First Busey Corporation — Q3 2020 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2020. First Busey is a regional bank holding company with banking, remittance processing and wealth management businesses. Comparisons below are to the corresponding 2019 period unless noted.
Financial performance and condition
- Q3 earnings: Net income was $30.8 million, up from $24.8 million; diluted EPS was $0.56 versus $0.45. Adjusted net income, a non-GAAP measure, was $32.8 million and adjusted diluted EPS was $0.60.
- Nine-month earnings: Net income was $72.0 million versus $74.4 million; diluted EPS was $1.31 versus $1.35. Adjusted net income was $74.5 million versus $86.6 million.
- Revenue and costs: Q3 net interest income was $69.8 million, down 5.1%, while non-interest income rose 4.4% to $32.3 million. Non-interest expense fell 17.0% to $56.5 million. For the first nine months, net interest income was $210.0 million and non-interest income was $87.8 million; non-interest expense was $170.1 million.
- Margins and returns: Tax-equivalent net interest margin was 2.86% in Q3, down from 3.35%; the nine-month margin was 3.02% versus 3.42%. Q3 return on average assets was 1.15% and return on average tangible common equity was 13.92%.
- Balance sheet: Total assets were $10.54 billion at quarter-end, up 8.7% from December 31, 2019. Net portfolio loans were $7.02 billion, up 5.9%; total deposits were $8.64 billion, up 9.4%. Noninterest-bearing deposits increased 41.6% to $2.60 billion.
- Credit and provision: The Q3 provision for credit losses was $5.5 million, compared with $3.4 million in Q3 2019; the nine-month provision was $35.7 million versus $8.0 million. The allowance was $98.8 million, or 1.39% of portfolio loans (1.55% excluding PPP loans). Non-performing loans were $24.2 million, 0.34% of portfolio loans, compared with $33.1 million and 0.50% a year earlier.
- Cash flow and liquidity: For the first nine months, operating cash flow was $101.4 million, investing cash use was $882.0 million and financing cash inflow was $731.0 million. Cash and cash equivalents ended at $479.7 million. Management said liquidity was adequate; additional borrowing capacity was reported as $1.5 billion at the FHLB and $477.5 million at the Federal Reserve.
- Debt and capital: The company issued $125 million of 5.25% fixed-to-floating subordinated notes due 2030 in June, qualifying as Tier 2 capital, and repaid its $48 million term-loan balance during Q1. At September 30, consolidated total capital was 16.63%, Tier 1 capital 13.08%, and CET1 12.08%; the company and bank exceeded applicable well-capitalized levels.
Material changes and management commentary
- COVID-19-related Federal Reserve rate cuts, lower-yielding PPP loans and elevated liquidity contributed to margin compression; lower deposit costs partly offset the pressure. Management warned margin pressure could continue.
- The company had $749.4 million in PPP loans outstanding for 4,569 customers. It had received approximately $25.4 million in fees and deferred them, net of $5.1 million of direct origination costs; $4.2 million of net fees and costs was recognized in Q3. No PPP loans had yet been approved for forgiveness by the SBA as of quarter-end.
- Customer-service fees declined 18.6% in Q3, attributed to COVID-related fee waivers and changes in customer behavior. Wealth-management fees rose 19.6% and mortgage revenue rose 73.9% year over year in Q3.
- After quarter-end, the company closed 12 banking centers. It estimated remaining Q4 non-operating pre-tax closure costs of $7.0–$7.5 million and anticipated approximately $3.3 million in annualized net expense savings when fully realized. A separate operating-model reorganization was expected to produce about $3.6 million in annual pre-tax expense savings.
- Total assets exceeded $10 billion. If they remain above that level at year-end, management expects interchange-fee limitations and heightened supervision and regulation in 2021.
- CECL adoption on January 1, 2020 reduced retained earnings by $15.9 million after tax. The company shortened its reasonable-and-supportable forecast horizon to four quarters because of uncertainty related to COVID-19.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management expects the pandemic’s effects to remain uncertain and potentially adverse, including further margin compression, higher credit provisions, weaker asset quality and lower customer-service fees. It highlighted exposure among hotel, restaurant, transportation, long-term healthcare, retail and commercial real estate borrowers. At quarter-end, payment deferrals included $426.4 million of commercial loans and $82.4 million of mortgage and personal loans; an additional $63.7 million of mortgage deferrals related to the serviced portfolio.
- Potential problem loans totaled $77.7 million, compared with $74.6 million at year-end 2019. The company said it was monitoring these credits and expected planned actions to support repayment.
- Management identified interest-rate, economic, credit, liquidity, cybersecurity and operational risks, among others. It also disclosed potential PPP-related litigation and the risk that the SBA could deny or reduce guarantees if origination, funding or servicing deficiencies are found.
- Legal matters were described as routine, with no material pending litigation disclosed. Banc Ed was under Illinois Department of Revenue examination for 2009–2016 income tax filings.
Important facts for investors to verify
- Whether the $10 billion asset threshold persists at year-end and the resulting regulatory and interchange-fee effects.
- PPP forgiveness progress, fee recognition timing and any SBA guarantee or compliance issues.
- Performance of loans emerging from payment deferrals, especially in vulnerable sectors, and changes in non-performing and potential problem loans.
- Whether credit provisions rise as economic forecasts and CECL assumptions change.
- Realized savings and final costs from the branch closures and operating-model reorganization.
- Net interest margin trends, deposit pricing and the continuing effects of low rates and PPP balances.