First Busey Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial amounts below are in U.S. dollars; figures are shown in millions unless stated otherwise. The interim financial statements are unaudited.
Business context and reporting period
First Busey is a bank holding company operating Busey Bank, FirsTech payment processing, and Busey Wealth Management. Its banking markets include downstate Illinois, Indiana, and southwest Florida. Management emphasized commercial loan growth, credit quality, expense discipline, and maintaining customer service.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $25.2 | $25.5 | $75.1 | $76.5 |
| Provision for loan losses | $2.0 | $3.5 | $6.0 | $13.0 |
| Other income | $15.6 | $15.6 | $48.1 | $49.2 |
| Other expense | $27.4 | $30.4 | $84.7 | $87.4 |
| Net income | $7.9 | $4.9 | $21.8 | $17.4 |
| Net income available to common shareholders | $7.0 | $4.0 | $19.1 | $14.7 |
| Diluted EPS | $0.08 | $0.05 | $0.22 | $0.17 |
- Net interest margin was 3.20% in Q3, versus 3.25% a year earlier; the nine-month margin was 3.16%, versus 3.26%. Management said margin had improved sequentially since Q1 as loans grew and funding costs declined.
- The Q3 efficiency ratio improved to 64.23% from 71.71%; the nine-month ratio was 66.00% versus 66.90%.
- At September 30, total assets were $3.532 billion, down 2.4% from December 31, 2012. Net loans were $2.185 billion; loans including loans held for sale totaled $2.251 billion, up 8.8% from year-end on the company’s stated net-loan measure.
- Total deposits were $2.880 billion, down 3.4% from year-end. Cash and due from banks was $198.7 million, down from $351.3 million. Management stated that core deposits funded 76.6% of total assets and that liquidity was adequate.
- Long-term debt was repaid at maturity and was zero at quarter-end. The company had $55 million of junior subordinated debt and $156.5 million of repurchase-agreement borrowings. Total stockholders’ equity was $414.4 million.
- For the first nine months, operating cash flow was $77.0 million, investing cash flow was negative $129.9 million, and financing cash flow was negative $99.7 million. Cash declined by $152.6 million.
Material changes versus comparable periods
- Year-to-date net income rose $4.4 million and diluted EPS increased from $0.17 to $0.22. Management attributed improved earnings principally to lower credit costs and expense reductions.
- Provision for loan losses declined by $7.0 million year over year for the nine-month period. Q3 provision of $2.0 million was consistent with the prior two quarters and described by management as a four-year quarterly low.
- Gross loans increased $215.3 million year over year and $91.5 million from Q2 2013; commercial balances drove much of the growth. Securities available for sale declined $94.1 million from year-end as the balance sheet shifted toward loans.
- Non-performing loans declined to $18.7 million from $25.4 million at year-end; non-performing assets declined to $20.8 million from $28.8 million. The allowance was $48.0 million, or 2.1% of loans, and covered non-performing loans by 256.7%.
- Management reported that higher-grade loans increased and lower-grade loans declined. Loans in the lowest risk grades fell to $177.1 million from $228.1 million at year-end. Total other expense fell 3.0% year over year for the nine months, reflecting cost-control measures, among other factors.
- Nine-month other comprehensive income included a $7.2 million after-tax loss, primarily reflecting unrealized losses on available-for-sale securities; this reduced accumulated other comprehensive income.
Outlook, commentary, risks, and unusual items
- No numerical earnings or revenue guidance was provided. Management expected gradual further improvement in asset quality, but said the pace may moderate and results can fluctuate with local economic conditions. It expected loan production and loan growth to support margin, while noting limited room for further deposit-rate reductions in a low-rate environment.
- Management expected mortgage production to ease during the remainder of 2013 as market interest rates rose. Wealth-management revenue benefited from growth in assets under care, which averaged $4.5 billion versus $4.0 billion a year earlier.
- Risks highlighted include uncertainty in the local and national economy, interest-rate and prepayment changes, competition, regulatory changes including Basel III, technology and cybersecurity, litigation, and credit losses. Management specifically noted Illinois’ fiscal challenges and the potential effect of delayed state payments on local customers; it also said an announced potential ADM headquarters move from Decatur could affect customers, with the impact not yet clear. Southwest Florida’s recovery was expected to take years.
- Potential problem loans were $53.1 million, down from $58.1 million at year-end. Management said it expected planned restructurings, guarantees, collateral, or other actions to support repayment, while acknowledging additional losses could emerge as new information becomes available.
- Off-balance-sheet commitments included $560.2 million of commitments to extend credit and $10.0 million of standby letters of credit; amounts may not be drawn. Management reported no material pending litigation and no significant subsequent events through issuance.
- The company reported that it and Busey Bank met applicable capital requirements and were “well capitalized.” It also stated that Basel III implementation was being assessed. Management reported achievement of targets under the SBLF program, but the filing text here does not provide the specific targets or quantified earnings effect.
Important facts for investors to verify
- Whether commercial loan growth continues without weakening underwriting or reversing the reported improvement in loan grades and non-performing assets.
- Whether the $48.0 million allowance remains appropriate as loan balances grow, and how potential problem loans, impaired credits, TDRs, and collateral valuations develop.
- How margin responds to interest rates and the changing mix of loans, securities, deposits, and other funding.
- Whether deposit declines and the reduction in cash affect liquidity despite management’s stated assessment of adequate liquidity.
- The actual impact of cost reductions, SBLF target achievement, and future Basel III requirements on earnings and capital.
- Developments in Illinois fiscal conditions, the potential ADM headquarters relocation, and the recovery of the company’s Florida markets.