Pulaski contributed two months of results in Q2 and expanded the company’s presence in the St. Louis region. The bank merger was anticipated in Q4 2016.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $38.0 | $27.4 | $65.9 | $54.0 |
| Provision for loan losses | $1.1 | $0.0 | $2.1 | $0.5 |
| Non-interest income | $18.6 | $16.6 | $35.4 | $32.6 |
| Non-interest expense | $36.3 | $28.4 | $64.0 | $59.0 |
| Net income | $12.4 | $9.9 | $22.8 | $17.7 |
| Diluted EPS | $0.35 | $0.33 | $0.71 | $0.59 |
- Q2 revenue, defined as net interest income plus non-interest income, was $56.5 million; six-month revenue was $101.3 million. Growth comparisons include Pulaski only from the acquisition date.
- Tax-equivalent net interest margin was 3.32% for Q2 and 3.23% for the first half, versus 3.05% and 3.04% in the respective 2015 periods. Excluding Pulaski purchase-accounting accretion and amortization, management reported margins of 3.18% for Q2 and 3.15% for the first half.
- The efficiency ratio was 61.7% for Q2 and 61.3% for the first half, compared with 62.1% and 65.5% in 2015.
- At June 30, total assets were $5.51 billion, deposits $4.38 billion, net loans $3.74 billion, and stockholders’ equity $588.1 million. Assets rose 37.8% from year-end, principally due to Pulaski.
- Cash and cash equivalents were $267.1 million. Six-month operating cash flow was negative $57.9 million, versus positive $16.3 million in 2015, largely reflecting mortgage-loan originations for sale and related sale proceeds. Investing activities provided $187.8 million; financing activities used $182.2 million.
- Period-end borrowings included $173.7 million of repurchase agreements, $166.2 million of short-term borrowings, $80.0 million of long-term debt and $70.8 million of junior subordinated debt. Management stated liquidity was adequate for projected obligations.
- Regulatory capital ratios exceeded applicable “well-capitalized” thresholds. Consolidated total capital, Tier 1, common equity Tier 1 and leverage ratios were 13.65%, 12.59%, 10.95% and 11.00%, respectively.
Material changes and credit quality
- Pulaski’s acquisition added approximately $1.6 billion of assets, including $1.4 billion of loans and $1.2 billion of deposits at acquisition. First Busey issued approximately 9.4 million shares; $76.7 million of goodwill was recorded. Acquisition expenses were $2.0 million in Q2 and $2.3 million for the first half.
- Gross loans increased to $4.06 billion from $2.64 billion at year-end, primarily due to Pulaski. Loans held for sale rose to $278.1 million from $9.4 million.
- Non-performing loans were $22.8 million, up from $17.8 million at March 31 and $8.4 million a year earlier; $10.9 million were Pulaski loans. Non-performing assets were $26.0 million, or 0.6% of loans and non-performing assets.
- The allowance for loan losses was $45.4 million, or 1.1% of loans, versus 1.7% at March 31 and 1.9% a year earlier. Management attributed the lower ratio largely to acquisition accounting: acquired loans carry fair-value credit adjustments rather than a transferred allowance. Approximately $1.0 billion of acquired loans had no related allowance at quarter-end.
- Six-month net charge-offs were $4.2 million (charge-offs of $5.8 million less recoveries of $1.6 million). Management increased qualitative reserve factors by $1.9 million relative to the March 31 methodology. Potential problem loans were $36.7 million, compared with $29.2 million at year-end.
Outlook, commentary and risks
- The filing provides no formal earnings or revenue guidance. Management said near-term loan losses were expected to remain generally low, while cautioning that asset-quality measures may fluctuate with market-specific conditions.
- Management expected Pulaski integration costs to affect expenses and potentially the efficiency ratio for the remainder of 2016. The company reported $1.2 million of Pulaski-related software conversion expense in first-half data processing costs.
- After quarter-end, First Busey announced a planned Florida branch closure, which management said would not materially affect the financial statements. August employee reductions were expected to generate restructuring expenses in Q3.
- Management highlighted Illinois fiscal and budget pressures, including potential effects on state-funded institutions and vendors. Other stated risks include interest-rate changes, competition, technology and cybersecurity, regulation, credit conditions, and realizing expected acquisition benefits.
- Commitments to extend credit were $901.8 million and standby letters of credit were $21.8 million; the filing notes these amounts do not necessarily represent future cash needs. Routine legal proceedings were not expected to have a material effect.
Most important facts for investors to verify
- Whether Pulaski integration produces the anticipated operating efficiencies and revenue opportunities, and how remaining integration and restructuring costs affect results.
- How acquired-loan credit performance develops as fair-value adjustments accrete or loans renew, and whether the allowance remains adequate as non-performing and potential problem loans change.
- Whether mortgage production and gains on loan sales are sustainable, given the sharp increase in loans held for sale and related interest-rate and execution risks.
- Whether liquidity, funding costs and regulatory capital remain resilient as the combined balance sheet and lending commitments grow.
- Reconcile reported earnings growth with the acquisition’s partial-period contribution, increased share count and purchase-accounting effects; the filing’s pro forma results are illustrative and not necessarily indicative of actual results.