First Busey Corporation — Q2 2013 Form 10-Q
Business and period. First Busey is a bank holding company with banking, remittance-processing (FirsTech), and wealth-management businesses. This unaudited report covers the quarter and six months ended June 30, 2013. Balance-sheet comparisons are with December 31, 2012 unless otherwise noted.
Financial performance and position
- Q2 earnings: Net income was $7.4 million, versus $4.9 million in Q2 2012; income available to common shareholders was $6.5 million, or $0.08 per diluted share, versus $4.0 million, or $0.05. For the first half, net income was $13.9 million versus $12.5 million, and diluted EPS was $0.14 versus $0.12.
- Revenue and margin: Q2 net interest income was $25.2 million, essentially flat year over year; other income was $15.8 million, also essentially flat. First-half net interest income was $49.8 million versus $51.0 million, and other income was $32.4 million versus $33.7 million. Tax-equivalent net interest margin was 3.17% in Q2 (3.21% a year earlier) and 3.14% for the first half (3.26%).
- Expenses and credit costs: Q2 noninterest expense declined 6.6% to $27.8 million year over year; first-half expense rose 0.7% to $57.4 million. The provision for loan losses was $2.0 million in Q2 and $4.0 million for the first half, compared with $4.5 million and $9.5 million, respectively, in 2012. Q2 efficiency ratio improved to 64.9% from 69.7%; first-half ratio worsened to 66.9% from 64.6%.
- Cash flow: First-half operating cash flow was $39.4 million, compared with $17.9 million in 2012; investing used $27.0 million and financing used $112.5 million. Cash and due from banks fell $100.1 million to $251.2 million. The filing attributes cash-flow movements in part to loan growth, deposit outflows, dividends, and debt repayment.
- Balance sheet and funding: Assets were $3.51 billion, down 2.9%; net loans were $2.07 billion, up 4.2%, while securities available for sale declined 8.0% to $921.6 million. Deposits fell 3.7% to $2.87 billion, including a 15.9% decrease in noninterest-bearing deposits. Management said core deposits equaled 77% of total assets and liquidity was adequate.
- Debt and capital: Long-term debt was repaid at maturity and was zero at quarter-end; junior subordinated debt remained $55.0 million and repurchase-agreement funding was $148.2 million. Stockholders’ equity was $410.0 million, including $72.7 million of preferred stock. The Company and Bank exceeded reported well-capitalized thresholds: consolidated total capital ratio was 18.58%, and the Bank’s was 16.14%.
Material changes and asset quality
- Gross loans increased $137.2 million year over year; commercial balances rose 9.1%. From year-end, gross loans increased $86.0 million, including $79.4 million of commercial growth. Management also reported purchase of $25.4 million of performing, floating-rate home-equity lines.
- Nonperforming loans declined to $21.0 million from $25.4 million at year-end; nonperforming assets declined to $23.7 million from $28.8 million. Nonperforming assets were 1.1% of loans and nonperforming assets, versus 1.4% at year-end. The allowance was $48.5 million, or 2.25% of loans, and covered nonperforming loans by 230.4%.
- Loans in the lowest risk grades decreased to $196.7 million from $228.1 million at year-end. Net charge-offs for the first half were down $13.6 million, or 79.4%, from the comparable 2012 period. Total troubled-debt-restructured loans were $21.0 million, down from $28.5 million.
- Unrealized losses on available-for-sale securities reduced first-half other comprehensive income by $7.8 million after tax; accumulated other comprehensive income fell to $5.8 million from $13.5 million. Management attributed the losses primarily to interest-rate and liquidity market changes, and said it did not expect to sell the securities or fail to recover amortized cost.
Outlook, commentary, and risks
- Management expected gradual asset-quality improvement during 2013, subject to local economic conditions and possible quarter-to-quarter fluctuations. It cited improving markets, lower credit costs, loan growth, and cost-containment actions; it provided no quantified earnings or revenue guidance.
- Management expected loan-sale production to decline in the second half as higher interest rates reduce refinancing activity. It said future margin improvement depended partly on redeploying liquid funds into higher-yielding loans; funding-rate reductions were limited in the low-rate environment.
- Key exposures include commercial real estate and construction lending, economic conditions in Illinois and southwest Florida, interest-rate movements, competition, regulatory changes, and the valuation of collateral, securities, and deferred tax assets. Management highlighted Illinois’s fiscal difficulties and potential effects on local employers and markets.
- A modeled immediate +400-basis-point rate increase reduced projected net interest income by 13.03%; management said the modeled result was within its policy limit. Down-rate scenarios were not available in the then-current rate environment. The filing notes that such simulations depend on assumptions and are not forecasts.
- Basel III rules approved in July 2013 were expected to apply generally beginning in 2015, with phase-in periods; management was assessing their effects. The filing reported no material pending litigation, no significant subsequent events, and no material changes to previously disclosed risk factors.
Investor verification priorities
- Track whether commercial loan growth continues without reversing the reported improvements in criticized loans, nonperforming assets, and charge-offs.
- Assess deposit trends and funding mix, especially the decline in noninterest-bearing deposits, alongside reported liquidity and reliance on repurchase agreements.
- Monitor net interest margin and loan yields as rates change, and compare actual performance with management’s rate-risk assumptions.
- Review securities valuation and accumulated other comprehensive income, including whether unrealized losses remain temporary and recoverable.
- Confirm the effect of Basel III implementation on regulatory capital and the capacity to sustain dividends; note the Bank’s retained-earnings constraints on upstream dividends described in the filing.