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FIRST BUSEY CORP /NV/ - Quarter Report: 2019 June (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 6/30/2019

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 þ  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 þ  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 transition 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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol (s)

Name of each exchange on which registered

Common Stock, $.001 par value

BUSE

The Nasdaq Stock Market LLC

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 August 7, 2019

Common Stock, $.001 par value

55,386,636

Table of Contents

FIRST BUSEY CORPORATION

FORM 10-Q

June 30, 2019

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

6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

7

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

39

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

57

Item 4.

CONTROLS AND PROCEDURES

58

Part II

OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

58

Item 1A.

RISK FACTORS

58

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

59

Item 3.

DEFAULTS UPON SENIOR SECURITIES

59

Item 4.

MINE SAFETY DISCLOSURES

59

Item 5.

OTHER INFORMATION

59

Item 6.

EXHIBITS

60

SIGNATURES

61

2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

3

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

June 30, 2019

    

December 31, 2018

(dollars in thousands)

Assets

Cash and due from banks

$

113,346

$

128,838

Interest-bearing deposits

306,861

111,135

Total cash and cash equivalents

420,207

239,973

Debt securities available for sale

 

1,848,073

 

697,685

Debt securities held to maturity (fair value 2019 $15,934; 2018 $603,360)

 

15,708

 

608,660

Equity securities

5,362

6,169

Loans held for sale, at fair value

 

39,607

 

25,895

Portfolio loans (net of allowance for loan losses 2019 $51,375; 2018 $50,648)

 

6,480,751

 

5,517,780

Premises and equipment, net

 

149,726

 

117,672

Right of use asset

10,426

Goodwill

 

314,343

 

267,685

Other intangible assets, net

 

60,984

 

32,873

Cash surrender value of bank owned life insurance

 

173,150

 

128,491

Other assets

 

94,330

 

59,474

Total assets

$

9,612,667

$

7,702,357

Liabilities and Stockholders’ Equity

Liabilities

Deposits:

Noninterest-bearing

$

1,766,681

$

1,464,700

Interest-bearing

 

6,066,541

 

4,784,621

Total deposits

7,833,222

6,249,321

Securities sold under agreements to repurchase

 

190,846

 

185,796

Short-term borrowings

30,761

Long-term debt

 

86,772

 

50,000

Senior notes, net of unamortized issuance costs

39,607

39,539

Subordinated notes, net of unamortized issuance costs

59,197

59,147

Junior subordinated debt owed to unconsolidated trusts

71,230

71,155

Lease liability

10,531

Other liabilities

 

86,893

 

52,435

Total liabilities

8,409,059

6,707,393

Outstanding commitments and contingent liabilities (see Note 10)

Stockholders’ Equity

Common stock, $.001 par value, authorized 66,666,667 shares; 55,910,733 shares issued 2019 and 49,185,581 shares issued 2018

 

56

 

49

Additional paid-in capital

 

1,246,160

 

1,080,084

Accumulated deficit

 

(44,878)

 

(72,167)

Accumulated other comprehensive income (loss)

 

14,627

 

(6,812)

Total stockholders’ equity before treasury stock

1,215,965

1,001,154

Treasury stock, at cost (2019 524,097 shares; 2018 310,745 shares)

 

(12,357)

 

(6,190)

Total stockholders’ equity

1,203,608

994,964

Total liabilities and stockholders’ equity

$

9,612,667

$

7,702,357

Common shares outstanding at period end

55,386,636

48,874,836

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

    

Three Months Ended June 30,

Six Months Ended June 30,

2019

    

2018

2019

    

2018

(dollars in thousands, except per share amounts)

Interest income:

Interest and fees on loans

$

78,031

$

62,290

$

149,820

$

123,250

Interest and dividends on investment securities:

Taxable interest income

 

11,152

6,323

21,336

 

12,313

Non-taxable interest income

 

1,200

1,204

2,276

 

2,464

Other interest income

1,083

508

2,315

931

Total interest income

 

91,466

70,325

175,747

 

138,958

Interest expense:

Deposits

 

14,154

6,904

26,654

 

12,891

Federal funds purchased and securities sold under

agreements to repurchase

 

627

372

1,210

 

713

Short-term borrowings

 

494

457

685

 

933

Long-term debt

 

741

213

1,320

 

377

Senior notes

399

399

799

799

Subordinated notes

731

794

1,462

1,587

Junior subordinated debt owed to unconsolidated trusts

 

892

814

1,806

 

1,529

Total interest expense

 

18,038

9,953

33,936

 

18,829

Net interest income

 

73,428

60,372

141,811

 

120,129

Provision for loan losses

 

2,517

2,258

4,628

 

3,266

Net interest income after provision for loan losses

 

70,911

58,114

137,183

 

116,863

Non-interest income:

Fees for customer services

 

9,696

7,290

17,793

 

14,236

Trust fees

 

8,318

6,735

16,433

 

14,249

Commissions and brokers’ fees, net

 

1,170

883

2,084

 

1,979

Remittance processing

 

3,717

3,566

7,497

 

6,958

Mortgage revenue

 

2,851

1,573

4,796

 

3,216

Net (losses) gains on sales of securities

 

(10)

160

(184)

 

160

Unrealized (losses) gains recognized on equity securities

(1,016)

(800)

Other income

 

3,170

2,595

6,222

 

4,490

Total non-interest income

 

27,896

22,802

53,841

 

45,288

Non-interest expense:

Salaries, wages and employee benefits

 

34,268

25,472

66,609

 

54,291

Net occupancy expense of premises

 

4,511

3,689

8,713

 

7,510

Furniture and equipment expenses

 

2,352

1,790

4,447

 

3,703

Data processing

 

5,616

4,030

10,017

 

8,375

Amortization of intangible assets

 

2,412

1,490

4,506

 

3,005

Other expense

 

18,861

10,834

30,891

 

21,461

Total non-interest expense

 

68,020

47,305

125,183

 

98,345

Income before income taxes

 

30,787

33,611

65,841

 

63,806

Income taxes

 

6,702

8,749

16,287

 

17,027

Net income

$

24,085

$

24,862

$

49,554

$

46,779

Basic earnings per common share

$

0.43

$

0.51

$

0.91

$

0.96

Diluted earnings per common share

$

0.43

$

0.51

$

0.90

$

0.95

Dividends declared per share of common stock

$

0.21

$

0.20

$

0.42

$

0.40

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

(dollars in thousands)

Net income

$

24,085

$

24,862

$

49,554

$

46,779

Other comprehensive income (loss), before tax:

Debt securities available for sale:

Unrealized net gains/(losses) on securities:

Unrealized net holding gains (losses) arising during

period

18,214

(1,666)

25,014

(10,420)

Unrealized gains on debt securities transferred from held

to maturity to available for sale

4,780

Reclassification adjustment for losses (gains) included in

net income

10

 

193

 

Other comprehensive income (loss), before tax

18,224

(1,666)

29,987

(10,420)

Income tax expense (benefit) related to items of other

comprehensive income

 

5,192

 

(475)

 

8,548

 

(2,970)

Other comprehensive income (loss), net of tax

13,032

(1,191)

21,439

(7,450)

Comprehensive income

$

37,117

$

23,671

$

70,993

$

39,329

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(dollars in thousands, except per share amounts)

Accumulated

Additional

Other

Common

Paid-in

Accumulated

Comprehensive

Treasury

Shares

Stock

    

Capital

    

(Deficit)

    

Income (loss)

    

Stock

    

Total

Balance, March 31, 2019

55,624,627

$

56

$

1,247,340

$

(57,125)

$

1,595

$

(5,725)

$

1,186,141

Net income

24,085

24,085

Other comprehensive income

13,032

13,032

Repurchase of stock

(333,334)

(8,433)

(8,433)

Issuance of treasury stock for employee stock

purchase plan

4,419

29

84

113

Net issuance of treasury stock for

restricted/deferred stock unit vesting and

related tax

81,962

(2,364)

174

(2,190)

Net issuance of treasury stock for stock options

exercised, net of shares redeemed and related

tax

8,962

(19)

1,543

1,524

Cash dividends common stock at $0.21 per share

(11,681)

(11,681)

Stock dividend equivalents restricted stock units

at $0.21 per share

157

(157)

Stock-based compensation

1,017

1,017

Balance, June 30, 2019

55,386,636

$

56

$

1,246,160

$

(44,878)

$

14,627

$

(12,357)

$

1,203,608

Balance, December 31, 2018

48,874,836

$

49

$

1,080,084

$

(72,167)

$

(6,812)

$

(6,190)

$

994,964

Net income

49,554

49,554

Other comprehensive income

21,439

21,439

Stock issued in acquisition of Banc Ed, net of

stock issuance costs

6,725,152

7

166,274

166,281

Repurchase of stock

(333,334)

(8,433)

(8,433)

Issuance of treasury stock for employee stock

purchase plan

16,150

79

306

385

Net issuance of treasury stock for

restricted/deferred stock unit vesting and

related tax

91,032

(2,535)

345

(2,190)

Net issuance of treasury stock for stock options

exercised, net of shares redeemed and related

tax

12,800

(91)

1,615

1,524

Cash dividends common stock at $0.42 per share

(21,947)

(21,947)

Stock dividend equivalents restricted stock units

at $0.42 per share

318

(318)

Stock-based compensation

2,031

2,031

Balance, June 30, 2019

55,386,636

$

56

$

1,246,160

$

(44,878)

$

14,627

$

(12,357)

$

1,203,608

7

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited)

(dollars in thousands, except per share amounts)

Accumulated

Additional

Other

Common

Paid-in

Accumulated

Comprehensive

Treasury

    

Shares

Stock

    

Capital

    

(Deficit)

    

Income (loss)

    

Stock

    

Total

Balance, March 31, 2018

48,717,239

$

49

$

1,084,411

$

(119,467)

$

(9,674)

$

(13,173)

$

942,146

Net income

 

 

 

24,862

 

 

 

24,862

Other comprehensive loss

 

 

 

 

(1,191)

 

 

(1,191)

Issuance of treasury stock for employee stock

purchase plan

3,030

 

 

(80)

 

 

 

172

 

92

Net issuance of treasury stock for

restricted/deferred stock unit vesting and

related tax

31,832

 

 

(1,875)

 

 

 

1,803

 

(72)

Net issuance of treasury stock for stock options

exercised, net of shares redeemed and related

tax

24,303

(1,161)

1,377

216

Cash dividends common stock at $0.20 per share

 

 

 

(9,743)

 

 

 

(9,743)

Stock dividend equivalents restricted stock units

at $0.20 per share

 

 

154

 

(156)

 

 

 

(2)

Stock-based compensation

 

 

874

 

 

 

 

874

Balance, June 30, 2018

48,776,404

$

49

$

1,082,323

$

(104,504)

$

(10,865)

$

(9,821)

$

957,182

Balance, December 31, 2017

48,684,943

$

49

$

1,084,889

$

(132,122)

$

(2,810)

$

(15,003)

$

935,003

Net income

 

 

 

46,779

 

 

 

46,779

Other comprehensive loss

 

 

 

 

(7,450)

 

 

(7,450)

Tax Cuts and Jobs Act of 2017 reclassification

605

(605)

Issuance of treasury stock for employee stock

purchase plan

11,748

 

 

(328)

 

 

 

666

 

338

Net issuance of treasury stock for

restricted/deferred stock unit vesting and

related tax

31,832

 

 

(1,875)

 

 

 

1,803

 

(72)

Net issuance of treasury stock for stock options

exercised, net of shares redeemed and related

tax

47,881

(2,367)

2,713

346

Cash dividends common stock at $0.40 per share

 

 

 

(19,482)

 

 

 

(19,482)

Stock dividend equivalents restricted stock units

at $0.40 per share

 

 

282

 

(284)

 

 

 

(2)

Stock-based compensation

 

 

1,722

 

 

 

 

1,722

Balance, June 30, 2018

48,776,404

$

49

$

1,082,323

$

(104,504)

$

(10,865)

$

(9,821)

$

957,182

See accompanying notes to unaudited consolidated financial statements.

8

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,

2019

    

2018

(dollars in thousands)

Cash Flows from Operating Activities

Net income

$

49,554

$

46,779

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

Provision for loan losses

 

4,628

 

3,266

Amortization of intangible assets (excluding Mortgage Servicing Rights ("MSR"))

4,506

3,005

Amortization of mortgage servicing rights

1,222

759

Depreciation and amortization of premises and equipment

 

5,674

 

4,748

Net amortization (accretion) of premium (discount) on portfolio loans

(5,729)

(6,375)

Net amortization (accretion) of premium (discount) on investment securities

 

2,843

 

4,485

Net amortization (accretion) of premium (discount) on time deposits

(802)

(121)

Net amortization (accretion) of premium (discount) on Federal Home Loan Bank ("FHLB") advances and

other borrowings

125

72

Impairment of other real estate owned ("OREO")

18

Impairment of fixed assets held for sale

 

 

817

Impairment of MSR

1,822

Change in fair value of loans held for sale, net

(800)

Change in fair value of equity securities, net

800

(1,071)

(Gain) loss on sales of securities, net

 

184

 

(160)

(Gain) loss on sale of loans, net

 

(5,615)

 

(5,095)

(Gain) loss on sale of OREO

(83)

(Gain) loss on sale of premises and equipment

116

105

(Gain) loss life insurance proceeds

(1,016)

Provision for deferred income taxes

 

3,816

 

3,601

Stock-based and non-cash compensation

 

2,031

 

1,722

Decrease in deferred compensation

(3,339)

Increase in cash surrender value of bank owned life insurance

 

(1,970)

 

(1,228)

Mortgage loans originated for sale

(244,781)

(219,252)

Proceeds from sales of mortgage loans

239,252

285,221

Net change in operating assets and liabilities:

(Increase) decrease in other assets

 

1,176

 

1,848

(Decrease) in other liabilities

 

(16,268)

 

(11,363)

Net cash provided by operating activities

$

37,364

$

111,763

Cash Flows from Investing Activities

Purchases of debt securities held to maturity

(85,050)

Purchases of debt securities available for sale

(227,182)

(93,591)

Purchase of FHLB stock

(3,700)

Proceeds from sales of equity securities

958

920

Proceeds from sales of debt securities available for sale

 

227,371

 

Proceeds from paydowns and maturities of debt securities held to maturity

13,922

18,033

Proceeds from paydowns and maturities of debt securities available for sale

 

146,566

 

82,817

Proceeds from the redemption of FHLB stock

3,720

2,114

Net cash (received) paid in acquisitions

(49,387)

Net change in loans

 

(89,642)

 

(36,080)

Cash paid for premiums on bank-owned life insurance

(3)

Purchases of premises and equipment

(5,918)

(8,594)

Proceeds from life insurance

1,672

Proceeds from disposition of premises and equipment

 

3

 

2

Capitalized expenditures on OREO

(2)

Proceeds from sale of OREO

 

1,119

 

722

Net cash provided by (used in) investing activities

$

19,497

$

(118,707)

9

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

    

Six Months Ended June 30,

2019

    

2018

(dollars in thousands)

Cash Flows from Financing Activities

Net change in deposits

$

145,499

$

38,069

Net change in federal funds purchased and securities sold under agreements to repurchase

 

(45,549)

 

(64,457)

Proceeds from other borrowings

60,000

Repayment of FHLB advances, net

(2,297)

Repayment of other borrowings

(3,000)

(70,000)

Cash dividends paid

(21,947)

(19,482)

Purchase of treasury stock

(8,433)

Cash paid for withholding taxes on share based payments

 

(835)

 

(74)

Proceeds from stock options exercised

169

346

Common stock issuance costs

(234)

Net cash provided by (used in) financing activities

$

123,373

$

(115,598)

Net increase in cash and cash equivalents

 

180,234

 

(122,542)

Cash and cash equivalents, beginning of period

 

239,973

 

353,272

Cash and cash equivalents, ending of period

$

420,207

$

230,730

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash Payments for:

Interest

$

33,122

$

17,212

Income taxes

 

10,555

 

4,322

Non-cash Investing and Financing Activities:

OREO acquired in settlement of loans

 

1,396

 

3,125

Transfer of debt securities held to maturity to available for sale

573,639

See accompanying notes to unaudited consolidated financial statements.

10

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Significant 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 Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). These interim unaudited consolidated financial statements serve to update our 2018 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.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.  There were no significant subsequent events for the quarter ended June 30, 2019 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 in conformity with GAAP, the Company’s management is required to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities, fair value of assets acquired and liabilities assumed in business combinations, goodwill, income taxes and the determination of the allowance for loan losses.

Leases

A determination is made at inception if an arrangement contains a lease. For arrangements that contain a lease, the Company recognizes the lease on the balance sheet as a right of use asset and corresponding lease liability. Lease-related assets, or right of use assets, are recognized on the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. If not readily determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the Company used a borrowing rate that corresponded to the remaining lease term.

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The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability.

Impact of recently adopted accounting standards

 

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842) and all subsequent ASUs that modified Topic 842. The Company made the following elections for all leases in connection with the adoption of this guidance:

The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs;
The Company did not elect the hindsight practical expedient;
The Company elected the optional transition method that allows companies to use the effective date as the date of initial application on transition. As a result, the Company did not adjust comparative period financial information or make the newly required lease disclosures for periods before the effective date;
The Company elected not to apply the above guidance to short-term leases;
The Company elected to separate the lease components from the nonlease components and exclude the nonlease components from the right-of-use asset and lease liability; and
The Company did not elect the land easement practical expedient.

At the date of adoption, the Company recorded approximately $8.1 million on its Consolidated Balance Sheets to reflect the right of use asset and associated lease liability. The Company utilized its incremental borrowing rate, on a collateralized basis, for the remaining contractual lease term.

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 was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s 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 was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. During the first quarter of 2019, the Company adopted this guidance, reassessed classification of certain investments and transferred $573.6 million of securities from held to maturity to available for sale.

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 was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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Recently issued accounting standards

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. The project plan includes an assessment of data, development of CECL methodologies, model validation, and parallel runs to assess the impact of CECL calculations on its consolidated financial statements and evaluation of related disclosures.

Note 2: Acquisition

The Banc Ed Corp.

On January 31, 2019, the Company completed its acquisition of The Banc Ed Corp. (“Banc Ed”). TheBANK of Edwardsville (“TheBANK”), Banc Ed’s wholly-owned bank subsidiary, will be merged with and into First Busey’s bank subsidiary, Busey Bank, in the fourth quarter of 2019. At the time of the bank merger, TheBANK’s banking offices will become branches of Busey Bank.

Under the terms of the Merger Agreement with Banc Ed, at the effective time of the acquisition, each share of Banc Ed common stock issued and outstanding was converted into the right to receive 8.2067 shares of the Company’s common stock, cash in lieu of fractional shares and $111.53 cash consideration per share. The market value of the 6.7 million shares of First Busey common stock issued at the effective time of the acquisition was approximately $166.5 million based on First Busey’s closing stock price of $24.76 on January 31, 2019.

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged was recorded at estimated fair values on the date of acquisition. Fair values are considered provisional until final fair values are determined or the measurement period has passed, but no later than one year from the acquisition date. Reviews of third party valuations are still being performed by management. Therefore amounts are subject to change and could change materially from the provisional amounts disclosed below.

First Busey incurred $4.0 million and $5.0 million in pre-tax expenses related to the acquisition of Banc Ed for the three and six months ended June 30, 2019, respectively, primarily for professional and legal fees and deconversion expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Statements of Income.

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The following table presents the estimated fair value of Banc Ed’s assets acquired and liabilities assumed as of January 31, 2019 (dollars in thousands):

Estimated

Fair Value

Assets acquired:

  

Cash and cash equivalents

$

42,013

Securities

 

692,684

Loans held for sale

 

2,157

Portfolio loans

 

873,336

Premises and equipment

 

31,929

Other intangible assets

32,617

Mortgage servicing rights

 

6,946

Other assets

 

57,296

Total assets acquired

 

1,738,978

Liabilities assumed:

Deposits

 

1,439,203

Other borrowings

 

63,439

Other liabilities

 

25,079

Total liabilities assumed

 

1,527,721

Net assets acquired

$

211,257

Consideration paid:

Cash

$

91,400

Common stock

 

166,515

Total consideration paid

$

257,915

Goodwill

$

46,658

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 balance outstanding and aggregate fair value of the acquired performing loans were $889.3 and $871.0 million, respectively.  The difference between the carrying value and aggregate fair value of $17.0 million will be accreted over the estimated 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 $3.9 million and the aggregate fair value of PCI loans totaled $2.3 million.  The accretable discount of $0.2 million on PCI loans represents the amount by which the undiscounted expected cash flows on such loans exceed their carrying value. The amount by which the contractual payments exceeds the undiscounted expected cash flows represents the non-accretable difference. 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. At June 30, 2019, the carrying value of PCI loans acquired from Banc Ed was $1.7 million. 

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Since the acquisition date, Banc Ed earned total revenues of $33.0 million and net income of $7.1 million, which are included in the Company’s unaudited Consolidated Statements of Income for the six months ended June 30, 2019.  The following table provides the unaudited pro forma information for the results of operations for the three and six months ended June 30, 2019 and 2018, as if the acquisition had occurred January 1, 2018.  The pro forma results combine the historical results of Banc Ed into the Company’s unaudited Consolidated Statements of Income, including the impact of purchase accounting adjustments including loan discount accretion, intangible assets amortization, deposit accretion and premises 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, 2018.  No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions (dollars in thousands):

 

Pro Forma

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Total revenues (net interest income plus non-

interest income)

$

101,324

$

105,517

$

201,976

$

206,635

Net income

26,947

30,578

 

54,337

56,931

Diluted earnings per common share

0.48

0.55

 

0.97

1.02

Note 3: Securities

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

    

    

    

Gross

    

Gross

    

    

Amortized

Unrealized

Unrealized

Fair

June 30, 2019:

    

Cost

    

Gains

    

Losses

    

Value

Debt securities available for sale

U.S. Treasury securities

$

58,308

$

260

$

(33)

$

58,535

Obligations of U.S. government corporations and

agencies

 

287,444

 

3,370

 

(48)

 

290,766

Obligations of states and political subdivisions

 

274,301

 

4,683

 

(54)

 

278,930

Commercial mortgage-backed securities

122,510

1,678

(33)

124,155

Residential mortgage-backed securities

 

951,998

 

10,394

 

(1,255)

 

961,137

Corporate debt securities

 

133,053

 

1,514

 

(17)

 

134,550

Total

$

1,827,614

$

21,899

$

(1,440)

$

1,848,073

Debt securities held to maturity

    

    

    

    

Obligations of states and political subdivisions(1)

$

15,708

$

226

$

$

15,934

(1)Gross unrealized losses less than one thousand dollars.

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Gross

    

Gross

    

    

Amortized

Unrealized

Unrealized

Fair

December 31, 2018:

    

Cost

    

Gains

    

Losses

    

Value

Debt securities available for sale

U.S. Treasury securities

$

25,824

$

1

$

(414)

$

25,411

Obligations of U.S. government corporations and

agencies

 

53,096

 

7

 

(761)

 

52,342

Obligations of states and political subdivisions

 

171,131

 

484

 

(1,571)

 

170,044

Commercial mortgage-backed securities

2,003

(61)

1,942

Residential mortgage-backed securities

 

322,646

 

245

 

(7,143)

 

315,748

Corporate debt securities

 

132,513

 

61

 

(376)

 

132,198

Total

$

707,213

$

798

$

(10,326)

$

697,685

Debt securities held to maturity

Obligations of states and political subdivisions

$

33,947

$

68

$

(87)

$

33,928

Commercial mortgage-backed securities

59,054

11

(1,003)

58,062

Residential mortgage-backed securities

515,659

1,748

(6,037)

511,370

Total

$

608,660

$

1,827

$

(7,127)

$

603,360

In adopting ASU 2017-12, the Company reassessed the classification of certain investments during the first quarter of 2019 and transferred $573.6 million of securities from held to maturity to available for sale. The transfer occurred at fair value and had a related unrealized loss of $4.8 million recorded in other comprehensive income.

The amortized cost and fair value of debt securities, 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).

Debt securities available for sale

Debt securities held to maturity

    

Amortized

    

Fair

    

Amortized

    

Fair

June 30, 2019:

    

Cost

    

Value

    

Cost

    

Value

Due in one year or less

$

220,023

$

220,304

$

2,724

$

2,729

Due after one year through five

years

 

418,649

 

424,241

 

11,861

 

12,035

Due after five years through ten

years

 

263,388

 

267,989

 

1,123

 

1,170

Due after ten years

 

925,554

 

935,539

 

 

Total

$

1,827,614

$

1,848,073

$

15,708

$

15,934

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

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2019

    

2018

    

2019

    

2018

Gross security gains

$

391

$

$

391

$

Gross security (losses)

(401)

 

 

(584)

 

Net (losses) gains on sales of securities(1)

$

(10)

$

$

(193)

$

(1)Net (losses) gains on sales of securities reported on the unaudited Consolidated Statements of Income includes sale of equity securities, excluded in this table.

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Debt securities with carrying amounts of $755.1 million and $498.3 million on June 30, 2019 and December 31, 2018, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

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

For less than

For greater

12 months, gross

than 12 months, gross

Total, gross

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

June 30, 2019:

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

Debt securities available for sale

U.S. Treasury securities

$

$

$

24,768

$

(33)

$

24,768

$

(33)

Obligations of U.S. government corporations and

agencies(1)

51

22,468

(48)

22,519

(48)

Obligations of states and political subdivisions

1,394

(8)

24,192

(46)

25,586

(54)

Commercial mortgage-backed securities

14,746

(33)

14,746

(33)

Residential mortgage-backed securities

 

13,629

 

(8)

 

183,552

 

(1,247)

 

197,181

 

(1,255)

Corporate debt securities

 

1,765

 

(7)

 

15,049

 

(10)

 

16,814

 

(17)

Total temporarily impaired securities

$

16,839

$

(23)

$

284,775

$

(1,417)

$

301,614

$

(1,440)

Debt securities held to maturity

Obligations of states and political subdivisions(1)

$

$

$

500

$

$

500

$

(1)Unrealized losses less than one thousand dollars.

For less than

For greater

 12 months, gross

than 12 months, gross

Total, gross

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

December 31, 2018:

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

Debt securities available for sale

U.S. Treasury securities

$

995

$

(4)

$

24,343

$

(410)

$

25,338

$

(414)

Obligations of U.S. government corporations and

agencies

749

(3)

50,744

(758)

51,493

(761)

Obligations of states and political subdivisions

49,893

(460)

77,651

(1,111)

127,544

(1,571)

Commercial mortgage-backed securities

1,942

(61)

1,942

(61)

Residential mortgage-backed securities

 

48,387

 

(496)

 

247,573

 

(6,647)

 

295,960

 

(7,143)

Corporate debt securities

 

90,713

 

(268)

 

15,083

 

(108)

 

105,796

 

(376)

Total temporarily impaired securities

$

190,737

$

(1,231)

$

417,336

$

(9,095)

$

608,073

$

(10,326)

Debt securities held to maturity

Obligations of states and political subdivisions

$

9,531

$

(33)

$

9,538

$

(54)

$

19,069

$

(87)

Commercial mortgage-backed securities

12,067

(212)

45,041

(791)

57,108

(1,003)

Residential mortgage-backed securities

77,071

(974)

245,128

(5,063)

322,199

(6,037)

Total temporarily impaired securities

$

98,669

$

(1,219)

$

299,707

$

(5,908)

$

398,376

$

(7,127)

Debt securities are periodically evaluated for other-than-temporary impairment (“OTTI”). As of June 30, 2019, the Company’s debt security portfolio consisted of 1,273 securities. The total number of debt securities in the investment portfolio in an unrealized loss position as of June 30, 2019 was 126 and represented an unrealized loss of 0.47% of the aggregate amortized cost. The unrealized losses relate to changes in market interest rates and market conditions that do not represent credit-related impairments.  Furthermore, 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 debt securities. Full collection of the amounts due according to the contractual terms of the debt securities is expected; therefore, the Company does not consider these investments to be OTTI at June 30, 2019. As of June 30, 2019, the Company did not hold general obligation bonds of any single issuer, the aggregate of which exceeded 10% of the Company’s stockholders’ equity.

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Note 4: Portfolio loans

The distribution of portfolio loans is as follows (dollars in thousands):

June 30, 

December 31, 

    

2019

    

2018

Commercial

$

1,668,098

$

1,405,106

Commercial real estate

2,661,905

2,366,823

Real estate construction

429,326

288,197

Retail real estate

1,721,370

1,480,133

Retail other

51,427

28,169

Portfolio loans

$

6,532,126

$

5,568,428

Allowance for loan losses

(51,375)

(50,648)

Portfolio loans, net

$

6,480,751

$

5,517,780

Net deferred loan origination costs included in the table above were $5.4 million as of June 30, 2019 and $5.6 million as of December 31, 2018. Net accretable purchase accounting adjustments included in the table above reduced loans by $25.0 million as of June 30, 2019 and $13.9 million as of December 31, 2018.

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.

Substandard Non-accrual- This category includes 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.

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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):

June 30, 2019

    

    

    

Special

    

    

Substandard

    

Pass

    

Watch

    

Mention

    

Substandard

    

Non-accrual

Commercial

 

$

1,378,041

$

188,282

$

48,181

$

45,599

$

10,647

Commercial real estate

 

 

2,367,741

 

178,859

 

85,837

 

29,926

 

12,780

Real estate construction

 

 

394,416

 

34,348

 

450

 

1,273

 

826

Retail real estate

 

 

1,674,105

 

16,038

 

6,317

 

9,235

 

8,529

Retail other

 

 

51,848

 

99

 

 

 

34

Total

$

5,866,151

$

417,626

$

140,785

$

86,033

$

32,816

December 31, 2018

    

    

    

Special

    

    

Substandard

    

Pass

    

Watch

    

Mention

    

Substandard

    

Non-accrual

Commercial

 

$

1,126,257

$

172,449

$

47,000

$

42,532

$

17,953

Commercial real estate

 

 

2,106,711

 

137,214

 

85,148

 

36,205

 

10,298

Real estate construction

 

 

268,069

 

14,562

 

3,899

 

1,888

 

18

Retail real estate

 

 

1,448,964

 

6,425

 

6,792

 

5,435

 

6,698

Retail other

 

 

26,707

 

 

 

 

30

Total

$

4,976,708

$

330,650

$

142,839

$

86,060

$

34,997

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

June 30, 2019

Loans past due, still accruing

Non-accrual

    

30-59 Days

    

60-89 Days

    

90+Days

    

 Loans

Commercial

$

2,745

$

593

$

$

10,647

Commercial real estate

 

4,519

 

608

 

38

 

12,780

Real estate construction

 

103

 

107

 

 

826

Retail real estate

 

8,140

 

987

 

220

8,529

Retail other

 

216

 

22

 

 

34

Total

$

15,723

$

2,317

$

258

$

32,816

December 31, 2018

Loans past due, still accruing

Non-accrual

    

30-59 Days

    

60-89 Days

    

90+Days

    

 Loans

Commercial

$

158

$

140

$

775

$

17,953

Commercial real estate

 

148

 

558

 

 

10,298

Real estate construction

 

121

 

 

58

 

18

Retail real estate

 

4,578

 

1,368

 

766

 

6,698

Retail other

 

48

 

2

 

2

 

30

Total

$

5,053

$

2,068

$

1,601

$

34,997

The gross interest income that would have been recorded in the three months ended June 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $0.4 million and $0.3 million, respectively. The gross interest income that would have been recorded in the six months ended June 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $1.1 million and $0.7 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 six months ended June 30, 2019 and 2018.

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Table of Contents

A summary of troubled debt restructurings (“TDR”) loans is as follows (dollars in thousands):

    

June 30, 

    

December 31, 

2019

    

2018

In compliance with modified terms

$

8,288

$

8,319

30 — 89 days past due

 

321

 

127

Included in non-performing loans

 

3,503

 

392

Total

$

12,112

$

8,838

Loans classified as a TDR during the three and six months ended June 30, 2019, included one commercial loan for payment modification with a recorded investment of $0.6 million. Loans classified as a TDR during the three and six months ended June 30, 2018 included one retail real estate modification for short-term interest rate relief, with a recorded investment of $0.1 million.

The gross interest income that would have been recorded in the three and six months ended June 30, 2019 and 2018 if TDRs had performed in accordance with their original terms compared with their modified terms was insignificant.

One commercial real estate TDR, with a recorded investment of $3.2 million, that was entered into during the last twelve months, was 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 six months ended June 30, 2019. 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 six months ended June 30, 2018.

At June 30, 2019, the Company had $2.6 million of residential real estate in the process of foreclosure.

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Table of Contents

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).

June 30, 2019

    

Unpaid

    

Recorded

    

    

    

    

    

    

    

    

Contractual

Investment

Recorded

Total

Average

Principal

with No

Investment

Recorded

Related

Recorded

    

Balance

    

Allowance

    

with Allowance

    

Investment

    

Allowance

    

Investment

Commercial

$

16,668

$

7,511

$

3,856

$

11,367

$

2,358

$

15,425

Commercial real estate

 

19,784

10,498

7,686

 

18,184

 

1,367

 

17,730

Real estate

construction

 

1,329

 

1,186

 

 

1,186

 

 

656

Retail real estate

 

15,322

 

13,367

 

474

 

13,841

 

474

 

13,685

Retail other

 

62

 

34

 

 

34

 

 

39

Total

$

53,165

$

32,596

$

12,016

$

44,612

$

4,199

$

47,535

December 31, 2018

    

Unpaid

    

Recorded

    

    

    

    

    

    

    

    

Contractual

Investment

Recorded

Total

Average

Principal

with No

Investment

Recorded

Related

Recorded

    

Balance

    

Allowance

    

with Allowance

    

Investment

    

Allowance

    

Investment

Commercial

$

21,442

$

6,858

$

12,001

$

18,859

$

4,319

$

13,364

Commercial real estate

 

19,079

 

13,082

 

4,498

 

17,580

 

1,181

 

18,077

Real estate

construction

 

478

 

453

 

 

453

 

 

712

Retail real estate

 

14,418

 

13,196

 

61

 

13,257

 

61

 

14,110

Retail other

 

117

 

33

 

 

33

 

 

40

Total

$

55,534

$

33,622

$

16,560

$

50,182

$

5,561

$

46,303

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.

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 recorded investment of all acquired loans as of June 30, 2019 totaled approximately $1.8 billion.

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Table of Contents

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 June 30, 2019

    

    

    

Commercial

    

Real Estate

    

Retail Real

    

    

    

    

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

$

17,998

$

20,097

$

2,807

$

9,503

$

510

$

50,915

Provision for loan losses

 

1,161

 

(97)

 

411

 

941

 

101

 

2,517

Charged-off

 

(2,563)

 

 

(200)

 

(178)

 

(2,941)

Recoveries

 

137

 

188

 

87

 

369

 

103

 

884

Ending balance

$

16,733

$

20,188

$

3,305

$

10,613

$

536

$

51,375

As of and for the Six Months Ended June 30, 2019

    

    

    

Commercial

    

Real Estate

    

Retail Real

    

    

    

    

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

$

17,829

$

21,137

$

2,723

$

8,471

$

488

$

50,648

Provision for loan losses

 

2,954

 

(1,186)

 

413

 

2,298

 

149

 

4,628

Charged-off

 

(4,370)

 

(15)

 

(717)

 

(308)

 

(5,410)

Recoveries

 

320

 

252

 

169

 

561

 

207

 

1,509

Ending balance

$

16,733

$

20,188

$

3,305

$

10,613

$

536

$

51,375

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

Commercial

Real Estate

Retail Real

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Beginning balance

 

$

17,577

 

$

22,090

 

$

2,799

 

$

9,836

 

$

347

 

$

52,649

Provision for loan losses

 

1,720

 

909

 

35

 

(548)

 

142

 

2,258

Charged-off

 

(1,916)

 

(110)

 

 

(412)

 

(115)

 

(2,553)

Recoveries

 

205

 

158

 

81

 

417

 

90

 

951

Ending balance

 

$

17,586

 

$

23,047

 

$

2,915

 

$

9,293

 

$

464

 

$

53,305

As of and for the Six Months Ended June 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

 

4,723

 

2,445

 

37

 

(4,210)

 

271

 

3,266

Charged-off

 

(2,697)

 

(1,425)

 

(97)

 

(942)

 

(322)

 

(5,483)

Recoveries

 

781

 

214

 

114

 

662

 

169

 

1,940

Ending balance

 

$

17,586

 

$

23,047

 

$

2,915

 

$

9,293

 

$

464

 

$

53,305

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Table of Contents

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

As of June 30, 2019

    

    

Commercial

    

Real Estate

    

Retail Real

    

    

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Allowance for loan losses

Ending balance attributed to:

Loans individually evaluated for

impairment

$

2,358

$

1,367

$

$

474

$

$

4,199

Loans collectively evaluated for

impairment

 

14,375

 

18,821

 

3,305

 

10,139

 

536

 

47,176

Ending balance

$

16,733

$

20,188

$

3,305

$

10,613

$

536

$

51,375

Loans:

Loans individually evaluated for

impairment

$

11,336

$

15,723

$

751

$

12,668

$

34

$

40,512

Loans collectively evaluated for

impairment

 

1,656,731

 

2,643,721

 

428,140

 

1,707,529

 

51,393

 

6,487,514

PCI loans evaluated for

impairment

31

2,461

435

1,173

4,100

Ending balance

$

1,668,098

$

2,661,905

$

429,326

$

1,721,370

$

51,427

$

6,532,126

As of December 31, 2018

    

    

Commercial

    

Real Estate

    

Retail Real

    

    

    

Commercial

    

Real Estate

    

Construction

    

Estate

    

Retail Other

    

Total

Allowance for loan losses

Ending balance attributed to:

Loans individually evaluated for

impairment

$

4,319

$

1,181

$

$

61

$

$

5,561

Loans collectively evaluated for

impairment

 

13,510

 

19,956

 

2,723

 

8,410

 

488

 

45,087

Ending balance

$

17,829

$

21,137

$

2,723

$

8,471

$

488

$

50,648

Loans:

Loans individually evaluated for

impairment

$

18,441

$

15,318

$

453

$

13,159

$

33

$

47,404

Loans collectively evaluated for

impairment

 

1,386,247

 

2,349,243

 

287,744

 

1,466,876

 

28,136

 

5,518,246

PCI loans evaluated for

impairment

418

2,262

98

2,778

Ending balance

$

1,405,106

$

2,366,823

$

288,197

$

1,480,133

$

28,169

$

5,568,428

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Table of Contents

Note 5: Deposits

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

June 30, 2019

December 31, 2018

Demand deposits, noninterest-bearing

$

1,766,681

$

1,464,700

Interest-bearing transaction deposits

 

1,926,502

 

1,435,574

Saving deposits and money market deposits

 

2,390,228

1,852,044

Time deposits

 

1,749,811

 

1,497,003

Total

$

7,833,222

$

6,249,321

The Company held brokered saving deposits and money market deposits of $14.4 million and $17.5 million at June 30, 2019 and December 31, 2018, respectively.

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $934.5 million and $673.7 million at June 30, 2019 and December 31, 2018, 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 $340.4 million and $264.1 million at June 30, 2019 and December 31, 2018, respectively. The Company held brokered time deposits of $108.8 million and $262.5 million at June 30, 2019 and December 31, 2018, respectively.

As of June 30, 2019, the scheduled maturities of time deposits are as follows (dollars in thousands):

July 1, 2019 – June 30, 2020

$

1,064,812

July 1, 2020 – June 30, 2021

389,392

July 1, 2021 – June 30, 2022

 

158,968

July 1, 2022 – June 30, 2023

 

63,863

July 1, 2023 – June 30, 2024

 

71,961

Thereafter

 

815

 

$

1,749,811

Note 6: 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 January 29, 2019, the Company entered into an Amended and Restated Credit Agreement providing for a $60.0 million term loan (the “Term Loan”) with a maturity date of November 30, 2023. The Term Loan has an annual interest rate of one-month LIBOR plus a spread of 1.50%. The proceeds of the Term Loan were used to fund the cash consideration related to the acquisition of Banc Ed. The Company had $57.0 million outstanding indebtedness on June 30, 2019, comprised of $6.0 million of short-term debt and $51.0 million of long-term debt.

The Amended and Restated Credit Agreement also retained the Company’s $20.0 million revolving facility with a maturity date of April 30, 2019. On April 19, 2019, the Company entered into an amendment to the Amended and Restated Credit Agreement to extend the maturity of its revolving loan facility to April 30, 2020. The revolving facility incurs a non-usage fee based on the undrawn amount. The Company had no outstanding balance under the revolving facility on June 30, 2019 or December 31, 2018.

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Table of Contents

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

June 30, 

December 31, 

    

2019

    

2018

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.

$

35,772

$

50,000

Notes payable

51,000

Total long-term borrowings

$

86,772

$

50,000

As of June 30, 2019, long-term debt from the FHLB, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 2.15% to 3.04%. The weighted average rate on the long-term advances was 2.29% as of June 30, 2019. As of December 31, 2018, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 2.20% to 2.41%. The weighted average rate on the long-term advances was 2.28% as of December 31, 2018.

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 on 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 $0.4 million and $0.8 million, respectively, at June 30, 2019. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $0.5 million and $0.9 million, respectively, at December 31, 2018.

Note 7:  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 acquisition of Pulaski Financial Corp. (“Pulaski”) 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 $71.2 million of junior subordinated debt owed to unconsolidated trusts at June 30, 2019 and December 31, 2018.

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.

 

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Table of Contents

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 June 30, 2019, 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.

Note 8: Earnings Per Common Share

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

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Net income

$

24,085

$

24,862

$

49,554

$

46,779

Shares:

Weighted average common shares outstanding

 

55,638

 

48,815

 

54,464

 

48,796

Dilutive effect of outstanding options, warrants and restricted

stock units as determined by the application of the treasury

stock method

 

303

 

409

 

300

 

407

Weighted average common shares outstanding, as adjusted for

diluted earnings per share calculation

 

55,941

 

49,224

 

54,764

 

49,203

Basic earnings per common share

$

0.43

$

0.51

$

0.91

$

0.96

Diluted earnings per common share

$

0.43

$

0.51

$

0.90

$

0.95

Basic earnings per share is computed by dividing net income 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 is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s outstanding stock options and warrants were exercised and restricted stock units were vested. At June 30, 2019, 169,258 outstanding restricted stock units, 48,107 outstanding stock options, and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents. At June 30, 2018, 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents.

Note 9: Share-based Compensation

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 over a twelve-month period following the grant date or on the date of the

26

Table of Contents

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 Plan or the First Community 2016 Equity 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.

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 six months ended June 30, 2019 follows:

Weighted-

Weighted-

Average

Average

Exercise

Remaining Contractual

    

Shares

    

Price

    

Term

Outstanding at beginning of period

 

87,600

 

$

20.58

Exercised

 

(21,799)

 

17.71

Forfeited

 

(2,271)

 

23.53

Expired

 

(5,176)

 

18.13

Outstanding at end of period

 

58,354

 

$

21.76

 

6.23

Exercisable at end of period

 

42,472

 

$

21.09

 

5.80

The Company recorded an insignificant amount and $0.1 million in stock option compensation expense for the three and six months ended June 30, 2019, related to the converted options from First Community. The Company recorded an insignificant amount and $0.1 million in stock option compensation expense for the three and six months ended June 30, 2018, respectively. As of June 30, 2019, the Company had $0.1 million of unrecognized stock option expense. This cost is expected to be recognized in 2019.

Restricted Stock Unit Plan

A summary of the changes in the Company’s stock unit awards for the six months ended June 30, 2019, 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 period

 

690,495

 

$

26.14

 

20,449

 

$

27.93

Granted

 

 

 

 

Dividend equivalents earned

 

11,359

 

25.56

 

1,269

 

25.56

Vested

 

(104,760)

 

18.40

 

(20,195)

 

31.29

Forfeited

 

(4,712)

 

30.47

 

(1,523)

 

31.62

Non-vested at end of period

 

592,382

 

$

27.46

 

 

$

Outstanding at end of period

 

592,382

 

$

27.46

 

68,153

 

$

22.27

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.

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Table of Contents

The Company recognized $1.0 million and $0.8 million of compensation expense related to both non-vested RSUs and DSUs for the three months ended June 30, 2019 and 2018, respectively. The Company recognized $1.9 million and $1.6 million of compensation expense related to both non-vested RSUs and DSUs for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was $8.8 million of total unrecognized compensation cost related to these non-vested stock awards. This cost is expected to be recognized over a period of 3.3 years.

As of June 30, 2019, 766,824 shares remain available for issuance pursuant to the Company’s 2010 Equity Incentive Plan, 54,841 shares remain available for issuance pursuant to the Company’s Employee Stock Purchase Plan and 309,326 shares remain available for issuance pursuant to the First Community 2016 Equity Incentive Plan.

Note 10: 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

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):

    

June 30, 2019

    

December 31, 2018

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit

$

1,567,091

$

1,398,483

Standby letters of credit

 

37,560

 

32,156

Note 11: Regulatory Capital

The Company and the subsidiary banks are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Banking regulations identify five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of June 30, 2019 and December 31, 2018, all capital ratios of the Company and the subsidiary banks exceeded the well capitalized levels under the applicable regulatory capital adequacy guidelines. Management believes that no events or changes have occurred subsequent to June 30, 2019 that would change this designation.

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Table of Contents

The following tables summarize the applicable holding company and bank regulatory capital requirements (dollars in thousands):

Minimum

 

Minimum

To Be Well

 

Actual

Capital Requirement

Capitalized

 

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

As of June 30, 2019:

Total Capital (to Risk Weighted Assets)

Consolidated

$

1,015,740

 

13.96

%  

$

581,993

 

8.00

%  

$

727,491

 

10.00

%  

Busey Bank

$

893,175

 

14.53

%  

$

491,782

 

8.00

%  

$

614,727

 

10.00

%  

TheBANK

$

194,755

 

17.34

%  

$

89,849

 

8.00

%  

$

112,312

 

10.00

%  

Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$

904,365

 

12.43

%  

$

436,495

 

6.00

%  

$

581,993

 

8.00

%  

Busey Bank

$

842,312

 

13.70

%  

$

368,837

 

6.00

%  

$

491,782

 

8.00

%  

TheBANK

$

194,243

 

17.30

%  

$

67,387

 

6.00

%  

$

89,849

 

8.00

%  

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$

830,365

 

11.41

%  

$

327,371

 

4.50

%  

$

472,869

 

6.50

%  

Busey Bank

$

842,312

 

13.70

%  

$

276,628

 

4.50

%  

$

399,573

 

6.50

%  

TheBANK

$

194,243

 

17.30

%  

$

50,540

 

4.50

%  

$

73,003

 

6.50

%  

Tier 1 Capital (to Average Assets)

Consolidated

$

904,365

 

9.87

%  

$

366,386

 

4.00

%  

 

N/A

 

N/A

Busey Bank

$

842,312

 

11.40

%  

$

295,539

 

4.00

%  

$

369,424

 

5.00

%  

TheBANK

$

194,243

 

10.93

%  

$

71,062

 

4.00

%  

$

88,827

 

5.00

%  

Minimum

Minimum

To Be Well

Actual

Capital Requirement

Capitalized

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

As of December 31, 2018:

Total Capital (to Risk Weighted Assets)

Consolidated

$

894,572

 

14.83

%  

$

482,638

 

8.00

%  

$

603,297

 

10.00

%  

Busey Bank

$

854,351

 

14.19

%  

$

481,701

 

8.00

%  

$

602,126

 

10.00

%  

Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$

783,924

 

12.99

%  

$

361,978

 

6.00

%  

$

482,638

 

8.00

%  

Busey Bank

$

803,703

 

13.35

%  

$

361,276

 

6.00

%  

$

481,701

 

8.00

%  

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$

709,924

 

11.77

%  

$

271,484

 

4.50

%  

$

392,143

 

6.50

%  

Busey Bank

$

803,703

 

13.35

%  

$

270,957

 

4.50

%  

$

391,382

 

6.50

%  

Tier 1 Capital (to Average Assets)

Consolidated

$

783,924

 

10.36

%  

$

302,704

 

4.00

%  

 

N/A

 

N/A

Busey Bank

$

803,703

 

10.64

%  

$

302,232

 

4.00

%  

$

377,789

 

5.00

%  

29

Table of Contents

In July 2013, the U.S. federal banking authorities approved the Basel III Rule for strengthening international capital standards. The Basel III Rule introduced a capital conservation buffer, composed entirely of Common Equity Tier 1 Capital (“CET1”), which is added to the minimum risk-weighted asset ratios. The capital conservation buffer is not a minimum capital requirement; however, banking institutions with a ratio of CET1 to risk-weighted assets below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. In order to refrain from restrictions on dividends, equity repurchases and discretionary bonus payments, banking institutions must maintain minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The ability of the Company to pay cash dividends to its stockholders and to service its debt is 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 an accumulated deficit position 2009 thru 2018, it was not able to pay dividends in prior years. 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 a positive retained earnings position in the second quarter of 2018 and, in 2019, returned to paying dividends.

Note 12: 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. Banking services for Busey Bank and TheBANK are aggregated into the banking operating segment as they have similar operations and activities. 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 “Note 1. Significant Accounting Policies” to Form 10-K. The Company accounts for intersegment revenue and transfers at current market value.

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

Goodwill

Total Assets

    

June 30, 2019

    

December 31, 2018

    

June 30, 2019

    

December 31, 2018

Banking

$

293,657

$

246,999

$

9,568,148

$

7,656,709

Remittance Processing

 

8,992

 

8,992

 

42,083

 

39,278

Wealth Management

 

11,694

 

11,694

 

26,015

 

20,992

Other

 

 

 

(23,579)

 

(14,622)

Totals

$

314,343

$

267,685

$

9,612,667

$

7,702,357

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Table of Contents

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2019

    

2018

    

2019

    

2018

    

Net interest income:

Banking

$

75,944

$

62,109

$

146,582

$

123,525

Remittance Processing

18

16

36

32

Wealth Management

 

 

100

 

 

194

Other

 

(2,534)

 

(1,853)

 

(4,807)

 

(3,622)

Total net interest income

$

73,428

$

60,372

$

141,811

$

120,129

Non-interest income:

Banking

$

15,659

$

11,734

$

28,442

$

22,631

Remittance Processing

 

4,117

 

3,987

 

8,298

 

7,770

Wealth Management

 

9,594

 

7,808

 

18,727

 

16,449

Other

 

(1,474)

 

(727)

 

(1,626)

 

(1,562)

Total non-interest income

$

27,896

$

22,802

$

53,841

$

45,288

Non-interest expense:

Banking

$

56,895

$

37,855

$

102,066

$

79,241

Remittance Processing

2,589

2,624

5,353

5,090

Wealth Management

5,749

4,703

11,313

9,614

Other

2,787

2,123

6,451

4,400

Total non-interest expense

$

68,020

$

47,305

$

125,183

$

98,345

Income before income taxes:

Banking

$

32,191

$

33,730

$

68,330

$

63,649

Remittance Processing

1,546

1,379

2,981

2,712

Wealth Management

3,845

3,205

7,414

7,029

Other

(6,795)

(4,703)

(12,884)

(9,584)

Total income before income taxes

$

30,787

$

33,611

$

65,841

$

63,806

Net income:

Banking

$

24,441

$

24,904

$

51,106

$

46,749

Remittance Processing

 

1,105

 

986

 

2,130

 

1,939

Wealth Management

 

2,845

 

2,288

 

5,486

 

5,052

Other

 

(4,306)

 

(3,316)

 

(9,168)

 

(6,961)

Total net income

$

24,085

$

24,862

$

49,554

$

46,779

Note 13: Derivative Financial Instruments

The Company enters into 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 derivatives to customers for interest rate swaps. See “Note 14: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.

Interest Rate Lock Commitments. At June 30, 2019 and December 31, 2018, the Company had issued $73.5 million and $27.2 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

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Table of Contents

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 June 30, 2019 and December 31, 2018, the Company had issued $107.5 million and $48.6 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. 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):

    

June 30, 2019

    

December 31, 2018

Fair value recorded in other assets

$

1,135

$

624

Fair value recorded in other liabilities

 

1,949

1,205

The gross gains and losses on these derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in non-interest income and expense in the unaudited Consolidated Statements of Income are summarized as follows (dollars in thousands):

Three Months Ended June 30, 

    

Six Months Ended June 30, 

    

2019

    

2018

    

2019

    

2018

Gross gains

$

1,929

$

1,023

$

3,007

$

1,755

Gross (losses)

 

(1,949)

(1,054)

 

(3,067)

(2,108)

Net gains (losses)

$

(20)

$

(31)

$

(60)

$

(353)

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.

Derivatives to Customers. The Company may offer derivative contracts to its customers in connection with their risk management needs. These derivatives are primarily interest rate swaps. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. With notional values of $407.4 million and $243.7 million at June 30, 2019 and December 31, 2018, respectively, these contracts support variable rate, commercial loan relationships totaling $203.7 million and $121.8 million, respectively. These derivatives generally worked together as an economic interest rate hedge, but 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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Table of Contents

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

   

June 30, 2019

   

December 31, 2018

Fair value recorded in other assets

$

11,948

$

1,438

Fair value recorded in other liabilities

11,948

1,438

The gross gains and losses on these derivative assets and liabilities recorded in non-interest income and non-interest expense in the unaudited Consolidated Statements of Income are summarized as follows (dollars in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

2019

2018

2019

2018

Gross gains

$

73

$

489

$

164

$

1443

Gross losses

(73)

(489)

(164)

(1,443)

Net gains (losses)

$

$

$

$

The Company pledged $12.3 million in cash to secure its obligation under these contracts at June 30, 2019. The Company pledged $1.0 million in cash to secure its obligation under contracts at December 31, 2018.

Note 14: 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.

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 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.

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Table of Contents

Debt securities available for sale. Debt securities 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.

Equity Securities. Equity securities are reported at fair value utilizing level 1 or level 2 measurements. For mutual funds, 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. For stock, quoted prices for identical or similar assets in markets that are not active are utilized and classified as level 2.

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.

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.

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Table of Contents

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, 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

June 30, 2019

Inputs

    

Inputs

    

Inputs

    

Fair Value

Fair value adjusted through comprehensive income:

Debt securities available for sale

U.S. Treasury securities

$

$

58,535

$

$

58,535

Obligations of U.S. government corporations and agencies

 

 

290,766

 

 

290,766

Obligations of states and political subdivisions

 

 

278,930

 

 

278,930

Commercial mortgage-backed securities

124,155

124,155

Residential mortgage-backed securities

 

 

961,137

 

 

961,137

Corporate debt securities

 

 

134,550

 

 

134,550

Fair value adjusted through current period earnings:

Equity securities

 

5,362

 

 

5,362

Loans held for sale

39,607

39,607

Derivative assets

13,083

13,083

Derivative liabilities

13,897

13,897

Level 1

    

Level 2

    

Level 3

    

Total

December 31, 2018

Inputs

    

Inputs

    

Inputs

    

Fair Value

Debt securities available for sale

U.S. Treasury securities

$

$

25,411

$

$

25,411

Obligations of U.S. government corporations and agencies

 

 

52,342

 

 

52,342

Obligations of states and political subdivisions

 

 

170,044

 

 

170,044

Commercial mortgage-backed securities

1,942

1,942

Residential mortgage-backed securities

 

 

315,748

 

 

315,748

Corporate debt securities

 

 

132,198

 

 

132,198

Fair value adjusted through period earnings:

Equity securities

6,169

6,169

Loans held for sale

25,895

25,895

Derivative assets

2,062

2,062

Derivative liabilities

2,643

2,643

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 portfolio loans at fair value on a recurring basis. However, periodically, a loan is identified as 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.

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. Due to the significance of the unobservable inputs, all OREO fair values have been classified as level 3.

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Table of Contents

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 lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon discounted 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.

The following table summarizes assets and liabilities measured at fair value on a non-recurring basis, 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

June 30, 2019

Impaired loans

$

$

$

7,817

$

7,817

OREO

 

 

 

84

 

84

Bank property held for sale

 

 

 

1,832

 

1,832

December 31, 2018

    

    

    

    

    

    

    

    

Impaired loans

$

$

$

10,999

$

10,999

OREO

 

 

 

55

 

55

Bank property held for sale

 

 

1,832

 

1,832

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)

June 30, 2019

Impaired loans

$

7,817

    

Appraisal of collateral

    

Appraisal adjustments

    

- 3.4

%

to

- 100.0

%

(-29.4)%

OREO

 

84

 

Appraisal of collateral

 

 Appraisal adjustments

 

- 25.0

%

to

- 100.0

%

(-61.8)%

Bank property held for sale

1,832

Appraisal of collateral or real estate listing price

Appraisal adjustments

- 0.0

%

to

- 35.1

%

(-28.3)%

December 31, 2018

Impaired loans

$

10,999

    

Appraisal of collateral

    

Appraisal adjustments

    

- 3.3

%

to

- 100.0

%

(-24.1)%

OREO

 

55

 

Appraisal of collateral

 

 Appraisal adjustments

 

- 25.0

%

to

- 100.0

%

(-65.0)%

Bank property held for sale

1,832

Appraisal of collateral or real estate listing price

Appraisal adjustments

- 0.0

%

to

- 35.1

%

(-28.3)%

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Table of Contents

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):

June 30, 2019

December 31, 2018

Carrying

    

Fair

    

Carrying

    

Fair

Amount

    

Value

    

Amount

    

Value

Financial assets:

Level 1 inputs:

Cash and cash equivalents

$

420,207

$

420,207

$

239,973

$

239,973

Level 2 inputs:

Debt securities held to maturity

15,708

15,934

608,660

603,360

Accrued interest receivable

 

28,614

 

28,614

 

22,314

 

22,314

Level 3 inputs:

Portfolio loans, net

 

6,480,751

 

6,447,502

 

5,517,780

 

5,473,063

Mortgage servicing rights

8,692

12,772

3,315

11,051

Other servicing rights

845

1,434

781

1,443

Financial liabilities:

Level 2 inputs:

Time deposits

$

1,749,811

$

1,747,766

$

1,497,003

$

1,482,301

Securities sold under agreements to repurchase

 

190,846

 

190,846

 

185,796

 

185,796

Short-term borrowings

30,761

30,748

Long-term debt

 

86,772

 

86,873

50,000

 

49,873

Junior subordinated debt owed to unconsolidated

trusts

 

71,230

 

65,073

 

71,155

 

65,182

Accrued interest payable

 

7,380

 

7,380

 

6,568

 

6,568

Level 3 inputs:

Senior notes, net of unamortized issuance costs

39,607

40,419

39,539

39,452

Subordinated notes, net of unamortized issuance costs

59,197

59,719

59,147

58,186

A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s 2018 Form 10-K.

Note 15: Leases

The Company has operating leases consisting primarily of equipment leases and real estate leases. The Company leases real estate property for bank branches, ATM locations, and office space with terms extending through 2032. As of June 30, 2019, the Company reported $10.4 million of right-of-use asset and $10.5 million lease liability in its unaudited Consolidated Balance Sheets.

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Table of Contents

The following tables represents lease costs and other lease information for the periods presented (dollars in thousands):

Three Months Ended

Six Months Ended

Lease Costs

June 30, 2019

    

June 30, 2019

Operating lease costs

$

584

$

1,117

Variable lease costs

 

119

 

230

Short-term lease costs

8

23

Sublease income

-

-

Net lease cost

$

711

$

1,370

Other information

Cash paid for amounts included in the measurement of lease liabilities:

Operating lease cash flows – Fixed payments

$

570

$

1,083

Operating lease cash flows – Liability reduction

 

490

 

953

Right of use assets obtained during the period in exchange for

operating lease liabilities

764

764

Weighted average lease term (in years)

6.81

6.81

Weighted average discount rate

3.04%

3.04%

At June 30, 2019, the Company was obligated under noncancelable operating leases for office space and other commitments. Rent expense under operating leases, included in net occupancy and equipment expense, was $0.7 million for the three months ended June 30, 2019 and 2018. Rent expense under operating leases, included in net occupancy and equipment expense, was $1.4 million for the six months ended June 30, 2019 and 2018.

Rent commitments were as follows (dollars in thousands):

June 30, 2019

2019

$

1,150

2020

 

2,342

2021

1,730

2022

1,375

2023

1,217

Thereafter

3,896

Amounts representing interest

(1,179)

Present value of net future minimum lease payments

$

10,531

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Table of Contents

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 as of June 30, 2019 (unaudited), as compared with December 31, 2018 and June 30, 2018 (unaudited), and the results of operations for the three and six months ended June 30, 2019 (unaudited) and 2018 (unaudited) and the three months ended March 31, 2019 (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 2018 Form 10-K.

EXECUTIVE SUMMARY

Operating Results

The Company reported net income for the second quarter of 2019 of $24.1 million, or $0.43 per diluted common share, as compared to $25.5 million, or $0.48 per diluted common share, for the first quarter of 2019 and $24.9 million, or $0.51 per diluted common share, for the second quarter of 2018. Adjusted net income(1) for the second quarter of 2019 was $29.5 million, or $0.53 per diluted common share, as compared to $26.6 million, or $0.50 per diluted common share, for the first quarter of 2019 and $25.6 million, or $0.52 per diluted common share, for the second quarter of 2018.

Year-to-date net income through June 30, 2019 was $49.6 million, or $0.90 per diluted common share, compared to net income of $46.8 million, or $0.95 per diluted common share, for the comparable period of 2018. Year-to-date adjusted net income(1) for the first six months of 2019 was $56.1 million, or $1.02 per diluted common share, compared to $50.5 million or $1.03 per diluted common share for the first six months of 2018.

The Company views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pretax adjustments for the second quarter of 2019 were $4.1 million of expenses related to acquisitions, $1.4 million of expenses related to other restructuring costs and $1.8 million related to mortgage servicing rights impairment from TheBANK. The reconciliation of non-GAAP measures (including adjusted net income, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible book value, tangible book value per share and return on average tangible common equity), which the Company believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Quarterly Report on Form 10-Q in the “Non-GAAP Financial Information” section.

On January 31, 2019, the Company completed its acquisition of Banc Ed, the holding company for TheBANK. TheBANK, founded in 1868, is a commercial bank headquartered in Edwardsville, Illinois. It is anticipated that TheBANK will be merged with and into First Busey’s bank subsidiary, Busey Bank, in the fourth quarter of 2019. The Company’s operating results and financial condition were materially impacted by this acquisition.

On May 13, 2019, the Company announced the execution of an Agreement and Plan of Merger in connection with the proposed acquisition by Busey Bank of Investors’ Security Trust Company (“IST”), a Fort Myers, Florida wealth management firm. While the proposed acquisition is expected to add to the Company’s wealth management offerings, it is not expected to have any immediate, material impact to the Company’s earnings or overall business. Through this transaction, Busey Bank and IST broaden the expertise and level of service available to clients, from individuals and families to institutions and foundations. It is anticipated that IST will be merged with and into the wealth management division of Busey Bank in 2019, subject to customary closing conditions and required approvals.

(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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Table of Contents

Asset Quality

As of June 30, 2019, the Company reported non-performing loans of $33.1 million compared to $36.6 million at March 31, 2019. Non-performing loans were 0.51% of total portfolio loans as of June 30, 2019 compared to 0.56% as of March 31, 2019.  With a continued commitment to asset quality and the strength of our balance sheet, near-term loan losses are expected to remain generally low.  While these results are encouraging, asset quality metrics can be generally influenced by market-specific economic conditions, and specific measures may fluctuate from period to period. The key metrics are as follows (dollars in thousands):

As of

 

June 30, 

March 31

December 31, 

September 30, 

    

2019

    

2019

 

2018

    

2018

 

Portfolio loans

$

6,532,126

$

6,515,081

$

5,568,428

$

5,623,741

Allowance for loan losses

 

51,375

 

50,915

 

50,648

 

52,743

Non-performing loans

 

  

 

  

 

  

 

Non-accrual loans

 

32,816

 

36,230

 

34,997

 

40,395

Loans 90+ days past due

 

258

 

356

 

1,601

 

364

Loans 30-89 days past due

 

18,040

 

10,780

 

7,121

 

8,189

Other non-performing assets

 

936

 

921

 

376

 

1,093

Allowance as a percentage of non-performing

loans

 

155.3

%  

 

139.2

%

 

138.4

%  

 

129.4

%

Allowance for loan losses to portfolio loans

 

0.79

%  

 

0.78

%

 

0.91

%  

 

0.94

%

Economic Conditions of Markets

Busey Bank has 44 banking centers serving Illinois. Our Illinois markets of Champaign, Macon, McLean, and Peoria counties and Southwest Chicago feature several Fortune 1000 companies.  Those organizations, coupled with large healthcare and higher education sectors, anchor the communities in which they are located and have provided a comparatively stable foundation for housing, employment and small business.  TheBANK has 19 banking centers in Southern Illinois.

 

The State of Illinois, where a large portion of the Company’s customer base is located, continues to be troubled with pension under-funding, continued budget deficits and a declining credit outlook.  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.  The bi-state metropolitan area includes seven counties in Missouri and eight counties in Illinois; therefore, the Company’s geographic concentration in only three of these 15 counties gives the Company 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.

 

Busey Bank has five banking centers in southwest Florida, which has experienced job growth and an expanded housing market over the last several years.

 

Busey Bank has one banking center in the Indianapolis, Indiana area. Indianapolis is the most populous city of Indiana with a diverse economy and it is headquarters to many large corporations.

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Table of Contents

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%.  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 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. All average information is provided on a daily average basis.

41

Table of Contents

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

(UNAUDITED)

Three Months Ended June 30,

2019

2018

    

Average

    

Income/

    

Yield/

    

Average

    

Income/

    

Yield/

    

(dollars in thousands)

Balance

Expense

Rate(5)

Balance

Expense

Rate(5)

Assets

Interest-bearing bank deposits and federal funds

sold

$

215,181

1,083

 

2.02

%  

$

115,599

$

508

 

1.76

%  

Investment securities:

 

  

 

  

 

  

 

  

 

 

  

U.S. Government obligations

 

354,327

 

2,151

 

2.43

%  

 

155,009

 

636

 

1.65

%  

Obligations of states and political

subdivisions(1)

 

294,371

 

2,181

 

2.97

%  

 

290,802

 

1,882

 

2.60

%  

Other securities

 

1,248,788

 

8,337

 

2.68

%  

 

862,392

 

5,328

 

2.48

%  

Loans held for sale

 

25,143

 

212

 

3.38

%  

 

27,516

 

299

 

4.36

%  

Portfolio loans(1), (2)

 

6,528,326

 

78,279

 

4.81

%  

 

5,533,168

 

62,233

 

4.51

%  

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

$

8,666,136

$

92,243

 

4.27

%  

$

6,984,486

$

70,886

 

4.07

%  

Cash and due from banks

 

113,233

 

  

 

  

 

102,640

 

  

 

  

Premises and equipment

 

149,334

 

 

  

 

120,595

 

  

 

  

Allowance for loan losses

 

(51,047)

 

 

  

 

(53,521)

 

  

 

  

Other assets

 

645,022

 

  

 

  

 

499,341

 

  

 

  

Total assets

$

9,522,678

 

  

 

  

$

7,653,541

 

  

 

  

Liabilities and Stockholders’ Equity

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing transaction deposits

$

1,821,827

$

2,489

 

0.55

%  

$

1,214,863

$

782

 

0.26

%  

Savings and money market deposits

 

2,400,751

 

3,581

 

0.60

%  

 

2,004,299

 

1,641

 

0.33

%  

Time deposits

 

1,747,830

 

8,084

 

1.86

%  

 

1,400,548

 

4,481

 

1.28

%  

Federal funds purchased and repurchase

agreements

 

193,621

 

627

 

1.30

%  

 

235,678

 

372

 

0.63

%  

Borrowings (4)

 

258,662

 

2,365

 

3.67

%  

 

250,552

 

1,863

 

2.98

%  

Junior subordinated debt issued to unconsolidated

trusts

 

71,194

 

892

 

5.03

%  

 

71,046

 

814

 

4.60

%  

Total interest-bearing liabilities

$

6,493,885

$

18,038

 

1.11

%  

$

5,176,986

$

9,953

 

0.77

%  

Net interest spread(1)

 

  

 

 

3.16

%  

 

  

 

  

 

3.30

%  

Noninterest-bearing deposits

 

1,747,746

 

  

 

  

 

1,492,251

 

  

 

  

Other liabilities

 

85,245

 

  

 

  

 

40,173

 

  

 

  

Stockholders’ equity

 

1,195,802

 

  

 

  

 

944,131

 

  

 

  

Total liabilities and stockholders’ equity

$

9,522,678

 

  

 

  

$

7,653,541

 

  

 

  

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

$

8,666,136

$

92,243

 

4.27

%  

$

6,984,486

$

70,886

 

4.07

%  

Interest expense / earning assets

$

8,666,136

$

18,038

 

0.84

%  

$

6,984,486

$

9,953

 

0.57

%  

Net interest margin(1)

 

  

$

74,205

 

3.43

%  

 

  

$

60,933

 

3.50

%  

(1)On a tax-equivalent basis and assuming an income tax rate of 21%.
(2)Non-accrual loans have been included in average portfolio loans.
(3)Interest income includes a tax-equivalent adjustment of $0.8 million and $0.6 million for the three months ended June 30, 2019 and 2018, respectively.
(4)Includes short-term and long-term borrowings. Interest expense includes a non-usage fee on revolving loan.
(5)Annualized.

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Table of Contents

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

(UNAUDITED)

Six Months Ended June 30,

2019

2018

    

Average

    

Income/

    

Yield/

    

Average

    

Income/

    

Yield/

    

(dollars in thousands)

Balance

Expense

Rate(5)

Balance

Expense

Rate(5)

Assets

Interest-bearing bank deposits and federal funds

sold

$

217,811

2,315

 

2.14

%  

$

116,956

$

931

 

1.61

%  

Investment securities:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government obligations

 

343,773

 

4,217

 

2.47

%  

 

158,272

 

1,285

 

1.64

%  

Obligations of states and political

subdivisions(1)

 

280,405

 

4,118

 

2.96

%  

 

299,976

 

3,861

 

2.60

%  

Other securities

 

1,186,059

 

15,881

 

2.70

%  

 

851,297

 

10,286

 

2.44

%  

Loans held for sale

 

21,218

 

379

 

3.60

%  

 

33,372

 

649

 

3.92

%  

Portfolio loans(1), (2)

 

6,329,596

 

150,291

 

4.79

%  

 

5,520,584

 

123,085

 

4.50

%  

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

$

8,378,862

$

177,201

 

4.26

%  

$

6,980,457

$

140,097

 

4.05

%  

Cash and due from banks

 

109,714

 

  

 

  

 

105,667

 

  

 

  

Premises and equipment

 

146,776

 

 

  

 

119,481

 

  

 

  

Allowance for loan losses

 

(51,236)

 

 

  

 

(54,076)

 

  

 

  

Other assets

 

614,859

 

  

 

  

 

507,162

 

  

 

  

Total assets

$

9,198,975

 

  

 

  

$

7,658,691

 

  

 

  

Liabilities and Stockholders’ Equity

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing transaction deposits

$

1,760,550

$

4,967

 

0.57

%  

$

1,188,922

$

1,452

 

0.25

%  

Savings and money market deposits

 

2,303,358

 

6,285

 

0.55

%  

 

2,015,561

 

3,160

 

0.32

%  

Time deposits

 

1,718,587

 

15,402

 

1.81

%  

 

1,389,595

 

8,279

 

1.20

%  

Federal funds purchased and repurchase

agreements

 

199,045

 

1,210

 

1.23

%  

 

246,802

 

713

 

0.58

%  

Borrowings (4)

 

227,460

 

4,266

 

3.78

%  

 

264,205

 

3,696

 

2.82

%  

Junior subordinated debt issued to unconsolidated

trusts

 

71,175

 

1,806

 

5.12

%  

 

71,028

 

1,529

 

4.34

%  

Total interest-bearing liabilities

$

6,280,175

$

33,936

 

1.09

%  

$

5,176,113

$

18,829

 

0.73

%  

Net interest spread(1)

 

  

 

 

3.17

%  

 

  

 

  

 

3.32

%  

Noninterest-bearing deposits

 

1,682,691

 

  

 

  

 

1,494,680

 

  

 

  

Other liabilities

 

80,034

 

  

 

  

 

48,923

 

  

 

  

Stockholders’ equity

 

1,153,075

 

  

 

  

 

938,975

 

  

 

  

Total liabilities and stockholders’ equity

$

9,195,975

 

  

 

  

$

7,658,691

 

  

 

  

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

$

8,378,862

$

177,201

 

4.26

%  

$

6,980,457

$

140,097

 

4.05

%  

Interest expense / earning assets

$

8,378,862

$

33,936

 

0.81

%  

$

6,980,457

$

18,829

 

0.55

%  

Net interest margin(1)

 

  

$

143,265

 

3.45

%  

 

  

$

121,268

 

3.50

%  

(1)On a tax-equivalent basis and assuming an income tax rate of 21%.
(2)Non-accrual loans have been included in average portfolio loans.
(3)Interest income includes a tax-equivalent adjustment of $1.5 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively.
(4)Includes short-term and long-term borrowings. Interest expense includes a non-usage fee on revolving loan.
(5)Annualized.

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Table of Contents

Earning Assets, Sources of Funds and Net Interest Margin

Total average interest-earning assets increased $1.7 billion, or 24.1%, to $8.7 billion for the three months ended June 30, 2019, as compared to $7.0 billion for the same period in 2018. Total average interest-earning assets increased $1.4 billion, or 20.0%, to $8.4 billion for the six months ended June 30, 2019, as compared to $7.0 billion for the same period of 2018. Average loans have increased due to the Banc Ed acquisition and organic growth.  Loans generally have notably higher yields compared to interest-bearing bank deposits and investment securities and our loan growth contributed to a positive effect on net interest margin.

 

Total average interest-bearing liabilities increased $1.3 billion, or 25.4%, to $6.5 billion for the three months ended June 30, 2019 as compared to $5.2 billion for the same period in 2018.   Total average interest-bearing liabilities increased $1.1 billion, or 21.3%, to $6.3 billion for the six months ended June 30, 2019 as compared to $5.2 billion for the same period of 2018. Average noninterest-bearing deposits increased $255.5 million, or 17.1%, to $1.7 billion for the three months ended June 30, 2019, as compared to $1.5 billion for the same period of 2018. Average noninterest-bearing deposits increased $188.0 million, or 12.6%, to $1.7 billion for the six months ended June 30, 2019, as compared to $1.5 billion for the same period of 2018.  

Interest income, on a tax-equivalent basis, increased $21.3 million, or 30.1%, to $92.2 million for the three months ended June 30, 2019, compared to $70.9 million in the same period of 2018. Interest income, on a tax-equivalent basis, increased $37.1 million, or 26.5%, to $177.2 million for the six months ended June 30, 2019, compared to $140.1 million in same period of 2018. The interest income increase related primarily to the increase in average loan balances. Interest expense increased during the three months ended June 30, 2019 by $8.0 million to $18.0 million, compared to $10.0 million in the same period of 2018. Interest expense increased during the six months ended June 30, 2019 by $15.1 million to $33.9 million, compared to $18.8 million in the same period of 2018. Funding costs have increased primarily due to resetting of time deposit rates to reflect market rate increases and additional borrowings in conjunction with the Banc Ed acquisition.

Net interest income, on a tax-equivalent basis, increased $13.3 million, or 21.8%, for the three months ended June 30, 2019 as compared to the same period of 2018.   Net interest income, on a tax-equivalent basis, increased $22.0 million, or 18.1%, for the six months ended June 30, 2019 as compared to the same period of 2018.

 

Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, decreased to 3.43% for the three months ended June 30, 2019, compared to 3.50% for the same period of 2018, and decreased to 3.45% for the six months ended June 30, 2019, compared to 3.50% for the same period of 2018.  Net of purchase accounting accretion and amortization,(1) the net interest margin for the three months ended June 30, 2019 was 3.27%, a decrease from 3.33% for the same period in 2018, and was 3.29% for the six months ended June 30, 2019, a decrease from 3.32% for the same period of 2018.

The quarterly net interest margins were as follows:

    

2019

    

2018

    

First Quarter

 

3.46

%  

3.51

%  

Second Quarter

 

3.43

%  

3.50

%  

Third Quarter

 

%  

3.41

%  

Fourth Quarter

 

%  

3.38

%  

(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.

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, was 3.16% for the three months ended June 30, 2019 compared to 3.30% in the same period of 2018, and was 3.17% for the six months ended June 30, 2019, compared to 3.32% for the same period of 2018, each on a tax-equivalent basis.

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Table of Contents

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 2018 Form 10-K for accounting policies underlying the recognition of interest income and expense.

Non-interest income (dollars in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

    

    

    $

    

    

    

$

    

 

2019

2018

Change

Change

2019

2018

Change

Change

 

Fees for customer services

$

9,696

$

7,290

$

2,406

33.0

%

$

17,793

$

14,236

$

3,557

25.0

%

Trust fees

8,318

6,735

1,583

23.5

%

16,433

14,249

2,184

15.3

%

Commissions and brokers’ fees,

net

 

1,170

 

883

 

287

32.5

%

 

2,084

 

1,979

 

105

5.3

%

Remittance processing

 

3,717

 

3,566

 

151

4.2

%

 

7,497

 

6,958

 

539

7.7

%

Mortgage revenue

 

2,851

 

1,573

 

1,278

81.2

%

 

4,796

 

3,216

 

1,580

49.1

%

Net (losses) gains on sales of

securities

 

(10)

 

160

 

(170)

(106.3)

%

 

(184)

 

160

 

(344)

(215.0)

%

Unrealized (losses) gains

recognized on equity securities

(1,016)

(1,016)

(100.0)

%

(800)

(800)

(100.0)

%

Other income

 

3,170

 

2,595

 

575

22.2

%

 

6,222

 

4,490

 

1,732

38.6

%

Total non-interest income

$

27,896

$

22,802

$

5,094

22.3

%

$

53,841

$

45,288

$

8,553

18.9

%

Total non-interest income of $27.9 million for the three months ended June 30, 2019 increased by 22.3% as compared to $22.8 million for the same period in 2018. Total non-interest income of $53.8 million for the six months ended June 30, 2019 increased by 18.9% as compared to $45.3 million for the same period in 2018. Revenues from trust fees, commissions and brokers’ fees and remittance processing activities represented 47.3% of the Company’s non-interest income for the quarter ended June 30, 2019, providing a balance to revenue from traditional banking activities.

Trust fees and commissions and brokers’ fees were $9.5 million for the second quarter of 2019 compared to $7.6 million for the second quarter of 2018. Trust fees and commissions and brokers’ fees were $18.5 million for the six months ended June 30, 2019 compared to $16.2 million for the same period of 2018. The Company’s wealth management division ended the second quarter of 2019 with $9.0 billion in assets under care compared to $7.0 billion in the second quarter of 2018.

Remittance processing revenue from the Company’s subsidiary, FirsTech, of $3.7 million for the second quarter of 2019 increased from $3.6 million for the second quarter of 2018. For the first six months of 2019, remittance processing revenue increased to $7.5 million compared to $7.0 million for the same period of 2018. FirsTech experienced growth from both new clients and expansion of existing clients.

Fees for customer services increased 33.0% and 25.0% for the three and six months ended June 30, 2019, respectively, compared to the same period of 2018 as a result of the Banc Ed acquisition. Evolving regulation, product changes and changing behaviors by our customer base impact fees for customer services.

The mortgage line of business generated $2.9 million of revenue in the second quarter of 2019, an increase compared to $1.6 million of revenue in the second quarter of 2018, and increased to $4.8 million for the six months ended June 30, 2019 compared to $3.2 million for the same period of 2018, following a period of restructuring and additional revenue from TheBANK.

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Non-interest expense (dollars in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

 

    

    

    

$

    

%

    

    

$

    

%

 

2019

2018

Change

Change

2019

2018

Change

Change

 

Salaries, wages and employee

benefits

$

34,268

$

25,472

$

8,796

34.5

%

$

66,609

$

54,291

$

12,318

22.7

%

Net occupancy expense of

premises

 

4,511

 

3,689

 

822

22.3

%

 

8,713

 

7,510

 

1,203

16.0

%

Furniture and equipment expenses

 

2,352

 

1,790

 

562

31.4

%

 

4,447

 

3,703

 

744

20.1

%

Data processing

 

5,616

 

4,030

 

1,586

39.4

%

 

10,017

 

8,375

 

1,642

19.6

%

Amortization of intangible assets

 

2,412

 

1,490

 

922

61.9

%

 

4,506

 

3,005

 

1,501

50.0

%

Other expense

 

18,861

 

10,834

 

8,027

74.1

%

 

30,891

 

21,461

 

9,430

43.9

%

Total non-interest expense

$

68,020

$

47,305

$

20,715

43.8

%

$

125,183

$

98,345

$

26,838

27.3

%

Income taxes

$

6,702

$

8,749

$

(2,047)

(23.4)

%

$

16,287

$

17,027

$

(740)

(4.3)

%

Effective rate on income taxes

 

21.8

%  

 

26.0

%  

 

  

  

 

24.7

%  

 

26.7

%  

 

  

  

Efficiency ratio

 

63.6

%  

 

54.8

%  

 

  

  

 

60.9

%  

 

57.3

%  

 

  

  

Full-time equivalent employees as of period-end

 

1,579

 

1,288

 

  

  

 

 

  

  

Total non-interest expense of $68.0 million for the three months ended June 30, 2019 increased as compared to $47.3 million for the same period in 2018. Total non-interest expense of $125.2 million for the six months ended June 30, 2019 increased as compared to $98.3 million for the same period in 2018. The three and six months ended June 30, 2019 reflect increases from the Banc Ed acquisition.

Salaries, wages and employee benefits increased to $34.3 million for the three months ended June 30, 2019 as compared to $25.5 million for the same period in 2018, and increased to $66.6 million for the six months ended June 30, 2019 as compared to $54.3 million for the same period in 2018. The increases in salaries, wages and employee benefits primarily relates to fluctuations in the number of employees resulting from the Banc Ed acquisition.

Combined net occupancy expense of premises and furniture and equipment expenses were $6.9 million for the three months ended June 30, 2019 and $5.5 million for the three months ended June 30, 2018. Combined net occupancy expense of premises and furniture and equipment expenses were $13.2 million for the six months ended June 30, 2019 and $11.2 million for the six months ended June 30, 2018. The increase is primarily due to TheBANK adding 19 banking centers to our banking center network.

Data processing expense in the second quarter of 2019 of $5.6 million increased compared to $4.0 million in the second quarter of 2018. In the first six months of 2019, data processing expense increased to $10.0 million compared to $8.4 million for the same period of 2018. Variances are related to payment of conversion expenses and data processing related to TheBANK.

Amortization of intangible assets increased to $2.4 million for the three months ended June 30, 2019 compared to $1.5 million for the three months ended June 30, 2018, and increased to $4.5 million for the six months ended June 30, 2019 compared to $3.0 million for the six months ended June 30, 2018, as a result of the Banc Ed acquisition.

Other expense of $18.9 million for the three months ended June 30, 2019 was an increase compared to $10.8 million for the same period in 2018. Other expense of $30.9 million for the six months ended June 30, 2019 was an increase compared to $21.5 million for the same period in 2018. Variances are across multiple expense categories and include expenses related to acquisitions and other restructuring activities. In addition, included in other expense for the three and six months ended June 30, 2019 is MSR valuation impairment of $1.8 million and lease impairment of $0.4 million.

The effective income tax rate of 21.8% and 24.7% for the three and six months ended June 30, 2019, was lower than the combined federal and state statutory rate of approximately 28% due to tax exempt interest income, such as municipal bond interest and bank owned life insurance income, and investments in various federal and state tax credits.

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The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis.  At June 30, 2019, the Company was not under examination by any tax authority.

The efficiency ratio(1) is calculated as 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 banking industry, measures the amount of expense incurred to generate a dollar of revenue.  The efficiency ratio was 63.6% in the second quarter of 2019 as compared to 54.8% in the same period of 2018 and the efficiency ratio was 60.9% for the six months ended June 30, 2019 as compared to 57.3% in the comparable period of 2018.  Operating costs have been influenced by acquisition, restructuring and other non-recurring items and the adjusted efficiency ratio(1), excluding the impact of such costs, was 56.6% for the quarter ended June 30, 2019 compared to 53.7% for the same period of 2018.  The adjusted efficiency ratio(1) was 56.5% and 54.6% for the six month periods ended June 30, 2019 and 2018, 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.

(1)For a reconciliation of efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see “Non-GAAP Financial Information”.

FINANCIAL CONDITION

Significant Consolidated Balance Sheet items (dollars in thousands):

    

June 30, 

    

December 31, 

    

    

 

2019

2018

$ Change

% Change

 

Assets

 

  

 

  

 

  

 

  

Debt securities available for sale

$

1,848,073

$

697,685

$

1,150,388

 

164.9

%

Debt securities held to maturity

 

15,708

 

608,660

 

(592,952)

 

(97.4)

%

Portfolio loans, net

 

6,480,751

 

5,517,780

 

962,971

 

17.5

%

Total assets

$

9,612,667

$

7,702,357

$

1,910,310

 

24.8

%

Liabilities

 

  

 

  

 

  

 

  

Deposits:

 

  

 

  

 

  

 

  

Noninterest-bearing

$

1,766,681

$

1,464,700

$

301,981

 

20.6

%

Interest-bearing

 

6,066,541

 

4,784,621

 

1,281,920

 

26.8

%

Total deposits

$

7,833,222

$

6,249,321

$

1,583,901

 

25.3

%

Securities sold under agreements to repurchase

$

190,846

$

185,796

$

5,050

 

2.7

%

Short-term borrowings

 

30,761

 

 

30,761

 

100.0

%

Long-term debt

 

86,772

 

50,000

 

36,772

 

73.5

%

Senior notes, net of unamortized issuance costs

 

39,607

 

39,539

 

68

 

0.2

%

Subordinated notes, net of unamortized issuance costs

 

59,197

 

59,147

 

50

 

0.1

%

Junior subordinated debt owed to unconsolidated trusts

 

71,230

 

71,155

 

75

 

0.1

%

Total liabilities

$

8,409,059

$

6,707,393

$

1,701,666

 

25.4

%

Stockholders’ equity

$

1,203,608

$

994,964

$

208,644

 

21.0

%

Portfolio Loans

The Company believes that making sound loans is a necessary and desirable means of employing funds available for investment. Authorized personnel are expected to 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

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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 banks. 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. 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. 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 2018 Form 10-K. 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.

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

June 30, 2019

    

Illinois

    

Missouri

    

Florida

    

Indiana

    

Total

Commercial

$

1,185,675

$

438,141

$

15,991

$

28,291

$

1,668,098

Commercial real estate

 

1,766,237

 

557,318

 

154,533

 

183,817

 

2,661,905

Real estate construction

 

175,619

 

141,991

 

28,997

 

82,719

 

429,326

Retail real estate

 

1,136,955

 

449,793

 

101,623

 

32,999

 

1,721,370

Retail other

 

47,597

 

1,601

 

1,481

 

748

 

51,427

Portfolio loans

$

4,312,083

$

1,588,844

$

302,625

$

328,574

$

6,532,126

Allowance for loan losses

 

  

 

  

 

  

 

  

 

(51,375)

Portfolio loans, net

 

  

 

  

 

  

 

  

$

6,480,751

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December 31, 2018

    

Illinois

    

Missouri

    

Florida

    

Indiana

    

Total

Commercial

$

972,072

$

394,043

$

17,954

$

21,037

$

1,405,106

Commercial real estate

 

1,448,937

 

579,536

 

158,337

 

180,013

 

2,366,823

Real estate construction

 

78,489

 

122,385

 

17,859

 

69,464

 

288,197

Retail real estate

 

874,910

 

475,739

 

102,117

 

27,367

 

1,480,133

Retail other

 

24,849

 

1,294

 

1,455

 

571

 

28,169

Portfolio loans

$

3,399,257

$

1,572,997

$

297,722

$

298,452

$

5,568,428

Allowance for loan losses

 

  

 

  

 

  

 

  

 

(50,648)

Portfolio loans, net

 

  

 

  

 

  

 

  

$

5,517,780

Portfolio loans increased $963.7 million, or 17.3%, as of June 30, 2019 compared to December 31, 2018, primarily due to the Banc Ed acquisition. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased $699.2 million from December 31, 2018. Retail real estate and retail other loans increased $264.5 million from December 31, 2018.

Allowance for Loan Losses

The Company recorded net charge-offs of $2.1 million for the second quarter of 2019 and $3.9 million for the six months ended June 30, 2019. The allowance for loan loss as a percentage of portfolio loans was 0.79% at June 30, 2019 as compared to 0.78% at March 31, 2019 and 0.91% at December 31, 2018. The decline in the allowance coverage ratio in 2019 is primarily attributed to the Banc Ed acquisition. Acquired loans are initially recorded at their acquisition date fair value so a separate allowance is not initially recognized. An allowance is recorded subsequent to acquisition to the extent the reserve requirement exceeds the recorded fair value adjustment.

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 $2.5 million and $2.3 million for the three months ended June 30, 2019 and 2018, respectively, and was $4.6 million and $3.3 million for the six months ended June 30, 2019 and 2018, 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.

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Table of Contents

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 guidelines. 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.

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

June 30, 

March 31, 

December 31, 

September 30, 

    

2019

    

2019

    

2018

    

2018

    

Non-accrual loans

$

32,816

$

36,230

$

34,997

$

40,395

Loans 90+ days past due and still accruing

 

258

 

356

 

1,601

 

364

Total non-performing loans

33,074

36,586

36,598

40,759

OREO

936

921

376

1,093

Total non-performing assets

$

34,010

$

37,507

$

36,974

$

41,852

Allowance for loan losses

$

51,375

$

50,915

$

50,648

$

52,743

Allowance for loan losses to portfolio loans

0.79

%

0.78

%

0.91

%

0.94

%

Allowance for loan losses to non-performing

loans

155.3

%

139.2

%

138.4

%

129.4

%

Non-performing loans to portfolio loans, before

allowance for loan losses

0.5

%

0.6

%

0.7

%

0.7

%

Non-performing assets to portfolio loans and

OREO, before allowance for loan losses

0.5

%

0.6

%

0.7

%

0.7

%

Total non-performing assets were $34.0 million at June 30, 2019, compared to $37.0 million at December 31, 2018. Non-performing assets as a percentage of portfolio loans and OREO continued to be favorably low at 0.5% on June 30, 2019. 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 loan repayment terms.  Management assesses the potential for loss on such loans and considers the effect of any potential loss in determining its provision for probable loan losses.  Potential problem loans totaled $79.2 million at June 30, 2019, compared to $70.9 million at December 31, 2018.  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 June 30, 2019, management identified no other loans that represent or result from trends or uncertainties which would be expected to materially impact future operating results, liquidity or capital resources.

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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 facility, or to utilize brokered deposits. As of June 30, 2019, the Company had additional capacity to borrow from the FHLB and Federal Reserve of $1.1 billion and $470.1 million, respectively. Additionally, the Company has an unused revolving facility of $20.0 million.

As of June 30, 2019, 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

The banks routinely enter into commitments to extend credit and standby letters of credit in the normal course of business to meet the financing needs of its customers.  As of June 30, 2019 and December 31, 2018, we had outstanding loan commitments and standby letters of credit of $1.6 billion and $1.4 billion, respectively. The balance of commitments to extend credit represents future cash requirements and some of these commitments may expire without being drawn upon.  We anticipate we will have sufficient funds available to meet current loan commitments, including loan applications received and in process prior to the issuance of firm 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 banks.  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.  In order to refrain from restrictions on dividends, equity repurchases and discretionary bonus payments, bank holding companies and their subsidiary banks are required to maintain, including the capital conservation buffer, a total capital to total risk-weighted asset ratio of not less than 10.50%, Tier 1 capital to total risk-weighted asset ratio of not less than 8.50%, Common Equity Tier 1 capital to total risk-weighted asset ratio of not less than 7.0% and a Tier 1 leverage ratio of not less than 4.00%.  The Basel III Rule was fully phased-in on January 1, 2019.  See “Note 11: Regulatory Capital” for ratios and further discussion.

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, tangible common equity to tangible assets and adjusted return on average tangible common equity. 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, for example, 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

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case of the tangible book value per share, appears below. 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.

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

(dollars in thousands)

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,

    

2019

2019

 

2018

2019

2018

Net income

$

24,085

$

25,469

$

24,862

$

49,554

$

46,779

Acquisition expenses

 

  

 

  

 

  

 

  

 

  

Salaries, wages, and employee

benefits

 

43

 

 

 

43

 

1,233

Data processing

 

327

 

7

 

34

 

334

 

406

Other (includes professional and

legal)

 

3,293

 

1,205

 

107

 

4,498

 

2,057

Lease impairment

415

415

Other restructuring costs

 

  

 

  

 

  

 

 

  

Salaries, wages, and employee

benefits

 

275

 

 

 

275

 

417

Data processing

292

100

392

Fixed asset impairment

817

817

Other (includes professional and

legal)

 

826

 

167

 

 

993

 

MSR valuation impairment

1,822

1,822

Related tax benefit

 

(1,880)

 

(334)

 

(230)

 

(2,214)

 

(1,197)

Adjusted net income

$

29,498

$

26,614

$

25,590

$

56,112

$

50,512

Average total assets

$

9,522,678

$

8,865,642

$

7,653,541

$

9,198,975

$

7,658,691

Reported: Return on average assets(1)

 

1.01

%

 

1.17

%

 

1.30

%

1.09

%

1.23

%

Adjusted: Return on average assets(1)

 

1.24

%

 

1.22

%

 

1.34

%

1.23

%

1.33

%

(1) Annualized measure

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

(dollars in thousands)

Three Months Ended

Six Months Ended

    

June 30, 

    

March 31, 

    

June 30, 

June 30, 

    

June 30, 

 

    

2019

    

2019

    

2018

2019

    

2018

 

Reported: Net interest income

$

73,428

$

68,383

$

60,372

$

141,811

$

120,129

Tax-equivalent adjustment

 

777

 

677

 

561

 

1,454

 

1,139

Purchase accounting accretion

 

(3,471)

 

(2,994)

 

(3,015)

 

(6,465)

 

(6,425)

Adjusted: Net interest income

$

70,734

$

66,066

$

57,918

$

136,800

$

114,843

Average interest-earning assets

$

8,666,136

$

8,088,396

$

6,984,486

$

8,378,862

$

6,980,457

Reported: Net interest margin(1)

 

3.43

%  

 

3.46

%  

 

3.50

%  

 

3.45

%  

 

3.50

%

Adjusted: Net Interest margin(1)

 

3.27

%  

 

3.31

%  

 

3.33

%  

 

3.29

%  

 

3.32

%

(1) Annualized measure

Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio

(dollars in thousands)

    

Three Months Ended

 

Six Months Ended

 

June 30, 

March 31, 

June 30, 

June 30, 

June 30, 

2019

 

2019

 

2018

 

2019

 

2018

 

Reported: Net Interest income

$

73,428

$

68,383

$

60,372

$

141,811

$

120,129

Tax-equivalent adjustment

 

777

 

677

 

561

 

1,454

1,139

Tax equivalent interest income

$

74,205

$

69,060

$

60,933

$

143,265

$

121,268

Reported: Non-interest income

 

27,896

 

25,945

 

22,802

 

53,841

 

45,288

Net (losses) gains on sales of

securities and unrealized (losses)

gains recognized on equity

securities

 

(1,026)

 

42

 

160

 

(984)

 

160

Adjusted: Non-interest income

$

28,922

$

25,903

$

22,642

$

54,825

$

45,128

Reported: Non-interest expense

 

68,020

 

57,163

 

47,305

 

125,183

 

98,345

Amortization of intangible assets

 

(2,412)

 

(2,094)

 

(1,490)

 

(4,506)

 

(3,005)

Non-operating adjustments:

 

 

  

 

  

 

  

 

  

Salaries, wages, and employee

benefits

 

(318)

 

 

 

(318)

 

(1,650)

Data processing

 

(619)

 

(107)

 

(34)

 

(726)

 

(406)

Other

 

(6,356)

 

(1,372)

 

(924)

 

(7,728)

 

(2,429)

Adjusted: Non-interest expense

$

58,315

$

53,590

$

44,857

$

111,905

$

90,855

Reported: Efficiency ratio

 

63.62

%

 

57.99

%

 

54.82

%

 

60.92

%

 

57.30

%

Adjusted: Efficiency ratio

 

56.55

%

 

56.43

%

 

53.67

%

 

56.49

%

 

54.60

%

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

(dollars in thousands)

Three Months Ended

 

    

June 30, 

    

March 31,

 

June 30, 

 

    

2019

    

2019

 

2018

 

Total Assets

$

9,612,667

$

9,537,334

$

7,775,544

Goodwill and other intangible assets, net

 

(375,327)

 

(377,739)

 

(303,407)

Tax effect of other intangible assets, net

 

17,075

 

17,751

 

9,288

Tangible assets

$

9,254,415

$

9,177,346

$

7,481,425

Total stockholders’ equity

 

1,203,608

 

1,186,141

 

957,182

Goodwill and other intangible assets, net

 

(375,327)

 

(377,739)

 

(303,407)

Tax effect of other intangible assets, net

 

17,075

 

17,751

 

9,288

Tangible common equity

$

845,356

$

826,153

$

663,063

Tangible common equity to tangible assets(1)

 

9.13

%  

 

9.00

%

 

8.86

%

Tangible book value per share

$

14.95

$

14.53

$

13.40

Average stockholders’ common equity

$

1,195,802

$

1,109,872

$

944,131

Average goodwill and other intangible assets, net

 

(376,851)

 

(352,587)

 

(304,379)

Average tangible stockholders’ common equity

$

818,951

$

757,285

$

639,752

Reported: Return on average tangible common equity(2)

 

11.80

%  

 

13.64

%

 

15.59

%

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

 

14.45

%  

 

14.25

%

 

16.04

%

Six Months Ended

June 30, 

June 30, 

2019

2018

Average stockholders’ common equity

$

1,153,075

$

938,975

Average goodwill and other intangible assets, net

 

(364,786)

 

(305,666)

Average tangible stockholders’ common equity

$

788,289

$

633,309

Reported: Return on average tangible common equity(2)

12.68

%  

14.90

%  

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

14.35

%  

16.08

%  

(1) Tax-effected measure

(2) Annualized measure

(3) Calculated using adjusted net income

FORWARD-LOOKING STATEMENTS

Statements made in this document, 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:

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(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 2018 Form 10-K. 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 Investment Securities. The fair values of investment securities are measurements from an independent pricing service and 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. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.

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 debt securities below their amortized cost are evaluated to determine whether such declines 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 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).

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

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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.

Goodwill.  Goodwill represents the excess of purchase price over the fair value of net assets acquired using the acquisition method of accounting. Determining the fair value often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Goodwill is not amortized, instead, the Company assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired.

Income Taxes. The Company estimates income tax expense based on amounts expected to be owed to federal and state tax jurisdictions. Estimated income tax expense is reported in the unaudited Consolidated Statements of Income. Accrued and deferred taxes, as reported in other assets or other liabilities in the unaudited Consolidated Balance Sheets, represent the net estimated amount due to or to be received from taxing jurisdictions either currently or in the future. Management judgment is involved in estimating accrued and deferred taxes, as it may be necessary to evaluate the risks and merits of the tax treatment of transactions, filing positions, and taxable income calculations after considering tax-related statutes, regulations and other relevant factors. Because of the complexity of tax laws and interpretations, interpretation is subject to judgment.

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 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 either 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.

 

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 fair value of the collateral, if the loan is collateral-dependent or based on the discounted cash flows of the loan at the loan’s effective interest rate.  The amount of impairment and any subsequent changes are recorded through a charge to the provision for loan losses.  For collateral dependent loans, the allowance is based upon the estimated fair value, net of selling costs, of the applicable

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Table of Contents

collateral.  The required allowance or actual loss on an impaired loan could differ significantly if the ultimate fair value of the collateral is significantly different from the fair value estimate.

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 and to structure the Consolidated Balance Sheets to maximize stable net interest income in consideration of projected future 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 one-year and a two-year time horizon and net interest income is calculated under current market rates and assuming permanent instantaneous shifts of +/-100, +/-200, and +300 basis points. The model assumes immediate and sustained shifts in the federal funds rate and other market rate indices and 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. Assets and liabilities are assumed to remain constant as of the measurement date; variable-rate assets and liabilities are repriced based on repricing frequency; and prepayment speeds on loans are projected for both declining and rising rate environments.

The interest rate risk of First Busey as a result of immediate and sustained changes 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

    

- 200

- 100

    

+100

    

+200

    

+300

    

June 30, 2019

 

(8.51)

%  

(4.58)

%  

1.10

%  

2.77

%  

4.26

%  

December 31, 2018

 

(9.86)

%  

(3.58)

%  

1.08

%  

2.01

%  

2.88

%  

 

Year-Two: Basis Point Changes

    

- 200

- 100

    

+100

    

+200

    

+300

    

June 30, 2019

 

(11.53)

%  

(6.79)

%  

2.87

%  

5.68

%  

8.25

%  

December 31, 2018

 

(13.71)

%  

(5.13)

%  

1.97

%  

3.70

%  

5.32

%  

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.

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Table of Contents

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 Exchange Act was carried out as of June 30, 2019, 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 June 30, 2019, 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 Exchange Act was (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 June 30, 2019, 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

There have been no material changes to the risk factors disclosed in Item 1A of Part I of the Company’s 2018 Form 10-K.

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Table of Contents

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 originally approved in 2008. On May 22, 2019, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by 1,000,000 shares. On June 14, 2019, the Company repurchased 333,334 shares in a private transaction for $25.30 per share. At June 30, 2019, the Company had 1,000,000 shares that may still be purchased under the plan.

Period

Total number of shared purchased

Average price paid per share

Total Number of Shares Purchased as Part of Publicly Announced Programs

Maximum number of Shares that May Yet Be Repurchased Under the Program

April 1-30, 2019

333,334

May 1-31, 2019

1,333,334

June 1-30, 2019

333,334

$ 25.30

333,334

1,000,000

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

10.1

Employment Agreement Addendum by and between First Busey Corporation and Christopher M. Shroyer, dated April 23, 2019 (filed as Exhibit 99.2 to the Company’s Form 8-K filed with the Commission on April 23, 2019 (Commission No. 0-15950), and incorporated herein by reference).

10.2

Letter Agreement by and between First Busey Corporation and Robin N. Elliott, dated April 23, 2019 (filed as Exhibit 99.3 to the Company’s Form 8-K filed with the Commission on April 23, 2019 (Commission No. 0-15950), and incorporated herein by reference).

*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.INS

iXBRL Instance Document

101.SCH

iXBRL Taxonomy Extension Schema

101.CAL

iXBRL Taxonomy Extension Calculation Linkbase

101.LAB

iXBRL Taxonomy Extension Label Linkbase

101.PRE

iXBRL Taxonomy Extension Presentation Linkbase

101.DEF

iXBRL Taxonomy Extension Definition Linkbase

*

Filed herewith.

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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 and Principal Accounting Officer)

Date: August 7, 2019

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