Business Context and Reporting Period
Company: First Busey Corporation (BUSE)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Key Event: The Company completed a "merger of equals" with Main Street Trust, Inc. on July 31, 2007. The financial results for the three and nine months ended September 30, 2007, include approximately two months of earnings from Main Street Bank & Trust and its payment processing subsidiary, FirsTech. The combined entity retained the First Busey Corporation name.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 | 3 Months Ended Sep 30, 2007 | 3 Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Net Income | $27,110 | $21,544 | $11,510 | $7,642 |
| Diluted EPS | $1.09 | $1.00 | $0.36 | $0.36 |
| Net Interest Income | $68,936 | $57,150 | $30,012 | $19,401 |
| Total Other Income | $27,341 | $20,278 | $13,012 | $7,201 |
| Total Assets | $4,288,150 | $2,509,514 | $4,288,150 | $2,509,514 |
| Total Loans (Net) | $3,002,683 | $1,933,339 | $3,002,683 | $1,933,339 |
| Total Deposits | $3,367,808 | $2,014,839 | $3,367,808 | $2,014,839 |
| Stockholders' Equity | $538,274 | $185,274 | $538,274 | $185,274 |
| Net Cash Provided by Operating Activities | $28,636 | $26,024 | N/A | N/A |
Material Changes vs. Prior Period
- Merger Impact: Total assets increased 70.9% and stockholders' equity increased 190.5% year-over-year, primarily driven by the acquisition of Main Street Trust, which added approximately $1.02 billion in loans and $1.25 billion in deposits.
- Profitability: Net income for the nine months ended September 30, 2007, increased 25.8% compared to the prior year. Diluted EPS rose 9.0% to $1.09.
- Asset Quality Deterioration: Total non-performing assets (NPA) rose significantly to $26.0 million at September 30, 2007, from $12.2 million at June 30, 2007, and $7.1 million at September 30, 2006.
- Non-accrual loans: Increased to $17.8 million (from $8.1 million in Q2 2007).
- Loans 90+ days past due: Increased to $6.1 million.
- Provision for Loan Losses: The provision increased to $2.8 million for the nine months ended September 30, 2007, compared to $1.0 million in the prior year period. The allowance for loan losses increased to $38.2 million (1.26% of total loans), largely due to the $12.9 million allowance assumed from Main Street.
- Segment Performance: Busey Bank N.A. (Florida) reported a decline in net income due to the downturn in the southwest Florida residential real estate market. Conversely, Main Street Bank & Trust contributed $3.4 million in net income for the two months post-merger.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the current credit environment to present challenges to net interest margin management due to growth in delinquent and non-accrual loans. The company anticipates data processing expenses to remain elevated temporarily due to merger-related infrastructure investments.
- Divestiture: To satisfy U.S. Department of Justice requirements, the Company agreed to divest five Main Street Bank & Trust branches in Champaign County, Illinois. The transaction closed in November 2007, transferring approximately $14.4 million in loans and $102.2 million in deposits.
- Interest Rate Risk: The Company maintains a liability-sensitive position (negative gap) in the short term (up to one year), meaning it would benefit from a decrease in interest rates. Simulation models indicate that a 200 basis point increase in rates would decrease net interest income by approximately 2.04%.
- Unusual Items:
- Severance: $1.5 million in contractual severance payments to executives was recorded in Q3 2007.
- Stock Options: The Company accelerated the vesting of all unvested stock options in conjunction with the merger.
- Capital Adequacy: As of September 30, 2007, the Company and its subsidiaries met all regulatory capital requirements, with the Consolidated Tier 1 Capital ratio at 9.76% (minimum required 4.00%).
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing loans in the southwest Florida market (Busey Bank N.A.) and the specific impact of the Main Street acquisition on the overall allowance for loan losses.
- Merger Integration Costs: Monitor the sustainability of elevated data processing and compensation expenses (including severance) and the timeline for realizing cost synergies.
- Divestiture Impact: Confirm the final financial impact of the five-branch divestiture required by the DOJ and its effect on future deposit and loan growth in the Champaign County market.
- Interest Rate Sensitivity: Assess the Company's liability-sensitive gap position and its exposure to rising interest rates in the current economic environment.
- Regulatory Capital: Review the impact of goodwill ($185.4 million recorded from the merger) on Tier 1 capital calculations under the 25% limitation rule for trust preferred securities.