First Busey Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are against December 31, 2012 unless stated otherwise. First Busey is a bank holding company with banking, wealth management and payment-processing businesses. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial results and position
- Profitability: Net income was $6.4 million, down from $7.6 million in Q1 2012. Income available to common shareholders was $5.5 million, or $0.06 per diluted share, versus $6.7 million, or $0.08, a year earlier. Management said 2012 included a $2.1 million gain on private-equity funds, compared with nominal gains in Q1 2013.
- Net interest income and margin: Net interest income was $24.6 million versus $25.7 million in Q1 2012. Tax-equivalent net interest margin declined to 3.10% from 3.31%; management cited lower asset yields, low interest rates and competition.
- Noninterest revenue and expenses: Other income was $16.6 million, down 6.9% year over year. Loan-sale gains rose to $3.5 million from $2.4 million, while other income fell to $1.1 million from $3.4 million, primarily reflecting the prior-year private-equity gain. Other expense increased 8.7% to $29.6 million, including higher compensation, data-processing and OREO expenses. The efficiency ratio rose to 68.83% from 59.79%.
- Credit costs: The loan-loss provision was $2.0 million versus $5.0 million in Q1 2012. Net charge-offs were $2.2 million, compared with $9.7 million a year earlier. The allowance for loan losses was $47.8 million, or 2.32% of loans.
- Cash flow and liquidity: Operating cash flow was $23.6 million versus $4.1 million in Q1 2012; investing activities provided $46.2 million, while financing activities provided $26.5 million. Cash and due from banks ended the quarter at $447.6 million, up from $351.3 million at year-end. The company reported an available $20 million correspondent-bank line of credit and said projected liquidity needs were covered.
- Balance sheet and funding: Total assets were $3.65 billion, up 0.8% from year-end. Deposits increased 1.2% to $3.02 billion; noninterest-bearing deposits declined 10.4%, while interest-bearing deposits increased 4.2%. Net loans including loans held for sale declined 0.6% to $2.01 billion, and securities available for sale declined 4.9% to $952.6 million.
- Debt and capital: Long-term debt was $6.0 million, junior subordinated debt was $55.0 million, and repurchase agreements were $130.8 million. Consolidated total capital and Tier 1 risk-based capital ratios were 19.33% and 18.04%; Busey Bank’s were 16.61% and 15.31%. The company reported that it and the bank met applicable well-capitalized standards.
Material changes and asset quality
- Nonperforming loans fell to $23.2 million from $25.4 million at year-end and $34.1 million in Q1 2012. Nonperforming assets were $25.8 million, or 1.25% of loans plus nonperforming assets, versus $28.8 million and 1.39% at year-end.
- Loans 30–89 days past due rose to $7.1 million from $2.3 million at year-end. Potential problem loans increased to $67.9 million from $58.1 million; management said it was monitoring these credits and expected planned actions to support repayment.
- Loans in the company’s lowest risk grades totaled $222.6 million, down from $228.1 million at year-end. Total troubled debt restructurings were $27.3 million, compared with $28.5 million at year-end.
- Deposits grew overall, but the mix shifted toward interest-bearing deposits. Management said loan growth remained a focus, while net loans declined during the quarter, concentrated in retail lending.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management expected gradual asset-quality improvement during 2013, subject to market-specific economic conditions, and said near-term margin improvement would depend in part on redeploying liquid funds into higher-yielding assets.
- Management highlighted low interest rates and competition as pressures on asset yields, and noted uncertainty in Illinois, including state payment delays and budget and pension pressures. Southwest Florida’s economy was improving but was expected to take years to regain peak strength.
- Interest-rate simulation indicated that an immediate +400 basis-point rate shift would reduce modeled one-year net interest income by 5.84%; management said modeled outcomes were within policy limits and cautioned that the analysis depends on assumptions.
- Key estimates subject to change include the allowance for loan losses, securities fair values and deferred tax assets. Management reported no valuation allowance on other deferred tax assets beyond certain state carryforwards, while noting realization depends on future profitability and other factors.
- An Illinois Department of Revenue examination of the company’s 2009 and 2010 tax filings was expected to conclude in Q2 2013. Management did not expect ordinary-course legal matters to materially affect financial position or results.
- Off-balance-sheet commitments included $495.7 million to extend credit and $12.3 million of standby letters of credit; contractual totals do not necessarily represent future funding needs. The bank returned $50 million of capital to the parent in January 2013 with regulatory approval.
- No common dividend was declared in Q1 2013; management said the Q1 dividend had been accelerated into Q4 2012. The company paid $0.9 million of preferred dividends during the quarter.
Important facts for investors to verify
- Whether the decline in net interest margin and the elevated efficiency ratio improve in subsequent quarters.
- Whether the increase in past-due and potential problem loans reverses, and whether nonperforming assets and charge-offs continue to decline.
- Whether loan growth, deposit composition and the use of excess liquidity support earnings without weakening underwriting or funding costs.
- The outcome of the Illinois tax examination and the continued realizability of deferred tax assets.
- Any changes to capital requirements, including final Basel III rules, and the effect on the company’s capital position and dividend capacity.