Business Context and Reporting Period
Company: First Busey Corporation (Nevada)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: First Busey operates through three reportable segments: Busey Bank (Illinois, Indiana, Florida loan production), Busey Bank Florida (Fort Myers), and First Busey Trust & Investment Co. The company provides commercial and consumer banking services, trust services, and mortgage loan origination.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2003 | 9 Months Ended Sep 30, 2002 | Q3 2003 | Q3 2002 |
|---|---|---|---|---|
| Net Income | $15,508,000 | $13,549,000 | $5,310,000 | $4,572,000 |
| Diluted EPS | $1.13 | $0.99 | $0.38 | $0.33 |
| Net Interest Income | $35,978,000 | $33,874,000 | $12,299,000 | $11,615,000 |
| Net Interest Margin (FTE) | 3.62% | 3.79% | 3.58% | 3.74% |
| Return on Average Assets | 1.43% | 1.38% | 1.42% | 1.34% |
| Return on Average Equity | 17.20% | 16.67% | 17.07% | 16.33% |
| Total Assets (Sep 30, 2003) | $1,494,185,000 | $1,435,578,000 (Dec 31, 2002) | - | - |
| Total Loans (Sep 30, 2003) | $1,144,846,000 | $1,101,043,000 (Dec 31, 2002) | - | - |
| Allowance for Loan Losses | $16,731,000 | $15,460,000 (Dec 31, 2002) | - | - |
| Net Cash from Operating Activities | $46,611,000 | $4,162,000 | - | - |
Material Changes vs. Prior Period
- Profitability Growth: Net income increased 14.5% year-to-date and 16.1% in the third quarter compared to the prior year periods. This was driven by lower interest expense and increased non-interest income.
- Interest Rate Environment: The average yield on interest-earning assets declined 73 basis points (to 5.55%) and the cost of interest-bearing liabilities declined 63 basis points (to 2.23%) year-to-date. The net interest margin compressed slightly due to the faster decline in asset yields.
- Loan Sales: Gains on sales of loans increased significantly to $5,833,000 (9 months 2003) from $2,383,000 (9 months 2002), driven by a high volume of mortgage refinancing in a low-interest-rate environment.
- Asset Quality: Non-performing assets increased to $10,885,000 (0.73% of total assets) from $7,953,000 (0.55%) at year-end 2002. This increase was primarily due to a rise in loans 90 days past due and still accruing ($2,817,000 vs. $963,000). However, net charge-offs decreased significantly to $107,000 (0.01% ratio) from $1,476,000.
- Balance Sheet Growth: Total assets grew 4.1% since December 31, 2002. Loans increased 4.0%, while deposits remained relatively flat with a shift toward noninterest-bearing deposits.
Outlook, Risks, and Management Commentary
- Guidance: Management anticipates continued sales of mortgage loans if originations allow and market conditions support the desired asset/liability structure. No specific numerical guidance for the full year was provided in this text.
- Accounting Changes (FIN 46): The company is monitoring the implementation of FIN 46 regarding Variable Interest Entities. While currently expected to adopt it in 2003, there is uncertainty regarding the de-consolidation of trust preferred securities. Management notes that even if the $25 million in trust preferred securities were excluded from Tier 1 capital, the company would still meet regulatory minimums.
- Interest Rate Risk: The company maintains a liability-sensitive gap structure in the short term (1-30 days). Simulation analysis indicates that a 100 basis point decrease in rates would reduce net interest income by 4.72%, while a 100 basis point increase would raise it by 2.27% over a one-year horizon.
- Unusual Items: The company sold Busey Plaza (an office building) in August 2003. Additionally, a valuation allowance of $215,000 was recorded against mortgage servicing assets due to rapid prepayments in the low-rate environment.
Investor Verification Checklist
- Asset Quality Trend: Verify the cause and potential resolution of the increase in loans 90 days past due and still accruing, which rose from $963,000 to $2,817,000.
- Loan Sales Sustainability: Assess the sustainability of the $5.8 million gain on loan sales, which is heavily dependent on the current low-interest-rate refinancing environment.
- Regulatory Capital Impact: Monitor the final impact of FIN 46 on the classification of the $25 million trust preferred securities and its effect on Tier 1 capital ratios.
- Non-Interest Expense Growth: Review the 11.5% increase in salaries and wages, driven by mortgage loan commissions and Florida branch expansion, to ensure it aligns with revenue growth.
- OREO Valuation: Confirm the valuation adjustments on Other Real Estate Owned (OREO) properties, specifically the hotel property in McLean County which reported an operating loss of $123,000 in the first nine months.