On April 22, 2014 First Busey Corporation (BUSE, Financial), announced a 25% increase in its annual dividend. In making the announcement, the Illinois-based regional bank cited "strong financial performance".
At current prices and an annual dividend of 20-cents, the stock yields around 3.5%.
In addition to the dividend increase, the First Quarter 2014 press release also reported, "Net income growth was led by a reduction in preferred dividends, credit costs and operating expenses."
With the stock continuing to trade well below its 2008 financial crisis levels and optimistic operating news, we'll take a look at First Busey Corporation as a potential value stock. The chart below shows stock prices and dividends
Business Model
First Busey Corporation is, according to its website, a $3.5-billion financial holding company, which owns and operates:
- Busey Bank, with 36 branches in Illinois (28 branches), Indiana (1), and southwest Florida (7);
- FirsTech, Inc., a retail payment processing subsidiary, through Busey Bank;
- Trevett Capital Partners, the wealth management division of Busey Bank;
- Busey Wealth Management, a wholly-owned subsidiary;
As the following table shows, the banking subsidiary accounts for more than half of the holding company's income:
The 10-K report also notes services offered through the subsidiaries include: "...commercial, agricultural and real estate loans, and retail banking services, including home equity lines of credit, residential real estate and consumer loans, customary types of demand and savings deposits, money transfers, safe deposit services, IRA, Keogh and other fiduciary services through our branch, ATM and technology-based networks."
First Busey Corporation is registered as a Nevada Corporation.
History
Based on information from Wikipedia and the company website unless otherwise noted:
- 1868: Busey Brothers and Company Bank founded by Dr. W. R. Earhart and the brothers Simeon Busey and Colonel Samuel T. Busey;
- 1913: receives a state charter to become Busey's State Bank;
- 1945: receives a federal charter and becomes Busey First National Bank;
- 1980: bank holding company established
- 1992: acquires Empire Capital Corporation
- 1993: acquires Eagle Bank of Champaign County
- 1999: acquires Eagle BancGroup, Inc.
- 2004: acquires First Capital Bankshares, Incorporated
- 2005: acquires Tarpon Coast Bancorp, Inc. (Florida)
- 2006: First Busey Corporation merges with Main Street Trust, Inc.
- 2009: under the TARP program, First Busey receives $100-million in cash in exchange for an issuance of preferred stock (Series T) and warrants (10-K Report for 2009);
- 2011: redeemed all outstanding shares of its Series T Preferred Stock, for a redemption price of approximately $100.1 million; this was made possible by an earlier sale of common stock and a new, less restrictive, preferred issuance (Series C) under the provisions of the Small Business Lending Fund, the SBLF (10-K Report for 2011);
- 2013: listed as one of Forbes' 100 Most Trustworthy Companies in America
- 2014: listed as one of Forbes' 50 Most Trustworthy Financial Companies in America
Growth Strategy
As noted in the introduction to this article, the company has leveraged better earnings through three areas of improvement. More specifically:
- lower payments to the Treasury Department on its preferred shares, by meeting loan volume thresholds;
- reducing its credit costs by increasing loans in the highest credit grades, and reducing loans in the lowest credit grades;
- reducing operating expenses - exercising what it calls expense discipline
The company also reports in its 2013 Annual Report, "...we expect to continue growing revenue for our shareholders by delivering superior service to existing customers, building strong new relationships and capitalizing on our size and scope by providing personal service across the widest range of capabilities. In short, we plan to "out-big the smalls and out-small the bigs.""
No specific mention is made of growth through acquisitions and mergers, although this had been a consistent theme between 1992 and 2006, and the company says in its Fourth Quarter 2013 press release, "... further growth opportunities through organic and external channels....". Of course, we would not expect the company to tip its hand, nor would we expect an imminent return to this strategy given the hardships many banks experienced during and after the 2008 financial crisis. Still, it may be an option for BUSE in the not-too-distant future, and a larger branch network would reduce its fixed costs on a per branch basis.
Management
- President & CEO: Van A. Dukeman, age 55, also serves as a Director. He has held the CEO post since August 2007. Previously, he served as a Director, Chief Executive Officer and President of Main Street Trust, Inc. (until its merger with First Busey);
- Chief Financial Officer: Robin N. Elliott, age 37;
- Chairman: Gregory B. Lykins, previously served as Chairman of Main Street Trust, Inc. (before its merger in 2007 with First Busey). Mr. Lykins is also a partner in a private equity firm;
- Directors have backgrounds in estate planning, private equity, furniture, real estate management, university management, legal, broadcasting, and agriculture.
- ISS Governance QuickScore: 6 out of 10 ("Scores indicate decile rank relative to index or region. A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk." BUSE receives red flags for Board Composition, Composition of Committees, Related Party Transactions, Use of Equity, and Termination. It receives stars for Equity Risk Mitigation and Voting Issues.
- The Forbes list of America's 100 Most Trustworthy Companies, in which First Busey Corporation is included, quotes a member of the ratings team on its screening criteria: ""In order to rank companies from the most to the least trustworthy, we look at over 60 different governance and forensic accounting measures," says GMI [Ratings] vice chair and chief executive James A. Kaplan. "Those companies that persistently display the most accounting transparency; have the lowest incidence of high-risk events; and have appropriate Board supervision are typically ranked the highest. Companies on this list reflect these practices."
Ownership
Based on data at GuruFocus
Gurus: two gurus followed by GuruFocus have positions in First Busey Corporation. Columbia Wanger (Trades, Portfolio) owns just over 8-million shares, while Jim Simons (Trades, Portfolio) has nearly 239,000;
Institutional Investors: own 46% of the company's shares, about average since 2010;
Insiders: 8%, down from the high 30s and even low 40s before the financial crisis. Still, 8% is a respectable number for a public company. According to Yahoo! Finance, CEO Van A. Dukeman owned 441,673 shares and Chairman Gregory B. Lykins owned 601,873 shares. The biggest holder among insiders is Director George Shapland with 1,049,603 shares.
Shorts: After hitting a high near 20% short interests have now fallen to 2.9%, near where they were before the financial crisis.
BUSE by the Numbers
Financial Strength
As the following GuruFocus visual summary shows, BUSE has a Financial Strength rating of 6/10 and a Profitability & Growth rating of 5/10.
A couple of issues catch our attention, including two Severe Warning Signs and the Cash to Debt ratio.
Perhaps the most direct way to address these and other financial issues will be to look at them from a higher perspective, which is that BUSE meets and exceeds the Tier 1 Capital requirements set by the Dodd-Frank Act and Basel III; dividends are also subject to meeting these requirements (10-K Report, 2013).
Valuation
As the following GuruFocus charts shows, the Median Per Share value ($5.69) and the Graham Number ($5.93) bracket the current price:
The analysts covered at Yahoo! Finance expect BUSE to post earnings of $0.37 for 2014 and $0.42 for 2015. These represent increases of 28% and 45% respectively on the $0.29 per share posted in 2013.
Outlook & Risks
Assuming earnings grow by 45% over the next roughly 18 months (the end of 2015), and the share price tracks the earnings (both assumptions, and not promises), the share price would rise to $8.66. With an equivalent increase in dividends (again a guess, or assumption), the annual dividend would rise to $0.30.
For those numbers to rise that significantly, the bank will need to see continuing economic recovery in the regions it serves (particularly southern Illinois).
BUSE says this of its market, "Our primary markets, which are in stable micro-urban communities of downstate Illinois, are distinct from the dense competitive landscapes of Chicago and the smaller rural populations of southern Illinois and they have strong industrial, academic and healthcare employment bases."
At the same time, it describes Illinois as being, "... among the most troubled of any state in the United States with severe pension under-funding, recurring bill payment delays, and budget deficits." Financial problems at the state level could reduce the strengths of the academic and healthcare industries that now provide significant revenue and income to BUSE's operations.
We do see encouraging news in 2013, with a dramatic reduction in the provision for loan losses, from $16.5-million in 2012 to $7.5-million last year. The company also reduced its non-interest expenses by about the same amount, $7.3-million.
Those measures continued to improve in the first quarter of 2014, the most recently reported quarter. In that period, net income increased, mainly because of lower preferred dividends, lower credit costs, and lower operating expenses. The preferred dividends began coming down at the beginning of this year as the company passed legal milestones for loan growth (SBLF agreement).
At the same time, there are a number of risk factors that might undercut the recovery. They include the fact that some 79% of its loans are backed with real estate, and that the company operates under many different regulatory regimes, any of which might change the rules or interpretation of the rules.
At the end of 2013, the BUSE balance sheet showed $289-million in cash and $842-million in securities and investments, while long-term debt and other liabilities amounted to $255-million.
Conclusions
While it may be too soon to declare First Busey Corporation entirely out of the woods, there's a good deal to like about its recovery. Since receiving funding from the TARP program in 2009, it has rebounded strongly, and reports for both 2013 and the first quarter of 2014 suggest management is doing a good job at improving the lot of shareholders.
Its inclusion on the Forbes' 100 Most Trustworthy and 50 Most Trustworthy Financial Companies adds confidence to our own conclusions.
It's a rebounding stock valued at less than $10 and one that pays a dividend of 3.5%. For some, that is a combination that will make it worth investigating further.
Note: this stock came to my attention when issued as a pick by Benj Gallander of Contra the Heard Investment Letter, a guest analyst on the Business News Network (a Canadian business television network).
