First Busey Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2011. Financial statements are unaudited. Comparisons are primarily with the corresponding 2010 periods; balance-sheet comparisons are with December 31, 2010.
Financial performance and condition
- Third-quarter earnings: Net income was $7.6 million, up from $6.0 million a year earlier; net income available to common stockholders was $6.5 million, or $0.08 per diluted share, versus $4.7 million, or $0.07. Management attributed the increase mainly to a $4.5 million lower loan-loss provision and $1.7 million lower regulatory expense.
- Nine-month earnings: Net income was $24.1 million versus $15.9 million; income available to common stockholders was $20.0 million, or $0.24 per diluted share, versus $12.1 million, or $0.18. Common dividends were $0.12 per share for the period, unchanged year over year.
- Revenue and margins: Nine-month net interest income was $83.9 million, down from $87.7 million; third-quarter net interest income was $27.7 million versus $29.6 million. Tax-equivalent net interest margin was 3.57% in Q3, versus 3.64% a year earlier, and 3.55% for the first nine months in both years. Nine-month other income declined to $44.0 million from $45.5 million. The efficiency ratio improved to 57.16% for nine months from 57.46%.
- Credit costs and asset quality: The nine-month loan-loss provision fell to $15.0 million from $31.7 million. The allowance was $63.9 million, or 3.04% of loans, versus $76.0 million, or 3.21%, at year-end. Nonperforming loans were $43.0 million, down from $68.1 million at year-end; nonperforming assets were $54.6 million, down from $77.3 million. However, other real estate owned increased to $11.6 million from $9.2 million, following foreclosure of four large commercial properties in Q3. Allowance coverage of nonperforming loans rose to 148.7% from 111.6%.
- Balance sheet and funding: Total assets declined 5.9% to $3.39 billion. Net loans, including loans held for sale, declined 11.2% to approximately $2.04 billion; available-for-sale securities increased 32.7% to $795.4 million. Deposits fell 5.5% to $2.76 billion, principally as higher-cost certificates of deposit matured; noninterest-bearing deposits increased 1.5%. Long-term debt fell 54.0% to $19.8 million. Stockholders’ equity was $407.5 million, down 3.1% from year-end.
- Cash flow and liquidity: Nine-month operating cash flow was $72.4 million, investing cash flow was $32.0 million, and financing cash flow was negative $234.1 million. Cash and due from banks declined by $129.8 million to $289.1 million. Management said projected obligations were adequately covered and reported that its $20 million operating line was fully available at quarter-end.
- Capital: At September 30, consolidated total capital was 18.44% of risk-weighted assets and Tier 1 capital was 17.15%; Busey Bank’s corresponding ratios were 16.90% and 15.61%. The company reported that it and the Bank met applicable capital requirements, including “well capitalized” requirements for the Bank.
Material changes and unusual items
- On August 25, 2011, First Busey exited TARP: it issued $72.664 million of Series C preferred stock to the Treasury under the Small Business Lending Fund and redeemed all Series T TARP preferred stock for approximately $100.1 million, including accrued dividends. Series C qualifies as Tier 1 capital; its dividend rate varies with qualified small-business lending and can rise to 9% after 4.5 years. The Treasury warrant for 573,833 common shares remained outstanding.
- Common shares outstanding increased to 86.6 million from 79.1 million at year-end, following conversion of Series B preferred stock into 7.497 million common shares in March 2011 and other share activity. The preferred-stock transactions and dividends affected equity and earnings available to common shareholders.
- Cash deployment included $289.5 million of securities purchases, partly offset by loan repayments and financing outflows. Securities carried $22.4 million of gross unrealized gains and $0.4 million of gross unrealized losses; management did not consider the loss-position securities other-than-temporarily impaired.
Outlook, management commentary, and risks
- Management expected gradual improvement in nonperforming loans and profitability while prioritizing balance-sheet strength, profitability, and then growth. It identified meaningful organic growth as a focus for 2012, including investment in business bankers, and said external growth opportunities could also matter. No specific earnings or revenue guidance was provided.
- Management cited weak loan demand, competition, lower loan balances, and pressure on asset yields. Mortgage refinancing activity increased in Q3 as rates reached record lows; the company reported its largest residential mortgage pipeline of 2011 at quarter-end.
- Management described signs of stabilization in southwest Florida but said recovery could take years. It also warned that Illinois fiscal stress and any further delays in state payments could harm the company’s markets, including university- and healthcare-dependent areas.
- Potential risks include further credit deterioration or collateral-value declines, particularly in real estate and southwest Florida; management noted that additional loan losses may emerge as new information becomes available. The allowance depends on estimates of borrower cash flows and collateral values. Potential problem loans were $101.9 million at quarter-end.
- Interest-rate simulation estimated net interest income declines of 3.50% under a +100-basis-point shock and 7.83% under +200 basis points. Downward shocks were unavailable in the prevailing rate environment; management said results remained within its stated policy limits.
- Off-balance-sheet commitments included $506.6 million to extend credit and $16.5 million of standby letters of credit; these contractual amounts do not necessarily represent future cash needs. Management did not expect ordinary-course legal matters to have a material adverse effect. The IRS was examining tax years 2009 and 2010.
Important facts for investors to verify
- Whether the improvement in nonperforming loans and lower provision expense persists, and whether new charge-offs or foreclosures offset that progress.
- The adequacy of the $63.9 million allowance, including assumptions about collateral values, Florida credit conditions, and the $101.9 million potential-problem-loan balance.
- Whether loan growth and revenue can recover enough to offset lower loan yields, deposit-related regulatory impacts, and planned staffing investments.
- The cost and dividend terms of Series C preferred stock as qualified small-business lending changes, along with the remaining Treasury warrant and the effect of preferred claims on common earnings.
- The liquidity impact of deposit trends, securities purchases, and the $523.1 million in credit commitments and standby letters of credit; also monitor the IRS examination and deferred-tax-asset assumptions.