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BUSE > SEC Filings for BUSE > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for FIRST BUSEY CORP /NV/


6-Aug-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 June 30, 2013 (unaudited), as compared with March 31, 2013 (unaudited), December 31, 2012 and June 30, 2012 (unaudited), and the results of operations for the three and six months ended June 30, 2013 and 2012 (unaudited), March 31, 2013 (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 second quarter of 2013 was $7.4 million and net income available to common shareholders was $6.5 million, or $0.08 per fully-diluted common share, as compared to net income of $6.4 million for the first quarter of 2013 and $5.5 million of net income available to common shareholders, or $0.06 per fully-diluted common share. Net income was $2.5 million higher than the second quarter of 2012, when the Company reported net income of $4.9 million and net income available to common shareholders of $4.0 million, or $0.05 per fully-diluted common share. The Company's 2013 year-to-date net income through June 30 was $13.9 million and net income available to common shareholders was $12.1 million, or $0.14 per fully-diluted common share, compared to net income of $12.5 million and net income available to common shareholders of $10.7 million, or $0.12 per fully-diluted common share, for the comparable period of 2012.

The growth in net income from the prior year was driven by a lower provision for loan loss, which was comparable to pre-recession norms. The second quarter of 2013's $2.0 million loan loss provision was consistent with the first quarter of 2013, with both periods marking four-year lows in quarterly credit costs as our market areas show signs of strengthening and credit quality continued to improve. In addition, actions have been taken to selectively offset planned expense growth with prudent reductions in other areas. The results of these actions impacted second quarter results and are expected to continue positively affecting future earnings.

Net interest margin rose to 3.17% for the second quarter of 2013 as compared to 3.10% for the first quarter of 2013 but fell from 3.21% for the second quarter of 2012. The net interest margin for the first six months of 2013 decreased to 3.14% compared to 3.26% for the same period of 2012.

Busey Wealth Management's net income of $1.1 million for the second quarter of 2013 rose 38.2% from the first quarter of 2013 and 12.8% from the second quarter of 2012. Seasonal fluctuations in revenue drove much of the increase in net income for the second quarter of 2013 compared to the first quarter of 2013. Busey Wealth Management's net income for the first six months of 2013 was $2.0 million as compared to $1.9 million for the first six months of 2012. Growth in assets under management accompanied by market trends positively impacted the quarter-over-quarter and year-over-year results. Assets under management increased to $4.5 billion as of June 30, 2013 compared to $4.0 billion at June 30, 2012. FirsTech's net income of $0.3 million for the second quarter of 2013 was comparable with the first quarter of 2013, and slightly higher than the $0.2 million recorded for the second quarter of 2012. FirsTech's 2013 year-to-date net income of $0.5 million remained consistent with the comparable period 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 progress across a range of credit indicators. At June 30, 2013, various asset quality measures were at their best quarter-end 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:


                         SELECTED  FINANCIAL HIGHLIGHTS

                             (dollars in thousands)



                                               As of and for the Three Months Ended
                                     June 30,       March 31,      December 31,      June 30,
                                       2013           2013             2012            2012
ASSET QUALITY
Gross loans(1)                      $ 2,159,098    $ 2,060,680    $    2,073,110    $ 2,021,931
Commercial loans(2)                   1,580,351      1,508,068         1,500,921      1,448,165
Allowance for loan losses                48,491         47,773            48,012         50,866
Non-performing loans
Non-accrual loans                        20,274         23,001            25,104         33,760
Loans 90+ days past due                     771            204               256             57
Non-performing loans, segregated
by geography
Illinois/ Indiana                        16,030         16,458            17,757         25,365
Florida                                   5,015          6,747             7,603          8,452
Loans 30-89 days past due                 3,683          7,132             2,285          4,240
Other non-performing assets               2,617          2,632             3,450          7,783
Non-performing assets to total
loans and non-performing assets             1.1 %          1.3 %             1.4 %          2.1 %
Allowance as a percentage of
non-performing loans                      230.4 %        205.9 %           189.3 %        150.4 %
Allowance for loan losses to
loans                                       2.3 %          2.3 %             2.3 %          2.5 %



(1) Includes loans held for sale.

(2) Includes loans categorized as commercial, commercial real estate and real estate construction.

As a result of the Company's strategic investment in loan growth, the total loan portfolio as of June 30, 2013 increased $137.2 million from June 30, 2012; gross commercial balances accounted for $132.2 million of this loan growth. The total loan portfolio increased $98.4 million from March 31, 2013 to June 30, 2013; gross commercial loan balances accounted for $72.3 million of this increase. The Company's continued emphasis on commercial loan growth resulted in an increase of gross commercial loan balances of 9.1% at June 30, 2013 from June 30, 2012 and 4.8% compared to March 31, 2013. In addition to overall loan growth, the Company experienced loan growth in the highest credit grades, while the volume of the lowest credit grades decreased.

Net charge-offs decreased $13.6 million, or 79.4%, for the six months ended June 30, 2013 from the comparable period of 2012. Net charge-offs decreased $1.0 million, or 42.7%, from the first quarter of 2013 and decreased by $6.2 million, or 82.8%, from the second quarter of 2012. This is a result of the improved quality of the loan portfolio.

Overview and Strategy

As the economy continues to emerge from recession, we continue to believe that long-term success will be driven by our commitment to our Pillars - our customers, associates, communities and shareholders. To honor this commitment, we initiated an internal review of our cost structure in early 2013, and the results of our efforts continue to materialize. We are encouraged by the positive momentum occurring in our commercial loan portfolio and assets under management. Our growing loan pipeline has begun to translate into increased loans. Additionally, our emphasis on maximizing shareholder value was evidenced this period by the increase in earnings per share on a quarterly and year-over-year basis. We 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 execute our growth strategy, it is critical to convert new relationships into long-term customers - which in turn, increases shareholder value. Since our product is service, we launched the Net Promoter System (NPS) in 2012 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, and opens up new avenues to further enhance our customer service.


In addition, we remain innovative in our product offerings. In the second quarter, we introduced Mobile Deposit and Mobile Accept. Mobile Deposit offers our mobile banking customers the ability to deposit paper checks by taking a picture of them and submitting them electronically through their smartphone. Mobile Accept is a mobile payment application that allows merchants to quickly and securely swipe any credit or signature debit card for processing on a smartphone or tablet. We are pleased to meet the growing needs of our customer base through these secure, convenient platforms.

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

Our primary markets in stable micro-urban communities of downstate Illinois are distinct from the dense competitive landscapes of Chicago and the smaller rural populations of southern Illinois and they have 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. 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.

Southwest Florida has shown continuing signs of improvement in areas such as unemployment and home sales since 2011. In addition, median sales prices in Florida are now on the rise. 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 credit downgrade concerns, severe pension under-funding, recurring bill payment delays, and budget deficits. 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 tables show 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. The tables also show, for the periods indicated, a summary of the changes in interest earned and interest expense resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities. All average information is provided on a daily average basis.


                   AVERAGE BALANCE SHEETS AND INTEREST RATES

                   THREE MONTHS ENDED JUNE 30, 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         $    240,342   $    151        0.25 %  $    310,306   $    194      0.25 %  $    (43 ) $          -   $    (43 )
Investment
securities
U.S. Government
obligations                436,963      1,495        1.37 %       461,684      2,076      1.81 %      (106 )         (475 )     (581 )
Obligations of
states and
political
subdivisions(1)            289,467      1,926        2.67 %       202,080      1,590      3.16 %       613           (277 )      336
Other securities           220,404      1,215        2.21 %       280,572      1,323      1.90 %      (309 )          201       (108 )
Loans(1) (2)             2,083,296     23,267        4.48 %     1,984,721     24,610      4.99 %     1,207         (2,550 )   (1,343 )
Total
interest-earning
assets(1)             $  3,270,472   $ 28,054        3.44 %  $  3,239,363   $ 29,793      3.70 %  $  1,362   $     (3,101 ) $ (1,739 )

Cash and due from
banks                       86,258                                 75,776
Premises and
equipment                   70,209                                 69,871
Allowance for loan
losses                     (48,237 )                              (52,190 )
Other assets               166,000                                188,980

Total Assets          $  3,544,702                           $  3,521,800

Liabilities and
Stockholders'
Equity
Interest-bearing
transaction
deposits              $     51,587   $      8        0.06 %  $     44,166   $     17      0.15 %  $      2   $        (11 ) $     (9 )
Savings deposits           213,122         16        0.03 %       199,475         72      0.15 %         5            (61 )      (56 )
Money market
deposits                 1,467,474        443        0.12 %     1,367,060        801      0.24 %        55           (413 )     (358 )
Time deposits              646,105      1,357        0.84 %       745,446      2,428      1.31 %      (291 )         (780 )   (1,071 )
Short-term
borrowings:
Repurchase
agreements                 133,708         40        0.12 %       129,690         76      0.24 %         2            (38 )      (36 )
Other                            -          6           - %             -          9         - %         -             (3 )       (3 )
Long-term debt               3,230         44        5.46 %        19,087        220      4.64 %      (210 )           34       (176 )
Junior subordinated
debt owed to
unconsolidated
trusts                      55,000        301        2.20 %        55,000        328      2.40 %         -            (27 )      (27 )
Total
interest-bearing
liabilities           $  2,570,226   $  2,215        0.35 %  $  2,559,924   $  3,951      0.62 %  $   (437 ) $     (1,299 ) $ (1,736 )

Net interest
spread(1)                                            3.09 %                               3.08 %

Noninterest-bearing
deposits                   533,816                                522,026
Other liabilities           27,714                                 26,611
Stockholders'
equity                     412,946                                413,239

Total Liabilities
and Stockholders'
Equity                $  3,544,702                           $  3,521,800

Interest income /
earning assets(1)     $  3,270,472   $ 28,054        3.44 %  $  3,239,363   $ 29,793      3.70 %
Interest expense /
earning assets        $  3,270,472   $  2,215        0.27 %  $  3,239,363   $  3,951      0.49 %

Net interest
margin(1)                            $ 25,839        3.17 %                 $ 25,842      3.21 %  $  1,799   $     (1,802 ) $     (3 )



(1) On a tax-equivalent basis assuming a federal income tax rate of 35% for 2013 and 2012.

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

(3) Annualized.


                   AVERAGE BALANCE SHEETS AND INTEREST RATES

                    SIX MONTHS ENDED JUNE 30, 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                $    256,188   $    313      0.25 %  $   296,201   $    371      0.25 %  $    (50 ) $         (8 ) $    (58 )
Investment securities
U.S. Government
obligations                  448,820      3,117      1.40 %      442,151      4,110      1.87 %        60         (1,053 )     (993 )
Obligations of states
and political
subdivisions(1)              284,842      3,811      2.70 %      186,535      3,044      3.28 %     1,381           (614 )      767
Other securities             229,374      2,229      1.96 %      279,702      2,661      1.91 %      (494 )           62       (432 )
Loans(1) (2)               2,060,332     46,295      4.53 %    2,006,716     50,240      5.03 %     1,281         (5,226 )   (3,945 )
Total
interest-earning
assets(1)               $  3,279,556   $ 55,765      3.43 %  $ 3,211,305   $ 60,426      3.78 %  $  2,178   $     (6,839 ) $ (4,661 )

Cash and due from
banks                         80,544                              77,187
Premises and
equipment                     70,573                              69,758
Allowance for loan
losses                       (48,487 )                           (54,878 )
Other assets                 169,495                             190,231

Total Assets            $  3,551,681                         $ 3,493,603

Liabilities and
Stockholders' Equity
Interest-bearing
transaction deposits    $     49,620   $     17      0.07 %  $    41,620   $     38      0.18 %  $      6   $        (27 ) $    (21 )
Savings deposits             211,205         36      0.03 %      196,867        148      0.15 %        10           (122 )     (112 )
Money market deposits      1,470,337        928      0.13 %    1,332,759      1,700      0.26 %       159           (931 )     (772 )
Time deposits                661,144      2,940      0.90 %      763,661      5,180      1.36 %      (631 )       (1,609 )   (2,240 )
Short-term
borrowings:
Repurchase agreements        131,911         84      0.13 %      133,851        154      0.23 %        (2 )          (68 )      (70 )
Other                              -         15         - %            -         18         - %         -             (3 )       (3 )
Long-term debt                 4,619        125      5.46 %       19,252        446      4.66 %      (386 )           65       (321 )
Junior subordinated
debt owed to
unconsolidated trusts         55,000        602      2.21 %       55,000        665      2.43 %         -            (63 )      (63 )
Total
interest-bearing
liabilities             $  2,583,836   $  4,747      0.37 %  $ 2,543,010   $  8,349      0.66 %  $   (844 ) $     (2,758 ) $ (3,602 )

Net interest
spread(1)                                            3.06 %                              3.12 %

Noninterest-bearing
deposits                     528,068                             512,077
Other liabilities             28,187                              26,732
Stockholders' equity         411,590                             411,784

Total Liabilities and
Stockholders' Equity    $  3,551,681                         $ 3,493,603

Interest income /
earning assets(1)       $  3,279,556   $ 55,765      3.43 %  $ 3,211,305   $ 60,426      3.78 %
Interest expense /
earning assets          $  3,279,556   $  4,747      0.29 %  $ 3,211,305   $  8,349      0.52 %

Net interest
margin(1)                              $ 51,018      3.14 %                $ 52,077      3.26 %  $  3,022   $     (4,081 ) $ (1,059 )



(1) On a tax-equivalent basis assuming a federal income tax rate of 35% for 2013 and 2012.

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

(3) Annualized.


Average earning assets increased for the three and six month periods ended June 30, 2013 as compared to the same periods of 2012. Average loans increased $98.6 million and $53.6 million for the three and six month periods ended June 30, 2013 compared to the same periods of 2012, respectively. Our growing loan pipeline and continued emphasis on commercial loan growth has begun to translate into increased loans. Our average securities balances increased by $2.5 million and $54.6 million for the three and six month periods ended June 30, 2013 compared to the same periods of 2012, respectively.

Average interest-bearing liability balances increased for the three and six month periods ended June 30, 2013 as compared to the same periods of 2012. Interest-bearing deposits increased $22.1 million and $57.4 million for the three and six month periods ended June 30, 2013 as compared to the same periods of 2012, respectively. 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 $1.7 million and $4.6 million for the three and six month periods ended June 30, 2013 as compared to the same periods of 2012, respectively. The interest income decline related to lower yields earned on assets in a low interest rate environment despite increased average balances of earning assets. Interest expense decreased $1.7 million and $3.6 million for the three and six month periods ended June 30, 2013 as compared to the same periods of 2012, respectively. The interest expense declines were primarily a result of decreases in interest rates offered by the Company on certain deposit products as the interest rate environment remains low.

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 3.17% for the three month period ended June 30, 2013 from 3.21% for the same period in 2012 and decreased to 3.14% for the six month period ended June 30, 2013 from 3.26% 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   3.17 % 3.21 %
Third Quarter       -   3.25 %
Fourth Quarter      -   3.20 %

The net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, also on a tax-equivalent basis, was 3.09% for the three month period ended June 30, 2013, compared to 3.08% for the same period in 2012 and was 3.06% for the six month period ended June 30, 2013 compared to 3.12% for the same period in 2012.

Compared to the first quarter of 2013, net interest margin has improved and the Company is encouraged by a growing loan-to-deposit ratio. 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 through redeployment of our liquid funds at higher yields as our loan pipeline continues to drive growth in loans.

Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting . . .

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