First Busey Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $25.5 | $27.7 | $76.5 | $83.9 |
| Provision for loan losses | $3.5 | $5.0 | $13.0 | $15.0 |
| Noninterest income | $15.6 | $14.7 | $49.2 | $44.0 |
| Noninterest expense | $30.4 | $25.7 | $87.4 | $76.6 |
| Net income | $4.9 | $7.6 | $17.4 | $24.1 |
| Net income available to common shareholders | $4.0 | $6.5 | $14.7 | $20.0 |
| Diluted earnings per share | $0.05 | $0.08 | $0.17 | $0.24 |
- Margins: Tax-equivalent net interest margin was 3.25% in Q3, up from 3.21% in Q2 2012 but below 3.57% in Q3 2011. Nine-month margin was 3.26%, versus 3.55% in 2011. Management cited low rates, asset repricing and competition.
- Balance sheet at September 30: Assets were $3.53 billion; net loans were $1.962 billion and available-for-sale securities $964.2 million. Total deposits were $2.893 billion, including $510.1 million noninterest-bearing. Stockholders’ equity was $417.3 million.
- Debt and liquidity: Long-term debt was $7.4 million, down from $19.4 million at year-end 2011; junior subordinated debt remained $55.0 million and repurchase-agreement funding was $131.8 million. Cash and due from banks was $328.3 million. Management reported adequate liquidity and a fully available $20 million correspondent-bank line.
- Cash flows, nine months: Operating activities provided $43.2 million; investing activities used $137.8 million; financing activities provided $107.8 million. Cash increased $13.3 million to $328.3 million.
- Capital: At September 30, consolidated total risk-based capital was 19.02%, Tier 1 risk-based capital 17.73%, and Tier 1 leverage 11.61%. The company and bank reported meeting applicable requirements, including “well capitalized” standards.
Changes versus comparable periods
- Q3 net income fell 35% year over year, while nine-month net income fell 28%; lower net interest income and higher operating expenses more than offset improved noninterest income and lower loan-loss provisions.
- Q3 noninterest expense rose 18% year over year, notably from compensation and data-processing costs. Staffing increased to 928 from 883 a year earlier as the company invested in growth capacity.
- Loans grew $13.4 million from the prior quarter-end, with commercial portfolios up $25.3 million; net loans remained slightly below year-end 2011. Deposits increased 4.7% from year-end, and securities increased 15.9%.
- Credit indicators improved: nonperforming loans declined to $25.2 million from $38.5 million at year-end 2011; nonperforming assets were $33.7 million versus $47.0 million. The allowance was $49.2 million, or 2.42% of loans, compared with $58.5 million, or 2.85%, at year-end.
Outlook, commentary and risks
- No formal earnings or revenue guidance was provided. Management expected gradual asset-quality improvement, dependent on local economic conditions, and described loan growth as a continuing priority into 2013. It saw potential for near-term margin improvement through redeployment of liquid funds, while warning of ongoing rate and competitive pressure.
- Management attributed $0.5 million of Q3 securities gains to sales of about $35 million of U.S. Treasuries to help offset core-processing conversion costs. The conversion was completed in mid-September; some lower conversion-related costs were expected in Q4.
- Nine-month other income included a $2.1 million gain on a private-equity investment, which management identified as nonrecurring. FirsTech revenue and earnings were pressured by lower online bill-payment volumes; deposit-account service charges also declined.
- Credit risks include commercial real estate and construction exposures, collateral valuation uncertainty, and a rise in loans 30–89 days past due to $7.9 million from $4.2 million at Q2-end. Management said several larger commercial credits were being pursued for collection. A large commercial foreclosure contributed to higher OREO as nonperforming loans declined.
- Management cited uncertainty in southwest Florida’s recovery and potential effects from Illinois’ fiscal difficulties and payment delays. Other risks include interest-rate movements, competition, regulation and economic conditions. Proposed Basel III rules could change capital requirements; final requirements were not yet settled.
- Off-balance-sheet commitments included $551.1 million to extend credit and $15.2 million of standby letters of credit; stated amounts do not necessarily represent future cash needs. Management did not expect ordinary-course legal matters to materially affect results. The company was under Illinois tax examination for 2009 and 2010.
Investor verification points
- Check whether reported loan-quality improvement persists, including the distinction between declining nonperforming loans and movement of foreclosed credit into OREO.
- Review the allowance methodology and collateral assumptions against future charge-offs; management noted estimates may change as new information becomes available.
- Separate recurring earnings from the $2.1 million investment gain and $0.5 million securities gain, and assess the ongoing cost and benefits of the processing-system conversion and staffing investments.
- Monitor core loan growth, deposit mix, net interest margin and the effect of continued low rates and competition.
- Assess liquidity against credit commitments and pledged securities, and track any final Basel III capital rules and their potential impact.