First Busey Corporation — Q1 2016 Form 10-Q
Business context and reporting period. First Busey is a regional banking and financial-services company with Banking, Remittance Processing and Wealth Management segments. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
- Revenue and earnings: Net interest income was $27.9 million, up 4.8% from $26.7 million. Other income was $16.8 million, up 5.5%; combined revenue (net interest income plus other income) was $44.8 million, versus $42.6 million. Net income rose to $10.4 million from $7.8 million, and diluted EPS was $0.36 versus $0.26. The 2015 quarter included acquisition-related and restructuring costs and a premises impairment, which affect comparability.
- Interest margin: Tax-equivalent net interest margin increased to 3.10% from 3.03%; net interest spread increased to 3.05% from 2.96%.
- Expenses and profitability: Noninterest expense declined 9.4% to $27.7 million. The efficiency ratio improved to 60.8% from 69.0%. The effective tax rate was 35.2%, versus 33.0%.
- Cash flow: Operating cash flow was $7.0 million, compared with $3.9 million. Investing activities provided $113.8 million, while financing activities used $119.1 million. Cash and due from banks ended at $321.0 million, up $1.7 million from year-end 2015; it was $428.9 million at March 31, 2015.
- Balance sheet and funding: Total assets were $3.89 billion, down 2.7% from year-end. Net loans were $2.53 billion, down 1.9%; total deposits were $3.18 billion, down 3.3%, principally reflecting a $121.9 million decline in noninterest-bearing deposits. Average deposits were $3.20 billion for the quarter, up from $3.15 billion a year earlier. Management said deposits represented 90.7% of average liabilities and described liquidity as solid.
- Debt and capital: Long-term debt was $80.0 million and junior subordinated debt was $55.0 million, both unchanged from year-end; repurchase-agreement balances were $166.1 million. Consolidated regulatory capital ratios were 15.02% total capital, 13.76% Tier 1, 11.91% common equity Tier 1 and 10.36% leverage. The company and bank met applicable requirements to be considered well capitalized.
- Credit quality: The allowance for loan losses was $45.2 million, or 1.7% of loans, versus $47.5 million, or 1.8%, at year-end. Nonperforming loans increased to $17.8 million from $12.8 million; nonperforming assets were $18.3 million, or 0.7% of loans and nonperforming assets. Q1 net charge-offs were $3.3 million, versus $0.7 million in Q4 2015 and $0.3 million in Q1 2015. Management attributed the Q1 charge-offs mainly to a few agricultural and energy borrowers and said exposure to those industries was limited.
Material changes versus comparable periods
- Compared with Q1 2015, net income increased 34%; higher net interest income and lower expenses more than offset increased loan-loss provision and lower loan-sale gains. Q1 2015 included $1.0 million of Herget acquisition expenses, $0.7 million of premises impairment and $0.3 million of other restructuring costs. Management estimated that excluding the cited 2015 one-time expenses, Q1 2015 net income available to common stockholders would have been $8.8 million, or $0.30 per diluted share.
- Other income included $1.1 million of net securities gains, versus an insignificant amount in Q1 2015. The company sold $31.1 million of seasoned mortgage-backed securities and reinvested the proceeds at similar yields. Loan-sale gains declined to $0.4 million from $1.4 million.
- From year-end 2015, securities declined $56.8 million and gross loans declined $51.6 million. Stockholders’ equity increased $10.1 million to $383.3 million, primarily from earnings and securities-market value changes, partly offset by dividends.
Outlook, commentary and risks
- First Busey completed its acquisition of Pulaski Financial Corp. on April 30, 2016, after quarter-end; Pulaski’s results are not included in this filing. Consideration was approximately $193.1 million in Busey shares based on the April 29 closing price. The planned bank merger was expected in Q4 2016, subject to regulatory approval. Purchase accounting valuations were incomplete, and management warned that Pulaski integration costs could raise expenses for the remainder of 2016.
- Management expressed confidence in its 2016 positioning, citing growth plans, capital, core funding and credit foundations. It expected the December 2015 increase in the federal funds rate to be modestly favorable to net interest income over the following year. No specific earnings or revenue guidance was provided.
- Risks highlighted include higher nonperforming loans and potential problem loans ($32.8 million versus $29.2 million at year-end), possible further credit losses, and uncertainty in the Illinois economy and state finances. Management also noted potential impacts from interest-rate changes, competition, regulation, technology, and acquisition execution. Its interest-rate simulation showed a year-one net-interest-income impact of +0.36% for a 100-basis-point rise and -1.04% for a 400-basis-point rise; the filing cautions that simulations depend on assumptions and are not forecasts.
- The company reported no material change to the risk factors in its 2015 Form 10-K and no material pending litigation beyond ordinary-course matters. Management stated that its disclosure controls were effective at March 31, 2016.
Investor verification points
- Track whether Pulaski integration, purchase-accounting adjustments and anticipated cost savings match management’s stated expectations; confirm the bank merger timing and regulatory approval.
- Monitor nonperforming loans, potential problem loans, charge-offs and allowance coverage, particularly given the quarter-over-quarter increase in nonaccrual loans and exposure to agricultural and energy borrowers.
- Reconcile the decline in quarter-end deposits with the reported growth in average deposits, and assess liquidity and funding after the Pulaski transaction.
- Evaluate whether earnings growth and the improved efficiency ratio persist after considering Q1 securities gains, lower prior-year comparison costs and the reclassification of mortgage-loan compensation expense.
- Verify capital ratios and dividend capacity after the acquisition. The filing notes that Busey Bank had not paid dividends to the holding company since 2009 because of a retained-earnings deficit; its most recent regulator-approved distribution was $60 million in December 2015.