First Busey Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. First Busey is a regional bank holding company with banking, remittance-processing and wealth-management businesses. Results include The Banc Ed Corp. (Banc Ed) from its January 31, 2019 acquisition; reported year-over-year comparisons are therefore affected by the acquisition.
Key financial metrics
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $101.3 | $83.2 | $195.7 | $165.4 |
| Net interest income | $73.4 | $60.4 | $141.8 | $120.1 |
| Provision for loan losses | $2.5 | $2.3 | $4.6 | $3.3 |
| Noninterest income | $27.9 | $22.8 | $53.8 | $45.3 |
| Noninterest expense | $68.0 | $47.3 | $125.2 | $98.3 |
| Net income | $24.1 | $24.9 | $49.6 | $46.8 |
| Diluted earnings per share | $0.43 | $0.51 | $0.90 | $0.95 |
| Tax-equivalent net interest margin | 3.43% | 3.50% | 3.45% | 3.50% |
- Q2 adjusted net income, a non-GAAP measure, was $29.5 million, or $0.53 per diluted share; first-half adjusted net income was $56.1 million, or $1.02 per diluted share. Adjustments principally exclude acquisition, restructuring, lease impairment and mortgage-servicing-rights impairment costs.
- Q2 reported efficiency ratio was 63.6%, versus 54.8% a year earlier; adjusted efficiency ratio was 56.6%, versus 53.7%. The filing attributes higher costs to the acquisition and related integration and restructuring activity.
- Six-month operating cash flow was $37.4 million, compared with $111.8 million in 2018. Cash and cash equivalents ended at $420.2 million, up from $240.0 million at December 31, 2018. Investing and financing cash flows were positive $19.5 million and $123.4 million, respectively.
- At June 30, total assets were $9.61 billion, up 24.8% from year-end; portfolio loans, net, were $6.48 billion, up 17.5%; deposits were $7.83 billion, up 25.3%. Stockholders’ equity was $1.20 billion.
- Total deposits were $7.83 billion; noninterest-bearing deposits were $1.77 billion. Debt included $86.8 million long-term debt, $30.8 million short-term borrowings, $39.6 million senior notes, $59.2 million subordinated notes and $71.2 million junior subordinated debt. The company reported $190.8 million of repurchase-agreement funding.
- Regulatory capital ratios exceeded well-capitalized thresholds. At the consolidated level, total capital to risk-weighted assets was 13.96%, Tier 1 capital was 12.43%, CET1 was 11.41%, and Tier 1 leverage was 9.87%.
Material changes versus comparable periods
- Q2 revenue rose about 21.8% year over year, while GAAP net income fell about 3.1% and diluted EPS declined from $0.51 to $0.43. Higher funding costs and sharply higher operating expenses offset revenue growth.
- Net interest income grew with higher average loan balances, including Banc Ed. Interest expense also increased, reflecting higher time-deposit rates and acquisition-related borrowings. Q2 net interest margin declined to 3.43% from 3.50%.
- Noninterest income rose 22.3% in Q2. Customer-service fees, trust fees and mortgage revenue increased; equity-security valuation losses of $1.0 million and net securities-sale losses of $0.01 million reduced reported income.
- Q2 noninterest expense increased 43.8% to $68.0 million. Salaries, data processing, intangible amortization and other expenses rose, with acquisition and conversion costs among the drivers. Management identified $4.1 million of acquisition expenses, $1.4 million of other restructuring costs and $1.8 million of MSR impairment as Q2 pretax non-operating adjustments.
- Banc Ed added scale: First Busey issued approximately 6.7 million shares and paid $91.4 million cash consideration. The acquisition added $46.7 million of provisional goodwill. TheBANK bank merger was anticipated in Q4 2019.
- Asset quality remained comparatively low-risk by reported measures: nonperforming loans were $33.1 million, or 0.51% of portfolio loans, versus $36.6 million at March 31. The allowance was $51.4 million, or 0.79% of portfolio loans, compared with 0.91% at year-end.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expected near-term loan losses to remain generally low and said it expects operating efficiencies from the acquisition to benefit future years; the timing and amount are not quantified.
- Management said liquidity was adequate. Available additional borrowing capacity was $1.1 billion from the FHLB and $470.1 million from the Federal Reserve, plus an unused $20 million revolving facility.
- Potential problem loans totaled $79.2 million, up from $70.9 million at year-end. Total nonperforming assets were $34.0 million. Management said it expects planned restructurings, guarantees, collateral or other actions to support repayment, but outcomes remain uncertain.
- Credit commitments and standby letters of credit totaled approximately $1.60 billion and $37.6 million, respectively; some commitments may expire undrawn. Management identified Illinois fiscal and pension challenges as a potential risk to local markets.
- Interest-rate sensitivity modeling estimated first-year net interest income changes of -8.51% under a 200-basis-point decline and +4.26% under a 300-basis-point increase; second-year estimates were -11.53% and +8.25%, respectively. These are simulations, not forecasts, and exclude management actions.
- The company adopted lease accounting guidance in 2019, recording a $10.4 million right-of-use asset and $10.5 million lease liability at June 30. It also transferred $573.6 million of securities from held-to-maturity to available-for-sale, with a $4.8 million unrealized loss recorded in other comprehensive income.
- Management reported no material pending litigation, no material changes to previously disclosed risk factors, and no significant subsequent events requiring disclosure. CECL, which is expected to recognize credit losses earlier, was scheduled to take effect for the company in 2020; implementation work was ongoing.
- A proposed acquisition of Investors’ Security Trust Company was announced in May 2019, subject to customary conditions and approvals; management did not expect an immediate material impact on earnings or the business.
Important facts for investors to verify
- Whether Banc Ed integration, the planned Q4 bank merger and anticipated cost efficiencies proceed on schedule and deliver the expected benefits.
- How much of the reported earnings and expense changes reflect acquired operations versus organic performance, and whether acquisition-related costs recur.
- Whether deposit costs and funding mix continue to pressure net interest margin as the acquired balance sheet is integrated.
- Credit trends, especially the increase in potential problem loans and troubled debt restructurings, acquired-loan marks, charge-offs and future allowance needs.
- Final acquisition fair values and goodwill, which were provisional, and the eventual impact of CECL implementation.
- Progress and closing terms for the proposed IST acquisition, and any changes in capital, liquidity or regulatory ratios.