First Busey Corporation (NASDAQ: BUSE) — Q1 2023 Form 10-Q
Business context and period. First Busey is a financial holding company with banking, payment technology (FirsTech), and wealth management businesses. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Net income | $36.8 million | $28.4 million in Q1 2022 |
| Diluted earnings per share | $0.65 | $0.51 in Q1 2022 |
| Net interest income | $85.9 million | $70.1 million in Q1 2022 |
| Tax-equivalent net interest margin | 3.13% | 2.45% in Q1 2022; 3.24% in Q4 2022 |
| Noninterest income | $31.8 million | Down 11.0% year over year |
| Noninterest expense | $70.4 million | Essentially unchanged year over year |
| Efficiency ratio | 56.9% | 63.0% in Q1 2022 |
| Operating cash flow | $45.3 million | $42.5 million in Q1 2022 |
Financial position, funding and credit
- Assets and equity: Total assets were $12.34 billion, broadly unchanged from year-end. Stockholders’ equity was $1.20 billion, up from $1.15 billion.
- Loans: Portfolio loans were $7.78 billion, up 0.8% from year-end. Management reported a tenth? No: the filing says the eighth consecutive quarter of core loan growth, and expects growth to slow from the prior 12 months given its economic outlook.
- Deposits and liquidity: Deposits declined 2.7% to $9.80 billion. Core deposits were 97.9% of deposits; estimated uninsured deposits were 27%. Cash and cash equivalents totaled $275.6 million; cash and unencumbered securities totaled $2.09 billion. Available additional borrowing capacity was $2.65 billion, down from $2.95 billion at year-end. Management said liquidity was adequate to meet projected cash-flow needs.
- Borrowings: Short-term borrowings rose $264.8 million to $615.9 million, primarily reflecting FHLB advances; these advances had a 4.81% weighted-average rate and four-day weighted-average maturity at quarter-end. Long-term debt was $27.0 million; subordinated notes were $222.2 million, net of issuance costs. Repurchase-agreement funding was $211.0 million.
- Credit quality: The allowance for credit losses was $91.7 million, or 1.18% of portfolio loans. Nonperforming loans were $15.2 million (0.20% of loans), down from $15.7 million at year-end. Net charge-offs were $1.2 million. Potential problem loans were $86.8 million, down from $89.2 million.
- Regulatory capital: First Busey and its bank subsidiary exceeded applicable well-capitalized thresholds. First Busey’s common equity Tier 1 ratio was 12.18%; the bank’s was 14.66%.
- Cash flows: Net cash increased $48.4 million in Q1, versus a $356.9 million decrease in Q1 2022. Financing cash outflow included a $270.0 million deposit decline, partly offset by $265.0 million of FHLB advance proceeds.
Material changes and management commentary
- Net interest income improved substantially year over year as earning-asset yields rose. Interest expense also increased sharply, from $6.0 million to $25.2 million, and management noted funding-cost pressure and a decline in margin from Q4 2022.
- Noninterest income fell $3.9 million. Customer-service fees declined 23.4%, including a $2.3 million impact from the Durbin Amendment; mortgage revenue fell 70.5%. Wealth management fees declined 6.2%, while FirsTech payment technology revenue increased 4.7%.
- Net income benefited from higher net interest income and a stable expense base. Compensation, data processing and professional fees increased, while occupancy and other expense declined. The reported efficiency ratio improved to 56.9%.
- Management cited relative stability in its deposit franchise despite banking-sector turmoil, while identifying seasonal outflows, rate competition and customers shifting funds—including into the company’s wealth management business—as factors behind deposit movements.
- First Busey reported $280.6 million of gross unrealized losses on available-for-sale securities and $126.9 million of unrecognized losses on held-to-maturity securities. It attributed these marks to interest rates and market conditions, not credit impairment, and said it did not intend, and was not more likely than not required, to sell the securities before recovery. AOCI improved to negative $245.8 million from negative $273.3 million at year-end.
Outlook, risks and contingencies
- No specific earnings or margin guidance was provided. Management expects loan growth to slow and cautioned that higher deposit and funding costs may pressure net interest margin.
- A targeted restructuring and efficiency initiative implemented in late 2022 is projected to generate approximately $4.0 million of annual savings; the filing does not quantify savings realized to date.
- Management identified economic deterioration, interest-rate and prepayment changes, deposit concentrations and uninsured balances, loan concentrations and credit deterioration, securities-value fluctuations, competition, technology and cybersecurity incidents, and litigation as risks.
- Commitments to extend credit and standby letters of credit totaled $2.10 billion; the reserve for unfunded commitments was $6.0 million. Management expected available funds to meet current commitments.
- Routine legal matters were not expected to have a material effect. The company disclosed an Illinois inquiry into prior franchise-tax filings; amendments, if required, could result in additional expense.
- The company repurchased 25,000 shares during the quarter at an average $21.34 per share. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit outflows persist, particularly among uninsured or rate-sensitive customers, and how funding mix and costs evolve.
- Whether net interest margin stabilizes or continues to contract as deposit rates and wholesale borrowing costs adjust.
- The liquidity implications of securities marks, pledged collateral, short-maturity FHLB funding and remaining borrowing capacity.
- Whether commercial real estate and other criticized or potential problem loans worsen, and whether the allowance remains adequate as economic forecasts change.
- Progress toward the projected $4.0 million annual efficiency savings and the durability of noninterest revenue, especially customer fees, wealth management and mortgage income.
- The outcome and potential financial effect of the Illinois franchise-tax inquiry, and any material developments in commitments or contingencies.