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BUSE > SEC Filings for BUSE > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for FIRST BUSEY CORP /NV/



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of the financial condition as of December 31, 2013 and 2012 and results of operations for the years ended December 31, 2013, 2012, and 2011 of First Busey and subsidiaries. It should be read in conjunction with "Item 1. Business," "Item 6. Selected Financial Data," the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included in this Annual Report.

Critical Accounting Estimates

Critical accounting estimates are those that are critical to the portrayal and understanding of First Busey's financial condition and results of operations and require management to make assumptions that are difficult, subjective or complex. These estimates involve judgments, estimates and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially different financial condition or materially different results of operations is a reasonable likelihood.

First Busey's significant accounting policies are described in "Note 1 - Significant Accounting Policies" in the Notes to the Consolidated Financial Statements. The majority of these accounting policies do not require management to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material. However, the following policies could be deemed critical:

Fair Value of Investment Securities. Securities are classified as held to maturity when First Busey has the ability and management has the positive intent to hold those securities to maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts. First Busey had $0.8 million securities classified as held to maturity at December 31, 2013 and none at December 31, 2012. First Busey had no securities classified as trading at December 31, 2013 or 2012. Securities are classified as available for sale when First Busey may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. First Busey had $841.3 million and $1.0 billion securities classified as available for sale at December 31, 2013 and 2012, respectively. For equity securities, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date. For all other securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security's terms and conditions, among other things. Due to the limited nature of the market for certain securities, the fair value and potential sale proceeds could be materially different in the event of a sale.

Realized securities gains or losses are reported in securities gains (losses), net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of available for sale securities below their amortized cost are evaluated to determine whether the loss is temporary or other-than-temporary. If the Company
(a) has the intent to sell a debt security or (b) will more likely than not be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire unrealized loss in earnings as an other-than-temporary loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The impairment is separated into the amount of the total impairment related to the credit loss and the amount of total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income.

The Company also evaluates whether the decline in fair value of an equity security is temporary or other-than-temporary. In determining whether an unrealized loss on an equity security is temporary or other-than-temporary, management considers various factors including the magnitude and duration of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the equity security to forecasted recovery.

Allowance for Loan Losses. First Busey has established an allowance for loan losses which represents its estimate of the probable losses inherent in the loan portfolio as of the date of the financial statements and reduces the total loans outstanding by an estimate of uncollectible loans. Loans deemed uncollectible are charged against and reduce the allowance. A provision for loan losses is charged to current expense. This provision acts to replenish the allowance for loan losses and to maintain the allowance at a level that management deems adequate.

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To determine the adequacy of the allowance for loan losses, a formal analysis is completed quarterly to assess the risk within the loan portfolio. This assessment is reviewed by senior management of the Company and the Bank. The analysis includes a review of historical performance, dollar amount and trends of past due loans, dollar amount and trends in non-performing loans, certain impaired loans, and loans identified as sensitive assets. Sensitive assets include non-accrual loans, past-due loans, loans on First Busey's watch loan reports and other loans identified as having probable potential for loss.

The allowance consists of specific and general components. The specific component considers loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying amount of that loan. The general component covers non-classified loans and classified loans not considered impaired, and is based on historical loss experience adjusted for qualitative factors. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss experience.

A loan is considered to be impaired when, based on current information and events, it is probable First Busey will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreement. When a loan becomes impaired, management generally calculates the impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate. If the loan is collateral dependent, the fair value of the collateral is used to measure the amount of impairment. The amount of impairment and any subsequent changes are recorded through a charge to the provision for loan losses. For collateral dependent loans, First Busey has determined the required allowance on these loans based upon the estimated fair value, net of selling costs, of the respective collateral. The required allowance or actual losses on these impaired loans could differ significantly if the ultimate fair value of the collateral is significantly different from the fair value estimates used by First Busey in estimating such potential losses.

Deferred Taxes. We have maintained significant net deferred tax assets for deductible temporary differences, the largest of which relates to the net operating loss carryforward and the allowance for loan losses. For income tax return purposes, only actual charge-offs are deductible, not the provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that the deferred tax assets will not be realized. The determination of the recoverability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate recoverability of our deferred tax assets. Positive evidence includes available tax planning strategies and the probability that taxable income will continue to be generated in future periods, as it was in periods since March 31, 2010, while negative evidence includes a cumulative loss in 2009 and 2008 and certain business and economic trends. We established a valuation allowance for certain state net operating loss and credit carryforwards that are not expected to be fully realized. Management believes that it is more likely than not that the other deferred tax assets included in the accompanying Consolidated Financial Statements will be fully realized. We determined that no valuation allowance was required for any other deferred tax assets as of December 31, 2013, although there is no guarantee that those assets will be recognizable in future periods.

We must assess the likelihood that any deferred tax assets will be realized through the reduction of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, we must make judgments and estimates regarding the ability to realize the asset through the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. The Company's evaluation gave consideration to the fact that all net operating loss carrybacks have been utilized. Therefore, utilization of net operating loss carryforwards are dependent on implementation of tax strategies and continued profitability.

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Executive Summary

Operating Results

                                                    Year Ended December 31:
                                                     2013             2012
Net income:
Consolidated                                     $      28,726    $      22,357
Busey Bank                                              25,416           19,162
FirsTech                                                 1,000              935
Busey Wealth Management                                  4,242            3,363
Consolidated earnings per share, fully-diluted   $        0.29    $        0.22

Operating Performance

First Busey Corporation's net income for the year ended December 31, 2013 was $28.7 million and net income available to common stockholders was $25.1 million, or $0.29 per fully-diluted common share, compared to net income of $22.4 million and net income available to common stockholders of $18.7 million, or $0.22 per fully-diluted common share, for the year ended December 31, 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 approximating historical Company norms prior to the economic downturn beginning in late 2007. Provision for loan loss decreased to $7.5 million for the year ended December 31, 2013 compared to $16.5 million for the year ended December 31, 2012.

Significant operating performance items were:

Net interest income for the year ended December 31, 2013 was $100.1 million compared to $102.1 million for the same period of 2012.

Net interest margin for the year ended December 31, 2013 decreased to 3.15% compared to 3.24% for the same period of 2012. Average loan balances for the year ended December 31, 2013 increased compared to the year ended December 31, 2012, while a highly competitive loan environment and prolonged period of low interest rates continued to put downward pressure on yields.

The efficiency ratio for the year ended December 31, 2013 was 66.39%, as compared to 68.54% for the same period of 2012. Efficiency ratios have been influenced throughout the past two years by a number of events (such as the core conversion, branch closures and restructuring costs which are discussed in more detail in the Other Expense section below).

FirsTech's net income for the year ended December 31, 2013 was $1.0 million as compared to $0.9 million for the year ended December 31, 2012. FirsTech offers sophisticated payment processing capabilities and adds important diversity to our revenue stream while widening our array of service offerings to larger commercial clients.

Busey Wealth Management's net income for the year ended December 31, 2013 was $4.2 million as compared to $3.4 million for the year ended December 31, 2012. Net inflows to assets under care accompanied by positive market valuations favorably impacted year-over-year results.

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Asset Quality

While much internal focus has been directed toward organic growth, our commitment to credit quality remains strong. As of December 31, 2013, we significantly improved asset quality measures from prior periods and expect these levels to generally stabilize in 2014; 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 $17.4 million at December 31, 2013 from $25.4 million at December 31, 2012.

Illinois/Indiana non-performing loans decreased to $13.6 million at December 31, 2013 from $17.8 million at December 31, 2012.

Florida non-performing loans decreased to $3.8 million at December 31, 2013 from $7.6 million at December 31, 2012.

Loans 30-89 days past due increased to $6.1 million at December 31, 2013 from $2.3 million at December 31, 2012, primarily as a result of one large commercial credit which the Company is actively working to resolve.

Other non-performing assets, primarily consisting of other real estate owned, decreased to $2.1 million at December 31, 2013 from $3.5 million at December 31, 2012.

The ratio of non-performing assets to total loans plus other non-performing assets at December 31, 2013 decreased to 0.85% from 1.39% at December 31, 2012.

The allowance for loan losses to non-performing loans ratio increased to 274.02% at December 31, 2013 from 189.32% at December 31, 2012.

The allowance for loan losses to total loans ratio decreased to 2.07% at December 31, 2013 from 2.32% at December 31, 2012.

Net charge-offs of $7.9 million recorded for the year ended December 31, 2013 were lower than the $27.0 million recorded for the year ended December 31, 2012.

Provision expense of $7.5 million for the year ended December 31, 2013 decreased from the $16.5 million recorded for the year ended December 31, 2012.

Overview and Strategy

We believe our emphasis on maximizing stockholder value was evidenced in 2013 by the upward momentum in earnings per share on a full year basis. We are pleased with the positive traction in earnings and loan growth during the year, powered by the strategic investments of prior periods and the outstanding commitment of our talented associates. 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.

The year was highlighted by meaningful progress in commercial loan growth which steadied net interest income and allowed us to attain certain targets under the SBLF program. Our success in growing loans was well-balanced across our footprint, as we serviced the funding needs of local businesses which support our communities. Moreover, as our loan portfolio expanded, our credit metrics continued to strengthen and provision expenses declined considerably.

Major sources of recurring non-interest income increased from the prior year including trust fees, commissions and brokers' fees, and fees for customer services. Non-interest expenses declined, as we actively managed our resources to higher productivity while remaining fully committed to premier customer service. In 2014 we will continue to monitor our investments and revenue growth with the greatest of care as we strive to deliver optimal value to our shareholders. We take pride in our past and look confidently towards our future.

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Results of Operation - Three Years Ended December 31, 2013

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.

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Average Balance Sheets and Interest Rates

                                                              Years Ended December 31,
                                     2013                               2012                               2011
                         Average      Income/    Yield/     Average      Income/    Yield/     Average      Income/    Yield/
                         Balance      Expense     Rate      Balance      Expense     Rate      Balance      Expense     Rate
                                                               (dollars in thousands)
bank deposits          $   194,508   $     483     0.25 % $   263,017   $     666     0.25 % $   282,634   $     722     0.26 %
U.S. Government
obligations                420,049       5,644     1.34 %     447,720       7,776     1.74 %     387,137       9,173     2.37 %
Obligations of
states and political
subdivisions(1)            287,928       7,699     2.67 %     222,931       6,735     3.02 %     107,746       4,363     4.05 %
Other securities           225,236       4,733     2.10 %     273,099       5,104     1.87 %     236,031       5,297     2.24 %
Loans(1), (2), (3)       2,126,536      92,498     4.35 %   2,014,797      98,963     4.91 %   2,173,408     115,157     5.30 %
assets(1)              $ 3,254,257   $ 111,057     3.41 % $ 3,221,564   $ 119,244     3.70 % $ 3,186,956   $ 134,712     4.23 %

Cash and due from
banks                       92,390                             77,482                             76,651
Premises and
equipment                   68,974                             70,748                             71,446
Allowance for loan
losses                     (48,239 )                          (52,243 )                          (71,031 )
Other assets               163,866                            186,125                            209,389
Total assets           $ 3,531,248                        $ 3,503,676                        $ 3,473,411

Liabilities and
Stockholders' Equity
transaction deposits   $    49,049   $      30     0.06 % $    42,532   $      66     0.16 % $    39,900   $      91     0.23 %
Savings deposits           207,185          57     0.03 %     196,592         223     0.11 %     188,539         318     0.17 %
Money market
deposits                 1,474,222       1,779     0.12 %   1,366,068       2,952     0.22 %   1,236,225       3,858     0.31 %
Time deposits              633,534       5,233     0.83 %     741,038       9,255     1.25 %     877,011      14,393     1.64 %
agreements                 137,777         186     0.14 %     132,150         279     0.21 %     127,095         367     0.29 %
Other                            -          15        - %           -          35        - %           -          38        - %
Long-term debt               2,290         125     5.46 %      13,531         648     4.79 %      29,024       1,442     4.97 %
Junior subordinated
debt issued to
trusts                      55,000       1,206     2.19 %      55,000       1,312     2.39 %      55,000       1,919     3.49 %
liabilities            $ 2,559,057   $   8,631     0.34 % $ 2,546,911   $  14,770     0.58 % $ 2,552,794   $  22,426     0.88 %

Net interest
spread(1)                                          3.07 %                             3.12 %                             3.35 %

Noninterest- bearing
deposits                   531,744                            515,934                            472,516
Other liabilities           28,356                             26,982                             29,228
Stockholders' equity       412,091                            413,849                            418,873
Total liabilities
and stockholders'
equity                 $ 3,531,248                        $ 3,503,676                        $ 3,473,411

assets(1)              $ 3,254,257   $ 111,057     3.41 % $ 3,221,564   $ 119,244     3.70 % $ 3,186,956   $ 134,712     4.23 %
assets                 $ 3,254,257   $   8,631     0.26 % $ 3,221,564   $  14,770     0.46 % $ 3,186,956   $  22,426     0.71 %
Net interest
margin(1)                            $ 102,426     3.15 %               $ 104,474     3.24 %               $ 112,286     3.52 %

(1) On a tax-equivalent basis, assuming a federal income tax rate of 35%.

(2) Non-accrual loans have been included in average loans, net of unearned discount.

(3) Includes loan fee income of $2.8 million, $2.0 million and $1.4 million for 2013, 2012 and 2011, respectively.

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Average Balance Sheets and Interest Rates (continued)

Changes in Net Interest Income:

                                                        Years Ended December 31, 2013, 2012, and 2011
                                    Year 2013 vs. 2012 Change due to(1)              Year 2012 vs. 2011 Change due to(1)
                                  Average          Average          Total        Average          Average
                                   Volume         Yield/Rate       Change         Volume        Yield/Rate       Total Change
                                                                    (dollars in thousands)
Increase (decrease) in
interest income:
Interest-bearing bank
deposits                        $       (170 )  $          (13 )  $    (183 )  $        (50 )  $          (6 )  $          (56 )
Investment securities:
U.S. Government obligations             (457 )          (1,675 )     (2,132 )         1,294           (2,691 )          (1,397 )
Obligations of state and
political subdivisions(2)              1,802              (838 )        964           3,707           (1,335 )           2,372
Other securities                        (960 )             589         (371 )           765             (958 )            (193 )
Loans(2)                               5,283           (11,748 )     (6,465 )        (8,097 )         (8,097 )         (16,194 )
Change in interest income(2)    $      5,498    $      (13,685 )  $  (8,187 )  $     (2,381 )  $     (13,087 )  $      (15,468 )

Increase (decrease) in
interest expense:
Interest-bearing transaction
deposits                        $          9    $          (45 )  $     (36 )  $          6    $         (31 )  $          (25 )
Savings deposits                          11              (177 )       (166 )            13             (108 )             (95 )
Money market deposits                    218            (1,391 )     (1,173 )           374           (1,280 )            (906 )
Time deposits                         (1,206 )          (2,816 )     (4,022 )        (2,022 )         (3,116 )          (5,138 )
Repurchase agreements                     11              (104 )        (93 )            14             (102 )             (88 )
Other short-term borrowings                -               (20 )        (20 )             -               (3 )              (3 )
Long-term debt                          (603 )              80         (523 )          (744 )            (50 )            (794 )
Junior subordinated debt owed
to unconsolidated trusts                   -              (106 )       (106 )             -             (607 )            (607 )
Change in interest expense      $     (1,560 )  $       (4,579 )  $  (6,139 )  $     (2,359 )  $      (5,297 )  $       (7,656 )
Increase (decrease) in net
interest income(2)              $      7,058    $       (9,106 )  $  (2,048 )  $        (22 )  $      (7,790 )  $       (7,812 )

Percentage decrease in net
interest income over prior
period                                                                 (2.0 )%                                            (7.0 )%

(1) Changes due to both rate and volume have been allocated proportionally.

(2) On a tax-equivalent basis, assuming a federal income tax rate of 35%.

Earning Assets, Sources of Funds, and Net Interest Margin

Average earning assets increased $32.7 million, or 1.0%, to $3.25 billion in 2013 as compared to $3.22 billion in 2012. Average earning assets increased $34.6 million, or 1.1%, to $3.22 billion in 2012 as compared to $3.19 billion in 2011. In 2013, average loans increased compared to 2012 due to our continued emphasis on commercial loan growth; however, at a lower yield than 2012. Loans generally have notably higher yields compared to interest-bearing bank deposits and securities, leading to a positive effect on net interest margin which helped . . .

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