First Busey Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Comparisons are with Q2 or the first six months of 2019, as applicable.
Business context and reporting period
First Busey is a regional banking company operating in Illinois, Missouri, Florida and Indiana, with banking, remittance processing and wealth management segments. COVID-19 began adversely affecting results in Q1 2020. The company reported substantial Paycheck Protection Program (PPP) lending and deposit growth during the quarter.
Financial performance and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $98.8 million in Q2 | $101.3 million in Q2 2019 |
| Net income; diluted EPS | $25.8 million; $0.47 | $24.1 million; $0.43 in Q2 2019 |
| Net interest income | $70.8 million in Q2 | $73.4 million in Q2 2019 |
| Net interest margin, tax-equivalent | 3.03% in Q2 | 3.43% in Q2 2019 |
| Non-interest income | $28.0 million in Q2 | $27.9 million in Q2 2019 |
| Non-interest expense; efficiency ratio | $53.1 million; 51.0% in Q2 | $68.0 million; 63.6% in Q2 2019 |
| Total assets | $10.84 billion | $9.70 billion at Dec. 31, 2019 |
| Portfolio loans, gross; deposits | $7.23 billion; $8.91 billion | $6.69 billion; $7.90 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $1.05 billion | $529.3 million at Dec. 31, 2019 |
| Allowance for credit losses | $96.0 million | $53.7 million at Dec. 31, 2019 |
| Stockholders’ equity | $1.24 billion | $1.22 billion at Dec. 31, 2019 |
For the six months, net income was $41.2 million versus $49.6 million in 2019; diluted EPS was $0.75 versus $0.90. Total revenue was approximately $195.7 million, essentially unchanged from the comparable 2019 period. The six-month GAAP cash flow statement reported $54.7 million provided by operations, $586.7 million used in investing and $1.05 billion provided by financing; cash and cash equivalents increased $520.8 million.
Q2 return on average assets was 1.00%; return on average tangible common equity was 12.02%. These are company-reported measures, with the latter being non-GAAP. Capital ratios remained above regulatory “well-capitalized” thresholds: consolidated total capital was 16.23%, Tier 1 capital 12.73%, and common equity Tier 1 11.73%.
At June 30, the company reported $194.2 million of repurchase-agreement funding, $24.6 million of short-term borrowings, $35.1 million of long-term debt, $39.7 million of senior notes, $182.0 million of subordinated notes and $71.4 million of junior subordinated debt. It issued $125 million of 5.25% fixed-to-floating subordinated notes due 2030 in June. Management reported additional borrowing capacity of $1.6 billion from the FHLB and $474.4 million from the Federal Reserve, and said liquidity was adequate for projected obligations.
Material changes versus comparable periods
- Q2 net income increased year over year, although six-month net income declined. Q2 pretax provision for credit losses rose to $12.9 million from $2.5 million; six-month provision was $30.1 million versus $4.6 million.
- Net interest margin fell year over year, reflecting rate cuts and faster repricing of loans than deposits, as well as lower purchase-accounting accretion, lower-yielding PPP loans and elevated liquidity. Interest expense declined, but not enough to offset lower interest income.
- Q2 non-interest expense fell 22.0% year over year. Management cited lower staffing costs, PPP origination costs deferred for accounting purposes, and reduced acquisition-related and other expenses. Wealth management fees rose; customer service fees fell 27.5%, partly due to fee waivers and changed customer activity.
- Assets increased 11.8% and deposits 12.7% from year-end 2019. Gross portfolio loans increased 8.1%, primarily due to PPP lending. Noninterest-bearing deposits rose 50.8% from year-end.
- Allowance for credit losses increased to $96.0 million, including the effect of adopting CECL and additional provision expense. The company recorded a $15.9 million reduction to retained earnings on CECL adoption at January 1, 2020.
Outlook, risks and unusual items
- COVID-19 and credit: Management expects continued uncertainty and potential adverse effects, including further margin compression, higher credit provisions, weaker asset quality and reduced service and wealth-management fees. It flagged borrower stress in hotel, restaurant, transportation, long-term healthcare and retail, and related commercial real estate. If economic conditions worsen beyond current forecasts, provisions may rise.
- PPP and payment deferrals: At June 30, PPP loans totaled $746.4 million principal and $729.3 million amortized cost across 4,445 customers. The company deferred approximately $25.0 million of PPP fees and $4.9 million of direct origination costs, recognizing $3.0 million net in Q2 interest income. It also reported payment deferrals on $1.1 billion of commercial loans and $130.2 million of mortgage and personal loans, plus $80.9 million of serviced mortgage loans. SBA-guarantee and PPP processing litigation risks are disclosed.
- CECL estimates: In response to fast-changing economic conditions, the company shortened its reasonable and supportable forecast period from eight quarters to four, followed by reversion to historical loss rates. The allowance depends on forecasts and management estimates.
- Branch consolidation: After quarter-end, the company decided to close 12 banking centers in October 2020. It expects one-time costs in Q3 and Q4 and approximately $3.3 million of annualized net expense savings when fully realized, with savings beginning in Q4.
- Regulatory size threshold: Assets exceeded $10 billion during Q2. If they remain above that level at year-end, management expects interchange-fee limitations and heightened supervision and regulation in 2021.
- Capital and distributions: Open-market share repurchases were suspended March 16, 2020, and management said the restart timing was uncertain. The quarterly dividend was $0.22 per share. All company and bank capital ratios exceeded well-capitalized levels.
- Other matters: The filing reports no material pending litigation beyond ordinary-course matters. Banc Ed is under Illinois Department of Revenue examination for 2009–2016 income tax filings. Management said there were no material changes in internal control and disclosure controls were effective.
No specific earnings or full-year financial guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether credit quality, deferral performance and provisions deteriorate as relief programs and payment deferrals expire, especially in the identified stressed industries and commercial real estate.
- Whether the four-quarter CECL forecast and resulting $96.0 million allowance remain adequate as economic forecasts change.
- How quickly PPP fees are recognized, the pace of forgiveness and repayment, and whether SBA guarantees or loan processing create losses or litigation exposure.
- Whether deposit growth, liquidity and net interest margin remain sustainable, including the effects of low rates and the new subordinated debt.
- Whether the company remains above $10 billion in assets at year-end and the resulting 2021 regulatory and interchange-fee impacts.
- Execution, one-time costs and net savings from the 12 planned branch closures, alongside any effects on customers and revenue.