First Busey Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial amounts are in millions of dollars unless stated otherwise. Results include Pulaski Financial from its April 30, 2016 acquisition, so year-over-year comparisons reflect a larger company as well as underlying performance.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $44.1 | $28.2 | $110.0 | $82.2 |
| Provision for loan losses | $2.0 | $0.1 | $4.1 | $0.6 |
| Non-interest income | $20.7 | $15.9 | $56.2 | $48.5 |
| Non-interest expense | $39.4 | $28.0 | $103.5 | $86.9 |
| Net income | $15.4 | $10.6 | $38.2 | $28.3 |
| Diluted EPS | $0.40 | $0.36 | $1.11 | $0.95 |
- Q3 tax-equivalent net interest margin was 3.51%, up from 3.10%; nine-month margin was 3.34%, up from 3.06%. Management attributed part of the improvement to Pulaski purchase-accounting accretion.
- Efficiency ratio improved to 58.0% in Q3 from 60.8%, and to 60.0% for the first nine months from 63.9%.
- Q3 non-interest income growth included higher loan-sale gains ($4.5 million versus $1.5 million) and deposit service charges. Wealth-management fees were broadly stable in Q3 but lower year to date.
Financial position, liquidity and capital
- At September 30, total assets were $5.59 billion, up 39.8% from December 31, 2015; net portfolio loans were $3.76 billion and deposits were $4.34 billion. The increase was primarily acquisition-related.
- Cash and cash equivalents were $360.8 million. Nine-month cash flow from operations was negative $31.6 million, versus positive $38.6 million in 2015, largely because mortgage loans originated for sale exceeded sale proceeds during the period. Before those mortgage-loan flows, operating cash was positive $46.5 million.
- Borrowings included $212.4 million in repurchase agreements, $246.7 million in short-term borrowings, $80.0 million in long-term debt and $70.8 million in junior subordinated debt.
- Consolidated regulatory capital ratios were 13.91% total capital, 12.80% Tier 1 risk-based capital, 11.10% common equity Tier 1, and 10.26% Tier 1 leverage. The company and both banks met applicable well-capitalized requirements.
- Common dividends declared were $0.17 per share for Q3 and $0.51 per share year to date.
Material changes and notable items
- First Busey acquired Pulaski for approximately $195.4 million in consideration, primarily stock. The transaction added approximately $1.6 billion of assets at acquisition, including $1.4 billion of loans and $1.2 billion of deposits, and generated $76.8 million of goodwill. Pulaski Bank merged into Busey Bank on November 4, 2016.
- Pulaski contributed $8.8 million of net income from acquisition through September. On a pro forma basis as if acquired January 1, nine-month 2016 net income was $36.4 million versus $42.6 million in 2015; pro forma diluted EPS was $0.94 versus $1.09. These pro forma figures include acquisition-accounting adjustments and do not assume synergies.
- Acquisition-related expenses were $3.1 million pretax for the first nine months, including conversion and restructuring costs. Management said integration costs could temporarily elevate Q4 expenses and expected operating efficiencies to benefit 2017 earnings.
- Mortgage loans held for sale rose to $266.4 million from $9.4 million at year-end. The company adopted fair-value accounting for loans held for sale effective January 1, 2016.
Outlook, risks and contingencies
- Management said near-term loan losses were expected to remain generally low, while cautioning that asset-quality measures can fluctuate with local economic conditions. The allowance was $47.8 million, or 1.3% of gross portfolio loans; non-performing loans were $20.1 million, up from $12.8 million at year-end but down from $22.8 million at June 30. A $7.6 million loan sale helped reduce Q3 non-performing loans.
- Potential problem loans were $46.1 million, compared with $29.2 million at year-end. Management said it was monitoring these credits and anticipated repayment through restructurings, guarantees, collateral or other actions.
- Commitments to extend credit totaled $939.7 million and standby letters of credit $17.0 million. These are contractual amounts and do not necessarily represent future cash needs; no related liabilities were recorded.
- Management reported adequate liquidity. It also cited Illinois budget and pension pressures as potential risks to its markets, alongside acquisition integration, competition, regulation, technology and interest-rate changes.
- Interest-rate modeling showed a potential 3.35% decline in year-one net interest income under an immediate, sustained 400-basis-point increase, and a 7.82% increase in year two. These are simulations, not forecasts, and exclude management actions.
- Management stated that routine legal matters were not expected to materially affect results; the filing disclosed no material pending litigation and no material change to previously reported risk factors.
Investor verification points
- Track Pulaski integration costs, realization and timing of the projected 2017 efficiencies, and final purchase-accounting fair-value adjustments.
- Assess credit trends behind the higher provision, potential problem loans and non-performing loans, including the effects of acquired-loan accounting and loan sales.
- Review mortgage production, loans held for sale, sale margins and repurchase exposure; the estimated mortgage-loan liability was $1.9 million, with possible losses above that estimate not quantifiable by management.
- Monitor funding mix and maturities, including time deposits and short-term borrowings, and the company’s ability to upstream capital and pay dividends subject to regulatory approval.
- Compare reported growth with organic and acquisition-adjusted results; confirm per-share performance against increased shares issued in the Pulaski transaction.