First Busey Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. Comparisons with 2017 reflect the acquisitions of First Community (July 2017) and Mid Illinois (October 2017), so periods are not fully comparable.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $60.4 million | $42.4 million | $120.1 million | $84.4 million |
| Provision for loan losses | $2.3 million | $0.5 million | $3.3 million | $1.0 million |
| Non-interest income | $22.8 million | $20.1 million | $45.3 million | $40.1 million |
| Non-interest expense | $47.3 million | $36.8 million | $98.3 million | $74.4 million |
| Net income | $24.9 million | $16.5 million | $46.8 million | $31.6 million |
| Diluted EPS | $0.51 | $0.43 | $0.95 | $0.82 |
| Tax-equivalent net interest margin | 3.51% | 3.47% | 3.51% | 3.50% |
Q2 net income increased about 51% year over year; six-month net income rose about 48%. Management-reported adjusted net income was $25.6 million for Q2 and $50.5 million for the first half, excluding specified acquisition and restructuring items. The reported efficiency ratio improved to 54.7% in Q2 from 56.3%; the first-half ratio was 57.2% versus 57.6%. These adjusted measures are non-GAAP.
- For the first six months, operating cash flow was $111.8 million, versus $135.1 million in 2017. Investing activities used $118.7 million and financing activities used $115.6 million; cash and equivalents declined $122.5 million to $230.7 million.
- At June 30, total assets were $7.776 billion, down 1.1% from year-end 2017. Portfolio loans were $5.555 billion gross ($5.502 billion net), up 0.6%; deposits were $6.164 billion, up 0.6%. Stockholders’ equity was $957.2 million.
- Funding and debt included $240.1 million of repurchase agreements, $150.0 million of short-term borrowings, $50.0 million of long-term debt, $39.5 million of senior notes, $64.7 million of subordinated notes, and $71.1 million of junior subordinated debt. Short-term borrowings and repurchase agreements declined from year-end; interest costs rose year over year.
- Regulatory capital ratios remained above well-capitalized thresholds: consolidated total capital 14.42%, Tier 1 risk-based capital 12.44%, Common Equity Tier 1 11.21%, and Tier 1 leverage 10.13%.
Material changes and credit quality
- Growth in interest income and earnings reflected the larger balance sheet following the 2017 acquisitions and organic loan growth. Deposit and borrowing costs also increased, reflecting acquired funding and rising rates.
- Fee income grew in trust, remittance processing, and customer services; mortgage revenue fell 43% in Q2 to $1.6 million, citing lower originations, sale timing, and the 2017 realignment of mortgage resources.
- Non-performing loans were $26.4 million, down from $33.6 million at March 31 but up from $20.1 million a year earlier. The allowance was $53.3 million, or 0.96% of portfolio loans; Q2 net charge-offs were $1.6 million.
- Potential problem loans increased to $106.1 million from $70.4 million at December 31, 2017; loans in the lowest risk-grade categories rose to $237.2 million from $193.8 million. OREO increased to $3.7 million from $1.3 million at year-end.
- The company recorded a $0.8 million impairment on Peoria banking properties held for sale. It also reported $4.5 million of first-half pre-tax non-operating expenses, including acquisition-related costs, restructuring, and fixed-asset impairment.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expected rate increases to be modestly favorable to net interest income for the remainder of 2018, while warning that higher rates could reduce mortgage purchases and refinancing.
- Management cited commercial banking, wealth management, and remittance processing as growth priorities and expected further operating efficiencies as acquisition integration continued. It described liquidity and capital as adequate/strong; liquidity included access to FHLB and Federal Reserve borrowing and brokered deposits.
- Key risks include credit deterioration, interest-rate and prepayment changes, competition, technology and cybersecurity, acquisition integration, and adverse economic or regulatory developments. The filing added tariffs and retaliatory trade measures as risks to customers, including agricultural borrowers. Management also highlighted Illinois’ fiscal and pension challenges and possible effects on local borrowers.
- Off-balance-sheet commitments included $1.350 billion to extend credit and $34.7 million of standby letters of credit; no liability was recorded for potential obligations under these commitments. Management said ordinary-course litigation was not expected to have a material effect and reported no material pending litigation.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter. No significant subsequent events requiring adjustment or disclosure were reported.
Important facts for investors to verify
- How much of earnings growth is attributable to acquired businesses versus organic growth, and whether anticipated integration efficiencies materialize.
- Whether higher interest expense and deposit competition pressure margins; verify the trend in the reported and purchase-accounting-adjusted net interest margins.
- Developments in potential problem loans, criticized risk grades, non-performing assets, charge-offs, and adequacy of the allowance.
- Mortgage revenue and originations, plus growth in brokered time deposits and the company’s liquidity needs.
- Progress on the Peoria property sale and any further restructuring or acquisition-related costs; the filing gives no quantified forward earnings guidance.