First Busey Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. First Busey is a $12.4 billion financial holding company operating Banking, FirsTech payment technology, and Wealth Management businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Financial performance and condition
- Q2 earnings: Net income was $29.8 million, versus $29.8 million in Q2 2021. Diluted EPS was $0.53 in both periods. For the first half, net income was $58.3 million versus $67.6 million, and diluted EPS was $1.04 versus $1.22.
- Net interest: Q2 net interest income increased 17.6% to $75.9 million from $64.5 million. Tax-equivalent net interest margin was 2.68%, up from 2.50%. First-half net interest income was $146.0 million versus $129.4 million; tax-equivalent margin was 2.56% versus 2.61%.
- Noninterest income and expense: Q2 noninterest income fell 6.0% to $31.0 million, including a $1.7 million unrealized loss on equity securities. Noninterest expense rose 10.3% to $69.1 million. First-half noninterest income increased 3.6% to $66.8 million, while expense increased 19.1% to $139.5 million.
- Profitability and efficiency: Q2 reported return on average assets was 0.96% and return on average tangible common equity was 14.50%. The reported efficiency ratio was 60.6%, compared with 61.7% in Q2 2021. First-half reported efficiency ratio worsened to 61.8% from 58.2%. The filing also presents adjusted, non-GAAP measures.
- Loans and credit: Gross portfolio loans grew 4.3% from year-end to $7.50 billion; the allowance for credit losses was $88.8 million, or 1.18% of loans. Nonperforming loans were $17.5 million, or 0.23% of loans, versus $16.9 million at year-end. Potential problem loans increased to $83.9 million from $70.5 million.
- Deposits, liquidity, and cash flow: Deposits declined 3.4% to $10.40 billion. Cash and cash equivalents fell to $230.9 million from $836.1 million. First-half operating cash flow was $73.7 million, investing cash outflow was $279.4 million, and financing cash outflow was $399.5 million. Management reported $2.58 billion of additional borrowing capacity and said liquidity was adequate for projected obligations.
- Debt and capital: The company issued $100 million of 5.00% fixed-to-floating subordinated notes due 2032 in June. Its $40 million 2017 senior notes matured and were redeemed in May. Management anticipated redeeming the $60 million 2017 subordinated notes in Q3 2022. At June 30, regulatory capital ratios exceeded applicable well-capitalized thresholds; consolidated total risk-based capital was 16.58% and Busey Bank’s was 15.36%.
- Equity and securities: Stockholders’ equity declined 11.9% to $1.16 billion, with AOCI moving to a loss of $211.1 million from a loss of $23.8 million at year-end. The company transferred $985.2 million of available-for-sale securities to held-to-maturity. Management attributed securities’ unrealized losses primarily to market interest rates and conditions, not credit impairment, and said it did not intend or expect to be required to sell the securities before recovery.
Material changes and management commentary
- Loan growth was led by commercial real estate, construction, and retail loans. PPP loans declined to $7.6 million from $75.0 million at year-end.
- Q2 net interest margin improved year over year as rates rose. Management said the May and June Federal Reserve increases would largely benefit subsequent quarters and noted a further 75-basis-point increase in July. The filing does not provide formal earnings or margin guidance.
- Wealth management and payment technology revenue together rose 8.5% in Q2 and 14.8% for the first half. Wealth management assets under care were $11.5 billion, down from $12.7 billion at year-end, primarily due to lower market valuations, partly offset by inflows and investment performance.
- Mortgage revenue fell substantially as sold-loan volume declined; more closed loans were adjustable-rate loans retained in portfolio. Management cautioned that economic conditions and rate volatility may affect future mortgage revenue.
- Beginning July 1, 2022, the company became subject to the Durbin Amendment’s debit interchange fee limits, which management said would negatively affect customer-service fees in the second half and future years. The company is also investing in FirsTech product, engineering, API, and Banking-as-a-Service capabilities.
- Management cited inflation, supply-chain constraints, labor-market pressures, changing interest rates, competition, technology and cybersecurity, regulatory changes, and economic deterioration as risks. It said credit quality could weaken if economic conditions deteriorate. Q2 nonperforming loans rose mainly because of one skilled-nursing borrower.
- The company reported an Illinois inquiry into prior franchise-tax filings; amended filings, if required, could result in additional expense. Management said routine litigation was not expected to materially affect results, and reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether deposit outflows continue and how the company funds loan growth while maintaining liquidity and deposit costs.
- Whether rising rates support net interest margin as expected, considering deposit repricing, interest-rate sensitivity, and the company’s hedges.
- Developments in the skilled-nursing borrower and the increase in potential problem loans; confirm that the allowance remains adequate as conditions evolve.
- The magnitude and accounting/capital effects of securities valuation losses, including the available-for-sale to held-to-maturity transfer.
- Completion and funding of the anticipated $60 million subordinated-note redemption, and the effect of new debt on interest expense and regulatory capital.
- The impact of Durbin Amendment limits, mortgage-market weakness, and FirsTech investment on fee income, expenses, and adjusted versus GAAP results.