First Busey Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Business context and results
First Busey operates Busey Bank, FirsTech payment processing and Busey Wealth Management, primarily in downstate Illinois, Indiana and southwest Florida. Second-quarter net income was $8.2 million; income available to common shareholders was $8.0 million, or $0.09 per diluted share. For the first half, net income was $16.1 million and common earnings were $15.7 million, or $0.18 per diluted share.
Key financial metrics
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $25.0 million | $25.2 million, Q2 2013 |
| Net interest margin, tax-equivalent | 3.13% | 3.17%, Q2 2013 |
| Other income | $15.0 million | $15.8 million, Q2 2013 |
| Other expense | $26.8 million | $27.8 million, Q2 2013 |
| Efficiency ratio | 64.4% | 64.9%, Q2 2013 |
| Total assets | $3,507.4 million | $3,539.6 million, Dec. 31, 2013 |
| Gross loans | $2,324.1 million | $2,295.3 million, Dec. 31, 2013 |
| Total deposits | $2,861.5 million | $2,869.1 million, Dec. 31, 2013 |
| Stockholders’ equity | $426.8 million | $415.4 million, Dec. 31, 2013 |
| Cash and due from banks | $182.0 million | $231.6 million, Dec. 31, 2013 |
| Net cash from operating activities, first half | $21.8 million | $39.4 million, first half 2013 |
At June 30, repurchase-agreement borrowings were $140.6 million and junior subordinated debt was $55.0 million. The company reported regulatory capital ratios above the stated well-capitalized thresholds: consolidated total risk-based capital 18.49%, Tier 1 risk-based capital 17.20%, and Tier 1 leverage 12.66%. Busey Bank’s corresponding ratios were 16.79%, 15.50% and 11.48%.
Changes versus comparable periods
- Q2 net income increased to $8.2 million from $7.4 million; common earnings rose to $8.0 million from $6.5 million. First-half net income increased to $16.1 million from $13.9 million.
- First-half net interest income edged down to $49.6 million from $49.8 million. The tax-equivalent net interest margin was 3.13%, versus 3.14% in first-half 2013.
- First-half other income declined 7.5% to $30.0 million, mainly because gains on loan sales fell to $2.2 million from $6.3 million. Growth in trust fees and remittance processing partly offset the decline.
- First-half other expense fell 6.8% to $53.4 million, supported by lower compensation and other cost-control measures. Full-time equivalent employees declined to 813 from 875 a year earlier.
- Loan quality improved: non-performing loans were $11.5 million, down from $17.4 million at year-end 2013; non-performing assets were $13.1 million, down from $19.5 million. The allowance was $47.4 million, or 2.0% of loans, and covered non-performing loans by 413.6%.
- Noninterest-bearing deposits increased 10.6% from year-end while interest-bearing deposits fell 2.8%; repurchase-agreement balances declined 18.4%. Equity increased 2.7%, reflecting earnings and higher securities values, partly offset by dividends.
Outlook, risks and contingencies
- Management expected credit-quality measures to remain generally stable for the rest of 2014, subject to local economic conditions and quarterly fluctuations. It cited continued loan growth and progress in problem assets; potential problem loans were $40.7 million, down from $50.1 million at year-end.
- Management said margin remains pressured by historically low rates and competition, and expects improvement from redeploying liquid funds into higher-yielding loans as the economy strengthens. These statements are expectations, not quantified earnings guidance.
- Management described liquidity as adequate, citing securities repricing within 30 and 90 days and access to deposits, security maturities and sales, loan repayments, repurchase agreements, Federal Reserve and Federal Home Loan Bank borrowing, and brokered deposits. First-half cash and due from banks declined by $49.6 million.
- Interest-rate sensitivity modeling showed an estimated year-one net interest income decline of 3.57% under a 100-basis-point rise and 15.35% under a 400-basis-point rise. The filing cautions that these simulations depend on assumptions and exclude potential management actions.
- Management identified Illinois fiscal and pension pressures as a risk to its primary markets, including institutions reliant on state funding. It also cited prolonged low rates, competition, mortgage-market conditions, cyber and technology risks, regulatory change, and economic uncertainty.
- Off-balance-sheet commitments at June 30 included $581.2 million to extend credit and $19.6 million of standby letters of credit. These amounts are contractual limits and do not necessarily represent expected cash outflows; no related liabilities were recorded.
- The company was under an Illinois Department of Revenue examination for its 2011 tax filing. Management said routine legal matters were not expected to materially affect results; no material pending litigation was reported. No significant subsequent events requiring disclosure were identified.
- Management attributed the lower preferred dividend burden to SBLF-qualified lending thresholds: first-half preferred dividends were $0.4 million versus $1.8 million a year earlier. The common dividend declared was $0.09 per share for the first half; management reported a 25% increase in the dividend paid in July 2014 to $0.05 per share.
Important facts for investors to verify
- Whether loan growth and improving non-performing asset trends continue, and whether the $47.4 million allowance remains adequate as conditions change.
- The sustainability of earnings given lower mortgage-sale gains, margin pressure and management’s reliance on cost savings and fee businesses.
- Interest-rate exposure, securities valuation and the sensitivity of deferred tax asset realization to future taxable income.
- Illinois and Florida credit and economic exposures, including the potential effects of state fiscal conditions and the size and funding of undrawn credit commitments.
- Regulatory capital treatment and the impact of Basel III implementation beginning in 2015, as well as the company’s ability to fund dividends while the bank remains restricted from paying dividends to the parent.