First Busey Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. First Busey is a regional financial services company with banking, remittance-processing and wealth-management operations. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $69.4 | $68.4 in Q1 2019 |
| Non-interest income | $27.5 | $25.9 in Q1 2019 |
| Net income | $15.4; diluted EPS $0.28 | $25.5 and $0.48 in Q1 2019; net income down about 40% |
| Provision for credit losses | $17.2 | $2.1 in Q1 2019 |
| Net interest margin | 3.20% | 3.46% in Q1 2019; 3.07% excluding purchase-accounting accretion |
| Total assets | $9,721 | $9,696 at December 31, 2019 |
| Portfolio loans, gross | $6,745 | $6,687 at December 31, 2019 |
| Deposits | $7,973 | $7,902 at December 31, 2019 |
| Cash and cash equivalents | $343 | $529 at December 31, 2019 |
| Stockholders’ equity | $1,218 | $1,220 at December 31, 2019 |
- Operating cash flow was $18.8 million, versus $36.3 million in Q1 2019. Investing activities used $181.2 million, principally reflecting securities purchases; financing activities used $24.0 million. Cash and cash equivalents fell $186.4 million during the quarter.
- The allowance for credit losses was $84.4 million, or 1.25% of gross portfolio loans, compared with $53.7 million and 0.80% at year-end. Non-performing loans were $27.2 million, down from $29.5 million at year-end; non-performing loans were 0.40% of portfolio loans.
- Regulatory capital ratios remained above well-capitalized thresholds: consolidated total capital 13.85%, Tier 1 12.20%, and common equity Tier 1 11.22%. Tangible common equity to tangible assets was 9.22% (a non-GAAP measure).
- Interest-bearing liabilities carried an average rate of 0.93%, compared with 1.06% in Q1 2019. The company repaid its $48 million term-loan balance during Q1; the $20 million revolving facility was drawn at quarter-end. The revolver maturity was extended to April 2021 after quarter-end.
Material changes and notable items
- Net income declined substantially as the $17.2 million credit-loss provision, largely driven by COVID-19-related economic assumptions, compared with $2.1 million a year earlier. Non-interest expense rose 5.9% to $60.5 million; the efficiency ratio increased to 59.7% from 58.0%.
- Federal Reserve rate cuts contributed to margin compression because assets, particularly commercial loans, repriced faster and more than liabilities. Average earning assets increased 9.0% year over year, but tax-equivalent net interest margin fell to 3.20% from 3.46%.
- Wealth-management fees increased 28.0% to $11.6 million. Assets under care declined 7.9% from year-end to $8.93 billion amid market volatility, although net customer inflows were $18.8 million. Customer-service fees rose 3.3%; mortgage revenue fell 29.0% to $1.4 million.
- First Busey adopted CECL on January 1, 2020, recording a $15.9 million after-tax reduction to retained earnings, including an initial $12.0 million loan allowance increase and a $3.9 million reserve for off-balance-sheet exposures. The company shortened its forecast period from eight quarters to four because COVID-19 made longer-range forecasts unreliable.
- Accumulated other comprehensive income increased, principally because of unrealized gains on available-for-sale securities. The securities portfolio’s fair value was $1.766 billion at quarter-end, up from $1.648 billion at year-end.
Outlook, risks and contingencies
- The filing provides no formal earnings or numerical guidance. Management expects COVID-19 to adversely affect future results, potentially through lower margins, higher credit-loss provisions, weaker asset quality, and lower wealth-management and customer-service fees. Management also expects organic loan growth to slow.
- Management cited potential borrower stress, credit-line draws and collateral-value declines, particularly in hotel, restaurant, transportation, long-term healthcare, retail and related commercial real estate exposures. It warned that further economic deterioration could increase future provisions and loan defaults.
- As of March 31, the company reported $1.5 billion of additional FHLB borrowing capacity and $529 million of Federal Reserve borrowing capacity, and management considered liquidity adequate. Commitments to extend credit were $1.628 billion and standby letters of credit were $42.8 million. These commitments may be drawn or expire undrawn.
- The bank participated in the Paycheck Protection Program and reported $734.4 million funded for 3,552 customers as of May 4, 2020, after quarter-end. The filing highlights potential PPP processing litigation and the risk that SBA guarantees could be denied or reduced if origination, funding or servicing deficiencies are found.
- First Busey suspended share repurchases on March 16 because of COVID-19 uncertainty; it had repurchased 407,850 shares during the quarter. The board’s declared dividend was $0.22 per share.
- Management reported no material pending litigation beyond routine matters. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How subsequent economic conditions, borrower payment relief and industry exposures affect credit quality, the CECL allowance and future provision expense.
- Whether net interest margin stabilizes after rate cuts and how deposit pricing, loan repricing and securities yields evolve.
- Whether wealth-management assets and fee income recover from market declines, and whether customer-service fee waivers or reduced activity persist.
- PPP loan volumes, SBA guarantee performance, processing-related litigation exposure and funding/liquidity implications.
- Capital and liquidity trends, including the impact of CECL and loan growth; compare reported GAAP results with management’s non-GAAP adjusted measures.