First Busey Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. First Busey is a $3.5 billion financial holding company operating banking, wealth management and payment-processing businesses, primarily in downstate Illinois, southwest Florida and central Indiana.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $100.1 million | $102.1 million |
| Net interest margin | 3.15% | 3.24% |
| Other income | $62.6 million | $66.9 million |
| Net income | $28.7 million | $22.4 million |
| Net income available to common stockholders | $25.1 million | $18.7 million |
| Diluted earnings per share | $0.29 | $0.22 |
| Provision for loan losses | $7.5 million | $16.5 million |
| Net charge-offs | $7.9 million | $27.0 million |
| Operating cash flow | $98.2 million | $49.1 million |
- Fourth-quarter 2013 net income was $6.9 million, or $0.07 per diluted share, versus $4.9 million, or $0.05 per diluted share, in fourth-quarter 2012.
- Total assets were $3.54 billion, down 2.2%. Gross loans reached $2.30 billion, up about 10.7%; commercial loans drove much of the growth. Available-for-sale securities fell 16.0% to $841.3 million.
- Total deposits declined 3.7% to $2.87 billion. Cash and due from banks fell to $231.6 million from $351.3 million. Management said liquidity was adequate; average cash and interest-bearing bank deposits were $286.9 million, or 8.1% of average assets.
- Year-end borrowings included $172.3 million of repurchase agreements and $55.0 million of junior subordinated debt; long-term debt was zero. Stockholders’ equity was $415.4 million.
- Regulatory capital remained above well-capitalized thresholds: consolidated total risk-based capital was 18.21% and the Bank’s was 16.17%. The Bank had no brokered deposits and was described as well-capitalized.
- Common dividends were $0.12 per share in 2013, down from $0.24 in 2012. The Bank paid no dividends to the parent in 2011–2013 because of its retained deficit, although it transferred $50 million to the parent in January 2013 with regulatory approval.
Material changes and management commentary
- Common earnings rose 34% as lower credit-loss provisions more than offset declining net interest income and other income. The provision declined as asset quality improved and charge-offs fell.
- Non-performing loans fell to $17.4 million from $25.4 million; non-performing loans and OREO totaled $19.5 million versus $28.8 million. The allowance was $47.6 million, 2.07% of loans and 274% of non-performing loans.
- Despite improvement, loans 30–89 days past due increased to $6.1 million from $2.3 million, primarily due to one large commercial credit. Potential problem loans were $50.1 million, down from $58.1 million.
- Net interest margin continued to compress amid low rates and competition. Management expected margin pressure to persist in 2014, while aiming to redeploy liquid funds into loans at higher yields and sustain commercial loan growth.
- Other expense fell 6.1% to $112.3 million, with cost reductions and lower operating costs; staffing declined to 849 FTEs from 948. The efficiency ratio improved to 66.4% from 68.5%.
- Wealth-management revenue benefited from growth in assets under care and market valuations. Mortgage gains declined as refinancing activity slowed; management expected overall mortgage production to continue declining with industry activity.
- The $72.7 million Series C preferred stock issued through the Small Business Lending Fund remained outstanding. Successful small-business lending targets were expected to reduce its dividend rate to 1% in 2014; the rate is scheduled to rise to 9% after 4.5 years from issuance.
Outlook, risks and contingencies
- Management expected asset quality to generally stabilize in 2014, subject to local economic conditions, and continued to emphasize organic loan growth and expense control. No specific earnings or revenue guidance was provided.
- Key exposures include commercial real estate and other real-estate-secured lending, economic conditions in Illinois and southwest Florida, and the ability of borrowers to repay. Approximately 79% of loans were collateralized by real estate; construction loans were 3.4% of the portfolio.
- Illinois fiscal stress and delayed state payments could affect local governments, universities, healthcare organizations, businesses and customers. Management reported minimal impact from Illinois storms in November 2013.
- Interest-rate risk is material: the company’s model estimated net interest income would decline 3.55% under an immediate 100-basis-point increase and 14.60% under a 400-basis-point increase. These are model estimates, not forecasts.
- Basel III capital rules were scheduled to begin applying in 2015, with certain phase-ins through 2019. First Busey was evaluating whether to elect the available AOCI opt-out in 2015.
- Net deferred tax assets were $35.6 million, including tax-loss carryforwards; realization depends on future taxable income, and ownership changes could limit use of tax attributes. The Illinois Department of Revenue notified the company of an intended audit of its 2011 income-tax filing.
- Credit commitments were $527.6 million and standby letters of credit were $10.2 million. Management said commitments were expected to be funded from available sources. Routine litigation was not expected to have a material effect; no material pending litigation was disclosed.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether loan growth and improving credit metrics continue, particularly the status of the large past-due commercial credit and potential problem loans.
- Whether declining net interest margin, low-rate conditions and deposit mix continue to pressure core earnings.
- Whether the $47.6 million allowance remains adequate as the loan portfolio expands and qualitative reserve assumptions change.
- Whether the $35.6 million deferred tax asset is realized and whether the planned Illinois tax audit or any ownership change affects tax benefits.
- How Basel III implementation, the AOCI election and preferred-stock terms affect capital flexibility, dividends and shareholder returns.
- Whether liquidity remains adequate as deposits declined and loan commitments totaled $527.6 million.