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FIRST BUSEY CORP /NV/ - Quarter Report: 2018 September (Form 10-Q)

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC  20549

 

FORM 10-Q

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended 9/30/2018

 

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File No. 0-15950

 

FIRST BUSEY CORPORATION

 

(Exact name of registrant as specified in its charter)

 

 

 

 

Nevada

 

37-1078406

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 W. University Ave.
Champaign, Illinois

 

61820

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:  (217) 365-4544

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at November 7, 2018

Common Stock, $.001 par value

 

48,860,557

 

 

 

 


 

Table of Contents

FIRST BUSEY CORPORATION

FORM 10-Q

September 30, 2018

 

Table of Contents

 

 

 

 

Part I 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

FINANCIAL STATEMENTS

3

 

CONSOLIDATED BALANCE SHEETS

4

 

CONSOLIDATED STATEMENTS OF INCOME

5

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

7

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

8

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

9

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11

Item 2. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

51

Item 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

70

Item 4. 

CONTROLS AND PROCEDURES

71

 

 

 

Part II 

OTHER INFORMATION

 

 

 

 

Item 1. 

LEGAL PROCEEDINGS

71

Item 1A. 

RISK FACTORS

71

Item 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

72

Item 3. 

DEFAULTS UPON SENIOR SECURITES

72

Item 4. 

MINE SAFETY DISCLOSURES

72

Item 5. 

OTHER INFORMATION

72

Item 6. 

EXHIBITS

72

 

SIGNATURES

73

 

 

2


 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

3


 

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

September 30, 2018 and December 31, 2017

(Unaudited)

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

(dollars in thousands)

Assets

 

 

 

 

 

 

Cash and cash equivalents (interest-bearing 2018 $52,390; 2017 $234,889)

 

$

160,652

 

$

353,272

Securities available for sale

 

 

863,381

 

 

872,682

Securities held to maturity

 

 

626,250

 

 

443,550

Securities equity investments

 

 

7,317

 

 

5,378

Loans held for sale

 

 

32,617

 

 

94,848

Portfolio loans (net of allowance for loan losses 2018 $52,743; 2017 $53,582)

 

 

5,570,998

 

 

5,465,918

Premises and equipment, net

 

 

119,162

 

 

116,913

Goodwill

 

 

267,685

 

 

269,346

Other intangible assets, net

 

 

34,278

 

 

38,727

Cash surrender value of bank owned life insurance

 

 

127,663

 

 

126,737

Deferred tax asset, net

 

 

16,431

 

 

17,296

Other assets

 

 

62,951

 

 

55,973

Total assets

 

$

7,889,385

 

$

7,860,640

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

1,438,054

 

$

1,597,421

Interest-bearing

 

 

4,757,515

 

 

4,528,544

Total deposits

 

$

6,195,569

 

$

6,125,965

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

 

255,906

 

 

304,566

Short-term borrowings

 

 

200,000

 

 

220,000

Long-term debt

 

 

50,000

 

 

50,000

Senior notes, net of unamortized issuance costs

 

 

39,505

 

 

39,404

Subordinated notes, net of unamortized issuance costs

 

 

59,121

 

 

64,715

Junior subordinated debt owed to unconsolidated trusts

 

 

71,118

 

 

71,008

Other liabilities

 

 

46,026

 

 

49,979

Total liabilities

 

$

6,917,245

 

$

6,925,637

 

 

 

 

 

 

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock, $.001 par value, authorized 66,666,667 shares; shares issued 2018 and    

  2017 49,185,581

 

 

49

 

 

49

Additional paid-in capital

 

 

1,079,111

 

 

1,084,889

Accumulated deficit

 

 

(87,532)

 

 

(132,122)

Accumulated other comprehensive loss

 

 

(13,024)

 

 

(2,810)

Total stockholders’ equity before treasury stock

 

$

978,604

 

$

950,006

 

 

 

 

 

 

 

Common stock shares held in treasury at cost, 2018 325,272; 2017 500,638

 

 

(6,464)

 

 

(15,003)

Total stockholders’ equity

 

$

972,140

 

$

935,003

Total liabilities and stockholders’ equity

 

$

7,889,385

 

$

7,860,640

 

 

 

 

 

 

 

Common shares outstanding at period end

 

 

48,860,309

 

 

48,684,943

See accompanying notes to unaudited Consolidated Financial Statements.

 

 

4


 

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

 

 

(dollars in thousands, except per share amounts)

Interest income:

 

 

 

 

 

 

 

Interest and fees on loans

 

$

186,839

 

$

138,595

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

Taxable interest income

 

 

21,250

 

 

12,339

 

Non-taxable interest income

 

 

3,630

 

 

2,521

 

Total interest income

 

 

211,719

 

 

153,455

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

21,837

 

 

8,058

 

Federal funds purchased and securities sold under agreements to repurchase

 

 

1,139

 

 

618

 

Short-term borrowings

 

 

1,257

 

 

521

 

Long-term debt

 

 

622

 

 

421

 

Senior notes

 

 

1,199

 

 

562

 

Subordinated notes

 

 

2,379

 

 

1,098

 

Junior subordinated debt owed to unconsolidated trusts

 

 

2,383

 

 

1,857

 

Total interest expense

 

 

30,816

 

 

13,135

 

Net interest income

 

 

180,903

 

 

140,320

 

Provision for loan losses

 

 

4,024

 

 

2,494

 

Net interest income after provision for loan losses

 

 

176,879

 

 

137,826

 

Non-interest income:

 

 

 

 

 

 

 

Trust fees

 

 

20,573

 

 

17,088

 

Commissions and brokers’ fees, net

 

 

2,860

 

 

2,239

 

Remittance processing

 

 

10,588

 

 

8,581

 

Fees for customer services

 

 

21,576

 

 

18,658

 

Mortgage revenue

 

 

4,488

 

 

8,430

 

Security gains, net

 

 

160

 

 

1,143

 

Other income

 

 

6,896

 

 

4,774

 

Total non-interest income

 

 

67,141

 

 

60,913

 

Non-interest expense:

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

 

80,315

 

 

67,448

 

Net occupancy expense of premises

 

 

11,271

 

 

10,025

 

Furniture and equipment expenses

 

 

5,418

 

 

5,123

 

Data processing

 

 

12,391

 

 

11,348

 

Amortization of intangible assets

 

 

4,450

 

 

3,675

 

Other expense

 

 

30,429

 

 

23,707

 

Total non-interest expense

 

 

144,274

 

 

121,326

 

Income before income taxes

 

 

99,746

 

 

77,413

 

Income taxes

 

 

26,108

 

 

26,980

 

Net income

 

$

73,638

 

$

50,433

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.51

 

$

1.24

 

Diluted earnings per common share

 

$

1.50

 

$

1.23

 

Dividends declared per share of common stock

 

$

0.60

 

$

0.54

 

See accompanying notes to unaudited Consolidated Financial Statements.

5


 

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended September 30, 2018 and 2017

(Unaudited)

 

 

 

 

 

 

 

 

    

2018

    

2017

 

 

(dollars in thousands, except per share amounts)

Interest income:

 

 

 

 

 

 

Interest and fees on loans

 

$

63,589

 

$

56,762

Interest and dividends on investment securities:

 

 

 

 

 

 

Taxable interest income

 

 

8,006

 

 

4,689

Non-taxable interest income

 

 

1,166

 

 

1,068

Total interest income

 

 

72,761

 

 

62,519

Interest expense:

 

 

 

 

 

 

Deposits

 

 

8,946

 

 

3,851

Federal funds purchased and securities sold under agreements to repurchase

 

 

426

 

 

291

Short-term borrowings

 

 

324

 

 

447

Long-term debt

 

 

245

 

 

141

Senior notes

 

 

400

 

 

400

Subordinated notes

 

 

792

 

 

799

Junior subordinated debt owed to unconsolidated trusts

 

 

854

 

 

649

Total interest expense

 

 

11,987

 

 

6,578

Net interest income

 

 

60,774

 

 

55,941

Provision for loan losses

 

 

758

 

 

1,494

Net interest income after provision for loan losses

 

 

60,016

 

 

54,447

Non-interest income:

 

 

 

 

 

 

Trust fees

 

 

6,324

 

 

5,071

Commissions and brokers’ fees, net

 

 

881

 

 

766

Remittance processing

 

 

3,630

 

 

2,877

Fees for customer services

 

 

7,340

 

 

6,577

Mortgage revenue

 

 

1,272

 

 

3,526

Security gains, net

 

 

 —

 

 

290

Other income

 

 

2,406

 

 

1,730

Total non-interest income

 

 

21,853

 

 

20,837

Non-interest expense:

 

 

 

 

 

 

Salaries, wages and employee benefits

 

 

26,024

 

 

25,497

Net occupancy expense of premises

 

 

3,761

 

 

3,714

Furniture and equipment expenses

 

 

1,715

 

 

1,785

Data processing

 

 

4,016

 

 

5,113

Amortization of intangible assets

 

 

1,445

 

 

1,286

Other expense

 

 

8,968

 

 

9,544

Total non-interest expense

 

 

45,929

 

 

46,939

Income before income taxes

 

 

35,940

 

 

28,345

Income taxes

 

 

9,081

 

 

9,561

Net income

 

$

26,859

 

$

18,784

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.55

 

$

0.41

Diluted earnings per common share

 

$

0.55

 

$

0.41

Dividends declared per share of common stock

 

$

0.20

 

$

0.18

See accompanying notes to unaudited Consolidated Financial Statements.

 

 

6


 

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(dollars in thousands)

 

Net income

 

$

26,859

 

$

18,784

 

$

73,638

 

$

50,433

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net (losses) gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net holding (losses) gains arising during period

 

 

(3,020)

 

 

563

 

 

(13,280)

 

 

1,864

 

Reclassification adjustment for gains included in net income

 

 

 —

 

 

(290)

 

 

(160)

 

 

(1,143)

 

Other comprehensive (loss) income, before tax

 

 

(3,020)

 

 

273

 

 

(13,440)

 

 

721

 

Income tax (benefit) expense related to items of other comprehensive income

 

 

(861)

 

 

119

 

 

(3,831)

 

 

298

 

Other comprehensive (loss) income, net of tax

 

 

(2,159)

 

 

154

 

 

(9,609)

 

 

423

 

Comprehensive income

 

$

24,700

 

$

18,938

 

$

64,029

 

$

50,856

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

 

7


 

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Common

 

Paid-in

 

Accumulated

 

Other

 

Treasury

 

 

 

 

    

Stock

    

Capital

    

(Deficit)

    

Income (loss)

    

Stock

    

Total

Balance, December 31, 2016

 

$

39

 

$

781,716

 

$

(163,689)

 

$

36

 

$

(23,788)

 

$

594,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

50,433

 

 

 —

 

 

 —

 

 

50,433

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

423

 

 

 —

 

 

423

Issuance of treasury stock for employee stock purchase plan

 

 

 —

 

 

(452)

 

 

 —

 

 

 —

 

 

841

 

 

389

Net issuance of treasury stock for restricted stock unit vesting and related tax benefit

 

 

 —

 

 

(5,221)

 

 

 —

 

 

 —

 

 

4,862

 

 

(359)

Net issuance of stock options exercised net of shares redeemed

 

 

 —

 

 

(923)

 

 

 —

 

 

 —

 

 

1,088

 

 

165

Stock issued for acquisition of First Community, net of stock issuance costs

 

 

 7

 

 

211,575

 

 

 —

 

 

 —

 

 

 —

 

 

211,582

Cash dividends common stock at $0.54 per share

 

 

 —

 

 

 —

 

 

(21,944)

 

 

 —

 

 

 —

 

 

(21,944)

Stock dividend equivalents restricted stock units at $0.54 per share

 

 

 —

 

 

342

 

 

(342)

 

 

 —

 

 

 —

 

 

 —

Stock dividend accrued on restricted stock awards assumed with the Pulaski Financial

  Corp. (“Pulaski”) acquisition at $0.54 per share

 

 

 —

 

 

 —

 

 

(10)

 

 

 —

 

 

 —

 

 

(10)

Return of 28,648 equity trust shares

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(860)

 

 

(860)

Stock based employee compensation

 

 

 —

 

 

1,935

 

 

 —

 

 

 —

 

 

 —

 

 

1,935

Balance, September 30, 2017

 

$

46

 

$

988,972

 

$

(135,552)

 

$

459

 

$

(17,857)

 

$

836,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

49

 

$

1,084,889

 

$

(132,122)

 

$

(2,810)

 

$

(15,003)

 

$

935,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

73,638

 

 

 —

 

 

 —

 

 

73,638

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

(9,609)

 

 

 —

 

 

(9,609)

Tax Cuts and Jobs Act (“TCJA”) of 2017 reclassification

 

 

 —

 

 

 —

 

 

605

 

 

(605)

 

 

 —

 

 

 —

Issuance of treasury stock for employee stock purchase plan

 

 

 —

 

 

(295)

 

 

 —

 

 

 —

 

 

724

 

 

429

Net issuance of treasury stock for restricted stock unit vesting and related tax benefit

 

 

 —

 

 

(6,059)

 

 

 —

 

 

 —

 

 

4,924

 

 

(1,135)

Net issuance of stock options exercised net of shares redeemed

 

 

 —

 

 

(2,505)

 

 

 —

 

 

 —

 

 

2,891

 

 

386

Cash dividends common stock at $0.60 per share

 

 

 —

 

 

 —

 

 

(29,238)

 

 

 —

 

 

 —

 

 

(29,238)

Stock dividend equivalents restricted stock units at $0.60 per share

 

 

 —

 

 

415

 

 

(415)

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 

 —

 

 

2,666

 

 

 —

 

 

 —

 

 

 —

 

 

2,666

Balance, September 30, 2018

 

$

49

 

$

1,079,111

 

$

(87,532)

 

$

(13,024)

 

$

(6,464)

 

$

972,140

See accompanying notes to unaudited Consolidated Financial Statements.

 

 

8


 

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

 

 

 

 

 

 

2018

    

2017

 

(dollars in thousands)

Cash Flows from Operating Activities

 

 

 

 

 

Net income

$

73,638

 

$

50,433

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Stock-based and non-cash compensation

 

2,666

 

 

1,935

Depreciation

 

7,158

 

 

6,084

Amortization of intangible assets

 

4,450

 

 

3,675

Premises and equipment impairment

 

817

 

 

 —

Provision for loan losses

 

4,024

 

 

2,494

Provision for deferred income taxes

 

4,696

 

 

(3,480)

Amortization of security premiums and discounts, net

 

6,545

 

 

4,172

Accretion of premiums and discounts on time deposits and trust preferred securities, net

 

(82)

 

 

(232)

Accretion of premiums and discounts on portfolio loans, net

 

(8,615)

 

 

(6,329)

Security gains, net

 

(160)

 

 

(1,143)

Change in equity securities, net

 

(2,699)

 

 

 —

Gain on sales of mortgage loans, net of origination costs

 

(7,805)

 

 

(36,911)

Mortgage loans originated for sale

 

(336,169)

 

 

(1,166,083)

Proceeds from sales of mortgage loans

 

406,205

 

 

1,314,779

Net losses (gains) on disposition of premises and equipment

 

186

 

 

(57)

Increase in cash surrender value of bank owned life insurance

 

(926)

 

 

(1,604)

Change in assets and liabilities:

 

 

 

 

 

(Increase) decrease in other assets

 

(3,627)

 

 

14,049

Decrease in other liabilities

 

(7,215)

 

 

(5,513)

Increase in interest payable

 

1,849

 

 

1,650

Decrease in income taxes receivable

 

2,200

 

 

1,435

Net cash provided by operating activities

$

147,136

 

$

179,354

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from sales of securities classified available for sale

 

 —

 

 

134,515

Proceeds from sales of securities classified equity

 

920

 

 

 —

Proceeds from maturities of securities classified available for sale

 

115,522

 

 

154,435

Proceeds from sales of securities classified held to maturity

 

31,815

 

 

 —

Proceeds from maturities of securities classified held to maturity

 

 —

 

 

6,358

Purchases of securities classified available for sale

 

(122,954)

 

 

(128,425)

Purchases of securities classified held to maturity

 

(217,767)

 

 

(185,201)

Net increase in loans

 

(104,195)

 

 

(98,040)

Proceeds from disposition of premises and equipment

 

26

 

 

622

Proceeds from sale of other real estate owned ("OREO") properties

 

4,275

 

 

4,069

Purchases of premises and equipment

 

(10,436)

 

 

(11,336)

Proceeds (purchases) from the redemption of Federal Home Loan Bank ("FHLB") stock, net

 

(2,611)

 

 

4,322

Net cash received in acquisitions

 

 —

 

 

29,947

Net cash used in investing activities

$

(305,405)

 

$

(88,734)

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FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

 

 

 

 

 

 

 

    

2018

    

2017

 

 

(dollars in thousands)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net increase (decrease) in certificates of deposit

 

$

216,313

 

$

(92,596)

Net increase in demand deposits, money market and savings accounts

 

 

(146,517)

 

 

(42,414)

Net increase (decrease)  in federal funds purchased and securities sold under agreements to

  repurchase

 

 

(48,660)

 

 

4,443

    Proceeds from short-term borrowings, net

 

 

 —

 

 

53,150

Repayment of long-term advances

 

 

(5,500)

 

 

(39,800)

Net proceeds from issuance of senior debt

 

 

 —

 

 

39,326

Net proceeds from issuance of subordinated debt

 

 

 —

 

 

58,986

Cash dividends paid

 

 

(29,238)

 

 

(21,971)

Proceeds from FHLB long term advances, net

 

 

(20,000)

 

 

 —

Value of shares surrendered upon vesting to satisfy tax withholding obligations of stock-based compensation

 

 

(1,136)

 

 

(1,975)

Proceeds from stock options exercised

 

 

387

 

 

165

Common stock issuance costs

 

 

 —

 

 

(259)

Net cash (used in) financing activities

 

 

(34,351)

 

 

(42,945)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(192,620)

 

 

47,675

Cash and cash equivalents, beginning of period

 

 

353,272

 

 

166,706

 

 

 

 

 

 

 

Cash and cash equivalents, ending of period

 

$

160,652

 

$

214,381

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Payments for:

 

 

 

 

 

 

Interest

 

$

26,665

 

$

11,485

Income taxes

 

 

20,127

 

 

19,369

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

Other real estate acquired in settlement of loans

 

 

3,706

 

 

477

See accompanying notes to unaudited Consolidated Financial Statements.

 

 

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FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1:  Accounting Policies

 

Basis of Financial Statement Presentation

 

When preparing these unaudited Consolidated Financial Statements of First Busey Corporation and its subsidiaries (“First Busey,” “Company,” “we,” or “our”), a Nevada corporation, we have assumed that you have read the audited Consolidated Financial Statements included in our 2017 Form 10-K.  These interim unaudited Consolidated Financial Statements serve to update our 2017 Form 10-K and may not include all information and notes necessary to constitute a complete set of Financial Statements. 

 

We prepared these unaudited Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the current period presentation.  These reclassifications did not have a material impact on our consolidated financial condition or results of operations.

 

In our opinion, the unaudited Consolidated Financial Statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

 

We have also considered the impact of subsequent events on these unaudited Consolidated Financial Statements.  On October 12, 2018 a return of capital and associated surplus to the Company from Busey Bank was executed as discussed in “Note 14: Capital” with no impact to capital for the unaudited Consolidated Financial Statements. In addition, on November 1, 2018, Busey Trust Company was merged with and into Busey Bank, with no impact to the unaudited Consolidated Financial Statements. Other than these events, there were no significant subsequent events for the quarter ended September 30, 2018 through the issuance date of these unaudited Consolidated Financial Statements that warranted adjustment to or disclosure in the unaudited Consolidated Financial Statements.

 

Use of Estimates

 

In preparing the accompanying unaudited Consolidated Financial Statements, the Company’s management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Financial Statements and the reported amounts of revenues and expenses for the reporting period.  Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the fair value of available for sale investment securities, the fair value of assets acquired and liabilities assumed in business combinations and the determination of the allowance for loan losses.

 

Recently Issued Accounting Standards

 

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).”  ASU 2014-09 outlines a single model for companies to use in accounting for revenue arising from contracts with customers and supersedes most prior revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and establishes additional disclosures.  The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has evaluated its non-interest income and the nature of its contracts with customers and determined that further disaggregation of revenue beyond what is presented in the accompanying unaudited Consolidated Financial Statements was not necessary.  The Company satisfies its performance obligations on its contracts with customers as services are rendered so there is limited judgment involved in applying Topic 606 that affects the determination of the timing and amount of revenue from contracts with customers. 

 

 

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Descriptions of the Company’s primary revenue generating activities that are within Topic 606, and are presented in the accompanying unaudited Consolidated Statements of Income as components of non-interest income, include trust fees, commission and brokers’ fees, net, remittance processing, and fees for customer services.  Trust fees and commission and brokers’ fees, net, represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and other fiduciary activities.  Also included are fees received from a third party broker-dealer as part of a revenue sharing agreement for fees earned from customers that the Company refers to the third party.  Revenue is recognized when the performance obligation is completed, which is generally monthly.  Remittance processing represents transaction-based fees for pay processing solutions such as online bill payments, lockbox and walk-in payments. Revenue is recognized when the performance obligation is completed, which is generally monthly.  Fees for customer services represents general service fees for monthly account maintenance and activity or transaction-based fees and consists of transaction-based revenue, time-based revenue, or item-based revenue. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. The adoption of this guidance on January 1, 2018 did not change the method in which non-interest income is recognized therefore a cumulative effect adjustment to retained earnings was not necessary.

 

ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 requires: equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets; eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Balance Sheet; and requires an entity to present separately in other comprehensive income (loss) the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk when the fair value option has been elected for the liability. ASU 2016-01 was effective on January 1, 2018 and the adoption of this guidance resulted in separate classification of equity securities previously included in available for sale securities on the Consolidated Financial Statements. There was no cumulative effect adjustment recorded with the adoption of this guidance.

 

ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to make a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for the effects of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate by the TCJA. The Company adopted this guidance in the first quarter of 2018 with no impact on total stockholders' equity or net income.

 

ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 intends to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the Consolidated Balance Sheet as a lease liability and a right-of-use asset. The guidance also requires qualitative and quantitative disclosures of the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, ASU 2018-11, "Leases (Topic 842): Targeted Improvements" was issued to allow companies to choose to recognize the cumulative effect of applying the new standard to leased assets and liabilities as an adjustment to the opening balance of retained earnings rather than recasting prior year results upon adoption of the standard. The Company is in the process of calculating the transition impact of the guidance on its Consolidated Financial Statements and related disclosures. Where the Company is a lessee, the Company expects an increase in assets and liabilities to record the right of use asset and the lease liability.

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ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 implements a change from the current impaired loss model to an expected credit loss model over the life of an instrument, including loans and securities held to maturity. The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods with those years. The Company has developed and is executing a project plan to implement this guidance. As part of that project plan, the Company will evaluate the impact this guidance will have on its Consolidated Financial Statements and related disclosures.

 

ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis which required an entity to determine the fair value of its assets and liabilities as of the impairment test date. Instead, ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit's fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. This guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 amends Topic 815 to reduce the cost and complexity of applying hedge accounting and expands the types of relationships that qualify for hedge accounting. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, requires all items that affect earnings to be presented in the same income statement line as the hedged item, provides for applying hedge accounting to additional hedging strategies, provides for new approaches to measuring the hedged item in fair value hedges of interest rate risk, and eases the requirements for effective testing and hedge documentation. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 removes, modifies, and adds certain disclosure requirements on fair value measurements. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The guidance has no impact on the Company’s Consolidated Financial Statements and is not expected to have a material impact on the Company’s required disclosures.

 

 

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Note 2:  Acquisitions

 

First Community Financial Partners, Inc.

 

On July 2, 2017, the Company completed its acquisition of First Community Financial Partners, Inc. (“First Community”), which was headquartered in Joliet, Illinois and its wholly owned bank subsidiary, First Community Financial Bank.  Founded in 2004, First Community operated nine banking centers in Will, DuPage and Grundy Counties, which encompass portions of the southwestern suburbs of Chicago.  The operating results of First Community are included with the Company’s results of operations since the date of acquisition.  First Busey operated First Community Financial Bank as a separate subsidiary from July 3, 2017 until November 3, 2017, when it was merged with and into Busey Bank.  At that time, First Community Financial Bank’s banking centers became banking centers of Busey Bank. 

 

Under the terms of the merger agreement with First Community, at the effective time of the acquisition, each share of First Community common stock issued and outstanding was converted into the right to receive 0.396 shares of the Company’s common stock, cash in lieu of fractional shares and $1.35 cash consideration per share.  The market value of the 7.2 million shares of First Busey common stock issued at the effective time of the acquisition was approximately $211.1 million based on First Busey’s closing stock price of $29.32 on June 30, 2017. In addition, certain options to purchase shares of First Community common stock that were outstanding at the acquisition date were converted into options to purchase shares of First Busey common stock, adjusted for the 0.44 option exchange ratio, and the fair value was included in the purchase price.  Further, the purchase price included cash payouts relating to unconverted stock options and restricted stock units outstanding as of the acquisition date.

 

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition.  The total consideration paid, which was used to determine the amount of goodwill resulting from the transaction, also included the fair value of outstanding First Community stock options that were converted into options to purchase common shares of First Busey and cash paid out relating to stock options and restricted stock units not converted.  As the total consideration paid for First Community exceeded the net assets acquired, goodwill of $116.0 million was recorded as a result of the acquisition.  Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and the greater revenue opportunities from the Company’s broader service capabilities in the Chicagoland area, is not tax deductible, and was assigned to the Banking operating segment.

 

First Busey did not incur any expenses related to the acquisition of First Community for the three months ended September 30, 2018. First Busey incurred $0.1 million in pre-tax expenses related to the acquisition of First Community for the nine months ended September 30, 2018, primarily for professional and legal fees. First Busey incurred $2.9 million and $3.7 million in pre-tax expenses related to the acquisition of First Community for the three and nine months ended September 30, 2017, respectively, primarily for professional and legal fees, data processing conversion expenses and restructuring expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.

 

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The following table presents the fair value of First Community assets acquired and liabilities assumed as of July 2, 2017 (dollars in thousands):

 

 

 

 

 

    

 

 

 

As Recorded by

 

    

First Busey

Assets acquired:

 

  

 

Cash and cash equivalents

 

$

60,686

Securities

 

 

165,843

Loans held for sale

 

 

905

Portfolio loans

 

 

1,096,583

Premises and equipment

 

 

18,094

OREO

 

 

722

Other intangible assets

 

 

13,979

Other assets

 

 

41,755

Total assets acquired

 

 

1,398,567

 

 

 

 

Liabilities assumed:

 

 

  

Deposits

 

 

1,134,355

Other borrowings

 

 

125,751

Other liabilities

 

 

11,862

Total liabilities assumed

 

 

1,271,968

 

 

 

 

Net assets acquired

 

$

126,599

 

 

 

 

Consideration paid:

 

 

  

Cash

 

$

24,557

Cash payout of options and restricted stock units

 

 

6,182

Common stock

 

 

211,120

Fair value of stock options assumed

 

 

722

Total consideration paid

 

 

242,581

 

 

 

 

Goodwill

 

$

115,982

 

The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses.  Purchased credit-impaired (“PCI”) loans were accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality.  As of the acquisition date, the aggregate principal outstanding and aggregate fair value of the acquired performing loans, including loans held for sale, totaled $1.1 billion.  The difference between the aggregate principal balance outstanding and aggregate fair value of $14.4 million is expected to be accreted over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method.  As of the acquisition date, the aggregate principal balance outstanding of PCI loans totaled $17.9 million and the aggregate fair value of PCI loans totaled $12.5 million, which became such loans’ new carrying value.  At September 30, 2018, PCI loans related to this transaction with a carrying value of $2.7 million were outstanding, with the decrease relating to collections and a loan sale.

 

 

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For PCI loans, the difference between contractually required payments at the acquisition date and the cash flow expected to be collected is referred to as the non-accretable difference.  Further, the excess of cash flows expected at acquisition over the fair value is referred to as the accretable yield.  The accretable yield, as of the acquisition date, of $0.6 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method; however, $0.2 million of the accretable yield was accelerated in 2017 as a result of collections of PCI loan balances so the full balance will be recognized by December 2018.

 

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2017, as if the acquisition had occurred January 1, 2017.  The pro forma results combine the historical results of First Community into the Company's unaudited Consolidated Statements of Income, including the impact of purchase accounting adjustments for loan discount accretion, intangible assets amortization and deposit accretion, net of taxes.  The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2017.  No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the merger related expenses that have been recognized are included in net income in the table below (dollars in thousands, except per share amount):

 

 

 

 

 

 

 

Pro Forma

 

 

Nine Months Ended

 

    

September 30, 2017

Total revenues (net interest income plus  non-interest income)

 

$

231,301

Net income

 

 

56,348

Diluted earnings per common share

 

 

1.23

 

Mid Illinois Bancorp, Inc.

 

On October 1, 2017, the Company completed its acquisition of Mid Illinois Bancorp, Inc. (“Mid Illinois”) and its wholly owned bank subsidiary South Side Trust & Savings Bank of Peoria (“South Side Bank”), under which each share of Mid Illinois common stock issued and outstanding as of the effective time was converted into, at the election of the stockholder the right to receive, either (i) $227.94 in cash, (ii) 7.5149 shares of the Company’s common stock, or (iii) mixed consideration of $68.38 in cash and 5.2604 shares of the Company’s common stock, subject to certain adjustments and proration.  In the aggregate, total consideration consisted of 70% stock and 30% cash.  Mid Illinois stockholders electing the cash consideration option were subject to proration under the terms of the merger agreement with Mid Illinois and ultimately received a mixture of cash and stock consideration.  First Busey operated South Side Bank as a separate bank subsidiary from October 2, 2017 until March 16, 2018, when it was merged with and into Busey Bank.  At that time, South Side Bank’s banking centers became banking centers of Busey Bank.

 

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition.  An adjustment to the fair value was recorded in the first quarter of 2018 as additional information became available.  As the total consideration paid for Mid Illinois exceeded the net assets acquired, goodwill of $48.9 million was recorded as a result of the acquisition.  Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and expansion within the greater Peoria area, is not tax deductible, and was assigned to the Banking operating segment.

 

First Busey did not incur any expenses related to the acquisition of Mid Illinois for the three months ended September 30, 2018.  First Busey incurred $3.1 million of pre-tax expenses related to the acquisition of Mid Illinois for the nine months ended September 30, 2018, primarily for salaries, wages and employee benefits expense, professional and legal fees and data conversion expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.  First Busey incurred $0.2 million and $0.4 million in pre-tax expenses related to the acquisition of Mid Illinois for the three and nine months ended September 30, 2017, respectively, primarily for legal fees, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.

 

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Table of Contents

The following table presents the fair value of Mid Illinois assets acquired and liabilities assumed as of October 1, 2017 (dollars in thousands):

 

 

 

 

 

    

 

 

 

As Recorded by

 

    

First Busey

Assets acquired:

 

  

 

Cash and cash equivalents

 

$

39,443

Securities

 

 

208,003

Loans held for sale

 

 

5,031

Portfolio loans

 

 

356,651

Premises and equipment

 

 

16,551

Other intangible assets

 

 

11,531

Other assets

 

 

29,564

Total assets acquired

 

 

666,774

 

 

 

 

Liabilities assumed:

 

 

 

Deposits

 

 

505,917

Other borrowings

 

 

61,040

Other liabilities

 

 

10,497

Total liabilities assumed

 

 

577,454

 

 

 

 

Net assets acquired

 

$

89,320

 

 

 

 

Consideration paid:

 

 

 

Cash

 

$

40,507

Common stock

 

 

97,702

Total consideration paid

 

 

138,209

 

 

 

 

Goodwill

 

$

48,889

 

The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses.  Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses.  PCI loans were accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality.  As of the acquisition date, the aggregate principal outstanding was $362.4 million and aggregate fair value of the acquired performing loans was $357.0 million, including loans held for sale.  The difference between the aggregate principal balance outstanding and aggregate fair value of $5.4 million is expected to be accreted over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method.  As of the acquisition date, the aggregate principal balance outstanding of PCI loans totaled $7.6 million and the aggregate fair value of PCI loans totaled $4.7 million, which became such loans’ new carrying value.  At September 30, 2018, PCI loans related to this transaction with a carrying value of $0.1 million were outstanding, with the decrease primarily relating to loan sales.  For PCI loans, the difference between contractually required payments at the acquisition date and the cash flow expected to be collected is referred to as the non-accretable difference.  Further, the excess of cash flows expected at acquisition over the fair value is referred to as the accretable yield.  The accretable yield, as of the acquisition date, of $0.1 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method; however, this was accelerated in 2018 due to loan sales of PCI loans.

 

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The Company had $4.5 million of banking center real estate in the Peoria market at September 30, 2018 that was no longer in use and was classified as bank properties held for sale, which was recorded at the lower of amortized cost or estimated fair value less estimated cost to sell.  The Company recognized an impairment charge of $0.8 million in the second quarter of 2018 related to these properties, resulting in a net amount of bank properties held for sale of $3.7 million at September 30, 2018 which is included in premises and equipment, net.

 

The Banc Ed Corp.

 

On August 21, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Banc Ed Corp., a Delaware corporation (“Banc Ed”), pursuant to which Banc Ed will merge into First Busey, with First Busey as the surviving corporation (the “Merger”).  It is anticipated that TheBANK of Edwardsville, Banc Ed’s wholly-owned bank subsidiary (“TheBANK”), will be merged with and into First Busey’s bank subsidiary, Busey Bank, at a date following the completion of the holding company merger. At the time of the bank merger, TheBANK’s banking offices will become branches of Busey Bank.  The Merger is anticipated to be completed in the fourth quarter of 2018 or early in the first quarter of 2019, and is subject to the satisfaction of customary closing conditions in the Merger Agreement and the approval of the appropriate regulatory authorities and of the stockholders of Banc Ed.  As of September 30, 2018, Banc Ed had total consolidated assets of $1.8 billion, total loans of $914.5 million and total deposits of $1.6 billion.

 

TheBANK was founded in 1868 and is a privately held commercial bank headquartered in Edwardsville, Illinois.  The partnership will enhance First Busey’s existing deposit, commercial banking and wealth management presence in the greater St. Louis Missouri-Illinois Metropolitan Statistical Area. Under the terms of the Merger Agreement, Banc Ed stockholders will have the right to receive 8.2067 shares of common stock of First Busey and $111.53 in cash for each share of common stock of Banc Ed, with total consideration to consist of approximately 70% stock and 30% cash.  Please reference the Company’s Form 8-K, filed on August 22, 2018 for additional information regarding our pending acquisition of Banc Ed.

 

This transaction will be accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged will be recorded at estimated fair values on the date of acquisition.  Fair values are subject to refinement for up to one year after the closing date.

 

First Busey incurred $0.2 million in pre-tax expenses related to the planned acquisition of Banc Ed for the three and nine months ended September 30, 2018, primarily for legal fees, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements. The operating results of Banc Ed and TheBANK are not included in the accompanying unaudited Consolidated Financial Statements. 

 

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Note 3:  Securities

 

The table below provides the amortized cost, unrealized gains and losses and fair values of securities summarized by major category (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2018:

    

Cost

    

Gains

    

Losses

    

Value

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

61,066

 

$

 —

 

$

(1,212)

 

$

59,854

Obligations of U.S. government corporations and agencies

 

 

91,767

 

 

 5

 

 

(2,106)

 

 

89,666

Obligations of states and political subdivisions

 

 

245,459

 

 

315

 

 

(3,849)

 

 

241,925

Residential mortgage-backed securities

 

 

342,421

 

 

207

 

 

(11,046)

 

 

331,582

Corporate debt securities

 

 

140,884

 

 

19

 

 

(549)

 

 

140,354

Total

 

$

881,597

 

$

546

 

$

(18,762)

 

$

863,381

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

    

 

 

    

 

 

    

 

 

    

 

 

Obligations of states and political subdivisions

 

$

36,689

 

$

13

 

$

(301)

 

$

36,401

Commercial  mortgage-backed securities

 

 

60,172

 

 

 —

 

 

(1,705)

 

 

58,467

Residential mortgage-backed securities

 

 

529,389

 

 

 —

 

 

(12,955)

 

 

516,434

Total

 

$

626,250

 

$

13

 

$

(14,961)

 

$

611,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2017:

    

Cost

    

Gains

    

Losses

    

Value

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

60,829

 

$

 7

 

$

(488)

 

$

60,348

Obligations of U.S. government corporations and agencies

 

 

104,807

 

 

 1

 

 

(1,143)

 

 

103,665

Obligations of states and political subdivisions

 

 

280,216

 

 

1,160

 

 

(1,177)

 

 

280,199

Residential mortgage-backed securities

 

 

400,661

 

 

612

 

 

(3,837)

 

 

397,436

Corporate debt securities

 

 

30,946

 

 

132

 

 

(44)

 

 

31,034

Total

 

$

877,459

 

$

1,912

 

$

(6,689)

 

$

872,682

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

41,300

 

$

228

 

$

(64)

 

$

41,464

Commercial mortgage-backed securities

 

 

60,474

 

 

41

 

 

(297)

 

 

60,218

Residential mortgage-backed securities

 

 

341,776

 

 

25

 

 

(2,431)

 

 

339,370

Total

 

$

443,550

 

$

294

 

$

(2,792)

 

$

441,052

 

Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity.  Any decision to sell a security classified as available for sale would be based on factors including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations or other similar factors. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. Securities classified as held to maturity are those debt securities that the Company intends to hold to maturity. Accordingly, they are carried at cost, adjusted for amortization of premiums and accretion of discounts.

 

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The Company held equity securities, consisting of money market mutual funds, with fair values of $7.3 million at September 30, 2018. The Company held equity securities, consisting of common stock and money market mutual funds, with fair values of $0.8 million and $4.6 million, respectively, at December 31, 2017. The Company recorded $0.1 million of unrealized losses in non-interest income in the accompanying unaudited Consolidated Financial Statements during the nine months ended September 30, 2018, related to the change in fair value of the common stock. The common stock was sold in the second quarter of 2018 and realized security gains recorded during the nine months ended September 30, 2018 were $0.2 million.

 

The amortized cost and fair value of debt securities as of September 30, 2018, by contractual maturity or pre-refunded date, are shown below.  Mortgages underlying mortgage-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government agencies and corporations (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

Held to maturity

 

    

Amortized

    

Fair

    

Amortized

    

Fair

 

    

Cost

    

Value

    

Cost

    

Value

Due in one year or less

 

$

86,344

 

$

86,041

 

$

9,858

 

$

9,837

Due after one year through five years

 

 

335,204

 

 

330,511

 

 

56,077

 

 

54,998

Due after five years through ten years

 

 

152,272

 

 

149,199

 

 

29,754

 

 

28,867

Due after ten years

 

 

307,777

 

 

297,630

 

 

530,561

 

 

517,600

Total

 

$

881,597

 

$

863,381

 

$

626,250

 

$

611,302

 

Realized gains and losses related to sales of available for sale securities are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Gross security gains

 

$

 —

 

$

290

 

$

 —

 

$

1,259

 

Gross security (losses)

 

 

 —

 

 

 —

 

 

 —

 

 

(116)

 

Security gains, net(1)

 

$

 —

 

$

290

 

$

 —

 

$

1,143

 


(1)

Security gains, net reported on the Consolidated Statements of Income in 2018 relate to the sale of equity securities as noted above.

 

The tax provision for the net realized gains and losses was $0.1 million for the three months ended September 30, 2017. The tax provision for the net realized gains and losses was $0.4 million for the nine months ended September 30, 2017. 

 

Investment securities with carrying amounts of $598.7 million and $638.2 million on September 30, 2018 and December 31, 2017, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

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Information pertaining to securities with gross unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuous unrealized

 

Continuous unrealized

 

 

 

 

 

 

 

losses existing for less than

 

losses existing for greater

 

 

 

 

 

 

 

12 months, gross

 

than 12 months, gross

 

Total, gross

 

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

September 30, 2018:

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

35,883

 

$

(471)

 

$

23,971

 

$

(741)

 

$

59,854

 

$

(1,212)

Obligations of U.S. government corporations and

  agencies

 

29,899

 

 

(707)

 

 

58,946

 

 

(1,399)

 

 

88,845

 

 

(2,106)

Obligations of states and political subdivisions

 

186,959

 

 

(3,067)

 

 

36,612

 

 

(782)

 

 

223,571

 

 

(3,849)

Residential mortgage-backed securities

 

204,979

 

 

(5,089)

 

 

114,013

 

 

(5,957)

 

 

318,992

 

 

(11,046)

Corporate debt securities

 

138,019

 

 

(546)

 

 

47

 

 

(3)

 

 

138,066

 

 

(549)

Total temporarily impaired securities

$

595,739

 

$

(9,880)

 

$

233,589

 

$

(8,882)

 

$

829,328

 

$

(18,762)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

$

31,932

 

$

(284)

 

$

911

 

$

(17)

 

$

32,843

 

$

(301)

Commercial mortgage-backed securities

 

49,853

 

 

(1,385)

 

 

8,614

 

 

(320)

 

 

58,467

 

 

(1,705)

Residential mortgage-backed securities

 

449,798

 

 

(9,550)

 

 

66,636

 

 

(3,405)

 

 

516,434

 

 

(12,955)

Total temporarily impaired securities

$

531,583

 

$

(11,219)

 

$

76,161

 

$

(3,742)

 

$

607,744

 

$

(14,961)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuous unrealized

 

Continuous unrealized

 

 

 

 

 

 

 

 losses existing for less than

 

 losses existing for greater

 

 

 

 

 

 

 

 12 months, gross

 

than 12 months, gross

 

Total, gross

 

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

December 31, 2017:

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

59,773

 

$

(488)

 

$

 —

 

$

 —

 

$

59,773

 

$

(488)

Obligations of U.S. government corporations and

  agencies

 

78,610

 

 

(636)

 

 

24,831

 

 

(507)

 

 

103,441

 

 

(1,143)

Obligations of states and political subdivisions

 

162,213

 

 

(1,027)

 

 

12,045

 

 

(150)

 

 

174,258

 

 

(1,177)

Residential mortgage-backed securities

 

223,261

 

 

(1,428)

 

 

90,930

 

 

(2,409)

 

 

314,191

 

 

(3,837)

Corporate debt securities

 

16,176

 

 

(44)

 

 

 —

 

 

 —

 

 

16,176

 

 

(44)

Total temporarily impaired securities

$

540,033

 

$

(3,623)

 

$

127,806

 

$

(3,066)

 

$

667,839

 

$

(6,689)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

$

17,939

 

$

(64)

 

$

 —

 

$

 —

 

$

17,939

 

$

(64)

Commercial mortgage-backed securities

 

44,514

 

 

(214)

 

 

2,374

 

 

(83)

 

 

46,888

 

 

(297)

Residential mortgage-backed securities

 

277,826

 

 

(2,431)

 

 

 —

 

 

 —

 

 

277,826

 

 

(2,431)

Total temporarily impaired securities

$

340,279

 

$

(2,709)

 

$

2,374

 

$

(83)

 

$

342,653

 

$

(2,792)

 

Securities are periodically evaluated for other-than-temporary impairment (“OTTI”).   The total number of securities in the investment portfolio in an unrealized loss position as of September 30, 2018 was 897, and represented an unrealized loss of 2.29% of the aggregate carrying value. As of September 30, 2018, the Company does not intend to sell such securities and it is more-likely-than-not that the Company will recover the amortized cost prior to being required to sell the securities.  Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be OTTI at September 30, 2018.

 

The Company had available for sale obligations of state and political subdivisions with a fair value of $241.9 million and $280.2 million as of September 30, 2018 and December 31, 2017, respectively.  In addition, the Company had held to maturity obligations of state and political subdivisions with a fair value of $36.4 million and $41.5 million as of September 30, 2018 and December 31, 2017, respectively. 

 

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As of September 30, 2018, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $236.2 million of general obligation bonds and $42.1 million of revenue bonds issued by 386 issuers, primarily consisting of states, counties, cities, towns, villages and school districts.  The Company held investments in general obligation bonds in 35 states, including nine states in which the aggregate fair value exceeded $5.0 million.  The Company held investments in revenue bonds in 20 states, including three states where the aggregate fair value exceeded $5.0 million.

 

As of December 31, 2017, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $271.7 million of general obligation bonds and $50.0 million of revenue bonds issued by 446 issuers, primarily consisting of states, counties, cities, towns, villages and school districts.  The Company held investments in general obligation bonds in 36 states (including the District of Columbia), including nine states in which the aggregate fair value exceeded $5.0 million.  The Company held investments in revenue bonds in 22 states, including three states where the aggregate fair value exceeded $5.0 million.

 

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuers’ state (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018:

    

    

 

 

    

    

 

    

Average Exposure

 

Number of

 

 

Amortized

 

Fair

 

Per Issuer

U.S. State

Issuers

    

Cost

    

Value

    

(Fair Value)

Illinois

89

 

$

87,902

 

$

86,739

 

$

975

Wisconsin

27

 

 

18,971

 

 

18,690

 

 

692

Texas

43

 

 

24,893

 

 

24,431

 

 

568

Michigan

25

 

 

13,589

 

 

13,620

 

 

545

Ohio

20

 

 

14,665

 

 

14,505

 

 

725

Pennsylvania

15

 

 

9,250

 

 

9,197

 

 

613

New Jersey

12

 

 

5,576

 

 

5,525

 

 

460

Missouri

 9

 

 

5,556

 

 

5,472

 

 

608

California

 7

 

 

8,829

 

 

8,765

 

 

1,252

Other

85

 

 

50,153

 

 

49,223

 

 

579

Total general obligations bonds

332

 

$

239,384

 

$

236,167

 

$

711

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

    

    

 

    

    

 

    

Average Exposure

 

Number of

 

Amortized

 

Fair

 

Per Issuer

U.S. State

Issuers

    

Cost

    

Value

    

(Fair Value)

Illinois

97

 

$

95,340

 

$

95,344

 

$

983

Wisconsin

41

 

 

27,852

 

 

27,809

 

 

678

Texas

46

 

 

27,485

 

 

27,514

 

 

598

Michigan

34

 

 

19,641

 

 

19,849

 

 

584

Ohio

20

 

 

15,172

 

 

15,162

 

 

758

Pennsylvania

18

 

 

12,189

 

 

12,174

 

 

676

New Jersey

15

 

 

7,755

 

 

7,760

 

 

517

Missouri

10

 

 

5,759

 

 

5,747

 

 

575

Minnesota

 8

 

 

5,657

 

 

5,667

 

 

708

Other

92

 

 

54,649

 

 

54,633

 

 

594

Total general obligations bonds

381

 

$

271,499

 

$

271,659

 

$

713

 

The general obligation bonds are diversified across many issuers, with $4.9 million and $4.0 million being the largest exposure to a single issuer at September 30, 2018 and December 31, 2017, respectively.  Accordingly, as of September 30, 2018 and December 31, 2017, the Company did not hold general obligation bonds of any single issuer, the aggregate

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book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the general obligation bonds in the Company’s portfolio, 99.1% had been rated by at least one nationally recognized rating organization and 0.9% were unrated as of September 30, 2018.  Of the general obligation bonds in the Company’s portfolio, 99.3% had been rated by at least one nationally recognized rating organization and 0.7% were unrated, based on the aggregate fair value as of December 31, 2017.

 

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuers’ state (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018:

    

    

 

    

    

 

    

Average Exposure

 

Number of

 

Amortized

 

Fair

 

Per Issuer

U.S. State

Issuers

    

Cost

    

Value

    

(Fair Value)

Indiana

13

 

$

10,902

 

$

10,801

 

$

831

Missouri

 5

 

 

7,041

 

 

6,966

 

 

1,393

Illinois

 5

 

 

5,218

 

 

5,128

 

 

1,026

Other

31

 

 

19,603

 

 

19,264

 

 

621

Total revenue bonds

54

 

$

42,764

 

$

42,159

 

$

781

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

    

    

 

    

    

 

    

Average Exposure

 

Number of

 

Amortized

 

Fair

 

Per Issuer

U.S. State

Issuers

    

Cost

    

Value

    

(Fair Value)

Indiana

14

 

$

12,001

 

$

12,054

 

$

861

Missouri

 6

 

 

7,376

 

 

7,336

 

 

1,223

Illinois

 7

 

 

6,477

 

 

6,456

 

 

922

Other

38

 

 

24,163

 

 

24,158

 

 

636

Total revenue bonds

65

 

$

50,017

 

$

50,004

 

$

769

 

The revenue bonds are diversified across many issuers and revenue sources with $3.5 million and $3.6 million being the largest exposure to a single issuer at each of September 30, 2018 and December 31, 2017, respectively.  Accordingly, as of September 30, 2018 and December 31, 2017, the Company did not hold revenue bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the revenue bonds in the Company's portfolio, 100.0% had been rated by at least one nationally recognized rating organization as of September 30, 2018. Of the revenue bonds in the Company’s portfolio, 99.4% had been rated by at least one nationally recognized rating organization and 0.6% were unrated, based on the fair value as of December 31, 2017.  Some of the primary types of revenue bonds held in the Company’s portfolio include: primary education or government building lease rentals secured by ad valorem taxes, utility systems secured by utility system net revenues, housing authorities secured by mortgage loans or principal receipts on mortgage loans, secondary education secured by student fees/tuitions, and pooled issuances (i.e. bond bank) consisting of multiple underlying municipal obligors.

 

At September 30, 2018, all of the Company’s obligations of state and political subdivision securities are owned by its subsidiary bank, which has adopted First Busey’s investment policy requiring that state and political subdivision securities purchased be investment grade.  Such investment policy also limits the amount of rated state and political subdivision securities to an aggregate 100% of the subsidiary bank’s total capital (as defined by federal regulations) at the time of purchase and an aggregate 15% of total capital for unrated state and political subdivision securities issued by municipalities having taxing authority or located in counties/micropolitan statistical areas/metropolitan statistical areas in which an office is located.

 

All securities in First Busey’s obligations of state and political subdivision securities portfolio are subject to periodic review.  Factors that may be considered as part of monitoring of state and political subdivision securities include credit rating changes by nationally recognized rating organizations, market valuations, third-party municipal credit analysis, which may include indicative information regarding the issuer’s capacity to pay, market and economic data and such

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other factors as are available and relevant to the security or the issuer such as its budgetary position and sources, strength and stability of taxes and/or other revenue.

 

Note 4:  Loans held for sale

 

Loans held for sale totaled $32.6 million and $94.8 million at September 30, 2018 and December 31, 2017, respectively.  The amount of loans held for sale decreased from December 31, 2017, due to lower origination volumes and the timing of sales. Loans held for sale generate net interest income until loans are delivered to investors, at which point mortgage revenue will be recognized.

 

The following is a summary of mortgage revenue (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

 

    

2018

    

2017

    

2018

    

2017

    

Premiums received on sales of mortgage loans, including fair value adjustments

 

$

2,794

 

$

11,366

 

$

9,779

 

$

33,582

 

Less direct origination costs

 

 

(1,976)

 

 

(8,398)

 

 

(6,805)

 

 

(26,433)

 

Less provisions to liability for loans sold

 

 

(47)

 

 

(25)

 

 

(156)

 

 

(200)

 

Mortgage servicing revenues, net of servicing

  expense

 

 

501

 

 

583

 

 

1,670

 

 

1,481

 

Mortgage revenue

 

$

1,272

 

$

3,526

 

$

4,488

 

$

8,430

 

 

 

Note 5: Portfolio loans

 

The distribution of portfolio loans at September 30, 2018 and December 31, 2017 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

Commercial

 

$

1,461,186

 

$

1,414,631

Commercial real estate

 

 

2,371,868

 

 

2,354,684

Real estate construction

 

 

308,762

 

 

261,506

Retail real estate

 

 

1,453,266

 

 

1,460,801

Retail other

 

 

28,659

 

 

27,878

Portfolio loans

 

$

5,623,741

 

$

5,519,500

 

 

 

 

 

 

 

Less allowance for loan losses

 

 

52,743

 

 

53,582

Portfolio loans, net

 

$

5,570,998

 

$

5,465,918

 

Net deferred loan origination costs included in the table above were $5.6 million as of September 30, 2018 and $4.1 million as of December 31, 2017. Net accretable purchase accounting adjustments included in the table above reduced loans by $15.8 million as of September 30, 2018 and $23.6 million as of December 31, 2017. 

 

The Company believes that making sound loans is a necessary and desirable means of employing funds available for investment.  Authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations and duration of loans most appropriate for its business model and markets.  While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices.  Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or are loans to existing customers of the Bank.

 

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The Company attempts to utilize government-assisted lending programs, such as the Small Business Administration and United States Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals.  The loans are expected to be repaid primarily from cash flows of the borrowers, or from proceeds from the sale of selected assets of the borrowers.

 

Management reviews and approves the Company’s lending policies and procedures on a routine basis.  The policies for legacy First Community and South Side Bank loans were similar in nature to Busey Bank’s policies and the Company is migrating such loan production towards the Busey Bank policies.  Management routinely (at least quarterly) reviews the Company’s allowance for loan losses in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company’s underwriting standards are designed to encourage relationship banking rather than transactional banking.  Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship.  Additional significant underwriting factors beyond location, duration, a sound and profitable cash flow basis and the borrower’s character include the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral. 

 

At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s regulatory lending limit and the Company generally limits such relationships to amounts substantially less than the regulatory limit.  Loans to related parties, including executive officers and directors of the Company and its subsidiaries, are reviewed for compliance with regulatory guidelines by the Company’s board of directors at least annually.

 

The Company maintains an independent loan review department that reviews the loans for compliance with the Company’s loan policy on a periodic basis.  In addition, the loan review department reviews the risk assessments made by the Company’s credit department, lenders and loan committees. Results of these reviews are presented to management and the audit committee at least quarterly.

 

The Company’s lending activities can be summarized into five primary areas: commercial loans, commercial real estate loans, real estate construction loans, retail real estate loans, and retail other loans. A description of each of the lending areas can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The significant majority of the Company’s portfolio lending activity occurs in its Illinois and Missouri markets, with the remainder in the Indiana and Florida markets.

 

The Company utilizes a loan grading scale to assign a risk grade to all of its loans. A description of the general characteristics of each grade is as follows:

 

·

Pass- This category includes loans that are all considered strong credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that exceed industry standards and loan policy guidelines and loans that exhibit acceptable credit fundamentals.

 

·

Watch- This category includes loans on management’s “Watch List” and is intended to be utilized on a temporary basis for a pass grade borrower where a significant risk-modifying action is anticipated in the near future.

 

·

Special mention- This category is for “Other Assets Specially Mentioned” loans that have potential weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

 

·

Substandard- This category includes “Substandard” loans, determined in accordance with regulatory guidelines, for which the accrual of interest has not been stopped.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

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·

Doubtful- This category includes “Doubtful” loans that have all the characteristics of a “Substandard” loan with additional factors that make collection in full highly questionable and improbable. Such loans are placed on non-accrual status and may be dependent on collateral with a value that is difficult to determine.

 

All loans are graded at their inception.  Most commercial lending relationships that are $1.0 million or less are processed through an expedited underwriting process.  If the credit receives a pass grade, it is aggregated into a homogenous pool of either:  $0.35 million or less, or $0.35 million to $1.0 million. These pools are monitored on a regular basis and reviewed annually.  Most commercial loans greater than $1.0 million are included in a portfolio review at least annually. Commercial loans greater than $0.35 million that have a grading of special mention or worse are reviewed on a quarterly basis.  Interim reviews may take place if circumstances of the borrower warrant a more timely review. 

 

Portfolio loans in the highest grades, represented by the pass and watch categories, totaled $5.4 billion and $5.3 billion at September 30, 2018 and December 31, 2017, respectively.  Portfolio loans in the lowest grades, represented by the special mention, substandard and doubtful categories, totaled $279.0 million at September 30, 2018, compared to $193.8 million at December 31, 2017.

 

The following table is a summary of risk grades segregated by category of portfolio loans (excluding accretable purchase accounting adjustments and clearings) (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

 

    

 

    

Special

    

 

    

 

 

    

Pass

    

Watch

    

Mention

    

Substandard

    

Doubtful

Commercial

 

$

1,205,074

 

$

136,262

 

$

51,840

 

$

48,266

 

$

20,994

Commercial real estate

 

 

2,098,441

 

 

146,634

 

 

76,941

 

 

46,267

 

 

13,417

Real estate construction

 

 

289,134

 

 

14,977

 

 

3,110

 

 

1,923

 

 

21

Retail real estate

 

 

1,427,792

 

 

4,162

 

 

4,613

 

 

5,690

 

 

5,931

Retail other

 

 

28,919

 

 

 —

 

 

 —

 

 

 —

 

 

32

Total

 

$

5,049,360

 

$

302,035

 

$

136,504

 

$

102,146

 

$

40,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

 

    

 

    

Special

    

 

    

 

 

    

Pass

    

Watch

    

Mention

    

Substandard

    

Doubtful

Commercial

 

$

1,175,421

 

$

141,776

 

$

51,366

 

$

43,933

 

$

5,285

Commercial real estate

 

 

2,169,420

 

 

130,056

 

 

21,151

 

 

36,482

 

 

11,997

Real estate construction

 

 

212,952

 

 

41,292

 

 

3,880

 

 

3,071

 

 

608

Retail real estate

 

 

1,436,156

 

 

6,883

 

 

5,162

 

 

4,135

 

 

6,714

Retail other

 

 

28,300

 

 

 9

 

 

 —

 

 

 7

 

 

20

Total

 

$

5,022,249

 

$

320,016

 

$

81,559

 

$

87,628

 

$

24,624

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of the principal due.  Loans may be returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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A summary of portfolio loans that are past due and still accruing or on a non-accrual status is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

Loans past due, still accruing

 

Non-accrual

 

    

30-59 Days

    

60-89 Days

    

90+Days

    

 Loans

Commercial

 

$

284

 

$

13

 

$

100

 

$

20,994

Commercial real estate

 

 

1,123

 

 

86

 

 

 —

 

 

13,417

Real estate construction

 

 

280

 

 

651

 

 

 —

 

 

21

Retail real estate

 

 

4,111

 

 

1,478

 

 

264

 

 

5,931

Retail other

 

 

157

 

 

 6

 

 

 —

 

 

32

Total

 

$

5,955

 

$

2,234

 

$

364

 

$

40,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Loans past due, still accruing

 

Non-accrual

 

    

30-59 Days

    

60-89 Days

    

90+Days

    

 Loans

Commercial

 

$

1,615

 

$

323

 

$

1,808

 

$

5,285

Commercial real estate

 

 

1,856

 

 

2,737

 

 

 —

 

 

11,997

Real estate construction

 

 

 —

 

 

 —

 

 

 —

 

 

608

Retail real estate

 

 

4,840

 

 

1,355

 

 

933

 

 

6,714

Retail other

 

 

166

 

 

 5

 

 

 —

 

 

20

Total

 

$

8,477

 

$

4,420

 

$

2,741

 

$

24,624

 

A loan is classified as impaired when, based on current information and events, it is probable the Company will be unable to collect scheduled principal and interest payments when due according to the terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans graded substandard or doubtful and loans classified as a troubled debt restructuring (“TDR”) are reviewed by the Company for potential impairment.

 

If a loan is impaired, impairment is measured on a loan-by-loan basis for commercial and construction loans based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  PCI loans are considered impaired.  Large groups of smaller balance homogenous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment unless such loans are the subject of a restructuring agreement.

 

The gross interest income that would have been recorded in the three and nine months ended September 30, 2018 if impaired loans had been current in accordance with their original terms was $0.4 million and $1.1 million, respectively. The gross interest income that would have been recorded in the three and nine months ended September 30, 2017 if impaired loans had been current in accordance with their original terms was $0.4 million and $0.9 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant for the three and nine months ended September 30, 2018 and 2017.

 

The Company’s loan portfolio includes certain loans that have been modified in a TDR, where concessions have been granted to borrowers who have experienced financial difficulties. The Company will restructure a loan for its customer after evaluating whether the borrower is able to meet the terms of the loan over the long term, though unable to meet the terms of the loan in the near term due to individual circumstances.

 

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The Company considers the customer’s past performance, previous and current credit history, the individual circumstances surrounding the customer’s current difficulties and the customer’s plan to meet the terms of the loan in the future prior to restructuring the terms of the loan.  Generally, restructurings consist of short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief or forbearance (debt forgiveness).  A restructured loan that exceeds 90 days past due or is placed on non-accrual status is classified as non-performing. A summary of restructured loans is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

    

2017

In compliance with modified terms

 

$

8,695

 

$

9,873

30 — 89 days past due

 

 

 —

 

 

108

Included in non-performing loans

 

 

1,541

 

 

1,919

Total

 

$

10,236

 

$

11,900

 

All TDRs are considered to be impaired for purposes of assessing the adequacy of the allowance for loan losses and for financial reporting purposes.  When the Company modifies a loan in a TDR, it evaluates any possible impairment similar to other impaired loans based on present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  If the Company determines that the fair value of the TDR is less than the recorded investment in the loan, impairment is recognized through an allowance estimate in the period of the modification and in periods subsequent to the modification.

 

There were no loans classified as TDRs during the three months ended September 30, 2018.  Loans classified as TDRs during the nine months ended September 30, 2018 included one retail real estate modification for short-term interest rate relief, with a recorded investment of $0.1 million.

 

Loans classified as TDRs during the three months ended September 30, 2017 included one retail real estate modification for short-term interest rate relief, with a recorded investment of $0.2 million.   Loans classified as TDRs during the nine months ended September 30, 2017 included one commercial modification for short-term principal payment relief, with a recorded investment of $1.7 million, and two retail real estate modifications for short-term interest rate relief, with a recorded investment of $0.5 million.

 

The gross interest income that would have been recorded in the three and nine months ended September 30, 2018 and 2017 if TDRs had performed in accordance with their original terms compared with their modified terms was insignificant.

 

There were no TDRs that were entered into during the last twelve months that were subsequently classified as non-performing and had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual) during the three and nine months ended September 30, 2018.

 

There were no TDRs that were entered into during the prior twelve months that were subsequently classified as non-performing and had payment defaults during the three and nine months ended September 30, 2017.

 

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The following tables provide details of loans identified as impaired, segregated by category. The unpaid contractual principal balance represents the recorded balance prior to any partial charge-offs.  The recorded investment represents customer balances net of any partial charge-offs recognized on the loan.  The average recorded investment is calculated using the most recent four quarters (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Unpaid

    

Recorded

    

    

 

    

    

 

    

    

 

    

    

 

 

 

Contractual

 

Investment

 

Recorded

 

Total

 

 

 

 

Average

 

 

Principal

 

with No

 

Investment

 

Recorded

 

Related

 

Recorded

 

    

Balance

    

Allowance

    

with Allowance

    

Investment

    

Allowance

    

Investment

Commercial

 

$

24,479

 

$

9,518

 

$

11,713

 

$

21,231

 

$

3,691

 

$

11,395

Commercial real estate

 

 

19,994

 

 

12,851

 

 

6,197

 

 

19,048

 

 

1,572

 

 

18,528

Real estate

  construction

 

 

429

 

 

405

 

 

 —

 

 

405

 

 

 —

 

 

826

Retail real estate

 

 

13,395

 

 

12,103

 

 

100

 

 

12,203

 

 

100

 

 

14,361

Retail other

 

 

117

 

 

32

 

 

 —

 

 

32

 

 

 —

 

 

43

Total

 

$

58,414

 

$

34,909

 

$

18,010

 

$

52,919

 

$

5,363

 

$

45,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Unpaid

    

Recorded

    

    

 

    

    

 

    

    

 

    

    

 

 

 

Contractual

 

Investment

 

Recorded

 

Total

 

 

 

 

Average

 

 

Principal

 

with No

 

Investment

 

Recorded

 

Related

 

Recorded

 

    

Balance

    

Allowance

    

with Allowance

    

Investment

    

Allowance

    

Investment

Commercial

 

$

10,604

 

$

7,192

 

$

191

 

$

7,383

 

$

138

 

$

10,184

Commercial real estate

 

 

22,218

 

 

16,472

 

 

1,964

 

 

18,436

 

 

704

 

 

15,195

Real estate

  construction

 

 

1,040

 

 

1,016

 

 

 —

 

 

1,016

 

 

 —

 

 

692

Retail real estate

 

 

18,517

 

 

14,957

 

 

25

 

 

14,982

 

 

25

 

 

13,009

Retail other

 

 

40

 

 

20

 

 

 —

 

 

20

 

 

 —

 

 

44

Total

 

$

52,419

 

$

39,657

 

$

2,180

 

$

41,837

 

$

867

 

$

39,124

 

Management's evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral.  These estimates are affected by changing economic conditions and the economic prospects of borrowers.

 

Allowance for Loan Losses

 

The allowance for loan losses represents an estimate of the amount of probable losses believed to be inherent in the Company’s loan portfolio at the Consolidated Balance Sheet date.  The allowance for loan losses is calculated by segmenting loans geographically, by product type and by risk classification.  The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of the loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.  Overall, the Company believes the allowance methodology is consistent with prior periods and the balance was adequate to cover the estimated losses in the Company’s loan portfolio at September 30, 2018 and December 31, 2017. 

 

The general portion of the Company’s allowance contains two components: (i) a component for historical loss ratios, and (ii) a component for adversely graded loans.  The historical loss ratio component is an annualized loss rate calculated using a sum-of-years digits weighted 20-quarter historical average.

 

The Company’s component for adversely graded loans attempts to quantify the additional risk of loss inherent in the special mention and substandard portfolios.  The substandard portfolio has an additional allocation of 3.0% placed on such loans, which is an estimate of the additional loss inherent in these loan grades based upon a review of overall

29


 

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historical charge-offs.  As of September 30, 2018, the Company believed this reserve remained adequate. Special mention loans have an additional allocation of 1.0% placed on such loans, which is an estimate of the additional loss inherent in these loan grades. As of September 30, 2018, the Company believed this reserve remained adequate.

 

The specific portion of the Company’s allowance relates to loans that are impaired, which includes non-performing loans, TDRs and other loans determined to be impaired.  Impaired loans are excluded from the determination of the general allowance for non-impaired loans and are allocated specific reserves as discussed above.

 

Impaired loans are reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using a combination of observable inputs, including recent appraisals discounted for collateral specific changes and current market conditions, and unobservable inputs based on customized discounting criteria.

 

The general reserve quantitative allocation that is based upon historical charge off rates is adjusted for qualitative factors based on current general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things:  (i) Management & Staff; (ii) Loan Underwriting, Policy and Procedures; (iii) Internal/External Audit & Loan Review; (iv) Valuation of Underlying Collateral; (v) Macro and Local Economic Factors; (vi) Impact of Competition, Legal & Regulatory Issues; (vii) Nature and Volume of Loan Portfolio; (viii) Concentrations of Credit; (ix) Net Charge-Off Trends; and (x) Non-Accrual, Past Due and Classified Trends.  Management evaluates the probable impact from the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis.  Based on each component’s risk factor, a qualitative adjustment to the reserve may be applied to the appropriate loan categories.  The Company monitors its qualitative factors on a quarterly basis. 

 

The Company holds acquired loans from business combinations with uncollected principal balances.  These loans are carried net of a fair value adjustment for credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.  As the acquired loans renew, it is generally necessary to establish an allowance, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans.  The balance of all acquired loans as of September 30, 2018 totaled approximately $1.3 billion.

 

The following table details activity in the allowance for loan losses.  Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Three Months Ended September 30, 2018

 

    

    

 

    

Commercial

    

Real Estate

    

Retail Real

    

    

 

    

    

 

 

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

 

$

17,586

 

$

23,047

 

$

2,915

 

$

9,293

 

$

464

 

$

53,305

Provision for loan losses

 

 

2,388

 

 

(1,291)

 

 

(15)

 

 

(399)

 

 

75

 

 

758

Charged-off

 

 

(1,144)

 

 

(62)

 

 

 —

 

 

(695)

 

 

(286)

 

 

(2,187)

Recoveries

 

 

136

 

 

58

 

 

32

 

 

423

 

 

218

 

 

867

Ending balance

 

$

18,966

 

$

21,752

 

$

2,932

 

$

8,622

 

$

471

 

$

52,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Nine Months Ended September 30, 2018

 

    

    

 

    

Commercial

    

Real Estate

    

Retail Real

    

    

 

    

    

 

 

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

 

$

14,779

 

$

21,813

 

$

2,861

 

$

13,783

 

$

346

 

$

53,582

Provision for loan losses

 

 

7,111

 

 

1,154

 

 

22

 

 

(4,609)

 

 

346

 

 

4,024

Charged-off

 

 

(3,841)

 

 

(1,487)

 

 

(97)

 

 

(1,637)

 

 

(608)

 

 

(7,670)

Recoveries

 

 

917

 

 

272

 

 

146

 

 

1,085

 

 

387

 

 

2,807

Ending balance

 

$

18,966

 

$

21,752

 

$

2,932

 

$

8,622

 

$

471

 

$

52,743

 

30


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Three Months Ended September 30, 2017

 

    

 

 

    

Commercial

    

Real Estate

    

Retail Real

    

 

 

    

 

 

 

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

 

$

12,928

 

$

20,124

 

$

2,161

 

$

13,681

 

$

307

 

$

49,201

Provision for loan losses

 

 

336

 

 

418

 

 

64

 

 

654

 

 

22

 

 

1,494

Charged-off

 

 

(60)

 

 

(69)

 

 

 —

 

 

(482)

 

 

(74)

 

 

(685)

Recoveries

 

 

318

 

 

403

 

 

36

 

 

223

 

 

45

 

 

1,025

Ending balance

 

$

13,522

 

$

20,876

 

$

2,261

 

$

14,076

 

$

300

 

$

51,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Nine Months Ended September 30, 2017

 

 

 

 

 

Commercial

 

Real Estate

 

Retail Real

 

 

 

 

 

 

 

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

 

$

13,303

 

$

20,623

 

$

1,870

 

$

11,648

 

$

351

 

$

47,795

Provision for loan losses

 

 

(1,885)

 

 

1,477

 

 

 1

 

 

2,894

 

 

 7

 

 

2,494

Charged-off

 

 

(241)

 

 

(1,758)

 

 

(48)

 

 

(1,574)

 

 

(257)

 

 

(3,878)

Recoveries

 

 

2,345

 

 

534

 

 

438

 

 

1,108

 

 

199

 

 

4,624

Ending balance

 

$

13,522

 

$

20,876

 

$

2,261

 

$

14,076

 

$

300

 

$

51,035

 

The following table presents the allowance for loan losses and recorded investments in portfolio loans by category (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

    

 

 

    

Commercial

    

Real Estate

    

Retail Real

    

 

 

    

 

 

 

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for

  impairment

 

$

3,691

 

$

1,572

 

$

 —

 

$

100

 

$

 —

 

$

5,363

Loans collectively evaluated for

  impairment

 

 

15,275

 

 

20,180

 

 

2,932

 

 

8,522

 

 

471

 

 

47,380

Ending balance

 

$

18,966

 

$

21,752

 

$

2,932

 

$

8,622

 

$

471

 

$

52,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for

  impairment

 

$

20,807

 

$

16,752

 

$

405

 

$

12,047

 

$

32

 

$

50,043

Loans collectively evaluated for

  impairment

 

 

1,439,955

 

 

2,352,820

 

 

308,357

 

 

1,441,063

 

 

28,627

 

 

5,570,822

PCI loans evaluated for impairment

 

 

424

 

 

2,296

 

 

 —

 

 

156

 

 

 —

 

 

2,876

Ending balance

 

$

1,461,186

 

$

2,371,868

 

$

308,762

 

$

1,453,266

 

$

28,659

 

$

5,623,741

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

    

 

 

    

Commercial

    

Real Estate

    

Retail Real

    

 

 

    

 

 

 

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for

  impairment

 

$

138

 

$

704

 

$

 —

 

$

25

 

$

 —

 

$

867

Loans collectively evaluated for

  impairment

 

 

14,641

 

 

21,109

 

 

2,861

 

 

13,758

 

 

346

 

 

52,715

Ending balance

 

$

14,779

 

$

21,813

 

$

2,861

 

$

13,783

 

$

346

 

$

53,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for

  impairment

 

$

6,572

 

$

11,491

 

$

435

 

$

12,673

 

$

20

 

$

31,191

Loans collectively evaluated for

  impairment

 

 

1,407,248

 

 

2,336,248

 

 

260,490

 

 

1,445,819

 

 

27,858

 

 

5,477,663

PCI loans evaluated for impairment

 

 

811

 

 

6,945

 

 

581

 

 

2,309

 

 

 —

 

 

10,646

Ending balance

 

$

1,414,631

 

$

2,354,684

 

$

261,506

 

$

1,460,801

 

$

27,878

 

$

5,519,500

 

 

Note 6: OREO

 

OREO represents properties acquired through foreclosure or other proceedings in settlement of loans and is included in other assets in the accompanying Consolidated Balance Sheets.  OREO is held for sale and is recorded at the date of foreclosure at the fair value of the properties less estimated costs of disposal, which establishes a new cost basis.  Any adjustment to fair value at the time of transfer to OREO is charged to the allowance for loan losses.  Properties are evaluated regularly to ensure each recorded amount is supported by its current fair value, and valuation allowances to reduce the carrying amount due to subsequent declines in fair value less estimated costs to dispose are recorded as necessary.  Revenue, expense, gains and losses from the operations of foreclosed assets are included in operations.   At September 30, 2018, the Company held $0.2 million in commercial OREO, $0.9 million in residential OREO and an insignificant amount of other repossessed assets. At December 31, 2017, the Company held $1.2 million in commercial OREO, $0.1 million in residential OREO and an insignificant amount of other repossessed assets. At September 30, 2018 the Company had $2.4 million of residential real estate in the process of foreclosure.

 

The following table summarizes activity related to OREO (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Year Ended

 

    

September 30, 2018

    

December 31, 2017

OREO:

 

 

 

Beginning balance

    

$

1,283

    

$

2,518

Additions, transfers from loans

 

 

3,706

 

 

1,417

Additions, fair value from First Community  

  acquisition 

 

 

 —

 

 

722

Additions, fair value from Mid Illinois acquisition 

 

 

 —

 

 

60

Proceeds from sales of OREO

 

 

(4,275)

 

 

(5,024)

Gain on sales of OREO

 

 

397

 

 

1,632

Valuation allowance for OREO

 

 

(18)

 

 

(42)

Ending balance

 

$

1,093

 

$

1,283

 

 

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Note 7: Deposits

 

The composition of deposits is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

Demand deposits, noninterest-bearing

 

$

1,438,054

 

$

1,597,421

Interest-bearing transaction deposits

 

 

1,325,702

 

 

1,166,170

Saving deposits and money market deposits

 

 

1,879,530

 

 

2,026,212

Time deposits

 

 

1,552,283

 

 

1,336,162

Total

 

$

6,195,569

 

$

6,125,965

 

The Company held brokered interest-bearing transaction deposits of $5.0 million at September 30, 2018 and December 31, 2017. The Company held brokered saving deposits and money market deposits of $30.0 million and $75.1 million at September 30, 2018 and December 31, 2017, respectively.

 

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $655.7 million and $578.9 million at September 30, 2018 and December 31, 2017, respectively.  The aggregate amount of time deposits with a minimum denomination that meets or exceeds the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 was approximately $249.7 million and $197.9 million at September 30, 2018 and December 31, 2017, respectively.  The Company held brokered time deposits of $351.1 million and $247.7 million at September 30, 2018 and December 31, 2017, respectively.

 

As of September 30, 2018, the scheduled maturities of time deposits are as follows (dollars in thousands):

 

 

 

 

 

October 1, 2018 – September 30, 2019

 

$

1,087,015

October 1, 2019 – September 30, 2020

 

 

293,053

October 1, 2020 – September 30, 2021

 

 

58,166

October 1, 2021 – September 30, 2022

 

 

73,509

October 1, 2022 – September 30, 2023

 

 

40,524

Thereafter

 

 

16

 

 

$

1,552,283

 

 

Note 8: Borrowings

 

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily.  Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction.  The underlying securities are held by the Company’s safekeeping agent.  The Company may be required to provide additional collateral based on fluctuations in the fair value of the underlying securities.

 

Short-term borrowings include FHLB advances which mature in less than one year from date of origination. 

 

On April 30, 2018, the Company entered into a third amendment to extend the maturity of its revolving loan facility from April 30, 2018 to April 30, 2019, to decrease the maximum principal amount from $40.0 million to $20.0 million, and to amend the annual interest rate. The revolving loan facility also bears a non-usage fee calculated based on the average daily principal balance of the loan outstanding during the prior fiscal quarter. The Company had no outstanding amount on September 30, 2018 or December 31, 2017.

 

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The following table sets forth the distribution of securities sold under agreements to repurchase and short-term borrowings and weighted average interest rates (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31, 

  

 

    

2018

    

2017

 

Securities sold under agreements to repurchase

 

 

  

 

 

 

 

Balance at end of period

 

$

255,906

 

$

304,566

 

Weighted average interest rate at end of period

 

 

0.85

%  

 

0.57

%

Maximum outstanding at any month end in year-to-date period

 

$

267,596

 

$

304,566

 

Average daily balance for the year-to-date period

 

$

242,268

 

$

213,527

 

Weighted average interest rate during period(1)

 

 

0.62

%  

 

0.46

%

 

 

 

 

 

 

 

 

Short-term borrowings, FHLB advances

 

 

  

 

 

  

 

Balance at end of period

 

$

200,000

 

$

220,000

 

Weighted average interest rate at end of period

 

 

2.24

%  

 

1.42

%

Maximum outstanding at any month end in year-to-date period

 

$

225,000

 

$

234,600

 

Average daily balance for the year-to-date period

 

$

93,022

 

$

84,201

 

Weighted average interest rate during period(1)

 

 

1.73

%  

 

1.20

%


(1)

The weighted average interest rate is computed by dividing total annualized interest for the year-to-date period by the average daily balance outstanding.

 

 

Long-term debt is summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

Notes payable, FHLB, ranging in original maturity from nineteen months to ten years, collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock.

 

$

50,000

 

$

50,000

 

As of September 30, 2018, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 2.01% to 2.18%.  The weighted average rate on the long-term advances was 2.08% as of September 30, 2018. As of December 31, 2017, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 1.10% to 1.32%.  The weighted average rate on the long-term advances was 1.19% as of December 31, 2017.

 

On May 25, 2017, the Company issued $40.0 million of 3.75% senior notes that mature on May 25, 2022. The senior notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017. Additionally, on May 25, 2017, the Company issued $60.0 million of fixed-to-floating rate subordinated notes that mature on May 25, 2027. The subordinated notes, which qualify as Tier 2 capital for First Busey, are at an initial rate of 4.75% for five years and thereafter at an annual floating rate equal to three-month LIBOR plus a spread of 2.919%. The subordinated notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017 during the five year fixed-term and thereafter each February 25, May 25, August 25 and November 25 of each year, commencing on August 25, 2022. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. The senior notes and subordinated notes are unsecured obligations of the Company. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $0.5 million and $0.9 million, respectively, at September 30, 2018.  Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $0.6 million and $1.0 million, respectively, at December 31, 2017. The Company used the net proceeds from the offering to finance a portion of the cash consideration for its acquisition of First Community, to redeem a portion of First Community subordinated debentures in July 2017, and to finance a portion of the cash consideration for its acquisition of Mid Illinois in October 2017, with the remaining proceeds used for general corporate purposes.

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Table of Contents

In relation to the First Community acquisition, the Company assumed $15.3 million in subordinated debt, of which $9.8 million was simultaneously redeemed. A  $0.3 million purchase accounting premium was recorded on the remaining subordinated debt.  The remaining $5.5 million was issued on September 30, 2013, and the Company, at its option, redeemed the note at a redemption price equal to the principal amount outstanding plus accrued but unpaid interest on September 30, 2018.

 

Note 9:  Junior Subordinated Debt Owed to Unconsolidated Trusts

 

First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities.  The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust.  Concurrent with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities.  The trust preferred securities are instruments that qualify, and are treated by the Company, as Tier 1 regulatory capital.  The Company owns all of the common securities of each trust.  The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment. In connection with the Pulaski acquisition in 2016, the Company acquired similar statutory trusts maintained by Pulaski and the fair value adjustment is being accreted over the weighted average remaining life.  The Company had $71.1 million and $71.0 million of junior subordinated debt owed to unconsolidated trusts at September 30, 2018 and December 31, 2017, respectively.

 

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at par value at the stated maturity date or upon redemption. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes.  The Company’s obligations under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust.  The Company has the right to defer payment of interest on the notes, in which case the distributions on the trust preferred securities will also be deferred, for up to five years, but not beyond the stated maturity date.

 

Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier 1) capital elements, net of goodwill and other intangible assets less any associated deferred tax liability.  As of September 30, 2018, 100% of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005. 

 

The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15.0 billion of assets, they may be retained, subject to certain restrictions. Because the Company has assets of less than $15.0 billion, it is able to maintain its trust preferred proceeds as capital, but the Company has to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

 

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Table of Contents

Note 10:  Earnings Per Common Share

 

Earnings per common share have been computed as follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income available to common stockholders

 

$

26,859

 

$

18,784

 

$

73,638

 

$

50,433

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

48,892

 

 

45,324

 

 

48,828

 

 

40,669

 

  Dilutive effect of outstanding options, warrants and restricted 

     stock units as determined by the application of the treasury

     stock method

 

 

355

 

 

440

 

 

388

 

 

400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, as adjusted for

  diluted earnings per share calculation

 

 

49,247

 

 

45,764

 

 

49,216

 

 

41,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.55

 

$

0.41

 

$

1.51

 

$

1.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.55

 

$

0.41

 

$

1.50

 

$

1.23

 

 

Basic earnings per share are computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding, which include deferred stock units that are vested but not delivered.

 

Diluted earnings per common share are computed using the treasury stock method and reflect the potential dilution that could occur if the Company’s outstanding stock options and warrants were exercised and restricted stock units were vested.  Stock options, warrants and restricted stock units for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect and are excluded from the calculation. At September 30, 2018,  172,571 outstanding restricted stock units and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents. At September 30, 2017, 78,540 outstanding options and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents.

 

Note 11:  Share-based Compensation

 

The Company grants share-based compensation awards to its employees and members of its board of directors as provided for under the Company’s 2010 Equity Incentive Plan.  In addition, pursuant to the terms of the First Community 2016 Equity Incentive Plan, the Company may grant awards with respect to First Busey common stock to legacy employees and directors of First Community or its subsidiaries.  Permissible awards under the plan include, but are not limited to, non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and restricted stock units.  

 

The Company currently grants share-based compensation in the form of restricted stock units (“RSUs”) and deferred stock units (“DSUs”). The Company grants RSUs to members of management periodically throughout the year.  Each RSU is equivalent to one share of the Company’s common stock. These units have requisite service periods ranging from one to five years. The Company annually grants share-based awards in the form of DSUs, which are RSUs with a deferred settlement date, to its board of directors and advisory directors. Each DSU is equivalent to one share of the Company’s common stock. The DSUs vest on the first anniversary of the grant date or on the date of the next Annual Meeting of Stockholders, whichever is earlier. These units generally are subject to the same terms as RSUs under the Company’s 2010 Equity Incentive Plan or the First Community 2016 Equity Incentive Plan, except that, following vesting, settlement occurs within 30 days following the earlier of separation from the board or a change in control of the Company. Subsequent to vesting and prior to delivery, these units will continue to earn dividend equivalents.  The Company also has outstanding stock options granted prior to 2011 and stock options assumed from acquisitions.

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Table of Contents

Under the terms of the Company’s 2010 Equity Incentive Plan and the First Community 2016 Equity Incentive Plan, the Company is allowed, but not required, to source stock option exercises and grants of RSUs and DSUs from its inventory of treasury stock.  As of September 30, 2018, the Company held 325,272 shares in treasury.  On February 3, 2015, First Busey announced that its board of directors approved a repurchase plan under which the Company is authorized to repurchase up to an aggregate of 666,667 shares of its common stock.  The repurchase plan has no expiration date and replaced the prior repurchase plan originally approved in 2008.  During 2015, the Company purchased 333,333 shares under this repurchase plan. At September 30, 2018 the Company had 333,334 shares that may still be purchased under the plan.

 

The Company’s 2010 Equity Incentive Plan is designed to encourage ownership of its common stock by its employees and directors, to provide additional incentive for them to promote the success of the Company’s business, and to attract and retain talented personnel.  All of the Company’s employees and directors, and those of its subsidiaries, are eligible to receive awards under the plan.

 

A description of the 2010 Equity Incentive Plan, which was amended in 2015, can be found in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders.  A description of the First Community 2016 Equity Incentive Plan can be found in the Proxy Statement of First Community Financial Partners, Inc. for the 2016 Annual Meeting of Stockholders.

 

Stock Option Plan

 

A summary of the status of and changes in the Company's stock option awards for the nine months ended September 30, 2018 follows:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

Weighted-

 

 

 

 

Average

 

Average

 

 

 

 

Exercise

 

Remaining Contractual

 

    

Shares

    

Price

    

Term

Outstanding at beginning of year

 

213,428

 

$

16.97

 

 

Exercised

 

(85,518)

 

 

13.90

 

 

Forfeited

 

(14,035)

 

 

21.81

 

 

Expired

 

(2,762)

 

 

16.15

 

 

Outstanding at end of period

 

111,113

 

$

18.75

 

4.66

Exercisable at end of period

 

73,469

 

$

16.30

 

2.87

 

The Company recorded $0.1 and $0.2 million in stock option compensation expense for the three and nine months ended September 30, 2018, respectively, related to the converted options from First Community. The Company recorded $0.1 million in stock option compensation expense for the three and nine months ended September 30, 2017. As of September 30, 2018, the Company had $0.2 million of unrecognized stock option expense. This cost is expected to be recognized over a period of 1.1 years.

 

37


 

Table of Contents

Restricted Stock Unit Plan

 

A summary of the changes in the Company’s stock unit awards for the nine months ended September 30, 2018, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

Director

 

Weighted-

 

 

Restricted

 

Average

 

Deferred

 

Average

 

 

Stock

 

Grant Date

 

Stock

 

Grant Date

 

    

Units

    

Fair Value

    

Units

    

Fair Value

Non-vested at beginning of year

 

587,763

 

$

22.68

 

42,411

 

$

25.47

    Reclass DSU to RSU

 

23,977

 

 

25.47

 

(23,977)

 

 

25.47

Granted

 

172,571

 

 

31.70

 

20,500

 

 

31.70

Dividend equivalents earned

 

11,870

 

 

31.05

 

1,669

 

 

30.98

Vested

 

(104,512)

 

 

16.40

 

(20,103)

 

 

29.74

Forfeited

 

(6,183)

 

 

24.84

 

 —

 

 

 —

Non-vested at end of period

 

685,486

 

$

26.13

 

20,500

 

$

27.97

Outstanding at end of period

 

685,486

 

$

26.13

 

86,270

 

$

22.41

 

Recipients earn quarterly dividend equivalents on their respective units which entitle the recipients to additional units. Therefore, dividends earned each quarter compound based upon the updated unit balances.  Upon vesting/delivery, shares are expected (though not required) to be issued from treasury.

 

On August 1, 2018, under the terms of the 2010 Equity Incentive Plan, the Company granted 152,926 RSUs to members of management, and under the terms of the First Community 2016 Equity Incentive Plan, granted 12,545 RSUs to members of management who were legacy First Community employees.  As the stock price on the grant date of August 1, 2018 was $31.70, total compensation cost to be recognized is $5.2 million.  This cost will be recognized over a period of four to five years.  Subsequent to the requisite service period, the awards will become 100% vestedFurther, the Company granted 7,100 RSUs, under the terms of the 2010 Equity Incentive Plan, to the Chairman of the Board.  As the stock price on the grant date of August 1, 2018 was $31.70, total compensation cost to be recognized is $0.2 million.  This cost will be recognized over a period of five years.  Subsequent to the requisite service period, the awards will become 100% vested.

 

On August 1, 2018, under the terms of the 2010 Equity Incentive Plan, the Company granted 17,500 DSUs to directors, and under the terms of the First Community 2016 Equity Incentive Plan, granted 1,500 DSUs to a director who was a legacy First Community director.  In addition, under the terms of the 2010 Equity Incentive Plan, the Company granted 1,500 advisory DSUs to advisory directors.  As the stock price on the grant date of August 1, 2018 was $31.70, total compensation cost to be recognized is $0.6 million.  These costs will be recognized over the requisite service period of one year from the date of grant or the next Annual Meeting of Stockholders, whichever is earlier.

 

The Company recognized $0.9 million and $0.7 million of compensation expense related to non-vested RSUs and DSUs for the three months ended September 30, 2018 and 2017, respectively. The Company recognized $2.5 million and $1.9 million of compensation expense related to non-vested RSUs and DSUs for the nine months ended September 30, 2018 and 2017, respectively.  As of September 30, 2018, there was $12.0 million of total unrecognized compensation cost related to these non-vested RSUs and DSUs.  This cost is expected to be recognized over a period of 3.8 years.

 

As of September 30, 2018, 740,943 shares remain available for issuance pursuant to the Company’s 2010 Equity Incentive Plan, 75,674 shares remain available for issuance pursuant to the Company’s Employee Stock Purchase Plan and 305,781 shares remain available for issuance pursuant to the First Community 2016 Equity Incentive Plan.

 

Note 12:  Income Taxes

 

At September 30, 2018, the Company was not under examination by any tax authority.

 

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Note 13:  Outstanding Commitments and Contingent Liabilities

 

Legal Matters

 

The Company is a party to legal actions which arise in the normal course of its business activities.  In the opinion of management, the ultimate resolution of these matters is not expected to have a material effect on the financial position or the results of operations of the Company.

 

Credit Commitments and Contingencies

 

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited Consolidated Balance Sheets.

 

The Company’s exposure to credit loss is represented by the contractual amount of those commitments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  A summary of the contractual amount of the Company’s exposure to off-balance-sheet risk relating to the Company’s commitments to extend credit and standby letters of credit follows (dollars in thousands):  

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

Financial instruments whose contract amounts represent credit risk:

 

 

 

 

 

 

Commitments to extend credit

 

$

1,296,406

 

$

1,300,294

Standby letters of credit

 

 

33,244

 

 

37,231

 

Commitments to extend credit are agreements to lend to a customer as long as no condition established in the contract has been violated.  These commitments are generally at variable interest rates and generally have fixed expiration dates or other termination clauses and may require payment of a fee.  The commitments for equity lines of credit may expire without being drawn upon.  Therefore, the total commitment amounts do not necessarily represent future cash requirements.  These commitments may be secured based on management’s credit evaluation of the borrower.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer’s obligation to a third-party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions and primarily have terms of one year or less.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company holds collateral, which may include accounts receivable, inventory, property and equipment, and income producing properties, supporting those commitments if deemed necessary.  In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment.  The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above.  If the commitment is funded, the Company would be entitled to seek recovery from the customer.  As of September 30, 2018 and December 31, 2017, no amounts were recorded as liabilities for the Company’s potential obligations under these guarantees.

 

Note 14:  Capital

 

The ability of the Company to pay cash dividends to its stockholders and to service its debt was historically dependent on the receipt of cash dividends from its subsidiaries.  Under applicable regulatory requirements, an Illinois state-chartered bank such as Busey Bank may not pay dividends in excess of its net profits.  Because Busey Bank had been in a retained earnings deficit position since 2009, it was not able to pay dividends. With prior approval from its regulators, however, an Illinois state-chartered bank in that situation was able to reduce its capital stock by amending its charter to decrease the authorized number of shares, and then make a subsequent distribution to its holding company.  Using this approach, and with the approval of its regulators, Busey Bank has distributed funds to the Company, the most recent of which was $40.0 million on October 12, 2018.  Busey Bank returned to positive retained earnings in the second quarter of 2018.  The  Company expects Busey Bank to return to paying dividends in future periods.

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The Company and Busey Bank are subject to regulatory capital requirements administered by federal and/or state agencies that involve the quantitative measure of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices.  Quantitative measures established by regulations to ensure capital adequacy require the Company and Busey Bank to maintain minimum dollar amounts and ratios of such to risk weighted assets (as defined in the regulations and set forth in the table below) of total capital, Tier 1 capital and Common Equity Tier 1 capital, and for the bank, Tier 1 capital to average assets.  Failure to meet minimum capital requirements may cause regulatory bodies to initiate certain discretionary and/or mandatory actions that, if undertaken, could have a direct material effect on our unaudited Consolidated Financial Statements.  The Company, as a financial holding company, is required to be “well capitalized” in the capital categories shown in the table below.  As of September 30, 2018, the Company and Busey Bank met all capital adequacy requirements to which they were subject, including the guidelines to be considered “well capitalized.”

 

The Dodd-Frank Act established minimum capital levels for bank holding companies on a consolidated basis. The components of Tier 1 capital are restricted to capital instruments that, at the time of signing, were considered to be Tier 1 capital for insured depository institutions. Under this legislation, the Company is able to maintain its trust preferred securities as Tier 1 capital, but it will have to comply with new capital mandates in other respects, and it will not be able to raise Tier 1 capital through the issuance of trust preferred securities in the future.

 

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rule required by the Dodd-Frank Act.  The Basel III Rule is applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally non-public bank holding companies with consolidated assets of less than $1.0 billion).  The Basel III Rule not only increased most of the required minimum regulatory capital ratios, but they also introduced a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.

 

The Basel III Rule also expanded the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital.  A number of instruments that generally qualified as Tier 1 Capital under the old guidelines no longer qualify, or their qualifications will change, as the Basel III Rule is being fully implemented. 

 

The Basel III Rule also permitted banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income (loss), which did not affect regulatory capital.  First Busey and Busey Bank made this election in the first quarter of 2015 to avoid variations in the level of their capital depending on fluctuations in the fair value of their securities portfolio.  The Basel III Rule maintained the general structure of the prompt corrective action framework, while incorporating increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio. Under the final capital rules that became effective on January 1, 2015, there was a requirement for a Common Equity Tier 1 capital conservation buffer of 2.5% of risk weighted assets which is in addition to the other minimum risk based capital standards in the rule. Failure to maintain the buffer will result in restrictions on the Company’s ability to make capital distributions, including the payment of dividends, and to pay discretionary bonuses to executive officers.  The capital buffer requirement is being phased-in over three years beginning in 2016. 

 

The September 30, 2018 table below includes the 1.875% increase as of January 1, 2018 in the minimum capital requirement ratios.  The capital buffer requirement effectively raises the minimum required Common Equity Tier 1 Capital ratio to 7.0%, the Tier 1 Capital ratio to 8.5%, and the Total Capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. As of September 30, 2018 and December 31, 2017, the Company was in compliance with the current phase of the Basel III Rule and management believes that the Company would meet all capital adequacy requirements under the Basel III Rule on a fully phased-in basis as if such requirements had been in effect (dollars in thousands).

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

Minimum

 

 

 

 

 

 

 

Capital Requirement with

 

To Be Well

 

 

Actual

 

Capital Buffer

 

Capitalized

 

 

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

As of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

877,322

 

14.34

%  

$

603,990

 

9.875

%  

$

611,636

 

10.00

%  

Busey Bank

$

865,523

 

14.22

%  

$

600,987

 

9.875

%  

$

608,594

 

10.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

764,579

 

12.50

%  

$

481,663

 

7.875

%  

$

489,309

 

8.00

%  

Busey Bank

$

812,780

 

13.36

%  

$

479,268

 

7.875

%  

$

486,875

 

8.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

690,579

 

11.29

%  

$

389,918

 

6.375

%  

$

397,564

 

6.50

%  

Busey Bank

$

812,780

 

13.36

%  

$

387,979

 

6.375

%  

$

395,586

 

6.50

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

764,579

 

10.17

%  

$

300,787

 

4.00

%  

 

N/A

 

N/A

 

Busey Bank

$

812,780

 

10.84

%  

$

299,786

 

4.00

%  

$

374,733

 

5.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

Minimum

 

 

 

 

 

 

 

Capital Requirement with

 

To Be Well

 

 

Actual

 

Capital Buffer

 

Capitalized

 

 

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

As of December 31, 2017:

 

 

Total Capital (to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

837,183

 

14.15

%  

$

547,265

 

9.250

%  

$

591,638

 

10.00

%  

Busey Bank

$

704,807

 

12.78

%  

$

509,978

 

9.250

%  

$

551,327

 

10.00

%  

South Side Bank

$

84,914

 

22.61

%  

$

34,744

 

9.250

%  

$

37,561

 

10.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

718,101

 

12.14

%  

$

428,937

 

7.250

%  

$

473,310

 

8.00

%  

Busey Bank

$

651,432

 

11.82

%  

$

399,713

 

7.250

%  

$

441,062

 

8.00

%  

South Side Bank

$

84,707

 

22.55

%  

$

27,232

 

7.250

%  

$

30,049

 

8.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

644,633

 

10.90

%  

$

340,192

 

5.750

%  

$

384,565

 

6.50

%  

Busey Bank

$

651,432

 

11.82

%  

$

317,013

 

5.750

%  

$

358,363

 

6.50

%  

South Side Bank

$

84,707

 

22.55

%  

$

21,598

 

5.750

%  

$

24,415

 

6.50

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

718,101

 

9.78

%  

$

293,588

 

4.00

%  

 

N/A

 

N/A

 

Busey Bank

$

651,432

 

9.80

%  

$

265,847

 

4.00

%  

$

332,309

 

5.00

%  

South Side Bank

$

84,707

 

12.75

%  

$

26,571

 

4.00

%  

$

33,214

 

5.00

%  

 

 

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Table of Contents

Note 15:  Operating Segments and Related Information

 

The Company has three reportable operating segments, Banking, Remittance Processing and Wealth Management.  The Banking operating segment provides a full range of banking services to individual and corporate customers through its banking center network in Illinois, St. Louis, Missouri metropolitan area, southwest Florida and through its banking center in Indianapolis, Indiana.  The Remittance Processing operating segment provides for online bill payments, lockbox and walk-in payments.  The Wealth Management operating segment provides a full range of asset management, investment and fiduciary services to individuals, businesses and foundations, tax preparation, philanthropic advisory services and farm and brokerage services.

 

The Company’s three operating segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies.  The “other” category consists of the parent company and the elimination of intercompany transactions.

 

The segment financial information provided below has been derived from information used by management to monitor and manage the financial performance of the Company.  The accounting policies of the three segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Following is a summary of selected financial information for the Company’s operating segments (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Total Assets

 

    

September 30, 2018

    

December 31, 2017

    

September 30, 2018

    

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

$

246,999

 

$

248,660

 

$

7,831,967

 

$

7,809,738

Remittance Processing

 

 

8,992

 

 

8,992

 

 

37,809

 

 

34,646

Wealth Management

 

 

11,694

 

 

11,694

 

 

33,543

 

 

32,077

Other

 

 

 —

 

 

 —

 

 

(13,934)

 

 

(15,821)

Totals

 

$

267,685

 

$

269,346

 

$

7,889,385

 

$

7,860,640

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

$

62,578

 

$

57,589

 

$

186,103

 

$

143,496

 

Remittance Processing

 

 

17

 

 

15

 

 

49

 

 

44

 

Wealth Management

 

 

110

 

 

87

 

 

304

 

 

233

 

Other

 

 

(1,931)

 

 

(1,750)

 

 

(5,553)

 

 

(3,453)

 

Total net interest income

 

$

60,774

 

$

55,941

 

$

180,903

 

$

140,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

$

11,196

 

$

12,338

 

$

33,827

 

$

33,550

 

Remittance Processing

 

 

4,042

 

 

3,032

 

 

11,812

 

 

9,061

 

Wealth Management

 

 

7,391

 

 

5,941

 

 

23,840

 

 

19,649

 

Other

 

 

(776)

 

 

(474)

 

 

(2,338)

 

 

(1,347)

 

Total non-interest income

 

$

21,853

 

$

20,837

 

$

67,141

 

$

60,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

$

37,034

 

$

38,697

 

$

116,275

 

$

97,318

 

Remittance Processing

 

 

2,718

 

 

2,190

 

 

7,808

 

 

6,476

 

Wealth Management

 

 

4,307

 

 

3,896

 

 

13,921

 

 

11,840

 

Other

 

 

1,870

 

 

2,156

 

 

6,270

 

 

5,692

 

Total non-interest expense

 

$

45,929

 

$

46,939

 

$

144,274

 

$

121,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

$

35,982

 

$

29,736

 

$

99,631

 

$

77,234

 

Remittance Processing

 

 

1,341

 

 

856

 

 

4,053

 

 

2,629

 

Wealth Management

 

 

3,194

 

 

2,132

 

 

10,223

 

 

8,042

 

Other

 

 

(4,577)

 

 

(4,379)

 

 

(14,161)

 

 

(10,492)

 

Total income before income taxes

 

$

35,940

 

$

28,345

 

$

99,746

 

$

77,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

$

26,486

 

$

18,942

 

$

73,235

 

$

49,546

 

Remittance Processing

 

 

957

 

 

505

 

 

2,896

 

 

1,567

 

Wealth Management

 

 

2,280

 

 

1,237

 

 

7,332

 

 

4,760

 

Other

 

 

(2,864)

 

 

(1,900)

 

 

(9,825)

 

 

(5,440)

 

Total net income

 

$

26,859

 

$

18,784

 

$

73,638

 

$

50,433

 

 

 

Note 16: Derivative Financial Instruments

 

The Company originates and purchases derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale, forward sales commitments to sell residential mortgage loans to loan investors, and interest rate swaps.  See “Note 17: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.

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Interest Rate Lock Commitments.  At September 30, 2018 and December 31, 2017, the Company had issued $50.4 million and $51.7 million, respectively, of unexpired interest rate lock commitments to loan customers.  Such interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited Consolidated Financial Statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.

 

Forward Sales Commitments. At September 30, 2018 and December 31, 2017, the Company had issued $82.3 million and $139.7 million, respectively, of unexpired forward sales commitments to mortgage loan investors.  Typically, the Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers.  Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited Consolidated Financial Statements.  While such forward sales commitments generally served as an economic hedge to the mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment.  Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

 

The fair values of derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

Fair value recorded in other assets

 

$

322

 

$

675

Fair value recorded in other liabilities

 

 

561

 

 

2,148

 

The gross gains and losses on these derivative assets and liabilities recorded in non-interest income and expense in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 are summarized as follows (dollars in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Gross gains

 

$

641

 

$

3,822

 

$

2,396

 

$

12,629

 

Gross (losses)

 

 

(561)

 

 

(3,083)

 

 

(2,669)

 

 

(11,102)

 

Net gains (losses)

 

$

80

 

$

739

 

$

(273)

 

$

1,527

 

 

The impact of the net gains or losses on derivative financial instruments related to interest rate lock commitments issued to residential loan customers for loans that will be held for sale and forward sales commitments to sell residential mortgage loans to loan investors are almost entirely offset by a corresponding change in the fair value of loans held for sale. 

 

Interest Rate Swaps. The Company entered into interest rate swap contracts to manage the interest rate risk exposure associated with specific commercial loan relationships, at the time such loans were originated.  The Company offsets each customer derivative with a bank counterparty.  With notional values of $188.8 million and $161.3 million at September 30, 2018 and December 31, 2017, respectively, these contracts support variable rate, commercial loan relationships totaling $94.4 million and $80.7 million, respectively.  While these swap derivatives generally worked together as an economic interest rate hedge, the Company did not designate them for hedge accounting treatment.  Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

 

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The fair values of derivative assets and liabilities related to interest rate swaps recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):  

 

 

 

 

 

 

 

 

 

   

 

September 30, 2018

   

 

December 31, 2017

Fair value recorded in other assets

 

$

2,428

 

$

262

Fair value recorded in other liabilities

 

 

2,428

 

 

262

 

The gross gains and losses on derivative assets and liabilities related to interest rate swaps recorded in non-interest income and expense in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 

 

2018

 

2017

 

2018

 

2017

Gross gains

$

724

 

$

128

 

$

2,167

 

$

429

Gross losses

 

(724)

 

 

(128)

 

 

(2,167)

 

 

(429)

Net gains (losses)

$

 —

 

$

 —

 

$

 —

 

$

 —

 

First Busey had $0.3 million in securities pledged to secure its obligation under these contracts at September 30, 2018.  First Busey had $2.0 million in cash and $0.4 million in securities pledged to secure its obligation under contracts at December 31, 2017.

 

Note 17: Fair Value Measurements

 

The fair value of an asset or liability is the price that would be received by selling that asset or paid in transferring that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 Inputs - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to those Company assets and liabilities that are carried at fair value.

 

There were no transfers between levels during the quarter ended September 30, 2018.

 

In general, fair value is based upon quoted market prices, when available. If such quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable data. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect, among other things, counterparty credit quality and the company's creditworthiness as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company's valuation

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methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 

 

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing level 2 measurements. The Company obtains fair value measurements from an independent pricing service. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information.  Because many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. 

 

The independent pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios.  The models and processes take into account market conventions.  For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models.

 

The market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.  The independent pricing service also monitors market indicators, industry and economic events.  For certain security types, additional inputs may be used or some of the market inputs may not be applicable.  Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day.  Because the data utilized was observable, the securities have been classified as level 2 in ASC Topic 820.

 

Securities Equity Investments. Securities classified as equity investments are reported at fair value utilizing level 1 measurements. For mutual funds and other equity securities, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and have been classified as level 1 in ASC Topic 820. 

 

Loans Held for Sale. Loans held for sale are reported at fair value utilizing level 2 measurements. The fair value of the mortgage loans held for sale are measured using observable quoted market or contract prices or market price equivalents and are classified as level 2 in ASC Topic 820.

 

Derivative Assets and Derivative Liabilities. Derivative assets and derivative liabilities are reported at fair value utilizing level 2 measurements.  The fair value of derivative assets and liabilities is determined based on prices that are obtained from a third-party which uses observable market inputs.  Derivative assets and liabilities are classified as level 2 in ASC Topic 820.

 

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The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

    

Level 2

    

Level 3

    

Total

September 30, 2018

Inputs

    

Inputs

    

Inputs

    

Fair Value

Fair value adjusted through comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

 —

 

$

59,854

 

$

 —

 

$

59,854

Obligations of U.S. government corporations and agencies

 

 —

 

 

89,666

 

 

 —

 

 

89,666

Obligations of states and political subdivisions

 

 —

 

 

241,925

 

 

 —

 

 

241,925

Residential mortgage-backed securities

 

 —

 

 

331,582

 

 

 —

 

 

331,582

Corporate debt securities

 

 —

 

 

140,354

 

 

 —

 

 

140,354

Fair value adjusted through current period earnings:

 

 

 

 

 

 

 

 

 

 

 

Securities equity investments

 

7,317

 

 

 —

 

 

 —

 

 

7,317

Loans held for sale

 

 —

 

 

32,617

 

 

 —

 

 

32,617

Derivative assets

 

 —

 

 

2,750

 

 

 —

 

 

2,750

Derivative liabilities

 

 —

 

 

2,989

 

 

 —

 

 

2,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

    

Level 2

    

Level 3

    

Total

December 31, 2017

Inputs

    

Inputs

    

Inputs

    

Fair Value

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

 —

 

$

60,348

 

$

 —

 

$

60,348

Obligations of U.S. government corporations and agencies

 

 —

 

 

103,665

 

 

 —

 

 

103,665

Obligations of states and political subdivisions

 

 —

 

 

280,199

 

 

 —

 

 

280,199

Residential mortgage-backed securities

 

 —

 

 

397,436

 

 

 —

 

 

397,436

Corporate debt securities

 

 —

 

 

31,034

 

 

 —

 

 

31,034

Securities equity investments

 

5,378

 

 

 —

 

 

 —

 

 

5,378

Loans held for sale

 

 —

 

 

94,848

 

 

 —

 

 

94,848

Derivative assets

 

 —

 

 

937

 

 

 —

 

 

937

Derivative liabilities

 

 —

 

 

2,410

 

 

 —

 

 

2,410

 

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

Impaired Loans.  The Company does not record loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral.  Impaired loans measured at fair value typically consist of loans on non-accrual status and restructured loans in compliance with modified terms.  Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all impaired loan fair values have been classified as level 3 in ASC Topic 820.

 

OREO.  Non-financial assets and non-financial liabilities measured at fair value include OREO (upon initial recognition or subsequent impairment). OREO properties are measured using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all OREO fair values have been classified as level 3 in ASC Topic 820.

 

Bank Property Held for Sale.  Bank property held for sale represents certain banking center office buildings which the Company has closed and consolidated with other existing banking centers. Bank property held for sale is measured at the

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lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon appraisals or real estate listing price.  Due to the significance of the unobservable inputs, all bank property held for sale fair values have been classified as level 3 in ASC Topic 820.

 

The following table summarizes assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

    

Inputs

    

Inputs

    

Inputs

    

Fair Value

September 30, 2018

 

 

Impaired loans

 

$

 —

 

$

 —

 

$

12,647

 

$

12,647

OREO

 

 

 —

 

 

 —

 

 

55

 

 

55

Bank property held for sale

 

 

 —

 

 

 —

 

 

3,711

 

 

3,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

    

    

 

    

    

 

    

    

 

    

    

 

Impaired loans

 

$

 —

 

$

 —

 

$

1,313

 

$

1,313

OREO(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 —


(1)

OREO fair value was less than one thousand dollars.

 

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized level 3 inputs to determine fair value (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value

 

Valuation

 

Unobservable

 

Range

 

Estimate

    

Techniques

    

Input

    

(Weighted Average)

September 30, 2018

 

Impaired loans

$

12,647

    

Appraisal of collateral

    

Appraisal adjustments

    

- 2.3

%

to

- 100.0

%

 

 

 

 

 

 

 

 

(-20.3)%

OREO

 

55

 

Appraisal of collateral

 

 Appraisal adjustments

 

- 25.0

%

to

- 100.0

%

 

 

 

 

 

 

 

 

(-65.0)%

Bank property held for sale

 

3,711

 

Appraisal of collateral or real estate listing price

 

Appraisal adjustments

 

- 0.0

%

to

- 35.1

%

 

 

 

 

 

 

 

 

(-18.0)%

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

1,313

    

Appraisal of collateral

    

Appraisal adjustments

    

- 20.3

%

to

- 100.0

%

 

 

 

 

 

 

 

 

(-30.8)%

OREO(1)

 

 —

 

Appraisal of collateral

 

 Appraisal adjustments

 

-100.0%

 

 

 

 

 

 

 

 

(-100.0)%


(1)

OREO fair value was less than one thousand dollars.

 

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The estimated fair values of financial instruments that are reported at amortized cost in the Company’s Consolidated Balance Sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

Carrying

    

Fair

    

Carrying

    

Fair

 

Amount

    

Value

    

Amount

    

Value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Level 1 inputs:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

160,652

 

$

160,652

 

$

353,272

 

$

353,272

Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

626,250

 

 

611,302

 

 

443,550

 

 

441,052

Accrued interest receivable

 

25,321

 

 

25,321

 

 

22,591

 

 

22,591

Level 3 inputs:

 

 

 

 

 

 

 

 

 

 

 

Portfolio loans, net

 

5,570,998

 

 

5,424,280

 

 

5,465,918

 

 

5,361,406

Mortgage servicing rights

 

3,456

 

 

11,147

 

 

3,680

 

 

8,635

Other servicing rights

 

616

 

 

1,236

 

 

280

 

 

901

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

Time deposits(2)

$

1,552,283

 

$

1,536,729

 

$

 —

 

$

 —

Deposits(2)

 

 —

 

 

 —

 

 

6,125,965

 

 

6,119,135

Securities sold under agreements to repurchase

 

255,906

 

 

255,906

 

 

304,566

 

 

304,566

Short-term borrowings

 

200,000

 

 

200,000

 

 

220,000

 

 

220,000

Long-term debt

 

50,000

 

 

49,562

 

 

50,000

 

 

50,000

Junior subordinated debt owed to unconsolidated trusts

 

71,118

 

 

71,118

 

 

71,008

 

 

71,008

Accrued interest payable

 

6,731

 

 

6,731

 

 

2,581

 

 

2,581

Level 3 inputs:

 

 

 

 

 

 

 

 

 

 

 

Senior notes, net of unamortized issuance costs

 

39,505

 

 

38,382

 

 

39,404

 

 

39,104

Subordinated notes, net of unamortized issuance costs

 

59,121

 

 

57,470

 

 

64,715

 

 

64,350


(2)

In connection with the adoption of ASU 2016-01 in 2018, only deposits with stated maturities are required to be disclosed.

 

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. 

 

Note 18: Liability for Loans Sold

 

Under standard representations and warranties and early payment default clauses in the Company’s mortgage sale agreements, the Company could be required to repurchase mortgage loans sold to investors or reimburse the investors for losses incurred on loans in the event of borrower default within a defined period after origination (generally 90 days), or in the event of breaches of contractual representations or warranties made at the time of sale that are not remedied within a defined period after the Company receives notice of such breaches (generally 90 days).  In addition, the Company may be required to refund the profit received from the sale of a loan to an investor if the borrower pays off the loan within a defined period after origination, which is generally 120 days. The Company records an estimated liability for probable amounts due to the Company’s loan investors under these obligations. This repurchase liability is determined based on a combination of factors including the volume of loans sold in current and previous periods; borrower default expectations; historical investor repurchase demand and appeals success rates; and estimated loss

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severity.  Payments made to investors as reimbursement for losses incurred are charged against the mortgage repurchase liability.  Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis.  The difference between the loan’s fair value and the payment made to investors as reimbursement for losses incurred is charged to the mortgage repurchase liability.  Subsequent to repurchase, such loans are carried as portfolio loans on the Company’s Consolidated Balance Sheets.  Loans repurchased with deteriorated credit quality at the date of repurchase are accounted for under ASC Topic 310-30.

 

The liability for loans sold of $2.0 million and $2.1 million at September 30, 2018 and December 31, 2017, respectively, represents the Company’s best estimate of the probable losses that the Company will incur for various early default provisions and contractual representations and warranties associated with the sales of mortgage loans and is included in other liabilities in the accompanying Consolidated Balance Sheets.  Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.  In addition, the Company generally does not service the loans that it has sold to investors and is generally unable to track the remaining unpaid balances or delinquency status after sale.  As a result, there may be a range of possible losses in excess of the estimated liability that cannot be estimated.  Management maintains regular contact with the Company’s investors to monitor and address their repurchase demand practices and concerns.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of the financial condition of First Busey at September 30, 2018 (unaudited), as compared with December 31, 2017 and September 30, 2017 (unaudited), and the results of operations for the three and nine months ended September 30, 2018 (unaudited) and 2017 (unaudited), and the three months ended June 30, 2018 (unaudited) when applicable.  Management’s discussion and analysis should be read in conjunction with the Company’s unaudited Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

On August 21, 2018, the Company entered into the Merger Agreement with Banc Ed, the holding company for TheBANK, pursuant to which Banc Ed will merge into the Company, with the Company as the surviving corporation.  The operating results of Banc Ed and TheBANK are not included in the Company’s unaudited Consolidated Financial Statements included herein.

 

EXECUTIVE SUMMARY

 

Operating Results

 

The Company’s net income for the third quarter of 2018 was $26.9 million, or $0.55 per diluted common share, an increase compared to net income of $24.9 million, or $0.51 per diluted common share, for the second quarter of 2018 and net income of $18.8 million, or $0.41 per diluted common share, for the third quarter of 2017.  Adjusted net income(1) for the third quarter of 2018 was $27.0 million, or $0.55 per diluted common share, an increase compared to $25.6 million, or $0.52 per diluted common share, for the second quarter of 2018 and $20.6 million, or $0.45 per diluted common share, for the third quarter of 2017.

 

Year-to-date net income through September 30, 2018 was $73.6 million, or $1.50 per diluted common share, an increase over net income of $50.4 million, or $1.23 per diluted common share, for the comparable period of 2017. Year-to-date adjusted net income(1) for the first nine months of 2018 was $77.5 million, or $1.58 per diluted common share, an increase compared to $53.1 million, or $1.29 per diluted common share, for the comparable period of 2017.  The results were favorably impacted by the acquisition of First Community, since the closing of the transaction on July 2, 2017, and Mid Illinois, since the closing of the transaction on October 1, 2017.

 

For the third quarter of 2018, return on average assets and return on average tangible common equity were 1.37% and 16.17%, respectively.  Based on adjusted net income(1), return on average assets was 1.37% and return on average tangible common equity was 16.26% for the same period.    For the nine months ended September 30, 2018, return on average assets was 1.28%, an increase from 1.15% for the same period of 2017.  Based on adjusted net income(1), return on average assets for the first nine months of 2018 was 1.34% compared to 1.22% for the comparable period of 2017. Return on average tangible common equity was 15.34% for the first nine months of 2018 compared to 13.15% for the same period of 2017.  Return on average tangible common equity based on adjusted net income(1) was 16.15% for the first nine months of 2018 compared to 13.86% for the same period of 2017.

 

The Company views certain non-operating items including, but not limited to, acquisition-related and restructuring charges, as adjustments to net income.  Non-operating adjustments for the third quarter of 2018 were $0.2 million of expenses related to acquisitions.  

 

Revenues from trust fees, commissions and brokers’ fees, and remittance processing activities represented 49.6% of the Company’s non-interest income for the quarter ended September 30, 2018, providing a balance to revenue from traditional banking activities. Two of the Company’s acquisitions, Pulaski and First Community, had no legacy fee income in these businesses; therefore, the addition of these fee-based service offerings in the corresponding acquired bank markets is expected to continue providing attractive growth opportunities in future periods.

 


(1)

For a reconciliation of adjusted net income, a non-GAAP financial measure, see “Non-GAAP Financial Information” included in this Quarterly Report on Form 10-Q.

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The pending Banc Ed transaction fits with our acquisition strategy as the addition of TheBANK will grow the Company’s current geographic footprint, allowing the Company to further serve customers in the St. Louis Missouri-Illinois Metropolitan Statistical Area and significantly adding to the Company’s wealth management business.  First Busey and TheBANK have similar risk philosophies and the combined entity will continue to be built upon capital strength and solid credit practices.

 

The reconciliation of non-GAAP measures (including adjusted net income and return on average assets,  adjusted net interest margin, adjusted efficiency ratio, tangible common equity to tangible assets, tangible book value per share and return on average tangible common equity), which the Company believes facilitates the assessment of its banking operations and peer comparability, is included in tabular form in this Quarterly Report on Form 10-Q in the “Non-GAAP Financial Information” section.

 

Asset Quality

 

We remain committed to our focus on quality balance sheet growth and our credit metrics remain solid.  As of September 30, 2018, non-performing loans increased to $40.8 million, compared to $26.4 million as of June 30, 2018, and $27.9 million as of September 30, 2017. Non-performing loans were 0.72% of total portfolio loans as of September 30, 2018, compared to 0.47% as of June 30, 2018 and 0.55% as of September 30, 2017.  The increase in non-performing loans for the third quarter of 2018 was driven primarily by two commercial credits. The Company has created specific reserves for these credits.

 

The Company recorded net charge-offs of $1.3 million for the third quarter of 2018, a decrease compared to $1.6 million for the second quarter of 2018, and an increase compared to net recoveries of $0.3 million for the third quarter of 2017.  The allowance for loan loss as a percentage of portfolio loans was 0.94% at September 30, 2018 as compared to 0.96% at June 30, 2018 and 1.00% at September 30, 2017. As a result of acquisitions, the Company is holding acquired loans that are carried net of a fair value adjustment for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.  The Company recorded provision for loan losses of $0.8 million in the third quarter of 2018, compared to $2.3 million in the second quarter of 2018 and $1.5 million in the third quarter of 2017. The Company recorded provision for loan losses of $4.0 million in the first nine months of 2018 and $2.5 million in the first nine months of 2017.

 

The key metrics are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Three Months Ended

 

 

 

September 30, 

 

June 30, 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2018

 

2018

    

2017

 

Portfolio loans

 

$

5,623,741

 

$

5,555,287

 

$

5,531,453

 

$

5,519,500

 

Commercial loans(1)

 

 

4,141,816

 

 

4,076,253

 

 

4,061,453

 

 

4,030,821

 

Allowance for loan losses

 

 

52,743

 

 

53,305

 

 

52,649

 

 

53,582

 

Non-performing loans

 

 

  

 

 

  

 

 

  

 

 

  

 

Non-accrual loans

 

 

40,395

 

 

23,215

 

 

32,588

 

 

24,624

 

Loans 90+ days past due

 

 

364

 

 

1,142

 

 

995

 

 

2,741

 

Loans 30-89 days past due

 

 

8,189

 

 

10,017

 

 

9,506

 

 

12,897

 

Other non-performing assets

 

 

1,093

 

 

3,694

 

 

1,001

 

 

1,283

 

Allowance as a percentage of non-performing 

  loans

 

 

129.4

%  

 

202.2

%

 

156.8

%  

 

195.8

%

Allowance for loan losses to portfolio loans

 

 

0.94

%  

 

0.96

%

 

0.95

%  

 

0.97

%


(1)

Includes loans categorized as commercial, commercial real estate and real estate construction.

 

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Economic Conditions of Markets

 

The Company has 44 banking centers serving Illinois.  Our primary Illinois markets of Champaign, Macon, McLean and Peoria counties are anchored by several strong, well-recognized and stable organizations.  Those organizations, coupled with a large agricultural sector, anchor the communities in which they are located, and have provided a comparatively stable foundation for housing, employment and small business.  The First Community acquisition provided the Company entrance into the demographically and economically attractive southwest suburban markets of the greater Chicagoland area and is part of the Company’s strategy of expanding into markets with both population and commercial density in the Midwest.

 

The State of Illinois, where a large portion of the Company’s customer base is located, continues to be one of the most troubled of any state in the United States with pension under-funding, continued budget deficits and a declining credit outlook.  Additionally, the Company is located in markets with significant universities and healthcare companies, which rely heavily on state funding and contracts.  Any possible payment lapses by the State of Illinois to its vendors and government sponsored entities may have negative effects on our primary market areas.

 

Busey Bank has 13 banking centers serving the St. Louis metropolitan area, all of which are located in the city of St. Louis, or the adjacent counties of St. Louis County and St. Charles County.  St. Louis, Missouri is the largest metropolitan area in Missouri and the twentieth largest in the United States.  The bi-state metropolitan area includes seven counties in Missouri and eight counties in Illinois.  The Company’s geographic concentration in only three of the 15 counties included in the St. Louis metropolitan area gives the Company tremendous expansion opportunities into neighboring counties.  St. Louis has a diverse economy with major employment sectors including health care, financial services, professional and business services, and retail.  St. Charles County has been one of the fastest-growing counties in the country for decades and features a cross-section of industry, as well as extensive retail and some agriculture.

 

Busey Bank has five banking centers in southwest Florida.  Southwest Florida has shown continuing signs of improvement in areas such as job growth and the housing market over the last several years.

 

Busey Bank has one banking center in the Indianapolis, Indiana area, which is the most populous city of Indiana with a diverse economy.  Many large corporations are headquartered in Indianapolis and it is host to numerous conventions and sporting events annually.

 

OPERATING PERFORMANCE

 

Net interest income

 

Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities.  Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income.  Net interest margin is tax-equivalent net interest income as a percent of average earning assets.    Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis.  Tax-equivalent basis assumes an income tax rate of 21% in 2018 and 35% in 2017.  Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets.  A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets.  After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets.  In addition to yield, various other risks are factored into the evaluation process.

 

The following tables (dollars in thousands) show our Consolidated Average Balance Sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the periods shown.  The tables also show, for the periods indicated, a summary of the changes in interest earned and interest expense resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on changes due to rate and changes due to volume.  All average information is provided on a daily average basis.

 

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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in income/

 

 

2018

 

2017

 

expense due to(1)

 

    

Average

    

Income/

    

Yield/

    

Average

    

Income/

    

Yield/

    

Average 

    

Average

    

Total

 

 

Balance

 

Expense

 

Rate(6)

 

Balance

 

Expense

 

Rate(6)

 

Volume

 

Yield/Rate

 

Change

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing bank deposits and federal

  funds sold

 

$

134,202

 

$

649

 

1.92

%  

$

110,976

 

$

348

 

1.24

%  

$

84

 

$

217

$

301

Investment securities:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

U.S. Government obligations

 

 

152,865

 

 

632

 

1.64

%  

 

135,404

 

 

564

 

1.65

%  

 

72

 

 

(4)

 

68

Obligations of states and political

  subdivisions(1)

 

 

280,041

 

 

1,816

 

2.57

%  

 

260,421

 

 

1,919

 

2.92

%  

 

138

 

 

(241)

 

(103)

Other securities

 

 

984,802

 

 

6,384

 

2.57

%  

 

613,530

 

 

3,502

 

2.26

%  

 

2,354

 

 

528

 

2,882

Loans held for sale

 

 

28,661

 

 

317

 

4.39

%  

 

127,369

 

 

1,205

 

3.75

%  

 

(1,063)

 

 

175

 

(888)

Portfolio loans(1), (2)

 

 

5,551,753

 

 

63,537

 

4.54

%  

 

5,035,025

 

 

55,971

 

4.41

%  

 

5,876

 

 

1,690

 

7,566

Total interest-earning assets(1), (3)

 

$

7,132,324

 

$

73,335

 

4.08

%  

$

6,282,725

 

$

63,509

 

4.01

%  

$

7,461

 

$

2,365

$

9,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

103,798

 

 

  

 

  

 

 

100,004

 

 

  

 

  

 

 

 

 

 

  

 

  

Premises and equipment

 

 

119,773

 

 

  

 

  

 

 

99,284

 

 

  

 

  

 

 

 

 

 

  

 

  

Allowance for loan losses

 

 

(54,017)

 

 

  

 

  

 

 

(51,380)

 

 

  

 

  

 

 

 

 

 

  

 

  

Other assets

 

 

500,430

 

 

  

 

  

 

 

430,744

 

 

  

 

  

 

 

 

 

 

  

 

  

Total assets

 

$

7,802,308

 

 

  

 

  

 

$

6,861,377

 

 

  

 

  

 

 

 

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

Interest-bearing transaction deposits

 

$

1,294,628

 

$

1,305

 

0.40

%  

$

1,204,141

 

$

703

 

0.23

%  

$

57

 

$

545

$

602

Savings and money market deposits

 

 

1,913,838

 

 

1,650

 

0.34

%  

 

1,867,388

 

 

1,093

 

0.23

%  

 

(29)

 

 

586

 

557

Time deposits

 

 

1,576,191

 

 

5,991

 

1.51

%  

 

1,010,224

 

 

2,055

 

0.81

%  

 

1,543

 

 

2,393

 

3,936

Short-term borrowings:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

Federal funds purchased and 

  repurchase agreements

 

 

234,729

 

 

426

 

0.72

%  

 

215,776

 

 

291

 

0.54

%  

 

27

 

 

108

 

135

Other(4)

 

 

59,457

 

 

324

 

2.16

%  

 

139,204

 

 

447

 

1.27

%  

 

(337)

 

 

214

 

(123)

          Long-term debt(5)

 

 

153,707

 

 

1,437

 

3.71

%  

 

158,267

 

 

1,340

 

3.36

%  

 

(39)

 

 

136

 

97

          Junior subordinated debt issued to

             unconsolidated trusts

 

 

71,082

 

 

854

 

4.77

%  

 

70,939

 

 

649

 

3.63

%  

 

 1

 

 

204

 

205

Total interest-bearing liabilities

 

$

5,303,632

 

$

11,987

 

0.90

%  

$

4,665,939

 

$

6,578

 

0.56

%  

$

1,223

 

$

4,186

$

5,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread(1)

 

 

  

 

 

  

 

3.18

%  

 

  

 

 

  

 

3.45

%  

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,492,709

 

 

  

 

  

 

 

1,328,770

 

 

  

 

  

 

 

 

 

 

  

 

  

Other liabilities

 

 

44,143

 

 

  

 

  

 

 

44,453

 

 

  

 

  

 

 

 

 

 

  

 

  

Stockholders’ equity

 

 

961,824

 

 

  

 

  

 

 

822,215

 

 

  

 

  

 

 

 

 

 

  

 

  

Total liabilities and stockholders’ equity

 

$

7,802,308

 

 

  

 

  

 

$

6,861,377

 

 

  

 

  

 

 

 

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income / earning assets(1), (3)

 

$

7,132,324

 

$

73,335

 

4.08

%  

$

6,282,725

 

$

63,509

 

4.01

%  

 

 

 

 

 

 

 

Interest expense / earning assets

 

$

7,132,324

 

$

11,987

 

0.67

%  

$

6,282,725

 

$

6,578

 

0.41

%  

 

 

 

 

 

 

 

Net interest margin(1)

 

 

  

 

$

61,348

 

3.41

%  

 

  

 

$

56,931

 

3.60

%  

$

6,238

 

$

(1,821)

$

4,417


(1)

On a tax-equivalent basis assuming an income tax rate of 21% in 2018 and 35% in 2017.

(2)

Non-accrual loans have been included in average portfolio loans.

(3)

Interest income includes a tax-equivalent adjustment of $0.6 million and $1.0 million for the three months ended September 30, 2018 and 2017, respectively.

(4)

Includes federal funds purchased, FHLB advances and a  revolving loan.  Interest expense includes a non-usage fee on the revolving loan.

(5)

Includes FHLB long-term debt, senior notes and subordinated notes.

(6)

Annualized.

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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in income/

 

 

2018

 

2017

 

expense due to(1)

 

    

Average

    

Income/

    

Yield/

    

Average

    

Income/

    

Yield/

    

Average 

    

Average

    

Total Change

 

 

Balance

 

Expense

 

Rate(6)

 

Balance

 

Expense

 

Rate(6)

 

Volume

 

Yield/Rate

 

Change

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing bank deposits and federal

  funds sold

 

$

122,768

 

$

1,580

 

1.72

%  

$

128,835

 

$

980

 

1.02

%  

$

(62)

 

$

662

$

600

Investment securities:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

U.S. Government obligations

 

 

156,450

 

 

1,917

 

1.64

%  

 

142,377

 

 

1,504

 

1.41

%  

 

158

 

 

255

 

413

Obligations of states and political

  subdivisions(1)

 

 

293,258

 

 

5,677

 

2.59

%  

 

214,264

 

 

4,762

 

2.97

%  

 

1,588

 

 

(673)

 

915

Other securities

 

 

896,288

 

 

16,670

 

2.49

%  

 

521,044

 

 

8,971

 

2.30

%  

 

6,927

 

 

772

 

7,699

Loans held for sale

 

 

31,785

 

 

966

 

4.06

%  

 

123,508

 

 

3,443

 

3.73

%  

 

(2,763)

 

 

286

 

(2,477)

Portfolio loans(1), (2)

 

 

5,531,087

 

 

186,622

 

4.51

%  

 

4,267,393

 

 

136,260

 

4.27

%  

 

42,270

 

 

8,092

 

50,362

Total interest-earning assets(1), (3)

 

$

7,031,636

 

$

213,432

 

4.06

%  

$

5,397,421

 

$

155,920

 

3.86

%  

$

48,118

 

$

9,394

$

57,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

105,038

 

 

  

 

  

 

 

85,037

 

 

  

 

  

 

 

 

 

 

  

 

  

Premises and equipment

 

 

119,580

 

 

  

 

  

 

 

85,507

 

 

  

 

  

 

 

 

 

 

  

 

  

Allowance for loan losses

 

 

(54,056)

 

 

  

 

  

 

 

(49,793)

 

 

  

 

  

 

 

 

 

 

  

 

  

Other assets

 

 

504,892

 

 

  

 

  

 

 

325,061

 

 

  

 

  

 

 

 

 

 

  

 

  

Total assets

 

$

7,707,090

 

 

  

 

  

 

$

5,843,233

 

 

  

 

  

 

 

 

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

Interest-bearing transaction deposits

 

$

1,224,545

 

$

2,758

 

0.30

%  

$

1,081,515

 

$

1,316

 

0.16

%  

$

194

 

$

1,248

$

1,442

Savings and money market deposits

 

 

1,981,281

 

 

4,811

 

0.32

%  

 

1,606,943

 

 

2,349

 

0.20

%  

 

480

 

 

1,982

 

2,462

Time deposits

 

 

1,452,477

 

 

14,268

 

1.31

%  

 

844,874

 

 

4,393

 

0.70

%  

 

4,415

 

 

5,460

 

9,875

Short-term borrowings:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

Federal funds purchased and

  repurchase agreements

 

 

242,733

 

 

1,139

 

0.63

%  

 

186,282

 

 

618

 

0.44

%  

 

218

 

 

303

 

521

Other(4)

 

 

93,022

 

 

1,257

 

1.81

%  

 

54,329

 

 

521

 

1.28

%  

 

467

 

 

269

 

736

          Long-term debt(5)

 

 

153,982

 

 

4,200

 

3.65

%  

 

119,756

 

 

2,081

 

2.32

%  

 

708

 

 

1,411

 

2,119

          Junior subordinated debt issued to

             unconsolidated trusts

 

 

71,046

 

 

2,383

 

4.48

%  

 

70,904

 

 

1,857

 

3.50

%  

 

 4

 

 

522

 

526

Total interest-bearing liabilities

 

$

5,219,086

 

$

30,816

 

0.79

%  

$

3,964,603

 

$

13,135

 

0.44

%  

$

6,486

 

$

11,195

$

17,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread(1)

 

 

  

 

 

  

 

3.27

%  

 

  

 

 

  

 

3.42

%  

 

  

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,494,016

 

 

  

 

  

 

 

1,163,440

 

 

  

 

  

 

 

 

 

 

  

 

  

Other liabilities

 

 

47,313

 

 

  

 

  

 

 

40,188

 

 

  

 

  

 

 

 

 

 

  

 

  

Stockholders’ equity

 

 

946,675

 

 

  

 

  

 

 

675,002

 

 

  

 

  

 

 

 

 

 

  

 

  

Total liabilities and stockholders’ equity

 

$

7,707,090

 

 

  

 

  

 

$

5,843,233

 

 

  

 

  

 

 

 

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income / earning assets(1), (3)

 

$

7,031,636

 

$

213,432

 

4.06

%  

$

5,397,421

 

$

155,920

 

3.86

%  

 

 

 

 

 

 

 

Interest expense / earning assets

 

$

7,031,636

 

$

30,816

 

0.59

%  

$

5,397,421

 

$

13,135

 

0.32

%  

 

 

 

 

 

 

 

Net interest margin(1)

 

 

  

 

$

182,616

 

3.47

%  

 

  

 

$

142,785

 

3.54

%  

$

41,632

 

$

(1,801)

$

39,831


(1)

On a tax-equivalent basis assuming an income tax rate of 21% in 2018 and 35% in 2017.

(2)

Non-accrual loans have been included in average portfolio loans.

(3)

Interest income includes a tax-equivalent adjustment of $1.7 million and $2.5 million at September 30, 2018 and 2017, respectively.

(4)

Includes federal funds purchased, FHLB advances and a  revolving loan.  Interest expense includes a non-usage fee on the revolving loan.

(5)

Includes FHLB long-term debt, senior notes and subordinated notes.

(6)

Annualized.

 

 

 

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The Consolidated Average Balance Sheets and interest rates were impacted by the 2017 acquisitions of First Community and Mid Illinois, along with organic growth.  Total average interest-earning assets increased $849.6 million, or 13.5%, to $7.1 billion for the three month period ended September 30, 2018, as compared to $6.3 billion for the same period in 2017.  Total average interest-earning assets increased $1.6 billion, or 30.3%, to $7.0 billion for the nine month period ended September 30, 2018, as compared to $5.4 billion for the same period in 2017. Total average interest-bearing liability balances increased $637.7 million, or 13.7%, to $5.3 billion for the three month period ended September 30, 2018, as compared to $4.7 billion for the same period in 2017.  Total average interest-bearing liability balances increased $1.2 billion, or 31.6%, to $5.2 billion for the nine month period ended September 30, 2018, as compared to $4.0 billion for the same period in 2017.

 

Interest income, on a tax-equivalent basis, increased $9.8 million, or 15.5%, to $73.3 million for the three month period ended September 30, 2018, as compared to $63.5 million in the same period of 2017. Interest income, on a tax-equivalent basis, increased $57.5 million, or 36.9%, to $213.4 million for the nine month period ended September 30, 2018, as compared to $155.9 million in the same period of 2017.  The interest income increases related primarily to the increase in loan volumes.  Interest expense increased during the three month period ended September 30, 2018 by $5.4 million to $12.0 million from $6.6 million in the same period of 2017. Interest expense increased during the nine month period ended September 30, 2018 by $17.7 million to $30.8 million from $13.1 million in the same period of 2017. The interest expense increases were the result of increases in deposits and borrowings related to the 2017 acquisitions of First Community and Mid Illinois and rising interest rates.

 

Net interest income, on a tax-equivalent basis, increased $4.4 million for the three month period ended September 30, 2018, as compared to the same period of 2017.  Net interest income, on a tax-equivalent basis, increased $39.8 million for the nine month period ended September 30, 2018, as compared to the same period of 2017.  The Federal Open Market Committee announced that the federal funds rate increased from 1.50% to 1.75% on March 21, 2018, 1.75% to 2.00% on June 13, 2018 and 2.00% to 2.25% on September 26, 2018, for a combined increase of 75 basis points.  For comparison, the federal funds rate increased 50 basis points, from 0.75% to 1.25% for the first nine months of 2017.  The Company expects the increases in interest rates to be modestly favorable to net interest income for the remainder of 2018; however, rising interest rates could result in decreased demand for first mortgages as well as mortgage refinancing, activities which contribute to a portion of the Company’s mortgage revenue.

 

Net interest margin

 

Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, decreased to 3.41% for the three month period ended September 30, 2018, compared to 3.60% for the same period in 2017, and decreased to 3.47% for the nine month period ended September 30, 2018, compared to 3.54% for the same period in 2017.  Net of purchase accounting accretion and amortization(1), the net interest margin for the three month period ended September 30, 2018 was 3.29%, a decrease from 3.40% for the same period in 2017, and was 3.31% for the nine month period ended September 30, 2018, a decrease from 3.37% for the same period in 2017.

 

 

 

 

 

 

 

 

 

 


(1)

For a reconciliation of net interest margin net of purchase accounting accretion and amortization, a non-GAAP financial measure, see “Non-GAAP Financial Information” included in this Quarterly Report on Form 10-Q.

 

 

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Quarterly net interest margins for 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

    

2018

    

2017

    

First Quarter

 

3.52

%  

3.53

%  

Second Quarter

 

3.51

%  

3.47

%  

Third Quarter

 

3.41

%  

3.60

%  

Fourth Quarter

 

 —

%  

3.68

%  

 

The net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, also on a tax-equivalent basis, was 3.18% for the three month period ended September 30, 2018, compared to 3.45% for the same period in 2017, and was 3.27% for the nine month period ended September 30, 2018, compared to 3.42% for the same period in 2017.

 

Management attempts to mitigate the effects of the interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies.  Please refer to the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for accounting policies underlying the recognition of interest income and expense.

 

Non-interest income  (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

Nine Months Ended September 30, 

 

 

 

    

 

 

    

 

 

    

    $

    

 

 

 

    

 

 

    

$

    

 

 

 

 

2018

 

2017

 

Change

 

Change

 

2018

 

2017

 

Change

 

Change

 

 

Trust fees

 

$

6,324

 

$

5,071

 

$

1,253

 

24.7

%

$

20,573

 

$

17,088

 

$

3,485

 

20.4

%

 

Commissions and brokers’ fees,

  net

 

 

881

 

 

766

 

 

115

 

15.0

%

 

2,860

 

 

2,239

 

 

621

 

27.7

%

 

Remittance processing

 

 

3,630

 

 

2,877

 

 

753

 

26.2

%

 

10,588

 

 

8,581

 

 

2,007

 

23.4

%

 

Fees for customer services

 

 

7,340

 

 

6,577

 

 

763

 

11.6

%

 

21,576

 

 

18,658

 

 

2,918

 

15.6

%

 

Mortgage revenue

 

 

1,272

 

 

3,526

 

 

(2,254)

 

(63.9)

%

 

4,488

 

 

8,430

 

 

(3,942)

 

(46.8)

%

 

Security gains, net

 

 

 —

 

 

290

 

 

(290)

 

(100.0)

%

 

160

 

 

1,143

 

 

(983)

 

(86.0)

%

 

Other income

 

 

2,406

 

 

1,730

 

 

676

 

39.1

%

 

6,896

 

 

4,774

 

 

2,122

 

44.4

%

 

Total non-interest income

 

$

21,853

 

$

20,837

 

$

1,016

 

4.9

%

$

67,141

 

$

60,913

 

$

6,228

 

10.2

%

 

 

Total non-interest income of $21.9 million for the three month period ended September 30, 2018 increased by 4.9% as compared to $20.8 million for the same period in 2017.  Total non-interest income of $67.1 million for the nine month period ended September 30, 2018 increased by 10.2% as compared to $60.9 million for the same period in 2017.  The increases reflect organic growth as well as the 2017 acquisitions of First Community and Mid Illinois, offset by a decline in mortgage revenue.

 

Combined Wealth Management revenue, consisting of trust fees and commissions and brokers’ fees, net, increased to $7.2 million for the three months ended September 30, 2018 compared to $5.8 million for the three months ended September 30, 2017 and increased to $23.4 million for the nine months ended September 30, 2018 compared to $19.3 million for the nine months ended September 30, 2017. Market expansion and increased assets under care drove fee income.  Further, two of the Company’s acquisitions, Pulaski and First Community, had no legacy fee income in these businesses; therefore, the addition of these fee-based service offerings in the corresponding acquired bank markets is expected to provide attractive growth opportunities in future periods.

 

Remittance processing revenue from the Company’s subsidiary, FirsTech, Inc., of $3.6 million for the three months ended September 30, 2018 increased compared to $2.9 million for the same period of 2017.  For the first nine months of 2018, remittance processing revenue increased to $10.6 million compared to $8.6 million for the same period of 2017.  The positive 2018 results are a reflection of new customer activity and volume increases from existing customers. 

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FirsTech, Inc. adds important diversity to our revenue stream while widening our array of service offerings to larger commercial clients within our footprint and nationally.

Fees for customer services increased to $7.3 million for the three month period ended September 30, 2018 as compared to $6.6 million for the same period of 2017 and increased to $21.6 million for the nine month period ended September 30, 2018 as compared to $18.7 million for the same period of 2017.  Evolving regulation, product changes and changing behaviors by our client base may impact the fees for customer services in future periods.

 

Mortgage revenue decreased to $1.3 million for the three month period ended September 30, 2018 compared to $3.5 million for the same period of 2017 and decreased to $4.5 million for the nine month period ended September 30, 2018 compared to $8.4 million for the same period of 2017.  2018 results reflect lower origination volumes and the realignment of mortgage origination resources to the Company’s branch market areas through the sale of certain mortgage origination offices in the fourth quarter of 2017.

 

Security gains, net, vary based on the Company’s decisions around selling securities.  In the first quarter of 2017, the Company sold 100% risk weighted investments and reinvested in 20% risk weighted investments at higher yields to better manage capital, while also producing higher future returns.

 

Other income increased to $2.4 million, or 39.1%, for the three months ended September 30, 2018 compared to $1.7 million for the same period of 2017 and increased to $6.9 million, or 44.4%, for the nine months ended September 30, 2018 compared to $4.8 million for the same period of 2017 across multiple revenue sources.

 

Non-interest expense  (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

Nine Months Ended September 30, 

 

 

 

    

 

 

    

 

 

    

$

    

%

 

 

 

    

 

 

    

$

    

%

 

 

 

 

2018

 

2017

 

Change

 

Change

 

2018

 

2017

 

Change

 

Change

 

 

Salaries, wages and employee benefits

 

$

26,024

 

$

25,497

 

$

527

 

2.1

%

$

80,315

 

$

67,448

 

$

12,867

 

19.1

%

 

Net occupancy expense of premises

 

 

3,761

 

 

3,714

 

 

47

 

1.3

%

 

11,271

 

 

10,025

 

 

1,246

 

12.4

%

 

Furniture and equipment expenses

 

 

1,715

 

 

1,785

 

 

(70)

 

(3.9)

%

 

5,418

 

 

5,123

 

 

295

 

5.8

%

 

Data processing

 

 

4,016

 

 

5,113

 

 

(1,097)

 

(21.5)

%

 

12,391

 

 

11,348

 

 

1,043

 

9.2

%

 

Amortization of intangible assets

 

 

1,445

 

 

1,286

 

 

159

 

12.4

%

 

4,450

 

 

3,675

 

 

775

 

21.1

%

 

Other expense

 

 

8,968

 

 

9,544

 

 

(576)

 

(6.0)

%

 

30,429

 

 

23,707

 

 

6,722

 

28.4

%

 

Total non-interest expense

 

$

45,929

 

$

46,939

 

$

(1,010)

 

(2.2)

%

$

144,274

 

$

121,326

 

$

22,948

 

18.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

9,081

 

$

9,561

 

$

(480)

 

(5.0)

%

$

26,108

 

$

26,980

 

$

(872)

 

(3.2)

%

 

Effective rate on income taxes

 

 

25.3

%  

 

33.7

%  

 

  

 

  

 

 

26.2

%  

 

34.9

%  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

53.5

%  

 

58.9

%  

 

  

 

  

 

 

56.0

%  

 

58.1

%  

 

  

 

  

 

 

Full-time equivalent employees as of period-end

 

 

1,298

 

 

1,382

 

 

  

 

  

 

 

 

 

 

 

 

 

  

 

  

 

 

 

 

 

 

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Total non-interest expense of $45.9 million for the three month period ended September 30, 2018 decreased as compared to $46.9 million for the same period in 2017.  Total non-interest expense of $144.3 million for the nine month period ended September 30, 2018 increased as compared to $121.3 million for the same period in 2017. Pre-tax non-operating expenses of $0.2 million impacted the three month period ended September 30, 2018 while pre-tax non-operating expenses of $3.1 million impacted the same period of 2017.  Pre-tax non-operating expenses of $4.7 million impacted the nine month period ended September 30, 2018 while pre-tax non-operating expenses of $4.4 million impacted the same period of 2017. We continue to examine expenses across all areas of the Company and remain focused on expense discipline, with an emphasis on the ones outlined below.

 

Salaries, wages and employee benefits expense of $26.0 million increased $0.5 million for the three month period ended September 30, 2018 as compared to the same period in 2017 and increased $12.9 million, to $80.3 million, for the nine month period ended September 30, 2018 as compared to the same period of 2017.  The increase was primarily due to an increased number of employees resulting from the First Community and Mid Illinois acquisitions.  In addition, restructuring costs designed to address the changing needs of our organization as we seek to balance growth with efficiency negatively impacted the nine month period ended September 30, 2018 by $1.7 million.  Full-time equivalent employees totaled 1,298 at September 30, 2018, down from 1,347 at December 31, 2017, and 1,382 at September 30, 2017.

 

Combined net occupancy expense of premises and furniture and equipment expenses were  $5.5 million for the three month periods ended September 30, 2018 and 2017.  Combined net occupancy expense of premises and furniture and equipment expenses were $16.7 million and $15.1 million for the nine month periods ended September 30, 2018 and 2017, respectively. 2017 acquisitions added 21 banking centers.  We continue to evaluate our banking center network and five banking centers were closed in the first quarter of 2018.

 

Data processing expense for the three month period ended September 30, 2018 of $4.0 million decreased from $5.1 million for the same period of 2017.  Data processing expense for the nine month period ended September 30, 2018 of $12.4 million increased from $11.3 million for the same period of 2017.  Variances are largely related to deconversion expenses related to acquisitions.

 

Amortization of intangible assets increased for the three and nine month periods ended September 30, 2018 compared to the same period in 2017 as a result of the First Community and Mid Illinois acquisitions.

 

Other expense of $9.0 million for the three month period ended September 30, 2018 decreased $0.6 million compared to the same period in 2017.  Other expense of $30.4 million for the nine month period ended September 30, 2018 increased $6.7 million compared to the same period in 2017 across multiple expense categories, including fluctuations in gains and losses on OREO sales, business development and marketing and acquisition-related check card service expense.

 

The effective rate on income taxes, or income taxes divided by income before taxes, of 25.3% and 26.2% for the three and nine months ended September 30, 2018, respectively, was lower than the combined federal and state statutory rate of approximately 28% due to tax preferred interest income, such as municipal bond interest and bank owned life insurance income, accounting for a portion of our taxable income.  Effective July 1, 2017, the combined Illinois corporate income tax rate and replacement tax rate increased from 7.75% to 9.50%.   Effective January 1, 2018 in connection with the TCJA, the corporate federal tax rate was reduced from 35.0% to 21.0%.

 

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The efficiency ratio(1) represents total non-interest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus non-interest income, less security gains and losses.  The efficiency ratio, which is a measure commonly used by management and the investment community in the banking industry, measures the amount of expense that is incurred to generate a dollar of revenue.  The efficiency ratio of 53.5% for the three month period ended September 30, 2018 improved from 58.9% in the comparable period in 2017 and the efficiency ratio of 56.0% for the nine month period ended September 30, 2018 improved from 58.1% in the comparable period in 2017.  Operating costs have been influenced by acquisitions and the adjusted efficiency ratio(1), excluding the impact of such acquisition costs among other items, was 53.3% and 55.0% for the three month periods ended September 30, 2018 and 2017, respectively.  The adjusted efficiency ratio(1) was 54.2% and 55.9% for the nine month periods ended September 30, 2018 and 2017, respectively.  While acquisition expenses may have a negative impact on the efficiency ratios, the Company expects to realize operating efficiencies creating a positive impact in future years. Further, the Company started to see greater operating efficiencies from the South Side Bank integration beginning in the second quarter of 2018.  We will continue to examine appropriate avenues to improve efficiency and remain consistently focused on expense discipline.

 


(1)

For a reconciliation of efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see “Non-GAAP Financial Information” included in this Quarterly Report on Form 10-Q.

 

FINANCIAL CONDITION

 

Significant Consolidated Balance Sheet items (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

 

 

    

 

 

 

 

2018

 

2017

 

$ Change

 

% Change

 

Assets

 

 

  

 

 

  

 

 

  

 

  

 

Securities available for sale

 

$

863,381

 

$

872,682

 

$

(9,301)

 

(1.1)

%

Securities held to maturity

 

 

626,250

 

 

443,550

 

 

182,700

 

41.2

%

Loans held for sale

 

 

32,617

 

 

94,848

 

 

(62,231)

 

(65.6)

%

Portfolio loans, net

 

 

5,570,998

 

 

5,465,918

 

 

105,080

 

1.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,889,385

 

$

7,860,640

 

$

28,745

 

0.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

 

  

 

  

 

Deposits:

 

 

  

 

 

  

 

 

  

 

  

 

Noninterest-bearing

 

$

1,438,054

 

$

1,597,421

 

$

(159,367)

 

(10.0)

%

Interest-bearing

 

 

4,757,515

 

 

4,528,544

 

 

228,971

 

5.1

%

Total deposits

 

$

6,195,569

 

$

6,125,965

 

$

69,604

 

1.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

255,906

 

$

304,566

 

$

(48,660)

 

(16.0)

%

Short-term borrowings

 

 

200,000

 

 

220,000

 

 

(20,000)

 

(9.1)

%

Long-term debt

 

 

50,000

 

 

50,000

 

 

 —

 

 —

%

Senior notes, net of unamortized issuance costs

 

 

39,505

 

 

39,404

 

 

101

 

0.3

%

Subordinated notes, net of unamortized issuance costs

 

 

59,121

 

 

64,715

 

 

(5,594)

 

(8.6)

%

Junior subordinated debt owed to unconsolidated trusts

 

 

71,118

 

 

71,008

 

 

110

 

0.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

6,917,245

 

$

6,925,637

 

$

(8,392)

 

(0.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

$

972,140

 

$

935,003

 

$

37,137

 

4.0

%

 

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In the first nine months of 2018, we continued to emphasize our key priorities - balance sheet strength, profitability and growth - achieved within a framework of safety and soundness. Our capital position remains strong and we continue to focus on a sound credit foundation.  We believe our emphasis on commercial banking and wealth management, supplemented by our remittance processing activities, will continue to produce growth and profitability as we move into the final quarter of 2018 and into 2019.

 

Loans Held for Sale

 

Loans held for sale totaled $32.6 million and $94.8 million at September 30, 2018 and December 31, 2017, respectively.  The amount of loans held for sale decreased from December 31, 2017 due to lower origination volumes in 2018.  Lower origination volumes are a reflection of the realignment of mortgage origination resources to the Company’s branch market areas through the sale of certain mortgage origination offices in the fourth quarter of 2017.  Loans held for sale generate net interest income until loans are delivered to investors, at which point mortgage revenue will be recognized.

 

Portfolio Loans

 

Geographic distributions of portfolio loans by category were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Illinois

    

Missouri

    

Florida

    

Indiana

    

Total

Commercial

 

$

1,014,616

 

$

397,734

 

$

19,368

 

$

29,468

 

$

1,461,186

Commercial real estate

 

 

1,468,435

 

 

586,480

 

 

161,347

 

 

155,606

 

 

2,371,868

Real estate construction

 

 

101,682

 

 

124,119

 

 

15,035

 

 

67,926

 

 

308,762

Retail real estate

 

 

840,900

 

 

487,573

 

 

101,119

 

 

23,674

 

 

1,453,266

Retail other

 

 

25,488

 

 

1,212

 

 

1,320

 

 

639

 

 

28,659

Portfolio loans

 

$

3,451,121

 

$

1,597,118

 

$

298,189

 

$

277,313

 

$

5,623,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

 

  

 

 

  

 

 

  

 

 

  

 

 

52,743

Portfolio loans, net

 

 

  

 

 

  

 

 

  

 

 

  

 

$

5,570,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Illinois

    

Missouri

    

Florida

    

Indiana

    

Total

Commercial

 

$

974,392

 

$

378,424

 

$

19,005

 

$

42,810

 

$

1,414,631

Commercial real estate

 

 

1,505,819

 

 

547,200

 

 

147,360

 

 

154,305

 

 

2,354,684

Real estate construction

 

 

87,084

 

 

74,662

 

 

26,209

 

 

73,551

 

 

261,506

Retail real estate

 

 

835,287

 

 

509,500

 

 

98,112

 

 

17,902

 

 

1,460,801

Retail other

 

 

26,230

 

 

685

 

 

961

 

 

 2

 

 

27,878

Portfolio loans

 

$

3,428,812

 

$

1,510,471

 

$

291,647

 

$

288,570

 

$

5,519,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

 

  

 

 

  

 

 

  

 

 

  

 

 

53,582

Portfolio loans, net

 

 

  

 

 

  

 

 

  

 

 

  

 

$

5,465,918

 

Portfolio loans increased $104.2 million, or 1.9%, as of September 30, 2018 compared to December 31, 2017.  Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased $111.0 million from December 31, 2017.  Retail real estate and retail other loans decreased $6.8 million from December 31, 2017.  2018 loan growth was driven by organic originations, particularly in the Missouri market. 

 

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Relationship banking, rather than transactional banking, remains a focus for the Company.  Relationship banking implies a primary banking relationship with the borrower that includes, at a  minimum, an active deposit banking relationship in addition to the lending relationship.

 

Allowance for Loan Losses

 

Our allowance for loan losses was $52.7 million, or 0.94% of portfolio loans, and $53.6 million, or 0.97% of portfolio loans, at September 30, 2018 and December 31, 2017, respectively.  As of September 30, 2018, management believed the level of the allowance and coverage of non-performing loans to be appropriate based upon the information available.   However, additional losses may be identified in our loan portfolio as new information is obtained.  We may need to provide for additional loan losses in the future as management continues to identify potential problem loans and gains further information concerning existing problem loans.

 

Provision for Loan Losses

 

The provision for loan losses is a current charge against income and represents an amount which management believes is sufficient to maintain an appropriate allowance for known and probable losses in the loan portfolio.  In assessing the appropriateness of the allowance for loan losses, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, historical loan loss experience and credit quality of the portfolio.  When a determination is made by management to charge-off a loan balance, a write-off is charged against the allowance for loan losses.  We continue to attempt to identify problem loan situations on a proactive basis.  Once problem loans are identified, adjustments to the provision for loan losses are made based upon all information available at that time.

 

The provision for loan losses was $4.0 million and $2.5 million for the nine months ended September 30, 2018 and 2017, respectively.  As a result of acquisitions, the Company is holding acquired loans that are carried net of a fair value adjustment for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.   However, as the acquired loans renew and as the Company originates new loan production, it is necessary to establish an allowance for loan losses, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses.

 

Sensitive assets include non-accrual loans, loans on our classified loan reports and other loans identified as having more than reasonable potential for loss.  Management reviews sensitive assets on at least a quarterly basis for changes in each applicable customer’s ability to pay and changes in valuation of underlying collateral in order to estimate probable losses.  The majority of these loans are being repaid in conformance with their contracts.

 

Non-performing Loans

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Typically, loans are collateral dependent. When a collateral dependent loan is classified as non-accrual it is charged down through the allowance for loan losses to the fair value of our interest in the underlying collateral less estimated costs to sell.  Our loan portfolio is collateralized primarily by real estate.

 

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The following table sets forth information concerning non-performing loans as of each of the dates indicated (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

June 30, 

    

March 31,

    

December 31,

 

 

 

2018

 

2018

 

2018

 

2017

 

Non-accrual loans

 

$

40,395

 

$

25,215

 

$

32,588

 

$

24,624

 

Loans 90+ days past due and still accruing

 

 

364

 

 

1,142

 

 

995

 

 

2,741

 

Total non-performing loans

 

$

40,759

 

$

26,357

 

$

33,583

 

$

27,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO

 

$

1,093

 

$

3,694

 

$

1,001

 

$

1,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing assets

 

$

41,852

 

$

30,051

 

$

34,584

 

$

28,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

52,743

 

$

53,305

 

$

52,649

 

$

53,582

 

Allowance for loan losses to portfolio loans

 

 

0.94

%

 

0.96

%

 

0.95

%

 

0.97

%

Allowance for loan losses to non-performing loans

 

 

129.4

%

 

202.2

%

 

156.8

%

 

195.8

%

Non-performing loans to portfolio loans, before allowance for loan losses

 

 

0.7

%

 

0.5

%

 

0.6

%

 

0.5

%

Non-performing loans and OREO to portfolio loans, before allowance

  for loan losses

 

 

0.7

%

 

0.5

%

 

0.6

%

 

0.5

%

 

Total non-performing assets were $41.9 million at September 30, 2018, compared to $28.6 million at December 31, 2017.  The increase in non-performing loans in the third quarter of 2018 was driven by two commercial credits.  Non-performing assets as a percentage of total loans and non-performing assets continued to be favorably low at 0.7% on September 30, 2018.  Asset quality metrics can be generally influenced by market-specific economic conditions beyond the control of the Company, and specific measures may fluctuate from quarter to quarter.

 

Potential Problem Loans

 

Potential problem loans are those loans which are not categorized as impaired, restructured, non-accrual or 90+ days past due, but where current information indicates that the borrower may not be able to comply with present loan repayment terms.  Management assesses the potential for loss on such loans as it would with other problem loans and has considered the effect of any potential loss in determining its provision for probable loan losses.  Potential problem loans totaled $89.6 million at September 30, 2018, compared to $70.4 million at December 31, 2017.  Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral or other planned actions will result in full repayment of the debts.  As of September 30, 2018, management identified no other loans that represent or result from trends or uncertainties which management reasonably expected to materially impact future operating results, liquidity or capital resources.

 

LIQUIDITY

 

Liquidity management is the process by which we ensure that adequate liquid funds are available to meet the present and future cash flow obligations arising in the daily operations of our business.  These financial obligations consist of needs for funds to meet commitments to borrowers for extensions of credit, fund capital expenditures, honor withdrawals by customers, pay dividends to stockholders and pay operating expenses.  Our most liquid assets are cash and due from banks, interest-bearing bank deposits and federal funds sold.  The balances of these assets are dependent on the Company’s operating, investing, lending, and financing activities during any given period.

 

First Busey’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayments, and capital funds.  Additional liquidity is provided by the ability to borrow from the FHLB, the Federal Reserve, First Busey’s revolving loan facility, or to utilize brokered deposits.

 

 

 

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As of September 30, 2018, management believed that adequate liquidity existed to meet all projected cash flow obligations.  We seek to achieve a satisfactory degree of liquidity by actively managing both assets and liabilities.  Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

At September 30, 2018 and December 31, 2017 the Company had outstanding standby letters of credit of $33.2 million and $37.2 million, respectively, and commitments to extend credit of $1.3 billion to its customers.  Since these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.  These commitments are made in the ordinary course of business to meet the financing needs of the Company’s customers.  As of September 30, 2018, no amounts were recorded as liabilities for the Company’s potential obligations under these commitments.

 

CAPITAL RESOURCES

 

Our capital ratios are in excess of those required to be considered “well-capitalized” pursuant to applicable regulatory guidelines.  The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary bank.  Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into risk-weighted categories.  These balances are then multiplied by the factor appropriate for that risk-weighted category.  For 2018, the guidelines, including the capital conservation buffer, required bank holding companies and their subsidiary bank to maintain a total capital to total risk-weighted asset ratio of not less than 9.875%, Tier 1 capital to total risk-weighted asset ratio of not less than 7.875%, Common Equity Tier 1 capital to total risk-weighted asset ratio of not less than 6.375% and a Tier 1 leverage ratio of not less than 4.00%.  These minimum capital requirements will increase annually until the Basel III Rule is fully phased-in on January 1, 2019.  As of September 30, 2018, First Busey had a total capital to total risk-weighted asset ratio of 14.34%, a Tier 1 capital to risk-weighted asset ratio of 12.50%, Common Equity Tier 1 capital to risk-weighted asset ratio of 11.29%  and a Tier 1 leverage ratio of 10.17%; Busey Bank had ratios of 14.22%, 13.36%, 13.36% and 10.84%, respectively.

 

NON-GAAP FINANCIAL INFORMATION

 

This Quarterly Report on Form 10-Q contains certain financial information determined by methods other than in accordance with GAAP.  These measures include adjusted net income, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible common equity, and tangible common equity to tangible assets. Management uses these non-GAAP measures, together with the related GAAP measures, to analyze the Company’s performance and to make business decisions.  Management also uses these measures for peer comparisons.

 

A reconciliation to what management believes to be the most direct compared GAAP financial measures, specifically net income in the case of adjusted net income and adjusted return on average assets, total net interest income, total non-interest income and total non-interest expense in the case of adjusted efficiency ratio and total stockholders’ equity in the case of the tangible book value per share, appears below (dollars in thousands, except per share data).  The Company believes each of the adjusted measures is useful for investors and management to understand the effects of certain non-recurring non-interest items and provides additional perspective on the Company’s performance over time as well as comparison to the Company’s peers.

 

These non-GAAP disclosures have inherent limitations and are not audited.  They should not be considered in isolation or as a substitute for the results reported in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.  Tax effected numbers included in these non-GAAP disclosures are based on estimated statutory rates.

 

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Reconciliation of Non-GAAP Financial Measures — Adjusted Net Income and Return on Average Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

 

June 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

    

2018

 

2018

 

2017

 

2018

 

2017

 

Net income

 

$

26,859

 

$

24,862

 

$

18,784

 

$

73,638

 

$

50,433

 

Acquisition expenses

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Salaries, wages, and employee benefits

 

 

 —

 

 

 —

 

 

720

 

 

1,233

 

 

720

 

Data processing

 

 

 —

 

 

34

 

 

1,262

 

 

406

 

 

1,348

 

Other (includes professional and legal)

 

 

167

 

 

107

 

 

1,031

 

 

2,224

 

 

2,048

 

Other restructuring costs

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Salaries, wages, and employee benefits

 

 

 —

 

 

 —

 

 

 —

 

 

417

 

 

215

 

Fixed asset impairments

 

 

 —

 

 

817

 

 

 —

 

 

817

 

 

 —

 

Other

 

 

 —

 

 

 —

 

 

46

 

 

 —

 

 

46

 

Related tax benefit

 

 

(20)

 

 

(230)

 

 

(1,195)

 

 

(1,217)

 

 

(1,681)

 

Adjusted net income

 

$

27,006

 

$

25,590

 

$

20,648

 

$

77,518

 

$

53,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average assets

 

$

7,802,308

 

$

7,653,541

 

$

6,861,377

 

$

7,707,090

 

$

5,843,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Return on average assets(1)

 

 

1.37

%

 

1.30

%

 

1.09

%

 

1.28

%

 

1.15

%

Adjusted: Return on average assets(1)

 

 

1.37

%

 

1.34

%

 

1.19

%

 

1.34

%

 

1.22

%


(1)

Annualized measure.

 

Reconciliation of Non-GAAP Financial Measures — Adjusted Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 30, 

    

June 30, 

    

September 30, 

 

September 30, 

    

September 30, 

 

 

    

2018

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Net interest income

 

$

60,774

 

$

60,372

 

$

55,941

 

$

180,903

 

$

140,320

 

Tax-equivalency adjustment

 

 

574

 

 

561

 

 

989

 

 

1,713

 

 

2,465

 

Less: Purchase accounting amortization

 

 

(2,273)

 

 

(3,015)

 

 

(3,124)

 

 

(8,698)

 

 

(6,610)

 

Adjusted: Net interest income

 

$

59,075

 

$

57,918

 

$

53,806

 

$

173,918

 

$

136,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest-earning assets

 

$

7,132,324

 

$

6,984,486

 

$

6,282,725

 

$

7,031,636

 

$

5,397,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Net interest margin(1)

 

 

3.41

%  

 

3.50

%  

 

3.60

%

 

3.47

%  

 

3.54

%

Adjusted: Net Interest margin(1)

 

 

3.29

%  

 

3.33

%  

 

3.40

%

 

3.31

%  

 

3.37

%


(1)

Annualized measure.

 

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Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30, 

 

 

June 30, 

 

 

September 30, 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

2018

 

2018

 

2017

 

2018

 

2017

 

 

Reported: Net Interest income

 

$

60,774

 

$

60,372

 

$

55,941

 

$

180,903

 

$

140,320

 

 

Tax-equivalency adjustment

 

 

574

 

 

561

 

 

989

 

 

1,713

 

 

2,465

 

 

Tax equivalent interest income

 

$

61,348

 

$

60,933

 

$

56,930

 

$

182,616

 

$

142,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Non-interest income

 

 

21,853

 

 

22,802

 

 

20,837

 

 

67,141

 

 

60,913

 

 

Less: Security gains, net

 

 

 —

 

 

160

 

 

290

 

 

160

 

 

1,143

 

 

Adjusted: Non-interest income

 

$

21,853

 

$

22,642

 

$

20,547

 

$

66,981

 

$

59,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Non-interest expense

 

 

45,929

 

 

47,305

 

 

46,939

 

 

144,274

 

 

121,326

 

 

Less:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Amortization of intangible assets

 

 

(1,445)

 

 

(1,490)

 

 

(1,286)

 

 

(4,450)

 

 

(3,675)

 

 

Non-operating adjustments:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Salaries, wages, and employee

  benefits

 

 

 —

 

 

 —

 

 

(720)

 

 

(1,650)

 

 

(935)

 

 

Data processing

 

 

 —

 

 

(34)

 

 

(1,262)

 

 

(406)

 

 

(1,348)

 

 

Other

 

 

(167)

 

 

(924)

 

 

(1,077)

 

 

(2,596)

 

 

(2,094)

 

 

Adjusted: Non-interest expense

 

$

44,317

 

$

44,857

 

$

42,594

 

$

135,172

 

$

113,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Efficiency ratio

 

 

53.47

%

 

54.82

%

 

58.92

%

 

56.02

%

 

58.08

%

 

Adjusted: Efficiency ratio

 

 

53.26

%

 

53.67

%

 

54.98

%

 

54.16

%

 

55.92

%

 

 

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Table of Contents

Reconciliation of Non-GAAP Financial Measures — Tangible common equity to tangible assets, Tangible book value per share, Return on average tangible common equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 30, 

 

June 30,

 

September 30, 

 

 

    

2018

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

7,889,385

 

$

7,775,544

 

$

6,913,789

 

Less:

 

 

  

 

 

  

 

 

  

 

Goodwill and other intangible assets, net

 

 

(301,963)

 

 

(303,407)

 

 

(247,562)

 

Tax effect of other intangible assets, net

 

 

8,912

 

 

9,288

 

 

11,846

 

Tangible assets

 

$

7,596,334

 

$

7,481,425

 

$

6,678,073

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

972,140

 

 

957,182

 

 

836,068

 

Less:

 

 

  

 

 

  

 

 

  

 

Goodwill and other intangible assets, net

 

 

(301,963)

 

 

(303,407)

 

 

(247,562)

 

Tax effect of other intangible assets, net

 

 

8,912

 

 

9,288

 

 

11,846

 

Tangible common equity

 

$

679,089

 

$

663,063

 

$

600,352

 

 

 

 

 

 

 

 

 

 

 

 

Tangible common equity to tangible assets(1)

 

 

8.94

%  

 

8.86

%  

 

8.99

%

Tangible book value per share

 

$

13.72

 

$

13.40

 

$

12.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 

 

June 30,

 

September 30, 

 

 

    

2018

    

2018

    

2017

 

Average stockholders’ common equity

 

$

961,824

 

$

944,131

 

$

822,215

 

Less: Average goodwill and intangibles, net

 

 

(302,914)

 

 

(304,379)

 

 

(245,371)

 

Average tangible common equity

 

$

658,910

 

$

639,752

 

$

576,844

 

 

 

 

 

 

 

 

 

 

 

 

Reported: Return on average tangible common equity(2)

 

 

16.17

%

 

15.59

%

 

12.92

%

Adjusted: Return on average tangible common equity(2),(3)

 

 

16.26

%

 

16.04

%

 

14.20

%

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

 

Average stockholders’ common equity

 

$

946,675

 

$

675,002

 

Less: Average goodwill and intangibles, net

 

 

(304,738)

 

 

(162,415)

 

Average tangible common equity

 

$

641,937

 

$

512,587

 

 

 

 

 

 

 

 

 

Reported: Return on average tangible common equity(2)

 

 

15.34

%

 

13.15

%

Adjusted: Return on average tangible common equity(2),(3)

 

 

16.15

%

 

13.86

%


(1)

Tax-effected measure.

(2)

Annualized measure.

(3)

Calculated using adjusted net income.

 

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FORWARD-LOOKING STATEMENTS

 

Statements made in this report, other than those concerning historical financial information, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events.  A number of factors, many of which are beyond our ability to control or predict, could cause actual results to differ materially from those in our forward-looking statements.  These factors include, among others, the following: (i) the strength of the local, state, national and international economy (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations); (ii) changes in state and federal laws, regulations and governmental policies concerning the Company’s general business; (iii) changes in interest rates and prepayment rates of the Company’s assets; (iv) increased competition in the financial services sector and the inability to attract new customers; (v) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (vi) the loss of key executives or employees; (vii) changes in consumer spending; (viii) unexpected results of current and/or future acquisitions, which may include failure to realize the anticipated benefits of any acquisition and the possibility that transaction costs may be greater than anticipated; (ix) unexpected outcomes of existing or new litigation involving the Company;  (x) the economic impact of any future terrorist threats or attacks; (xi) the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards; and (xii) changes in accounting policies and practices.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Additional information concerning the Company and its business, including additional factors that could materially affect its financial results, is included in the Company’s filings with the Securities and Exchange Commission.

 

CRITICAL ACCOUNTING ESTIMATES

 

Critical accounting estimates are those that are critical to the portrayal and understanding of First Busey’s financial condition and results of operations and require management to make assumptions that are difficult, subjective or complex.  These estimates involve judgments, assumptions and uncertainties that are susceptible to change.  In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially different financial condition or materially different results of operations is a reasonable likelihood.  Further, changes in accounting standards could impact the Company’s critical accounting estimates.

 

Our significant accounting policies are described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The majority of these accounting policies do not require management to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material.  However, the following policies could be deemed critical:

 

Fair Value of Available for Sale Investment Securities.  Securities are classified as available for sale when First Busey determines it is possible the securities could be sold in the future due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons.  Securities classified as available for sale are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income (loss).  For securities classified as available for sale, fair value measurements from an independent pricing service are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

 

Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of securities below their amortized cost are evaluated to determine whether they are temporary or OTTI.  If the Company (a) has the intent to sell a debt security or (b) will more-likely-than-not be required to sell the debt security before its anticipated recovery, then the Company

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recognizes the entire decline in fair value as an OTTI loss.  If neither of these conditions are met, the Company evaluates whether a credit loss exists.  The decline in fair value is separated into the amount of impairment related to the credit loss and the amount of impairment related to all other factors.  The amount of the impairment related to credit loss is recognized in earnings, and the amount of impairment related to all other factors is recognized in other comprehensive income (loss).

 

The Company also evaluates whether the decline in fair value of an equity security is temporary or OTTI.  In determining whether an unrealized loss on an equity security is temporary or OTTI, management considers various factors including the magnitude and duration of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the equity security to forecasted recovery.

 

Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations. Business combinations are accounted for using the acquisition method of accounting.  Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the date of acquisition.  Fair values are determined based on the definition of “fair value” defined in FASB ASC Topic 820 — Fair Value Measurement as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

 

The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed. At the date of acquisition, when loans have evidence of credit deterioration since origination and it is probable that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. At each future reporting date, the Company re-estimates the expected cash flows of the loans. Subsequent decreases in the expected cash flows will generally result in a provision for loan losses. Subsequent increases in the expected cash flows will generally be offset against the allowance for loan losses to the extent an allowance has been established or will be recognized as interest income prospectively.

 

Allowance for Loan Losses. First Busey has established an allowance for loan losses which represents its estimate of the probable losses inherent in the loan portfolio as of the date of the unaudited Consolidated Financial Statements and reduces the total loans outstanding by an estimate of uncollectible loans.  Loans deemed uncollectible are charged against and reduce the allowance.  A provision for loan losses is charged to current expense and acts to replenish the allowance for loan losses in order to maintain the allowance at a level that management deems adequate.  Acquired loans from business combinations with uncollected principal balances are carried net of a fair value adjustment for credit and interest rates.  These loans are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.  However, as the acquired loans renew, it is generally necessary to establish an allowance which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans.

 

To determine the adequacy of the allowance for loan losses, a formal analysis is completed quarterly to assess the risk within the loan portfolio.  This assessment is reviewed by the Company’s senior management.  The analysis includes a review of historical performance, dollar amount and trends of past due loans, dollar amount and trends in non-performing loans, certain impaired loans, and loans identified as sensitive assets.  Sensitive assets include non-accrual loans, past-due loans, loans on First Busey’s watch loan reports and other loans identified as having probable potential for loss.

 

The allowance consists of specific and general components.  The specific component considers loans that are classified as impaired.  For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying amount of that loan.  The general component covers non-classified loans and classified loans not considered impaired, and is based on historical loss experience adjusted for qualitative factors.  Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss experience.

 

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A loan is considered to be impaired when, based on current information and events, it is probable First Busey will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreement.  When a loan becomes impaired, management generally calculates the impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate.  If the loan is collateral dependent, the fair value of the collateral is used to measure the amount of impairment.  The amount of impairment and any subsequent changes are recorded through a charge to the provision for loan losses.  For collateral dependent loans, First Busey has determined the required allowance on these loans based upon the estimated fair value, net of selling costs, of the applicable collateral.  The required allowance or actual losses on these impaired loans could differ significantly if the ultimate fair value of the collateral is significantly different from the fair value estimates used by First Busey in estimating such potential losses.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of changes in asset values due to movements in underlying market rates and prices.  Interest rate risk is a type of market risk to earnings and capital arising from movements in interest rates.  Interest rate risk is the most significant market risk affecting First Busey as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, have minimal impact or do not arise in the normal course of First Busey’s business activities.

 

First Busey has an asset-liability committee, whose policy is to meet at least quarterly, to review current market conditions to attempt to structure the Consolidated Balance Sheets to ensure stable net interest income despite potential changes in interest rates.

 

As interest rate changes do not impact all categories of assets and liabilities equally or simultaneously, the asset-liability committee primarily relies on balance sheet and income simulation analysis to determine the potential impact of changes in market interest rates on net interest income.  In these standard simulation models, the balance sheet is projected over a year-one time horizon and a year-two time horizon, and net interest income is calculated under current market rates and then assuming permanent instantaneous shifts of +/-100, +200, +300 and +400 basis points.  Management measures such changes assuming immediate and sustained shifts in the federal funds rate and other market rate indices and the corresponding shifts in other non-market rate indices based on their historical changes relative to changes in the federal funds rate and other market indices.  The model assumes assets and liabilities remain constant at the measurement date balances.  The model uses repricing frequency on all variable-rate assets and liabilities.  Prepayment speeds on loans have been adjusted to incorporate expected prepayment speeds in both a declining and rising rate environment.

 

Utilizing this measurement concept, the interest rate risk of First Busey due to an immediate and sustained change in interest rates, expressed as a change in net interest income as a percentage of the net interest income calculated in the constant base model, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-One: Basis Point Changes

 

 

    

- 100

    

+100

    

+200

    

+300

    

+400

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

(2.51)

%  

(1.23)

%  

(2.31)

%  

(3.44)

%  

(4.73)

%

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

0.34

%  

(0.72)

%  

(1.61)

%  

(2.56)

%  

(3.52)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-Two: Basis Point Changes

 

 

    

- 100

    

+100

    

+200

    

+300

    

+400

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

(3.77)

%  

(0.46)

%  

(0.82)

%  

(1.31)

%  

(1.92)

%

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

(2.65)

%  

1.53

%  

2.91

%  

4.14

%  

5.22

%

 

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Interest rate risk is monitored and managed within approved policy limits.  The calculation of potential effects of hypothetical interest rate changes is based on numerous assumptions and should not be relied upon as indicative of actual results.  Actual results would likely differ from simulated results due to the timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.  The above results do not take into account any management action to mitigate potential risk.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 was carried out as of September 30, 2018, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2018, First Busey did not make any changes in its internal control over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

As part of the ordinary course of business, First Busey and its subsidiaries are parties to litigation that is incidental to their regular business activities.

 

There is no material pending litigation, other than ordinary routine litigation incidental to its business, in which First Busey or any of its subsidiaries is involved or of which any of their property is the subject.  Furthermore, there is no pending legal proceeding that is adverse to First Busey in which any director, officer or affiliate of First Busey, or any associate of any such director or officer, is a party, or has a material interest.

 

ITEM 1A.  RISK FACTORS

 

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018, the Company made the following addition to the risk factors disclosed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017:

 

Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.

 

In recent months, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory tariffs against products from the United States, including agricultural products.  Additional tariffs and retaliatory tariffs may be imposed in the future by the United States and these and other countries.  Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt, which, in turn, could adversely

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affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On February 3, 2015, First Busey’s board of directors authorized the Company to repurchase up to an aggregate of 666,667 shares of its common stock.  The repurchase plan has no expiration date and replaced the prior repurchase plan that was originally approved in 2008.  There were no purchases made by or on behalf of First Busey of shares of its common stock during the quarter ended September 30, 2018.  At September 30, 2018, the Company had 333,334 shares that may still be purchased under the plan.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITES

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5.  OTHER INFORMATION

 

None.

 

ITEM 6.  EXHIBITS

 

 

 

 

2.1**

 

Agreement and Plan of Merger by and between First Busey Corporation and The Banc Ed Corp., dated August 21, 2018 (filed as Exhibit 2.1 to the Company’s Form 8-K filed with the Commission on August 22, 2018).

 

 

 

*31.1

 

Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

 

 

*31.2

 

Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

 

 

*32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Chief Executive Officer.

 

 

 

*32.2

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Chief Financial Officer.

 

 

 

*101

 

Interactive Data File

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017; (iv) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017; and (vi) Notes to Unaudited Consolidated Financial Statements.


*Filed herewith.

**The Company has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K.  The Company will furnish a copy of any omitted schedules or similar attachment to the SEC upon request.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FIRST BUSEY CORPORATION

(Registrant)

 

 

 

 

 

By:

/s/ VAN A. DUKEMAN

 

 

Van A. Dukeman

 

 

President and Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

By:

/s/ ROBIN N. ELLIOTT

 

 

Robin N. Elliott

 

 

Chief Financial Officer
(Principal Financial Officer)

 

 

 

 

By:

/s/ JENNIFER L. SIMONS

 

 

Jennifer L. Simons

 

 

Chief Accounting Officer
(Principal Accounting Officer)

 

Date:  November 7, 2018

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