First Busey Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Comparisons are primarily with Q1 2014, with balance-sheet comparisons to December 31, 2014. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context and notable developments
First Busey is a regional banking and financial-services company operating through Busey Bank, FirsTech payment processing and Busey Wealth Management. On January 8, 2015, it acquired Herget Financial for $34.1 million in cash. Herget added approximately $107.1 million of loans and $241.9 million of deposits at acquisition-date fair value, three Pekin, Illinois branches, and $4.8 million of goodwill. Its results are included from the acquisition date.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $26.7 million | $24.6 million, Q1 2014 |
| Net income | $7.8 million | $7.9 million, Q1 2014 |
| Net income available to common shareholders | $7.6 million; diluted EPS $0.09 | $7.7 million; diluted EPS $0.09, Q1 2014 |
| Other income | $16.0 million | $15.0 million, Q1 2014 |
| Total other expense | $30.5 million | $26.6 million, Q1 2014 |
| Tax-equivalent net interest margin | 3.03% | 3.13%, Q1 2014 |
| Efficiency ratio | 69.0% | 64.7%, Q1 2014 |
| Net cash provided by operating activities | $3.9 million | $16.8 million, Q1 2014 |
| Total assets | $3.94 billion | $3.67 billion, December 31, 2014 |
| Gross loans | $2.48 billion | $2.42 billion, December 31, 2014 |
| Total deposits | $3.18 billion | $2.90 billion, December 31, 2014 |
| Stockholders’ equity | $439.8 million | $433.6 million, December 31, 2014 |
Q1 2015 investing cash flow was $64.2 million, including $12.1 million of net cash received in the Herget acquisition. Financing cash flow was $21.4 million. Cash and due from banks ended the quarter at $428.9 million. Outstanding borrowings included $183.7 million under repurchase agreements, $50.0 million of long-term debt and $55.0 million of junior subordinated debt.
Reported regulatory capital ratios exceeded well-capitalized thresholds. At March 31, the consolidated total capital, Tier 1, common equity Tier 1 and leverage ratios were 17.64%, 16.36%, 11.78% and 11.80%, respectively; Busey Bank’s respective ratios were 15.44%, 14.16%, 14.16% and 10.25%.
Changes, management commentary and outlook
- Net interest income rose 8.6% year over year, supported by higher average earning assets and loan growth. The tax-equivalent margin nevertheless declined 10 basis points as asset mix shifted, deposits increased and loan yields faced competitive pressure.
- Other income increased 6.5%, including higher gains on loan sales and growth in service charges and remittance processing. Management said wealth and payment-processing activities diversify revenue.
- Expenses increased 14.8% year over year, including acquisition and restructuring costs. The resulting increase in the efficiency ratio reflects higher costs relative to revenue.
- Management expects near-term loan losses to remain generally low, while noting that asset-quality measures can fluctuate. It said it expects to redeploy liquid funds into loans at improved yields as the economy strengthens and continues to focus on margin improvement and operating efficiency. The filing provides no formal numeric earnings or margin guidance.
- Interest-rate simulation showed estimated first-year net interest income declines of 0.94% to 4.86% for immediate rate increases of 100 to 400 basis points; the second-year simulations showed increases of 2.06% to 5.66%. These are modeled scenarios, not forecasts, and exclude mitigating management actions.
Credit quality, unusual items and risks
- Non-performing loans were $10.4 million, up from $9.0 million at year-end but below $14.3 million a year earlier. Non-performing assets were $10.7 million; non-performing loans were 0.4% of loans. Net charge-offs were $0.3 million. The allowance was $47.7 million, or 1.9% of loans, and management considered it adequate.
- Loans in the lowest risk grades totaled $140.0 million, versus $124.0 million at year-end; figures include Herget. Management adjusted qualitative allowance factors, increasing estimated allowance requirements by $3.3 million relative to the method used at December 31, 2014.
- Q1 included $1.0 million of Herget acquisition expenses and separate branch/team restructuring items, including a $0.7 million premises impairment and $0.3 million of other restructuring costs. Management also cited $0.7 million of Herget system-conversion costs within acquisition expenses.
- Management identified Illinois fiscal and pension pressures as a market risk, particularly given local reliance on state-funded institutions. Other stated risks include interest-rate movements, competition, regulation, cybersecurity and technology, acquisition integration, litigation, and economic conditions. The filing reported no material change to the risk factors in the 2014 Form 10-K.
- Commitments to extend credit were $592.7 million and standby letters of credit were $21.0 million; these are contractual maximum amounts and not necessarily expected funding needs. Management reported no material pending litigation and no recorded liability for these commitments.
- Busey Bank had not paid dividends to the parent since 2009, and distributions remain subject to regulatory restrictions. The company said it anticipates redeeming its preferred stock in full in early 2016 because of a scheduled dividend-rate increase. An Illinois tax examination covering 2011 and 2012 was ongoing.
Most important facts for investors to verify
- Whether Herget integration delivers expected benefits and how acquisition-related costs and purchase-accounting estimates develop.
- Whether expense growth moderates and the efficiency ratio improves after the reported acquisition and restructuring charges.
- Whether the increase in lower-graded loans and non-performing loans is temporary, and whether allowance coverage remains adequate, particularly after the $3.3 million qualitative-factor adjustment.
- Whether margin improves as management deploys excess liquidity, given competitive loan pricing and the modeled sensitivity to rising rates.
- How the preferred-stock redemption will be funded, considering restrictions on bank-to-parent dividends and regulatory approval requirements.
- Whether actual cash flows and credit draws remain consistent with the large off-balance-sheet commitments and reported liquidity position.