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 September 30, 2021
☐
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)
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 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 ☑
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 4, 2021
55,668,984
September 30, 2021
GLOSSARY
3
Part I
FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS (UNAUDITED)
4
CONSOLIDATED BALANCE SHEETS
5
CONSOLIDATED STATEMENTS OF INCOME
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12
Note 1:
Significant Accounting Policies
Note 2:
Acquisitions
13
Note 3:
Securities
15
Note 4:
Portfolio Loans
17
Note 5:
Deposits
25
Note 6:
Borrowings
26
Note 7:
Regulatory Capital
27
Note 8:
Employee Benefit Plans
29
Note 9:
Stock-Based Compensation
Note 10:
Outstanding Commitments and Contingent Liabilities
32
Note 11:
Derivative Financial Instruments
Note 12:
Fair Value Measurements
35
Note 13:
Earnings per Common Share
39
Note 14:
Accumulated Other Comprehensive Income
40
Note 15:
Operating Segments and Related Information
41
Note 16:
Leases
43
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
45
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
68
Item 4.
CONTROLS AND PROCEDURES
69
Part II
OTHER INFORMATION
LEGAL PROCEEDINGS
70
Item 1A
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
Item 5.
Item 6.
EXHIBITS
71
SIGNATURES
72
2
We use acronyms, abbreviations, and other terms throughout this Quarterly Report, as defined in the glossary below:
Term
Definition
2020 Equity Plan
First Busey's 2020 Equity Incentive Plan
2020 Annual Report
Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Exchange Act for the year ended December 31, 2020
ACL
Allowance for credit losses
ASC
Accounting Standards Codification
Basel III
2010 capital accord adopted by the international Basel Committee on Banking Supervision
Basel III Rule
Regulations promulgated by U.S. federal banking agencies—the OCC, the Federal Reserve, and the FDIC—to both enforce implementation of certain aspects of the Basel III capital reforms and effect certain changes required by the Dodd-Frank Act
CAC
Cummins-American Corp.
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
CECL
Current Expected Credit Losses
COVID-19
Coronavirus disease 2019
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
DSU
Deferred stock unit
ESPP
Employee Stock Purchase Plan
Exchange Act
Securities Exchange Act of 1934, as amended
Fair value
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, as defined in ASC 820
FDIC
Federal Deposit Insurance Corporation
Federal Reserve
Board of Governors of the Federal Reserve System
FHLB
Federal Home Loan Bank
First Busey
First Busey Corporation and its wholly-owned consolidated subsidiaries; also, "Busey," "the Company," "we," "us," and "our"
First Busey Risk Management
First Busey Risk Management, Inc.
FirsTech
FirsTech, Inc.
GAAP
U.S. Generally Accepted Accounting Principles
GSB
Glenview State Bank
Interagency Statement
Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, issued on March 22, 2020, and revised on April 7, 2020
LIBOR
London Interbank Offered Rate
OCI
Other comprehensive income (loss)
OREO
Other real estate owned
PCD
Purchased credit deteriorated
PSU
Performance-based restricted stock unit
PPP
Paycheck Protection Program
Quarterly Report
Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Exchange Act
RSU
Restricted stock unit
SBA
U.S. Small Business Administration
SEC
U.S. Securities and Exchange Commission
TDR
Troubled debt restructuring
U.S. Treasury
U.S. Department of the Treasury
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
As of
September 30,
December 31,
2021
2020
Assets
Cash and cash equivalents:
Cash and due from banks
$
151,372
118,824
Interest-bearing deposits
732,473
569,713
Total cash and cash equivalents
883,845
688,537
Debt securities available for sale
3,997,244
2,261,187
Equity securities
13,012
5,530
Loans held for sale, at fair value
20,225
42,813
Portfolio loans (net of ACL of $92,802 at September 30, 2021; $101,048 at December 31, 2020)
7,057,833
6,713,129
Premises and equipment, net
142,031
135,191
Right of use assets
11,068
7,714
Goodwill
317,766
311,536
Other intangible assets, net
61,125
51,985
Cash surrender value of bank owned life insurance
176,730
176,405
Other assets
218,451
150,020
Total assets
12,899,330
10,544,047
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing
3,453,906
2,552,039
Interest-bearing
7,363,961
6,125,810
Total deposits
10,817,867
8,677,849
Securities sold under agreements to repurchase
241,242
175,614
Short-term borrowings
17,673
4,658
Long-term debt
49,233
4,757
Senior notes, net of unamortized issuance costs
39,910
39,809
Subordinated notes, net of unamortized issuance costs
182,637
182,226
Junior subordinated debt owed to unconsolidated trusts
71,593
71,468
Lease liabilities
11,120
7,757
Other liabilities
134,979
109,840
Total liabilities
11,566,254
9,273,978
Outstanding commitments and contingent liabilities (see Notes 10 and 16)
Stockholders’ Equity
Common stock, ($.001 par value)
58
56
Additional paid-in capital
1,315,038
1,253,360
Retained earnings
75,643
20,830
Accumulated other comprehensive income (loss)
(1,366)
33,309
Total stockholders’ equity before treasury stock
1,389,373
1,307,555
Treasury stock at cost
(56,297)
(37,486)
Total stockholders’ equity
1,333,076
1,270,069
Total liabilities and stockholders’ equity
Shares
Common shares issued
58,116,970
55,910,733
Less treasury shares
(2,289,986)
(1,506,354)
Common shares outstanding
55,826,984
54,404,379
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
Interest income
Interest and fees on loans
65,163
69,809
189,132
213,434
Interest and dividends on investment securities:
Taxable interest income
11,324
8,466
29,016
26,807
Non-taxable interest income
915
1,141
2,878
3,458
Other interest income
462
213
857
1,596
Total interest income
77,864
79,629
221,883
245,295
Interest expense
3,059
6,105
10,086
26,053
Federal funds purchased and securities sold under agreements to repurchase
60
88
177
596
112
30
195
215
270
38
415
495
Senior notes
400
1,199
Subordinated notes
2,480
2,475
7,436
4,518
728
740
2,185
2,220
Total interest expense
7,109
9,876
21,693
35,296
Net interest income
70,755
69,753
200,190
209,999
Provision for credit losses
(1,869)
5,549
(10,365)
35,656
Net interest income after provision for credit losses
72,624
64,204
210,555
174,343
Noninterest income
Wealth management fees
13,749
10,548
39,335
32,296
Fees for customer services
9,288
8,014
25,936
23,400
Remittance processing
4,355
3,995
13,122
11,466
Mortgage revenue
1,740
5,793
6,153
9,879
Income on bank owned life insurance
999
1,022
3,439
4,361
Net gains (losses) on sales of securities
(5)
11
114
1,710
Unrealized gains (losses) recognized on equity securities
62
(437)
2,482
(1,234)
Other income
3,071
3,339
7,134
5,888
Total noninterest income
33,259
32,285
97,715
87,766
Noninterest expense
Salaries, wages, and employee benefits
41,949
32,839
107,222
95,397
Data processing
7,782
3,937
16,881
12,383
Net occupancy expense of premises
4,797
4,256
13,606
13,419
Furniture and equipment expenses
2,208
2,325
6,300
7,311
Professional fees
1,361
1,698
5,617
5,508
Amortization of intangible assets
3,149
2,493
8,200
7,569
Interchange expense
1,434
1,223
4,360
3,590
Other expense
10,807
7,771
28,425
24,947
Total noninterest expense
73,487
56,542
190,611
170,124
Income before income taxes
32,396
39,947
117,659
91,985
Income taxes
6,455
9,118
24,136
19,986
Net income
25,941
30,829
93,523
71,999
Basic earnings per common share
0.46
0.56
1.69
1.32
Diluted earnings per common share
1.67
1.31
Dividends declared per share of common stock
0.23
0.22
0.69
0.66
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
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 $4,902, $682, $14,195, and ($9,577), respectively
(12,296)
(1,710)
(35,606)
23,974
Reclassification adjustment for realized (gains) losses on debt securities available for sale included in net income, net of taxes of ($1), $3, $7, and $492, respectively
(8)
(16)
(1,218)
Net change in unrealized gains (losses) on debt securities available for sale
(12,292)
(1,718)
(35,622)
22,756
Unrealized gains (losses) on cash flow hedges:
Net unrealized holding gains (losses) on cash flow hedges, net of taxes of $2, ($6), ($134), and $890, respectively
14
336
(2,233)
Reclassification adjustment for realized (gains) losses on cash flow hedges included in net income, net of taxes of ($82), ($76), ($243), and ($16), respectively
206
192
611
42
Net change in unrealized gains (losses) on cash flow hedges
201
947
(2,191)
Net change in accumulated other comprehensive income (loss)
(12,091)
(1,512)
(34,675)
20,565
Total comprehensive income
13,850
29,317
58,848
92,564
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
Three Months Ended September 30, 2021
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Treasury
Stockholders'
Stock
Capital
Earnings
Income (Loss)
Equity
Balance, June 30, 2021
56,330,616
1,316,716
62,926
10,725
(44,734)
1,345,691
—
Stock issued in acquisition, net of stock issuance costs
(29)
Repurchase of stock
(625,000)
(14,790)
Issuance of treasury stock for employee stock purchase plan
14,658
377
361
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax
106,710
(3,738)
2,850
(888)
Cash dividends common stock at $0.23 per share
(12,956)
Stock dividend equivalents restricted stock units at $0.23 per share
268
(268)
Stock-based compensation
1,837
Balance, September 30, 2021
Nine Months Ended September 30, 2021
Balance, December 31, 2020
2,206,237
58,953
58,955
(905,000)
(22,038)
Cash dividends common stock at $0.69 per share
(37,953)
Stock dividend equivalents restricted stock units at $0.69 per share
757
(757)
5,722
Three Months Ended September 30, 2020
(Accumulated
Deficit)
Balance, June 30, 2020
54,516,000
1,248,045
(13,951)
37,037
(35,103)
1,236,084
6,119
(23)
116
93
(2)
Cash dividends common stock at $0.22 per share
(11,994)
Stock dividend equivalents restricted stock units at $0.22 per share
166
(166)
2,205
Balance, September 30, 2020
54,522,231
1,250,391
4,718
35,525
(34,985)
1,255,705
Nine Months Ended September 30, 2020
Balance, December 31, 2019
54,788,772
1,248,216
(14,813)
14,960
(27,985)
1,220,434
Cumulative effect of change in accounting principle
(15,922)
(407,850)
(9,669)
26,651
(68)
504
436
106,589
(2,648)
2,013
(635)
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax
8,069
(51)
152
101
Cash dividends common stock at $0.66 per share
(36,017)
Stock dividend equivalents restricted stock units at $0.66 per share
529
(529)
4,413
9
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash Flows Provided by (Used in) Operating Activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of mortgage servicing rights
4,202
3,932
Depreciation and amortization of premises and equipment
8,723
9,384
Net amortization (accretion) of premium (discount) on portfolio loans acquired
(4,860)
(7,015)
Net amortization (accretion) of premium (discount) on investment securities
17,263
6,698
Net amortization (accretion) of premium (discount) on time deposits
(929)
(662)
Net amortization (accretion) of premium (discount) on FHLB advances and other borrowings
620
387
Impairment of OREO
Impairment of fixed assets held for sale
36
Impairment of mortgage servicing rights
(542)
604
Change in fair value of equity securities, net
(2,482)
1,234
(Gain) loss on sales of debt securities, net
(114)
(Gain) loss on sales of loans, net
(8,202)
(21,357)
(Gain) loss on sales of OREO
163
47
(Gain) loss on sales of premises and equipment
(1,007)
198
(Gain) loss on life insurance proceeds
(493)
(1,256)
Provision for deferred income taxes
2,326
(2,730)
(Increase) decrease in cash surrender value of bank owned life insurance
(2,946)
(3,105)
Mortgage loans originated for sale
(214,096)
(770,186)
Proceeds from sales of mortgage loans
244,356
771,039
Net change in operating assets and liabilities:
(Increase) decrease in other assets
(12,791)
(3,435)
Increase (decrease) in other liabilities
(23,775)
(369)
Net cash provided by (used in) operating activities
102,496
101,414
Cash Flows Provided by (Used in) Investing Activities
Purchases of equity securities
(11,017)
(13,123)
Purchases of debt securities available for sale
(2,048,554)
(907,094)
Proceeds from sales of equity securities
7,254
33
Proceeds from sales of debt securities available for sale
290,955
Proceeds from paydowns and maturities of debt securities available for sale
641,754
477,370
Net cash received in (paid for) acquisitions (see Note 2)
228,279
Net (increase) decrease in loans
114,729
(439,679)
Cash paid for premiums on bank-owned life insurance
(118)
(120)
Purchases of premises and equipment
(4,041)
(3,158)
Proceeds from life insurance
3,232
2,512
Proceeds from disposition of premises and equipment
6,519
806
Proceeds from sales of OREO
1,452
492
Net cash provided by (used in) investing activities
(769,556)
(881,961)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
Cash Flows Provided by (Used in) Financing Activities
Net increase (decrease) in deposits
816,551
740,967
Net change in federal funds purchased and securities sold under agreements to repurchase
48,977
(3,850)
Proceeds from other borrowings
72,500
142,634
Repayment of other borrowings
(15,500)
(74,000)
Proceeds from FHLB advances
5,000
4,000
Repayment of FHLB advances
(4,492)
(32,551)
Cash dividends paid
Purchase of treasury stock
Cash paid for withholding taxes on stock-based payments
Proceeds from stock options exercised
Issuance of treasury stock for ESPP
Common stock issuance costs
(150)
Net cash provided by (used in) financing activities
862,368
730,980
Net increase (decrease) in cash and cash equivalents
195,308
(49,567)
Cash and cash equivalents, beginning of period
529,288
Cash and cash equivalents, ending of period
479,721
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest
16,257
41,987
9,641
19,395
Non-cash investing and financing activities:
OREO acquired in settlement of loans
228
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Significant Accounting Policies
Nature of Operations
First Busey Corporation, a Nevada corporation organized in 1980, is a $12.9 billion financial holding company headquartered in Champaign, Illinois. Our common stock is traded on The Nasdaq Global Select Market under the symbol “BUSE.”
The Company operates and reports its business in three segments: Banking, Remittance Processing, and Wealth Management. The Banking operating segment provides a full range of banking services to individual and corporate customers through the Company’s wholly-owned bank subsidiary, Busey Bank, with banking centers in Illinois; the St. Louis, Missouri metropolitan area; southwest Florida; and Indianapolis, Indiana. The Remittance Processing operating segment provides technology-driven payment solutions for walk-in, lockbox, interactive voice recognition, and online bill payments, among others, through the Company’s subsidiary, FirsTech. The Wealth Management operating segment provides a full range of asset management, investment, brokerage, fiduciary, philanthropic advisory, tax preparation, and farm management services to individuals, businesses, and foundations.
Basis of Financial Statement Presentation
These unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements included in our 2020 Annual Report. These interim unaudited consolidated financial statements serve to update our 2020 Annual Report 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 conformity with 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.
First Busey has continued to operate as an essential community resource during these challenging and unprecedented times. Federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of guidance responding to the COVID-19 pandemic and have taken a number of steps to help banks navigate the pandemic and mitigate its impact.
The Company remains vigilant as the negative impacts of COVID-19, such as further margin compression and a deterioration in asset quality, could impact future quarters.
As part of the CARES Act, Congress appropriated approximately $349 billion for the creation of the PPP and then authorized a second phase for an additional $310 billion in PPP loans. The program provided payroll assistance for the nation’s nearly 30 million small businesses—and select nonprofits—in the form of 100% government-guaranteed low-interest loans from the SBA. On December 27, 2020, the Economic Aid Act extended the authority to make PPP loans through March 31, 2021, and revised certain PPP requirements. On March 30, 2021, the President signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021, or until funding was exhausted, which occurred on May 28, 2021. First Busey served as a bridge for these programs, actively helping existing and new business clients sign up for this important financial resource.
The following table summarizes First Busey’s PPP loans as of September 30, 2021, (dollars in thousands):
CARES
Economic Aid
PPP Loan
Act
Totals
Customers with PPP loans processed/acquired
4,595
2,753
7,348
PPP loans originated/acquired
765,212
324,593
1,089,805
Customers with PPP loans outstanding
121
1,499
1,620
PPP loans outstanding
17,364
165,746
183,110
PPP loans outstanding, amortized cost
17,325
160,906
178,231
PPP loan balance forgiveness:
Received
744,320
151,135
895,455
Balances submitted to the SBA for forgiveness
10,796
10,217
21,013
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 debt securities available for sale, fair value of assets acquired and liabilities assumed in business combinations, goodwill, income taxes, and the determination of the ACL.
Subsequent Events
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 were issued. There were no significant subsequent events for the quarter ended September 30, 2021, through the filing date of these unaudited consolidated financial statements.
Note 2: Acquisitions
Effective May 31, 2021, the Company completed its acquisition of CAC, the holding company for GSB. The partnership has enhanced the Company’s existing deposit, commercial banking, and wealth management presence in the Chicago-Naperville-Elgin, IL-IN-WI Metropolitan Statistical Area. GSB’s results of operations were included in the Company’s results of operations beginning June 1, 2021. First Busey operated GSB as a separate banking subsidiary until August 14, 2021, when it was merged with and into Busey Bank. At that time, all GSB banking centers became branches of Busey Bank.
Under terms of the definitive agreement, each share of CAC common stock issued and outstanding as of the effective date was converted into the right to receive 444.4783 shares of First Busey common stock and $14,173.96 in cash, which reflects the adjustments made to the cash consideration in accordance with the terms of the definitive agreement. The fair value of the common shares issued as part of the consideration paid for CAC was determined on the basis of the closing price of the Company’s common shares on the last trading day immediately preceding the acquisition date of May 31, 2021. As additional consideration provided to CAC’s shareholders in the merger, CAC paid a special dividend to its shareholders in the amount of $60.0 million, or $12,087.58 per share of CAC common stock, on May 28, 2021.
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. Measurement period adjustments of $0.2 million were recorded in the third quarter of 2021 as more information became available regarding unrecorded liabilities.
As the total consideration paid for CAC exceeded the provisional fair value of net assets acquired, estimated goodwill of $6.2 million was recorded as a result of the acquisition. The amount of goodwill recognized as a result of this transaction is expected to be fully tax deductible for federal income tax purposes in accordance with the Company’s election pursuant to Section 338(h)(10) of the Internal Revenue Code. Goodwill recorded for this transaction reflects synergies expected from the acquisition and expansion within the Chicago-Naperville-Elgin, IL-IN-WI Metropolitan Statistical Area, and was assigned to the Banking operating segment.
The following table presents the estimated fair value of CAC’s assets acquired and liabilities assumed as of May 31, 2021 (dollars in thousands):
Fair Value
Assets acquired
Cash and cash equivalents
298,637
702,367
Portfolio loans, net of ACL
430,470
Premises and equipment
17,034
Other intangible assets
17,340
Mortgage servicing rights
629
8,176
Total assets acquired
1,474,653
Liabilities assumed
1,315,671
Other borrowings
16,651
19,098
Total liabilities assumed
1,351,420
Net assets acquired
123,233
Consideration paid:
Cash
70,358
Common stock
59,105
Total consideration paid
129,463
6,230
The fair value of PCD financial assets was $60.5 million on the date of acquisition. Gross contractual amounts receivable relating to the PCD financial assets was $65.2 million. The Company estimated, on the date of acquisition, that $4.2 million of the contractual cash flows specific to the PCD financial assets will not be collected.
During three and nine months ended September 30, 2021, First Busey incurred $8.4 million and $11.4 million, respectively, in pre-tax acquisition expenses related to the acquisition of CAC, comprised primarily of professional fees, compensation expense, and data processing expense.
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):
As of September 30, 2021
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Treasury securities
185,636
(255)
185,453
Obligations of U.S. government corporations and agencies
37,784
1,213
38,997
Obligations of states and political subdivisions
288,023
8,743
(754)
296,012
Commercial mortgage-backed securities
607,097
5,278
(9,078)
603,297
Residential mortgage-backed securities
2,108,388
13,973
(19,753)
2,102,608
Asset-backed securities
468,618
323
(134)
468,807
Corporate debt securities
301,878
1,374
(1,182)
302,070
Total debt securities available for sale
3,997,424
30,976
(31,156)
As of December 31, 2020
27,481
356
27,837
67,406
2,162
(49)
69,519
292,940
11,779
304,711
408,716
10,212
(312)
418,616
1,344,047
24,571
(303)
1,368,315
70,953
1,237
(1)
72,189
2,211,543
50,317
(673)
Amortized cost and fair value of debt securities by contractual maturity or pre-refunded date are shown below. Mortgages underlying mortgage-backed securities and asset-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 corporations and agencies (dollars in thousands):
Due in one year or less
103,158
103,787
Due after one year through five years
603,868
608,074
Due after five years through ten years
385,479
393,540
Due after ten years
2,904,919
2,891,843
Realized gains and losses related to sales and calls of debt securities available for sale are summarized as follows (dollars in thousands):
Realized gains and losses on sales of debt securities
Gross security gains
524
1,718
Gross security (losses)
(410)
Net gains (losses) on sales of debt securities
Debt securities with carrying amounts of $729.2 million on September 30, 2021, and $628.0 million December 31, 2020, were pledged as collateral for public deposits, securities sold under agreements to repurchase, and for other purposes as required.
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):
Less than 12 months
12 months or more
180,317
55,434
434,220
(9,036)
3,063
(42)
437,283
1,392,160
(19,707)
5,568
(46)
1,397,728
51,183
210,951
Total temporarily impaired securities
2,324,265
(31,068)
8,631
(88)
2,332,896
4,957
762
129,655
89,997
(300)
139
(3)
90,136
221,913
(621)
5,096
(52)
227,009
Debt securities available for sale are not within the scope of CECL, however, the accounting for credit losses on these securities is affected by ASC 326-30. The Company’s debt security portfolio consisted of 1,274 securities as of September 30, 2021, compared to 1,114 securities as of December 31, 2020. The number of debt securities in the investment portfolio in an unrealized loss position was 294, representing an unrealized loss of 1.3% of the aggregate fair value, as of September 30, 2021, compared to 23 securities representing an unrealized loss of 0.3% of the aggregate fair value as of December 31, 2020. Unrealized losses related 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
16
impairment related to noncredit factors is recognized in accumulated other comprehensive income (loss), net of applicable taxes. As of September 30, 2021, 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
Distributions of portfolio loans are as follows (dollars in thousands):
Portfolio loans
Commercial
1,931,863
2,014,576
Commercial real estate
3,068,622
2,892,535
Real estate construction
430,857
461,786
Retail real estate
1,512,884
1,407,852
Retail other
206,409
37,428
Total portfolio loans
7,150,635
6,814,177
(92,802)
(101,048)
Portfolio loans, net
Net deferred loan origination costs included in the balances above were $4.9 million as of September 30, 2021, compared to $2.4 million as of December 31, 2020. Net accretable purchase accounting adjustments included in the balances above reduced loans by $10.1 million as of September 30, 2021, and $10.9 million as of December 31, 2020. The September 30, 2021, commercial balance includes loans originated under PPP with an amortized cost of $178.2 million, compared to $446.4 million in loans originated under PPP included in the December 31, 2020, balance.
There were no retail real estate loans purchased during the three months ended September 30, 2021 or 2020. During the nine months ended September 30, 2021, the Company purchased retail real estate loans totaling $32.2 million, compared to $43.9 million of retail real estate loan purchases in the nine months ended September 30, 2020.
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. Commercial lending relationships that are $1.0 million or less are usually processed through an expedited underwriting process. 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 typically reviewed on a quarterly basis. Interim reviews may take place if circumstances of the borrower warrant a more frequent review. GSB’s policies were similar in nature to Busey Bank’s policies and the Company is migrating the legacy GSB portfolio and grading toward the Busey Bank policies. We acquired two non-accrual loans from GSB totaling $4.4 million, which are still outstanding as of September 30, 2021.
The following table is a summary of risk grades segregated by category of portfolio loans (dollars in thousands):
Special
Substandard
Pass
Watch
Mention
Non-accrual
1,718,398
115,108
62,094
26,033
10,230
2,623,243
338,270
81,525
18,964
6,620
413,986
14,464
2,400
1,486,172
11,724
2,008
4,498
8,482
206,372
37
6,448,171
479,566
145,634
51,895
25,369
1,768,755
136,948
72,447
27,903
8,523
2,393,372
383,277
75,486
34,897
5,503
434,681
24,481
77
2,546
1
1,382,616
10,264
2,471
3,702
8,799
37,324
104
6,016,748
554,970
150,481
69,048
22,930
Risk grades of portfolio loans, further sorted by origination year are as follows (dollars in thousands):
18
Term Loans Amortized Cost Basis by Origination Year
Revolving
Risk Grade Ratings
2019
2018
2017
Prior
loans
468,833
265,204
112,809
90,292
73,553
132,127
575,580
15,078
5,355
19,783
5,668
7,545
4,287
57,392
Special Mention
3,011
1,143
2,479
4,385
6,864
12,484
31,728
3,357
3,504
3,321
1,437
1,244
5,552
7,618
Substandard non-accrual
4,305
444
1,597
1,821
63
2,000
Total commercial
494,584
275,649
139,989
101,782
91,027
154,513
674,318
655,907
690,244
463,830
289,396
257,618
245,795
20,453
41,596
40,404
130,282
62,312
27,226
34,572
1,878
27,115
7,056
7,551
18,661
10,436
10,430
276
4,894
9,289
1,574
2,072
526
429
180
761
352
1,962
3,407
24
Total commercial real estate
729,627
747,753
603,588
374,403
299,213
291,250
22,787
160,719
141,699
93,701
3,918
899
1,249
11,801
6,279
6,115
55
1,616
123
Total real estate construction
166,999
150,214
93,763
4,193
2,516
1,372
428,556
230,120
107,262
92,875
95,667
313,708
217,984
2,641
2,666
1,982
1,521
2,292
1,979
1,630
321
73
2,210
84
500
145
546
1,369
4,582
1,268
Total retail real estate
435,305
233,281
109,330
95,015
97,553
320,771
221,629
45,614
25,177
30,366
19,737
9,935
2,658
72,885
Total retail other
25,188
30,373
19,742
9,949
1,872,128
1,432,087
977,044
595,136
500,258
770,563
1,003,419
19
2016
812,536
158,307
107,565
93,190
61,847
79,970
455,340
16,544
22,247
14,954
13,724
2,577
10,943
55,959
6,402
2,671
2,069
7,164
6,763
13,733
33,645
7,772
3,791
2,371
1,939
819
1,233
9,978
150
3,045
451
2,168
641
843,404
190,061
127,410
118,185
72,647
105,947
556,922
717,559
503,977
360,573
384,843
180,555
227,068
18,797
88,297
110,526
90,412
33,734
32,887
27,023
398
16,490
8,858
10,490
10,505
7,102
21,808
233
17,445
4,166
1,491
7,812
2,111
1,377
1,091
776
821
882
286
1,647
840,882
628,303
463,787
437,776
222,941
278,923
19,923
179,232
171,663
64,025
1,468
1,444
16,088
18,485
3,657
337
1,838
164
67
146
200,184
175,330
64,362
3,306
1,071
1,445
319,302
162,711
135,065
136,427
140,600
257,147
231,364
2,715
2,053
1,396
349
579
2,939
509
96
727
1,631
267
687
78
646
1,147
4,815
1,193
324,112
164,938
137,163
137,949
144,101
263,826
235,763
8,357
9,430
5,600
691
440
10,290
57
8,371
9,437
5,605
2,531
696
497
10,291
2,216,953
1,168,069
798,327
699,747
441,456
650,638
838,987
20
An analysis of the amortized cost basis 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
Past due and non-accrual loans
1,092
202
2,068
2,020
491
182
Total past due and non-accrual loans
4,224
2,222
243
237
235
6,248
1,305
66
149
6,794
784
1,371
Gross interest income recorded on 90+ days past due loans, and that would have been recorded on non-accrual loans if they had been accruing interest in accordance with their original terms, was $0.3 million and $1.2 million for the three and nine months ended September 30, 2021, respectively. Gross interest income recorded on 90+ days past due loans and that would have been recorded on non-accrual loans if they had been accruing interest in accordance with their original terms was $0.5 million and $1.4 million for the three and nine months ended September 30, 2020, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was $0.4 million for the three and nine months ended September 30, 2021, and was insignificant for the three and nine months ended September 30, 2020.
A summary of TDRs is as follows (dollars in thousands):
TDRs
In compliance with modified terms
2,083
3,814
30 – 89 days past due
Non-performing TDRs
1,285
Total TDRs
3,368
5,078
21
The following tables summarize TDRs that occurred during the periods presented (dollars in thousands):
Recorded Investment
Number of
Rate
Payment
Contracts
Modification (1)
Newly designated TDRs
324
651
167
353
There were no TDRs that were entered into during the last 12 months that subsequently had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual) during the three and nine months ended September 30, 2021 or 2020. During the nine months ended September 30, 2021, one retail real estate loan for $0.1 million that had been a performing TDR for longer than 12 months, with a rate modification, became non-performing.
Gross interest income that would have been recorded in the three and nine months ended September 30, 2021 and 2020, if TDRs had performed in accordance with their original terms compared with their modified terms, was insignificant.
Modified loans with payment deferrals that fall under the CARES Act or revised Interagency Statement that suspended requirements under GAAP related to TDR classification are not included in the Company’s TDR totals.
As of September 30, 2021, the Company had $0.2 million of residential real estate in the process of foreclosure. The Company follows Federal Housing Finance Agency guidelines on single-family foreclosures and real estate owned evictions on portfolio loans, as well as all COVID-19 related state foreclosure and eviction orders.
The following tables provide details of loans evaluated individually, segregated by category. The Company evaluates loans with disparate risk characteristics on an individual basis. The unpaid contractual principal balance represents the customer outstanding balance excluding any partial charge-offs. Amortized cost represents customer balances net of any partial charge-offs recognized on the loan. Average amortized cost is calculated using the most recent four quarters (dollars in thousands):
Unpaid
Contractual
Average
Principal
with No
Related
Balance
Allowance
with Allowance
Loans evaluated on an individual basis
14,233
2,003
8,203
10,206
4,450
8,945
7,188
6,222
6,906
338
4,020
3,637
3,662
4,630
Total loans evaluated individually
25,717
12,138
8,228
20,366
4,475
20,819
22
16,771
4,001
4,371
8,372
1,600
7,920
7,406
6,067
9,349
292
581
5,873
5,490
5,515
7,439
30,342
15,850
4,396
20,246
1,625
25,299
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. Collateral dependent loans are loans in which repayment is expected to be provided solely by the underlying collateral and there are no other available and reliable sources of repayment. Loans are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. As of September 30, 2021, there were $15.5 million of collateral dependent loans secured by real estate or business assets.
Management estimates the ACL balance using relevant available information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience beginning in 2010. As of September 30, 2021, the Company expects the markets in which it operates to experience continued economic uncertainty around the levels of delinquencies over the next 12 months. Management adjusted the historical loss experience for these expectations with an immediate reversion to historical loss rate beyond this forecast period. PPP loans were excluded from the ACL calculation as they are 100% government guaranteed.
The following tables detail activity in the ACL. Allocation of a portion of the ACL 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, 2021
Real Estate
Retail Real
Construction
Estate
Retail Other
ACL beginning balance
24,356
39,974
7,599
20,505
2,976
95,410
657
(25)
(1,503)
(1,155)
157
Charged-off
(764)
(191)
(155)
(98)
(1,208)
Recoveries
469
ACL ending balance
24,406
39,831
6,121
19,352
3,092
92,802
As of and for the Nine Months Ended September 30, 2021
Retail
23,866
46,230
8,193
21,992
767
101,048
Day 1 PCD (1)
3,546
129
4,178
(1,428)
(6,109)
(2,082)
(3,028)
2,282
(2,026)
(812)
(209)
(315)
(349)
(3,711)
448
186
219
574
225
1,652
23
As of and for the Three Months Ended September 30, 2020
24,146
42,680
7,792
20,405
1,023
96,046
2,593
3,703
(381)
(383)
(2,500)
(569)
(18)
(139)
(171)
(3,397)
124
103
301
89
643
24,363
45,917
7,419
20,184
958
98,841
As of and for the Nine Months Ended September 30, 2020
Beginning balance, prior to adoption of ASC 326-30
18,291
21,190
3,204
10,495
568
53,748
Adoption of ASC 326-30
715
9,306
2,954
3,292
566
16,833
10,739
17,090
1,082
6,635
110
(5,682)
(1,833)
(1,139)
(575)
(9,247)
300
197
901
289
1,851
The following table presents the ACL and amortized cost of portfolio loans by category (dollars in thousands):
Ending balance attributed to:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
19,956
19,327
88,327
1,921,657
3,062,400
430,581
1,509,222
7,130,269
Loans ending balance
22,266
21,967
99,423
2,006,204
2,886,468
461,494
1,402,337
6,793,931
Note 5: Deposits
The composition of deposits is as follows (dollars in thousands):
Demand deposits, noninterest-bearing
Interest-bearing transaction deposits
2,938,109
2,263,093
Saving deposits and money market deposits
3,398,917
2,743,369
Time deposits
1,026,935
1,119,348
Additional information about our deposits is as follows (dollars in thousands):
Brokered savings deposits and money market deposits
2,002
2,251
Brokered time deposits
264
5,257
Aggregate amount of time deposits with a minimum denomination of $100,000
504,367
568,735
Aggregate amount of time deposits with a minimum denomination that meets or exceeds the FDIC insurance limit of $250,000
156,419
192,563
As of September 30, 2021, the scheduled maturities of time deposits are as follows (dollars in thousands):
Time deposits by schedule of maturities
October 1, 2021 – September 30, 2022
719,932
October 1, 2022 – September 30, 2023
188,639
October 1, 2023 – September 30, 2024
85,339
October 1, 2024 – September 30, 2025
20,008
October 1, 2025 – September 30, 2026
12,280
Thereafter
737
Total time deposits
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. Securities sold under agreements to repurchase were as follows (dollars in thousands):
Weighted average rate for securities sold under agreements to repurchase
0.08
%
0.13
On May 28, 2021, the Company entered into a Second Amended and Restated Credit Agreement, pursuant to which the Company has access to (i) a $40.0 million revolving line of credit with a termination date of April 30, 2022, and (ii) a $60.0 million term loan with a maturity date of May 31, 2026. The loans have an annual interest rate of 1.75% plus the one-month LIBOR rate. Proceeds of the term loan were used to fund a part of the cash portion of the merger consideration related to the acquisition of CAC and for general corporate purposes. The revolving credit facility incurs a non-usage fee based on any undrawn amounts. As of September 30, 2021, there was no balance outstanding on the revolving credit facility and a total of $57.0 million outstanding on the term loan.
Short-term borrowings are summarized as follows (dollars in thousands):
FHLB advances maturing in less than one year from date of origination, and the current portion of long-term FHLB advances due within 12 months
5,673
Term Loan, current portion due within 12 months
12,000
Total short-term debt
Federal funds purchased are short-term borrowings that generally mature between one and 90 days. The Company had no federal funds purchased as of September 30, 2021 or December 31, 2020.
Long-term debt is summarized as follows (dollars in thousands):
Notes payable, FHLB, original maturity of 5 years, collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock
4,233
Term Loan
45,000
Total long-term debt
As of September 30, 2021, and December 31, 2020, funds borrowed from the FHLB, listed above, consisted of one variable-rate note maturing May 2023, with an interest rate of 3.04%.
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.
On June 1, 2020, the Company issued $125.0 million of fixed-to-floating rate subordinated notes that mature on June 1, 2030. The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 5.25% for the first five years after issuance and thereafter bear interest at a floating rate equal to a three-month benchmark rate plus a spread of 5.11%, as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each June 1 and December 1 during the five-year fixed-term, and thereafter on March 1, June 1, September 1, and December 1 of each year, commencing on September 1, 2025. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after June 1, 2025. The subordinated notes are unsecured obligations of the Company.
Unamortized debt issuance costs related to senior notes and subordinated notes are presented in the following table (dollars in thousands):
Unamortized debt issuance costs
Senior notes issued in 2017
90
191
Subordinated notes issued in 2017
575
Subordinated notes issued in 2020
1,788
2,123
Total unamortized debt issuance costs
2,453
2,965
Note 7: Regulatory Capital
The Company and its subsidiary bank 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. Capital amounts and classification also are subject to qualitative judgments by 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, 2021, and December 31, 2020, all capital ratios of the Company and its subsidiary bank exceeded well capitalized levels under the applicable regulatory capital adequacy guidelines. Management believes that no events or changes have occurred subsequent to September 30, 2021, that would change this designation.
On March 27, 2020, the FDIC and other federal banking agencies published an interim final rule that provides those banking organizations adopting CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital and to phase in the aggregate impact of the deferral on regulatory capital over a subsequent three-year period. On August 26, 2020, the CECL final rule was finalized and was substantially similar to the interim final rule. Under this final rule, because the Company has elected to use the deferral option, the regulatory capital impact of our transition adjustments recorded on January 1, 2020, from the adoption of CECL will be deferred for two years, until January 1, 2022. In addition, 25 percent of the ongoing impact of CECL on our ACL, retained earnings, and average total consolidated assets from January 1, 2020, through the end of the two-year deferral period, each as reported for regulatory capital purposes, will be added to the deferred transition amounts (“adjusted transition amounts”) and deferred for the two-year period. At the conclusion of the two-year period the adjusted transition amounts will be phased-in for regulatory capital purposes at a rate of 25 percent per year, with the phased-in amounts included in regulatory capital at the beginning of each year.
The following tables summarize regulatory capital requirements applicable to the holding company its subsidiary bank (dollars in thousands):
Minimum
To Be Well
Actual
Capital Requirement
Capitalized
Amount
Ratio
Total Capital (to Risk Weighted Assets)
Consolidated
1,313,989
15.91
660,850
8.00
826,062
10.00
Busey Bank
1,306,293
15.87
658,612
823,265
Tier 1 Capital (to Risk Weighted Assets)
1,060,756
12.84
495,637
6.00
1,238,060
15.04
493,959
Common Equity Tier 1 Capital (to Risk Weighted Assets)
986,756
11.95
371,728
4.50
536,940
6.50
370,469
535,123
Tier 1 Capital (to Average Assets)
8.60
493,201
4.00
10.06
492,170
615,212
5.00
28
1,245,997
17.04
585,015
731,269
1,131,875
15.50
584,082
730,103
983,033
13.44
438,761
1,053,910
14.44
438,062
909,033
12.43
329,071
475,325
328,546
474,567
9.79
401,717
10.52
400,581
500,727
In July 2013, 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, 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 Common Equity Tier 1 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) total capital to risk-weighted assets of at least 10.50%, (ii) Tier 1 Capital to risk-weighted assets of at least 8.50%, and (iii) Common Equity Tier 1 to risk-weighted assets of at least 7.00%.
Note 8: Employee Benefit Plans
The First Busey Corporation 2021 Employee Stock Purchase Plan was approved at the Company’s 2021 Annual Meeting of Stockholders and details can be found within First Busey’s Definitive Proxy Statement filed with the SEC on April 8, 2021. The first offering under this plan began on July 1, 2021. There were 585,342 shares available for issuance under the 2021 Employee Stock Purchase Plan as of September 30, 2021.
For additional information related to the Company’s employee benefit plans, see the Company’s 2020 Annual Report.
Note 9: Stock-Based Compensation
Under the terms of the 2020 Equity Plan, the Company has granted RSU, DSU, and PSU awards. 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, subject to accelerated vesting upon eligible retirement from the Company. 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.
The Company grants DSUs, which are restricted stock units with a deferred settlement date, to its directors and advisory directors. Each DSU is equivalent to one share of the Company’s common stock. DSUs vest over a one-year period following the grant date. These units generally are subject to the same terms as RSUs under the 2020 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. After vesting and prior to delivery, these units will continue to earn dividend equivalents.
The Company also grants PSU awards to members of management periodically throughout the year. Each PSU is equivalent to one share of the Company’s common stock. The number of units that ultimately vest will be determined based on the achievement of the market or other performance goals, subject to accelerated service-based vesting conditions upon eligible retirement from the Company.
The Company has outstanding stock options assumed from acquisitions.
Upon vesting/delivery, shares are expected (though not required) to be issued from treasury.
Stock Options
A summary of the status of, and changes in, the Company's stock option awards for the nine months ended September 30, 2021 follows:
Weighted-
Remaining
Exercise
Price
Life
Outstanding at beginning of period
39,085
23.53
5.88
Expired
(7,479)
Outstanding at end of period
31,606
5.13
Exercisable at end of period
The Company did not record any stock option compensation expense for the three or nine months ended September 30, 2021, or 2020. As of September 30, 2021, the Company did not have any unrecognized stock option expense.
Restricted Stock Unit, Performance-Based Restricted Stock Unit, and Deferred Stock Unit Awards
A summary of changes in the Company’s RSU, PSU, and DSU awards for the nine months ended September 30, 2021, is as follows:
RSU Awards
PSU Awards
DSU Awards
Grant Date
Shares (1)
Nonvested at beginning of period
1,017,038
23.87
15,724
16.25
34,263
17.18
Granted
260,231
24.26
99,159
23.91
35,664
24.59
Dividend equivalents earned
33,388
23.07
3,716
23.15
Vested
(128,824)
22.88
(39,813)
18.08
Forfeited
(29,883)
24.88
(968)
23.48
Nonvested at end of period
1,151,950
24.02
113,915
22.86
33,830
Vested and outstanding at end of period
96,427
21.99
On March 24, 2021, under the terms of the 2020 Equity Plan, the Company granted 212,426 RSUs to members of management, including the Vice-Chairman of the Board. The grant date fair value of the award totaled $5.2 million and will be recognized as compensation expense over the requisite service period ranging from one year to five years. The
terms of these awards included an accelerated vesting provision upon eligible retirement from the Company, after a one-year minimum requisite service period. Subsequent to the requisite service period, the awards will become 100% vested. Further, the Company granted 33,288 DSUs to directors and advisory directors. The grant date fair value of the award totaled $0.8 million and will be recognized as compensation expense over the requisite service period of one year. Subsequent to the requisite service period, the awards will become 100% vested.
During the first quarter of 2021, the Company also granted a target of 70,815 market-based PSUs with a maximum award of 113,304 units. The actual number of units issued at the vesting date could range from 0% to 160% of the initial grant, depending on attaining the market-based total shareholder return performance goal. The grant date fair value of the award was $1.7 million and will be recognized in compensation expense over the performance period ending December 31, 2023.
Further, during the first quarter of 2021, the Company granted a target of 28,344 PSUs with a maximum award of 39,682 units. The actual number of units issued at the vesting date could range from 0% to 140% of the initial grant, depending on attaining a performance goal based upon the compounded annual revenue growth rate of the Remittance Processing segment. The grant date fair value of the award is $0.7 million and will be recognized in compensation expense over the performance period ending August 31, 2023, subject to achievement of the performance goal.
On May 19, 2021, under the terms of the 2020 Equity Plan, the Company granted 2,376 DSUs to directors. The grant date fair value of the award totaled $0.1 million and will be recognized as compensation expense over the requisite service period of one year. Subsequent to the requisite service period, the awards will become 100% vested.
On September 22, 2021, under the terms of the 2020 Equity Plan, the Company granted 47,805 RSUs to members of management. The grant date fair value of the award totaled $1.1 million and will be recognized as compensation expense over the requisite service period ranging from three year to five years. Subsequent to the requisite service period, the awards will become 100% vested.
Stock-based compensation expense related to nonvested RSU, PSU, and DSU awards is presented in the table below (dollars in thousands):
RSU awards
1,316
2,029
4,362
3,952
PSU awards
290
619
DSU awards
231
135
741
420
Total stock-based compensation
Unamortized stock-based compensation expense related to nonvested RSU, PSU, and DSU awards is presented in the table below (dollars in thousands):
Unamortized stock-based compensation
11,650
10,411
1,554
179
430
294
Total unamortized stock-based compensation
13,634
10,884
Weighted average period over which expense is to be recognized
3.0
yrs
There were 1,038,975 shares remaining available for issuance pursuant to the 2020 Equity Incentive Plan as of September 30, 2021.
31
Note 10: Outstanding Commitments and Contingent Liabilities
Legal Matters
The Company is a party to legal actions which arise in the normal course of its business activities. In the opinion of management, the ultimate resolution of these matters is not expected to have a material effect on the Company’s financial position or results of operations.
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
1,836,815
1,754,370
Standby letters of credit
38,329
38,937
Total commitments
1,875,144
1,793,307
Note 11: 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 12: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.
Interest Rate Swaps Designated as Cash Flow Hedges
The Company entered into derivative instruments designated as cash flow hedges. For a derivative instrument that is designated and qualifies as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The change in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.
Interest rate swaps with notional amounts totaling $50.0 million as of September 30, 2021, and $70.0 million as of December 31, 2020, 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 highly effective during the period. A $20.0 million swap matured on September 17, 2021, and the Company has one remaining swap. The gross aggregate fair value of the swaps of $1.7 million as of September 30, 2021, and $3.1 million as of December 31, 2020, is recorded in other liabilities in the unaudited Consolidated Balance Sheets, with changes in fair value recorded net of tax in other comprehensive income (loss). The Company expects its hedge to remain highly effective during the remaining term of the swap.
A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):
Notional amount
50,000
70,000
Weighted average fixed pay rates
1.79
1.80
Weighted average variable 3-month LIBOR receive rates
0.12
Weighted average maturity, in years
2.96
2.85
Unrealized gains (losses), net of tax
(1,237)
(2,184)
Interest expense recorded on these swap transactions was $0.3 million and $0.9 million during the three and nine months ended September 30, 2021, respectively, and was $0.3 million and $0.5 million during the three and nine months ended September 30, 2020, respectively. The Company expects $0.2 million of the unrealized loss to be reclassified from OCI to interest expense during the next three 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, 2021.
The following table reflects the net gains (losses) recorded in accumulated other comprehensive income (loss) and the unaudited Consolidated Statements of Income relating to cash flow derivative instruments for the periods presented (dollars in thousands):
Interest rate contracts
Gain (loss) recognized in OCI, net of tax
(Gain) loss reclassified from OCI to interest expense, net of tax
The Company pledged $1.8 million in cash to secure its obligation under these contracts as of September 30, 2021, compared to $3.2 million pledged as of December 31, 2020.
Interest Rate Lock Commitments
Interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited consolidated financial statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Forward Sales Commitments
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 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.
Amounts and fair values of mortgage banking derivatives included in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):
Notional
Location
Derivatives with positive fair value
Interest rate lock commitments
31,480
538
45,004
1,201
Forward sales commitments
117
978
Mortgage banking derivatives recorded in other assets
31,597
539
45,982
Derivatives with negative fair value
118
49,418
1,439
84,964
2,662
Mortgage banking derivatives recorded in other liabilities
49,535
1,440
85,082
2,663
Net gains (losses) relating to these derivative instruments are summarized as follows for the periods presented (dollars in thousands):
Net gains (losses)
537
1,405
1,502
8,467
(1,438)
(3,874)
(3,616)
(15,699)
(901)
(2,469)
(2,114)
(7,232)
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 equal and offsetting derivative agreements with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $424.6 million and $395.0 million as of September 30, 2021, and December 31, 2020, 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.
Amounts and fair values of derivative assets and liabilities related to customer interest rate swaps recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):
Derivative Asset
Derivative Liability
Derivatives not designated as hedging instruments
Interest rate swaps – pay floating, receive fixed
332,856
19,420
91,711
1,910
Interest rate swaps – pay fixed, receive floating
Total derivatives not designated as hedging instruments
424,567
21,330
34
394,954
32,685
Changes in fair value of these derivative assets and liabilities are recorded in noninterest expense in the unaudited Consolidated Statements of Income and summarized as follows (dollars in thousands):
Interest rate swaps
Pay floating, receive fixed
(2,024)
(549)
(11,355)
25,790
Pay fixed, receive floating
2,024
549
11,355
(25,790)
Net change in fair value of interest rate swaps
The Company pledged $26.3 million in cash to secure its obligation under these contracts as of September 30, 2021, compared to $36.0 million pledged as of December 31, 2020.
Note 12: 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:
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 classified as available for sale are reported at fair value utilizing Level 2 measurements. The Company obtains fair value measurements from an independent pricing service. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid, and other market information. Because many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations.
The independent pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. 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.
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. As applicable, for mutual funds, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and are 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. Fair values of derivative assets and liabilities are 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 tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2021, and December 31, 2020, 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
Debt securities available for sale:
Loans held for sale
Derivative assets
21,869
Derivative liabilities
24,501
33,918
38,403
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).
Loans Evaluated Individually
The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. If the collateral value is not sufficient, a specific reserve is recorded. 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 unobservable inputs, fair values of individually evaluated collateral dependent loans have been classified as Level 3.
Non-financial assets 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 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. Fair values were based upon discounted appraisals or real estate listing prices.
Due to the significance of unobservable inputs, fair values of all bank property held for sale have been classified as Level 3.
The following tables summarize assets and liabilities measured at fair value on a non-recurring basis for the periods presented, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
Loans evaluated individually
3,753
51
Bank property held for sale
6,150
2,771
106
10,676
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
September 30, 2021:
Estimate
Techniques
Input
(Weighted Average)
Appraisal of collateral
Appraisal adjustments
-18.0
to
-100.0
(-54.4)
-33.0
(-67.9)
Appraisal of collateral or real estate listing price
-6.2
-64.9
(-41.2)
December 31, 2020:
-30.0
(-37.0)
-25.0
(-54.5)
(-42.8)
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
33,545
33,240
Level 3 inputs:
7,108,483
6,755,425
9,247
11,011
10,912
11,107
Other servicing rights
1,680
2,127
1,966
Financial liabilities
1,029,879
1,132,107
17,671
4,661
49,323
5,014
62,840
59,943
Accrued interest payable
5,435
3,401
40,700
40,104
196,350
187,697
Note 13: Earnings Per Common Share
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 RSUs were vested.
Earnings per common share have been computed as follows (dollars in thousands, except per share amounts):
Shares:
Weighted average common shares outstanding
56,227,816
54,585,998
55,256,348
54,579,088
Dilutive effect of outstanding options, warrants, and restricted stock units as determined by the application of the treasury stock method
597,148
151,922
613,969
217,266
Dilutive effect of ESPP shares
7,554
2,518
Weighted average common shares outstanding, as adjusted for diluted earnings per share calculation
56,832,518
54,737,920
55,872,835
54,796,354
Shares that were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive are summarized in the table below for the periods presented:
Anti-dilutive common stock equivalents
Options
RSU and DSU awards
47,805
261,091
97,067
85,571
95,511
Total anti-dilutive common stock equivalents
133,376
300,176
192,578
Note 14: Accumulated Other Comprehensive Income (Loss)
The following tables represent 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
17,013
(4,850)
12,163
55,436
(15,802)
39,634
Unrealized holding gains (losses) on debt securities available for sale, net
(17,198)
4,902
(2,392)
682
Amounts reclassified from accumulated other comprehensive income, net
(11)
Balance at end of period
(180)
(129)
53,033
(15,117)
37,916
Unrealized gains (losses) on cash flow hedges
(2,012)
(3,633)
1,036
(2,597)
Unrealized holding gains (losses) on cash flow hedges, net
(7)
(6)
288
(82)
(76)
(1,731)
494
(3,345)
954
(2,391)
Total accumulated other comprehensive income (loss)
(1,911)
545
49,688
(14,163)
49,644
(14,151)
35,493
21,192
(6,032)
15,160
(49,801)
14,195
33,551
(9,577)
(3,055)
871
(280)
80
(200)
470
(3,123)
890
854
(243)
Note 15: Operating Segments and Related Information
The Company has three reportable operating segments: Banking, Remittance Processing, and Wealth Management. The Banking operating segment provides a full range of banking services to individual and corporate customers through its banking center network in Illinois; the St. Louis, Missouri metropolitan area; southwest Florida; and Indianapolis, Indiana. The Remittance Processing operating segment provides solutions for online bill payments, lockbox, and walk-in payments. The Wealth Management operating segment provides a full range of asset management, investment, brokerage, fiduciary, philanthropic advisory, tax preparation, and farm management services to individuals, businesses, and foundations.
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 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 “Note 1. Significant Accounting Policies” to the Company’s 2020 Annual Report. 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. The “other” category included in the tables below consists of the Parent Company, First Busey Risk Management, and the elimination of intercompany transactions (dollars in thousands):
Total Assets
Operating segment
Banking
294,666
288,436
12,788,398
10,462,673
Remittance Processing
8,992
47,528
46,553
Wealth Management
14,108
60,496
46,504
2,908
(11,683)
Consolidated total
74,672
73,330
211,377
218,221
59
(3,936)
(3,598)
(11,247)
(8,281)
Total net interest income
14,976
18,523
42,798
45,717
5,030
14,700
12,318
13,746
10,662
39,333
32,681
(1,187)
884
(2,950)
59,520
44,863
150,032
135,037
4,519
3,523
13,086
9,669
7,679
6,497
20,961
19,725
1,769
1,659
6,532
5,693
31,996
41,441
114,507
93,245
530
785
1,674
2,708
6,068
4,165
18,373
12,956
(6,198)
(6,444)
(16,895)
(16,924)
Total income before income taxes
25,123
31,744
89,889
72,653
384
578
1,214
4,719
3,166
14,285
9,847
(4,285)
(4,659)
(11,865)
(12,467)
Total net income
Note 16: Leases
The Company has operating leases consisting primarily of equipment leases and real estate leases for banking centers, ATM locations, and office space. The following table summarizes lease-related information and balances the Company reported in its unaudited Consolidated Balance Sheets for the periods presented (dollars in thousands):
Lease balances
Supplemental information
Year through which lease terms extend
2031
2032
Weighted average remaining lease term (in years)
6.60
5.93
Weighted average discount rate
2.15
2.82
The following tables represents lease costs and cash flows related to leases for the periods presented (dollars in thousands):
Lease costs
Operating lease costs
656
622
1,828
1,877
Variable lease costs
94
99
394
401
Short-term lease costs
Total lease cost
759
736
2,265
2,323
Cash flows related to leases
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease cash flows – Fixed payments
616
1,756
1,839
Operating lease cash flows – Liability reduction
569
1,610
Right of use assets obtained during the period in exchange for operating lease liabilities (1)
3,408
5,018
128
As of September 30, 2021, 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 $2.3 million for the three and nine months ended September 30, 2021, respectively, compared to $0.7 million and $2.3 million for the three and nine months ended September 30, 2020, respectively.
Rent commitments were as follows (dollars in thousands):
Rent commitments
Remainder of 2021
621
2022
2,288
2023
2,071
2024
1,645
2025
1,416
3,921
Amounts representing interest
(842)
Present value of net future minimum lease payments
44
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
First Busey is a $12.9 billion financial holding company headquartered in Champaign, Illinois. Our common stock is traded on The Nasdaq Global Select Market under the symbol “BUSE.”
Our three operating segments provide a full range of banking, remittance processing, and wealth management services through our subsidiaries, Busey Bank and FirsTech, in Illinois; the St. Louis, Missouri metropolitan area; southwest Florida; and Indianapolis, Indiana.
The following discussion and analysis are intended to assist readers in understanding the financial condition and results of operations of the Company during the three and nine months ended September 30, 2021, and should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto included in this Quarterly Report, as well as the Company’s 2020 Annual Report.
EXECUTIVE SUMMARY
Although the progression of the COVID-19 pandemic in the United States has impacted the Company’s results of operations, the Company continues to navigate the economic environment caused by COVID-19 effectively and prudently and remains resolute in its focus on serving its customers, communities, and associates while protecting its balance sheet. The Company remains vigilant, given that negative impacts of COVID-19, such as further margin compression and a deterioration in asset quality, could impact future quarters.
Our commercial and consumer banking products and services are delivered in Illinois, Missouri, Florida, and Indiana. Each state has taken different steps to reopen after COVID-19 thrust the country into lockdown starting in March 2020, and these efforts are subject to changes and delays based on case monitoring in each state.
Federal, state, and local governments, and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic. See the Company’s 2020 Annual Report for information on policy and regulatory actions taken during 2020. Regulatory actions taken during 2021 include the following:
We have taken, and continue to take, numerous steps in response to the COVID-19 pandemic, including the following:
First Busey has served as a bridge for the PPP, actively helping 7,348 existing and new business clients sign up for this important financial resource. The Company originated and acquired a total of $1.1 billion in PPP loans, of which $178.2 million remains outstanding as of September 30, 2021. Additional information about the Company’s PPP loans is included in the COVID-19 section of “Note 1. Significant Accounting Policies” in this Quarterly Report.
Operating Results
Operating performance metrics presented in the table below have been derived from information used by management to monitor and manage the financial performance of the Company (dollars in thousands, except per share amounts):
Three Months Ended
Nine Months Ended
June 30,
Reported:
29,766
Adjusted:
Net income (1)
32,845
31,921
32,803
102,831
74,473
0.53
Diluted earnings per common share (1)
0.58
0.57
0.60
1.84
1.36
Return on average assets (2)
0.81
1.05
1.15
1.08
0.94
Return on average assets (1), (2)
1.03
1.12
1.22
1.19
0.97
Return on average tangible common equity (1), (2)
10.60
12.26
13.92
13.12
11.14
13.43
13.14
14.81
14.43
11.52
Pre-provision net revenue (1)
30,470
34,030
45,922
104,698
127,165
39,409
37,486
48,701
119,648
133,360
Pre-provision net revenue to average assets (1), (2)
0.95
1.20
1.71
1.21
1.66
1.23
1.81
1.38
1.74
On May 31, 2021, the Company completed its acquisition of CAC, the holding company for GSB. GSB was operated as a separate banking subsidiary from June 1, 2021, until August 14, 2021, when it was merged with and into Busey Bank. At that time GSB’s banking centers became banking centers of Busey Bank. When we completed the GSB acquisition, we reset the baseline for the future financial performance of First Busey in a multitude of positive ways. With GSB now merged and integrated, we expect to see the full contribution of synergies of GSB reflected in the Company’s financial performance in the quarters ahead.
The Company views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pre-tax adjustments for the three and nine months ended September 30, 2021, included $8.7 million and $11.7 million of expenses related to acquisitions and other restructuring, respectively. A reconciliation of non-GAAP measures—including adjusted pre-provision net revenue, adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, adjusted efficiency
46
ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity—which the Company believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Quarterly Report. See “Non-GAAP Financial Information.”
Banking Center Markets
As of September 30, 2021, we served the Illinois banking market with 60 Busey Bank banking centers. Our Illinois markets 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. However, 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.
As of September 30, 2021, Busey Bank had 10 banking centers in Missouri. St. Louis, Missouri has a diverse economy with major employment sectors including health care, financial services, professional and business services, and retail. Fourteen of our banking centers in Illinois are located within the boundaries of the St. Louis Metropolitan Statistical Area.
As of September 30, 2021, Busey Bank had four banking centers in southwest Florida, an area which has experienced above average population growth, job growth, and an expanded housing market over the last several years.
As of September 30, 2021, Busey Bank had one banking center in the Indianapolis, Indiana area, which is the most populous city of Indiana with a diverse economy, including the headquarters of many large corporations.
On July 27, 2021, the Company announced its Personal Banking Transformation Plan to close and consolidate 15 Busey Bank banking centers, with the closures expected to occur in the fourth quarter of 2021. In addition, as part of the acquisition integration plan, during the fourth quarter of 2021 the Company plans to close and consolidate two banking centers that were formerly GSB banking centers. Following the completion of these banking center closures and consolidations, the Company expects to have a total of 58 banking centers in operation across its markets.
Net Interest Income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets.
Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 21.0%. 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.
Consolidated Average Balance Sheets and Interest Rates (Unaudited)
The following tables show our Consolidated Average Balance Sheets (dollars in thousands), and details the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for interest-bearing liabilities, and the related interest yields for the periods shown. All average information is provided on a daily average basis.
Income/
Yield/
Expense
Rate (5)
Interest-bearing bank deposits and federal funds sold
860,200
0.21
715,899
Investment securities:
U.S. Government obligations
251,553
416
112,867
593
2.09
Obligations of states and political subdivisions (1)
299,024
1,900
2.52
301,796
2,122
2.80
Other securities
3,171,163
10,167
1.27
1,409,664
7,195
2.03
15,589
104,965
662
2.51
Portfolio loans (1), (2)
7,133,108
65,418
3.64
7,160,757
69,481
3.86
Total interest-earning assets (1), (3)
11,730,637
78,462
2.65
9,805,948
80,266
3.26
149,550
120,198
144,334
145,948
(96,682)
(97,127)
769,956
706,028
12,697,795
10,680,995
2,809,669
522
0.07
2,312,804
774
Savings and money market deposits
3,369,482
811
0.10
2,557,732
869
0.14
1,074,091
1,726
0.64
1,298,841
4,462
1.37
Federal funds purchased and repurchase agreements
221,813
0.11
190,046
0.18
Borrowings (4)
296,185
3,262
4.37
263,736
2,943
4.44
Junior subordinated debt issued to unconsolidated trusts
71,565
4.04
71,402
4.12
Total interest-bearing liabilities
7,842,805
0.36
6,694,561
0.59
Net interest spread (1)
2.29
2.67
Noninterest-bearing deposits
3,365,823
2,592,130
137,751
145,856
Stockholders’ equity
1,351,416
1,248,448
Interest income / earning assets (1), (3)
Interest expense / earning assets
0.24
0.40
Net interest margin (1)
71,353
2.41
70,390
2.86
48
597,960
0.19
506,235
0.42
166,300
1,375
1.11
144,807
2,359
2.18
297,094
5,772
2.60
286,097
6,228
2.91
2,645,746
25,513
1.29
1,329,557
22,597
2.27
23,060
2.32
91,964
1,880
2.73
6,921,226
189,743
3.67
7,012,497
212,721
4.05
10,651,386
223,661
2.81
9,371,157
247,381
3.53
134,998
119,987
138,257
148,697
(98,522)
(84,213)
745,151
693,950
11,571,270
10,249,578
2,534,979
1,529
2,131,608
0.26
2,981,559
2,151
2,558,053
5,265
0.27
1,060,993
6,406
1,418,944
16,623
1.56
203,777
185,528
0.43
262,024
9,245
4.72
213,101
6,427
4.03
71,524
4.08
4.16
7,114,856
0.41
6,578,587
0.72
2.40
3,010,999
2,303,538
121,844
134,105
1,323,571
1,233,348
0.51
201,968
2.54
212,085
3.02
49
Earning Assets, Sources of Funds, and Net Interest Margin
Changes in average earning assets are summarized as follows for the periods presented (dollars in thousands):
Change
% Change
Average interest-earning assets
1,924,689
19.6
Average interest-bearing liabilities
1,148,244
17.2
Average noninterest-bearing deposits
773,693
29.8
Total average deposits
10,619,065
8,761,507
1,857,558
21.2
Total average liabilities
11,346,379
9,432,547
1,913,832
20.3
Average noninterest-bearing deposits as a percent of total average deposits
31.7
29.6
Total average deposits as a percent of total average liabilities
93.6
92.9
1,280,229
13.7
536,269
8.2
707,461
30.7
9,588,530
8,412,143
1,176,387
14.0
10,247,699
9,016,230
1,231,469
31.4
27.4
93.3
Changes in sources of funds and net interest margin are summarized as follows (dollars in thousands):
Interest income, on a tax-equivalent basis (1)
(1,804)
(2.2)
(2,767)
(28.0)
Net interest income, on a tax equivalent basis (1)
963
1.4
Net interest margin (1), (2)
50
(23,720)
(9.6)
(13,603)
(38.5)
(10,117)
(4.8)
The Consolidated Average Balance Sheets and interest rates were impacted in 2021 and 2020 by numerous factors surrounding COVID-19. The Federal Open Market Committee rate cuts during the first quarter of 2020 have contributed to the decline in net interest margin, as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities. Net interest margin has also been negatively impacted by existing loan amortization and paydowns at higher rates than new loan production, significant growth in the Company’s liquidity position, and the issuance of debt. Those impacts were partially offset by the Company’s efforts to lower deposit funding costs as well as the fees recognized on PPP loans.
The Company remains substantially core deposit funded, with robust liquidity and significant market share in the communities we serve. As of September 30, 2021, the Company’s loan to deposit ratio was 66.1% and core deposits represented 98.5% of total deposits outstanding (excluding time deposits with balances greater than $250,000).
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 2.29% and 2.40% for the three and nine months ended September 30, 2021, respectively, compared to 2.67% and 2.81% for the three and nine months ended September 30, 2020, respectively, each on a tax equivalent basis.
The net interest margin discussion above is based upon the results and average balances for the three and nine months ended September 30, 2021 and 2020. Annualized net interest margins for the quarterly periods indicated were as follows:
First Quarter
2.72
3.20
Second Quarter
2.50
3.03
Third Quarter
Fourth Quarter
3.06
Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting, effective funding cost control, meaningful noninterest income contribution, and operational efficiencies. Please refer to the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report for a description of accounting policies underlying the recognition of interest income and expense.
Noninterest Income
Changes in noninterest income are summarized as follows for the periods presented (dollars in thousands):
3,201
30.3
1,274
15.9
360
9.0
(4,053)
(70.0)
(2.3)
(145.5)
499
114.2
(8.0)
974
7,039
21.8
2,536
10.8
1,656
14.4
(3,726)
(37.7)
(922)
(21.1)
(1,596)
(93.3)
301.1
1,246
11.3
Total noninterest income was $33.3 million for the three months ended September 30, 2021, a 3.0% increase from the comparable period in 2020, and was $97.7 million for the nine months ended September 30, 2021, an 11.3% increase from the comparable period in 2020. Revenues from wealth management fees and remittance processing activities represented 54.4% and 53.7% of the Company’s noninterest income for the three and nine months ended September 30, 2021, respectively, providing a complement to spread-based revenue from traditional banking activities. On a combined basis, revenue from these two critical operating areas was $18.1 million for the three months ended September 30, 2021, a 24.5% increase from the comparable period in 2020, and was $52.5 million for the nine months ended September 30, 2021, a 19.9% increase from the comparable period in 2020.
Wealth management fees were $13.7 million for the three months ended September 30, 2021, a 30.3% increase from the comparable period in 2020, and were $39.3 million for the nine months ended September 30, 2021, a 21.8% increase from the comparable period for 2020. First Busey’s Wealth Management division ended the third quarter of 2021 with $12.4 billion in assets under care, compared to $10.2 billion as of December 31, 2020, a 20.9% increase. The increase in assets under care includes $1.2 billion related to assets obtained in the acquisition of CAC.
Fees for customer services were $9.3 million for the three months ended September 30, 2021, a 15.9% increase from the comparable period in 2020, and were $25.9 million for the nine months ended September 30, 2021, a 10.8% increase from the comparable period in 2020. Fees for customer services have been impacted since March 2020 due to changing customer behaviors resulting from COVID-19 and related government stimulus programs, and continue to rebound with improving economic conditions and customer activity levels.
52
Remittance processing revenue relates to our payment processing company, FirsTech. Remittance processing revenue was $4.4 million for the three months ended September 30, 2021, a 9.0% increase from the comparable period in 2020, and was $13.1 million for the nine months ended September 30, 2021, a 14.4% increase from the comparable period in 2020. Fluctuations in remittance processing revenue were primarily the result of increased payment and volume activity as well as growth in customers served by FirsTech. In addition to reported remittance processing revenue, FirsTech generated additional revenue of $0.3 million in the three months and $0.7 million in the nine months ended September 30, 2021, related to professional programming services, excluding intercompany eliminations and consolidation. These revenues are reported separately within the “Other income” component of our noninterest income. FirsTech operations add important diversity to our revenue stream while widening our array of service offerings to larger commercial clients both within our footprint and nationally. The Company is currently making strategic investments in FirsTech to enhance future growth including upgrades to the product and engineering teams to build an application programming interface cloud-based platform and expansion of the sales organization to drive increased market reach.
Mortgage revenue was $1.7 million for the three months ended September 30, 2021, a 70.0% decrease from the comparable period in 2020, primarily as a result of declines in sold-loan mortgage volume. Mortgage revenue was $6.2 million for the nine months ended September 30, 2021, a 37.7% decrease from the comparable period in 2020. General economic conditions and interest rate volatility may impact fees in future quarters.
Income on bank owned life insurance was $1.0 million for the three months ended September 30, 2021, a 2.3% decrease from the comparable period in 2020, and was $3.4 million for the nine months ended September 30, 2021, a 21.1% decrease from the comparable period in 2020. Decreases primarily resulted from a $0.8 million decline in earnings on death proceeds for the nine months ended September 30, 2021.
Other income was $3.1 million for the three months ended September 30, 2021, an 8.0% decrease from the comparable period in 2020, and was $7.1 million for the nine months ended September 30, 2021, a 21.2% increase from the comparable period in 2020. Other income variances are primarily driven by fluctuations in income generated from swap origination fees, commercial loan sales gains, and gains and losses on fixed asset disposal.
Noninterest Expense
Changes in noninterest expense are summarized as follows for the periods presented (dollars in thousands):
9,110
27.7
3,845
97.7
541
12.7
(117)
(5.0)
(337)
(19.8)
26.3
211
17.3
3,036
39.1
16,945
30.0
(2,663)
(29.2)
Effective income tax rate
19.9
22.8
Efficiency ratio (1)
67.3
52.4
Adjusted efficiency ratio (1)
59.0
50.0
53
11,825
12.4
36.3
187
(1,011)
(13.8)
109
2.0
631
8.3
770
21.4
3,478
13.9
20,487
12.0
4,150
20.8
20.5
21.7
61.4
54.3
57.5
53.2
Full-time equivalent employees as of period-end
1,462
91
6.6
Total noninterest expense was $73.5 million for the three months ended September 30, 2021, a 30.0% increase from the comparable period in 2020, and was $190.6 million for the nine months ended September 30, 2021, a 12.0% increase from the comparable period in 2020. Non-operating acquisition and other restructuring expenses contributed $8.7 million to total noninterest expense for the three months ended September 30, 2021, compared to $2.5 million for the comparable period in 2020, and contributed $11.7 million to total noninterest expense for the nine months ended September 30, 2021, compared to $3.2 million for the comparable period in 2020. GSB’s results of operations were included in the Company’s results of operations beginning June 1, 2021.
Salaries, wages, and employee benefits were $41.9 million for the three months ended September 30, 2021, a 27.7% increase from the comparable period in 2020, and were $107.2 million for the nine months ended September 30, 2021, a 12.4% increase from the comparable period in 2020. Non-operating expenses contributed $2.7 million and $3.5 million of the increases for the three and nine months ended September 30, 2021, over the comparable periods in 2020, respectively. Salaries, wages, and employee benefit expenses were impacted by increases in full-time equivalent employees since June 1, 2021, related to the CAC acquisition, and we began to see synergies in late August after the banks were merged.
Data processing expense was $7.8 million for the three months ended September 30, 2021, a 97.7% increase from the comparable period in 2020, and was $16.9 million for the nine months ended September 30, 2021, a 36.3% increase from the comparable period in 2020. Acquisition related non-operating expenses contributed $3.2 million and $3.6 million of the increases for the three and nine months ended September 30, 2021, respectively.
54
Combined, net occupancy expense of premises and furniture and equipment expense was $7.0 million for the three months ended September 30, 2021, a 6.4% increase from the comparable period in 2020, and was $19.9 million for the nine months ended September 30, 2021, a 4.0% decrease from the comparable period in 2020. GSB added 7 branches in 2021. The Company closed 12 banking centers in October 2020, and has evaluated and expects to close and consolidate 17 Busey Bank banking centers, two of which were formerly GSB banking centers, in the fourth quarter of 2021.
Professional fees were $1.4 million for the three months ended September 30, 2021, a 19.8% decrease from the comparable period in 2020, and were $5.6 million for the nine months ended September 30, 2021, a 2.0% increase from the comparable period in 2020. Non-operating expenses contributed $0.1 million and $1.4 million in professional fees for the three and nine months ended September 30, 2021, compared to $0.2 million for the three and nine months ended September 30, 2020.
Amortization of intangible assets was $3.1 million for the three months ended September 30, 2021, a 26.3% increase from the comparable period in 2020, and was $8.2 million for the nine months ended September 30, 2021, an 8.3% increase from the comparable period for 2020. The increase primarily related to intangibles acquired in the CAC acquisition.
Interchange expense was $1.4 million for the three months ended September 30, 2021, a 17.3% increase from the comparable period in 2020, and was $4.4 million for the nine months ended September 30, 2021, a 21.4% increase from the comparable period in 2020. Fluctuations in interchange expense were primarily the result of increased payment and volume activity at FirsTech.
Other expense was $10.8 million for the three months ended September 30, 2021, a 39.1% increase from the comparable period in 2020, and was $28.4 million for the nine months ended September 30, 2021, a 13.9% increase from the comparable period in 2020. Increases were across multiple expense categories including New Market Tax Credit amortization, regulatory expenses, marketing, business development, recruiting and onboarding, director compensation, and card service fees, partially offset by lower MSR valuation impairment and releases in the provision for unfunded commitments.
The efficiency ratio(1), 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 ratios were 67.3% and 61.4% for the three and nine months ended September 30, 2021, respectively, compared to 52.4% and 54.3% for the three and nine months ended September 30, 2020, respectively.
The adjusted efficiency ratios(1) were 59.0% and 57.5% for the three and nine months ended September 30, 2021, respectively, compared to 50.0% and 53.2% for three and nine months ended September 30, 2020, respectively. The Company remains focused on expense discipline.
Income Taxes
The effective income tax rates of 19.9% and 20.5% for the three and nine months ended September 30, 2021, respectively, were 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, including an Illinois new market tax credit. The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. As of September 30, 2021, the Company was not under examination by any tax authority.
(1) A Non-GAAP financial measure. See “Non-GAAP Financial Information” for reconciliation.
FINANCIAL CONDITION
Balance Sheet
Changes in significant items included in our unaudited Consolidated Balance Sheets are summarized as follows as of each of the dates indicated (dollars in thousands):
1,736,057
76.8
344,704
5.1
2,355,283
22.3
901,867
35.3
1,238,151
20.2
2,140,018
24.7
65,628
37.4
0.3
411
0.2
125
2,292,276
63,007
5.0
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. GSB’s policies were similar in nature to Busey Bank’s policies and the Company is migrating the legacy GSB portfolio toward Busey Bank’s policies. 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 Busey Bank. The Company attempts to utilize government-assisted lending programs, such as the SBA and U.S. Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate, and guaranteed by individuals. 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 ACL 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.
As a matter of policy and practice, the Company limits the level of concentration exposure in any particular loan segment with the goal of maintaining a well-diversified loan portfolio. In anticipation of the potential risks associated with COVID-19, the Company took actions starting in early March 2020 to escalate the monitoring of susceptible industry sectors within its portfolio.
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 loans for compliance with the Company’s loan policy on a periodic basis. In addition, the loan review department reviews 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 2020 Annual Report. The significant majority of the Company’s portfolio lending activity occurs in its Illinois and Missouri markets, with the remainder in the Florida and Indiana markets.
Geographic distributions of portfolio loans, based on originations, by category were as follows (dollars in thousands):
Illinois
Missouri
Florida
Indiana
1,340,421
490,939
54,092
46,411
2,061,455
668,014
181,352
157,801
186,171
133,385
65,637
45,664
1,127,787
237,966
94,429
52,702
195,329
4,025
2,320
4,735
4,911,163
1,534,329
397,830
307,313
December 31, 2020
1,386,587
529,281
50,878
47,830
1,880,437
715,680
154,234
142,184
192,971
115,227
57,381
96,207
963,538
295,352
94,748
54,214
32,678
2,415
1,188
4,456,211
1,657,955
358,429
341,582
Portfolio loans increased by 4.9% to $7.2 billion as of September 30, 2021, compared to $6.8 billion as of December 31, 2020. Commercial balances (consisting of commercial, commercial real estate, and real estate construction loans), excluding PPP loans, increased $330.6 million since December 31, 2020. Retail real estate and retail other loans increased $274.0 million since December 31, 2020. September 30, 2021, portfolio loan balances included balances acquired in the CAC acquisition.
Allowance and Provision for Credit Losses
The ACL is a significant estimate in the Company’s unaudited consolidated financial statements, affecting both earnings and capital. The methodology adopted influences, and is influenced by, the Company’s overall credit risk management processes. The ACL is recorded in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date. The ACL is established through the provision for credit loss expense charged to income.
As a result of continued strength in asset quality performance metrics, as well as improved macro-economic outlooks, the third quarter of 2021 results reflect a provision release, as compared to a reserve build at the onset of the COVID-19 pandemic. Provision for credit loss expense decreased due to a reserve release of $1.9 million for the three months ended September 30, 2021, compared to a $5.5 million provision expense for the same period in 2020. Provision for credit loss expense decreased due to a reserve release of $10.4 million for the nine months ended September 30, 2021, compared to a $35.7 million provision expense for the same period in 2020. In addition to the effects of the provision, the ACL was increased by $4.2 million in the second quarter of 2021 by the Day 1 PCD related to the CAC acquisition.
The relationship between our portfolio loan balances and our ACL is summarized as follows, as of each of the dates indicated (dollars in thousands):
March 31,
Portfolio loans, excluding PPP loans
6,972,404
6,795,255
6,257,196
6,367,774
6,384,916
PPP loans, amortized cost
390,395
522,104
446,403
736,395
7,185,650
6,779,300
7,121,311
93,943
ACL to portfolio loans
1.30
1.33
1.39
1.48
ACL to portfolio loans, excluding PPP loans
1.40
1.50
1.59
1.55
ACL to non-performing loans
358.86
336.96
411.04
415.82
408.82
ACL to non-performing assets
319.52
303.35
346.05
349.99
339.02
As of September 30, 2021, management believed the level of the ACL to be appropriate based upon the information available. However, additional losses may be identified in our loan portfolio as new information is obtained. The ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration, and other factors.
Non-performing Loans and Non-performing Assets
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 principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Typically, loans are secured by collateral. When a loan is classified as non-accrual and determined to be collateral dependent, it is appropriately reserved or charged down through the ACL to the fair value of our interest in the underlying collateral less estimated costs to sell. Our loan portfolio is collateralized primarily by real estate.
The following table sets forth information concerning non-performing loans and performing restructured loans, as of each of the dates indicated (dollars in thousands):
Loans 30 – 89 days past due
6,446
3,888
9,929
7,578
6,708
Non-performing assets
Non-performing loans:
Non-accrual loans
27,725
21,706
23,898
Loans 90+ days past due and still accruing
590
1,149
279
Total non-performing loans
25,860
28,315
22,855
24,301
24,177
3,184
3,137
4,292
4,571
4,978
Total non-performing assets
29,044
31,452
27,147
28,872
29,155
Substandard (excludes 90+ days past due)
51,740
44,877
65,088
68,924
77,939
Classified assets
80,784
76,329
92,235
97,796
107,094
Performing TDRs (includes 30 – 89 days past due)
3,299
3,829
4,218
Non-performing assets to total assets
0.25
0.28
Non-performing loans to portfolio loans
0.39
0.34
Non-performing loans to portfolio loans, excluding PPP loans
0.37
0.38
Non-performing assets to portfolio loans and OREO
0.44
Classified assets to Busey Bank Tier 1 Capital and ACL
6.07
5.72
7.76
8.47
9.58
Non-performing loan balances increased by 6.4% to $25.9 million as of September 30, 2021, compared with $24.3 million as of December 31, 2020. Non-performing loans acquired from GSB were $4.4 million at September 30, 2021. Continued disciplined credit management resulted in non-performing loans as a percentage of total loans of 0.36% as of September 30, 2021, and December 31, 2020. Excluding the amortized cost of PPP loans, non-performing loans as a percentage of total loans was 0.37% as of September 30, 2021, compared to 0.38% as of December 31, 2020.
Asset quality metrics remain dependent upon market-specific economic conditions, and specific measures may fluctuate from period to period. If economic conditions were to deteriorate, the Company would expect the credit quality of our loan portfolio to decline and loan defaults to increase.
Potential Problem Loans
Potential problem loans are loans classified as substandard 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 expected credit losses. Potential problem loans decreased by 25.0% to $51.6 million as of September 30, 2021, compared to $68.8 million as of December 31, 2020. 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, 2021, 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.
To alleviate some of the financial hardships faced as a result of COVID-19, the Company offered a Financial Relief Program to qualifying customers. The program included options for short-term loan payment deferrals and certain fee waivers. As of September 30, 2021, the Company had no loans remaining on full payment deferral, and 27 commercial loans on interest-only payment deferrals representing $116.6 million in loans. In addition, as of September 30, 2021, the
Company had three retail loans on payment deferrals representing $0.4 million in loans. As these deferrals expire, the Company will continue to monitor credits for potential problem loans.
Total deposits increased by 24.7% to $10.8 billion as of September 30, 2021, compared to $8.7 billion as of December 31, 2020. We focus on deepening our relationships with customers to foster core deposit growth, allowing us to reduce our reliance on wholesale funding. Fluctuations in deposit balances can be attributed to the retention of PPP loan funding in customer deposit accounts, the impacts of economic stimulus payments to consumers, other core deposit growth, the seasonality of public funds, and the CAC acquisition. Approximately $1.3 billion of deposits were acquired in the CAC acquisition.
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. 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, 2021, the Company had additional capacity to borrow $1.2 billion from the FHLB and $603.6 million from the Federal Reserve. The Company has the ability to pledge PPP loans as collateral to either the FHLB or Federal Reserve Discount Window to increase the availability to borrow against any potential short-term funding needs.
As of September 30, 2021, 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
Busey Bank routinely enters 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, 2021, we had outstanding loan commitments and standby letters of credit of $1.9 billion, compared to $1.8 billion as of December 31, 2020. 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.
As of September 30, 2021, our reserve for unfunded commitments was $6.2 million, compared to $7.3 million as of December 31, 2020. Provision expense for unfunded commitments decreased due to a reserve release of $1.0 million and $1.1 million for the three and nine months ended September 30, 2021, respectively, compared to an expense of $0.3 million and $1.8 million for the three and nine months ended September 30, 2020.
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, banking institutions must maintain capital in excess of regulatory minimum capital requirements. The table below presents minimum capital ratios with capital buffer and September 30, 2021, capital ratios for First Busey and Busey Bank.
Minimum Capital
Requirements with
Busey
Capital Buffer
Corporation
Bank
Total Capital to Risk Weighted Assets
10.50
Tier 1 Capital to Risk Weighted Assets
8.50
Common Equity Tier 1 Capital to Risk Weighted Assets
7.00
Tier 1 Capital to Average Assets
For further discussion of capital resources and requirements, see “Note 7: Regulatory Capital.”
NON-GAAP FINANCIAL INFORMATION
This Quarterly Report contains certain financial information determined by methods other than in accordance with GAAP. These measures include adjusted pre-provision net revenue, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted net interest margin, efficiency ratio, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per share, and 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 directly comparable GAAP financial measures—specifically net revenue in the case of adjusted pre-provision net revenue, net income in the case of adjusted net income, adjusted diluted earnings per share, and adjusted return on average assets; total net interest income in the case of adjusted net interest margin; total noninterest income and total noninterest expense in the case of efficiency ratio and adjusted efficiency ratio; and total stockholders’ equity in the case of tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity—appears below. The Company believes the adjusted measures are useful for investors and management to understand the effects of certain non-recurring noninterest 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 and effective rates as appropriate.
61
Reconciliation of Non-GAAP Financial Measures — Adjusted Pre-Provision Net Revenue
(unaudited, dollars in thousands)
Pre-provision net revenue
64,542
33,011
Less net (gains) losses on sales of securities and unrealized (gains) losses recognized on equity securities
(57)
(898)
426
(2,596)
(476)
(73,487)
(62,625)
(56,542)
(190,611)
(170,124)
Total pre-provision net revenue
Adjustments to pre-provision net revenue
Acquisition and other restructuring expenses
8,677
2,713
2,529
11,710
3,161
Provision for unfunded commitments
(978)
(496)
250
(1,068)
1,834
New Market Tax Credit amortization
1,240
1,239
4,308
1,200
Adjusted pre-provision net revenue
Average total assets
11,398,655
Reported: Pre-provision net revenue to average assets (1)
Adjusted: Pre-provision net revenue to average assets (1)
Reconciliation of Non-GAAP Financial Measures — Adjusted Net Income, Adjusted Diluted Earnings Per Share, and Adjusted Return on Average Assets
(unaudited, dollars in thousands, except per share amounts)
Adjustments to net income
Acquisition expenses:
1,125
5,587
3,182
368
3,557
Lease or fixed asset impairment
234
Professional fees, occupancy, and other
1,220
2,309
385
Other restructuring costs:
257
2,011
2,357
185
Related tax benefit
(1,773)
(558)
(555)
(2,402)
(687)
Adjusted net income
Dilutive average common shares outstanding
55,730,883
Reported: Diluted earnings per share
Adjusted: Diluted earnings per share
Reported: Return on average assets (1)
Adjusted: Return on average assets (1)
Reconciliation of Non-GAAP Financial Measures — Adjusted Net Interest Margin
Adjustments to net interest income
Tax-equivalent adjustment
598
638
1,778
2,085
Acquisition-related purchase accounting accretion
(1,799)
(1,726)
(2,618)
(7,922)
Adjusted net interest income
69,554
63,395
67,773
196,286
204,162
10,448,417
Reported: Net interest margin (1)
Adjusted: Net Interest margin (1)
2.35
2.43
2.75
2.46
Reconciliation of Non-GAAP Financial Measures — Efficiency Ratio and Adjusted Efficiency Ratio
Tax-equivalent interest income
65,121
70,391
212,084
Adjusted noninterest income
33,202
32,113
32,711
95,119
87,290
62,625
(3,149)
(2,650)
(2,493)
(8,200)
(7,569)
Non-operating adjustments:
(4,719)
(1,125)
(2,011)
(5,844)
(2,357)
(3,182)
(368)
(3,557)
(234)
Professional fees and other
(776)
(1,220)
(284)
(2,309)
(570)
Adjusted noninterest expense
61,661
57,262
51,520
170,701
159,394
Reported: Efficiency ratio (1)
67.27
61.68
52.42
61.40
54.30
Adjusted: Efficiency ratio (2)
58.97
58.89
49.97
57.46
53.24
64
Reconciliation of Non-GAAP Financial Measures — Tangible Common Equity, Tangible Common Equity to Tangible Assets, Tangible Book Value per Share, and Return on Average Tangible Common Equity
As of and for the Three Months Ended
12,415,449
10,539,628
Goodwill and other intangible assets, net
(378,891)
(381,795)
(365,960)
Tax effect of other intangible assets, net
17,115
17,997
15,239
Tangible assets
12,537,554
12,051,651
10,188,907
Tangible common equity
971,300
981,893
904,984
Ending number of common shares outstanding
Tangible common equity to tangible assets (1)
7.75
8.15
8.88
Tangible book value per share
17.09
17.11
16.32
Average common equity
1,342,771
Average goodwill and other intangible assets, net
(380,885)
(368,709)
(367,490)
Average tangible common equity
970,531
974,062
880,958
Reported: Return on average tangible common equity (2)
Adjusted: Return on average tangible common equity (2), (3)
Average stockholders’ common equity
(370,829)
(369,801)
Average tangible stockholders’ common equity
952,742
863,547
Reported: Return on average tangible common equity (1)
Adjusted: Return on average tangible common equity (1), (2)
65
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 the Company undertakes no obligation to update any statement in light of new information or future events. A number of factors, many of which are beyond the Company’s ability to control or predict, could cause actual results to differ materially from those in the Company’s 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 the current presidential administration); (ii) the economic impact of any future terrorist threats or attacks, widespread disease or pandemics (including the COVID-19 pandemic), or other adverse external events that could cause economic deterioration or instability in credit markets; (iii) changes in state and federal laws, regulations, and governmental policies concerning the Company’s general business; (iv) changes in accounting policies and practices; (v) changes in interest rates and prepayment rates of the Company’s assets (including the impact of the LIBOR phase-out); (vi) increased competition in the financial services sector and the inability to attract new customers; (vii) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (viii) the loss of key executives or associates; (ix) changes in consumer spending; (x) 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; (xi) unexpected outcomes of existing or new litigation involving the Company; and (xii) the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards. 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 SEC.
CRITICAL ACCOUNTING ESTIMATES
First Busey has established various accounting policies that govern the application of GAAP in the preparation of its unaudited Consolidated Financial Statements. Significant accounting policies are described in “Note 1. Significant Accounting Policies” of the Company’s 2020 Annual Report.
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. The following policies could be deemed critical:
Fair Value of Debt Securities Available for Sale
The fair values of debt securities available for sale 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.
Debt securities available for sale are not within the scope of CECL; however, the accounting for credit losses on these securities is affected by ASC 326-30. A debt security available for sale is impaired if the fair value of the security declines below its amortized cost basis. To determine the appropriate accounting, the Company must first determine if it intends to sell the security or if it is more likely than not that it will be required to sell the security before the fair value increases to at least the amortized cost basis. If either of those selling events is expected, the Company will write down the amortized cost basis of the security to its fair value. This is achieved by writing off any previously recorded ACL balance related to the debt security, if applicable, and recognizing any incremental impairment through earnings. If the Company does not intend to sell the security, nor believes it more likely than not will be required to sell the security before the fair value recovers to the amortized cost basis, the Company must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors.
The Company considers the following factors in assessing whether the decline is due to a credit loss:
Impairment related to a credit loss must be measured using the discounted cash flow method. Credit loss recognition is limited to the fair value of the security. The impairment is recognized by establishing an ACL balance for the debt security through the provision for credit losses. Impairment related to noncredit factors is recognized in accumulated other comprehensive income, net of applicable taxes.
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 ASC 820 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. Acquired loans are in the scope of ASC 326-30. However, the offset to record the ACL at the date of acquisition on acquired loans depends on whether or not the loan is classified as PCD. The ACL for PCD loans is recorded through a gross-up effect, while the ACL for acquired non-PCD loans is recorded through provision expense, consistent with originated loans. Thus, the determination of which loans are PCD and non-PCD can have a significant effect on the accounting for these loans.
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. The Company will continue to monitor events around COVID-19 and its potential impact on goodwill.
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 Credit Losses
The Company calculates the ACL at each reporting date. The Company recognizes an ACL for the lifetime expected credit losses for the amount the Company does not expect to collect. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported book value. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical credit loss information.
In determining the ACL, management relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The ACL must be determined on a collective (pool) basis when similar risk characteristics exists. On a case-by-case basis, the Company may conclude a loan should be evaluated on an individual basis based on the disparate risk characteristics.
Loans deemed uncollectible are charged against and reduce the ACL. A provision for credit losses is charged to current expense and acts to replenish the ACL in order to maintain the ACL at a level that management deems adequate. Determining the ACL involves significant judgments and assumptions by management. Because of the nature of the judgments and assumptions made by management, actual results may differ from these judgments and assumptions.
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. Due to the current low interest rate environment, a downward adjustment in federal fund rates was not meaningful as of September 30, 2021 or December 31, 2020. 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
+200
+300
8.44
16.43
24.32
7.40
14.16
20.20
Year-Two: Basis Point Changes
9.12
17.39
25.45
9.59
17.95
25.40
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, 2021, 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, 2021, 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, 2021, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our 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 1 of the Company’s 2020 Annual Report.
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. 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, and on February 5, 2020, First Busey’s board of directors approved another amendment to increase the authorized shares under the repurchase program by an additional 2,000,000 shares. During the third quarter of 2021, the company purchased 625,000 shares under the plan. As of September 30, 2021, the Company had 953,824 shares that may still be purchased under the plan.
Period
Total Number of Shares Purchased
Weighted Average Price Paid per Common Share
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July 1-31, 2021
137,000
23.84
1,441,824
August 1-31, 2021
288,000
23.73
1,153,824
September 1-30, 2021
200,000
23.45
953,824
625,000
23.66
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
Description of Exhibit
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 First Busey’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 First Busey’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 Exchange Act, 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
Chairman, President and Chief Executive Officer(Principal Executive Officer)
/s/ JEFFREY D. JONES
Jeffrey D. Jones
Chief Financial Officer(Principal Financial Officer)
/s/ LYNETTE M. STRODE
Lynette M. Strode
Principal Accounting Officer
Date: November 4, 2021