First Busey Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Comparisons below are with Q2 or the first six months of 2011, unless otherwise stated. Balance-sheet comparisons are with December 31, 2011. First Busey operates Busey Bank, FirsTech payment processing and Busey Wealth Management.
Financial performance and position
| Metric | Q2 / June 30, 2012 | Comparable period / prior date |
|---|---|---|
| Net interest income | $25.3 million | $27.8 million in Q2 2011; six-month total was $51.0 million versus $56.2 million |
| Net interest margin | 3.21% in Q2; 3.26% for six months | 3.54% in both comparable 2011 periods |
| Other income | $15.8 million in Q2; $33.7 million for six months | Q2 2011: $13.7 million; six months 2011: $29.3 million |
| Provision for loan losses | $4.5 million in Q2; $9.5 million for six months | Q2 2011: $5.0 million; six months 2011: $10.0 million |
| Net income / common earnings | $4.9 million net income; $4.0 million available to common stockholders; diluted EPS $0.05 | Q2 2011: $7.4 million, $6.2 million and $0.07, respectively. Six-month diluted EPS was $0.12 versus $0.16 |
| Expenses and efficiency | Other expense $29.8 million; Q2 efficiency ratio 69.7% | Q2 2011: $25.2 million and 57.8%; six-month ratio 64.6% versus 56.8% |
| Assets and funding | Total assets $3.525 billion; deposits $2.895 billion | Assets increased 3.6% and deposits 4.8% from year-end |
| Loans and securities | Net loans $1.936 billion; available-for-sale securities $980.8 million | Net loans declined 1.1%; securities increased 17.9% from year-end |
| Debt and equity | Long-term debt $14.4 million; junior subordinated debt $55.0 million; stockholders’ equity $414.8 million | Long-term debt decreased from $19.4 million; subordinated debt was unchanged; equity increased from $409.3 million |
| Cash flows, six months | Operating +$17.9 million; investing −$121.8 million; financing +$109.2 million; cash increased $5.3 million to $320.3 million | 2011: operating +$67.5 million, investing +$18.4 million, financing −$147.7 million; cash declined $61.8 million |
Material changes and management commentary
- Q2 revenue, defined in management’s discussion as net interest income plus other income net of interest expense and security gains, was approximately $41.0 million, versus $41.6 million in Q2 2011. Six-month net interest income fell as loan volumes and asset yields declined; lower funding costs partly offset the reduction.
- Management attributed weaker earnings and efficiency to investment in staff, systems and growth infrastructure, along with roughly $1.0 million of Q2 one-time costs related to insurance and other benefits, OREO and technology initiatives. Average loans fell year over year, while management said additional deposit liquidity was primarily invested in securities at lower yields.
- Compensation expense rose 29% for the first six months; full-time equivalent employees increased to 925 from 853 a year earlier. Wealth management fees grew, while FirsTech remittance revenue and deposit service charges declined. Mortgage loan-sale gains increased.
- Other income included a $2.1 million private-equity fund gain in the first quarter, described as nonrecurring. Management said it did not expect comparable significant increases in future periods. Q2 also included a $64,000 securities gain.
- Management’s stated priorities are balance-sheet strength, profitability and growth. It is investing in sales talent and relationship banking to pursue quality loan growth and expand fee-based revenue. Management expects gradual asset-quality improvement during 2012, subject to market-specific economic conditions; it did not provide numerical earnings guidance.
Credit, liquidity, capital and risks
- Non-performing loans were $33.8 million, down from $38.5 million at year-end; total non-performing assets were $41.6 million, down from $47.0 million. Potential problem loans were $66.0 million, compared with $80.6 million at year-end.
- The allowance for loan losses was $50.9 million, 2.52% of loans and 150.4% of non-performing loans. Net charge-offs were $7.5 million in Q2. The allowance fell from $58.5 million at year-end; management cited a $2.6 million reduction in allowance requirements from second-quarter changes to qualitative factors. Management considers the allowance adequate but cautions that further losses may emerge as new information becomes available.
- Restructured loans totaled $33.9 million, including $13.2 million included in non-performing loans. The portfolio is concentrated in real estate lending, particularly commercial real estate; management notes that southwest Florida collateral valuations rely significantly on unobservable inputs.
- Deposits grew, including noninterest-bearing deposits, while repurchase agreements and long-term debt declined. The company reported a fully available $20 million operating line of credit and said projected liquidity needs were adequately covered. Regulatory capital ratios exceeded the stated “well capitalized” thresholds: consolidated total capital 19.26%, Tier 1 risk-based capital 17.97%, and Tier 1 leverage 11.37%.
- Risks include persistent low rates and margin pressure; economic weakness in southwest Florida; Illinois fiscal stress and potential effects on local employers and vendors; and drought-related impacts on agricultural borrowers. Agricultural production/farmer loans were about 1% of total loans and farmland-secured loans about 2%. The company reported no Alt-A or subprime loans or investments.
- Interest-rate simulation showed net interest income declining 11.03% under an immediate, sustained +400 basis-point shock; management said modeled sensitivity remained within policy limits. Basel III rules were proposed and their final effects were uncertain. The company was under Illinois tax examination for its 2009 and 2010 filings; management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth and fee-income initiatives offset lower net interest margin, increased staffing and other operating costs.
- Whether asset-quality gains persist, particularly in commercial real estate and Florida, and whether the allowance remains adequate given charge-offs and the qualitative-factor reduction.
- The sustainability of earnings excluding the nonrecurring $2.1 million private-equity gain and the effect of Q2 one-time costs.
- How deposit growth, securities purchases and loan production affect liquidity, yields and capital as interest rates or local economic conditions change.
- The outcome of the Illinois tax examination and the eventual impact of Basel III implementation.