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BUSE > SEC Filings for BUSE > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for FIRST BUSEY CORP /NV/

Form 10-Q for FIRST BUSEY CORP /NV/


7-Nov-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 September 30, 2013 (unaudited), as compared with June 30, 2013 (unaudited), December 31, 2012 and September 30, 2012 (unaudited), and the results of operations for the three and nine months ended September 30, 2013 and 2012 (unaudited), and the three months ended June 30, 2013 (unaudited) 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 third quarter of 2013 was $7.9 million and net income available to common stockholders was $7.0 million, or $0.08 per fully-diluted common share, as compared to net income of $7.4 million and $6.5 million of net income available to common stockholders for the second quarter of 2013, or $0.08 per fully-diluted common share. Net income was $3.0 million higher than the third quarter of 2012, when the Company reported net income of $4.9 million and net income available to common stockholders of $4.0 million, or $0.05 per fully-diluted common share. The Company's 2013 year-to-date net income through September 30 was $21.8 million and net income available to common stockholders was $19.1 million, or $0.22 per fully-diluted common share, compared to net income of $17.4 million and net income available to common stockholders of $14.7 million, or $0.17 per fully-diluted common share, for the comparable period of 2012.

Net income growth relative to the prior year was driven by positive trends in credit quality, which reduced our provision for loan loss in 2013 to levels resembling historical Company norms prior to the economic downturn. The $2.0 million loan loss provision in the third quarter of 2013 was consistent with the prior two quarters, 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 taken in recent quarters to reduce operating expenses favorably impacted third quarter results and are expected to continue positively affecting future earnings. As cost management measures have been implemented, we maintain our priority of exceptional customer service.

Net interest margin rose to 3.20% for the third quarter of 2013 as compared to 3.17% for the second quarter of 2013 but decreased from 3.25% for the third quarter of 2012. The net interest margin for the first nine months of 2013 decreased to 3.16% compared to 3.26% for the same period of 2012. Since the first quarter of 2013, our net interest margin has improved due to the development of a more profitable asset mix from increased loan balances, while we actively continued to bring down interest expense and optimize funding costs.

Busey Wealth Management's net income of $1.2 million for the third quarter of 2013 rose 3.5% from the second quarter of 2013 and 50.4% from the third quarter of 2012. Busey Wealth Management's net income for the first nine months of 2013 was $3.1 million as compared to $2.6 million for the first nine months of 2012. Growth in assets under care accompanied by market trends positively impacted the quarter-over-quarter and year-over-year results. FirsTech's net income of $0.3 million for the third quarter of 2013 was comparable to the second quarter of 2013, and slightly higher than the $0.2 million recorded for the third quarter of 2012. FirsTech's year-to-date net income of $0.8 million was slightly higher than the $0.7 million recorded for 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 September 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
                                             September 30,      June 30,       December 31,      September 30,
                                                 2013             2013             2012              2012
ASSET QUALITY
Gross loans(1)                              $     2,250,605    $ 2,159,098    $    2,073,110    $     2,035,319
Commercial loans(2)                               1,695,583      1,580,351         1,500,921          1,473,450
Allowance for loan losses                            47,964         48,491            48,012             49,213
Non-performing loans
Non-accrual loans                                    18,489         20,274            25,104             25,129
Loans 90+ days past due                                 199            771               256                 59
Non-performing loans, segregated by
geography
Illinois/ Indiana                                    14,451         16,030            17,757             17,377
Florida                                               4,237          5,015             7,603              7,811
Loans 30-89 days past due                             2,283          3,683             2,285              7,895
Other non-performing assets                           2,156          2,617             3,450              8,486
Non-performing assets to total loans and
non-performing assets                                   0.9 %          1.1 %             1.4 %              1.6 %
Allowance as a percentage of
non-performing loans                                  256.7 %        230.4 %           189.3 %            195.4 %
Allowance for loan losses to loans                      2.1 %          2.3 %             2.3 %              2.4 %



(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 September 30, 2013 increased $91.5 million from June 30, 2013 and increased $215.3 million from September 30, 2012. Loan growth was driven by the $115.2 million increase in commercial balances from June 30, and $222.1 million increase from September 30, 2012. 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 for the third quarter increased $1.2 million from the second quarter of 2013 but decreased by $2.6 million from the third quarter of 2012. The linked quarter net charge-off activity represents normal fluctuations, while longer-term trends reflect the significantly improved quality of the loan portfolio.

Overview and Strategy

Our emphasis on maximizing stockholder value is evidenced this period by the upward momentum in earnings per share on a quarterly and year-over-year basis. We are inspired by the positive traction in earnings and loan growth during the quarter, powered by the strategic investments of prior periods and the outstanding commitment of our talented associates. Loan growth from the prior year has been well-balanced across our footprint, as we service the funding needs of our local businesses which support our communities.

Our third quarter was highlighted by meaningful progress in commercial loan growth which increased our net interest margin and propelled us to the successful attainment of targets under the SBLF program. The achievement of this important milestone under SBLF will be highly impactful to growth in earnings in future periods.

With the confidence that our hard-won efforts are drivers of true change, we move ahead from a stronger base that enhances further growth opportunities through organic and external channels, and serves as a solid foundation for continued success going forward. 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, continue 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 44,000 students. Additionally, Champaign County healthcare providers serve a significant area of downstate Illinois and western Indiana. Macon County is currently 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. During the third quarter of 2013, ADM announced its intent to move corporate headquarters from the Decatur area. While the exact number of job relocations hasn't been disclosed, the move could impact our customers and we will continue to monitor the situation. 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 continue to be 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 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 SEPTEMBER 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                  $    114,012   $     74      0.26 %  $   203,650   $    132      0.26 %  $    (58 ) $          -   $    (58 )
Investment securities
U.S. Government
obligations                    405,316      1,339      1.31 %      470,912      1,943      1.64 %      (247 )         (357 )     (604 )
Obligations of states
and political
subdivisions(1)                295,024      1,975      2.66 %      246,494      1,804      2.91 %       338           (167 )      171
Other securities               224,293      1,278      2.26 %      268,527      1,254      1.86 %      (225 )          249         24
Loans(1) (2)                 2,162,138     23,162      4.25 %    2,014,586     24,488      4.84 %     1,742         (3,068 )   (1,326 )
Total interest-earning
assets(1)                 $  3,200,783   $ 27,828      3.45 %  $ 3,204,169   $ 29,621      3.68 %  $  1,550   $     (3,343 ) $ (1,793 )

Cash and due from banks        111,168                              78,974
Premises and equipment          68,230                              71,172
Allowance for loan
losses                         (48,393 )                           (50,199 )
Other assets                   160,572                             184,313

Total Assets              $  3,492,360                         $ 3,488,429

Liabilities and
Stockholders' Equity
Interest-bearing
transaction deposits      $     48,595   $      7      0.06 %  $    41,083   $     16      0.15 %  $      2   $        (11 ) $     (9 )
Savings deposits               203,836         11      0.02 %      195,542         46      0.09 %         2            (37 )      (35 )
Money market deposits        1,468,892        420      0.11 %    1,390,501        717      0.21 %        39           (336 )     (297 )
Time deposits                  618,181      1,218      0.78 %      731,571      2,181      1.19 %      (301 )         (662 )     (963 )
Short-term borrowings:
Repurchase agreements          129,485         44      0.13 %      116,141         63      0.22 %         7            (26 )      (19 )
Other                                -          -         - %            -          8         - %         -             (8 )       (8 )
Long-term debt                       -          -         - %        8,330        106      5.06 %       (53 )          (53 )     (106 )
Junior subordinated
debt owed to
unconsolidated trusts           55,000        303      2.19 %       55,000        329      2.38 %         -            (26 )      (26 )
Total interest-bearing
liabilities               $  2,523,989   $  2,003      0.31 %  $ 2,538,168   $  3,466      0.54 %  $   (304 ) $     (1,159 ) $ (1,463 )

Net interest spread(1)                                 3.14 %                              3.14 %

Noninterest-bearing
deposits                       529,480                             508,030
Other liabilities               29,299                              26,734
Stockholders' equity           409,592                             415,497

Total Liabilities and
Stockholders' Equity      $  3,492,360                         $ 3,488,429

Interest income /
earning assets(1)         $  3,200,783   $ 27,828      3.45 %  $ 3,204,169   $ 29,621      3.68 %
Interest expense /
earning assets            $  3,200,783   $  2,003      0.25 %  $ 3,204,169   $  3,466      0.43 %

Net interest margin(1)                   $ 25,825      3.20 %                $ 26,155      3.25 %  $  1,854   $     (2,184 ) $   (330 )



(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

                 NINE MONTHS ENDED SEPTEMBER 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                    $    208,275   $    387      0.25 %  $    265,126   $    503      0.25 %  $   (106 ) $        (10 ) $   (116 )
Investment securities
U.S. Government
obligations                      434,160      4,456      1.37 %       451,808      6,053      1.79 %      (229 )       (1,368 )   (1,597 )
Obligations of states and
political subdivisions(1)        288,273      5,786      2.68 %       206,667      4,848      3.13 %     1,708           (770 )      938
Other securities                 227,662      3,507      2.06 %       275,950      3,915      1.90 %      (727 )          319       (408 )
Loans(1) (2)                   2,094,640     69,457      4.43 %     2,009,358     74,728      4.97 %     3,053         (8,324 )   (5,271 )
Total interest-earning
assets(1)                   $  3,253,010   $ 83,593      3.44 %  $  3,208,909   $ 90,047      3.75 %  $  3,699   $    (10,153 ) $ (6,454 )

Cash and due from banks           90,865                               77,787
Premises and equipment            69,783                               70,227
Allowance for loan losses        (48,455 )                            (53,307 )
Other assets                     166,487                              188,247

Total Assets                $  3,531,690                         $  3,491,863

Liabilities and
Stockholders' Equity
Interest-bearing
transaction deposits        $     49,274   $     24      0.07 %  $     41,440   $     54      0.17 %  $      9   $        (39 ) $    (30 )
Savings deposits                 208,722         46      0.03 %       196,422        194      0.13 %        11           (159 )     (148 )
Money market deposits          1,469,850      1,348      0.12 %     1,352,144      2,417      0.24 %       194         (1,263 )   (1,069 )
Time deposits                    646,666      4,159      0.86 %       752,886      7,361      1.31 %      (936 )       (2,266 )   (3,202 )
Short-term borrowings:
Repurchase agreements            131,093        128      0.13 %       127,905        217      0.23 %         5            (94 )      (89 )
Other                                  -         15         - %             -         26         - %         -            (11 )      (11 )
Long-term debt                     3,062        125      5.46 %        15,585        552      4.73 %      (501 )           74       (427 )
Junior subordinated debt
owed to unconsolidated
trusts                            55,000        905      2.20 %        55,000        994      2.41 %         -            (89 )      (89 )
Total interest-bearing
liabilities                 $  2,563,667   $  6,750      0.35 %  $  2,541,382   $ 11,815      0.62 %  $ (1,218 ) $     (3,847 ) $ (5,065 )

Net interest spread(1)                                   3.09 %                               3.13 %

Noninterest-bearing
deposits                         528,544                              510,718
Other liabilities                 28,562                               26,732
Stockholders' equity             410,917                              413,031

Total Liabilities and
Stockholders' Equity        $  3,531,690                         $  3,491,863

Interest income / earning
assets(1)                   $  3,253,010   $ 83,593      3.44 %  $  3,208,909   $ 90,047      3.75 %
Interest expense /
earning assets              $  3,253,010   $  6,750      0.28 %  $  3,208,909   $ 11,815      0.49 %

Net interest margin(1)                     $ 76,843      3.16 %                 $ 78,232      3.26 %  $  4,917   $     (6,306 ) $ (1,389 )



(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 decreased nominally by $3.4 million for the three month period ended September 30, 2013 as compared to the same period of 2012. Average earning assets increased $44.1 million for the nine month period ended September 30, 2013 as compared to the same period of 2012. Average loans increased $147.6 million and $85.3 million for the three and nine month periods ended September 30, 2013 compared to the same periods of 2012, respectively; however, at a lower yield than 2012. Our previously discussed loan pipeline and continued emphasis on commercial loan growth has translated into increased loans during 2013. Loans generally have notably higher yields compared to interest-bearing bank deposits and securities, leading to a positive effect on net interest margin.

Our average interest-bearing bank deposits decreased $89.6 million and $56.9 million for the three and nine month periods ended September 30, 2013 compared to the same periods of 2012, respectively. Average securities balances decreased by $61.3 million for the three month period and increased $15.7 million for the nine month period ended September 30, 2013 compared to the same periods of 2012, respectively.

Average interest-bearing liability balances decreased $14.2 million for the three month period ended September 30, 2013 as compared to the same period of 2012. Average interest-bearing liability balances increased $22.3 million for the nine month period ended September 30, 2013 as compared to the same period of 2012. Core deposits are an important low cost source of funding and maintaining adequate levels has allowed the Company to reduce more expensive non-core funding.

Interest income, on a tax-equivalent basis, decreased $1.8 million and $6.5 million for the three and nine month periods ended September 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. Interest expense decreased $1.5 million and $5.1 million for the three and nine month periods ended September 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 3.20% for the three month period ended September 30, 2013 from 3.25% for the same period in 2012 and decreased to 3.16% for the nine month period ended September 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    3.20 % 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 3.14% for the three month period ended September 30, 2013 and 2012 and was 3.09% for the nine month period ended September 30, 2013 compared to 3.13% for the same period in 2012.

Since the first quarter of 2013, net interest margin has improved and the Company is encouraged by a growing loan-to-deposit ratio. The 2013 improvement is due to the development of a stronger asset mix from increased loan balances, while we actively continued to bring down interest expense and optimize funding costs. We have limited ability to improve margin through funding rate decreases due to the historically low interest rate environment. We believe further improvements in margin will be achieved through continued deployment of our liquid funds at higher yields as we expect to redeploy cash and securities into our loan portfolio at improved yields.

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

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