KBRA Affirms Ratings for First Busey Corporation
12 Apr 2024 | New York
KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Champaign, Illinois based First Busey Corporation (NASDAQ: BUSE) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, Busey Bank. The Outlook for all long-term ratings is Stable.
Key Credit Considerations
The ratings are underpinned by a conservatively managed, low-leverage balance sheet, reflecting loan-to-earning asset mix (67% at 4Q23) and loan-to-deposit ratio (74% at 4Q23) that track well below many peers, further anchored by a strong funding profile, ample secondary liquidity capacity, and above peer regulatory capital ratios. Regulatory capital protection as measured by the CET1 ratio (13.1% at 4Q23) continues to be prudently managed, with capital impacts from the recent acquisition of ~$490 million-asset Merchants and Manufacturers Bank Corporation (closed April 1, 2024) viewed as modest. The company's highly diverse earnings profile is also a rating strength, driven by robust levels of recurring fee revenues that are less correlated to lending activities. Total noninterest income has averaged ~1.10% of average assets, or nearly 30% of total revenues since YE18, with combined fees from the scalable wealth management platform and high-growth payment solutions verticals representing over 60% of total noninterest income. Durable fee revenues, taken together with disciplined expense and balance sheet management, has largely counterbalanced NII pressures attributed to the high-rate environment. In that regard, bottom line ROA has been remarkably stable in recent years (ROA of ~1.00%), while most peers have exhibited earnings pressures. BUSE’s funding profile is bolstered by a durable, lower-cost core deposit base, a solid NIB deposit mix that represented 28% of total deposits at 4Q23, very limited use of non-core sources, and low levels of uninsured/uncollateralized deposits (~27% of total deposits). On the latter, combined secondary and contingency liquidity sources provided over 2.2x coverage. Credit quality measures, notably the NPA ratio (0.10% at 4Q23) and classified loan levels, continue to remain benign and track to historical lows, and charge-offs have been nominal over time. Although we anticipate normalization of credit to eventually lead to some negative loan rating migration, we take comfort in BUSE’s proactive credit administration approach, relatively low policy lending limits, and substantial loss absorbing protection. That said, while total investor, non-medical, office CRE exposure is modest (3.5% of total loans) with very limited downtown exposure, ~$18 million of an office loan was placed in classified status in 4Q23 stemming from a single borrower. The timing of resolution appears uncertain; however, stable core earnings expectations along with reasonable loan loss reserve coverage (1.20% of loans at 4Q23) provide a more than adequate first line buffer, in KBRA's view. Although the operating footprint is generally narrower than many higher rated peers, we consider BUSE’s liquidity and capital deployment capacity for growth via organic means or through M&A as comparatively strong.
Rating Sensitivities
Demonstrating consistent outperformance in core and risk adjusted earnings, maintaining strong asset quality across a credit cycle or economic downturn, and sustaining an above peer CET1 ratio could lead to positive rating momentum over time. Enhanced scale outside of the heritage footprint without compromising the above noted attributes would also be viewed favorably. Conversely, degradation in credit, including persistent losses meaningfully above peer levels, or aggressive capital management leading to capital ratios, notably the CET1 ratio, declining to levels substantially below peers could pressure the ratings.
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