First Busey Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. First Busey is a bank holding company with banking, remittance-processing (FirsTech), and wealth-management businesses, operating primarily in Illinois, Indiana, and southwest Florida. Figures below are in U.S. dollars; financial amounts are rounded to millions unless otherwise stated.
Financial results and condition
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $25.7 million | $28.3 million in Q1 2011 |
| Net interest margin | 3.31% | 3.55% in Q1 2011 |
| Total other income | $17.9 million | $15.5 million in Q1 2011 |
| Net income | $7.6 million | $9.1 million in Q1 2011 |
| Net income available to common shareholders; diluted EPS | $6.7 million; $0.08 | $7.3 million; $0.09 in Q1 2011 |
| Total assets | $3,537 million | $3,402 million at December 31, 2011 |
| Loans, including loans held for sale, net of allowance | $1,952 million | $1,993 million at December 31, 2011 |
| Deposits | $2,880 million | $2,763 million at December 31, 2011 |
| Allowance for loan losses | $53.8 million; 2.68% of loans | $58.5 million; 2.85% at December 31, 2011 |
- Revenue and expenses: Total revenue, defined by management as net interest income plus other income, was $43.6 million versus $43.9 million in Q1 2011. Total other expenses rose 6% to $27.2 million; compensation expense increased 21.8% to $15.0 million. The efficiency ratio was 59.79%, versus 55.87%.
- Cash flow: Operating cash flow was $4.1 million, versus $51.9 million in Q1 2011; investing activities used $63.3 million, versus providing $33.6 million. Financing activities provided $129.2 million, versus using $92.3 million. Cash and due from banks ended at $385.1 million, up $70.1 million during the quarter.
- Debt and liquidity: Long-term debt was $19.4 million and junior subordinated debt was $55.0 million, both unchanged from year-end. Repurchase-agreement funding was $144.7 million. Management reported $20 million available on its correspondent-bank operating line and considered liquidity adequate for projected obligations.
- Capital: The company reported consolidated total capital of 19.30% and Tier 1 capital of 18.00% of risk-weighted assets. Management stated that First Busey and Busey Bank met applicable capital requirements, including “well capitalized” standards.
- Credit quality: Non-performing loans were $34.1 million, down from $38.5 million at year-end; total non-performing assets were $42.8 million, down from $47.0 million. Net charge-offs were $9.7 million. Loans 30–89 days past due increased to $15.9 million from $4.7 million at year-end, primarily due to two large commercial credits. Potential problem loans fell to $71.3 million from $80.6 million.
Material changes and unusual items
- Net interest income fell as average loans declined; lower funding costs partially offset the reduction. Average earning assets were down $110.8 million year over year, including a $266.5 million decline in average loans, while securities grew but yielded less.
- Other income included a $2.1 million net gain from private-equity funds, primarily a local community-focused fund. Management said it did not expect other income to remain as high in future quarters.
- The allowance fell by $4.7 million during the quarter despite $11.1 million in gross charge-offs and $1.4 million in recoveries. Management cited improving economic and credit trends; changes to qualitative factors reduced allowance requirements by $4.4 million compared with the prior-year-end methodology.
- Deposits rose 4.2% from year-end, while net loans including loans held for sale declined 2.0%. Securities available for sale increased 13.1% to $940.7 million.
Outlook, commentary, and risks
- No formal numerical earnings or revenue guidance is provided. Management prioritized growing high-quality loans in 2012 through investment in commercial banking talent, sales tools, and relationship-building. It expected gradual asset-quality improvement, subject to market-specific economic conditions.
- Management cautioned that staffing investment may pressure the efficiency ratio until revenue growth exceeds added costs. It also cited ongoing pressure on earning-asset yields and limited scope for further funding-cost reductions.
- Management described southwest Florida as taking years to recover fully and warned that Illinois’s fiscal challenges and delayed payments could adversely affect its markets, particularly institutions dependent on state funding or contracts.
- Key stated risks include economic conditions, interest rates and prepayments, competition, regulation, technology and cybersecurity, employee retention, litigation, and uncertainty in loan collateral values and allowance estimates. Fair-value and deferred-tax-asset estimates are also judgment-sensitive.
- The Illinois Department of Revenue planned to audit the company’s 2009 and 2010 tax filings beginning in May 2012. The IRS finalized its examination of those years during the quarter, resulting in a $0.3 million receivable due to the company. Management said ordinary-course legal matters were not expected to have a material adverse effect; the filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and net interest margin stabilize as management redeploys liquidity and expands commercial banking efforts.
- Whether non-performing and past-due loans continue to improve, especially the two large commercial credits, and whether the lower allowance remains adequate after substantial charge-offs and reserve-factor reductions.
- How much reported earnings depend on the $2.1 million private-equity gain and whether higher compensation produces recurring revenue growth.
- Whether deposit growth, available borrowing capacity, and reported capital ratios remain sufficient under adverse credit or market conditions.
- The outcome and any financial effect of the planned Illinois tax audit, and the sensitivity of collateral valuations and deferred tax assets to changing assumptions.