First Busey(BUSE) - 2023 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited consolidated financial statements provide a comprehensive overview of the company's financial position, performance, and cash movements Consolidated Balance Sheet Highlights (As of March 31, 2023) | Metric | Amount (in thousands) | Change from Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $12,344,555 | +0.1% | | Portfolio Loans, net | $7,692,081 | +0.8% | | Total Deposits | $9,801,169 | -2.7% | | Total Stockholders' Equity | $1,198,558 | +4.6% | Consolidated Income Statement Highlights (Three Months Ended March 31, 2023) | Metric | Amount (in thousands) | YoY Change | | :--- | :--- | :--- | | Net Interest Income | $85,857 | +22.6% | | Provision for Credit Losses | $953 | N/A (vs. release of $253) | | Noninterest Income | $31,848 | -11.0% | | Net Income | $36,786 | +29.3% | Earnings Per Share (Three Months Ended March 31, 2023) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Basic EPS | $0.66 | $0.51 | | Diluted EPS | $0.65 | $0.51 | Consolidated Cash Flow Highlights (Three Months Ended March 31, 2023) | Cash Flow Category | Amount (in thousands) | | :--- | :--- | | Net Cash from Operating Activities | $45,296 | | Net Cash from Investing Activities | $44,035 | | Net Cash used in Financing Activities | $(40,926) | Note 1: Significant Accounting Policies The financial statements conform to GAAP, with material estimates for ACL, and the company operates in Banking, FirsTech, and Wealth Management segments - The company operates and reports in three segments: Banking, FirsTech (payment technology), and Wealth Management[204][205][206] - Material estimates critical to the financial statements include the fair value of debt securities, goodwill, income taxes, and the Allowance for Credit Losses (ACL)[211] - Adopted ASU 2022-02, which eliminates the Troubled Debt Restructuring (TDR) accounting model for creditors that have adopted CECL, effective January 1, 2023, with no material impact[213] Note 2: Debt Securities The company held $2.38 billion in AFS and $0.91 billion in HTM securities, with unrealized losses attributed to interest rate changes, not credit issues Debt Securities Portfolio (March 31, 2023) | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | | :--- | :--- | :--- | | Available for Sale | $2,663,921 | $2,383,550 | | Held to Maturity | $907,559 | $780,653 | - As of March 31, 2023, debt securities with a carrying amount of $764.9 million were pledged as collateral for public deposits and other purposes[229] - Unrealized and unrecognized losses on debt securities, totaling $407.5 million, were attributed to changes in market interest rates and not credit-related impairments[270][268] Note 3: Portfolio Loans The total loan portfolio reached $7.78 billion, primarily commercial loans, with a stable Allowance for Credit Losses (ACL) of $91.7 million Loan Portfolio Composition (March 31, 2023) | Loan Category | Amount (in thousands) | | :--- | :--- | | Total Commercial Loans | $5,815,703 | | Total Retail Loans | $1,968,105 | | Total Portfolio Loans | $7,783,808 | Allowance for Credit Losses (ACL) Activity (Q1 2023) | Metric | Amount (in thousands) | | :--- | :--- | | ACL Balance, Dec 31, 2022 | $91,608 | | Provision for Credit Losses | $953 | | Charged-off | $(1,181) | | Recoveries | $347 | | ACL Balance, Mar 31, 2023 | $91,727 | - As of March 31, 2023, non-accrual loans totaled $14.7 million, and loans 30-89 days past due amounted to $5.5 million[293] Note 7: Regulatory Capital The company and its subsidiary bank remain well-capitalized, with all capital ratios significantly exceeding regulatory minimums Regulatory Capital Ratios (As of March 31, 2023) | Ratio | First Busey Corp. | Busey Bank | Well-Capitalized Minimum | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 12.18% | 14.66% | 6.50% | | Tier 1 Capital | 12.99% | 14.66% | 8.00% | | Total Capital | 16.40% | 15.59% | 10.00% | | Leverage Ratio | 9.71% | 10.95% | 5.00% | - The company elected to defer the regulatory capital impact of CECL adoption for two years until January 1, 2022, after which the impact began to be phased-in over three years[1] Note 8: Stock-Based Compensation Stock-based compensation expense was $1.7 million in Q1 2023, with $21.5 million in unamortized compensation remaining Stock-Based Compensation Expense (in thousands) | Award Type | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | RSU awards | $1,020 | $1,176 | | PSU awards | $360 | $412 | | DSU awards | $196 | $226 | | 2021 ESPP | $93 | $95 | | Total | $1,669 | $1,909 | - On March 22, 2023, the company granted 224,316 RSUs with a fair value of $4.6 million, a target of 104,643 market-based PSUs valued at $2.1 million, and 41,548 DSUs valued at $0.8 million[338][339][10] - Total unamortized stock-based compensation increased to $21.5 million as of March 31, 2023, from $13.0 million at year-end 2022[14] Note 10: Derivative Financial Instruments The company uses interest rate swaps and mortgage banking derivatives to manage interest rate risk Interest Rate Swaps Designated as Cash Flow Hedges (March 31, 2023) | Swap Type | Notional Amount (in thousands) | Avg. Maturity (years) | | :--- | :--- | :--- | | Debt Swap | $50,000 | 1.46 | | Loan Swap | $300,000 | 5.85 | - The company offers derivative contracts to customers for their risk management, managing its own risk by entering into equal and offsetting agreements supporting commercial loan relationships totaling $648.3 million[21][22] - Mortgage banking derivatives, including interest rate lock commitments and forward sales commitments, are used to economically hedge mortgage loans held for sale but are not designated for hedge accounting[362][363] Note 11: Fair Value Measurements Most financial instruments are measured at fair value using Level 2 inputs, with minimal reliance on unobservable Level 3 inputs - The fair value hierarchy prioritizes inputs: Level 1 (quoted prices for identical assets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[27][366][37] Assets Measured at Fair Value on a Recurring Basis (March 31, 2023) | Asset/Liability Type | Level 2 Fair Value (in thousands) | Level 3 Fair Value (in thousands) | Total Fair Value (in thousands) | | :--- | :--- | :--- | :--- | | Debt securities available for sale | $2,372,635 | $0 | $2,372,635 | | Derivative assets | $34,600 | $24 | $34,624 | | Derivative liabilities | $58,547 | $0 | $58,547 | - Assets measured at fair value on a non-recurring basis, such as individually evaluated loans and OREO, are primarily classified as Level 3 due to reliance on unobservable inputs[43][36][45] Note 12: Earnings Per Common Share Basic and diluted earnings per share for Q1 2023 were $0.66 and $0.65 respectively, an increase from $0.51 in the prior year Earnings Per Share Calculation (Q1 2023 vs Q1 2022) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Income (in thousands) | $36,786 | $28,439 | | Weighted Avg. Shares, Basic | 55,397,989 | 55,427,696 | | Weighted Avg. Shares, Diluted | 56,179,606 | 56,194,946 | | Basic EPS | $0.66 | $0.51 | | Diluted EPS | $0.65 | $0.51 | Note 14: Operating Segments and Related Information The Banking segment is the primary profit driver, complemented by the Wealth Management and FirsTech segments Segment Net Income (Three Months Ended March 31, 2023) | Segment | Net Income (in thousands) | | :--- | :--- | | Banking | $36,835 | | FirsTech | $(38) | | Wealth Management | $4,858 | | Other/Eliminations | $(4,869) | | Total Net Income | $36,786 | - The Banking segment provides a full range of services through its network in Illinois, Missouri, Florida, and Indiana[52][379] - The FirsTech segment offers payment technology solutions, while the Wealth Management segment provides asset management, investment, and fiduciary services[53][54] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q1 2023 performance, highlighting net interest income growth, stable asset quality, and robust capital levels Executive Summary The company reported strong Q1 2023 results driven by a conservative banking strategy, with an efficiency plan expected to yield $4.0 million in savings Q1 2023 Operating Performance Highlights | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income (Reported) | $36,786 thousand | $28,439 thousand | | Diluted EPS (Reported) | $0.65 | $0.51 | | Return on Average Assets | 1.22% | 0.91% | | Return on Avg. Tangible Common Equity | 18.48% | 12.72% | - The company's operating mandate focuses on offering convenient products while emphasizing credit quality over asset growth[62] - A restructuring and efficiency plan is projected to generate approximately $4.0 million in annual savings[63] Net Interest Income Tax-equivalent net interest income grew 22.4% year-over-year to $86.4 million, driven by a 68 basis point expansion in net interest margin Net Interest Income and Margin (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income (Tax-equivalent) | $86,415 thousand | $70,602 thousand | +22.4% | | Net Interest Margin (Tax-equivalent) | 3.13% | 2.45% | +68 bps | - The increase in net interest income was driven by a 45.7% rise in tax-equivalent interest income, partially offset by a 318.4% increase in interest expense[74] - The company remains substantially core deposit funded, with a loan-to-deposit ratio of 79.4% and core deposits representing 97.9% of total deposits[75] Noninterest Income Noninterest income decreased 11.0% to $31.8 million, primarily due to the Durbin Amendment's impact and lower mortgage revenue Noninterest Income Breakdown (in thousands) | Category | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Wealth management fees | $14,797 | $15,779 | (6.2)% | | Payment technology solutions | $5,315 | $5,077 | 4.7% | | Fees for customer services | $6,819 | $8,907 | (23.4)% | | Mortgage revenue | $288 | $975 | (70.5)% | | Total Noninterest Income | $31,848 | $35,772 | (11.0)% | - The decrease in fees for customer services was primarily due to a $2.3 million reduction from the Durbin Amendment, which caps debit interchange fees[410] - Payment technology solutions revenue from FirsTech grew 4.7% to $5.3 million, supported by strategic investments in its API cloud-based and BaaS platforms[86] Noninterest Expense Noninterest expense remained flat at $70.4 million, while the efficiency ratio improved significantly to 56.9% Noninterest Expense Breakdown (in thousands) | Category | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Salaries, wages, and employee benefits | $40,331 | $39,354 | 2.5% | | Data processing | $5,640 | $4,978 | 13.3% | | Premises and equipment expenses | $6,508 | $7,097 | (8.3)% | | Other expense | $11,284 | $12,884 | (12.4)% | | Total Noninterest Expense | $70,403 | $70,376 | 0.0% | - The efficiency ratio improved to 56.9% for Q1 2023, compared to 63.0% for Q1 2022, reflecting better expense management relative to revenue[418] Financial Condition Total assets were stable at $12.3 billion, with continued core loan growth and strong asset quality - Core loan growth of $58.2 million (0.8%) was generated during Q1 2023, marking the eighth consecutive quarter of growth[103] - Asset quality remains strong, with non-performing loans at 0.20% of portfolio loans as of March 31, 2023[112] - Total deposits decreased by 2.7% to $9.8 billion, with core deposits comprising 97.9% of the total and estimated uninsured deposits at 27%[115][120] Liquidity The company maintains a strong liquidity position with over $4.7 billion in available funds from cash, securities, and borrowing capacity Available Liquidity Sources (As of March 31, 2023) | Source | Amount (in thousands) | | :--- | :--- | | Cash and unencumbered securities | $2,090,875 | | Additional borrowing capacity (FHLB, Fed, etc.) | $2,647,716 | - Management believes that as of March 31, 2023, adequate liquidity existed to meet all projected cash flow obligations[123] Capital Resources Capital ratios remain significantly above 'well-capitalized' regulatory minimums, demonstrating financial strength Capital Ratios vs. Minimum Requirements (First Busey, March 31, 2023) | Ratio | Actual Ratio | Minimum with Buffer | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 12.18% | 7.00% | | Tier 1 Capital | 12.99% | 8.50% | | Total Capital | 16.40% | 10.50% | Non-GAAP Financial Information This section reconciles GAAP to non-GAAP measures like adjusted net income and tangible common equity to provide additional performance insight - Management uses non-GAAP measures like adjusted net income, tangible book value per share, and core efficiency ratio to assess performance[129][67] Reconciliation of Net Income to Adjusted Net Income (in thousands) | | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income (GAAP) | $36,786 | $28,439 | | Non-GAAP Adjustments (Acquisition expenses, etc.) | $0 | $665 | | Adjusted Net Income (Non-GAAP) | $36,786 | $29,104 | Key Non-GAAP Ratios | Ratio | As of March 31, 2023 | | :--- | :--- | | Tangible book value per common share | $15.14 | | Tangible common equity to tangible assets | 7.05% | | Core deposits to total deposits | 97.89% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with the balance sheet positioned to benefit from rising rates Net Interest Income Sensitivity (Year-One Horizon, as of March 31, 2023) | Rate Shock (Basis Points) | Estimated % Change in NII | | :--- | :--- | | +200 | +4.34% | | +100 | +2.14% | | -100 | (2.92)% | | -200 | (6.03)% | - Interest rate risk is the most significant market risk affecting the company, managed by an asset-liability committee[170][175] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls - The CEO and CFO concluded that as of March 31, 2023, disclosure controls and procedures were effective[179] - No material changes occurred in internal control over financial reporting during the three months ended March 31, 2023[180] PART II—OTHER INFORMATION Legal Proceedings The company is not party to any material pending litigation outside the ordinary course of business - There is no material pending litigation, other than ordinary routine litigation incidental to the business[184][183] Issuer Purchases of Equity Securities The company repurchased 25,000 shares in Q1 2023, with 122,210 shares remaining under its authorized repurchase plan Share Repurchase Activity (Q1 2023) | Period | Total Shares Purchased | Weighted Avg. Price Paid | | :--- | :--- | :--- | | Jan 1-31, 2023 | 0 | N/A | | Feb 1-28, 2023 | 0 | N/A | | Mar 1-31, 2023 | 25,000 | $21.34 | - As of March 31, 2023, the company had 122,210 shares remaining that may be purchased under the current repurchase plan[187]