Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☑
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended 9/30/2019
☐
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 incorporationor 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 November 7, 2019
55,047,777
September 30, 2019
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
42
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
61
Item 4.
CONTROLS AND PROCEDURES
62
Part II
OTHER INFORMATION
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
63
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
Item 5.
Item 6.
EXHIBITS
64
SIGNATURES
65
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST BUSEY CORPORATION and Subsidiaries
(Unaudited)
December 31, 2018
(dollars in thousands)
Assets
Cash and due from banks
$
139,523
128,838
Interest-bearing deposits
385,934
111,135
Total cash and cash equivalents
525,457
239,973
Debt securities available for sale
1,701,005
697,685
Debt securities held to maturity (fair value 2019 $15,399; 2018 $603,360)
15,170
608,660
Equity securities
5,690
6,169
Loans held for sale, at fair value
70,345
25,895
Portfolio loans (net of allowance for loan losses 2019 $52,965; 2018 $50,648)
6,616,450
5,517,780
Premises and equipment, net
153,641
117,672
Right of use asset
9,979
—
Goodwill
322,699
267,685
Other intangible assets, net
58,624
32,873
Cash surrender value of bank owned life insurance
172,512
128,491
Other assets
102,188
59,474
Total assets
9,753,760
7,702,357
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing
1,779,490
1,464,700
Interest-bearing
6,150,976
4,784,621
Total deposits
7,930,466
6,249,321
Securities sold under agreements to repurchase
202,500
185,796
Short-term borrowings
29,739
Long-term debt
85,106
50,000
Senior notes, net of unamortized issuance costs
39,640
39,539
Subordinated notes, net of unamortized issuance costs
59,222
59,147
Junior subordinated debt owed to unconsolidated trusts
71,269
71,155
Lease liability
10,101
Other liabilities
109,736
52,435
Total liabilities
8,537,779
6,707,393
Outstanding commitments and contingent liabilities (see Note 11)
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
1,247,560
1,080,084
Accumulated deficit
(31,868)
(72,167)
Accumulated other comprehensive income (loss)
17,391
(6,812)
Total stockholders’ equity before treasury stock
1,233,139
1,001,154
Treasury stock, at cost (2019 713,456 shares; 2018 310,745 shares)
(17,158)
(6,190)
Total stockholders’ equity
1,215,981
994,964
Total liabilities and stockholders’ equity
Common shares outstanding at period end
55,197,277
48,874,836
See accompanying notes to unaudited consolidated financial statements.
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
(dollars in thousands, except per share amounts)
Interest income:
Interest and fees on loans
78,083
63,589
227,903
186,839
Interest and dividends on investment securities:
Taxable interest income
10,247
7,357
31,583
19,670
Non-taxable interest income
1,180
1,166
3,456
3,630
Other interest income
2,181
649
4,496
1,580
Total interest income
91,691
72,761
267,438
211,719
Interest expense:
Deposits
14,753
8,946
41,407
21,837
Federal funds purchased and securities sold under
agreements to repurchase
579
426
1,789
1,139
200
324
885
1,257
700
245
2,020
622
Senior notes
400
1,199
Subordinated notes
731
792
2,193
2,379
852
854
2,658
2,383
Total interest expense
18,215
11,987
52,151
30,816
Net interest income
73,476
60,774
215,287
180,903
Provision for loan losses
3,411
758
8,039
4,024
Net interest income after provision for loan losses
70,065
60,016
207,248
176,879
Non-interest income:
Fees for customer services
9,842
7,340
27,635
21,576
Trust fees
7,689
6,324
24,122
20,573
Commissions and brokers’ fees, net
1,132
881
3,216
2,860
Remittance processing
3,780
11,277
10,588
Mortgage revenue
3,331
1,272
8,127
4,488
Net gains on sales of securities
296
112
160
Unrealized gains (losses) recognized on equity securities
(735)
Other income
4,801
2,406
11,023
6,896
Total non-interest income
30,936
21,853
84,777
67,141
Non-interest expense:
Salaries, wages and employee benefits
38,747
26,024
105,356
80,315
Net occupancy expense of premises
4,652
3,761
13,365
11,271
Furniture and equipment expenses
2,489
1,715
6,936
5,418
Data processing
5,032
4,016
15,049
12,391
Amortization of intangible assets
2,360
1,445
6,866
4,450
Other expense
14,841
8,968
45,732
30,429
Total non-interest expense
68,121
45,929
193,304
144,274
Income before income taxes
32,880
35,940
98,721
99,746
Income taxes
8,052
9,081
24,339
26,108
Net income
24,828
26,859
74,382
73,638
Basic earnings per common share
0.45
0.55
1.36
1.51
Diluted earnings per common share
1.35
1.50
Dividends declared per share of common stock
0.21
0.20
0.63
0.60
Three Months Ended
Nine Months Ended
September 30,
Other comprehensive income (loss):
Unrealized gains (losses) on debt securities available for sale:
Net unrealized holding gains (losses) on debt securities
available for sale, net of taxes of $(1,423), $860, $(8,552)
and $3,830, respectively
3,568
(2,159)
21,453
(9,609)
Net unrealized gains on debt securities transferred from
held to maturity to available for sale, net of taxes of $-,$-,
$(1,363) and $-, respectively
3,417
Reclassification adjustment for realized (gains) losses on
debt securities available for sale included in net income,
net of taxes of $85, $-, $29 and $-, respectively
(212)
(75)
Net change in unrealized gains (losses) on debt securities
available for sale
3,356
24,795
Unrealized gains (losses) on cash flow hedges:
Net unrealized holding gains (losses) on cash flow hedges,
net of taxes of $239, $-, $239 and $-, respectively
(598)
cash flow hedges included in net income, net of taxes of
$(3), $-, $(3) and $-, respectively
Net change in unrealized gains (losses) on derivative
instruments
(592)
Net change in accumulated other comprehensive income
(loss)
2,764
24,203
Total comprehensive income (loss)
27,592
24,700
98,585
64,029
Accumulated
Additional
Other
Common
Paid-in
Comprehensive
Treasury
Shares
Stock
Capital
(Deficit)
Income (loss)
Total
For the Three Months Ended September 30, 2019
Balance, June 30, 2019
55,386,636
1,246,160
(44,878)
14,627
(12,357)
1,203,608
Other comprehensive income
Repurchase of stock
(194,062)
(4,890)
Issuance of treasury stock for employee stock purchase plan
4,378
21
83
104
Net issuance of treasury stock for restricted/deferred stock unit
vesting and related tax
(6)
Net issuance of treasury stock for stock options exercised, net of
shares redeemed and related tax
325
Cash dividends common stock at $0.21 per share
(11,632)
Stock dividend equivalents restricted stock units at $0.21 per
share
186
(186)
Stock-based compensation
1,205
Balance, September 30, 2019
For the Nine Months Ended September 30, 2019
Balance, December 31, 2018
Stock issued in acquisition of Banc Ed, net of stock issuance costs
6,725,152
166,274
166,281
(527,396)
(13,323)
20,528
100
389
489
91,032
(2,541)
345
(2,196)
13,125
(97)
1,621
1,524
Cash dividends common stock at $0.63 per share
(33,579)
Stock dividend equivalents restricted stock units at $0.63 per
504
(504)
3,236
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
For the Three Months Ended September 30, 2018
Balance, June 30, 2018
48,776,404
1,082,323
(104,504)
(10,865)
(9,821)
957,182
Other comprehensive loss
Issuance of treasury stock for employee stock
purchase plan
3,080
33
58
91
Net issuance of treasury stock for
restricted/deferred stock unit vesting and related
tax
72,805
(4,184)
3,121
(1,063)
Net issuance of treasury stock for stock options
exercised, net of shares redeemed and related tax
8,020
(138)
178
40
Cash dividends common stock at $0.20 per share
(9,756)
Stock dividend equivalents restricted stock units at
$0.20 per share
133
(131)
944
Balance, September 30, 2018
48,860,309
1,079,111
(87,532)
(13,024)
(6,464)
972,140
For the Nine Months Ended September 30, 2018
Balance, December 31, 2017
48,684,943
1,084,889
(132,122)
(2,810)
(15,003)
935,003
Tax Cuts and Jobs Act of 2017 reclassification
605
(605)
14,828
(295)
724
429
104,637
(6,059)
4,924
(1,135)
55,901
(2,505)
2,891
386
Cash dividends common stock at $0.60 per share
(29,238)
$0.60 per share
415
(415)
2,666
8
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of Mortgage Servicing Rights ("MSR")
2,061
1,153
Depreciation and amortization of premises and equipment
8,701
7,158
Net amortization (accretion) of premium (discount) on portfolio loans
(8,300)
(8,615)
Net amortization (accretion) of premium (discount) on investment securities
4,538
6,545
Net amortization (accretion) of premium (discount) on time deposits
(1,243)
(191)
Net amortization (accretion) of premium (discount) on Federal Home Loan Bank ("FHLB") advances and other
borrowings
216
109
Impairment of other real estate owned ("OREO")
26
Impairment of fixed assets held for sale
817
Impairment of MSR
1,822
Change in fair value of loans held for sale, net
(1,022)
Change in fair value of equity securities, net
735
(2,699)
(Gain) loss on sales of securities, net
(112)
(160)
(Gain) loss on sale of loans, net
(11,022)
(7,805)
(Gain) loss on sale of OREO
(81)
(Gain) loss on sale of premises and equipment
114
(Gain) loss life insurance proceeds
(1,509)
Provision for deferred income taxes
3,816
4,696
Stock-based and non-cash compensation
Decrease in deferred compensation
(3,339)
Increase in cash surrender value of bank owned life insurance
(3,050)
(926)
Mortgage loans originated for sale
(468,227)
(336,169)
Proceeds from sales of mortgage loans
437,525
406,205
Net change in operating assets and liabilities:
(Increase) decrease in other assets
1,746
(2,580)
(Decrease) in other liabilities
(3,603)
(5,366)
Net cash provided by operating activities
52,315
147,136
Cash Flows from Investing Activities
Purchases of debt securities held to maturity
(217,767)
Purchases of debt securities available for sale
(296,806)
(122,954)
Purchase of FHLB stock
(3,700)
(25,990)
Proceeds from sales of securities classified held to maturity
31,815
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
14,422
Proceeds from paydowns and maturities of debt securities available for sale
366,624
115,522
Proceeds from the redemption of FHLB stock
3,720
23,379
Net cash (paid) in acquisitions
(61,481)
Net change in loans
(227,069)
(104,195)
Cash paid for premiums on bank-owned life insurance
(3)
Purchases of premises and equipment
(10,746)
(10,436)
Proceeds from life insurance
3,915
Proceeds from disposition of premises and equipment
393
Capitalized expenditures on OREO
(2)
Proceeds from sale of OREO
2,071
4,275
Net cash provided by (used in) investing activities
19,667
(305,405)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Cash Flows from Financing Activities
Net change in deposits
243,184
69,796
Net change in federal funds purchased and securities sold under agreements to repurchase
(33,895)
(48,660)
Proceeds from other borrowings
60,000
Repayment of FHLB advances, net
(3,479)
(20,000)
Repayment of other borrowings
(4,500)
(5,500)
Cash dividends paid
Purchase of treasury stock
Cash paid for withholding taxes on share-based payments
(841)
(1,136)
Proceeds from stock options exercised
169
387
Common stock issuance costs
(234)
Net cash provided by (used in) financing activities
213,502
(34,351)
Net increase (decrease) in cash and cash equivalents
285,484
(192,620)
Cash and cash equivalents, beginning of period
353,272
Cash and cash equivalents, ending of period
160,652
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest
51,230
26,665
15,205
20,127
Non-cash Investing and Financing Activities:
OREO acquired in settlement of loans
2,349
3,706
Transfer of debt securities held to maturity to available for sale
573,639
10
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. On October 4, 2019 TheBANK of Edwardsville (“TheBANK”) was merged with and into Busey Bank. On October 15, 2019, the Company began operations of First Busey Risk Management, Inc. (“First Busey Risk Management”), a new formed wholly-owned subsidiary of First Busey. First Busey Risk Management, incorporated in Nevada, is a captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Busey Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. First Busey Risk Management is subject to regulations of the State of Nevada and will be subject to periodic examinations by the Nevada Division of Insurance. Other than these events, there were no significant subsequent events for the quarter ended September 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
Effective January 1, 2019, 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.
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 Accounting Standards Update (“ASU”) 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:
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.
12
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 is executing a project plan to implement this guidance. The project plan includes an assessment of data, development of methodologies, model validation, parallel runs, refining qualitative factors and forecast periods and evaluating related disclosures. The Company is currently assessing the impact of adopting ASU 2016-13, which will be significantly influenced by the composition, characteristics and quality of the loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.
Note 2: Acquisition
The Banc Ed Corp.
On January 31, 2019, the Company completed its acquisition of The Banc Ed Corp. (“Banc Ed”). TheBANK, Banc Ed’s wholly-owned bank subsidiary, was operated as a separate subsidiary from the completion of the acquisition until October 4, 2019 when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers 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 in 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. During the quarter ended September 30, 2019, the Company adjusted the provisional fair value estimates of Banc Ed’s assets acquired and liabilities assumed. Adjustments included a $0.1 million decrease to premises and equipment and a $0.3 decrease to other liabilities with a corresponding decrease to goodwill of $0.2 million.
First Busey incurred $6.5 million and $11.5 million in pre-tax expenses related to the acquisition of Banc Ed for the three and nine months ended September 30, 2019, respectively, primarily for salaries, wages and employee benefits, 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.
13
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
692,716
Loans held for sale
2,157
Portfolio loans
873,336
Premises and equipment
31,804
Other intangible assets
32,617
Mortgage servicing rights
6,946
57,296
Total assets acquired
1,738,885
Liabilities assumed:
1,439,203
Other borrowings
63,439
24,760
Total liabilities assumed
1,527,402
Net assets acquired
211,483
Consideration paid:
Cash
91,400
Common stock
166,515
Total consideration paid
257,915
46,432
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 million 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 September 30, 2019, the carrying value of PCI loans acquired from Banc Ed was $1.5 million.
14
Since the acquisition date, Banc Ed earned total revenues of $53.7 million and net income of $9.5 million, which are included in the Company’s unaudited Consolidated Statements of Income for the nine months ended September 30, 2019. The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 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, except per share amounts):
Pro Forma
Total revenues (net interest income plus non-
interest income)
104,543
101,001
305,709
306,472
30,811
31,641
84,742
87,972
0.57
1.60
Investors’ Security Trust Company
On August 31, 2019, the Company completed the previously announced acquisition by Busey Bank of Investors’ Security Trust Company (“IST”), a Fort Myers, Florida wealth management firm. While the partnership is expected to add to the Company’s wealth management offerings, it is not expected to have any immediate, material impact on the Company’s earnings or overall business.
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.
First Busey incurred $0.5 million and $0.7 million in pre-tax expenses related to the acquisition of IST for the three and nine months ended September 30, 2019, respectively, primarily for professional and legal fees, which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Statements of Income.
15
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
Amortized
Unrealized
Fair
September 30, 2019:
Cost
Gains
Losses
Value
U.S. Treasury securities
51,395
262
51,651
Obligations of U.S. government corporations and
agencies
202,393
3,273
(53)
205,613
Obligations of states and political subdivisions
263,345
5,733
(16)
269,062
Commercial mortgage-backed securities
121,338
2,248
(18)
123,568
Residential mortgage-backed securities
914,320
12,674
(607)
926,387
Corporate debt securities
123,061
1,668
(5)
124,724
1,675,852
25,858
(705)
Debt securities held to maturity
229
15,399
December 31, 2018:
25,824
1
(414)
25,411
53,096
(761)
52,342
171,131
484
(1,571)
170,044
2,003
(61)
1,942
322,646
(7,143)
315,748
132,513
(376)
132,198
707,213
798
(10,326)
33,947
68
(87)
33,928
59,054
(1,003)
58,062
515,659
1,748
(6,037)
511,370
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.
16
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).
Due in one year or less
128,897
129,230
2,215
2,218
Due after one year through five
years
407,251
413,491
11,834
12,006
Due after five years through ten
248,270
253,453
1,121
1,175
Due after ten years
891,434
904,831
Realized gains and losses related to sales and calls of debt securities available for sale are summarized as follows (dollars in thousands):
Gross security gains
298
689
Gross security (losses)
(1)
(585)
Net (losses) gains on sales of securities(1)
297
Debt securities with carrying amounts of $768.7 million and $498.3 million on September 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.
The following information pertains to debt securities with gross unrealized losses, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (dollars in thousands):
For less than
For greater
12 months, gross
than 12 months, gross
Total, gross
9,982
Obligations of U.S. government corporations and agencies
6,938
(45)
6,481
(8)
13,419
4,949
(11)
9,129
14,078
3,913
9,702
(7)
13,615
43,372
(47)
57,319
(560)
100,691
485
5,595
6,080
Total temporarily impaired securities
59,657
(116)
98,208
(589)
157,865
17
995
(4)
24,343
(410)
25,338
749
50,744
(758)
51,493
49,893
(460)
77,651
(1,111)
127,544
48,387
(496)
247,573
(6,647)
295,960
90,713
(268)
15,083
(108)
105,796
190,737
(1,231)
417,336
(9,095)
608,073
9,531
(33)
9,538
(54)
19,069
12,067
45,041
(791)
57,108
77,071
(974)
245,128
(5,063)
322,199
98,669
(1,219)
299,707
(5,908)
398,376
Debt securities are periodically evaluated for other-than-temporary impairment (“OTTI”). As of September 30, 2019, the Company’s debt security portfolio consisted of 1,208 securities. The total number of debt securities in the investment portfolio in an unrealized loss position as of September 30, 2019 was 74 and represented an unrealized loss of 0.44% of the aggregate fair value. 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 September 30, 2019. As of September 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.
Note 4: Portfolio loans
The distribution of portfolio loans is as follows (dollars in thousands):
December 31,
Commercial
1,680,491
1,405,106
Commercial real estate
2,793,380
2,366,823
Real estate construction
426,559
288,197
Retail real estate
1,717,555
1,480,133
Retail other
51,430
28,169
6,669,415
5,568,428
Allowance for loan losses
(52,965)
(50,648)
Portfolio loans, net
Net deferred loan origination costs included in the table above were $5.4 million as of September 30, 2019 and $5.6 million as of December 31, 2018. Net accretable purchase accounting adjustments included in the table above reduced loans by $22.5 million as of September 30, 2019 and $13.9 million as of December 31, 2018.
18
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:
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.
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):
Special
Substandard
Pass
Watch
Mention
Non-accrual
1,393,420
167,439
63,516
47,765
10,708
2,474,248
189,443
91,689
38,018
11,852
397,377
24,050
5,151
1,130
611
1,670,187
14,231
7,565
7,963
8,591
51,752
79
5,986,984
395,242
167,921
94,889
31,827
19
1,126,257
172,449
47,000
42,532
17,953
2,106,711
137,214
85,148
36,205
10,298
268,069
14,562
3,899
1,888
1,448,964
6,425
6,792
5,435
6,698
26,707
30
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):
Loans past due, still accruing
30-59 Days
60-89 Days
90+Days
Loans
464
584
698
474
3,040
222
198
4,119
3,252
354
66
5,352
7,082
1,276
158
140
775
148
558
121
4,578
1,368
766
48
5,053
2,068
1,601
The gross interest income that would have been recorded in the three months ended September 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $0.5 million and $0.4 million, respectively. The gross interest income that would have been recorded in the nine months ended September 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $1.6 million and $1.1 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant for the three and nine months ended September 30, 2019 and 2018.
A summary of troubled debt restructurings (“TDR”) loans is as follows (dollars in thousands):
In compliance with modified terms
8,778
8,319
30 — 89 days past due
127
Included in non-performing loans
3,557
392
12,335
8,838
Loans classified as a TDR during the three and nine months ended September 30, 2019 included one commercial loan for short-term interest rate relief, with a recorded investment of $0.3 million. There were no loans classified as TDRs during the three months ended September 30, 2018. Loans classified as a TDR during the nine months ended September
20
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 nine months ended September 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 12 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 nine months ended September 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 nine months ended September 30, 2018.
At September 30, 2019, the Company had $3.1 million of residential real estate in the process of foreclosure.
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).
Unpaid
Recorded
Contractual
Investment
Average
Principal
with No
Related
Balance
Allowance
with Allowance
16,593
9,237
3,262
12,499
2,671
16,070
19,011
8,566
8,823
17,389
2,497
18,104
1,071
929
759
14,869
13,141
13,569
98
67
37
51,642
31,940
12,559
44,499
5,642
48,539
21,442
6,858
12,001
18,859
4,319
13,364
19,079
13,082
4,498
17,580
1,181
18,077
Real estate
construction
478
453
712
14,418
13,196
13,257
14,110
117
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 September 30, 2019 totaled approximately $1.7 billion.
The following table details activity in the allowance for loan losses. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories (dollars in thousands):
As of and for the Three Months Ended September 30, 2019
Real Estate
Retail Real
Construction
Estate
Retail Other
Beginning balance
16,733
20,188
3,305
10,613
536
51,375
463
3,167
(359)
(86)
226
Charged-off
(817)
(1,168)
(226)
(288)
(2,499)
Recoveries
147
164
221
113
678
Ending balance
16,526
22,220
3,110
10,522
587
52,965
As of and for the Nine Months Ended September 30, 2019
17,829
21,137
2,723
8,471
488
50,648
1,981
54
2,212
375
(5,187)
(1,183)
(943)
(596)
(7,909)
467
285
333
782
320
2,187
As of and for the Three Months Ended September 30, 2018
17,586
23,047
2,915
9,293
53,305
2,388
(1,291)
(15)
(399)
75
(1,144)
(62)
(695)
(286)
(2,187)
136
32
423
218
867
18,966
21,752
2,932
8,622
471
52,743
As of and for the Nine Months Ended September 30, 2018
14,779
21,813
2,861
13,783
346
53,582
7,111
1,154
22
(4,609)
(3,841)
(1,487)
(1,637)
(608)
(7,670)
917
272
146
1,085
2,807
The following table presents the allowance for loan losses and recorded investments in portfolio loans by category (dollars in thousands):
As of September 30, 2019
Ending balance attributed to:
Loans individually evaluated for
impairment
Loans collectively evaluated for
13,855
19,723
10,048
47,323
Loans:
12,481
14,954
494
12,693
40,689
1,667,992
2,775,991
425,630
1,703,940
51,363
6,624,916
PCI loans evaluated for
2,435
435
922
3,810
As of December 31, 2018
13,510
19,956
8,410
45,087
18,441
15,318
13,159
47,404
1,386,247
2,349,243
287,744
1,466,876
28,136
5,518,246
418
2,262
2,778
23
Note 5: Deposits
The composition of deposits is as follows (dollars in thousands):
Demand deposits, noninterest-bearing
Interest-bearing transaction deposits
2,039,095
1,435,574
Saving deposits and money market deposits
2,458,910
1,852,044
Time deposits
1,652,971
1,497,003
The Company held brokered saving deposits and money market deposits of $14.7 million and $17.5 million at September 30, 2019 and December 31, 2018, respectively.
The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $899.3 million and $673.7 million at September 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 $309.2 million and $264.1 million at September 30, 2019 and December 31, 2018, respectively. The Company held brokered time deposits of $57.3 million and $262.5 million at September 30, 2019 and December 31, 2018, respectively.
As of September 30, 2019, the scheduled maturities of time deposits are as follows (dollars in thousands):
October 1, 2019 – September 30, 2020
468,221
October 1, 2020 – September 30, 2021
167,271
October 1, 2021 – September 30, 2022
80,492
October 1, 2022 – September 30, 2023
55,019
October 1, 2023 – September 30, 2024
881,935
Thereafter
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 $55.5 million outstanding indebtedness on September 30, 2019, comprised of $6.0 million of short-term debt and $49.5 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 September 30, 2019 or December 31, 2018.
24
Long-term debt is summarized as follows (dollars in thousands):
Notes payable, FHLB, ranging in original maturity from
seven to 10 years, collateralized by FHLB
deposits, residential and commercial real estate loans and
FHLB stock.
35,606
Notes payable
49,500
Total long-term borrowings
As of September 30, 2019, long-term debt from the FHLB consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 1.57% to 3.04%. The weighted average rate on the long-term advances was 1.80% as of September 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. The senior notes are not subject to optional redemption by the Company. 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, bear interest at an annual rate of 4.75% for the first five years after issuance and thereafter bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.919%, as calculated on each applicable determination date. 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 September 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 $71.3 million and $71.2 million of junior subordinated debt owed to unconsolidated trusts at September 30, 2019 and December 31, 2018, respectively.
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at par value at the stated maturity date or upon redemption. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes.
25
The Company’s obligations under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes, in which case the distributions on the trust preferred securities will also be deferred, for up to five years, but not beyond the stated maturity date.
Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier 1) capital elements, net of goodwill and other intangible assets less any associated deferred tax liability. As of September 30, 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):
Shares:
Weighted average common shares outstanding
55,410
48,892
54,783
48,828
Dilutive effect of outstanding options, warrants and restricted
stock units as determined by the application of the treasury
stock method
236
355
275
388
Weighted average common shares outstanding, as adjusted for
diluted earnings per share calculation
55,646
49,247
55,058
49,216
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 September 30, 2019, 385,322 outstanding restricted stock units and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents. At September 30, 2018, 172,571 outstanding restricted stock equivalents and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents.
Note 9: Accumulated Other Comprehensive Income (Loss)
The following table represents changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods below (dollars in thousands):
Before Tax
Tax Effect
Net of Tax
Unrealized gains (losses) on debt securities available for
sale:
Balance at beginning of period
20,459
(5,832)
(15,197)
4,332
Unrealized holding gains (losses) on debt securities
available for sale, net
4,991
(1,423)
(3,019)
860
Unrealized gains on debt securities transferred from held
to maturity to available for sale
Amounts reclassified from accumulated other
comprehensive income, net
(297)
85
Balance at end of period
25,153
(7,170)
17,983
(18,216)
5,192
Unrealized holding gains (losses) on cash flow hedges,
net
(837)
239
(828)
Total accumulated other comprehensive income (loss)
24,325
(6,934)
27
(9,528)
2,716
(4,777)
1,967
30,005
(8,552)
(13,439)
3,830
4,780
(1,363)
(104)
29
Note 10: 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 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.
28
Stock Option Plan
A summary of the status of and changes in the Company's stock option awards for the nine months ended September 30, 2019 follows:
Weighted-
Exercise
Remaining Contractual
Price
Term
Outstanding at beginning of period
87,600
20.58
Exercised
(23,561)
17.69
Forfeited
(3,003)
23.53
Expired
(5,767)
17.38
Outstanding at end of period
55,269
21.99
6.11
Exercisable at end of period
39,825
21.39
5.71
The Company recorded an insignificant amount and $0.1 million in stock option compensation expense for the three and nine months ended September 30, 2019, related to the converted options from First Community. The Company recorded $0.1 million and $0.2 million in stock option compensation expense for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, the Company had an insignificant amount of unrecognized stock option expense. This cost is expected to be recognized the fourth quarter of 2019.
Restricted Stock Unit Plan
A summary of the changes in the Company’s stock unit awards for the nine months ended September 30, 2019, is as follows:
Director
Restricted
Deferred
Grant Date
Units
Non-vested at beginning of period
690,495
26.14
20,449
27.93
Granted
216,411
26.73
20,984
26.78
Dividend equivalents earned
17,559
26.07
1,961
Vested
(104,760)
18.40
(20,723)
31.18
(4,712)
30.47
(1,523)
31.62
Non-vested at end of period
814,993
27.26
21,148
23.17
89,831
23.36
Recipients earn quarterly dividend equivalents on their respective units which entitle the recipients to additional units. Therefore, dividends earned each quarter compound based upon the updated unit balances. Upon vesting/delivery, shares are expected (though not required) to be issued from treasury.
On July 5, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted 185,400 RSUs to members of management, and under the terms of the First Community 2016 Equity Incentive Plan, granted 10,644 RSUs to members of management who were legacy First Community employees. As the stock price on the grant date of July 5, 2019 was $26.78, total compensation cost to be recognized is $5.3 million. This cost will be recognized over a period of five years. Subsequent to the requisite service period, the awards will become 100% vested. Further, the Company granted 8,775 RSUs, under the terms of the 2010 Equity Incentive Plan, to the Chairman of the Board. As the stock price on the grant date of July 5, 2019 was $26.78, total compensation cost to be recognized is $0.2 million. This cost will be recognized over a period of five years. Subsequent to the requisite service period, the awards will become 100% vested. Finally, on September 25, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted 11,592 RSUs to a member of management. As the stock price on the grant date of September 25, 2019 was $25.88, total compensation
cost to be recognized is $0.3 million. This cost will be recognized over a period of three years. Subsequent to the requisite service period, the awards will become 100% vested.
On July 5, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted 17,549 DSUs to directors, and under the terms of the First Community 2016 Equity Incentive Plan, granted 1,867 DSUs to a director who was a legacy First Community director. In addition, under the terms of the 2010 Equity Incentive Plan, the Company granted 1,568 advisory DSUs to advisory directors. As the stock price on the grant date of July 5, 2019 was $26.78, total compensation cost to be recognized is $0.6 million. These costs will be recognized over the requisite service period of one year from the date of grant or the next Annual Meeting of Stockholders, whichever is earlier.
The Company recognized $1.2 million and $0.9 million of compensation expense related to both non-vested RSUs and DSUs for the three months ended September 30, 2019 and 2018, respectively. The Company recognized $3.1 million and $2.5 million of compensation expense related to both non-vested RSUs and DSUs for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $14.0 million of total unrecognized compensation cost related to these non-vested stock awards. This cost is expected to be recognized over a period of 3.6 years.
As of September 30, 2019, 535,377 shares remain available for issuance pursuant to the Company’s 2010 Equity Incentive Plan, 50,463 shares remain available for issuance pursuant to the Company’s Employee Stock Purchase Plan and 297,216 shares remain available for issuance pursuant to the First Community 2016 Equity Incentive Plan.
Note 11: 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):
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
1,664,799
1,398,483
Standby letters of credit
40,073
32,156
Note 12: 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 September 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 September 30, 2019 that would change this designation.
The following tables summarize the applicable holding company and bank regulatory capital requirements (dollars in thousands):
Minimum
To Be Well
Actual
Capital Requirement
Capitalized
Amount
Ratio
As of September 30, 2019:
Total Capital (to Risk Weighted Assets)
Consolidated
1,020,195
13.71
%
595,295
8.00
744,118
10.00
Busey Bank
883,146
13.93
507,070
633,837
TheBANK
198,244
18.08
87,743
109,678
Tier 1 Capital (to Risk Weighted Assets)
907,230
12.19
446,471
6.00
830,995
13.11
380,303
197,430
18.00
65,807
Common Equity Tier 1 Capital (to Risk Weighted Assets)
833,230
11.20
334,854
4.50
483,677
6.50
285,227
411,994
49,356
71,291
Tier 1 Capital (to Average Assets)
9.78
371,129
4.00
11.12
298,943
373,679
5.00
10.55
74,851
93,563
As of December 31, 2018:
894,572
14.83
482,638
603,297
854,351
14.19
481,701
602,126
783,924
12.99
361,978
803,703
13.35
361,276
709,924
11.77
271,484
392,143
270,957
391,382
10.36
302,704
10.64
302,232
377,789
31
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 7.00%, (ii) Tier 1 capital to risk-weighted assets of at least 8.50%, and (iii) Total capital to risk-weighted assets of at least 10.50%.
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 from 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, most recently in the amount of $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 13: 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):
Total Assets
Banking
293,431
246,999
9,704,121
7,656,709
Remittance Processing
8,992
43,138
39,278
Wealth Management
20,276
11,694
28,587
20,992
(22,086)
(14,622)
Totals
Net interest income:
75,955
62,578
222,537
186,103
110
304
(1,931)
(7,306)
(5,553)
Total net interest income
18,301
11,196
46,743
33,827
4,088
4,042
12,386
11,812
8,994
7,391
27,721
23,840
(447)
(776)
(2,073)
(2,338)
56,593
37,034
158,659
116,275
2,746
2,718
8,099
7,808
6,043
4,307
17,356
13,921
2,739
1,870
9,190
6,270
Income before income taxes:
34,252
35,982
102,582
99,631
1,362
1,341
4,343
4,053
2,951
3,194
10,365
10,223
(5,685)
(4,577)
(18,569)
(14,161)
Total income before income taxes
Net income:
25,731
26,486
76,837
73,235
972
957
3,102
2,896
2,184
2,280
7,670
7,332
(4,059)
(2,864)
(13,227)
(9,825)
Total net income
Note 14: Derivative Financial Instruments
The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, 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 investors and interest rate swaps with customers and other third parties. See “Note 15: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.
Interest Rate Swaps Designated as Cash Flow Hedges: Starting in the third quarter of 2019, the Company entered into derivative instruments designated as a cash flow hedges. For derivative instruments that are designated and qualify as a
cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Interest rate swaps with notional amounts totaling $70.0 million as of September 30, 2019 were designated as cash flow hedges to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified 3 month LIBOR benchmark interest rate on the Company’s junior subordinated debt owed to unconsolidated trusts and were determined to be fully effective during the period. As such, no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps of $0.8 million is recorded in other liabilities in the unaudited consolidated financial statements at September 30, 2019, with changes in fair value recorded in other comprehensive income. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.
A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):
Notional amount
70,000
Weighted average fixed pay rates
1.80
Weighted average receive rates
2.12
Weighted average maturity
4.11
yrs
Unrealized gains (losses)
592
Interest income (expense) recorded on these swap transactions were insignificant during the three and nine months ended September 30, 2019. The Company expects $0.1 million of the unrealized gain to be reclassified from Other Comprehensive Income (“OCI”) to interest expense during the next 12 months. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2019.
The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the unaudited Consolidated Statements of Income relating to cash flow derivative instruments for the periods presented (dollars in thousands):
Three Months Ended September 30, 2019
Amount of (gain) loss recognized in OCI (effective portion)
Amount of (gain) loss reclassified from OCI to interest income
Amount of (gain) loss recognized in other non-interest income (ineffective portion)
Interest rate contracts
Nine Months Ended September 30, 2019
The Company pledged $0.8 million in cash to secure its obligation under these contracts at September 30, 2019.
Interest Rate Lock Commitments. At September 30, 2019 and December 31, 2018, the Company had issued $135.6 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 Hedging, are carried at their fair values in other assets or other liabilities in the unaudited consolidated financial
34
statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Forward Sales Commitments. At September 30, 2019 and December 31, 2018, the Company had issued $189.5 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):
Fair value recorded in other assets
1,182
624
Fair value recorded in other liabilities
1,707
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):
Gross gains
1,655
641
4,662
2,396
Gross (losses)
(1,706)
(561)
(4,773)
(2,669)
Net gains (losses)
(51)
80
(111)
(273)
The impact of the net gains or losses on derivative financial instruments related to interest rate lock commitments issued to residential loan customers for loans that will be held for sale and forward sales commitments to sell residential mortgage loans to loan investors are almost entirely offset by a corresponding change in the fair value of loans held for sale.
Interest Rate Swaps Not Designated as Hedges. The Company may offer derivative contracts to its customers in connection with their risk management needs. 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 $511.4 million and $243.7 million at September 30, 2019 and December 31, 2018, respectively, these contracts support variable rate, commercial loan relationships totaling $255.7 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.
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):
16,643
1,438
35
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):
4,695
2,167
Gross losses
(4,695)
(724)
(15,205)
(2,167)
The Company pledged $18.6 million and $1.0 million in cash to secure its obligation under these contracts at September 30, 2019 and December 31, 2018, respectively.
Note 15: 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.
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.
36
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.
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
Inputs
Derivative assets
17,825
Derivative liabilities
19,177
2,062
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.
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):
Impaired loans
6,917
OREO
55
Bank property held for sale
1,832
10,999
38
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
Valuation
Unobservable
Range
Estimate
Techniques
Input
(Weighted Average)
Appraisal of collateral
Appraisal adjustments
- 5.6
to
- 100.0
(-39.2)%
- 25.0
(-65.0)%
Appraisal of collateral or real estate listing price
- 0.0
- 35.1
(-28.3)%
- 3.3
(-24.1)%
39
The estimated fair values of financial instruments that are reported at amortized cost in the Company’s unaudited 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):
Carrying
Financial assets:
Level 1 inputs:
Level 2 inputs:
Accrued interest receivable
29,408
22,314
Level 3 inputs:
6,630,255
5,473,063
9,276
11,410
3,315
11,051
Other servicing rights
1,039
1,676
781
1,443
Financial liabilities:
1,654,955
1,482,301
29,835
85,238
49,873
73,292
65,182
Accrued interest payable
7,487
6,568
40,144
39,452
60,971
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 16: 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 September 30, 2019, the Company reported $10.0 million of right-of-use asset and $10.1 million lease liability in its unaudited Consolidated Balance Sheets.
The following tables represents lease costs and other lease information for the periods presented (dollars in thousands):
Lease Costs
Operating lease costs
619
1,736
Variable lease costs
363
Short-term lease costs
46
69
Sublease income
-
Net lease cost
2,168
Other information
Cash paid for amounts included in the measurement of lease
liabilities:
Operating lease cash flows – Fixed payments
1,688
Operating lease cash flows – Liability reduction
526
1,479
Right of use assets obtained during the period in exchange for
operating lease liabilities
159
923
Weighted average lease term (in years)
6.73
Weighted average discount rate
3.04%
At September 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 $0.8 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively. Rent expense under operating leases, included in net occupancy and equipment expense, was $2.2 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively.
Rent commitments were as follows (dollars in thousands):
613
2020
2,386
2021
1,763
2022
1,375
2023
1,217
3,895
Amounts representing interest
(1,148)
Present value of net future minimum lease payments
41
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 September 30, 2019 (unaudited), as compared with December 31, 2018, and the results of operations for the three and nine months ended September 30, 2019 (unaudited), as compared to the three and nine months ended September 30, 2018 (unaudited). 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 third quarter of 2019 of $24.8 million, or $0.45 per diluted common share, as compared to $24.1 million, or $0.43 per diluted common share, for the second quarter of 2019 and $26.9 million, or $0.55 per diluted common share, for the third quarter of 2018. Adjusted net income(1) for the third quarter of 2019 was $30.5 million, or $0.55 per diluted common share, as compared to $29.5 million, or $0.53 per diluted common share, for the second quarter of 2019 and $27.0 million, or $0.55 per diluted common share, for the third quarter of 2018.
Year-to-date net income through September 30, 2019 was $74.4 million, or $1.35 per diluted common share, compared to net income of $73.6 million, or $1.50 per diluted common share, for the comparable period of 2018. Year-to-date adjusted net income(1) for the first nine months of 2019 was $86.6 million, or $1.57 per diluted common share, compared to $77.5 million, or $1.58 per diluted common share for the first nine 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 third quarter of 2019 were $7.0 million of expenses related to acquisitions and $0.7 million of expenses related to other restructuring costs. 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. First Busey operated TheBANK as a separate subsidiary from the completion of the acquisition until October 4, 2019, when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers of Busey Bank. When we completed the Banc Ed acquisition, we reset the baseline for the future financial performance of First Busey in a multitude of positive ways. With TheBANK now merged and integrated, we expect to see the full contribution and synergies of TheBANK reflected in the Company’s financial performance in the quarters ahead.
On October 4, 2019, in addition to TheBANK being merged into Busey Bank, the Company partnered with a new core provider. The core conversion positions the combined organization for future growth. Strategic process improvements and investments in technology platforms will allow the Company to serve customers more efficiently and effectively for years to come.
On August 31, 2019, the Company completed the previously announced acquisition by Busey Bank of IST, a Fort Myers, Florida wealth management firm, which had $471.1 million in assets under care. Through this transaction, Busey Bank and IST broaden the expertise and raise the level of service available to clients—from individuals and families to institutions and foundations—and remain committed to their founding principles of being active community stewards and providing the highest level of personal service to clients delivered by experienced, local professionals.
In addition to the successful integration of these acquisitions, we are pleased to report net organic loan growth of $137.3 million in the third quarter, with total portfolio loans increasing to $6.67 billion at September 30, 2019 from $6.53 billion at June 30, 2019. This is the result of focused initiatives and effort on the part of our associates across our markets and was accomplished while maintaining our conservative credit principles.
Asset Quality
The Company reported non-performing loans of $33.1 million at September 30, 2019 and June 30, 2019 as compared to $36.6 million at December 31, 2018. Non-performing loans were 0.50% of total portfolio loans as of September 30, 2019 compared to 0.51% as of June 30, 2019 and 0.66% as of December 31, 2018. 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
6,532,126
5,623,741
Loans 30-89 days past due
12,434
18,040
7,121
8,189
Non-performing loans
Non-accrual loans
32,816
40,395
Loans 90+ days past due
258
364
Total non-performing loans
33,103
33,074
36,598
40,759
Other non-performing assets
926
936
376
1,093
Total non-performing assets
34,029
34,010
36,974
41,852
Allowance as a percentage of non-performing
loans
160.0
155.3
138.4
129.4
Allowance for loan losses to portfolio loans
0.79
0.91
0.94
Economic Conditions of Markets at September 30, 2019
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 had 17 banking centers in Southern Illinois, which became banking centers of Busey Bank on October 4, 2019. The financial condition of the state of Illinois, in which the largest portion of the Company’s customer base resides, is characterized by low credit ratings and budget deficits.
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.
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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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.
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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES
(UNAUDITED)
Income/
Yield/
Expense
Rate(5)
Interest-bearing bank deposits and federal funds
sold
400,587
2.16
134,202
1.92
Investment securities:
U.S. Government obligations
278,612
2.40
152,865
632
1.64
Obligations of states and political
subdivisions(1)
287,659
2,118
2.92
280,041
1,816
2.57
Other securities
1,213,795
7,936
2.59
984,802
6,384
42,418
2.79
28,661
317
4.39
Portfolio loans(1), (2)
6,558,519
78,248
4.73
5,551,753
63,537
4.54
Total interest-earning assets(1), (3)
8,781,590
92,469
4.18
7,132,324
73,335
4.08
115,378
103,798
150,714
119,773
(52,014)
(54,017)
664,101
500,430
9,659,769
7,802,308
1,953,201
2,924
0.59
1,294,628
1,305
0.40
Savings and money market deposits
2,442,620
3,828
0.62
1,913,838
1,650
0.34
1,690,557
8,001
1.88
1,576,191
5,991
Federal funds purchased and repurchase
agreements
184,637
1.24
234,729
0.72
Borrowings (4)
215,271
2,031
3.74
213,164
1,761
3.28
Junior subordinated debt issued to unconsolidated
trusts
71,232
4.75
71,082
4.77
Total interest-bearing liabilities
6,557,518
1.10
5,303,632
0.90
Net interest spread(1)
3.08
3.18
Noninterest-bearing deposits
1,780,645
1,492,709
108,773
44,143
Stockholders’ equity
1,212,833
961,824
Interest income / earning assets(1), (3)
Interest expense / earning assets
0.83
0.67
Net interest margin(1)
74,254
3.35
61,348
3.41
45
279,406
2.15
122,768
1.72
321,814
5,905
2.45
156,450
1,917
282,850
6,236
2.95
293,258
5,677
1,195,405
23,817
2.66
896,288
16,670
2.49
28,326
677
3.20
31,785
966
4.06
6,406,779
228,539
5,531,087
186,622
4.51
8,514,580
269,670
4.23
7,031,636
213,432
111,623
105,038
146,115
119,580
(51,498)
(54,056)
631,452
504,892
9,352,272
7,707,090
1,825,473
7,891
0.58
1,224,545
2,758
0.30
2,350,289
10,113
1,981,281
4,811
0.32
1,709,142
23,403
1.83
1,452,477
14,268
1.31
194,189
1.23
242,733
223,352
6,297
3.77
247,004
5,457
71,194
4.99
71,046
4.48
6,373,639
1.09
5,219,086
3.14
3.27
1,715,701
1,494,016
89,719
47,313
1,173,213
946,675
0.81
217,519
3.42
182,616
3.47
Earning Assets, Sources of Funds and Net Interest Margin
Total average interest-earning assets increased $1.7 billion, or 23.1%, to $8.8 billion for the three months ended September 30, 2019, as compared to $7.1 billion for the same period in 2018. Total average interest-earning assets increased $1.5 billion, or 21.1%, to $8.5 billion for the nine months ended September 30, 2019, as compared to $7.0 billion for the same period of 2018.
Total average interest-bearing liabilities increased $1.3 billion, or 23.6%, to $6.6 billion for the three months ended September 30, 2019 as compared to $5.3 billion for the same period in 2018. Total average interest-bearing liabilities increased $1.2 billion, or 22.1%, to $6.4 billion for the nine months ended September 30, 2019 as compared to $5.2 billion for the same period of 2018. Average noninterest-bearing deposits increased $287.9 million, or 19.3%, to $1.8 billion for the three months ended September 30, 2019, as compared to $1.5 billion for the same period of 2018. Average noninterest-bearing deposits increased $221.7 million, or 14.8%, to $1.7 billion for the nine months ended September 30, 2019, as compared to $1.5 billion for the same period of 2018.
Interest income, on a tax-equivalent basis, increased $19.2 million, or 26.1%, to $92.5 million for the three months ended September 30, 2019, compared to $73.3 million in the same period of 2018. Interest income, on a tax-equivalent basis, increased $56.3 million, or 26.3%, to $269.7 million for the nine months ended September 30, 2019, compared to $213.4 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 September 30, 2019 by $6.2 million to $18.2 million, compared to $12.0 million in the same period of 2018. Interest expense increased during the nine months ended September 30, 2019 by $21.4 million to $52.2 million, compared to $30.8 million in the same period of 2018.
Net interest income, on a tax-equivalent basis, increased $12.9 million, or 21.0%, for the three months ended September 30, 2019 as compared to the same period of 2018. Net interest income, on a tax-equivalent basis, increased $34.9 million, or 19.1%, for the nine months ended September 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 3.35% for the three months ended September 30, 2019, compared to 3.41% for the same period of 2018, and decreased to 3.42% for the nine months ended September 30, 2019, compared to 3.47% for the same period of 2018. Net of purchase accounting accretion and amortization,(1) the net interest margin for the three months ended September 30, 2019 was 3.22%, a decrease from 3.29% for the same period in 2018, and was 3.27% for the nine months ended September 30, 2019, a decrease from 3.31% for the same period of 2018.
Higher aggregate yields from loan production partially offset increases in funding costs in 2019 as compared to 2018. Funding costs in 2019 increased from 2018, primarily due to resetting of time deposit rates to reflect market rates and additional borrowings in conjunction with funding the Banc Ed acquisition. The Federal Open Market Committee lowered Federal Funds Target rates for the first time in 11 years on July 31, 2019 and then again on September 18, 2019, for a combined decrease of 50 basis points during the third quarter. This contributed to the decline in net interest margin for the quarter ended September 30, 2019 as compared to the quarter ended June 30, 2019, as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities. Subsequent to quarter end, on October 30, 2019, the Federal Open Market Committee lowered Federal Funds Target rates another 25 basis points.
The quarterly net interest margins were as follows:
First Quarter
3.46
3.51
Second Quarter
3.43
3.50
Third Quarter
Fourth Quarter
3.38
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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 3.08% for the three months ended September 30, 2019 compared to 3.18% in the same period of 2018, and was 3.14% for the nine months ended September 30, 2019, compared to 3.27% for the same period of 2018, each on a tax-equivalent basis.
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):
Change
2,502
34.1
6,059
28.1
1,365
21.6
3,549
17.3
251
28.5
356
12.4
150
4.1
6.5
2,059
161.9
3,639
81.1
Net (losses) gains on sales of
securities
100.0
(48)
(30.0)
Unrealized (losses) gains
recognized on equity securities
(100.0)
2,395
99.5
4,127
59.8
9,083
41.6
17,636
26.3
Total non-interest income of $30.9 million for the third quarter of 2019 increased as compared to $21.9 million in the third quarter of 2018. Total non-interest income of $84.8 million for the nine months ended September 30, 2019 increased as compared to $67.1 million for the same period of 2018. Revenues from trust fees, commissions and brokers’ fees, and remittance processing activities represented 40.7% of the Company’s non-interest income for the quarter ended September 30, 2019, providing a complement to spread-based revenue from traditional banking activities.
Fees for customer services increased 34.1% and 28.1% for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018 as a result of the Banc Ed acquisition. Evolving regulation, product changes and changing behaviors by our customer base also impact fees for customer services.
Trust fees and commissions and brokers’ fees were $8.8 million for the third quarter of 2019 an increase from $7.2 million for the third quarter of 2018. Trust fees and commissions and brokers’ fees increased to $27.3 million for the first nine months of 2019 compared to $23.4 million for the first nine months of 2018. First Busey’s wealth management division ended the third quarter of 2019 with $9.4 billion in assets under care.
Remittance processing revenue from the Company’s subsidiary, FirsTech, of $3.8 million for the third quarter of 2019 increased compared to $3.6 million for the third quarter of 2018. Remittance processing revenue for the nine months ended September 30, 2019 was $11.3 million, an increase of 6.5%, compared to $10.6 million during the same period of 2018. FirsTech has seen a relative slowdown in new business onboarding as compared to recent quarters that showed significant growth, which is consistent with the business’ typical sales cycle.
The mortgage line of business generated $3.3 million of revenue in the third quarter of 2019, an increase compared to $1.3 million of revenue in the third quarter of 2018. Mortgage revenue for the first nine months of 2019 was $8.1 million, an increase over the comparable period of 2018 of $4.5 million, following a long period of restructuring and additional revenue from TheBANK. A decline in prevailing market rates for mortgages also contributed to increased production in recent periods.
Other income increased to $4.8 million and $11.0 million for the three and nine months ended September 30, 2019, respectively, across multiple revenue sources, including swap fee income, bank owned life insurance income and additional income from TheBANK.
Non-interest expense
Salaries, wages and employee
benefits
12,723
48.9
25,041
31.2
Net occupancy expense of
premises
891
23.7
2,094
18.6
774
45.1
1,518
28.0
1,016
25.3
21.5
915
63.3
2,416
54.3
5,873
65.5
15,303
50.3
22,192
48.3
49,030
34.0
(1,029)
(11.3)
(1,769)
(6.8)
Effective rate on income taxes
24.5
24.7
26.2
Efficiency ratio
62.7
53.5
61.6
56.0
Full-time equivalent employees as of period-end
1,595
1,298
Total non-interest expense of $68.1 million for the three months ended September 30, 2019 increased as compared to $45.9 million for the same period in 2018. Total non-interest expense of $193.3 million for the nine months ended September 30, 2019 increased as compared to $144.3 million for the same period in 2018. Total non-interest expenses have been influenced by acquisition expenses and other restructuring costs. For the third quarter of 2019, adjusted non-interest expenses(1), including amortization, were $60.5 million compared to reported non-interest expense of $68.1 million.
Salaries, wages and employee benefits were $38.7 million in the third quarter of 2019, an increase from $26.0 million from the third quarter of 2018. In the first nine months of 2019, salaries, wages and employee benefits increased to $105.4 million compared to $80.3 million for the same period of 2018. For the three and nine months ended September 30, 2019, salaries, wages and employee benefits included $3.9 million and $4.2 million, respectively, of non-operating expenses(1). Total full-time equivalents (“FTE”) at September 30, 2019 were 1,595 compared to 1,298 at September 30, 2018. Included in the September 30, 2019 FTE are 293 FTEs of TheBANK.
Combined net occupancy expense of premises and furniture and equipment expenses was $7.1 million for the three months ended September 30, 2019 and $5.5 million for the three months ended September 30, 2018. Combined net occupancy expense of premises and furniture and equipment expenses was $20.3 million for the nine months ended September 30, 2019 and $16.7 million for the nine months ended September 30, 2018. The increase is primarily due to TheBANK adding 17 banking centers to our banking center network.
Data processing expense in the third quarter of 2019 of $5.0 million increased compared to $4.0 million in the third quarter of 2018. In the first nine months of 2019, data processing expense increased to $15.0 million compared to $12.4 million for the same period of 2018. For the three and nine months ended September 30, 2019, data processing included $0.3 million and $1.0 million, respectively, of non-operating expenses(1) , related to payment of conversion expenses. Data processing for 2019 also includes data processing related to TheBANK.
Amortization of intangible assets increased to $2.4 million for the three months ended September 30, 2019 compared to $1.4 million for the three months ended September 30, 2018 and increased to $6.9 million for the nine months ended September 30, 2019 compared to $4.5 million for the nine months ended September 30, 2018, as a result of the Banc Ed acquisition.
Other expense in the third quarter of 2019 of $14.8 million increased compared to $9.0 million in the third quarter of 2018. In the first nine months of 2019, other expense increased to $45.7 million compared to $30.4 million for the same period of 2018. For the three and nine months ended September 30, 2019, other expenses included $3.6 million and $11.3 million, respectively, of non-operating expenses(1) which primarily includes professional and legal expenses and check card conversion expenses.
The effective income tax rate of 24.5% and 24.7% for the three and nine months ended September 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.
The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. At September 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 62.7% for the quarter ended September 30, 2019 compared to 63.6% for the quarter ended June 30, 2019 and 53.5% for the quarter ended September 30, 2018. The adjusted efficiency ratio(1) was 55.4% for the quarter ended September 30, 2019, 56.6% for the quarter ended June 30, 2019, and 53.3% for the quarter ended September 30, 2018. The efficiency ratio for the first nine months of 2019 was 61.6% compared to 56.0% for the first nine months of 2018. The adjusted efficiency ratio(1) was 56.1% for the first nine months of 2019 compared to 54.2% for the first nine months of 2018. Total non-interest expenses have been influenced by acquisition expenses and other restructuring costs. 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. The Company remains focused on expense discipline.
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FINANCIAL CONDITION
Significant Consolidated Balance Sheet Items (dollars in thousands):
$ Change
% Change
1,003,320
143.8
(593,490)
(97.5)
1,098,670
19.9
2,051,403
26.6
314,790
1,366,355
28.6
1,681,145
26.9
16,704
9.0
35,106
70.2
101
0.3
0.1
0.2
1,830,386
27.3
221,017
22.2
Portfolio Loans
The Company believes that making sound and profitable loans is a necessary and desirable means of employing funds available for investment. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations and duration of loans most appropriate for its business model and markets. While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or 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 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 regular 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. Significant underwriting factors in addition to 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.
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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):
Illinois
Missouri
Florida
Indiana
1,178,779
452,177
17,590
31,945
1,825,972
616,169
153,855
197,384
194,044
128,864
29,342
74,309
1,159,727
421,731
100,222
35,875
47,121
1,675
1,380
1,254
4,405,643
1,620,616
302,389
340,767
972,072
394,043
17,954
21,037
1,448,937
579,536
158,337
180,013
78,489
122,385
17,859
69,464
874,910
475,739
102,117
27,367
24,849
1,294
1,455
571
3,399,257
1,572,997
297,722
298,452
Portfolio loans increased $1.1 billion, or 19.8%, as of September 30, 2019 compared to December 31, 2018, as a result of the Banc Ed acquisition and organic loan growth. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased $840.3 million from December 31, 2018. Retail real estate and retail other loans increased $260.7 million from December 31, 2018.
Allowance for Loan Losses
The Company recorded net charge-offs of $1.8 million for the third quarter of 2019 and $5.7 million for the nine months ended September 30, 2019. The allowance for loan loss as a percentage of portfolio loans was 0.79% at September 30, 2019 and June 30, 2019 as compared to 0.91% at December 31, 2018. The decline in the allowance coverage ratio in
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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 $3.4 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively, and was $8.0 million and $4.0 million for the nine months ended September 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.
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 appropriately reserved or 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.
53
The following table sets forth information concerning non-performing loans as of each of the dates indicated (dollars in thousands):
June 30,
Loans 90+ days past due and still accruing
Allowance for loan losses to non-performing loans
Non-performing loans to portfolio loans
0.5
0.7
Non-performing assets to portfolio loans and
Total non-performing assets were $34.0 million at September 30, 2019 and 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 September 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 $82.8 million at September 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 September 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.
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 credit facility, or to utilize brokered deposits. As of September 30, 2019, the Company had additional capacity to borrow from the FHLB and Federal Reserve of $1.1 billion and $479.4 million, respectively. Additionally, the Company has an unused revolving credit facility of $20.0 million.
As of September 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 September 30, 2019 and December 31, 2018, we had outstanding loan commitments and standby letters of credit of $1.7 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 7.00% 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 12: 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 case of the tangible book value per share, appear 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
24,085
Acquisition expenses
Salaries, wages, and employee
3,673
3,716
1,233
172
327
506
406
Other (includes professional and
legal)
3,100
3,293
167
7,598
2,224
Lease impairment
Other restructuring costs
182
457
417
84
292
476
Fixed asset impairment
459
826
1,452
MSR valuation impairment
Related tax benefit
(1,963)
(1,880)
(20)
(4,177)
(1,217)
Adjusted net income
30,535
29,498
27,006
86,647
77,518
Average total assets
9,522,678
Reported: Return on average assets(1)
1.02
1.01
1.37
1.06
1.28
Adjusted: Return on average assets(1)
1.25
1.34
(1) Annualized measure
Reconciliation of Non-GAAP Financial Measures — Adjusted Net Interest Margin
Reported: Net interest income
73,428
Tax-equivalent adjustment
778
777
574
2,232
1,713
Purchase accounting accretion
(2,974)
(3,471)
(2,273)
(9,439)
(8,698)
Adjusted: Net interest income
71,280
70,734
59,075
208,080
173,918
Average interest-earning assets
8,666,136
Reported: Net interest margin(1)
Adjusted: Net Interest margin(1)
3.22
3.29
3.31
Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio
Reported: Net Interest income
Tax-equivalent interest income
74,205
Reported: Non-interest income
27,896
securities and unrealized (losses)
gains recognized on equity
361
(1,026)
(623)
Adjusted: Non-interest income
30,575
28,922
85,400
66,981
Reported: Non-interest expense
68,020
(2,360)
(2,412)
(1,445)
(6,866)
(4,450)
Non-operating adjustments:
(3,855)
(318)
(4,173)
(1,650)
(256)
(619)
(982)
(406)
(3,559)
(6,356)
(167)
(11,287)
(2,596)
Adjusted: Non-interest expense
58,091
58,315
44,317
169,996
135,172
Reported: Efficiency ratio
62.73
63.62
53.47
61.55
56.02
Adjusted: Efficiency ratio
55.42
56.55
53.26
56.12
54.16
57
Reconciliation of Non-GAAP Financial Measures — Tangible common equity to tangible assets, Tangible book value per share, Return on average tangible common equity
As of and for the Three Months Ended
9,612,667
7,889,385
Goodwill and other intangible assets, net
(381,323)
(375,327)
(301,963)
Tax effect of other intangible assets, net
16,415
17,075
8,912
Tangible assets
9,388,852
9,254,415
7,596,334
Tangible common equity
851,073
845,356
679,089
Tangible common equity to tangible assets(1)
9.06
9.13
8.94
Tangible book value per share
15.12
14.95
13.72
Average stockholders’ common equity
1,195,802
Average goodwill and other intangible assets, net
(377,601)
(376,851)
(302,914)
Average tangible stockholders’ common equity
835,232
818,951
658,910
Reported: Return on average tangible common equity(2)
11.79
11.80
16.17
Adjusted: Return on average tangible common equity(2), (3)
14.50
14.45
16.26
(369,104)
(304,738)
804,109
641,937
12.37
15.34
14.41
16.15
(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: (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 (i) has the intent to sell a debt security or (ii) 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
59
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 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.
60
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 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 optimize stability in 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
- 100
+100
+200
+300
(4.84)
2.50
4.81
6.98
(3.58)
1.08
2.01
2.88
Year-Two: Basis Point Changes
(7.22)
7.36
10.53
(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.
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 September 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 September 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 September 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.
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. During the quarter, the Company repurchased 194,062 shares at an average price of $25.19 per share. At September 30, 2019, the Company had 805,938 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
July 1-31, 2019
1,000,000
August 1-31, 2019
64,062
$ 24.72
935,938
September 1-30, 2019
130,000
$ 25.43
805,938
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
10.1
Employment Agreement by and between First Busey Corporation and Jeffrey D. Jones, dated July 26, 2019 (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on July 26, 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
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
*
Filed herewith.
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.
(Registrant)
By:
/s/ VAN A. DUKEMAN
Van A. Dukeman
President and Chief Executive Officer(Principal Executive Officer)
/s/ JEFFREY D. JONES
Jeffrey D. Jones
Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)
Date: November 7, 2019