First Busey Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited consolidated results cover the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. First Busey is a regional banking and financial-services company, with Banking, Remittance Processing and Wealth Management segments. Comparisons with Q1 2016 are affected by the April 2016 Pulaski acquisition, whose results are included only from its acquisition date.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $62.0 million | $44.8 million in Q1 2016 |
| Net interest income | $42.0 million | $27.9 million in Q1 2016 |
| Net interest margin, tax-equivalent | 3.53% | 3.10% in Q1 2016 |
| Net income | $15.2 million | $10.4 million in Q1 2016 |
| Diluted earnings per share | $0.39 | $0.36 in Q1 2016 |
| Non-interest expense / efficiency ratio | $37.6 million / 58.8% | $27.7 million / 60.8% in Q1 2016 |
| Cash and cash equivalents | $439.5 million | $166.7 million at December 31, 2016 |
| Total assets / deposits | $5.44 billion / $4.49 billion | $5.43 billion / $4.37 billion at December 31, 2016 |
| Portfolio loans, gross | $3.87 billion | $3.88 billion at December 31, 2016 |
| Total stockholders’ equity | $602.3 million | $594.3 million at December 31, 2016 |
Operating cash flow was $186.6 million, investing cash flow was $83.9 million, and financing cash flow was $2.3 million; cash increased $272.8 million during the quarter. Operating cash flow included substantial mortgage originations and sale proceeds, so the reported amount should not be read as a recurring earnings measure. The company said liquidity was adequate to meet projected obligations.
At March 31, short-term borrowings were zero, down from $75.0 million at year-end; long-term FHLB debt was $80.0 million and junior subordinated debt was $70.9 million. Repurchase-agreement funding was $163.1 million. Total deposits rose 2.5% from year-end, including growth in noninterest-bearing deposits.
The allowance for loan losses was $48.4 million, or 1.3% of portfolio loans, versus $47.8 million, or 1.2%, at year-end. Non-performing assets were $21.6 million, or 0.6% of portfolio loans and non-performing assets; non-accrual loans were $20.5 million. The quarter recorded $0.1 million of net recoveries, compared with $1.6 million of net charge-offs in Q4 2016. Potential problem loans increased to $56.0 million from $50.2 million at year-end.
Regulatory capital ratios remained above well-capitalized thresholds. Consolidated total capital, Tier 1 capital, Common Equity Tier 1 and Tier 1 leverage ratios were 14.87%, 13.69%, 11.90% and 10.92%, respectively. Busey Bank’s corresponding ratios were 13.84%, 12.65%, 12.65% and 10.06%.
Material changes versus prior comparable period
- Net income increased about 45% year over year, while diluted EPS rose from $0.36 to $0.39. The Pulaski acquisition materially expanded the company and increased average interest-earning assets 32.8% and average interest-bearing liabilities 31.2% year over year.
- Net interest margin improved to 3.53% from 3.10%; management attributed higher net interest income to the larger balance sheet and improved spread.
- Non-interest income increased 18.8%, with growth in trust fees, deposit service charges and mortgage revenue. Remittance-processing revenue declined 2.7% year over year.
- Non-interest expense rose 35.9%, primarily reflecting Pulaski-related scale, alongside higher compensation, occupancy, equipment and intangible amortization. The efficiency ratio nevertheless improved to 58.8% from 60.8%.
- Quarter-end portfolio loans were nearly unchanged from year-end. Loans held for sale fell 62.4% to $96.4 million, which management attributed to lower 2017 origination volumes.
Outlook, commentary, risks and unusual items
- No specific full-year earnings or revenue guidance was provided. Management said the March 2017 Federal Reserve rate increase was expected to be modestly favorable to net interest income in 2017, while higher rates could reduce first-mortgage demand and refinancing activity.
- Management described near-term loan losses as generally expected to remain low, but cautioned that asset quality can fluctuate with local economic conditions and that additional losses may be identified. The allowance methodology did not include changes to qualitative factors in Q1.
- First Busey agreed to acquire First Community Financial Partners, with closing anticipated in mid-2017, subject to shareholder and remaining regulatory approvals and customary conditions. First Community reported $1.3 billion of assets, $1.1 billion of loans and $1.1 billion of deposits at March 31. The company also agreed to acquire Mid Illinois Bancorp, anticipated to close in the second half of 2017, subject to approvals and customary conditions; Mid Illinois reported $674.8 million of assets, $369.3 million of loans and $528.4 million of deposits. The company incurred $0.7 million of combined pre-tax pending-acquisition costs in Q1.
- Management’s non-GAAP operating earnings were $15.8 million, or $0.41 per diluted share, excluding pending-acquisition expenses, Pulaski acquisition costs and restructuring costs; GAAP net income was $15.2 million, or $0.39 per diluted share. The company also reported $0.2 million of restructuring costs and $1.2 million of net gains on OREO sales.
- Management identified Illinois’s pension underfunding, budget impasse and fiscal pressures as possible risks to local markets, including universities, health-care providers and government-related businesses. Other stated risks include interest-rate movements, competition, technology and cybersecurity, and acquisition execution and integration.
- Off-balance-sheet commitments included $936.6 million to extend credit and $20.1 million of standby letters of credit; these amounts are contractual maximums and do not necessarily represent future cash needs. Management reported no material pending litigation beyond ordinary-course matters. The filing disclosed a $2.1 million mortgage loan repurchase liability and noted that actual losses could exceed estimates.
- After quarter-end, the company amended its revolving credit facility with U.S. Bank: maturity was extended to April 30, 2018, and the maximum commitment increased from $20 million to $40 million. No amount was drawn at March 31.
Most important facts for investors to verify
- Whether First Community and Mid Illinois transactions closed on anticipated timelines and on terms consistent with announced expectations, including integration costs and realized efficiencies.
- Whether the improvement in earnings and net interest margin persists after separating Pulaski acquisition effects, mortgage-sale activity, security gains and other unusual items.
- Whether credit quality remains stable: monitor the $56.0 million of potential problem loans, non-accrual loans, recoveries, allowance coverage and acquired-loan marks.
- Whether deposit growth, liquidity and capital remain adequate as acquisitions proceed and the company funds customer commitments.
- How higher rates affect net interest income, mortgage production, deposit costs and the value of the securities portfolio; management’s sensitivity estimates are model-based and not forecasts.