FIRST BUSEY CORP quarterly report, Q2 FY2013

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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

  1. Track whether commercial loan growth continues without reversing the reported improvements in criticized loans, nonperforming assets, and charge-offs.
  2. Assess deposit trends and funding mix, especially the decline in noninterest-bearing deposits, alongside reported liquidity and reliance on repurchase agreements.
  3. Monitor net interest margin and loan yields as rates change, and compare actual performance with management’s rate-risk assumptions.
  4. Review securities valuation and accumulated other comprehensive income, including whether unrealized losses remain temporary and recoverable.
  5. 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.