First Busey Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, with unaudited fourth-quarter results also reported. First Busey is a financial holding company operating banking, remittance processing and wealth management businesses, principally in Illinois, southwest Florida and Indiana.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets, year-end | $4.00 billion | $3.67 billion |
| Gross loans, year-end | $2.64 billion | $2.42 billion |
| Total deposits, year-end | $3.29 billion | $2.90 billion |
| Net interest income | $111.8 million | $101.6 million |
| Noninterest income | $64.8 million | $58.9 million |
| Net income | $39.0 million | $32.8 million |
| Net income available to common stockholders | $38.3 million | $32.0 million |
| Diluted earnings per share | $1.32 | $1.10 |
| Net interest margin | 3.10% | 3.15% |
| Efficiency ratio | 62.84% | 65.11% |
- Net income rose 19%; net interest income increased 10%, principally on loan growth and lower funding costs. Total reported revenue, calculated as net interest income plus noninterest income, was approximately $176.6 million, up from $160.5 million.
- Net interest margin declined five basis points. Management cited prolonged low rates and competitive pressure on asset yields.
- Cash flow from operating activities was $61.5 million, versus $68.1 million. Investing activities used $134.2 million; financing activities provided $52.6 million.
- Year-end cash and due from banks was $319.3 million. Management said liquidity was adequate; average liquid assets were $324.8 million, or 8.3% of average assets. Deposits represented the principal funding source.
- Year-end borrowings included $173.0 million of repurchase-agreement funding, $80.0 million of FHLB long-term debt and $55.0 million of junior subordinated debt.
- Consolidated regulatory capital ratios were 14.55% total capital, 13.29% Tier 1 risk-based capital, 11.52% Common Equity Tier 1 and 10.13% Tier 1 leverage. The company and bank met applicable well-capitalized standards.
- The allowance for loan losses was $47.5 million, or 1.80% of gross loans. Nonperforming loans were $12.8 million; nonperforming loans and other real estate owned were $13.5 million, or 0.51% of loans and those assets.
Material changes versus the prior period
- First Busey acquired Herget Financial on January 8, 2015 for $34.1 million in cash. Herget’s results are included from the acquisition date; the acquired business added to loan, deposit and asset growth. The company recorded $1.0 million of Herget-related expenses in 2015.
- Loans grew 9.2% and deposits grew 13.4% year over year, reflecting organic growth and the Herget acquisition. Noninterest-bearing deposits increased to 22.7% of average deposits from 20.7%.
- Provision for loan losses declined to $1.6 million from $2.0 million; net charge-offs were 0.06% of average loans versus 0.09%. Nonperforming loans nevertheless increased to $12.8 million from $9.0 million, partly reflecting Herget.
- Noninterest income rose 9.9%; remittance-processing revenue increased 18.0% to $11.1 million. Noninterest expense rose 6.6% to $115.3 million, including acquisition and restructuring-related costs.
- Stockholders’ equity declined to $373.2 million from $433.6 million, including the $72.7 million redemption of Treasury-held SBLF preferred stock. First Busey also repurchased 333,333 shares during 2015. A one-for-three reverse stock split became effective September 8; historical per-share data were adjusted retrospectively.
- Common dividends were $0.62 per share for 2015, compared with $0.57 in 2014. The company stated its intent to continue regular dividends, subject to earnings, capital, financial condition and regulatory limits.
Outlook, commentary and risks
- Management expected the December 2015 federal funds rate increase to be modestly favorable to net interest income in 2016. It provided no specific earnings or revenue guidance.
- A merger agreement with Pulaski Financial was signed December 3, 2015. Completion was anticipated in the first half of 2016, subject to shareholder and customary closing conditions. Pulaski reported $1.65 billion in assets, $1.41 billion in loans and $1.21 billion in deposits at year-end. Management cited expansion into the St. Louis market and a regional mortgage franchise as strategic benefits, while warning of integration costs and execution risks.
- Management anticipated one-time Pulaski integration charges could pressure 2016 expenses and the efficiency ratio. No quantified estimate is provided here.
- Key exposures include commercial real estate, which comprised 45.8% of loans; changing interest rates; credit quality and collateral values; and the financial condition and budget impasse of Illinois, where most customers are located. Management also highlighted competition, regulatory and compliance costs, cybersecurity and third-party operational risks, and acquisition integration.
- Two putative class actions challenged the Pulaski merger process and disclosures. First Busey said it intended to defend the remaining action; one case voluntarily dismissed First Busey as a defendant. Management said ordinary-course litigation was not expected to have a material financial effect.
- Management reported no goodwill impairment and no material weakness in internal control; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the Pulaski merger closed as anticipated, its final terms, integration costs and realized synergies.
- Whether loan growth and increased nonperforming loans, especially in commercial real estate, lead to higher provisions or charge-offs.
- Whether margin performance benefits from rate changes as management expected, given modeled interest-rate sensitivity and deposit repricing.
- The sustainability of noninterest revenue growth and expense control after acquisition-related and restructuring items.
- The company’s capacity to fund dividends and other capital needs, including the bank’s retained deficit and reliance on regulatory approval for subsidiary capital distributions.
- Resolution and potential costs of the remaining merger-related lawsuit, and the realizability of deferred tax assets.