First Busey Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted. The January 8 acquisition of Herget Financial is included from its acquisition date, affecting year-over-year and balance-sheet comparisons.
Financial performance
- Q2 earnings: Net income was $9.9 million, versus $8.2 million in Q2 2014; net income available to common shareholders was $9.8 million, or $0.11 per diluted share, versus $8.0 million, or $0.09. For the first six months, net income was $17.7 million versus $16.1 million, and diluted EPS was $0.20 versus $0.18.
- Revenue and margin: Q2 net interest income increased 9.3% to $27.4 million; six-month net interest income rose 9.0% to $54.0 million. Tax-equivalent net interest margin was 3.05% in Q2 and 3.04% for the first half, down from 3.13% in each comparable 2014 period. Total other income rose 10.7% in Q2 to $16.6 million and 8.6% for the half to $32.6 million.
- Noninterest items and efficiency: Q2 noninterest expense increased 6.0% to $28.4 million; first-half expense increased 10.4% to $59.0 million. The Q2 efficiency ratio improved to 62.1% from 64.4%; the first-half ratio worsened to 65.5% from 64.5%. First-half expenses include acquisition and restructuring costs.
- Cash flow: First-half operating cash flow was $16.3 million, versus $21.8 million in 2014; investing cash outflow was $25.7 million and financing cash outflow was $40.6 million. Cash and due from banks declined $50.1 million from year-end to $289.4 million.
Financial position, credit, and capital
- Total assets were $3.89 billion, up 6.0% from December 31, 2014. Net loans were $2.44 billion and securities totaled $924.2 million. Deposits were $3.14 billion, up 8.1%; noninterest-bearing deposits were $705.2 million.
- Long-term debt remained $50.0 million and junior subordinated debt $55.0 million; repurchase-agreement funding fell to $174.4 million from $198.9 million. The $50 million of long-term FHLB advances are variable-rate notes with five-to-ten-year maturities and prepayment options.
- The allowance for loan losses was $47.7 million, or 1.9% of loans. Nonperforming loans were $8.4 million, down from $10.4 million at March 31; nonperforming assets were $8.8 million. First-half net charge-offs were $0.2 million versus $2.1 million in 2014. Potential problem loans rose to $33.3 million from $30.9 million at year-end, and loans in risk grades 8–10 increased to $162.0 million from $124.0 million.
- Q2 provision for loan losses was zero, but management’s second-quarter changes to Illinois/Indiana qualitative reserve factors increased estimated allowance requirements by $1.8 million compared with the prior-quarter method. Management said the allowance was adequate while noting future losses could emerge as information changes.
- At June 30, consolidated regulatory capital ratios included total capital of 17.46%, Tier 1 capital of 16.18%, and Common Equity Tier 1 of 11.71%; Busey Bank’s corresponding ratios were 15.43%, 14.15%, and 14.15%. Both were reported as well capitalized and compliant with applicable requirements.
Material changes, outlook, and risks
- Herget Financial was acquired for $34.1 million in cash, funded internally, adding deposits, loans, securities, and three Pekin branches. First-half acquisition expenses were $1.0 million. First-quarter restructuring included $0.7 million of fixed-asset impairment and $0.3 million of other costs; three branches closed July 30, 2015.
- Growth in loan volume and noninterest revenues supported earnings, including stronger mortgage loan-sale gains and 15.8% first-half growth in FirsTech remittance-processing revenue. Higher data-processing costs partly reflected Herget system conversion and FirsTech growth. Management cited competitive lending and historically low rates as pressure on asset yields and margin, and expects to improve margin by deploying liquid funds into loans and securities.
- No numerical earnings or margin guidance was provided. Management expects near-term loan losses to remain generally low, while cautioning that asset quality can fluctuate with local economic conditions. It reported adequate liquidity and no material pending litigation; ordinary-course legal matters were not expected to have a material effect.
- Risks highlighted include Illinois fiscal and budget stress, including potential effects on state-funded employers and vendors; southwest Florida’s recovery remaining below prior peak strength; interest-rate changes, competition, regulation, technology and cybersecurity, and acquisition integration. The company’s interest-rate simulation showed modeled year-one net interest income declines of 2.69% for a +100 bp shock and 11.57% for +400 bp; management cautioned that simulations are assumption-dependent and exclude mitigating actions.
- Management expects to redeem the $72.7 million Series C preferred stock in full in early 2016 because of a scheduled dividend-rate increase. The bank has not paid dividends to the parent since 2009, and distributions remain subject to regulatory constraints. The company reported no share repurchases in Q2, though a plan authorizes repurchases of up to 2 million shares.
Investor verification priorities
- Assess whether Herget’s acquired deposits and loans, integration costs, and branch restructuring produce the expected earnings and efficiency benefits.
- Track the increase in adversely graded and potential problem loans, the allowance methodology and qualitative adjustments, and whether low charge-offs persist.
- Monitor net interest margin against loan growth, funding costs, liquidity deployment, and the company’s exposure to rising rates.
- Confirm the preferred-stock redemption timing, funding source, and effect on capital and common-shareholder returns.
- Evaluate exposure to Illinois fiscal conditions, off-balance-sheet credit commitments ($600.2 million of lending commitments and $22.5 million of standby letters of credit), and the assumptions underlying reported liquidity and capital strength.