First Busey Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. First Busey is a bank holding company with banking, wealth management and payment-processing businesses. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $24.6 | $24.6 in Q1 2013 |
| Other income | $15.0 | $16.6 in Q1 2013 |
| Income before taxes | $11.9 | $9.7 in Q1 2013 |
| Net income | $7.9; $7.7 available to common shareholders | $6.4; $5.5 available to common shareholders in Q1 2013 |
| Diluted earnings per share | $0.09 | $0.06 in Q1 2013 |
| Net interest margin, tax-equivalent | 3.13% | 3.10% in Q1 2013 |
| Efficiency ratio | 64.65% | 68.83% in Q1 2013 |
| Operating cash flow | $16.8 | $23.6 in Q1 2013 |
| Total assets | $3,542.1 | $3,539.6 at December 31, 2013 |
| Loans, gross | $2,232.6 | $2,295.3 at December 31, 2013 |
| Total deposits | $2,927.2 | $2,869.1 at December 31, 2013 |
| Cash and due from banks | $288.6 | $231.6 at December 31, 2013 |
| Stockholders’ equity | $420.3 | $415.4 at December 31, 2013 |
Net cash increased $57.0 million in the quarter. Investing activities provided $40.9 million, while financing activities used $0.7 million. The company reported $55.0 million of junior subordinated debt and $117.2 million of repurchase-agreement borrowings at quarter-end; the latter declined from $172.3 million at year-end. Management said core deposits funded 78.2% of total assets and that liquidity was adequate for projected cash needs.
Regulatory capital remained above stated well-capitalized thresholds: consolidated total risk-based capital was 18.64% and Tier 1 risk-based capital was 17.35%; Busey Bank’s respective ratios were 16.73% and 15.44%.
Material changes versus prior periods
- Net income rose $1.5 million year over year. Lower loan-loss provision, reduced operating expenses and lower preferred dividends more than offset weaker noninterest income.
- Other income fell 9.9%, chiefly because loan-sale gains dropped to $1.0 million from $3.5 million amid a mortgage-industry slowdown. Trust fees increased 7.9% and remittance-processing revenue increased 12.0%.
- Total other expense decreased 10.0% to $26.6 million. Compensation expense fell 9.8%; full-time-equivalent employees declined to 822 from 893 a year earlier.
- Loans declined 2.7% from year-end, which management attributed to seasonal softness, severe Midwest winter weather and lower line utilization. Deposits grew 2.0%.
- Asset-quality measures improved: nonperforming loans were $14.3 million versus $17.4 million at year-end; nonperforming assets were $16.3 million versus $19.5 million. Potential problem loans decreased to $43.0 million from $50.1 million.
- The allowance for loan losses was $47.4 million, or 2.1% of loans. The provision was $1.0 million versus $2.0 million in Q1 2013. Management increased qualitative factors related to net charge-off trends, adding $1.1 million to required allowance compared with its year-end method.
Outlook, commentary and risks
- Management expected asset-quality measures to generally stabilize during 2014, while cautioning they could fluctuate with market-specific economic conditions. It reported no formal earnings or revenue guidance.
- Management anticipated mortgage production could improve from Q1 to Q2 based on then-current pipelines and seasonal conditions. It also expected margin improvement from deploying liquid funds into loans at higher yields, subject to competition and the prolonged low-rate environment.
- Management said prior-year growth in Small Business Lending Fund-qualified credits reduced preferred dividends to $0.2 million in Q1 2014 from $0.9 million in Q1 2013, with benefits expected through 2015. In April 2014, the company raised its common dividend 25%, to $0.05 per share from $0.04.
- Key risks include credit losses and collateral valuations, interest-rate and prepayment changes, competition, regulatory changes including Basel III, cyber and technology risks, and economic conditions in the company’s markets. Management specifically noted Illinois fiscal pressures and the exposure of local employers and institutions to state funding.
- The company had $587.7 million of commitments to extend credit and $20.3 million of standby letters of credit. These are contractual amounts, not necessarily expected cash outflows; no guarantee liabilities were recorded. Management said ordinary-course litigation was not expected to materially affect results.
- Management identified fair value of securities, the loan-loss allowance and deferred-tax-asset valuation as significant estimates. The filing also notes an Illinois Department of Revenue examination of the 2011 income tax filing.
Important facts for investors to verify
- Whether loan growth resumes and mortgage-sale gains recover, given the sharp year-over-year decline in loan-sale gains.
- Whether improving nonperforming and potential-problem-loan trends persist, and whether the allowance remains adequate as credit information and collateral values change.
- How deposit growth, liquidity and the reduction in repurchase-agreement funding develop, alongside the company’s ability to meet off-balance-sheet commitments.
- Whether projected margin improvement materializes. The company’s rate simulation showed first-year net interest income declining 2.67% under an immediate, sustained 100-basis-point increase and 11.62% under a 400-basis-point increase; management cautioned that modeled outcomes are not forecasts.
- The effects of Illinois fiscal conditions, Basel III implementation, and the deferred-tax-asset assumptions and tax examination.