First Busey Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. First Busey is a financial holding company operating Banking, Wealth Management and FirsTech payment technology businesses. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Prior period / change |
|---|---|---|
| Net interest income | $75.8 million | $85.9 million; down 11.8% |
| Tax-equivalent net interest margin | 2.79% | 3.13%; down 34 basis points |
| Noninterest income | $35.0 million | $31.8 million; up 9.9% |
| Noninterest expense | $70.8 million | $70.4 million; up 0.5% |
| Provision for credit losses | $5.0 million | $1.0 million |
| Net income | $26.2 million | $36.8 million |
| Diluted earnings per share | $0.46 | $0.65 |
| Cash dividends declared per share | $0.24 | $0.24 |
Net interest income fell as funding costs rose: interest expense was $50.0 million, versus $25.2 million a year earlier. The tax-equivalent yield on earning assets increased to 4.61% from 4.05%, but the cost of interest-bearing liabilities rose to 2.57% from 1.34%. Wealth management fees increased 5.1% and FirsTech revenue increased 7.4%. Results included a $7.5 million pretax gain on the sale of mortgage servicing rights and a $6.8 million securities-sale loss.
Financial condition, cash flow and capital
- Assets and loans: Total assets were $11.89 billion at March 31, down 3.2% from year-end 2023. Portfolio loans were $7.59 billion, down 0.8%; commercial real estate represented 43.9% of portfolio loans.
- Deposits and liquidity: Deposits were $9.96 billion, down 3.2% from year-end. Core deposits were 96.7% of deposits; estimated uninsured deposits were $3.63 billion. The company reported a 76.2% loan-to-deposit ratio, $1.89 billion of cash and unencumbered securities, and $3.16 billion of additional borrowing capacity.
- Cash flows: Operating cash flow was $37.4 million, investing cash flow was $249.0 million, and financing cash outflow was $414.8 million. Cash and cash equivalents ended the quarter at $591.1 million, down $128.5 million during the quarter. Financing outflows included a $331.0 million decline in deposits and repayment of $30.0 million of the term loan.
- Debt: The $30.0 million term-loan balance was repaid in Q1; no short- or long-term term-loan debt remained at quarter-end. The company had $223.1 million of subordinated notes and $72.0 million of junior subordinated debt.
- Capital: First Busey’s common equity Tier 1 ratio was 13.45%, total capital ratio 17.95%, and Tier 1 leverage ratio 10.46%. The company and bank exceeded applicable well-capitalized thresholds.
- Credit: The allowance for credit losses was $91.6 million, or 1.21% of loans. Nonperforming loans increased to $17.6 million from $7.8 million at year-end; net charge-offs were $5.2 million versus $0.8 million in Q1 2023. Management attributed much of the increase to one commercial relationship. Classified assets rose to $105.4 million from $72.3 million.
Material changes, outlook and risks
- Management said deposit funding costs peaked at the beginning of Q1 and cited lower deposit pricing, prior balance-sheet repositioning and repayment of the term loan as actions supporting margins. No formal earnings or full-year guidance was provided.
- The Q1 repositioning sold mortgage servicing rights on approximately $923.5 million of residential loans for a $7.5 million pretax gain and sold approximately $108.2 million of available-for-sale securities for a $6.8 million pretax loss. Proceeds were placed at the Federal Reserve, yielding 5.40%. Management estimates the transactions will add about $3.3 million to annualized net interest income and 3 basis points to the margin run rate; it anticipates the proceeds will be reinvested over time. The servicing-rights sale is expected to reduce mortgage revenue by about $0.2 million per quarter for the remainder of 2024.
- Unrealized and unrecognized losses on debt securities totaled $397.5 million at quarter-end, including $248.3 million on available-for-sale securities and $149.2 million on held-to-maturity securities. The company attributed the losses to market rates and conditions, not credit impairment, and said it expects contractual collection and does not intend or expect to be required to sell loss-position securities, except as part of a strategy or restructuring.
- Loan growth is expected to remain modest over the next several quarters as the company maintains conservative underwriting and pricing. Management said asset quality remains strong but warned that deterioration in economic conditions could increase defaults and weaken credit quality.
- After quarter-end, on April 1, 2024, First Busey completed its acquisition of Merchants and Manufacturers Bank Corporation (M&M), issuing approximately 1.43 million shares and paying approximately $12.2 million in cash. The bank merger was expected in June 2024; purchase accounting fair values remained subject to refinement.
- An Illinois franchise-tax inquiry could result in additional taxes, penalties, interest or other costs. The company said the potential loss was reasonably possible but not probable and could not be reasonably estimated; a material liability could arise if circumstances change.
- Other stated risks include interest-rate and securities-value movements, commercial real estate and other loan concentrations, uninsured deposit withdrawals, acquisition integration, competition, cybersecurity and technology disruptions, and legal or regulatory matters.
Key facts for investors to verify
- Whether deposit trends, funding costs and net interest margin stabilize after the decline in noninterest-bearing deposits and the Q1 repositioning.
- Whether the reported $3.3 million annualized net-interest-income benefit and 3-basis-point margin improvement materialize, and how reinvestment of proceeds affects returns.
- Developments in the single commercial relationship linked to higher nonperforming loans and charge-offs, and trends in classified assets and the allowance.
- The size and management of unrealized securities losses, liquidity needs, and the potential effect of any securities sales.
- M&M integration, realized acquisition costs and effects on capital, earnings and share count; and any updates on the Illinois franchise-tax inquiry.