Business Context and Reporting Period
Company: First Busey Corporation (First Busey)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2009
Business Overview: First Busey operates through three segments: Busey Bank (commercial and retail banking in Illinois, Indiana, and Florida), FirsTech (remittance processing), and Busey Wealth Management (trust and investment services). The company faced significant headwinds in the third quarter due to the deterioration of the real estate market in southwest Florida, leading to substantial credit losses and a goodwill impairment charge.
Key Financial Metrics
| Metric (in thousands, except per share) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net Interest Income | $28,464 | $31,441 | $84,459 | $94,229 |
| Provision for Loan Losses | $140,000 | $8,000 | $197,500 | $22,450 |
| Goodwill Impairment Expense | $208,164 | $0 | $208,164 | $0 |
| Total Other Expenses (excl. goodwill) | $29,594 | $27,325 | $85,573 | $82,435 |
| Net Income (Loss) | $(282,319) | $8,817 | $(295,555) | $23,412 |
| Net Income (Loss) Available to Common | $(283,675) | $8,817 | $(298,641) | $23,412 |
| Diluted EPS | $(7.92) | $0.25 | $(8.34) | $0.65 |
| Total Assets | $3,973,906 | $4,460,093 | $3,973,906 | $4,460,093 |
| Total Deposits | $3,282,653 | $3,506,693 | $3,282,653 | $3,506,693 |
| Stockholders' Equity | $323,059 | $454,817 | $323,059 | $454,817 |
| Net Cash Provided by Operating Activities | $39,150 (9M) | $60,063 (9M) | $39,150 (9M) | $60,063 (9M) |
Material Changes vs. Prior Period
- Significant Losses: The company reported a net loss of $282.3 million for Q3 2009, compared to a net income of $8.8 million in Q3 2008. This reversal was driven primarily by a $208.2 million goodwill impairment charge and a $140.0 million provision for loan losses.
- Goodwill Impairment: Management recorded a full impairment of goodwill associated with Busey Bank ($204.8 million) and First Busey Corporation ($3.4 million) due to significant operating losses in the Florida market and a decline in the company's market capitalization.
- Loan Loss Provisions: The provision for loan losses surged to $140.0 million in Q3 2009 from $8.0 million in Q3 2008. This increase reflects aggressive write-downs of problem credits, particularly in the southwest Florida commercial loan portfolio, where real estate values have deteriorated.
- Asset Quality: Non-performing loans increased to $172.5 million (5.7% of total loans) from $84.2 million at year-end 2008. Non-accrual loans rose to $158.0 million. The allowance for loan losses to total loans ratio increased to 4.0% from 3.0% at year-end 2008.
- Capital Actions: In September 2009, the company completed a public common stock offering raising approximately $78.1 million. In March 2009, it received $100 million from the U.S. Treasury under the Capital Purchase Program (CPP).
Guidance, Outlook, and Risks
- Outlook on Provisions: Management believes the "outsized provisioning" for loan losses is behind them. They expect future provision rates to be significantly lower than the last two quarters, though they anticipate continued provisioning as they work through the non-performing loan portfolio.
- Florida Market: The southwest Florida market remains the primary source of credit stress. Management expects it will take years for the region to return to economic strength. The strategy involves selling non-performing loans at a discount rather than carrying them to resolution.
- Dividend Policy: The company reduced its quarterly common stock dividend from $0.08 to $0.04 per share in October 2009 to retain capital. Future dividends are subject to review and Treasury consent due to CPP participation.
- Covenant Violations: As of September 30, 2009, the company was in default on two loan covenants at the holding company level (non-performing loan ratio and return on assets). Negotiations with the lender were ongoing to resolve these violations.
- Interest Rate Risk: The company is currently liability-sensitive through one year but effectively asset-sensitive due to the low interest rate environment. A rise in rates could negatively impact net interest income as liabilities reprice faster than assets.
Investor Verification Checklist
- Goodwill Impairment: Verify the methodology used for the $208.2 million goodwill write-down and confirm if further impairments are likely given the stock price decline.
- Florida Loan Portfolio: Assess the specific composition of the $113.2 million in non-accrual loans in Florida and the adequacy of the allowance for loan losses relative to the continuing real estate devaluation.
- Covenant Resolution: Monitor the status of negotiations regarding the holding company debt covenant violations to ensure no immediate liquidity crisis arises.
- Capital Adequacy: Confirm that the company remains "well capitalized" under regulatory guidelines despite the net loss and equity reduction.
- Non-Performing Loan Resolution: Track the timeline and discount rates associated with the planned sales of non-performing loans to manage the portfolio.