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BUSE > SEC Filings for BUSE > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for FIRST BUSEY CORP /NV/


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of the financial condition of First Busey Corporation and subsidiaries (referred to herein as "First Busey", "Company", "we", or "our") at March 31, 2013 (unaudited), as compared with December 31, 2012, and the results of operations for the three months ended March 31, 2013 and 2012 (unaudited) and December 31, 2012 when applicable. Management's discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this quarterly report, as well as the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

EXECUTIVE SUMMARY

Operating Results

Net income for the first quarter of 2013 was $6.4 million and net income available to common shareholders was $5.5 million, or $0.06 per fully-diluted common share. Net income was $1.5 million higher than the fourth quarter of 2012 and reflected the highest quarterly results since the first quarter of 2012 when the Company reported net income of $7.6 million and net income available to common shareholders of $6.7 million, or $0.08 per fully-diluted common share. Year-over-year results were primarily impacted by a $2.1 million gain on the Company's private equity funds in 2012, compared to nominal gains in the 2013 period.

Net interest income decreased to $24.6 million in the first quarter of 2013 from $25.6 million in the fourth quarter of 2012 and from $25.7 million for the first quarter of 2012. Overall net interest income declines were driven by decreases in yields and were further influenced by comparatively fewer days falling within the first quarter of 2013 relative to the fourth quarter of 2012 and the first quarter of 2012. Additional liquidity generated by our growing deposit base has primarily been deployed into both our loan and investment portfolios over the past year.

Net interest margin fell to 3.10% for the first quarter of 2013 as compared to 3.20% for the fourth quarter of 2012 and 3.31% for the first quarter of 2012. The Company continued to experience downward pressure on its yield on interest-earning assets resulting from a protracted period of historically low rates and heightened competition for assets, which has been experienced throughout the banking industry.

Busey Wealth Management's net income of $0.8 million for the first quarter of 2013 rose slightly from $0.7 million for the fourth quarter of 2012, but was down from the $0.9 million earned in the first quarter of 2012. Our wealth teams drove growth in new assets under management during the first quarter of 2013 suggesting future income will be positively impacted. FirsTech's net income of $0.3 million for the first quarter of 2013 was slightly higher than the fourth quarter of 2012 and was generally consistent with the amount earned in the first quarter of 2012.

Asset Quality

While much internal focus has been directed toward organic growth, our commitment to credit quality remains strong, as evidenced by another quarter of meaningful improvement across a range of credit indicators. At March 31, 2013, various asset quality measures were at their lowest levels in recent years. We continue to expect gradual improvement in our overall asset quality during 2013; however, this remains dependent upon market-specific economic conditions, and specific measures may fluctuate from quarter to quarter. The key metrics are as follows:

Non-performing loans decreased to $23.2 million at March 31, 2013 from $25.4 million at December 31, 2012 and $34.1 million at March 31, 2012.

Illinois/Indiana non-performing loans slightly decreased to $16.5 million at March 31, 2013 from $17.8 million at December 31, 2012 and $25.6 million at March 31, 2012.

Florida non-performing loans decreased to $6.7 million at March 31, 2013 from $7.6 million at December 31, 2012 and $8.5 million at March 31, 2012.


Loans 30-89 days past due increased to $7.1 million at March 31, 2013 from $2.3 million at December 31, 2012 but decreased from $15.9 million at March 31, 2012. We are actively pursuing collection on these loans.

Other non-performing assets, primarily consisting of other real estate owned, decreased to $2.6 million at March 31, 2013 from $3.5 million at December 31, 2012 and $8.7 million at March 31, 2012.

The ratio of non-performing assets to total loans plus other non-performing assets at March 31, 2013 decreased to 1.25% from 1.39% at December 31, 2012 and 2.13 % at March 31, 2012.

The allowance for loan losses to non-performing loans ratio increased to 205.87% at March 31, 2013 from 189.32% at December 31, 2012 and 157.75% at March 31, 2012.

The allowance for loan losses to total loans ratio remained unchanged at 2.32% in the first quarter compared to the prior quarter, but decreased from 2.68% in March 31, 2012.

Net charge-offs of $2.2 million recorded in the first quarter of 2013 were significantly lower than the $4.7 million recorded in the fourth quarter of 2012 and the $9.7 million recorded in the first quarter of 2012. This trend further emphasizes the improvements in overall asset quality.

Provision expense of $2.0 million recorded in the first quarter was a reduction from the prior quarter expense of $3.5 million, and from the $5.0 million recorded in the first quarter of 2012 reflecting the lower level of risk in the portfolio.

Overview and Strategy

Recognizing that the banking landscape would rapidly change as our country emerged from a difficult economic cycle, the Company embraced strong measures to position itself for greater opportunities in the future. We believed that long term success could be best derived from internal reorganization that would make us a better partner to our Pillars - our customers, associates, communities and shareholders. We are excited to have much of the hard work to rebuild our enterprise behind us and can now see positive momentum increasing around our growing book of commercial loans, assets under care, and core deposit franchise. We also acknowledge that true progress requires constant adjustment and renewed commitment to our common purpose, and have underscored our unwavering drive for success with the discipline to contain costs.

As we continue to focus on low-risk and profitable growth, it is important that we strengthen our customer service. During 2012, we launched the Net Promoter System (NPS) to garner specific, tangible and immediate input on our customers' experiences with Busey Bank. Sent to customers via email, our survey is designed to gather feedback that will aid Busey Bank in improving customer relationships. Information shared by customers with friends and family enhances Busey Bank's reputation for premier customer service in an authentic and relevant way. We will continue to use this responsive and personal engagement to further differentiate Busey Bank - strengthening our ability to serve and build solid, lasting relationships with our customers.

With our strong capital position, a stable platform of earnings and an improving credit dynamic, we are actively engaged in growing our Company and communities through both organic and external measures. We understand there is still great work to be done and embrace the resolve to drive our business in a continually positive direction for the success of our Pillars - our customers, associates, communities and shareholders.


Economic Conditions of Markets

The Illinois markets we operate in possess strong industrial, academic and healthcare employment bases. Our primary downstate Illinois markets of Champaign, Macon, McLean and Peoria counties are anchored by several strong, familiar and stable organizations. Although our downstate Illinois and Indiana markets experienced economic distress in recent years, they did not experience it to the level of many other areas, including our southwest Florida market. Our primary markets in stable micro-urban communities of central Illinois are distinct from the dense competitive landscapes of Chicago and the smaller rural populations of southern Illinois. While future economic conditions remain uncertain, we believe our markets have generally stabilized following a few years of economic downturn and, as a whole, have begun to show signs of improvement.

Champaign County is home to the University of Illinois - Urbana/Champaign ("U of I"), the University's primary campus. U of I has in excess of 42,000 students. Additionally, Champaign County healthcare providers serve a significant area of downstate Illinois and western Indiana. Macon County is home to Archer Daniels Midland ("ADM"), a Fortune 100 company and one of the largest agricultural processors in the world. ADM's presence in Macon County supports many derivative businesses in the agricultural processing arena. Additionally, Macon County is home to Millikin University, and its healthcare providers serve a significant role in the market. McLean County is home to State Farm, Country Financial, Illinois State University and Illinois Wesleyan University. State Farm, a Fortune 100 company, is the largest employer in McLean County, and Country Financial and the universities provide additional stability to a growing area of downstate Illinois. Peoria County is home to Caterpillar, a Fortune 100 company, and Bradley University, in addition to a large healthcare presence serving much of the western portion of downstate Illinois. The institutions noted above, coupled with a large agricultural sector, anchor the communities in which they are located, and have provided a comparatively stable foundation for housing, employment and small business.

In 2012, the agriculture sector in the United States dealt with the nation's worst drought in decades. Loans to finance agricultural production and other loans to farmers and loans secured by farmland do not represent a significant portion of our total loan portfolio. The economic impact of the drought appeared to be less than originally anticipated in our markets. Furthermore, farmland values are continuing to increase. The financial condition of these clients and the agriculture base in our communities will continue to be monitored by management for negative effects in future periods.

Southwest Florida has shown continuing signs of improvement in areas such as unemployment and home sales since 2011. As southwest Florida's economy is based primarily on tourism and the secondary/retirement residential market, declines in discretionary spending brought on by uncertain economic conditions caused damage to that economy and, the recent improvement in certain economic indicators notwithstanding, we expect it will take southwest Florida a number of years to return to peak economic strength.

The largest portion of the Company's customer base is within the State of Illinois, the financial condition of which is among the most troubled of any state in the United States with severe pension under-funding, recurring bill payment delays, and budget gaps. Additionally, the Company is located in markets with significant universities and healthcare companies, which rely heavily on state funding and contracts. The State of Illinois continues to be significantly behind on payments to its vendors and government sponsored entities. Further and continued payment lapses by the State of Illinois to its vendors and government sponsored entities may have significant, negative effects on our primary market areas.


OPERATING PERFORMANCE

NET INTEREST INCOME

Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets.

Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 35%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.

The following table shows the consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the periods, or as of the dates, shown. All average information is provided on a daily average basis.


                   AVERAGE BALANCE SHEETS AND INTEREST RATES

                   THREE MONTHS ENDED MARCH 31, 2013 AND 2012



                                                                                                              Change in income/
                                         2013                                  2012                           expense due to (1)
                            Average      Income/     Yield/       Average      Income/     Yield/     Average      Average       Total
                            Balance      Expense    Rate (3)      Balance      Expense    Rate (3)     Volume     Yield/Rate     Change
                                                                      (dollars in thousands)
Assets
Interest-bearing bank
deposits                  $    272,209   $    162       0.24 %  $    282,097   $    177       0.25 %  $     (7 ) $         (8 ) $    (15 )
Investment securities
U.S. Government
obligations                    460,810      1,622       1.43 %       422,617      2,034       1.94 %       166           (578 )     (412 )
Obligations of states
and political
subdivisions(1)                280,165      1,885       2.73 %       170,990      1,454       3.42 %       770           (339 )      431
Other securities               238,443      1,014       1.72 %       278,833      1,338       1.93 %      (187 )         (137 )     (324 )
Loans(1) (2)                 2,037,113     23,028       4.58 %     2,028,711     25,630       5.08 %        96         (2,698 )   (2,602 )
Total interest-earning
assets                    $  3,288,740   $ 27,711       3.42 %  $  3,183,248   $ 30,633       3.87 %  $    838   $     (3,760 ) $ (2,922 )

Cash and due from banks         74,768                                78,598
Premises and equipment          70,941                                69,646
Allowance for loan
losses                         (48,740 )                             (57,567 )
Other assets                   173,028                               191,482

Total Assets              $  3,558,737                          $  3,465,407

Liabilities and
Stockholders' Equity
Interest-bearing
transaction deposits      $     47,631   $      9       0.08 %  $     39,075   $     21       0.22 %  $      4   $        (16 ) $    (12 )
Savings deposits               209,267         20       0.04 %       194,259         76       0.16 %         5            (61 )      (56 )
Money market deposits        1,473,233        485       0.13 %     1,298,458        899       0.28 %       106           (520 )     (414 )
Time deposits                  676,350      1,583       0.95 %       781,876      2,752       1.42 %      (340 )         (829 )   (1,169 )
Short-term borrowings:
Repurchase agreements          130,093         44       0.14 %       138,012         78       0.23 %        (4 )          (30 )      (34 )
Other                                -          9          - %             -          9          - %         -              -          -
Long-term debt                   6,022         81       5.45 %        19,417        226       4.68 %      (177 )           32       (145 )
Junior subordinated
debt owed to
unconsolidated trusts           55,000        301       2.22 %        55,000        337       2.46 %         -            (36 )      (36 )
Total interest-bearing
liabilities               $  2,597,596   $  2,532       0.40 %  $  2,526,097   $  4,398       0.70 %  $   (406 ) $     (1,460 ) $ (1,866 )

Net interest spread                                     3.02 %                                3.17 %

Noninterest-bearing
deposits                       522,256                               502,127
Other liabilities               28,666                                26,854
Stockholders' equity           410,219                               410,329

Total Liabilities and
Stockholders' Equity      $  3,558,737                          $  3,465,407

Interest income /
earning assets(1)         $  3,288,740   $ 27,711       3.42 %  $  3,183,248   $ 30,633       3.87 %
Interest expense /
earning assets            $  3,288,740   $  2,532       0.32 %  $  3,183,248   $  4,398       0.56 %

Net interest margin (1)                  $ 25,179       3.10 %                 $ 26,235       3.31 %  $  1,244   $     (2,300 ) $ (1,056 )



(1) On a tax-equivalent basis assuming a federal income tax rate of 35% for 2012 and 2011.

(2) Non-accrual loans have been included in average loans.

(3) Annualized.


Average earning assets increased for the three month period ended March 31, 2013 as compared to the same period of 2012. Average loans increased $8.4 million for the three month period ended March 31, 2013 compared to the same period of 2012. The Company is focused on rebuilding its loan portfolio with new assets and made significant investments in tools and talent in 2011 and 2012 to support organic growth. Securities increased by $107.0 million for the three month period ended March 31, 2013 compared to the same period of 2012; however, these assets earn a much lower yield than loans.

Interest-bearing liabilities increased for the three month period ended March 31, 2013 as compared to the same period of 2012. Interest-bearing deposits increased $92.8 million for the three month period ended March 31, 2013 as compared to the same period of 2012. The Company has focused on reducing more expensive non-core funding, which we were able to do in light of the continued increase in our average core deposits.

Interest income, on a tax-equivalent basis, decreased $2.9 million for the three month period ended March 31, 2013 as compared to the same period of 2012. The interest income decline related to repricing of assets in a low interest rate environment and heightened competition for assets which is generally being experienced in the banking industry. Interest expense decreased $1.9 million for the three month period ended March 31, 2013 as compared to the same period of 2012. The interest expense declines were a result of reductions in non-core funding sources and decreases in interest rates offered on certain deposit products as the interest rate environment remains low. Both interest income and expense for the first three months of 2013 include 90 days compared to 91 days for the first three months of 2012 as a result of leap year.

Net interest margin

Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, decreased to 3.10% for the three month period ended March 31, 2013 from 3.31% for the same period in 2012.

Quarterly net interest margins for 2013 and 2012 are as follows:

                 2013   2012
First Quarter    3.10 % 3.31 %
Second Quarter      -   3.21 %
Third Quarter       -   3.25 %
Fourth Quarter      -   3.20 %

The net interest spread, also on a tax-equivalent basis, was 3.02% for the three month period ended March 31, 2013, compared to 3.17% for the same period in 2012.

We continue to experience downward pressure on our yield in interest-earning assets as have most financial institutions. We have limited ability to improve margin through funding rate decreases due to the historically low interest rate environment and we believe further improvements in margin will be achieved in the short term through redeployment of our liquid funds at higher yields.

Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies. Please refer to the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 for accounting policies underlying the recognition of interest income and expense.


OTHER INCOME



                                           Three Months Ended
                                               March 31,
                                                              %
                                        2013       2012     Change
                                         (dollars in thousands)
Trust fees                            $  5,208   $  5,195      0.3 %
Commissions and brokers' fees, net         540        506      6.7 %
Remittance processing                    2,098      2,167     (3.2 )%
Service charges on deposit accounts      2,727      2,811     (3.0 )%
Other service charges and fees           1,439      1,381      4.2 %
Gain on sales of loans                   3,497      2,413     44.9 %
Other                                    1,132      3,407    (66.8 )%
Total other income                    $ 16,641   $ 17,880     (6.9 )%

Combined wealth management revenue, trust and commissions and brokers' fees, net, increased for the three month period ended March 31, 2013 as compared to the same period in 2012. The increase was led by organic growth, which increased assets under management ("AUM") and increased securities market valuations. AUM averaged $4.3 billion for the first three months of 2013 compared to $4.0 billion for the first three months of 2012. Continued growth in new AUM driven by our wealth teams during the first quarter of 2013 suggest future income will also be positively impacted as wealth management revenues are typically highly correlated to AUM.

Remittance processing revenue relates to our payment processing company, FirsTech. FirsTech's revenue decreased for the three month period ended March 31, 2013 as compared to the same period of 2012 due to decreased volume of online bill payments and walk-in payment income.

Overall, service charges on deposit accounts combined with other service charges and fees were stable for the three month period ended March 31, 2013 as compared to the same period in 2012. Evolving regulation, changing behaviors by our client base to avoid fees and changes in product mix are affecting general growth trends in service charges.

Gain on sales of loans increased for the three month period ended March 31, 2013 as compared to the same period in 2012. Residential mortgage fee activity continued to increase in 2013, based on strong loan production, an active market for refinancing and positive momentum in the home purchase market. These fee revenues provide a good balance to our revenue stream and represent a valued service to our clients and communities to refinance and purchase homes.

Other income decreased for the three month period ended March 31, 2013 as compared to the same period in 2012. The decrease was primarily due to the income fluctuation in the Company's private equity investment funds. The majority of the gain in 2012 related to income earned from an investment in a local, community-focused fund. The gain was non-recurring; therefore, the Company did not expect other income to show significant increases in future periods.


OTHER EXPENSE



                                         Three Months Ended
                                             March 31,
                                                            %
                                      2013       2012     Change
                                       (dollars in thousands)
Compensation expense:
Salaries and wages                  $ 13,560   $ 12,111     12.0 %
Employee benefits                      3,227      2,896     11.4 %
Total compensation expense          $ 16,787   $ 15,007     11.9 %

Net occupancy expense of premises      2,182      2,205     (1.0 )%
Furniture and equipment expenses       1,254      1,272     (1.4 )%
Data processing                        2,639      2,159     22.2 %
Amortization of intangible assets        783        827     (5.3 )%
Regulatory expense                       646        626      3.2 %
OREO expense                             543          5       NM
Other                                  4,733      5,101     (7.2 )%
Total other expense                 $ 29,567   $ 27,202      8.7 %

Income taxes                        $  3,224   $  3,733    (13.6 )%
Effective rate on income taxes          33.4 %     32.8 %

Efficiency ratio                       68.83 %    59.79 %

NM=Not Meaningful

Total compensation expense increased for the three months ended March 31, 2013 as compared to the same period in 2012, although full-time equivalent employees decreased to 893 at March 31, 2013 from 915 one year earlier. Starting late 2011, the Company executed a long-term plan and began to rebuild in select areas of the organization to spur organic growth and support a diversified revenue stream, including our addition of Trevett Capital Partners. In the later part of 2012, the Company engaged in a renewed focus to carefully reexamine our structure and we reduced our workforce in select areas based on our collective vision of the strongest path for broad-based future strength, profitability and growth, while renewing our strong commitment to superior customer service. This reduction and other cost containment efforts in recent months are expected to maintain or slightly reduce staffing costs from the current period on a forward looking basis.

Combined occupancy expenses and furniture and equipment expenses declined slightly for the three months ended March 31, 2013 as compared to the same period in 2012. We continue to evaluate our operations for appropriate cost control measures while seeking improvements in service delivery to our customers.

Data processing expense increased for the three months ended March 31, 2013 as compared to the same period in 2012. We continue to invest to support the developing product needs of our customers including online banking and mobile capabilities, while continually enhancing measures for data safety and risk containment.

Amortization of intangible assets expense decreased as we are now in the sixth year of amortization arising from our merger with Main Street Trust, Inc. The amortization is on an accelerated basis; thus, exclusive of any further acquisitions in the future, we expect amortization expense to continue to gradually decline.

Regulatory expense increased slightly for the three months ended March 31, 2013 as compared to the same period in 2012. We anticipate that our regulatory expenses will remain at current levels for the near future. . . .

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