First Busey Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results cover First Busey’s banking, payment-processing (FirsTech), and wealth-management businesses.
Financial performance and condition
| Metric | Q2 2011 / June 30, 2011 | Comparable period / prior year-end |
|---|---|---|
| Net income | $7.4 million for Q2; $16.6 million for first half | Q2 2010: $5.7 million; first half 2010: $9.9 million |
| Net income available to common shareholders | $6.2 million Q2; $13.5 million first half | $4.4 million Q2 2010; $7.3 million first half 2010 |
| EPS / common dividend | Q2 EPS $0.07; first-half EPS $0.16. Dividend: $0.04 Q2, $0.08 first half | EPS: $0.07 Q2 and $0.11 first half 2010; dividends unchanged |
| Net interest income | $27.8 million Q2; $56.2 million first half | $29.1 million Q2 2010; $58.1 million first half 2010 |
| Net interest margin | 3.54% Q2 and first half, tax-equivalent basis | Q2 2010: 3.49%; first half 2010: 3.50% |
| Provision for loan losses | $5.0 million Q2; $10.0 million first half | $7.5 million Q2 2010; $22.2 million first half 2010 |
| Total assets / stockholders’ equity | $3.47 billion / $429.8 million | December 31, 2010: $3.61 billion / $420.5 million |
| Loans / deposits | Net loans $2.07 billion; deposits $2.81 billion | December 31, 2010: net loans $2.24 billion; deposits $2.92 billion |
| Debt and repurchase agreements | Long-term debt $19.8 million; junior subordinated debt $55.0 million; repurchase agreements $126.8 million | December 31, 2010: long-term debt $43.2 million; junior subordinated debt $55.0 million; repurchase agreements $139.0 million |
- Q2 net income rose year over year, reflecting lower loan-loss provision and improved pre-tax, pre-provision income, but fell from $9.1 million in Q1 2011. Management attributed the sequential decline mainly to lower loans and mortgage-sale gains.
- Q2 total other income was $13.7 million, down 4.6% from Q2 2010; mortgage-loan sale gains declined 46.7% to $1.8 million. Other expenses fell 9.0% to $25.2 million. Q2 efficiency ratio improved to 57.8% from 60.6% a year earlier.
- For the first half, net interest income declined 3.3% year over year as lower loan balances outweighed reduced funding costs. The reported margin improved modestly, supported by lower funding rates.
- Operating cash flow was $67.5 million for the first half, including loan originations for sale and sale proceeds. Investing activities provided $18.4 million; financing activities used $147.7 million. Cash and due from banks declined $61.8 million to $357.2 million.
- Available-for-sale securities increased 23.9% from year-end to $742.8 million. First-half cash dividends paid were $9.6 million. Common shares outstanding rose to 86.6 million from 79.1 million, including conversion of $31.9 million of Series B preferred stock to common stock.
Material changes, outlook, and risks
- Credit quality improved, but remains a key risk: Non-performing loans fell to $53.8 million from $68.1 million at year-end; non-performing assets declined to $60.6 million from $77.3 million. The allowance was $69.3 million, equal to 128.9% of non-performing loans and 3.20% of loans. Second-quarter net charge-offs were $10.5 million, above Q1’s $6.2 million.
- Potential problem loans were $114.5 million, up from $107.5 million at year-end but below Q1’s $124.4 million. Management said it expects gradual asset-quality improvement, while noting outcomes depend on local economic conditions and further losses may emerge as new information becomes available.
- Loans, including loans held for sale, declined $193.8 million from year-end. Management cited soft demand, active reduction of underperforming loans and non-relationship commercial real estate exposure, and strong competition. It reported some improvement in the loan pipeline and expects gradual loan-volume improvement, without sacrificing credit quality.
- Management described balance-sheet strength, profitability, and growth—in that order—as priorities. Non-time deposits grew $37.6 million, or 2.0%, in the first half. Illinois fiscal and payment pressures, the slow economy, and continued weakness in southwest Florida were identified as risks to customers and loan performance.
- Management considered liquidity adequate, citing deposits, securities and loan repayments, borrowing facilities, and a fully available $20 million correspondent-bank line of credit. It reported that the company and bank met regulatory capital requirements and were “well capitalized”; bank total risk-based capital was 16.28% and Tier 1 leverage was 10.00%.
- Interest-rate sensitivity analysis showed modeled net interest income declines of 2.31% and 5.72% under immediate +100 and +200 basis-point shocks, respectively; management said results were within policy limits. The filing notes rate floors constrain further funding-cost reductions.
- The company is restricted from repurchasing common shares while Treasury holds equity securities under the TARP Capital Purchase Program, except for certain benefit-plan activity. No material legal proceedings were reported; management said ordinary-course legal matters were not expected to materially affect results.
- There is no specific earnings or loan-growth numerical guidance. Management cautioned that results for the interim periods may not indicate full-year results. The IRS notified the company of its intent to audit the 2009 income tax filing beginning in Q3 2011. Subsequent to quarter-end, restricted stock units were granted in July.
Important facts for investors to verify
- Whether declining loan balances and mortgage-sale gains stabilize, and whether the reported pipeline translates into profitable loan growth.
- Whether non-performing and potential problem loans continue to improve, particularly in Florida and commercial real estate, and whether allowance coverage remains adequate relative to charge-offs and collateral values.
- Whether deposit growth and the large securities and cash balances support liquidity and margins without weakening asset yields.
- The effect of TARP-related share-repurchase limits, preferred-stock obligations, and the increase in common shares on future per-share earnings and capital allocation.
- Whether Illinois fiscal conditions, local economic weakness, regulatory changes, and the IRS audit create additional credit, revenue, expense, or tax risks.