Business Context and Reporting Period
Company: First Busey Corporation (BUSE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: A financial holding company operating through three segments: Busey Bank (Illinois/Indiana), Busey Bank N.A. (Florida), and Busey Investment Group (Trust/Securities/Insurance).
Key Event: On July 31, 2007, the Company completed a merger of equals with Main Street Trust, Inc. (Main Street) for a total purchase price of approximately $309.1 million. The merger is not reflected in the financial statements for the period ended June 30, 2007, but significantly impacts future outlook.
Key Financial Metrics
| Metric (Dollars in thousands) | Six Months Ended June 30, 2007 |
Six Months Ended June 30, 2006 |
Three Months Ended June 30, 2007 |
Three Months Ended June 30, 2006 |
|---|---|---|---|---|
| Net Income | $15,600 | $13,902 | $7,864 | $7,035 |
| Diluted EPS | $0.72 | $0.65 | $0.37 | $0.33 |
| Total Assets (Period End) | $2,500,196 | $2,342,375 | $2,500,196 | $2,342,375 |
| Total Loans (Net) | $1,958,667 | $1,933,339 | $1,958,667 | $1,933,339 |
| Total Deposits | $2,043,737 | $2,014,839 | $2,043,737 | $2,014,839 |
| Net Interest Income (Tax-Equivalent) | $39,887 | $38,794 | $20,113 | $19,779 |
| Net Interest Margin (Tax-Equivalent) | 3.50% | 3.72% | 3.51% | 3.74% |
| Return on Average Assets | 1.27% | 1.23% | 1.28% | 1.23% |
| Return on Average Equity | 16.80% | 16.39% | 16.68% | 16.41% |
| Allowance for Loan Losses | $24,135 | $23,588 | $24,135 | $23,588 |
| Non-Performing Assets | $12,209 | $8,486 | $12,209 | $8,486 |
Material Changes vs. Prior Period
- Profitability Growth: Net income increased 12.2% year-to-date and 11.8% for the quarter compared to the prior year. This was driven by growth in net interest income and other income, offset by minimal increases in operating expenses.
- Net Interest Margin Compression: The net interest margin declined to 3.50% (YTD) from 3.72% in the prior year due to market-driven tightening of interest rate spreads. Higher yields on interest-bearing deposits increased the cost of funds.
- Asset Quality Deterioration: Total non-performing assets increased 43.9% to $12.2 million, primarily due to the weak Florida housing market affecting Busey Bank N.A. Non-performing loans rose to 0.52% of total loans from 0.40%.
- Loan Portfolio Mix: Real estate construction loans increased 14.5% ($67.8 million), driven by non-residential construction. Conversely, other real estate loan categories decreased by a combined 3.5%.
- Segment Performance: Busey Bank (Illinois) net income increased 13.4% YTD. Busey Bank N.A. (Florida) net income decreased 69.0% YTD due to the weak local housing market.
Guidance, Outlook, and Risks
- Merger Outlook: The completed merger with Main Street Trust is expected to be the most significant step toward the "Vision 2010" goal of $2.00 per fully diluted share by year-end 2010. Combined assets are projected at approximately $4.1 billion.
- Florida Market Risk: Management maintains a positive outlook for Busey Bank N.A. based on commercial loan growth, but acknowledges the weak Florida housing market continues to impact residential real estate construction portfolios and resolution of non-performing loans.
- Interest Rate Risk: The Company has a liability-sensitive gap structure (negative gap) for the next 12 months, meaning it would benefit more from a decrease in interest rates. Management uses simulation models to monitor the impact of rate shifts on net interest income.
- Secondary Market Risk: While the Company does not originate sub-prime loans, management notes that sub-prime market issues may constrain the secondary mortgage market, potentially affecting the ability to sell mortgage loans for a gain.
- Capital Adequacy: As of June 30, 2007, the Company and its subsidiaries met all regulatory capital adequacy requirements, with Total Capital ratios well above the "Well Capitalized" thresholds.
Investor Verification Checklist
- Merger Integration: Verify the timeline and cost synergies associated with the July 31, 2007 merger with Main Street Trust, Inc., and the anticipated Q4 2007 merger of the banking subsidiaries.
- Florida Asset Quality: Monitor the trend of non-performing loans and the allowance for loan losses specifically within the Busey Bank N.A. segment given the 69% drop in segment profitability.
- Net Interest Margin Trends: Assess the sustainability of the 3.50% margin in a rising rate environment and the impact of deposit cost increases on future earnings.
- Loan Sales Volume: Track the volume and gains on mortgage loans held for sale, as secondary market conditions (sub-prime issues) could impact this revenue stream.
- Regulatory Capital: Confirm that the combined entity post-merger maintains capital ratios above the "Well Capitalized" thresholds required by federal regulators.