First Busey Corporation (Nasdaq: BUSE) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. First Busey is a $12.3 billion financial holding company operating through Busey Bank, payment-technology subsidiary FirsTech, and Wealth Management, principally in Illinois, Missouri, Florida, and Indiana.
Financial performance
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Net interest income | $323.4 million | $270.7 million | Up 19.5% |
| Tax-equivalent net interest margin | 2.84% | 2.49% | Up 35 basis points; fourth-quarter margin was 3.24% versus 2.36% |
| Noninterest income | $126.8 million | $132.8 million | Down 4.5% |
| Noninterest expense | $283.9 million | $261.8 million | Up 8.4% |
| Provision for credit losses | $4.6 million | ($15.1 million) release | Provision returned as conditions stabilized |
| Net income | $128.3 million | $123.4 million | Up 3.9% |
| Diluted EPS | $2.29 | $2.20 | Up 4.1% |
| Adjusted net income and diluted EPS | $131.9 million; $2.35 | $137.1 million; $2.45 | Both declined; non-GAAP measures |
| Efficiency ratio | 59.9% | 62.2% | Improved; adjusted ratio worsened to 58.9% from 57.9% |
Net interest income benefited from higher rates, loan growth, and faster repricing of assets than liabilities. The Federal Reserve raised its target range by 425 basis points in 2022. Wealth-management fees and payment-technology revenue together rose 5.6% to $75.4 million. Customer-service fees fell 7.0%, including a $4.8 million reduction in fee income after Durbin interchange limits took effect July 1; mortgage revenue dropped 73.8% to $1.9 million.
Balance sheet, credit, liquidity, and capital
- Assets: $12.34 billion at year-end, down 4.1% from $12.86 billion. Portfolio loans rose 7.5% to $7.73 billion; core loans grew 8.6%.
- Deposits: $10.07 billion, down 6.5%. Noninterest-bearing deposits were 33.7% of deposits; core deposits were 98.8%. Management attributed the decline to runoff of PPP-related funding and stimulus balances, and rate-driven movement by some non-relationship customers.
- Funding and liquidity: Year-end cash and cash equivalents were $227.2 million. Cash and unencumbered available-for-sale securities totaled $1.94 billion, and stated additional borrowing capacity was $2.47 billion. The loan-to-deposit ratio was 76.7%; management said liquidity was adequate for projected obligations. FHLB advances increased, with $339.1 million in short-term advances at year-end.
- Debt: Year-end balances included $351.1 million of short-term borrowings, $30.0 million of long-term debt, $222.0 million of subordinated notes, and $71.8 million of junior subordinated debt. The company issued $100 million of subordinated notes in June and redeemed $60 million of older subordinated notes in the third quarter.
- Credit: Allowance for credit losses was $91.6 million, or 1.19% of portfolio loans, versus $87.9 million, or 1.22%, a year earlier. Nonperforming assets declined to $16.6 million from $21.3 million; nonperforming loans were 0.20% of loans. Classified assets increased to $107.1 million from $91.8 million, and potential problem loans rose to $89.2 million from $70.5 million.
- Capital: First Busey and Busey Bank exceeded well-capitalized regulatory thresholds. Company ratios included 11.96% CET1, 16.12% total capital, and 9.45% leverage. Tangible common equity to tangible assets declined to 6.60% from 7.68%.
- Investment securities: Available-for-sale securities had a $311.1 million net unrealized loss at year-end, primarily attributed to higher market interest rates. The company transferred $918.3 million of securities to held-to-maturity; their fair value was $785.3 million. No securities credit-loss allowance was recorded. AOCI fell to negative $273.3 million from negative $23.8 million, contributing to lower reported equity.
- Cash flow: Operating activities provided $165.8 million; investing activities used $290.9 million; financing activities used $483.9 million. Cash and cash equivalents decreased $608.9 million during the year.
Changes, outlook, and notable items
- Reported net income and EPS increased, while adjusted net income and adjusted EPS decreased. Net interest margin expanded, but noninterest income declined and operating expenses increased.
- Early in the fourth quarter, the company began an efficiency plan expected to save approximately $4.0 million annually in salary and benefits. About one-third of the quarterly run-rate was reflected in fourth-quarter results; management expected the full run-rate by first-quarter 2023 and said savings would largely be reinvested in growth initiatives.
- Acquisition and restructuring costs totaled $4.5 million in 2022, down from $17.4 million in 2021. Fourth-quarter severance-related costs were $2.4 million. FirsTech also had a leadership change; management described technology and operational investments intended to support growth. No quantified company-wide earnings or revenue guidance is provided.
- Hurricane Ian disrupted the company’s southwest Florida operations. The company reported $0.2 million of hurricane-related noninterest income and $0.4 million of related expense in 2022; as of February 23, 2023, two of three branches were fully operational and the third was operating from a temporary facility.
- Key risks include interest-rate and deposit-cost pressure, inflation and possible recession, securities valuation and liquidity exposure, commercial real estate and other credit concentrations, cyber and third-party operational risks, competition, and regulatory change. CFPB supervisory transition began in August 2022. The company reported no material pending litigation; it had received an Illinois inquiry concerning prior franchise-tax filings.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for credit losses, particularly management’s adjustments to historical loss factors, was identified as a critical audit matter.
Important facts for investors to verify
- How deposit trends, customer rate sensitivity, and use of FHLB funding evolved after year-end, and whether reported liquidity capacity remains available on acceptable terms.
- Whether the expanded net interest margin persisted as deposit costs repriced, and how the company’s interest-rate sensitivity and hedges affect future earnings.
- Whether the $4.0 million annualized savings target was achieved, how much was reinvested, and whether adjusted expenses and efficiency improved.
- Trends in classified and potential problem loans, commercial real estate exposure, credit-loss provisions, and collateral values.
- Whether unrealized securities losses could create pressure to sell securities, and how the AOCI decline affects equity and capital measures.
- Future performance of FirsTech and Wealth Management, including fee income, assets under care, and execution of stated growth investments.