Business context and reporting period
First Busey Corporation, a bank holding company with banking, wealth management and payment-processing businesses, filed this unaudited Form 10-Q for the quarter ended September 30, 2015. Comparisons are with Q3 and the first nine months of 2014, unless otherwise noted. On January 8, 2015, the company acquired Herget Financial; its results are included from the acquisition date. Share and per-share figures reflect a 1-for-3 reverse stock split effective September 8, 2015.
Financial performance and position
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $28.2 | $25.9 | $82.2 | $75.5 |
| Net income | $10.6 | $9.1 | $28.3 | $25.2 |
| Net income available to common | $10.4 | $8.9 | $27.8 | $24.6 |
| Diluted earnings per share | $0.36 | $0.31 | $0.95 | $0.85 |
| Total other income | $15.9 | $14.2 | $48.5 | $44.2 |
| Total other expense | $28.0 | $26.3 | $86.9 | $79.7 |
Third-quarter tax-equivalent net interest margin was 3.10%, down from 3.19% a year earlier; the nine-month margin was 3.06%, versus 3.15%. The Q3 efficiency ratio improved to 60.8% from 63.0%; the nine-month ratio was 63.9% versus 64.0%. The nine-month effective tax rate was 34.4%.
At September 30, 2015, total assets were $3.86 billion, up 5.4% from year-end 2014. Gross loans were $2.58 billion, up about 6.8%; deposits were $3.11 billion, up 7.2%. Available-for-sale and held-to-maturity securities totaled $952.6 million. Stockholders’ equity was $444.2 million. Debt included $50 million of long-term debt and $55 million of junior subordinated debt; repurchase-agreement funding was $177.0 million.
For the first nine months, operating cash flow was $38.6 million, investing cash flow was negative $128.6 million and financing cash flow was negative $74.3 million. Cash and due from banks declined by $164.3 million to $175.1 million, reflecting, among other activity, securities purchases and loan growth. Management stated that liquidity was adequate to meet projected obligations.
At quarter-end, consolidated regulatory capital ratios included total capital of 17.07%, Tier 1 capital of 15.80%, Common Equity Tier 1 of 11.52% and Tier 1 leverage of 11.81%. Busey Bank also exceeded applicable “well-capitalized” thresholds.
Material changes versus comparable periods
- Q3 net income rose 16.7% year over year; nine-month net income rose 12.5%. Nine-month diluted EPS increased to $0.95 from $0.85.
- Net interest income increased with loan and securities growth, but lower asset yields contributed to margin compression. Management cited historically low rates and intense competition for loans.
- Noninterest income grew 11.9% in Q3 and 9.7% year to date, with growth in wealth fees, remittance processing and mortgage gains. FirsTech’s nine-month remittance revenue rose 17.6%.
- Operating expenses increased 6.3% in Q3 and 9.0% year to date. Management attributed part of the year-to-date increase to Herget integration and other first-quarter items.
- Herget was acquired for $34.1 million in cash, funded internally. The acquisition added $241.9 million of deposits and $105.2 million of loans at acquisition, among other assets and liabilities.
- Nonperforming loans were $8.0 million, down from $8.7 million at September 2014; nine-month net charge-offs were $0.8 million versus $2.6 million. However, potential problem loans rose to $40.7 million from $30.9 million at year-end 2014, and lower-grade loans increased to $151.2 million from $124.0 million.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expects near-term loan losses to remain generally low, while cautioning that asset-quality measures can fluctuate with local economic conditions. It aims to improve margin by redeploying liquid funds into higher-yielding securities and loans.
- Reported nine-month results included $1.0 million of Herget-related acquisition costs, $0.7 million of premises impairment and $0.3 million of other restructuring costs. Management also cited software conversion and other integration expenses.
- Management expected, subject to regulatory approval, to redeem the $72.7 million Series C preferred stock in full in early 2016 because its dividend rate was scheduled to increase.
- Risks highlighted include interest-rate changes, competitive pressure, acquisition integration, changes in regulation and technology, and local economic conditions. The company specifically noted Illinois’ budget impasse and fiscal challenges, Caterpillar’s announced restructuring in the Peoria area, and that southwest Florida had not returned to peak economic strength.
- Interest-rate simulations showed a modeled first-year net-interest-income decline of 3.14% under an immediate +100 basis-point shift and 13.48% under +400 basis points. Management cautioned that simulations rely on assumptions and do not include mitigating actions.
- Off-balance-sheet commitments included $586.4 million to extend credit and $15.7 million of standby letters of credit; these are contractual maximums and do not necessarily represent expected funding needs. Management reported no material pending litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan-quality deterioration continues: potential problem loans, lower-grade loans, delinquencies and charge-offs warrant tracking alongside the declining allowance-to-loans ratio of 1.83%.
- How much reported growth and profitability reflect Herget, and whether integration costs, operating synergies and acquired-loan performance develop as expected.
- Whether net interest margin stabilizes as cash is redeployed, and how actual results compare with the company’s interest-rate sensitivity simulations.
- Whether liquidity remains sufficient as cash balances fall and loan growth, deposit flows and securities investment continue.
- Whether regulatory approval is obtained and the preferred stock is redeemed as management expected, and the resulting effect on capital and funding.