First Busey Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. First Busey is a $12.5 billion financial holding company headquartered in Champaign, Illinois, with Banking, FirsTech payment technology, and Wealth Management segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $86.3 million | $70.8 million | $232.3 million | $200.2 million |
| Provision for credit losses | $2.4 million | ($1.9 million) release | $3.8 million | ($10.4 million) release |
| Noninterest income | $30.9 million | $33.3 million | $97.7 million | $97.7 million |
| Noninterest expense | $70.7 million | $73.5 million | $210.2 million | $190.6 million |
| Net income | $35.7 million | $25.9 million | $93.9 million | $93.5 million |
| Diluted EPS | $0.64 | $0.46 | $1.67 | $1.67 |
| Tax-equivalent net interest margin | 3.00% | 2.41% | 2.71% | 2.54% |
Q3 diluted EPS was $0.64; the declared dividend was $0.23 per share. Management-reported adjusted diluted EPS was $0.65 for Q3 and $1.70 for the nine months; these are non-GAAP measures.
Financial condition, cash flow, and liquidity
- At September 30, total assets were $12.50 billion, down 2.8% from December 31, 2021. Portfolio loans, net of allowance, rose 6.7% to $7.58 billion; total deposits fell 1.6% to $10.60 billion.
- Cash and cash equivalents were $347 million, versus $836 million at year-end 2021. For the first nine months, operating cash flow was $118 million; investing cash flow was negative $339 million and financing cash flow negative $268 million.
- Management reported a 72.4% loan-to-deposit ratio and 99.0% core deposits as a share of total deposits. Available additional borrowing capacity was $2.62 billion through the FHLB, Federal Reserve, and revolving facility; management said liquidity was adequate for projected obligations.
- Outstanding debt included $221.8 million of subordinated notes, $71.8 million of junior subordinated debt, $33.0 million of long-term debt, and $16.2 million of short-term borrowings. The company issued $100 million of new Tier 2 subordinated notes in June and redeemed $60 million of older subordinated notes in Q3; its $40 million senior notes matured and were redeemed in May.
- Regulatory capital remained above well-capitalized thresholds: consolidated CET1 was 11.79%, Tier 1 capital 12.62%, total capital 15.98%, and leverage 9.15%. Busey Bank’s corresponding ratios were 14.45%, 14.45%, 15.31%, and 10.47%.
- Stockholders’ equity declined 16.1% from year-end to $1.11 billion. AOCI was negative $289.0 million, largely reflecting market-value losses on securities as interest rates rose. Available-for-sale securities had $328.9 million of gross unrealized losses; held-to-maturity securities had $127.4 million. Management attributed the losses to market rates and conditions, said it did not intend to sell the securities, and recorded no credit-loss allowance for them.
Changes and management commentary
- Q3 net income increased 37.5% year over year, supported by higher net interest income and lower noninterest expense. Nine-month net income was nearly unchanged despite higher net interest income, as noninterest expense rose and the prior-year period included substantial credit-provision releases.
- The tax-equivalent margin improved 59 basis points year over year in Q3. Management said 2022 rate increases benefited margin because loans repriced faster than liabilities, with some September rate effects expected to appear in later quarters. The FOMC raised rates 300 basis points in the first nine months.
- Q3 noninterest income fell 7.0%; lower wealth-management fees, customer-service fees, and mortgage revenue outweighed growth in FirsTech and other income. Nine-month wealth-management and payment-technology revenue grew 7.8% and 9.3%, respectively. Assets under care fell to $10.7 billion from $12.7 billion at December 2021, principally due to market valuation declines.
- Effective July 1, the Durbin Amendment reduced Q3 fee income by $2.4 million. Mortgage revenue declined sharply amid lower loan-sale volume and gain-on-sale premiums.
- Loans grew 6.7% from year-end, with notable growth in construction, retail other, and commercial real estate loans. Nonperforming loans were $16.7 million, or 0.22% of portfolio loans. Potential problem loans increased to $83.7 million from $70.5 million at year-end; management said it was monitoring these credits and expected planned actions to support repayment.
- Early in Q4, the company implemented a restructuring plan expected to save $4.0–$4.4 million annually in salaries and benefits, with $1.1–$1.3 million in one-time severance costs, mostly expected in Q4. Management expects to largely reinvest savings in growth initiatives.
Risks, contingencies, and unusual items
- Hurricane Ian affected southwest Florida operations beginning September 28. The company described customer and employee assistance, fee waivers, and loan-modification programs; the filing does not quantify the storm’s financial impact.
- Interest-rate exposure is material. Simulation estimated that an immediate, sustained 100-basis-point increase would raise net interest income 4.60% in year one and 5.52% in year two; a 100-basis-point decline was estimated to reduce it 5.83% and 7.21%, respectively. The filing cautions that actual outcomes may differ from model results.
- Credit quality, economic conditions, inflation, competition, technology and cybersecurity, future rate changes, and severe weather are among the disclosed risks. The allowance for credit losses was $90.7 million, or 1.18% of loans, and depends on management estimates and economic forecasts.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $2.06 billion; the reserve for unfunded commitments was $7.1 million. Management anticipated sufficient funds to meet current commitments.
- Management said ordinary-course legal matters were not expected to have a material effect. The company received an Illinois inquiry concerning prior franchise-tax filings and could incur additional expense if amendments are required. No material changes to previously disclosed risk factors were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margin expansion persists as deposit costs catch up with rising market rates, and whether deposit balances or funding mix change materially.
- The scale and duration of securities-related AOCI losses, and whether liquidity needs could require securities sales before unrealized losses recover.
- Performance of the $83.7 million in potential problem loans, the allowance’s adequacy, and any credit deterioration following Hurricane Ian or weaker economic conditions.
- Whether FirsTech and Wealth Management growth offsets lower mortgage and customer-service fee income, including the Durbin Amendment’s ongoing effect.
- Actual restructuring savings and severance costs, and whether savings are reinvested as management intends.
- Any outcome or expense arising from the Illinois franchise-tax inquiry, and any quantified financial effects from Hurricane Ian.