FIRST BUSEY CORP quarterly report, Q3 FY2023

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First Busey Corporation (Nasdaq: BUSE) — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. First Busey is a $12.3 billion financial holding company serving markets in Illinois, Missouri, Florida and Indiana, with Banking, Wealth Management and FirsTech payment technology segments. Dollar amounts below are in millions unless otherwise noted.

Financial performance

  • Q3 earnings: Net income was $30.7 million, down 14.0% from $35.7 million a year earlier. Diluted EPS was $0.54 versus $0.64. Nine-month net income was $96.8 million, up from $93.9 million; diluted EPS was $1.72 versus $1.67.
  • Net interest: Q3 net interest income was $77.8 million, down 9.9% year over year, as interest expense rose to $44.9 million from $9.1 million, offsetting higher interest income. Tax-equivalent net interest margin was 2.80%, down 20 basis points year over year and from 2.86% in Q2. For nine months, net interest income was $242.3 million, up 4.3%, and tax-equivalent margin was 2.93% versus 2.71%.
  • Other income and expenses: Q3 noninterest income was $31.0 million, essentially flat year over year; noninterest expense was $70.9 million, up 0.3%. The reported efficiency ratio increased to 62.4% from 57.6%. For nine months, noninterest income declined 7.0% to $90.9 million, while expense was nearly unchanged at $210.6 million.
  • Cash flow: For nine months, operating activities provided $127.3 million and investing activities provided $159.3 million; financing activities used $175.8 million. Cash and cash equivalents increased $110.8 million to $337.9 million.

Financial condition, debt and liquidity

  • Balance sheet: Total assets were $12.26 billion, down 0.6% from year-end 2022. Portfolio loans, net of allowance, grew 1.7% to $7.76 billion; deposits rose 2.6% to $10.33 billion.
  • Deposit mix: Noninterest-bearing deposits fell 14.0% to $2.92 billion, while interest-bearing deposits rose 11.0% to $7.41 billion. Time deposits increased to $1.67 billion from $855 million. Core deposits were 96.6% of deposits, down from 98.8% at year-end. Management reported a 76.0% loan-to-deposit ratio.
  • Liquidity: Cash and unencumbered available-for-sale securities totaled $1.90 billion. Additional borrowing capacity was $3.02 billion across the FHLB, Federal Reserve, federal funds and revolving credit facility. Management said liquidity was adequate for projected obligations.
  • Debt: The term loan totaled $33.0 million ($12.0 million current and $21.0 million long-term); subordinated notes were $222.7 million, junior subordinated debt $71.9 million, and repurchase-agreement borrowings $183.7 million.
  • Capital: First Busey’s CET1, total risk-based capital and Tier 1 leverage ratios were 12.52%, 16.72% and 10.08%, respectively. The company and bank exceeded applicable well-capitalized thresholds.

Material changes and credit quality

  • Rate increases materially raised deposit and funding costs. Average noninterest-bearing deposits as a share of average deposits declined to 28.8% in Q3 from 33.9% a year earlier; management noted migration to higher-cost deposit products and funding.
  • Q3 wealth management fees increased 13.8% year over year and FirsTech payment technology revenue increased 2.9%. For nine months, customer-service fees declined 17.5%, principally due to the Durbin Amendment and changes to overdraft and insufficient-funds fees; mortgage revenue declined 48.7%.
  • Credit metrics improved from year-end: nonperforming loans fell 23.7% to $12.0 million, classified assets fell 44.3% to $59.6 million, and nonperforming assets were 0.10% of total assets. The allowance for credit losses was $91.7 million, or 1.17% of portfolio loans; nine-month provision expense was $1.9 million.
  • Loans modified for financially troubled borrowers totaled $24.8 million in the first nine months; $725,000 was on nonaccrual at quarter-end. Management reported no COVID-relief-program loans remaining.

Outlook, risks and unusual items

  • No numerical earnings or margin guidance was provided. Management expects loan growth to remain modest over the next several quarters, citing conservative underwriting, pricing discipline and its economic outlook.
  • Available-for-sale securities had $334.6 million of gross unrealized losses; held-to-maturity securities had $180.9 million of unrecognized losses. The company attributed these primarily to interest rates and market conditions, said it did not intend or expect to be required to sell the securities before recovery, and recorded no related credit-loss allowance. AOCI was negative $290.7 million.
  • Management identified interest-rate movements, deposit competition and outflows, economic deterioration and potential loan defaults, securities valuation, concentration exposures, cybersecurity and technology disruption as risks. It cautioned that simulated interest-rate sensitivity is not a forecast of actual results.
  • Potential problem loans declined to $47.5 million. Management expects identified restructurings, guarantees, additional collateral or other actions to support repayment, but notes credit conditions could worsen if the economy deteriorates.
  • After quarter-end, the company disclosed the departure of a named executive officer and expects to record severance expense in Q4; the filing does not quantify that expense. Illinois tax authorities had also inquired about prior franchise-tax filings, which could result in additional expense if amended.
  • Q3 share repurchases totaled 65,123 shares at a weighted-average price of $19.63; $0.24 per share was declared as a quarterly dividend. No material pending litigation was reported.

Key facts for investors to verify

  • Whether deposit costs continue to rise and noninterest-bearing balances or core-deposit share continue to decline, and the resulting effect on net interest margin.
  • Whether the large unrealized securities losses remain manageable without forced sales, and how rate and liquidity conditions evolve.
  • Whether credit quality remains strong, particularly classified and potential problem loans, commercial real estate exposures, and modified loans.
  • The amount and timing of Q4 executive severance costs and any outcome of the Illinois franchise-tax inquiry.
  • Whether modest loan growth, noninterest-income trends and expense controls support earnings as funding costs and FDIC assessments rise.