First Busey Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014. Financial statements are unaudited. Amounts below are in millions of dollars unless otherwise stated.
Business context and reporting period
First Busey is a bank holding company with banking operations in Illinois, Indiana and southwest Florida, plus wealth management and payment-processing businesses. The filing reports third-quarter and nine-month 2014 results against the comparable 2013 periods, and balance-sheet changes against December 31, 2013.
Financial performance and condition
- Third-quarter earnings: Net income was $9.1 million, up from $7.9 million; net income available to common shareholders was $8.9 million, or $0.10 per diluted share, versus $7.0 million, or $0.08. Net interest income rose to $25.9 million from $25.2 million. No loan-loss provision was recorded in the quarter, compared with $2.0 million a year earlier.
- Nine-month earnings: Net income was $25.2 million versus $21.8 million; common net income was $24.6 million, or $0.28 per diluted share, versus $19.1 million, or $0.22. Net interest income was $75.5 million versus $75.1 million, and provision for loan losses was $2.0 million versus $6.0 million.
- Revenue and expenses: Third-quarter other income fell 9.1% to $14.2 million, mainly because mortgage loan-sale gains declined; nine-month other income fell 8.0% to $44.2 million. Total other expense declined 3.9% for the quarter and 5.9% year to date, to $26.3 million and $79.7 million, respectively. The efficiency ratio improved to 63.0% for the quarter and 64.0% year to date, from 64.2% and 66.0%.
- Margins: Tax-equivalent net interest margin was 3.19% for the quarter versus 3.20% and 3.15% year to date versus 3.16%. Management cited low rates and strong competition as continuing pressure on asset yields.
- Balance sheet and funding: Total assets were $3.52 billion, down 0.5% from year-end. Gross loans rose to $2.38 billion from $2.30 billion; net loans including loans held for sale increased 3.8% to $2.33 billion. Deposits declined 1.5% to $2.83 billion, as interest-bearing balances fell and noninterest-bearing deposits increased. Cash and due from banks declined to $179.7 million from $231.6 million. Management reported core deposits at 76.1% of total assets and considered liquidity adequate.
- Debt and equity: The company recorded $30.0 million of new variable-rate FHLB advances, with stated maturities of seven to ten years and options to prepay at par; $55.0 million of junior subordinated debt remained outstanding. Total stockholders’ equity was $430.0 million, up from $415.4 million at year-end. Common dividends declared were $0.05 per share for the quarter and $0.14 year to date; preferred dividends were $0.5 million year to date, down from $2.7 million.
- Cash flow: For the first nine months, operating activities provided $46.0 million, investing activities used $56.4 million, and financing activities used $41.5 million. Cash declined $51.9 million to $179.7 million. Investing outflows included $89.5 million of net loan growth; financing inflows included the $30.0 million FHLB borrowing.
Material changes and asset quality
- Nonperforming loans declined to $8.7 million from $17.4 million at year-end; nonperforming assets fell to $9.0 million from $19.5 million. Nonperforming loans were 0.4% of loans, and allowance coverage of nonperforming loans increased to 537.6%.
- Net charge-offs were $0.4 million for the quarter and $2.6 million year to date, compared with $2.5 million and $6.0 million in the corresponding 2013 periods. Potential problem loans declined to $34.7 million from $50.1 million at year-end.
- The allowance was $47.0 million, or 2.0% of loans, compared with $47.6 million, or 2.1%, at year-end. Management said third-quarter changes to qualitative reserve factors increased the allowance requirement by $5.3 million versus the method used at June 30. The company also considered a $2.0 million recovery recorded early in the fourth quarter when deciding not to record a third-quarter provision.
- Loan growth was concentrated in commercial real estate and retail real estate. Most loans were in Illinois; management flagged Illinois budget deficits, pension underfunding and the state’s declining credit outlook as possible pressures on local borrowers.
Outlook, commentary, risks and unusual items
- Management said it expects near-term loan losses to remain at lower levels, while noting asset-quality measures may fluctuate with local economic conditions. It aims to grow loans, redeploy liquid funds into higher-yielding loans as the economy strengthens, and continue cost control. The filing provides no specific earnings or revenue guidance.
- Management reported that the company and bank met applicable capital requirements and were well capitalized. At September 30, consolidated total risk-based capital was 18.66% and Tier 1 risk-based capital was 17.37%; the bank’s corresponding ratios were 17.06% and 15.77%.
- On October 22, 2014, with regulatory approval, Busey Bank returned $60.0 million of capital and associated surplus to the parent company. This occurred after quarter-end.
- First Busey agreed to acquire Herget Financial for aggregate cash consideration of $34.1 million, subject to specified downward adjustments and regulatory and other closing conditions. Closing was anticipated in early 2015. Herget reported $275.1 million of consolidated assets at September 30, 2014.
- Interest-rate risk remains material: modeled immediate rate increases of 100 to 400 basis points reduced year-one net interest income by 2.62% to 11.44%; the filing cautions that simulations are assumption-dependent and exclude possible management actions. Other risks include competition, changing regulation, cybersecurity and technology, local economic conditions, and acquisition execution.
- The company reported no material pending litigation and no material changes to the risk factors in its 2013 Form 10-K. An Illinois Department of Revenue examination of the company’s 2011 and 2012 filings was ongoing. Management said the new revenue-recognition standard was still under evaluation and did not expect certain other recently issued accounting standards to have significant effects.
Important facts for investors to verify
- Whether the Herget acquisition closes on the anticipated timetable, the final consideration after contractual adjustments, and its effects on capital and earnings.
- The impact of the October 22 return of $60.0 million on Busey Bank’s capital, regulatory approvals and the parent company’s capacity to fund obligations and dividends.
- Whether asset-quality improvements persist, including the allowance’s adequacy after the $5.3 million qualitative-factor increase and the $2.0 million fourth-quarter recovery.
- Whether loan growth can offset continued yield pressure and lower mortgage-sale gains, and whether deposit trends and liquidity remain stable.
- Progress on the Illinois tax examination, implementation of Basel III requirements beginning in 2015, and exposure to Illinois economic and fiscal conditions.