(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial condition as of March 31, 2019 (unaudited), as compared with December 31, 2018 and March 31, 2018 (unaudited), and the results of operations for the three months ended March 31, 2019 and 2018 (unaudited) and December 31, 2018. Management's discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
The Company recorded net income for the first quarter of 2019 of $25.5 million, or $0.48 per diluted common share, as compared to $25.3 million, or $0.51 per diluted common share, for the fourth quarter of 2018 and $21.9 million, or $0.45 per diluted common share, for the first quarter of 2018. Adjusted net income1 for the first quarter of 2019 was $26.6 million, or $0.50 per diluted common share, as compared to $26.0 million, or $0.53 per diluted common share, for the fourth quarter of 2018 and $24.9 million, or $0.51 per diluted common share, for the first quarter of 2018.
On January 31, 2019, the Company completed its acquisition of The Banc Ed Corp., the holding company for The Bank of Edwardsville ("TheBANK"). TheBANK, founded in 1868, is a commercial bank headquartered in Edwardsville, Illinois. It is anticipated that TheBANK will be merged with and into First Busey's bank subsidiary, Busey Bank, in the fourth quarter of 2019.
The Company views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pretax adjustments for the first quarter of 2019 were $1.2 million of expenses related to acquisitions and $0.3 million of expenses related to restructuring costs. The reconciliation of non-GAAP measures (including adjusted net income, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible book value, tangible book value per share and return on average tangible common equity), which the Company believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Quarterly Report on Form 10-Q in the "Non-GAAP Financial Information" section.
Revenues from trust fees, commissions and brokers' fees, and remittance processing activities represented 49.4% of the Company's non-interest income for the first quarter of 2019, providing a balance to revenue from traditional banking activities. Two of the Company's acquisitions, Pulaski and First Community, had no legacy fee income in these businesses; therefore, the addition of First Busey's fee-based service offerings in the respective acquired bank markets is expected to continue providing attractive growth opportunities in future periods.
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As of March 31, 2019 and December 31, 2018, the Company reported non-performing loans of $36.6 million. Non-performing loans were 0.56% of total portfolio loans as of March 31, 2019 compared to 0.66% as of December 31, 2018. With a continued commitment to asset quality and the strength of our balance sheet, near-term loan losses are expected to remain generally low. While these results are encouraging, asset quality metrics can be generally influenced by market-specific economic conditions, and specific measures may fluctuate from period to period. The key metrics are as follows (dollars in thousands):
As of March 31, December 31, September 30, June 30, 2019 2018 2018 2018 Portfolio loans $ 6,515,081 $ 5,568,428 $ 5,623,741 $ 5,555,287 Allowance for loan losses 50,915 50,648 52,743 53,305 Non-performing loans Non-accrual loans 36,230 34,997 40,395 23,215 Loans 90+ days past due 356 1,601 364 1,142 Loans 30-89 days past due 10,780 7,121 8,189 10,017 Other non-performing assets 921 376 1,093 3,694 Allowance as a percentage of non-performing loans 139.2 % 138.4 % 129.4 % 202.2 % Allowance for loan losses to portfolio loans 0.78 % 0.91 % 0.94 % 0.96 %
Economic Conditions of Markets
The Company has 44 banking centers serving Illinois. Our Illinois markets of Champaign, Macon, McLean, and Peoria counties and Southwest Chicago feature several Fortune 1000 companies. Those organizations, coupled with large healthcare and higher education sectors, anchor the communities in which they are located and have provided a comparatively stable foundation for housing, employment and small business.
The State of Illinois, where a large portion of the Company's customer base is located, continues to be troubled with pension under-funding, continued budget deficits and a declining credit outlook. Any possible payment lapses by the State of Illinois to its vendors and government sponsored entities may have negative effects on our primary market areas.
Busey Bank has 13 banking centers serving the St. Louis metropolitan area, all of which are located in the city of St. Louis or the adjacent counties of St. Louis County and St. Charles County. The bi-state metropolitan area includes seven counties in Missouri and eight counties in Illinois; therefore, the Company's geographic concentration in only three of these 15 counties gives the Company expansion opportunities into neighboring counties. St. Louis has a diverse economy with major employment sectors including health care, financial services, professional and business services, and retail. St. Charles County has been one of the fastest-growing counties in the country for decades.
Busey Bank has five banking centers in southwest Florida, which has experienced job growth and an expanded housing market over the last several years.
Busey Bank has one banking center in the Indianapolis, Indiana area, which is the most populous city of Indiana with a
diverse economy Indianapolis is the headquarters of many large corporations.
TheBANK has 19 banking centers in Illinois and one loan production office in the greater St. Louis, MO-IL MSA.
Net interest income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-
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bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets. Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes an income tax rate of 21%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.
The following tables show our consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the periods shown. All average information is provided on a daily average basis.
CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES (UNAUDITED) Three Months Ended March 31, 2019 2018 Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate(5) Balance Expense Rate(5) Assets Interest-bearing bank deposits and federal funds sold $ 220,471 1,232 2.27 % $ 118,327 $ 423 1.45 % Investment securities: U.S. Government obligations 333,101 2,066 2.52 % 161,572 649 1.63 % Obligations of states and political subdivisions(1) 266,283 1,937 2.95 % 309,252 1,979 2.74 % Other securities 1,122,631 7,544 2.73 % 840,078 4,958 2.39 % Loans held for sale 17,249 167 3.93 % 39,294 350 3.61 % Portfolio loans(1), (2) 6,128,661 72,012 4.77 % 5,507,860 60,852 4.49 % Total interest-earning assets(1), (3) $ 8,088,396 $ 84,958 4.26 % $ 6,976,383 $ 69,211 4.03 % Cash and due from banks 106,155 108,728 Premises and equipment 138,157 118,356 Allowance for loan losses (51,427) (54,637) Other assets 584,361 515,069 Total assets $ 8,865,642 $ 7,663,899 Liabilities and Stockholders' Equity Interest-bearing transaction deposits $ 1,698,592 $ 2,478 0.59 % $ 1,162,692 $ 670 0.23 % Savings and money market deposits 2,204,884 2,704 0.50 % 2,026,948 1,519 0.30 % Time deposits 1,689,019 7,318 1.76 % 1,378,520 3,798 1.12 % Federal funds purchased and repurchase agreements 204,529 583 1.16 % 258,049 341 0.54 % Borrowings (4) 195,911 1,901 3.93 % 278,009 1,833 2.67 % Junior subordinated debt issued to unconsolidated trusts 71,156 914 5.21 % 71,010 715 4.08 % Total interest-bearing liabilities $ 6,064,091 $ 15,898 1.06 % $ 5,175,228 $ 8,876 0.70 % Net interest spread(1) 3.20 % 3.33 % Noninterest-bearing deposits 1,616,913 1,497,136 Other liabilities 74,766 57,773 Stockholders' equity 1,109,872 933,762 Total liabilities and stockholders' equity $ 8,865,642 $ 7,663,899 Interest income / earning assets(1), (3) $ 8,088,396 $ 84,958 4.26 % $ 6,976,383 $ 69,211 4.02 % Interest expense / earning assets $ 8,088,396 $ 15,898 0.80 % $ 6,976,383 $ 8,876 0.51 % Net interest margin(1) $ 69,060 3.46 % $ 60,335 3.51 %
(2) Non-accrual loans have been included in average portfolio loans.
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(3) Interest income includes a tax-equivalent adjustment of $0.7 million and $0.6 million at March 31, 2019 and 2018, respectively.
(4) Includes short-term and long-term borrowings. Interest expense includes a non-usage fee on revolving loan.
Earning Assets, Sources of Funds and Net Interest Margin
Total average interest-earning assets increased $0.9 million, or 12.7%, to $8.1 billion in the first quarter of 2019, as compared to $7.2 billion in the fourth quarter of 2018. Average loans have increased due to the acquisition and organic growth. Loans generally have notably higher yields compared to interest-bearing bank deposits and investment securities and our loan growth contributed to a positive effect on net interest margin.
Total average interest-bearing liabilities increased $734.2 million, or 13.8%, to $6.1 billion in the first quarter of 2019 as compared to $5.3 billion in the fourth quarter of 2018. Average noninterest-bearing deposits increased $129.9 million, or 8.7%, to $1.6 billion in the first quarter of 2019, as compared to $1.5 billion in the fourth quarter of 2018.
Interest income, on a tax-equivalent basis, increased $15.7 million, or 22.8%, to $85.0 million for the three month period ended March 31, 2019, compared to $69.2 million in same period of 2018. The interest income increase related primarily to the increase in loan volumes. Interest expense increased during the three month period ended March 31, 2019 by $7.0 million to $15.9 million, compared to $8.9 million in the same period of 2018. Funding costs have increased primarily due to resetting of time deposit rates to reflect market increase and additional borrowings in conjunction with the Banc Ed acquisition.
Net interest income, on a tax-equivalent basis, increased $8.7 million, or 14.5%, for the three month period ended March 31, 2019 as compared to the same period of 2018. The Federal Open Market Committee announced that the federal funds rate increased from 1.50% to 1.75% on March 21, 2018, from 1.75% to 2.00% on June 13, 2018, from 2.00% to 2.25% on September 26, 2018 and from 2.25% to 2.50% on December 19, 2018, for a combined increase of 100 basis points in 2018. The Company expects the increases in interest rates to be modestly favorable to net interest income for the remainder of 2019; however, rising interest rates could result in decreased demand for first mortgages as well as mortgage refinancing, both activities which contribute to a portion of the Company's mortgage revenue.
Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, decreased to 3.46% for the three month period ended March 31, 2019, compared to 3.51% for the same period of 2018. Net of purchase accounting accretion and amortization,(1) the net interest margin for the three month period ended March 31, 2019 was 3.31%, consistent with the same period in 2018.
The quarterly net interest margins were as follows:
2019 2018 First Quarter 3.46 % 3.51 % Second Quarter - % 3.51 % Third Quarter - % 3.41 % Fourth Quarter - % 3.38 %
The net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.20% in the first quarter of 2019 compared to 3.33% in the same period of 2018, each on a tax-equivalent basis.
Management attempts to mitigate the effects of the interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies. Please refer to the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for accounting policies underlying the recognition of interest income and expense.
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Non-interest income (dollars in thousands): Three Months Ended March 31, $ % 2019 2018 Change Change Trust fees $ 8,115 $ 7,514 $ 601 8.0 % Commissions and brokers' fees, net 914 1,096 (182) (16.6) % Remittance processing 3,780 3,392 388 11.4 % Fees for customer services 8,097 6,946 1,151 16.6 % Mortgage revenue 1,945 1,643 302 18.4 % Security gains, net 42 - 42 - % Other income 3,052 1,895 1,157 61.1 % Total non-interest income $ 25,945 $ 22,486 $ 3,459 15.4 %
Total non-interest income of $25.9 million for the three month period ended March 31, 2019 increased by 10.2% as compared to $22.5 million for the same period in 2018.
Combined Wealth Management revenue, consisting of trust fees and commissions and brokers' fees were positively impacted as we built upon recent acquisitions and expanded market share, partially offset by a decline in farm management brokerage income due to timing of land sales. Trust fees and commissions and brokers' fees were $9.0 million for the first quarter of 2019 compared to $8.6 million for the first quarter of 2018. The Company's wealth management division ended the first quarter of 2019 with $8.9 billion in assets under care.
Remittance processing revenue from the Company's subsidiary, FirsTech, of $3.8 million for the first quarter of 2019 increased from $3.4 million for the first quarter of 2018. FirsTech experienced growth from both new clients and expansion of existing clients.
The mortgage line of business generated $1.9 million of revenue in the first quarter of 2019, an increase compared to $1.6 million of revenue in the first quarter of 2018, following a period of restructuring and additional revenue from TheBANK.
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Non-interest expense (dollars in thousands): Three Months Ended March 31, $ % 2019 2018 Change Change Salaries, wages and employee benefits $ 32,341 $ 28,819 $ 3,522 12.2 % Net occupancy expense of premises 4,202 3,821 381 10.0 % Furniture and equipment expenses 2,095 1,913 182 9.5 % Data processing 4,401 4,345 56 1.3 % Amortization of intangible assets 2,094 1,515 579 38.2 % Other expense 12,030 10,627 1,403 13 % Total non-interest expense $ 57,163 $ 51,040 $ 6,123 12.0 % Income taxes $ 9,585 $ 8,278 $ 1,307 15.8 % Effective rate on income taxes 27.3 % 27.4 % Efficiency ratio 58.0 % 59.8 % Full-time equivalent employees as of period-end 1,589 1,278
Total non-interest expense of $57.2 million for the three month period ended March 31, 2019 increased as compared to $51.0 million for the same period in 2018. The three months ended March 31, 2019 reflect increases from the Banc Ed acquisition.
Salaries, wages and employee benefits increased to $32.3 million in 2019 as compared to $28.8 million in 2018. The increases in salaries, wages and employee benefits primarily relates to fluctuations in the number of employees resulting from the acquisition.
Combined net occupancy expense of premises and furniture and equipment expenses were $6.3 million for the three months ended March 31, 2019 and $5.7 million for the three months ended March 31, 2018.
Amortization of intangible assets increased to $2.1 million for the three months ended March 31, 2019 compared to $1.5 million for the three months ended March 31, 2018 as a result of the Banc Ed acquisition. Other expense of $12.0 million for the three month period ended March 31, 2019 was an increase compared to $10.6 million for the same period in 2018.
The effective income tax rate of 27.3% for the three months ended March 31, 2019, was lower than the combined federal and state statutory rate of approximately 28% due to fairly stable amounts of tax preferred interest income, such as municipal bond interest and bank owned life insurance income. The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. At March 31, 2019, the Company was not under examination by any tax authority.
The efficiency ratio(1) is calculated as total non-interest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus non-interest income, less security gains and losses. The efficiency ratio, which is a measure commonly used by management and the banking industry, measures the amount of expense incurred to generate a dollar of revenue. The efficiency ratio improved in the first quarter of 2019 to 58.0% as compared to 59.8% in the same period of 2018. Operating costs have been influenced by acquisitions and the adjusted efficiency ratio(1), excluding the impact of such acquisition costs among other items, was 56.4% for the quarter ended March 31, 2019 and increase from 55.5% for the same period of 2018. While acquisition expenses may have a negative impact on the efficiency ratios, the Company expects to realize operating efficiencies creating a positive impact in future years.
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FINANCIAL CONDITION Significant Consolidated Balance Sheet items (dollars in thousands): March 31, December 31, 2019 2018 $ Change % Change Assets Securities available for sale $ 1,918,295 $ 697,685 $ 1,220,610 175.0 % Securities held to maturity 15,846 608,660 (592,814) (97.4) % Portfolio loans, net 6,464,166 5,517,780 946,386 17.2 % Total assets $ 9,537,334 $ 7,702,357 $ 1,834,977 23.8 % Liabilities Deposits: Noninterest-bearing $ 1,791,339 $ 1,464,700 $ 326,639 22.3 % Interest-bearing 5,971,887 4,784,621 1,187,266 24.8 % Total deposits $ 7,763,226 $ 6,249,321 $ 1,513,905 24.2 % Securities sold under agreements to repurchase $ 217,077 $ 185,796 $ 31,281 16.8 % Short-term borrowings 30,739 - 30,739 100.0 % Long-term debt 89,476 50,000 39,476 79.0 % Senior notes, net of unamortized issuance costs 39,573 39,539 34 0.1 % Subordinated notes, net of unamortized issuance costs 59,172 59,147 25 0.0 % Junior subordinated debt owed to unconsolidated trusts 71,192 71,155 37 0.1 % Total liabilities $ 8,351,193 $ 6,707,393 $ 1,643,800 24.5 % Stockholders' equity $ 1,186,141 $ 994,964 $ 191,177 19.2 %
The Company believes that making sound loans is a necessary and desirable means of employing funds available for investment. Authorized personnel are expected to make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations and duration of loans most appropriate for its business model and markets. While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or are loans to existing customers of the banks. The Company attempts to utilize government-assisted lending programs, such as the Small Business Administration and United States Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid primarily from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.
Management reviews and approves the Company's lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews the Company's allowance for loan losses in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company's underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an
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active deposit banking relationship in addition to the lending relationship. Additional significant underwriting factors beyond location, duration, a sound and profitable cash flow basis and the borrower's character include the quality of the borrower's financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.
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May 08, 2019
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