UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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The aggregate market value of the voting and non-voting common equity held by non-affiliates on the last business day of the registrant’s most recently completed second fiscal quarter was $
As of February 27, 2020, there were
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of First Busey Corporation to be held May 20, 2020, are incorporated by reference in this Form 10-K in response to Part III.
FIRST BUSEY CORPORATION
Form 10-K Annual Report
Table of Contents
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Part I
Item 1. Business
Introduction
First Busey Corporation (“First Busey” or the “Company”), a Nevada corporation, initially organized in 1980, is a $9.7 billion financial holding company. First Busey conducts a broad range of financial services through its one wholly-owned bank subsidiary, Busey Bank (“the Bank”), with banking centers in Illinois, Missouri, Florida and Indiana. First Busey is headquartered in Champaign, Illinois, and its common stock is traded on The Nasdaq Global Select Market under the symbol “BUSE.”
Acquisitions
On January 8, 2015, First Busey acquired Herget Financial Corp., a Delaware corporation, and its wholly-owned bank subsidiary, Herget Bank, National Association (“Herget Bank”). First Busey operated Herget Bank as a separate banking subsidiary from January 9, 2015 until March 13, 2015, when it was merged with and into Busey Bank. At that time, Herget Bank’s banking centers became banking centers of Busey Bank.
On April 30, 2016, First Busey acquired Pulaski Financial Corp., a Missouri corporation (“Pulaski”), and its wholly-owned bank subsidiary, Pulaski Bank, National Association (“Pulaski Bank”). First Busey operated Pulaski Bank as a separate bank subsidiary from May 1, 2016 until November 4, 2016, when it was merged with and into Busey Bank. At that time, Pulaski Bank’s banking centers became banking centers of Busey Bank. The acquisition of Pulaski expanded the Company into the St. Louis, Missouri metropolitan area.
On July 2, 2017, First Busey acquired First Community Financial Partners, Inc., an Illinois corporation (“First Community”), and its wholly-owned bank subsidiary, First Community Financial Bank. First Busey operated First Community Financial Bank as a separate bank subsidiary from July 3, 2017 until November 3, 2017, when it was merged with and into Busey Bank. At that time, First Community Financial Bank’s banking centers became banking centers of Busey Bank. The First Community acquisition provided the Company entrance into the southwest suburban markets of the greater Chicagoland area.
On October 1, 2017, First Busey acquired Mid Illinois Bancorp, Inc., an Illinois corporation (“Mid Illinois”) and its wholly-owned bank subsidiary, South Side Trust & Savings Bank of Peoria (“South Side Bank”). First Busey operated South Side Bank as a separate bank subsidiary from October 2, 2017 until March 16, 2018, when it was merged with and into Busey Bank. At that time, South Side Bank’s banking centers became banking centers of Busey Bank.
On January 31, 2019, First Busey acquired The Banc Ed Corp., a Delaware corporation (“Banc Ed”) and its wholly-owned bank subsidiary, TheBANK of Edwardsville (“TheBANK”). First Busey operated TheBANK as a separate bank subsidiary from February 1, 2019 until October 4, 2019, when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers of Busey Bank.
On August 31, 2019, the Company acquired Investors’ Security Trust Company (“IST”), a Fort Myers, Florida wealth management firm.
See “Note 2. Acquisitions” in the Notes to the Consolidated Financial Statements for further information relating to acquisitions.
Subsidiaries of First Busey
First Busey conducts the business of banking, related banking services, asset management, brokerage and fiduciary services through Busey Bank and retail payment processing through FirsTech, Inc. (“FirsTech”).
Busey Bank is an Illinois state-chartered bank organized in 1868 with its headquarters in Champaign, Illinois. Busey Bank has 61 banking centers in Illinois, 13 in Missouri, five in southwest Florida and one in Indianapolis, Indiana.
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Busey Bank offers a range of diversified financial products and services for consumers and businesses, including online and mobile banking capabilities to conveniently serve our customers’ needs. Commercial services include commercial, commercial real estate, real estate construction and agricultural loans as well as commercial depository services such as cash management. Retail banking services include residential real estate, home equity lines of credit and consumer loans, customary types of demand and savings deposits, money transfers, safe deposit services, and IRA and other fiduciary services through our banking center, ATM and technology-based networks.
Further, Busey Bank provides asset management, investment and fiduciary services to individuals, businesses and foundations. As of December 31, 2019, $9.7 billion of assets were under care. For individuals, Busey Bank provides investment management, trust and estate advisory services and financial planning. For businesses, it provides investment management, business succession planning and employee retirement plan services. For foundations, Busey Bank provides investment management, investment strategy consulting and fiduciary services. Brokerage-related services are offered by Busey Investment Services, a division of Busey Bank, through a third-party arrangement with Raymond James Financial Services. In addition, Busey Bank provides professional farm management and brokerage services to the agricultural industry.
Busey Bank’s principal sources of income are interest and fees on loans and investments, wealth management fees and service fees. Principal expenses are interest paid on deposits and general operating expenses. Busey Bank’s primary markets are Illinois, the St. Louis, Missouri metropolitan area, southwest Florida, and central Indiana.
Busey Bank’s subsidiary, FirsTech, which has offices in Decatur, Illinois and Clayton, Missouri, offers pay processing solutions including: walk-in payment processing for payments delivered by customers to retail pay agents; online bill payment solutions for payments made by customers on a billing company’s website; customer service payments for payments accepted over the telephone; mobile bill pay; direct debit services; electronic concentration of payments delivered by the Automated Clearing House network; money management software and credit card networks; and lockbox remittance processing of payments delivered by mail. As of December 31, 2019, FirsTech had approximately 4,000 agent locations in 43 states.
On October 15, 2019, the Company began operations of First Busey Risk Management, Inc. (“First Busey Risk Management”), a newly formed wholly-owned subsidiary of First Busey. First Busey Risk Management, incorporated in Nevada, is a captive insurance company that insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Busey Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Company does not expect the financial results of First Busey Risk Management to have a material impact to the Consolidated Financial Statements. First Busey Risk Management is subject to regulations of the State of Nevada and will be subject to periodic examinations by the Nevada Division of Insurance.
First Busey Corporation also has various other subsidiaries that are not significant to the consolidated entity.
The Company’s operations are managed through three operating segments consisting of Banking, Remittance Processing and Wealth Management. See “Note 21. Operating Segments and Related Information” in the Notes to the Consolidated Financial Statements for an analysis of segment operations.
Economic Conditions of Markets
Busey Bank has 61 banking centers in Illinois. 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. The financial condition of the state of Illinois, in which the largest portion of the Company’s customer base resides, is characterized by low credit ratings and budget deficits.
Busey Bank has 13 banking centers in Missouri. St. Louis, Missouri has a diverse economy with major employment sectors including health care, financial services, professional and business services, and retail.
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Busey Bank has five 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.
Busey Bank has 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.
Competition
Busey Bank competes actively with national and state banks, savings and loan associations and credit unions for deposits and loans mainly in Illinois, the St. Louis, Missouri metropolitan area, southwest Florida, and central Indiana. Busey Bank competes for real estate and other loans primarily on the basis of type of loan, interest rates and loan fees and the quality of services provided. Busey Bank and FirsTech compete with other financial institutions, including asset management and trust companies, security broker/dealers, personal loan companies, insurance companies, finance companies, leasing companies, mortgage companies, remittance processing companies, and certain governmental agencies, all of which actively engage in marketing various types of loans, deposit accounts, wealth management and other products and services.
The Bank faces substantial competition in attracting deposits from other commercial banks, savings institutions, money market and mutual funds, credit unions, insurance agencies, brokerage firms, and other investment vehicles. Customers for banking services are generally influenced by convenience, quality of service, personal contacts, price of services and availability of products. The Bank attracts a significant amount of deposits through their banking centers, primarily from the communities in which those banking centers are located; therefore, competition for those deposits is principally from other commercial banks, savings institutions, and credit unions located in the same communities. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, high-quality customer service, convenient business hours, internet and mobile banking, and convenient banking centers with interbranch deposit and withdrawal privileges.
Based on information obtained from the Federal Deposit Insurance Corporation (“FDIC”) Summary of Deposits dated June 30, 2019, the most recent report available, Busey Bank ranked in the top 10 in total deposits in 12 Illinois counties: first in Champaign County; fifth in Ford County; sixth in Grundy County; seventh in Livingston County; second in Macon County; first in Madison County; sixth in McLean County; second in Peoria County; second in Shelby County; third in St. Clair County; third in Tazewell County; and seventh in Will County. First Busey believes that it effectively competes with other banks, thrifts and financial institutions in its market areas.
Supervision, Regulation and Other Factors
General
FDIC-insured institutions, like Busey Bank, as well as their holding companies and affiliates, are extensively regulated under federal and state law. As a result, the Company’s growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Illinois Department of Financial and Professional Regulation (the “DFPR”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the FDIC and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the Securities and Exchange Commission (“SEC”) and state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury have an impact on the Company’s business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the Company’s operations and results.
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Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company’s business, the kinds and amounts of investments the Company and the Bank may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Company’s and the Bank’s insiders and affiliates and the Company’s payment of dividends.
In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank Act, financial institutions like the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused the Company’s compliance and risk management processes, and the costs thereof, to increase. However, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted to provide meaningful relief for community banks and their holding companies (those with less than $10.0 billion in assets) and on larger institutions that had been categorized as systemically important solely because of size (those with assets between $50.0 billion and $250.0 billion). Because the Company is approaching the $10.0 billion threshold, it will not benefit from all of the changes effected for community banks; however, the new law relieves it from certain prudential requirements, including mandatory annual company-run stress tests, that would otherwise have triggered when it exceeded $10.0 billion in assets. The Company believes that such reforms are favorable to its operations.
The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the continuing regulatory emphasis on the Company’s capital levels. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
The Role of Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects the Company’s earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and the Basel III Rule, discussed below, establish capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.
Minimum Required Capital Levels
Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by “total assets”. As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have historically had to comply with less stringent
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capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, were excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15.0 billion of assets, they may be retained, subject to certain restrictions. Because the Company has assets of less than $15.0 billion, the Company is able to maintain its trust preferred proceeds as capital but the Company has to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.
The Basel International Capital Accords
The risk-based capital guidelines for U.S. banks since 1989 were based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weights (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250.0 billion or more, or consolidated foreign exposures of $10.0 billion or more) known as “advanced approaches” banks. The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This “standardized approach” increased the number of risk-weight categories and recognized risks well above the original 100% risk weight. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.
The Basel III Rule
In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally holding companies with consolidated assets of less than $3.0 billion) and certain qualifying banking organizations that may elect a simplified framework (which the Company has not done.) Thus, the Company and the Bank are each currently subject to the Basel III Rule as described below.
The Basel III Rule increased the required quantity and quality of capital and, for nearly every class of assets, it requires a more complex, detailed and calibrated assessment of risk and calculation of risk-weight amounts. Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital under Basel I, does not
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qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 Capital.
The Basel III Rule requires minimum capital ratios as follows:
| ● | A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets; |
| ● | A minimum required amount of Tier 1 Capital equal to 6% of risk-weighted assets; |
| ● | A minimum required amount of Total Capital (Tier 1 plus Tier 2) equal to 8% of risk-weighted assets; and |
| ● | A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances. |
In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.
Well-Capitalized Requirements
The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.
Under the capital regulations of the FDIC and Federal Reserve, in order to be well-capitalized, a banking organization must maintain:
| ● | A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more; |
| ● | A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more; |
| ● | A ratio of Total Capital to total risk-weighted assets of 10% or more; and |
| ● | A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater. |
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.
As of December 31, 2019: (i) the Bank was not subject to a directive from the FDIC to increase its capital and (ii) the Bank was well-capitalized, as defined by FDIC regulations. As of December 31, 2019, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. The Company is also in compliance with the capital conservation buffer.
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Prompt Corrective Action
The concept of an institution being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of institutions based on the capital level of each particular institution. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Regulation and Supervision of the Company
General
The Company, as the sole stockholder of the Bank, is a bank holding company. Previously, the Company also owned South Side Bank and TheBANK; however, the banks were merged on March 16, 2018 and October 4, 2019, respectively, with the Bank, and the Bank is currently the sole bank subsidiary of the Company. As a bank holding company, the Company is registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company is legally obligated to act as a source of financial and managerial strength to the Bank and to commit resources to support it in circumstances where we might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file with the Federal Reserve periodic reports of its operations and such additional information regarding the Company and the Bank as the Federal Reserve may require.
Acquisitions, Activities and Financial Holding Company Election
The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States (“U.S.”). In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The Role of Capital” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority permits the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and
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mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. The Company has elected to operate as a financial holding company. In order to maintain its status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have a least a satisfactory Community Reinvestment Act (“CRA”) rating. If the Federal Reserve determines that a financial holding company is not well-capitalized or well-managed, the company has a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on the company it believes to be appropriate. Furthermore, if the Federal Reserve determines that a financial holding company’s subsidiary bank has not received a satisfactory CRA rating, that company will not be able to commence any new financial activities or acquire a company that engages in such activities.
Change in Control
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
Capital Requirements
Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements. For a discussion of capital requirements, see “—The Role of Capital” above.
Dividend Payments
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies. As a Nevada corporation, the Company is subject to the limitations of Nevada law, which allows the Company to pay dividends unless, after such dividend, (i) the Company would not be able to pay its debts as they become due in the usual course of business or (ii) the Company’s total assets would be less than the sum of its total liabilities plus any amount that would be needed, if the Company were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to the rights of the stockholders receiving the distribution.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to stockholders if: (i) the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above.
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Incentive Compensation
There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound incentive compensation practices.
The interagency guidance recognized three core principles. Effective incentive plans should: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Much of the guidance addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards. Smaller banking organizations like the Company that use incentive compensation arrangements are expected to be less extensive, formalized, and detailed than those of the larger banks.
Monetary Policy
The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation
The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate Governance
The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.
Regulation and Supervision of Busey Bank
General
The Bank is an Illinois-chartered bank. Its deposit accounts are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. As an Illinois-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFPR, the chartering authority for Illinois banks. The Bank is also regulated by the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the Bank, are not members of the Federal Reserve System.
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Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.
The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory required minimum reserve ratio of 1.35%. As a result, the FDIC is providing assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10.0 billion for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The share of the aggregate small bank credits allocated to each insured institution is proportional to its credit base, defined as the average of its regular assessment base during the credit calculation period. The FDIC is currently applying the credits for quarterly assessment periods beginning July 1, 2019, and, as long as the reserve ratio is at least 1.35%, the FDIC will remit the full nominal value of any remaining credits in a lump-sum payment.
Supervisory Assessments
All Illinois-chartered banks are required to pay supervisory assessments to the DFPR to fund the operations of that agency. The amount of the assessment is calculated on the basis of each bank’s total assets. During the year ended December 31, 2019, the Bank paid supervisory assessments to the DFPR totaling approximately $0.7 million.
Capital Requirements
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—The Role of Capital” above.
Liquidity Requirements
Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While
13
these rules do not, and will not, apply to the Bank, it continues to review its liquidity risk management policies in light of developments.
Dividend Payments
The primary source of funds for the Company is dividends from the subsidiary bank. Under Illinois banking law, Illinois-chartered banks generally may pay dividends only out of undivided profits. The DFPR may restrict the declaration or payment of a dividend by an Illinois-chartered bank. The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, the FDIC and the DFPR may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.
State Bank Investments and Activities
The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Illinois law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Insider Transactions
The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a principal stockholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards/Risk Management
The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. While regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan
14
that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. The key risk themes identified for 2020 are: (i) elevated operational risk as banks adapt to an evolving technology environment and persistent cybersecurity risks; (ii) the need for banks to prepare for a cyclical change in credit risk while credit performance is strong; (iii) elevated interest rate risk due to lower rates continuing to compress net interest margins; and (iv) strategic risks from non-depository financial institutions, use of innovative and evolving technology and progressive data analysis capabilities. The Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls.
Privacy and Cybersecurity
The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers. These laws require the Bank to periodically disclose their privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.
Branching Authority
Illinois banks, such as the Bank, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or acquire individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.
Transaction Account Reserves
Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2020, the first $16.9 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating between $16.9 million to $127.5 million, the reserve requirement is 3% of those transaction account balances; and for net transaction accounts in excess of $127.5 million, the reserve requirement is 10% of the aggregate amount of total transaction account balances in excess of $127.5 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.
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Community Reinvestment Act Requirements
The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.
Anti-Money Laundering
The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The USA Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.
Concentrations in Commercial Real Estate
Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2019, the Bank did not exceed these guidelines.
Consumer Financial Services
The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10.0 billion in assets, and that will include the Bank when its assets exceed that amount. In the meantime, as long as the Bank is an FDIC-insured institution with $10.0 billion or less in assets, it will continue to be examined by the applicable bank regulators. The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.
Regulation of First Busey Risk Management
First Busey Risk Management, incorporated in Nevada, is a captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Busey Risk Management is subject to regulations of the State of Nevada and periodic examinations by the Nevada Division of Insurance.
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Executive Officers
Following is a description of the business experience for at least the past five years of our executive officers.
Van A. Dukeman. Mr. Dukeman, age 61, has served as a Director, Chief Executive Officer and President of First Busey since August 2007. Prior to August 2007, Mr. Dukeman served as a Director, Chief Executive Officer and President of Main Street Trust, Inc. (“Main Street Trust”) from May 1998 until its merger with First Busey.
Curt A. Anderson. Mr. Anderson, age 64, currently serves as President of Busey Wealth Management, a division of Busey Bank. Prior to that appointment, he had served as President and Chief Executive Officer of Busey Wealth Management, Inc. from February 2016 to October 2018 and as Executive Vice President and Senior Managing Director at Busey Wealth Management, Inc. since 2007.
Robin N. Elliott. Mr. Elliott, age 43, was appointed President and Chief Executive Officer of Busey Bank in April 2019. Prior to that, he served as Chief Operating Officer of First Busey since February 2016 and Chief Financial Officer of First Busey since January 2014. Mr. Elliott had previously served as Director of the Business Banking Group of Busey Bank since November 2011. Prior to that appointment, he had served as Director of Finance & Treasury since joining the organization in 2006.
Jeffrey D. Jones. Mr. Jones, age 46, was appointed Chief Financial Officer of First Busey in July 2019. Prior to that, he was Co-Head of the US Depository Group and Head of Depository Investment Banking with Stephens, Inc., since 2015.
Howard F. Mooney II. Mr. Mooney, age 55, has served as President and Chief Executive Officer of FirsTech Inc., our payment processing subsidiary, since 2000. In addition, Mr. Mooney has served as Chief Information Officer of First Busey since January 1, 2014. Prior to our August 2007 merger, FirsTech was a subsidiary of Main Street Trust.
Robert F. Plecki, Jr. Mr. Plecki, age 59, has served as Chief Credit Officer of First Busey since March 2010. Mr. Plecki previously served as President & Chief Executive Officer of Busey Wealth Management, Inc. from October 2013 until February 2016 and Chief Operating Officer of First Busey from October 2012 until February 2016. Prior to March 2010, he had served as Executive Vice President of our southwest Florida market since early 2009. Prior to that he served as Executive Vice President of our Champaign-Urbana market following First Busey’s merger with Main Street Trust in 2007, and, prior to the merger, had served as President of Main Street Bank & Trust Retail Banking since 2004.
John J. Powers. Mr. Powers, age 64, has served as General Counsel of First Busey since December 2011. Prior to that, he was a shareholder of Meyer Capel, P.C., a law firm based in Champaign, Illinois, since 1998.
Amy L. Randolph. Mrs. Randolph, age 45, was appointed Chief of Staff in April 2017. Prior to that appointment she served as Executive Vice President and Chief Brand Officer since March 2014. Prior to March 2014, she served as Senior Vice President of Growth Strategies since 2008.
Employees
As of December 31, 2019, First Busey and its subsidiaries had a total of 1,531 employees (full-time equivalents).
Securities and Exchange Commission Reporting and Other Information
First Busey’s website address is www.busey.com. We make available on this website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, as soon as reasonably practicable after such reports are filed or furnished with the SEC, and in any event, on the same day as such filing with the SEC. Reference to this website does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document. First Busey has adopted a code of ethics applicable to our employees, officers, and directors. The text of this code of ethics may be found under “Investor Relations” on our website.
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Non-GAAP Financial Information
This Annual Report on Form 10-K contains certain financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). These measures include adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, 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 direct compared GAAP financial measures, specifically net income in the case of adjusted net income, adjusted earnings per share and adjusted return on average assets, total net interest income in the case of adjusted net interest margin, total non-interest income and total non-interest expense in the case of 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 (dollars in thousands, except per share data). The Company believes the adjusted measures are useful for investors and management to understand the effects of certain non-recurring non-interest items and provides additional perspective on the Company’s performance over time as well as comparison to the Company’s peers.
These non-GAAP disclosures have inherent limitations and are not audited. They should not be considered in isolation or as a substitute for the results reported in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Tax effected numbers included in these non-GAAP disclosures are based on estimated statutory rates and effective rates as appropriate.
Reconciliation of Non-GAAP Financial Measures — Adjusted Net Income, Adjusted Earnings Per Share and Return on Average Assets
Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||
| 2019 | 2018 |
| 2017 | ||||||
Net income | $ | 102,953 | $ | 98,928 | $ | 62,726 | ||||
Acquisition expenses |
|
|
|
|
|
| ||||
Salaries, wages, and employee benefits |
| 4,083 |
| 1,233 |
| 840 | ||||
Data processing |
| 1,523 |
| 406 |
| 2,616 | ||||
Lease or fixed asset impairment |
| 580 |
| — | — | |||||
Other (includes professional and legal) | 8,477 | 2,486 |
| 3,617 | ||||||
Other restructuring costs |
|
|
|
|
|
| ||||
Salaries, wages, and employee benefits |
| 495 |
| 1,058 |
| 711 | ||||
Data processing | 827 | — | — | |||||||
Fixed asset impairment | 1,861 | 817 | — | |||||||
Other (includes professional and legal) |
| 2,248 |
| — |
| 66 | ||||
Related tax benefit | (4,618) | (1,451) | (3,012) | |||||||
Tax Cuts and Jobs Act (the "TCJA") related adjustment |
| — |
| — |
| 8,098 | ||||
Adjusted net income | $ | 118,429 | $ | 103,477 | $ | 75,662 | ||||
Dilutive average common shares outstanding | 55,132,494 | 49,215,455 | 43,126,245 | |||||||
Reported: Diluted earnings per share | $ | 1.87 | $ | 2.01 | $ | 1.45 | ||||
Adjusted: Diluted earnings per share | 2.15 | 2.10 | 1.75 | |||||||
Average total assets | $ | 9,443,690 | $ | 7,742,142 | $ | 6,294,105 | ||||
Reported: Return on average assets |
| 1.09 | % |
| 1.28 | % |
| 1.00 | % | |
Adjusted: Return on average assets |
| 1.25 | % |
| 1.34 | % |
| 1.20 | % | |
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Reconciliation of Non-GAAP Financial Measures — Adjusted Net Interest Margin
Year Ended |
| |||||||||
| December 31, |
| December 31, |
| December 31, |
| ||||
| 2019 | 2018 | 2017 |
| ||||||
Reported: Net interest income | $ | 287,223 | $ | 241,406 | $ | 203,366 | ||||
Tax-equivalent adjustment |
| 3,013 |
| 2,258 |
| 3,656 | ||||
Purchase accounting accretion |
| (12,422) |
| (10,550) |
| (12,458) | ||||
Adjusted: Net interest income | $ | 277,814 | $ | 233,114 | $ | 194,564 | ||||
Average interest-earning assets | $ | 8,590,262 | $ | 7,067,710 | $ | 5,784,408 | ||||
Reported: Net interest margin |
| 3.38 | % |
| 3.45 | % |
| 3.58 | % | |
Adjusted: Net Interest margin | 3.23 | % | 3.30 | % | 3.36 | % | ||||
Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio
| Year Ended | |||||||||
December 31, | December 31, | December 31, | ||||||||
2019 |
| 2018 |
| 2017 | ||||||
Reported: Net Interest income | $ | 287,223 | $ | 241,406 | $ | 203,366 | ||||
Tax-equivalent adjustment |
| 3,013 |
| 2,258 |
| 3,656 | ||||
Tax-equivalent interest income | $ | 290,236 | $ | 243,664 | $ | 207,022 | ||||
Reported: Non-interest income |
| 116,415 |
| 89,993 |
| 84,474 | ||||
Net (losses) gains on sales of securities and unrealized (losses) gains recognized on equity securities |
| (18) |
| 331 |
| 1,143 | ||||
Adjusted: Non-interest income | $ | 116,433 | $ | 89,662 | $ | 83,331 | ||||
Reported: Non-interest expense |
| 258,794 |
| 193,043 |
| 174,426 | ||||
Amortization of intangible assets |
| (9,547) |
| (5,854) |
| (5,245) | ||||
Non-operating adjustments: |
|
|
|
| ||||||
Salaries, wages, and employee benefits |
| (4,578) |
| (2,291) |
| (1,551) | ||||
Data processing |
| (2,350) |
| (406) |
| (2,616) | ||||
Other |
| (13,166) |
| (2,858) |
| (3,683) | ||||
Adjusted: Non-interest expense | $ | 229,153 | $ | 181,634 | $ | 161,331 | ||||
Reported: Efficiency ratio |
| 61.29 | % |
| 56.16 | % |
| 58.27 | % | |
Adjusted: Efficiency ratio |
| 56.35 | % |
| 54.49 | % |
| 55.56 | % | |
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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 | |||||||
| December 31, |
| December 31, |
| |||
| 2019 |
| 2018 |
| |||
Total Assets | $ | 9,695,729 | $ | 7,702,357 | |||
Goodwill and other intangible assets, net |
| (373,129) |
| (300,558) | |||
Tax effect of other intangible assets, net |
| 17,247 |
| 8,547 | |||
Tangible assets | $ | 9,339,847 | $ | 7,410,346 | |||
Total stockholders’ equity |
| 1,220,434 |
| 994,964 | |||
Goodwill and other intangible assets, net |
| (373,129) |
| (300,558) | |||
Tax effect of other intangible assets, net |
| 17,247 |
| 8,547 | |||
Tangible common equity | $ | 864,552 | $ | 702,953 | |||
Ending number of common shares outstanding | 54,788,772 | 48,874,836 | |||||
Tangible common equity to tangible assets(1) |
| 9.26 | % |
| 9.49 | % | |
Tangible book value per share | $ | 15.46 | $ | 14.21 | |||
Average stockholders’ common equity | $ | 1,186,127 | $ | 954,949 | |||
Average goodwill and other intangible assets, net |
| (371,666) |
| (303,917) | |||
Average tangible stockholders’ common equity | $ | 814,461 | $ | 651,032 | |||
Reported: Return on average tangible common equity |
| 12.64 | % |
| 15.20 | % | |
Adjusted: Return on average tangible common equity(2) |
| 14.54 | % |
| 15.89 | % | |
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Special Cautionary Note Regarding Forward-Looking Statements
Statements contained in or incorporated by reference into this Annual Report on Form 10-K that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. These forward-looking statements are covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain assumptions and estimates and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim” and similar expressions. These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, our business and growth strategies and any other statements that are not historical facts.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. Factors that could have a material adverse effect on our financial condition, results of operations and future prospects can be found under Item 1A “Risk Factors” in this Annual Report on Form 10-K and elsewhere in our periodic and current reports filed with the SEC. These factors include, but are not limited to, the following:
| ● | the strength of the local, state, national and international economy (including the impact of the 2020 presidential election and the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations); |
| ● | changes in state and federal laws, regulations and governmental policies concerning First Busey’s general business; |
| ● | changes in interest rates and prepayment rates of First Busey’s assets (including the impact of The London Inter-bank Offered Rate (“LIBOR”) phase-out); |
| ● | increased competition in the financial services sector and the inability to attract new customers; |
| ● | changes in technology and the ability to develop and maintain secure and reliable electronic systems; |
| ● | the loss of key executives or employees; |
| ● | changes in consumer spending; |
| ● | unexpected results of current and/or future acquisitions, which may include failure to realize the anticipated benefits of the acquisition and the possibility that the transaction costs may be greater than anticipated; |
| ● | unexpected outcomes of existing or new litigation involving First Busey; |
| ● | the economic impact of any future terrorist threats or attacks, widespread disease or pandemics, or other adverse external events that could cause economic deterioration or instability in credit markets; |
| ● | the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards; |
| ● | changes in accounting policies and practices, including FASB’s new Current Expected Credit Loss impairment standards (“CECL”), that will change how the Company estimates credit losses; and |
| ● | other factors and risks described under “Risk Factors” herein. |
Because of those risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of our future results.
You should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. We are not undertaking an obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under federal securities law. We qualify all of our forward-looking statements by these cautionary statements.
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Item 1A. Risk Factors
This section highlights the risks management believes could adversely affect our financial performance. Additional possible risks that could affect the Company adversely and cannot be predicted may arise at any time. Other risks that are immaterial at this time may also have an adverse impact on our future financial condition.
Economic and Market Risks
Conditions in the financial market and economic conditions, including conditions in the states in which it operates, generally may adversely affect the Company’s business.
The Company’s general financial performance is highly dependent upon the business environment in the markets where it operates and, in particular, the ability of borrowers to pay interest on and repay principal of outstanding loans and value of collateral securing those loans, as well as demand for loans and other products and services it offers. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a combination of these or other factors.
While economic conditions have both improved and stabilized since the 2008-2009 recession, there can be no assurance that either improvement or stability will continue. Uncertainty regarding continuing economic conditions may result in changes in consumer and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of the Company’s loans, our financial condition and results of operations. In addition, there is potential for an increasing federal government debt burden to negatively impact long-term financial stability. U.S. federal government debt held by the public stood at 79% of gross domestic product as of September 2019. The Congressional Budget Office projects that debt burden could increase in an accelerating manner in the coming decades, the impacts of which could include higher interest rates which can lead to slower economic growth, a decrease in government investment as well as a diminished demand for U.S. Treasury bonds. International financial events including slowing economic growth in the euro area and China and the potential for disorderly withdrawal of the United Kingdom from the European Union could have a direct impact on U.S. markets and consumers.
The Company’s financial performance is also affected by the condition of the markets in which it conducts business. The Company currently conducts its banking operations in downstate Illinois, the Southwest suburbs of Chicago, Illinois, the St. Louis, Missouri metropolitan area, central Indiana and southwest Florida. The financial condition of the State of Illinois, in which the largest portion of the Company’s customer base resides, is characterized with low credit ratings, pension under-funding, budget deficits and lower job growth rates than most of the country. The Company operates in markets with significant university and healthcare presence, which rely heavily on state and federal funding and contracts. Payment delays by the State of Illinois to its vendors and government-sponsored entities as well as potential federal changes to healthcare laws could affect the Company’s primary market areas, which could in turn adversely affect its financial condition and results of operations. Downturns in markets where banking operations occur could result in a decrease in demand for the Company’s products and services, an increase in loan delinquencies and defaults, high or increased levels of problem assets and foreclosures and reduced wealth management fees resulting from lower asset values.
Market volatility and changes in interest rates could have an adverse effect on the Company.
In certain recent periods, the capital and credit markets experienced heightened volatility and disruption. In some cases, the markets produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial condition or performance. Conversely, significant increases in the stock markets can also have destabilizing effects. If the capital and credit markets experience these types of heightened levels of disruption and volatility again, both the Company and its customers’ ability to maintain or access capital could be adversely affected which could have an impact on the Company’s business, financial condition and results of operations.
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Changes in interest rates could affect the level of assets and liabilities held on the Company’s balance sheet and the revenue that the Company earns from net interest income, as earnings and profitability depend significantly on our net interest income. Net interest income represents the difference between interest income and fees earned on interest-earning assets such as loans and investment securities and interest expense incurred on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies, including the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect the Company’s ability to originate loans and obtain deposits and the fair value of the Company’s financial assets and liabilities. In addition, a rise in interest rates could result in decreased demand for first mortgages as well as mortgage refinancing, activities which have historically contributed to a significant portion of the Company’s mortgage revenue. Furthermore, if the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and investment securities, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Finally, when interest rates rise, competition for deposits often increases, which can lead to a change in the Company’s funding mix and cost of funding. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company’s wealth management business may also be negatively impacted by changes in general economic conditions and the conditions in the financial and securities markets, which could affect the values of assets held under care. Management contracts generally provide for fees payable for wealth management services based on the market value of assets under care. Because most of the Company’s contracts provide for a fee based on market values of securities, declines in securities prices may have an adverse effect on the Company’s results of operations from this business. Market declines and reductions in the value of customers' wealth management accounts, could also result in the loss of wealth management customers, including those who are also banking customers.
The recent interest rate cuts by the Federal Reserve have led to the potential for higher inflation and financial instability driven by low borrowing costs that could have a negative effect on financial markets.
The Federal Reserve cut rates in 2019 as it sought to offset risks to an otherwise healthy economy exposed to trade uncertainty and slowing global economic growth. The rate cuts were generally supported by most central banks. However, there is potential that the rate cuts could pose additional risks to the economy primarily through higher inflation and financial-stability concerns driven by low borrowing costs. There is a possibility that labor markets could tighten causing inflationary pressures to build faster than the expected gradual pace. There is additional risk that persistently low interest rates could lead consumers and firms to take on riskier financial investments in search of better returns, increasing asset prices to unsustainable levels. The potential rise in asset prices to unsustainable levels could pose potential financial-stability risks in the commercial real estate and corporate borrowing sectors. Sustained low interest rate periods were something that preceded the 1990 and 2007 recessions, placing significant pressure on real estate asset prices through reach-for-yield investor behavior.
The transition to an alternative reference rate could cause instability and have a negative effect on financial market conditions.
LIBOR represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. Beginning in 2008, concerns were expressed that some of the member banks surveyed by the British Bankers’ Association in connection with the calculation of LIBOR rates may have been under-reporting or otherwise manipulating the interbank lending rates applicable to them. Regulators and law enforcement agencies from a number of governments have conducted investigations relating to the calculation of LIBOR across a range of maturities and currencies. If manipulation of LIBOR or another inter-bank lending rate occurred, it may have resulted in that rate being artificially lower (or higher) than it otherwise would have been. Responsibility for the calculation of LIBOR was transferred to ICE Benchmark Administration Limited, as independent LIBOR administrator, effective February 1, 2014.
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On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021 (the “July 27th Announcement”). The July 27th Announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has proposed a paced-market transition plan to SOFR from U.S. dollar-LIBOR and organizations are working on industry-wide and company-specific transition plans relating to derivatives and cash markets exposed to LIBOR.
At this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark, whether SOFR or another rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the value of LIBOR-linked securities.
Although the Financial Stability Oversight Council has recommended a transition to an alternative reference rate in the event LIBOR is no longer available after 2021, such plans are still in development and, if enacted, could present challenges. Moreover, contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties. The downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact the financial markets and individual institutions. The uncertainty surrounding the sustainability of LIBOR more generally could undermine market integrity and threaten individual financial institutions and the U.S. financial system more broadly.
The Company could recognize losses on debt securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
Factors beyond the Company’s control may significantly influence the fair value of securities in its investment portfolio and may cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by the Company are generally subject to decreases in market value when interest rates rise. A change in the fair value of securities could cause an other-than-temporary impairment (“OTTI”) in future periods and result in realized losses.
The process for determining whether a security has experienced OTTI usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
Downgrades in the credit ratings of one or more insurers that provide credit enhancements for the Company’s state and municipal securities portfolio may have an adverse impact on the market for and valuation of these types of securities.
The Company invests in tax-exempt state and local municipal securities, some of which are insured by monoline insurers. In recent years, several of these insurers have come under scrutiny by rating agencies. Even though management generally purchases municipal securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of the Company’s investment securities. A downgrade or a default by an issuer could adversely affect the Company’s liquidity, financial condition and results of operations.
Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.
The U.S. government continues to engage in trade negotiations with certain foreign countries or entities including Mexico, Canada, China, and the European Union. The U.S. government previously implemented tariffs on certain
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products while foreign entities or countries have issued or continue to threaten retaliatory tariffs against products from the U.S., including agricultural products. Additional tariffs and retaliatory tariffs may be imposed in the future by the U.S. and these and other countries. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer’s margins, and adversely impact their revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.
Regulatory and Legal Risks
The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.
At this time, it is difficult to predict future legislative and regulatory changes. Although both the President and senior members of Congress have advocated for and successfully passed some reductions of financial services regulation, exactly which regulatory changes will be pursued in the future, as well as the timing and extent of regulatory changes that could be enacted, remains uncertain. New appointments to the Board of Governors of the Federal Reserve may affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.
As the Company continues to grow in asset size and complexity, regulatory expectations and scrutiny will likely increase and could have a potential impact on the Company’s operations and business.
The Company has grown steadily over the past 5 years, increasing through both organic growth and strategic acquisitions. Further, in 2019, the Company began operations of First Busey Risk Management, a captive insurance company. As financial institutions grow, so do the expectations of regulatory agencies regarding the financial institution’s ability to control for increasingly complex and sophisticated business operations. Certain regulations and laws have embedded asset thresholds that change regulatory expectations, have different financial statement impacts, require different committee and management compositions, or enhanced reporting requirements. For example, the Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that banks with assets of $10.0 billion or more may charge to process electronic debit transactions. Banks must begin complying with the Durbin Amendment no later than July 1 of the next calendar year after the bank crosses the $10.0 billion threshold. While we do not currently have $10.0 billion or more in total consolidated assets, we have begun analyzing these requirements to ensure we are prepared to comply with the rules when and if they become applicable. There is potential that changes in the regulatory expectations from asset growth could impact the business operationally, strategically, or financially.
Legislative and regulatory reforms applicable to the financial services industry, as well as heightened focus on particular regulations, may have a significant impact on the Company’s business, financial condition and results of operations.
The laws, regulations, rules, policies and regulatory interpretations governing the Company continue to evolve and will likely continue to change over time as Congress and various regulatory agencies react to adverse economic conditions or other matters. The global financial crisis of 2008-2009 served as a catalyst for a number of significant changes in the financial services industry, including the Dodd-Frank Act, which reformed the regulation of financial institutions in a comprehensive manner, and the Basel III regulatory capital reforms, which increase both the amount and quality of capital that financial institutions must hold. The implementation of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of the Company’s business activities and may change certain business practices, including the ability to offer new products, obtain financing, attract deposits, make
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loans, and achieve satisfactory interest spreads, and could expose the Company to additional expense, including increased compliance costs.
These rule and regulatory changes may also require the Company to invest significant management attention and resources so as to make necessary changes to operations in order to comply. In addition to the expense and uncertainty related to increased regulation, the financial services industry in recent years has faced more intense scrutiny from regulatory agencies in the examination process and more aggressive enforcement of regulations on both the federal and state levels, particularly with respect to mortgage-related practices and other consumer compliance matters, and compliance with the Bank Secrecy Act, anti-money laundering laws, and the USA Patriot Act, which focuses on money laundering in the form of terrorist financing. Federal law grants substantial enforcement powers to financial services’ regulators including, among other things, the ability to assess significant civil or criminal monetary penalties, fines or restitution; to issue cease and desist orders; and to initiate injunctive actions against banking organizations. These enforcement actions may be initiated for violations of laws or regulations and for unsafe or unsound practices. If the Company were the subject of an enforcement action, it could have an adverse impact on the Company.
Evolving law impacting cannabis-related businesses in Illinois may have an impact on the Company’s operations and risk profile.
The Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Starting January 1, 2020, however, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase marijuana for recreational use from licensed dispensaries. It is the Bank’s current practice to avoid knowingly providing banking products or services to entities or individuals that: (i) directly or indirectly manufacture, distribute, or dispense marijuana or hemp products, or those who have a significant financial interest in such entities; and (ii) derive a significant percentage of revenue from providing products or services to, or other involvement with, such entities. The Bank is taking reasonable measures, including appropriate new account screening and customer due diligence measures, to ensure that existing and potential customers do not engage in any such activities. Nonetheless, the shift in Illinois law is increasing the number of direct and indirect cannabis-related businesses in Illinois, and therefore increasing the likelihood that the Bank could interact with such businesses, as well as their owners and employees. Such interactions could create additional legal, regulatory, strategic, and reputational risk to the Bank and the Company.
Credit and Lending Risks
Heightened credit risk associated with lending activities may result in insufficient loan loss provisions, which could have material adverse effect on the Company’s results of operations and financial condition.
There are risks in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from economic and market conditions. The Company attempts to reduce its credit risk through loan application approval procedures, monitoring the concentration of loans within specific industries and geographic location, and periodic independent reviews of outstanding loans by its loan review and audit departments as well as external parties. However, while such procedures help reduce risks, they cannot be expected to completely eliminate the Company’s credit risks. Borrowers may experience difficulties in repaying their loans for any of a variety of reasons resulting in a rise in the level of nonperforming loans, charge-offs and delinquencies and/or a need for increases in the provision for loan losses.
The Company estimates and establishes reserves for loan losses and maintains them at a level considered adequate by management to absorb probable loan losses based on a continual analysis of the Company’s portfolio and market environment. These reserves represent the Company’s estimate of probable losses in the portfolio at each balance sheet date and are based upon other relevant information available.
In 2016, the FASB published CECL, which requires recording loss estimates for the life of the instrument for loans, a change from the 40-year standard in which losses are recorded under the “incurred loss” concept. CECL has taken effect for the Company beginning in 2020.
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Although management believes the reserves are adequate to absorb losses on existing loans that may become uncollectible, management cannot guarantee that additional provisions for loan losses will not be required in the future. Additional provision could be recorded, either as a result of management’s decision or as a requirement by regulators, to further supplement the reserve for loan losses, particularly if economic conditions unfold in a manner which differs significantly from what management currently expects. Additional provisions in excess of the Company’s current reserves may adversely affect its business, financial condition and results of operations.
Non-performing assets take significant time to resolve and adversely affect the Company’s results of operations and financial condition and could result in further losses in the future.
The Company’s non-performing assets adversely affect its net income in various ways. While the Company pays interest expense to fund non-performing assets, it does not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting its income and returns on assets and equity. In addition, loan administration costs increase and the Company’s efficiency ratio is adversely affected. When the Company takes collateral in foreclosures and similar proceedings, it is required to mark the collateral to its then-fair market value, which, when compared to the outstanding balance of the loan, may result in a loss. Non-performing loans and other real estate owned also increase the Company’s risk profile and the capital its regulators believe is appropriate in light of such risks. The resolution of non-performing assets requires significant time commitments from management, which can be detrimental to the performance of their other responsibilities. The Company cannot guarantee that it will not experience increases in non-performing loans in the future, and its non-performing assets may result in further losses in the future.
Concentrations of credit and market risk could increase the potential for significant losses.
The Company may have higher credit risk, or experience higher credit losses, to the extent its loans are concentrated by loan type, industry segment, borrower type, or geographic location of the borrower or collateral. A significant portion of the Company’s loan portfolio is made up of mortgage, commercial and industrial loans, and secured by real estate. Thus, deterioration in economic conditions or real estate values could result in higher credit costs and losses to the Company.
The Company’s commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, machinery or real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, which the Company requires whenever appropriate on commercial loans. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. As a result of the larger average size of each commercial loan as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on the Company’s financial condition and results of operations.
As previously noted, a significant portion of the Company’s loans are collateralized by real estate. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more markets could increase the credit risk associated with the Company’s loan portfolio and could result in losses which would adversely affect profitability. Mortgage loans in the Company’ portfolio with high loan-to-value ratios are more sensitive to declining property values and may experience a higher incident of default and severity of losses. Adverse changes in the economy affecting real estate values and liquidity generally, and in markets in which the Company has banking operations, could significantly impair the value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan which would result in losses.
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Credit risk associated with concentration of securities in the Company’s investment portfolio may increase the potential for loss.
The Company’s investment portfolio consists, in part, of securities issued by government or government sponsored agencies and non-government entities. A downturn in the financial condition of the issuers, the performance of the underlying collateral, or the financial condition of the individual mortgagors with respect to the underlying securities could create results such as rating agency downgrades of the securities and default by issuers or individual mortgagors. Any of the foregoing factors could cause an OTTI in future periods and result in realized losses, which could adversely affect the Company’s financial condition and results of operations.
Real estate construction, land acquisition and development loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and the Company may be exposed to significant losses on loans for these projects.
Construction, land acquisition, and development loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If the Company’s appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, there may be inadequate security for the repayment of the loan upon completion of construction of the project. If the Company is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that it will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, the Company may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while it attempts to dispose of it.
The Company’s exposure to home equity lines of credit may increase the potential for loss.
The Company’s mortgage loan portfolio consists, in part, of originated and purchased home equity lines of credit. A portion of home equity lines of credit are originated in conjunction with the origination of first mortgage loans eligible for sale in the secondary market, which the Company typically does not service if the loan is sold. By not servicing the first mortgage loans, the Company is unable to track the delinquency status which may indicate whether such loans are at risk of foreclosure by others. In addition, home equity lines of credit are initially offered as “revolving” lines of credit whereby the borrowers are only required to make scheduled interest payments during the initial terms of the loans, which is generally five years. Thereafter, the borrowers no longer have the ability to make principal draws from the lines and the loans convert to a fully-amortizing basis, requiring scheduled principal and interest payments sufficient to repay the loans within a certain period of time, which is generally 10 years. The conversion of a home equity line of credit to a fully amortizing basis presents an increased level of default risk to us since the borrower no longer has the ability to make principal draws on the line, and the amount of the required monthly payment could substantially increase to provide for scheduled repayment of principal and interest.
Capital and Liquidity Risks
The Company is required to maintain capital to meet regulatory requirements, and if it fails to maintain sufficient capital, whether as a result of losses, inability to raise additional capital or otherwise, its financial condition, liquidity, and results of operations, as well as its ability to maintain regulatory compliance would be adversely affected.
First Busey and Busey Bank must meet regulatory capital requirements and maintain sufficient liquidity. The Company’s ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside the Company’s control, and on its financial
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condition and performance. Accordingly, the Company cannot guarantee that it will be able to raise additional capital if needed or on terms acceptable to the Company. If it fails to meet these capital and other regulatory requirements, its financial condition, liquidity and results of operations would be materially and adversely affected.
The Company’s failure to continue to maintain capital ratios in excess of the amounts necessary to be considered “well-capitalized” for bank regulatory purposes could affect customer confidence, its ability to grow, its costs of funds and FDIC insurance costs, its ability to pay dividends to its stockholders or on outstanding stock, its ability to make acquisitions, and its business, results of operations and financial condition. Furthermore, under FDIC rules, if the Company ceases to meet the requirements to be considered a “well-capitalized” institution for bank regulatory purposes, the interest rates it pays on deposits and its ability to accept, renew or rollover deposits, particularly brokered deposits, may be restricted.
Liquidity risks could affect operations and jeopardize the Company’s business, financial condition and results of operations.
Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on liquidity. The Company’s primary sources of funds consist of deposits and funds from sales of investment securities, investment maturities and sales, and cash from operations. Additional liquidity is available through repurchase agreements, brokered deposits, and the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank (“FHLB”). Access to funding sources in amounts adequate to finance or capitalize the Company’s activities or on terms that are acceptable to the Company could be impaired by factors that affect it directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
During periods of economic turmoil, the financial services industry and the credit markets generally may be materially and adversely affected by significant declines in asset values and depressed levels of liquidity. These and other factors could negatively affect the Company’s ability to engage in routine funding and other transactions with other financial institutions, lead to market-wide liquidity problems, loss of depositor, creditor, and counterparty confidence, which could lead to losses or defaults by the Company or by other institutions. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size, limited analyst coverage, and lack of credit rating resulting from significant expense required to obtain it.
Any decline in available funding and/or capital could adversely impact the Company’s ability to originate loans, invest in securities, meet its expenses, pay dividends to its stockholders, or meet deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations.
The soundness of other financial institutions could negatively affect the Company.
The Company’s ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by the Company or by other institutions. The Company could experience growth as a result of the difficulties or failures of other banks or government-sponsored financial institutions, which would increase its funding needs.
In addition, a prolonged period of illiquidity in the secondary mortgage market, and an increase in interest rates, could reduce the demand for residential mortgage loans and increase investor yield requirements for those loans. As a result, the Company may be at higher risk of retaining a larger portion of mortgage loans than in other environments until they are sold to investors. The Company’s ability to retain fixed-rate residential mortgage loans is limited and could result in a reduction of loan production volumes, which could have a material adverse effect on our financial condition and results of operations.
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Competitive and Strategic Risks
If securities or industry analysts do not publish or cease publishing research reports about us, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, the price of our stock could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If there is limited or no securities or industry analyst coverage of us, the market price for our stock would be negatively impacted. Moreover, if any of the analysts who elect to cover us downgrade our common stock, provide more favorable relative recommendations about our competitors or if our operating results or prospects do not meet their expectations, the market price of our common stock may decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
The Company faces strong competition from financial service companies and other companies that offer banking and wealth management services, which could harm its business.
The Company currently conducts its banking operations in downstate Illinois, the Southwest suburbs of Chicago, Illinois, St. Louis, Missouri metropolitan area, central Indiana and southwest Florida. In addition, the Company currently offers fiduciary and wealth management services, which account for a significant portion of its non-interest income. Many competitors offer the same, or a wider variety of, banking and wealth management services within the Company’s market areas. These competitors include national banks, regional banks and other community banks. The Company also faces competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and online lenders, and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in the Company’s market areas. Also, technology and other changes have lowered barriers to entry and made it possible for non-banks, or financial technology companies, to offer products and services traditionally provided by banks. For example, customers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Customers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Increased competition in the Company’s markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, the Company may not be able to compete successfully against current and future competitors. If the Company is unable to attract and retain banking and wealth management customers, it may be unable to grow its loan and deposit portfolios or its wealth management commissions, which could adversely affect its business, results of operations and financial condition.
Rapid speed of disruptive innovations enabled by new and emerging technologies and/or other market forces may outpace the Company’s ability to compete.
Many well-established industries are experiencing significant disruptions created by advances in technologies and changing customer requirements and expectations, thus the ability to quickly recognize the change, and then respond and adapt becomes critical to long-term sustainability. If the Company’s culture does not sufficiently encourage the timely identification and escalation of emerging risk issues, these risks have the potential to significantly affect our core operations and achievement of strategic objectives. Similarly, cultural resistance to change may restrict the Company from making the necessary adjustments to the business model and core operations to remain competitive. Inability to utilize data analytics and “big data” to achieve market intelligence and increase productivity and efficiency could also significantly affect our operations. Ultimately, if we fall behind in our ability to be adaptive and innovative, sustaining customer loyalty and retention may be increasingly difficult as a result of evolving customer preferences and/or demographic shifts in our existing customer base.
30
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could negatively affect us.
To help us fulfill our strategic objectives and enhance our earnings, part of our strategy is to supplement organic growth by acquiring other financial institutions in our market areas and in nearby markets. As our capital position and asset quality allow, we may again supplement organic growth through acquisitions, as we did with recent acquisitions. There are risks associated with an acquisition strategy, including the following:
| ● | We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings and financial condition may be materially and adversely affected. |
| ● | Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices our management considered acceptable and expect that we will experience this condition in the future in one or more markets. |
| ● | The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity in order to make the transaction economically feasible. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. Furthermore, the integration of personnel can be challenging and the likelihood of turnover of personnel from acquired institutions presents potential risks to both operational efficiency as well as customer retention. The Company may also experience greater than anticipated customer losses even if the integration process is successful. |
| ● | We are subject to due diligence expenses which may not result in an acquisition. |
| ● | To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or issue capital stock to the sellers in an acquisition or to third-parties to raise capital, which could dilute the interests of our existing stockholders. |
| ● | The time period in which anticipated benefits of a merger are fully realized may take longer than anticipated, or we may be unsuccessful in realizing the anticipated benefits from mergers and future acquisitions. |
New lines of business or new products and services may subject us to additional risks.
From time to time, we may seek to implement new lines of business or offer new products, services or delivery channels within existing lines of business in our current markets or new markets. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results.
Accounting and Tax Risks
Financial statements are created, in part, by assumptions and methods used by management, which, if incorrect, could cause unexpected losses in the future.
The Company’s financial performance is impacted by accounting principles, policies and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of assets or liabilities and financial results. Certain accounting policies are critical and require management to make difficult, subjective and complex
31
judgments about matters that are inherently uncertain, and materially different amounts could be reported under different conditions or using different assumptions. If such estimates or assumptions underlying the Company’s Consolidated Financial Statements are incorrect, the Company may experience material losses.
One such assumption and estimate is the valuation analysis of its goodwill and other intangible assets. Although the Company’s analysis does not indicate impairments exist; the Company is required to perform additional impairment assessments on at least an annual basis, and perhaps more frequently, which could result in further impairment charges. Any future goodwill or other intangible assets impairment charges, based on the current balances or future balances arising out of acquisitions, could have a material adverse effect on the results of operations by reducing net income or increasing net losses.
The Company is subject to changes in accounting principles, policies or guidelines.
Periodically, agencies such as the FASB or the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of the Company’s Financial Statements. These changes are beyond the Company’s control, can be difficult to predict and could materially impact how the Company reports its financial condition and results of operations. Changes in these standards are continuously occurring and the implementation of such changes could have a material adverse effect on the Company’s financial condition and results of operations.
In 2016, the FASB published CECL, which requires recording loss estimates for the life of the instrument for loans and held-to-maturity investment securities. This is a change from the 40-year standard in which losses are recorded under the “incurred loss” concept. The CECL methodology estimates losses in consideration of a reasonably foreseeable economic forecast. CECL has taken effect for the Company beginning in 2020 and could introduce significant earnings volatility compared to the “incurred loss” concept. The ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, loan origination volumes, originated and acquired loan portfolio composition, portfolio duration, and other factors.
The Company is subject to changes in tax law and may not realize tax benefits which could adversely affect our results of operations.
Changes in tax laws at national or state levels could have an effect on the Company’s short-term and long-term earnings. Tax law changes are both difficult to predict and are beyond the Company’s control. Changes in tax laws could affect the Company’s earnings as well as its customers’ financial positions, or both.
Deferred tax assets are designed to reduce subsequent period’s income tax expense and arise, in part, as a result of net loss carry-overs, and other book accounting to tax accounting differences including expected credit losses, stock-based compensation, and deferred compensation. Such items are recorded as assets when it is anticipated the tax consequences will be recorded in future periods. A valuation allowance is established against a deferred tax asset when it is unlikely the future tax effects will be realized. Significant judgment by management about matters that are by nature uncertain is required to record a deferred tax asset and establish a valuation allowance.
In evaluating the need for a valuation allowance, the Company estimates future taxable income based on management forecasts and tax planning strategies that may be available to us. While the Company has determined that no valuation allowance is currently required for any deferred tax assets, if future events differ significantly from our current forecasts, it may need to establish a valuation allowance against its net deferred tax assets, which would have a material adverse effect on its results of operations and financial condition. In addition, current portions of the net deferred tax assets relate to tax effected state net operating loss carry-forward, the utilization of which may be further limited in the event of certain material changes in the Company’s ownership.
In addition, changes in ownership could further limit the Company’s realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses and may be limited by Section 382 of the Internal Revenue Code. If the Company undergoes an ownership change, its ability to use net operating loss carry-forwards, tax credit carry-forwards
32
or net unrealized built-in losses at the time of ownership change may be limited. The limitation may affect the amount of the Company’s deferred income tax asset and, depending on the limitation, a portion of its built-in losses.
Further, the Company invests in certain tax-advantaged projects promoting affordable housing, community development and other community revitalization projects. These projects are designed to generate return primarily though federal and state tax credits. The ultimate realization is dependent upon having sufficient taxable income and other factors outside of the Company’s control, including changes in tax laws and the ability of the projects to be completed.
Operational Risks
The Company relies on the integrity of its operating systems and employees, and those of third-parties and certain failures of such systems or error by employees or customers could materially and adversely affect the Company’s operations.
Communications and information systems are essential to conduct the Company’s business, as it uses such systems to manage customer transactions and relationships, the general ledger, and deposits, loans, and investments. However, the computer systems and network infrastructure the Company uses could be vulnerable to unforeseen problems as operations are dependent upon the protection of computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, cybersecurity attacks, viruses and other disruptive problems caused by hackers. The termination of a third-party software license or service agreement on which any of these systems is based could also interrupt our operations.
In addition, the Company outsources certain processing functions to third-party providers. If third-party providers encounter difficulties or if the Company has difficulty in communicating with them, the ability to adequately process and account for customer transactions may be affected and business operations may be adversely impacted. If third-party providers are unable to meet service expectations, experience system or processing failure, or incur disruptions affecting operations, results could adversely impact the Company. Moreover, it may be difficult for the Company to replace third party vendors, particularly vendors providing core banking and information services, in a timely manner if they are unwilling or unable to provide the Company with these services in the future or for any reason and, even if the Company is able to replace them, it may be at higher cost or result in the loss of customers. While the Company follows certain due diligence procedures in reviewing and vetting its third-parties, it cannot control their actions.
Although the Company has procedures in place to prevent or limit the effects of any of these potential problems and intends to continue to implement security technology and establish operational procedures to prevent such occurrences, technology-related disruptions, failures and cybersecurity risks are a constant threat, both for the Company and for the third-parties it works with. Therefore, it cannot guarantee that these measures will be successful. Any failure, interruption in, or breach in security of, its computer systems and network infrastructure, as well as those of its customers engaging in internet banking activities or electronic funds transfers, could damage its reputation, result in a loss of customer business, subject it to additional regulatory scrutiny, or expose it to civil litigation and possible financial liability, any of which could have a material adverse effect on its financial condition and results of operations.
Similarly, the Company is reliant upon its employees. Such dependencies create risks for potential losses resulting from employee errors, breakdowns in process or control, failures to properly execute change management, negligence, or a number of other factors outside the Company’s control. The Company maintains a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, customer or employee fraud and other disruptions which might impact its business. In addition, the Company’s Internal Audit department routinely reviews operations and high-risk areas for error, deficient controls, and failure to adhere to policy.
Potential legal actions, fines and civil money penalties could arise as results of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.
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A breach in the security of the Company’s systems could disrupt its businesses, result in the disclosure of confidential information, damage its reputation and create significant financial and legal exposure for the Company.
Although the Company devotes significant resources to maintain and regularly upgrade systems and processes designed to protect the security of its computer systems, software, networks and other technology assets, these measures do not provide absolute security. Several financial services institutions, government agencies, retailers and other companies have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means.
Some companies in the U.S. have experienced well-publicized attacks from technically sophisticated and well-resourced third-parties that were intended to disrupt normal business activities by making internet banking systems inaccessible to customers for extended periods. These “denial-of-service” attacks may not have breached data security systems, but require substantial resources to defend, and may affect customer satisfaction and behavior. Even if not directed at the Company, attacks on financial or other institutions important to the overall functioning of the financial system could adversely affect, directly or indirectly, aspects of the Company’s businesses.
Threats to security also exist in the processing of customer information through various other third-parties, their personnel, and their use of subcontractors. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms the Company and its third-party service providers use to encrypt and protect customer transaction data. Such cyber incidents may go undetected for a period of time. An inability by our third-party providers to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our reputation, the incurrence of additional expenses, additional regulatory scrutiny or penalties or exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company’s customers through various third-parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Because card transactions involve third-parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third-parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them. Cyber-attacks or other breaches, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material adverse effect on the Company’s business.
Penetration or circumvention of the Company’s security systems could result in serious negative consequences for the Company, including significant disruption of the Company’s operations, misappropriation of confidential information of the Company or that of its customers or employees, or damage to computers or systems of the Company and those of its customers and counterparties. Such events could result in violations of applicable privacy and other laws, financial loss to the Company or its customers, loss of confidence in the Company’s security measures, customer dissatisfaction, significant litigation exposure and harm to the Company’s reputation, all of which would adversely affect the Company.
These risks have increased for all financial institutions globally as new technologies, the use of the Internet and telecommunications technologies, including mobile devices, to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. Despite the Company’s significant investment in security resources and its continued efforts to prevent or limit the effects of potential threats, it is possible that the Company may not be able to anticipate or implement effective preventative measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because security-related attacks can originate from a wide variety of sources, including organized crime, hackers, terrorists, activists, and other external parties, including parties sponsored by hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers, third-party service providers
34
or other users of the Company’s systems to disclose sensitive information in order to gain access to the Company’s data or that of its customers. These risks may increase in the future as the Company increases its mobile payments, internet-based product offerings, and expand its internal usage of web-based products and applications.
Customer or employee fraud may affect operations, result in significant financial loss, and have an adverse impact on the Company’s reputation.
Misconduct could subject the Company to financial losses or regulatory sanctions and seriously harm its reputation. Misconduct by employees and customers could include hiding unauthorized activities, conducting improper or unauthorized activities or improper use of confidential information. It is not possible to prevent all errors and misconduct, and the precautions the Company takes to prevent and detect this activity may not be effective in all cases.
Customer or other outsiders may also attempt to perpetuate fraud or scams in the form of identity theft, money laundering, fraudulent or altered deposits, or use of counterfeit instruments, as a few examples. The Company also faces fraud risk associated with the origination of loans, including the intentional misstatement of information in property appraisals or other underwriting documentation provided to it by customers or by third-parties. Customers may expose the Company to certain fraud risks associated with the compromise of their computing systems or accounts, as well.
Should the Company’s internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, such failures could adversely affect its business, results of operations and financial condition. Both the number and sophistication level of attempted fraudulent transactions are increasing. Should our internal controls fail to prevent or detect an occurrence of fraud, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company’s ability to attract and retain management and key personnel may affect future growth and earnings and legislation imposing new compensation restrictions could adversely affect its ability to do so.
Much of the Company’s success and growth has been influenced strongly by its ability to attract and retain management experienced in banking and financial services and familiar with the communities in its market areas. The Company’s ability to retain executive officers, current management teams, lending and retail banking officers, and administrative staff of its subsidiaries continues to be important to the successful implementation of its strategy. In addition, the Company’s ability to retain key personnel at acquired financial institutions is vitally important to the Company’s strategy to grow through mergers and acquisitions. Also critical is the Company’s ability to attract and retain qualified staff with the appropriate level of experience and knowledge about its market areas so as to implement its community-based operating strategy. The unexpected loss of services of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business, financial condition, and results of operation.
Damage resulting from negative publicity could harm the Company’s reputation and adversely impact its business and financial condition.
The Company’s ability to attract and maintain customers, investors, and employees is contingent upon maintaining trust. Negative public opinion could result from the Company’s actual or alleged conduct in a number of activities, including, but not limited to, employee misconduct, a failure or perceived failure to deliver appropriate standards of service and quality or to treat customers fairly, faulty lending practices, compliance failures, security breaches, corporate governance, sharing or inadequate protection of customer information, failure to comply with laws or regulations, and actions taken by government regulators and community organizations in response to that conduct. The results of such actual or alleged misconduct could include customer dissatisfaction, inability to attract potential acquisition prospects, litigation, and heightened regulatory scrutiny, all of which could lead to lost revenue, higher operating costs and harm to the Company’s reputation. No assurance can be made, despite the cost or efforts made by the Company to address the issues arising from reputational harm, that results could not adversely affect the Company’s business, financial condition, and results of operations.
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Severe weather, natural disasters, acts of terrorism or war, widespread disease or pandemics or other adverse external events could significantly impact the Company’s business.
As the Company’s operating and market footprint continues to grow, severe weather, natural disasters, acts of terrorism or war, widespread disease or pandemics and other adverse external events could have a significant impact on the Company’s ability to conduct business. The Company’s current footprint poses a wide variety of potential adverse events that could impact the Company in various ways. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company’s business, which in turn, could have a material adverse effect on the financial condition and results of operation.
The Company’s framework for managing risks may not be effective in mitigating risk and loss.
The Company’s risk management framework seeks to mitigate risk and loss. It has established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which it is subject, compliance risk and reputational risk, among others. However, as with any risk management framework, there are inherent limitations. Risks may exist, or emerge in the future, that have not been appropriately identified or anticipated. As it continues to grow, the Company’s ability to successfully identify and manage the risks it faces is an important factor that can significantly impact results. If its risk management framework proves ineffective, the Company could suffer unexpected losses and could be materially adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
First Busey and Busey Bank’s headquarters are located at 100 West University Avenue, Champaign, Illinois. FirsTech’s headquarters are located at 130 North Water Street, Decatur, Illinois. These facilities, which are owned by the Company, house the executive and primary administrative offices of each respective entity. First Busey and its subsidiaries also own or lease other facilities, such as banking centers of Busey Bank, for business operations.
The Company considers its properties to be suitable and adequate for its present needs. None of the properties are subject to any material encumbrance.
Item 3. 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 4. Mine Safety Disclosures
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
First Busey’s common stock is traded on The Nasdaq Global Select Market under the symbol “BUSE.”
The Company’s board of directors and management are currently committed to continue paying regular cash dividends; however, no guarantee can be given with respect to future dividends, as they are dependent on certain regulatory restrictions, future earnings, capital requirements and financial condition of the Company and its subsidiaries. See “Item 1. Business—Supervision, Regulation and Other Factors—Regulation and Supervision of Company—Dividend Payments and Regulation” and “Item 1. Business—Supervision, Regulation and Other Factors—Regulation and Supervision of Busey Bank—Dividend Payments” for further discussion of these matters.
As of February 27, 2020, First Busey Corporation had 54,541,061 shares of common stock outstanding held by 2,301 holders of record. Additionally, there were an estimated 10,269 beneficial holders whose stock was held in street name by brokerage houses and nominees as of that date.
Stock Repurchases
On February 3, 2015, First Busey’s board of directors authorized the Company to repurchase up to an aggregate of 666,667 shares of its common stock. The repurchase plan has no expiration date and replaced the prior repurchase plan originally approved in 2008. On May 22, 2019, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by 1,000,000 shares. During the quarter, the Company repurchased 416,000 shares at an average price of $26.37 per share. At December 31, 2019, the Company had 389,938 shares that may still be purchased under the plan. Subsequent to year end, on February 5, 2020, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by 2,000,000 shares.
Period | Total number of shares purchased | Average price paid per share | Total 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 |
October 1-31, 2019 | 149,500 | $ 25.22 | 149,500 | 656,438 |
November 1-30, 2019 | 130,000 | $ 26.83 | 130,000 | 526,438 |
December 1-31, 2019 | 136,500 | $ 27.19 | 136,500 | 389,938 |
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Performance Graph
The following graph compares First Busey’s performance, as measured by the change in price of its common stock plus reinvested dividends, with the Nasdaq Composite and the SNL Midwest Bank Index for the five years ended December 31, 2019.
Index |
| 12/31/14 |
| 12/31/15 |
| 12/31/16 |
| 12/31/17 |
| 12/31/18 |
| 12/31/19 | ||||||
First Busey Corporation | $ | 100.00 | $ | 109.06 | $ | 167.98 | $ | 167.36 | $ | 140.77 | $ | 162.99 | ||||||
SNL Midwest Bank Index |
| 100.00 |
| 101.52 |
| 135.64 |
| 145.76 |
| 124.47 |
| 161.94 | ||||||
Nasdaq Composite |
| 100.00 |
| 106.96 |
| 116.45 |
| 150.96 |
| 146.68 |
| 200.49 | ||||||
The banks in the SNL Midwest Bank Index represent all Major Exchange Traded Banks in SNL’s coverage universe headquartered in Iowa, Illinois, Indiana, Kansas, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Nebraska, Ohio, South Dakota and Wisconsin.
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Item 6. Selected Financial Data
Selected Consolidated Financial Information
The following selected financial data (dollars in thousands, except per share data), as of and for each of the periods indicated, has been derived from First Busey’s audited Consolidated Financial Statements and the results of operations for each period. This financial data should be read in conjunction with the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included in this Annual Report. The Per Share Data provided below has been adjusted to reflect First Busey's one-for-three reverse stock split, which became effective on September 8, 2015 (the “Reverse Stock Split”). First Busey's periodic reports filed prior to the Reverse Stock Split have not been revised to reflect the Reverse Stock Split.
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| ||||||
Balance Sheet Items |
|
|
|
|
|
|
|
|
|
| ||||||
Securities available for sale | $ | 1,648,257 | $ | 697,685 | $ | 872,682 | $ | 759,811 | $ | 834,838 | ||||||
Securities held to maturity |
| — |
| 608,660 |
| 443,550 |
| 47,820 |
| 49,832 | ||||||
Loans held for sale |
| 68,699 |
| 25,895 |
| 94,848 |
| 256,319 |
| 9,351 | ||||||
Portfolio loans |
| 6,687,249 |
| 5,568,428 |
| 5,519,500 |
| 3,878,900 |
| 2,627,739 | ||||||
Allowance for loan losses |
| 53,748 |
| 50,648 |
| 53,582 |
| 47,795 |
| 47,487 | ||||||
Total assets |
| 9,695,729 |
| 7,702,357 |
| 7,860,640 |
| 5,425,170 |
| 3,998,976 | ||||||
Tangible assets(1) |
| 9,339,847 |
| 7,410,346 |
| 7,563,606 |
| 5,311,271 |
| 3,969,001 | ||||||
Total deposits |
| 7,902,396 |
| 6,249,321 |
| 6,125,965 |
| 4,374,298 |
| 3,289,106 | ||||||
Short-term debt(2) |
| 214,042 |
| 185,796 |
| 524,566 |
| 264,157 |
| 172,972 | ||||||
Long-term debt |
| 83,600 |
| 50,000 |
| 50,000 |
| 80,000 |
| 80,000 | ||||||
Senior notes, net of unamortized issuance costs |
| 39,674 |
| 39,539 |
| 39,404 |
| — |
| — | ||||||
Subordinated notes, net of unamortized issuance costs |
| 59,248 |
| 59,147 |
| 64,715 |
| — |
| — | ||||||
Junior subordinated debt owed to unconsolidated trusts |
| 71,308 |
| 71,155 |
| 71,008 |
| 70,868 |
| 55,000 | ||||||
Stockholders’ equity |
| 1,220,434 |
| 994,964 |
| 935,003 |
| 594,314 |
| 373,186 | ||||||
Tangible common stockholders’ equity(3) |
| 864,552 |
| 702,953 |
| 637,969 |
| 480,415 |
| 343,211 | ||||||
Results of Operations |
|
|
|
|
|
|
|
| ||||||||
Interest income | $ | 356,234 | $ | 286,033 | $ | 224,302 | $ | 164,889 | $ | 118,022 | ||||||
Interest expense |
| 69,011 |
| 44,627 |
| 20,936 |
| 10,229 |
| 6,207 | ||||||
Net interest income |
| 287,223 |
| 241,406 |
| 203,366 |
| 154,660 |
| 111,815 | ||||||
Provision for loan losses |
| 10,406 |
| 4,429 |
| 5,303 |
| 5,550 |
| 1,600 | ||||||
Net income available for common stockholders |
| 102,953 |
| 98,928 |
| 62,726 |
| 49,694 |
| 38,306 | ||||||
Per Share Data |
|
|
|
|
|
|
|
| ||||||||
Diluted earnings | $ | 1.87 | $ | 2.01 | $ | 1.45 | $ | 1.40 | $ | 1.32 | ||||||
Cash dividends |
| 0.84 |
| 0.80 |
| 0.72 |
| 0.68 |
| 0.62 | ||||||
Book value(4) |
| 22.28 |
| 20.36 |
| 19.21 |
| 15.54 |
| 13.01 | ||||||
Tangible book value(5) |
| 15.46 |
| 14.21 |
| 12.88 |
| 12.37 |
| 11.86 | ||||||
Closing stock price |
| 27.50 |
| 24.54 |
| 29.94 |
| 30.78 |
| 20.63 | ||||||
Other Information |
|
|
|
|
|
|
|
| ||||||||
Return on average assets |
| 1.09 | % |
| 1.28 | % |
| 1.00 | % |
| 1.00 | % |
| 0.98 | % | |
Return on average common equity |
| 8.68 | % |
| 10.36 | % |
| 8.48 | % |
| 9.59 | % |
| 10.41 | % | |
Net interest margin(6) |
| 3.38 | % |
| 3.45 | % |
| 3.58 | % |
| 3.42 | % |
| 3.10 | % | |
Equity to assets ratio(7) |
| 12.56 | % |
| 12.33 | % |
| 11.75 | % |
| 10.42 | % |
| 9.39 | % | |
Dividend payout ratio(8) |
| 44.92 | % |
| 39.80 | % |
| 49.66 | % |
| 48.57 | % |
| 46.97 | % | |
| (1) | Total assets less goodwill and tax effected intangible assets, a non-GAAP financial measure. |
| (2) | Includes federal funds purchased, securities sold under agreements to repurchase, and short-term borrowings. |
| (3) | Common equity less goodwill and tax effected intangible assets, a non-GAAP financial measure. |
| (4) | Total common equity divided by shares outstanding as of period end. |
| (5) | Total common equity less goodwill and intangible assets divided by shares outstanding as of period end. |
| (6) | Tax-equivalent net interest income divided by average earning assets. |
| (7) | Average common equity divided by average total assets. |
| (8) | Ratio calculated using only common stock dividends and diluted earnings per share. |
39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the financial condition as of December 31, 2019 and 2018 and the results of operations for the years ended December 31, 2019, 2018, and 2017 of First Busey and its subsidiaries. It should be read in conjunction with “Item 1. Business,” “Item 6. Selected Financial Data,” the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included in this Annual Report.
Detailed discussion and analysis of the financial condition and results of operation for 2019 as compared to 2018 can be found below. Comparison of 2018 to 2017 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2018 Annual Report on Form 10-K.
Critical Accounting Estimates
First Busey has established various accounting policies that govern the application of GAAP in the preparation of its Consolidated Financial Statements. Significant accounting policies are described in “Note 1. Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
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 Investment Securities. The fair values of investment securities are measurements from an independent pricing service and are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.
Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of debt securities below their amortized cost are evaluated to determine whether such declines are temporary or OTTI. If the Company (i) has the intent to sell a debt security or (ii) will more likely than not be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire decline in fair value as an OTTI loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The decline in fair value is separated into the amount of impairment related to the credit loss and the amount of impairment related to all other factors. The amount of the impairment related to credit loss is recognized in earnings, and the amount of impairment related to all other factors is recognized in other comprehensive income (loss).
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations. Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the date of acquisition. Fair values are determined based on the definition of “fair value” defined in FASB Accounting Standards Codification (“ASC”) Topic 820 — Fair Value Measurement as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed. At the date of acquisition, when loans have evidence of credit deterioration since origination and it is probable that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. At each future reporting date, the
40
Company re-estimates the expected cash flows of the loans. Subsequent decreases in the expected cash flows will generally result in a provision for loan losses. Subsequent increases in the expected cash flows will generally be offset against the allowance for loan losses to the extent an allowance has been established or will be recognized as interest income prospectively.
Goodwill. Goodwill represents the excess of purchase price over the fair value of net assets acquired using the acquisition method of accounting. Determining the fair value often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Goodwill is not amortized, instead, the Company assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired.
Income Taxes. The Company estimates income tax expense based on amounts expected to be owed to federal and state tax jurisdictions. Estimated income tax expense is reported in the Consolidated Statements of Income. Accrued and deferred taxes, as reported in other assets or other liabilities in the Consolidated Balance Sheets, represent the net estimated amount due to or to be received from taxing jurisdictions either currently or in the future. Management judgment is involved in estimating accrued and deferred taxes, as it may be necessary to evaluate the risks and merits of the tax treatment of transactions, filing positions, and taxable income calculations after considering tax-related statutes, regulations and other relevant factors. Because of the complexity of tax laws and interpretations, interpretation is subject to judgment.
Allowance for Loan Losses. First Busey has established an allowance for loan losses which represents its estimate of the probable losses inherent in the loan portfolio as of the date of the Consolidated Financial Statements and reduces the total loans outstanding by an estimate of uncollectible loans. Loans deemed uncollectible are charged against and reduce the allowance. A provision for loan losses is charged to current expense and acts to replenish the allowance for loan losses in order to maintain the allowance at a level that management deems adequate. Acquired loans from business combinations with uncollected principal balances are carried net of a fair value adjustment for credit and interest rates. These loans are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. However, as the acquired loans renew, it is generally necessary to establish an allowance which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans.
To determine the adequacy of the allowance for loan losses, a formal analysis is completed quarterly to assess the risk within the loan portfolio. This assessment is reviewed by the Company’s senior management. The analysis includes a review of historical performance, dollar amount and trends of past due loans, dollar amount and trends in non-performing loans, certain impaired loans, and loans identified as sensitive assets. Sensitive assets include non-accrual loans, past-due loans, loans on First Busey’s watch loan reports and other loans identified as having probable potential for loss.
The allowance consists of specific and general components. The specific component considers loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when either the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying amount of that loan. The general component covers non-classified loans and classified loans not considered impaired and is based on historical loss experience adjusted for qualitative factors. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss experience.
A loan is considered to be impaired when, based on current information and events, it is probable First Busey will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreement. When a loan becomes impaired, management generally calculates the impairment based on the fair value of the collateral, if the loan is collateral-dependent or based on the discounted cash flows of the loan at the loan’s effective interest rate. The amount of impairment and any subsequent changes are recorded through a charge to the provision for loan losses. For collateral dependent loans, the allowance is based upon the estimated fair value, net of selling costs, of the applicable collateral. The required allowance or actual loss on an impaired loan could differ significantly if the ultimate fair value of the collateral is significantly different from the fair value estimate.
41
Executive Summary
Operating Results (dollars in thousands)
Years Ended December 31, | ||||||
| 2019 |
| 2018 | |||
Net income by operating segment: |
|
|
|
| ||
Banking | $ | 106,409 | $ | 97,369 | ||
Remittance Processing |
| 4,060 |
| 3,710 | ||
Wealth Management |
| 11,135 |
| 9,372 | ||
Other |
| (18,651) |
| (11,523) | ||
Net income | $ | 102,953 | $ | 98,928 | ||
Operating Performance
Net income for the full year 2019 was $103.0 million, or $1.87 per diluted common share, compared to net income of $98.9 million, or $2.01 per diluted common share, for the full year 2018. Adjusted net income(1) for the full year 2019 was $118.4 million, or $2.15 per diluted common share, compared to $103.5 million or $2.10 per diluted common share for the full year 2018.
The Company views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pretax adjustments for 2019 were $14.7 million of expenses related to acquisitions and $5.4 million of expenses related to other restructuring costs. The reconciliation of non-GAAP measures (including adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible book value, tangible book value per share and return on average tangible common equity), which the Company believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Annual Report on Form 10-K. See Non-GAAP Financial Information.
On January 31, 2019, the Company completed its acquisition of Banc Ed, the holding company for TheBANK. First Busey operated TheBANK as a separate subsidiary from the completion of the acquisition until October 4, 2019, when it was merged with and into Busey Bank. When we completed the Banc Ed acquisition, we reset the baseline for the future financial performance of First Busey. With TheBANK now merged and integrated, we expect to see the full contribution and synergies of TheBANK reflected in the Company’s financial performance in the years ahead.
On August 31, 2019, the Company completed its acquisition of IST, a Fort Myers, Florida wealth management firm. Through this transaction, Busey Bank and IST broaden the expertise and raise the level of service available to their clients—from individuals and families to institutions and foundations—and remain committed to their founding principles of being active community stewards and providing the highest level of personal service to clients delivered by experienced, local professionals.
On October 4, 2019, in addition to the merger of TheBANK into Busey Bank, the Company partnered with a new core operating system provider. The core conversion positions the combined organization for future growth and will allow the Company to serve customers more efficiently and effectively for years to come.
Revenues from trust fees, commissions and brokers’ fees, and remittance processing activities represented 46.0% of the Company’s non-interest income in 2019, providing a balance to spread-based revenue from traditional banking activities. Further, non-interest income, excluding net security losses, represented 28.8% of total revenue for the year ended December 31, 2019.
| (1) | For a reconciliation of adjusted net income, a non-GAAP financial measure, see Non-GAAP Financial Information. |
42
Asset Quality
As of December 31, 2019, the Company reported non-performing loans of $29.5 million compared to $36.6 million as of December 31, 2018. Non-performing loans were 0.44% of total portfolio loans as of December 31, 2019 compared to 0.66% as of December 31, 2018. While these results are encouraging, asset quality metrics can be generally influenced by market-specific economic conditions, and specific measures may fluctuate from period to period. The key metrics are as follows (dollars in thousands):
As of |
| ||||||
December 31, | December 31, | ||||||
| 2019 |
| 2018 |
| |||
Portfolio loans | $ | 6,687,249 | $ | 5,568,428 | |||
Allowance for loan losses |
| 53,748 |
| 50,648 | |||
Loans 30-89 days past due |
| 14,271 |
| 7,121 | |||
Non-performing loans |
|
|
|
| |||
Non-accrual loans |
| 27,896 |
| 34,997 | |||
Loans 90+ days past due |
| 1,611 |
| 1,601 | |||
Total non-performing loans | 29,507 | 36,598 | |||||
Other non-performing assets |
| 3,057 |
| 376 | |||
Total non-performing assets | 32,564 | 36,974 | |||||
Allowance as a percentage of non-performing loans |
| 182.2 | % |
| 138.4 | % | |
Allowance for loan losses to portfolio loans |
| 0.80 | % |
| 0.91 | % | |
Results of Operation — Three Years Ended December 31, 2019
Net Interest Income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets.
Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes an income tax rate of 21% in 2019 and 2018 and 35% in 2017. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.
The following tables (dollars in thousands) show our Consolidated Average Balance Sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the periods shown. The tables also show, for the periods indicated, a summary of the changes in interest earned and interest expense resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on changes due to rate and changes due to volume. All average information is provided on a daily average basis.
43
Average Balance Sheets and Interest Rates
Years Ended December 31, | ||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||
| Average |
| Income/ |
| Yield/ |
| Average |
| Income/ |
| Yield/ |
| Average |
| Income/ |
| Yield/ |
| ||||||||
Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Interest-bearing bank deposits and federal funds sold | $ | 312,604 | 6,320 |
| 2.02 | % | $ | 134,035 | $ | 2,491 |
| 1.86 | % | $ | 132,464 | $ | 1,444 |
| 1.09 | % | ||||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
U.S. Government obligations |
| 300,805 |
| 7,323 |
| 2.43 | % |
| 152,086 |
| 2,501 |
| 1.64 | % |
| 148,116 |
| 2,112 |
| 1.43 | % | |||||
Obligations of states and political subdivisions(1) |
| 281,460 |
| 8,294 |
| 2.95 | % |
| 284,262 |
| 7,386 |
| 2.60 | % |
| 243,403 |
| 7,219 |
| 2.97 | % | |||||
Other securities |
| 1,187,026 |
| 31,335 |
| 2.64 | % |
| 934,112 |
| 23,654 |
| 2.53 | % |
| 573,230 |
| 12,960 |
| 2.26 | % | |||||
Loans held for sale |
| 38,447 |
| 1,275 |
| 3.32 | % |
| 29,666 |
| 1,241 |
| 4.18 | % |
| 119,936 |
| 4,479 |
| 3.73 | % | |||||
Portfolio loans(1), (2) |
| 6,469,920 |
| 304,700 |
| 4.71 | % |
| 5,533,549 |
| 251,018 |
| 4.54 | % |
| 4,567,259 |
| 199,744 |
| 4.37 | % | |||||
Total interest-earning assets(1), (3) | $ | 8,590,262 | $ | 359,247 |
| 4.18 | % | $ | 7,067,710 | $ | 288,291 |
| 4.08 | % | $ | 5,784,408 | $ | 227,958 |
| 3.94 | % | |||||
Cash and due from banks |
| 114,619 |
|
|
|
|
| 105,114 |
|
|
|
|
| 92,184 |
|
|
|
| ||||||||
Premises and equipment |
| 148,063 |
|
|
|
| 119,388 |
|
|
|
|
|
| 93,025 |
|
|
|
|
| |||||||
Allowance for loan losses |
| (52,284) |
|
|
|
| (53,789) |
|
|
|
|
| (50,924) |
|
|
|
| |||||||||
Other assets |
| 643,030 |
|
|
|
|
| 503,719 |
|
|
|
|
| 375,412 |
|
|
|
| ||||||||
Total assets | $ | 9,443,690 |
|
|
|
| $ | 7,742,142 |
|
|
|
| $ | 6,294,105 |
|
|
|
| ||||||||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-bearing transaction deposits | $ | 1,865,506 | $ | 10,638 |
| 0.57 | % | $ | 1,257,491 | $ | 4,532 |
| 0.36 | % | $ | 1,103,245 | $ | 1,980 |
| 0.18 | % | |||||
Savings and money market deposits |
| 2,386,171 |
| 13,767 |
| 0.58 | % |
| 1,958,435 |
| 6,968 |
| 0.36 | % |
| 1,729,492 |
| 3,805 |
| 0.22 | % | |||||
Time deposits |
| 1,675,477 |
| 30,672 |
| 1.83 | % |
| 1,491,363 |
| 21,101 |
| 1.41 | % |
| 927,736 |
| 7,147 |
| 0.77 | % | |||||
Federal funds purchased and repurchase agreements |
| 196,681 |
| 2,348 |
| 1.19 | % |
| 234,587 |
| 1,626 |
| 0.69 | % |
| 213,531 |
| 978 |
| 0.46 | % | |||||
Borrowings (4) |
| 219,920 |
| 8,172 |
| 3.72 | % |
| 234,076 |
| 7,150 |
| 3.05 | % |
| 212,618 |
| 4,500 |
| 2.12 | % | |||||
Junior subordinated debt issued to unconsolidated trusts |
| 71,214 |
| 3,414 |
| 4.79 | % |
| 71,065 |
| 3,250 |
| 4.57 | % |
| 70,922 |
| 2,526 |
| 3.56 | % | |||||
Total interest-bearing liabilities | $ | 6,414,969 | $ | 69,011 |
| 1.08 | % | $ | 5,247,017 | $ | 44,627 |
| 0.85 | % | $ | 4,257,544 | $ | 20,936 |
| 0.49 | % | |||||
Net interest spread(1) |
|
|
|
| 3.10 | % |
|
|
|
|
| 3.23 | % |
|
|
|
|
| 3.45 | % | ||||||
Noninterest-bearing deposits |
| 1,746,938 |
|
|
|
|
| 1,492,242 |
|
|
|
|
| 1,252,363 |
|
|
|
| ||||||||
Other liabilities |
| 95,656 |
|
|
|
|
| 47,934 |
|
|
|
|
| 44,373 |
|
|
|
| ||||||||
Stockholders’ equity |
| 1,186,127 |
|
|
|
|
| 954,949 |
|
|
|
|
| 739,825 |
|
|
|
| ||||||||
Total liabilities and stockholders’ equity | $ | 9,443,690 |
|
|
|
| $ | 7,742,142 |
|
|
|
| $ | 6,294,105 |
|
|
|
| ||||||||
Interest income / earning assets(1), (3) | $ | 8,590,262 | $ | 359,247 |
| 4.18 | % | $ | 7,067,710 | $ | 288,291 |
| 4.08 | % | $ | 5,784,408 | $ | 227,958 |
| 3.94 | % | |||||
Interest expense / earning assets | $ | 8,590,262 | $ | 69,011 |
| 0.80 | % | $ | 7,067,710 | $ | 44,627 |
| 0.63 | % | $ | 5,784,408 | $ | 20,936 |
| 0.36 | % | |||||
Net interest margin(1) |
|
| $ | 290,236 |
| 3.38 | % |
|
| $ | 243,664 |
| 3.45 | % |
|
| $ | 207,022 |
| 3.58 | % | |||||
| (1) | On a tax-equivalent basis, assuming a federal income tax rate of 21% in 2019 and 2018 and 35% in 2017. |
| (2) | Non-accrual loans have been included in average portfolio loans. |
| (3) | Interest income includes a tax-equivalent adjustment of $3.0 million, $2.3 million and $3.7 million for 2019, 2018 and 2017, respectively. |
| (4) | Includes short-term and long-term borrowings. Interest expense includes a non-usage fee on revolving loan. |
44
Average Balance Sheets and Interest Rates (continued)
Changes in Net Interest Income:
Years Ended December 31, 2019, 2018 and 2017 |
| ||||||||||||||||||
Year 2019 vs. 2018 Change due to | Year 2018 vs. 2017 Change due to |
| |||||||||||||||||
| Average |
| Average |
| Total |
| Average |
| Average |
| Total |
| |||||||
Volume | Yield/Rate | Change | Volume | Yield/Rate | Change |
| |||||||||||||
Increase (decrease) in interest income: | |||||||||||||||||||
Interest-bearing bank deposits and federal funds sold | $ | 3,573 | $ | 256 | $ | 3,829 | $ | 7 | $ | 1,040 | $ | 1,047 | |||||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
U.S. Government obligations |
| 3,233 |
| 1,589 |
| 4,822 |
| 58 |
| 331 |
| 389 | |||||||
Obligations of state and political subdivisions |
| (73) |
| 981 |
| 908 |
| 1,125 |
| (958) |
| 167 | |||||||
Other securities |
| 6,640 |
| 1,041 |
| 7,681 |
| 8,982 |
| 1,712 |
| 10,694 | |||||||
Loans held for sale |
| 322 |
| (288) |
| 34 |
| (3,720) |
| 482 |
| (3,238) | |||||||
Portfolio loans |
| 43,800 |
| 9,882 |
| 53,682 |
| 43,598 |
| 7,676 |
| 51,274 | |||||||
Change in interest income | $ | 57,495 | $ | 13,461 | $ | 70,956 | $ | 50,050 | $ | 10,283 | $ | 60,333 | |||||||
Increase (decrease) in interest expense: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest-bearing transaction deposits | $ | 2,770 | $ | 3,336 | $ | 6,106 | $ | 311 | $ | 2,241 | $ | 2,552 | |||||||
Savings and money market deposits |
| 1,584 |
| 5,215 | 6,799 |
| 355 |
| 2,808 |
| 3,163 | ||||||||
Time deposits |
| 2,832 |
| 6,739 |
| 9,571 |
| 5,870 |
| 8,084 |
| 13,954 | |||||||
Federal funds purchased and repurchase agreements |
| (298) |
| 1,020 |
| 722 |
| 103 |
| 545 |
| 648 | |||||||
Borrowings |
| 99 |
| 923 |
| 1,022 |
| 686 |
| 1,964 |
| 2,650 | |||||||
Junior subordinated debt owed to unconsolidated trusts |
| 7 |
| 157 |
| 164 |
| 5 |
| 719 |
| 724 | |||||||
Change in interest expense | $ | 6,994 | $ | 17,390 | $ | 24,384 | $ | 7,330 | $ | 16,361 | $ | 23,691 | |||||||
Increase (decrease) in net interest income | $ | 50,501 | $ | (3,929) | $ | 46,572 | $ | 42,720 | $ | (6,078) | $ | 36,642 | |||||||
Percentage increase in net interest income over prior period |
|
|
|
|
| 19.1 | % |
|
|
|
|
| 17.7 | % | |||||
Earning Assets, Sources of Funds, and Net Interest Margin
The Consolidated Average Balance Sheets and interest rates were impacted by the 2019 acquisitions of Banc Ed, along with organic growth. Total average interest-earning assets increased $1.5 billion, or 21.5%, to $8.6 billion in 2019, as compared to $7.1 billion in 2018. Average loans increased and generally have notably higher yields compared to interest-bearing bank deposits and investment securities, so the loan growth contributed to a positive effect on net interest margin.
Total average interest-bearing liability balances increased $1.2 billion, or 22.3%, to $6.4 billion in 2019 as compared to $5.2 billion in 2018. Average noninterest-bearing deposits increased $254.7 million, or 17.1%, to $1.7 billion in 2019, as compared to $1.5 billion in 2018. Average non-interest bearing deposits represented 22.8% of total average deposits in 2019. The Company remains strongly core deposit funded with total average deposits in 2019 representing 92.9% of total average liabilities, with solid liquidity and significant market share in the communities we serve.
Interest income, on a tax-equivalent basis, increased $71.0 million, or 24.6%, to $359.2 million in 2019, from $288.3 million in 2018. The interest income increase related primarily to increases in loan volumes. Interest expense increased during 2019 by $24.4 million to $69.0 million from $44.6 million in 2018. The increase in 2019 was primarily the result of higher funding costs combined with an increase in deposits and borrowings balances.
Net interest income, on a tax-equivalent basis, increased $46.6 million, or 19.1%, in 2019 as compared to 2018. The Federal Open Market Committee lowered Federal Funds Target Rates for the first time in 11 years on July 31, 2019 and then again on September 18, 2019 and October 30, 2019, for a combined decrease of 75 basis points during 2019. This contributed to the decline in net interest margin during the second half of 2019 as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities.
45
Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, decreased to 3.38% in 2019, which included a tax-equivalent adjustment of $3.0 million, compared to 3.45% in 2018, which included a tax-equivalent adjustment of $2.3 million.
The net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.10% in 2019 compared to 3.23% in 2018, each on a tax-equivalent basis.
The quarterly net interest margins were as follows:
| 2019 |
| 2018 |
| 2017 |
| |
First Quarter |
| 3.46 | % | 3.51 | % | 3.53 | % |
Second Quarter |
| 3.43 | % | 3.50 | % | 3.47 | % |
Third Quarter |
| 3.35 | % | 3.41 | % | 3.60 | % |
Fourth Quarter |
| 3.27 | % | 3.38 | % | 3.68 | % |
Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies.
Non-interest Income (dollars in thousands)
As of December 31, | ||||||||||||||||||||||||
|
|
| $ |
| % |
|
| $ |
| % |
| |||||||||||||
2019 | 2018 | Change | Change | 2018 | 2017 | Change | Change |
| ||||||||||||||||
Wealth management fees | $ | 38,561 | $ | 30,974 | $ | 7,587 | 24.5 | % | $ | 30,974 | $ | 27,037 | $ | 3,937 | 14.6 | % | ||||||||
Fees for customer services | 36,683 | 28,879 | 7,804 | 27.0 | % | 28,879 | 25,841 | 3,038 | 11.8 | % | ||||||||||||||
Remittance processing |
| 15,042 | 14,345 |
| 697 | 4.9 | % |
| 14,345 | 11,427 |
| 2,918 | 25.5 | % | ||||||||||
Mortgage revenue |
| 11,703 | 5,545 |
| 6,158 | 111.1 | % |
| 5,545 | 11,140 |
| (5,595) | (50.2) | % | ||||||||||
Income on bank owned life insurance |
| 5,795 | 3,726 |
| 2,069 | 55.5 | % |
| 3,726 | 2,579 |
| 1,147 | 44.5 | % | ||||||||||
Net gains on sales of securities |
| 741 | (1,831) |
| 2,572 | 140.5 | % |
| (1,831) | 1,143 |
| (2,974) | (260.2) | % | ||||||||||
Unrealized (losses) gains recognized on equity securities | (759) | 2,162 | (2,921) | (135.1) | % | 2,162 | — | 2,162 | 100.0 | % | ||||||||||||||
Other income | 8,649 | 6,193 | 2,456 | 39.7 | % | 6,193 | 5,307 | 886 | 16.7 | % | ||||||||||||||
Total non-interest income | $ | 116,415 | $ | 89,993 | $ | 26,422 | 29.4 | % | $ | 89,993 | $ | 84,474 | $ | 5,519 | 6.5 | % | ||||||||
Total non-interest income of $116.4 million increased $26.4 million from $90.0 million in 2018. The 2019 increases reflect organic growth as well as the 2019 acquisitions of Banc Ed and IST.
Wealth management fees increased to $38.6 million, or 24.5%, in 2019 compared to $31.0 million in 2018. As of December 31, 2019, assets under care were approximately $9.7 billion compared to $7.1 billion at December 31, 2018. At the time of acquisition, Banc Ed added $1.5 billion in assets under care and IST added $0.5 million in assets under care, with the balance of year over year growth being organic.
Fees for customer services were impacted by acquisition activity and increased to $36.7 million in 2019 as compared to $28.9 million in 2018. Evolving regulation, product changes and changing behaviors by our client base may impact the revenue derived from charges on deposit accounts in the future.
Remittance processing revenue relates to our payment processing company, FirsTech. Remittance processing revenue of $15.0 million in 2019 increased compared to $14.3 million in 2018. Remittance processing adds important diversity to our revenue stream while widening our array of service offerings to larger commercial clients within our footprint and nationally.
Mortgage revenue of $11.7 million in 2019 increased $6.2 million compared to $5.5 million in 2018, following a long period of restructuring and as a result of additional revenue from TheBANK. A decline in prevailing market rates for mortgages also contributed to increased production in recent periods.
Income on bank owned life insurance increased $2.1 million, or 55.5%, in 2019 compared to 2018 as a result of the Banc Ed acquisition and life insurance proceeds.
46
Other income of $8.6 million in 2019 increased as compared to $6.2 million in 2018 across multiple revenue sources, including swap origination fee income.
Non-interest Expense (dollars in thousands)
As of December 31, | |||||||||||||||||||||||||
|
|
| $ |
| % |
|
| $ |
| % |
| ||||||||||||||
2019 | 2018 | Change | Change | 2018 | 2017 | Change | Change |
| |||||||||||||||||
Salaries, wages and employee benefits | $ | 140,473 | $ | 107,844 | $ | 32,629 | 30.3 | % | $ | 107,844 | $ | 95,633 | $ | 12,211 | 12.8 | % | |||||||||
Data processing | 21,511 | 16,383 | 5,128 | 31.3 | % | 16,383 | 16,716 | (333) | (2.0) | % | |||||||||||||||
Net occupancy expense of premises |
| 18,176 |
| 14,803 |
| 3,373 | 22.8 | % |
| 14,803 |
| 13,830 |
| 973 | 7.0 | % | |||||||||
Furniture and equipment expenses |
| 9,506 |
| 7,233 |
| 2,273 | 31.4 | % |
| 7,233 |
| 7,089 |
| 144 | 2.0 | % | |||||||||
Professional fees |
| 11,104 |
| 5,389 |
| 5,715 | 106.0 | % |
| 5,389 |
| 6,814 |
| (1,425) | (20.9) | % | |||||||||
Amortization of intangible assets |
| 9,547 |
| 5,854 |
| 3,693 | 63.1 | % |
| 5,854 |
| 5,245 |
| 609 | 11.6 | % | |||||||||
Other expense |
| 48,477 |
| 35,537 |
| 12,940 | 36.4 | % |
| 35,537 |
| 29,099 |
| 6,438 | 22.1 | % | |||||||||
Total non-interest expense | $ | 258,794 | $ | 193,043 | $ | 65,751 | 34.1 | % | $ | 193,043 | $ | 174,426 | $ | 18,617 | 10.7 | % | |||||||||
Income taxes | $ | 31,485 | $ | 34,999 | $ | (3,514) | (10.0) | % | $ | 34,999 | $ | 45,385 | $ | (10,386) | (22.9) | % | |||||||||
Effective rate on income taxes |
| 23.4 | % |
| 26.1 | % |
|
|
|
| 26.1 | % |
| 42.0 | % |
|
|
| |||||||
Efficiency ratio |
| 61.3 | % |
| 56.2 | % |
|
|
|
| 56.2 | % |
| 58.3 | % |
|
|
| |||||||
Full-time equivalent employees as of period-end |
| 1,531 |
| 1,270 |
|
|
|
| 1,270 | 1,347 |
|
|
| ||||||||||||
Total non-interest expense of $258.8 million in 2019 increased by $65.8 million as compared to $193.0 million in 2018. Total non-interest expenses have been influenced by acquisition expenses and other restructuring costs. The Company remains focused on expense discipline and expects additional expense savings from the integration of prior acquisitions and recent core operating system conversion efforts to be realized over the next year.
Salaries, wages and employee benefits were $140.5 million in 2019 compared to $107.8 million for the same period of 2018. Total full time equivalents at December 31, 2019 was 1,531 compared to 1,270 at December 31, 2018.
Data processing expense in 2019 increased to $21.5 million compared to $16.4 million for the same period of 2018. Data processing included $2.4 million of non-operating expenses, related to the payment of merger and conversion expenses. Data processing for 2019 also includes data processing related to TheBANK from January 31, 2019 until merged with Busey Bank on October 4, 2019.
Combined net occupancy expense of premises and furniture and equipment expenses of $27.7 million in 2019 increased as compared to $22.0 million in 2018. The increase was largely due to acquisitions, which in 2019 resulted in 20 additional facilities. We continue to evaluate our banking center network. The Company opened four banking centers and closed six banking centers in 2019.
Professional fees of $11.1 million in 2019 increased by $5.7 million as compared to $5.4 million in 2018. Professional fees were influenced by acquisition expenses and other restructuring costs as well as Company initiatives.
Amortization of intangible assets was $9.5 million in 2019 as compared to $5.9 million in 2018 as a result of increases in intangible asset balances from acquisitions.
Other expense of $48.5 million in 2019 increased as compared to $35.5 million in 2018. Variances are across multiple expense categories, including business development and marketing expenses, branch impairment and acquisition-related check card service expense.
47
The efficiency ratio(3) is calculated as total non-interest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus non-interest income, less security gains and losses. The efficiency ratio, which is a measure commonly used by management and the banking industry, measures the amount of expense incurred to generate a dollar of revenue. The efficiency ratio was 61.3% in 2019 as compared to 56.2% in 2018. Operating costs have been influenced by acquisition expenses and other restructuring costs and the adjusted efficiency ratio(3) was 56.4% for the year ended December 31, 2019. While acquisition expenses may have a negative impact on the efficiency ratios, the Company expects to realize operating efficiencies creating a positive impact in future years.
| (3) | For a reconciliation of efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see Non-GAAP Financial Information. |
Income Taxes
The effective income tax rate, or income taxes divided by income before taxes, was 23.4% and 26.1% for the years ended December 31, 2019 and 2018, respectively. The decrease in the effective tax rate was primarily driven by an increase in tax exempt income combined with the benefits received from tax credit investments. The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis.
Balance Sheet
Significant Balance Sheet Items (dollars in thousands)
| December 31, |
| December 31, |
|
|
| ||||||
2019 | 2018 | $ Change | % Change |
| ||||||||
Assets |
|
|
|
|
|
|
|
| ||||
Debt securities available for sale | $ | 1,648,257 | $ | 697,685 | $ | 950,572 |
| 136.2 | % | |||
Debt securities held to maturity |
| — |
| 608,660 |
| (608,660) |
| (100.0) | % | |||
Portfolio loans, net |
| 6,633,501 |
| 5,517,780 |
| 1,115,721 |
| 20.2 | % | |||
Total assets | $ | 9,695,729 | $ | 7,702,357 | $ | 1,993,372 |
| 25.9 | % | |||
Liabilities |
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
| ||||
Noninterest-bearing | $ | 1,832,619 | $ | 1,464,700 | $ | 367,919 |
| 25.1 | % | |||
Interest-bearing |
| 6,069,777 |
| 4,784,621 |
| 1,285,156 |
| 26.9 | % | |||
Total deposits | $ | 7,902,396 | $ | 6,249,321 | $ | 1,653,075 |
| 26.5 | % | |||
Securities sold under agreements to repurchase | $ | 205,491 | $ | 185,796 | $ | 19,695 |
| 10.6 | % | |||
Short-term borrowings |
| 8,551 |
| — |
| 8,551 |
| 100.0 | % | |||
Long-term debt |
| 83,600 |
| 50,000 |
| 33,600 |
| 67.2 | % | |||
Senior notes, net of unamortized issuance costs |
| 39,674 |
| 39,539 |
| 135 |
| 0.3 | % | |||
Subordinated notes, net of unamortized issuance costs |
| 59,248 |
| 59,147 |
| 101 |
| 0.2 | % | |||
Junior subordinated debt owed to unconsolidated trusts |
| 71,308 |
| 71,155 |
| 153 |
| 0.2 | % | |||
Total liabilities | $ | 8,475,295 | $ | 6,707,393 | $ | 1,767,902 |
| 26.4 | % | |||
Stockholders’ equity | $ | 1,220,434 | $ | 994,964 | $ | 225,470 |
| 22.7 | % | |||
Investment Securities
Debt securities available for sale are carried at fair value. Debt securities held to maturity are carried at amortized cost. Equity securities are carried at fair value. As of December 31, 2019, the fair value and amortized cost of debt securities available for sale were $1.6 billion. There were $22.0 million of gross unrealized gains and $0.8 million of gross unrealized losses for a net unrealized loss of $21.2 million. The net unrealized loss, net of tax, is recorded in stockholders’ equity. As of December 31, 2019, the Company did not have any debt securities held to maturity. As of December 31, 2019, the fair value of equity securities was $6.0 million.
48
The composition of debt securities available for sale was as follows (dollars in thousands):
As of December 31, | ||||||||||
| 2019 |
| 2018 |
| 2017 |
| ||||
U.S. Treasury securities | $ | 51,737 | $ | 25,411 | $ | 60,348 | ||||
Obligations of U.S. government corporations and agencies |
| 163,000 |
| 52,342 |
| 103,665 | ||||
Obligations of states and political subdivisions |
| 268,291 |
| 170,044 |
| 280,199 | ||||
Commercial mortgage-backed securities | 139,287 | 1,942 | — | |||||||
Residential mortgage-backed securities |
| 921,966 |
| 315,748 |
| 397,436 | ||||
Corporate debt securities |
| 103,976 |
| 132,198 |
| 31,034 | ||||
Fair value of securities available for sale | $ | 1,648,257 | $ | 697,685 | $ | 872,682 | ||||
Amortized cost | $ | 1,627,065 | $ | 707,213 | $ | 877,459 | ||||
Fair value as a percentage of amortized cost |
| 101.30 | % |
| 98.65 | % |
| 99.46 | % | |
The composition of debt securities held to maturity was as follows (dollars in thousands):
As of December 31, | ||||||||||
| 2019 |
| 2018 |
| 2017 |
| ||||
Obligations of states and political subdivisions |
| $ | — |
| $ | 33,928 |
| $ | 41,464 |
|
Commercial mortgage-backed securities |
| — |
| 58,062 |
| 60,218 |
| |||
Residential mortgage-backed securities |
| — |
| 511,370 |
| 339,370 |
| |||
Fair value of securities held to maturity | $ | — | $ | 603,360 | $ | 441,052 | ||||
Amortized cost | $ | — | $ | 608,660 | $ | 443,550 | ||||
Fair value as a percentage of amortized cost |
| — | % |
| 99.13 | % |
| 99.44 | % | |
The primary purposes of the investment securities portfolio are to provide a source of liquidity; to provide collateral for pledging purposes against public monies and repurchase agreements; to serve as a tool for interest rate risk positioning; and to provide a source of earnings by deploying funds which are not needed to fulfill loan demand, deposit redemptions or other liquidity purposes. Pledged securities totaled $704.7 million, or 42.8% of total securities, and $498.3 million, or 38.0% of total securities, at December 31, 2019 and 2018, respectively.
The maturities, fair values and weighted average yields of debt securities available for sale as of December 31, 2019 were (dollars in thousands):
Due after 1 year | Due after 5 years | Due after |
| ||||||||||||||||||
Due in 1 year or less | through 5 years | through 10 years | 10 years |
| |||||||||||||||||
Weighted | Weighted | Weighted | Weighted |
| |||||||||||||||||
Fair | Average | Fair | Average | Fair | Average | Fair | Average |
| |||||||||||||
Available for sale(1) | Value | Yield | Value | Yield | Value | Yield | Value | Yield |
| ||||||||||||
U.S. Treasury securities |
| $ | 24,206 |
| 2.21 | % | $ | 27,531 |
| 2.05 | % | $ | — |
| — | % | $ | — |
| — | % |
Obligations of U.S. government corporations and agencies |
| 37,683 |
| 2.44 | % |
| 113,151 |
| 2.49 | % |
| 12,166 |
| 2.58 | % |
| — |
| — | % | |
Obligations of states and political subdivisions(2) |
| 29,057 |
| 2.54 | % |
| 111,418 |
| 2.95 | % |
| 87,040 |
| 3.10 | % |
| 40,776 |
| 3.33 | % | |
Commercial mortgage-backed securities | 10,871 | 2.63 | % | 44,797 | 2.39 | % | 19,661 | 2.49 | % | 63,958 | 3.12 | % | |||||||||
Residential mortgage-backed securities |
| 251 |
| 3.37 | % |
| 12,976 |
| 2.73 | % |
| 109,775 |
| 2.60 | % |
| 798,964 |
| 2.62 | % | |
Corporate debt securities |
| 48,041 |
| 3.09 | % |
| 51,627 |
| 3.31 | % |
| 4,308 |
| 3.71 | % |
| — |
| — | % | |
Total | $ | 150,109 |
| 2.65 | % | $ | 361,500 |
| 2.71 | % | $ | 232,950 |
| 2.80 | % | $ | 903,698 |
| 2.69 | % | |
| (1) | Securities are presented based upon final contractual maturity or pre-refunded date. |
| (2) | Weighted average yield calculated on a tax-equivalent basis, assuming a federal income tax rate of 21%. |
We consider many factors in determining the composition of our investment portfolio including, but not limited to, credit quality, duration, interest rate risk, liquidity, tax-equivalent yield, regulatory and overall portfolio allocation. As of December 31, 2019, the Company did not have any non-U.S. Treasury securities or obligations of U.S. government corporations and agencies issued securities that exceeded 10% of the Company’s total stockholders’ equity.
49
Portfolio Loans
The Company believes that making sound and profitable loans is a necessary and desirable means of employing funds available for investment. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations and duration of loans most appropriate for its business model and markets. While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or loans to existing customers of the bank. The Company attempts to utilize government-assisted lending programs, such as the Small Business Administration and U.S. Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate and guaranteed by individuals. The loans are expected to be repaid primarily from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.
Management reviews and approves the Company’s lending policies and procedures on a regular basis. Management routinely (at least quarterly) reviews the Company’s allowance for loan losses in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company’s underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship. Significant underwriting factors in addition to location, duration, a sound and profitable cash flow basis and the borrower’s character include the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.
At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s regulatory lending limit. The Company generally limits such relationships to amounts substantially less than the regulatory limit. Loans to related parties, including executive officers and directors of the Company and its subsidiaries, are reviewed for compliance with regulatory guidelines by the Company’s board of directors at least annually.
The Company maintains an independent loan review department that reviews the loans for compliance with the Company’s loan policy on a periodic basis. In addition, the loan review department reviews the risk assessments made by the Company’s credit department, lenders and loan committees. Results of these reviews are presented to management and the audit committee at least quarterly.
The Company’s lending 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.
Commercial Loans
Commercial loans typically comprise working capital loans or business expansion loans, including loans for asset purchases and other business loans. Commercial loans will generally be guaranteed in full or a significant amount by the primary owners of the business. Commercial loans are made based primarily on the historical and projected cash flow of the underlying borrower and secondarily on the underlying assets pledged as collateral by the borrower. The cash flows of the underlying borrower, however, may not perform consistently with historical or projected information. Further, the collateral securing loans may fluctuate in value due to individual economic or other factors. The Company has established minimum standards and underwriting guidelines for all commercial loan types.
Commercial Real Estate Loans
The commercial environment, along with the academic presence in some of the Company’s markets, provides for the majority of the Company’s commercial lending opportunities to be commercial real estate related, including multi-unit housing. As the majority of the Company’s loan portfolio is within the commercial real estate class, the Company’s goal is to maintain a high quality, geographically diverse portfolio of commercial real estate loans. Commercial real estate loans are subject to underwriting standards and guidelines similar to commercial loans. Commercial real estate loans will generally be guaranteed in full or a significant amount by the primary owners of the business. The repayment of
50
these loans is primarily dependent on the cash flows of the underlying property. However, commercial real estate loans generally must be supported by an adequate underlying collateral value. The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors. These loans are subject to other industry guidelines that are closely monitored by the Company.
Real Estate Construction Loans
Real estate construction loans are typically commercial in nature. The loan proceeds are monitored by the Company and advanced for the improvement of real estate in which the Company holds a mortgage. Real estate construction loans will generally be guaranteed in full or a significant amount by the developer or primary owners of the business. These loans are subject to underwriting standards and guidelines similar to commercial loans. The loan generally must be supported by an adequate “as completed” value of the underlying project. In addition to the underlying project, the financial history of the developer and business owners weighs significantly in determining approval. The repayment of these loans is typically through permanent financing following completion of the construction. Real estate construction loans are inherently more risky than loans on completed properties as the unimproved nature and the financial risks of construction significantly enhance the risks of commercial real estate loans. These loans are closely monitored and subject to other industry guidelines.
Retail Real Estate Loans
Retail real estate loans are comprised of direct consumer loans that include residential real estate, residential real estate construction loans, home equity lines of credit and home equity loans. In 2019, the Company sold the majority of its originated fixed rate retail real estate loans to secondary market purchasers. As retail real estate loan underwriting is subject to specific regulations, the Company typically underwrites its retail real estate loans to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income and credit history of the borrower.
Retail Other Loans
Retail other loans consist of installment loans to individuals, including automotive loans. These loans are centrally underwritten utilizing the borrower’s financial history, including the FICO credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower.
The composition of our portfolio loans as of the dates indicated was as follows (dollars in thousands):
As of December 31, | |||||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | ||||||
Commercial | $ | 1,748,368 | $ | 1,405,106 | $ | 1,414,631 | $ | 959,888 | $ | 656,576 | |||||
Commercial real estate |
| 2,793,417 |
| 2,366,823 |
| 2,354,684 |
| 1,654,164 |
| 1,208,429 | |||||
Real estate construction |
| 401,861 |
| 288,197 |
| 261,506 |
| 182,078 |
| 96,568 | |||||
Retail real estate |
| 1,693,769 |
| 1,480,133 |
| 1,460,801 |
| 1,069,060 |
| 651,191 | |||||
Retail other |
| 49,834 |
| 28,169 |
| 27,878 |
| 13,710 |
| 14,975 | |||||
Portfolio loans | $ | 6,687,249 | $ | 5,568,428 | $ | 5,519,500 | $ | 3,878,900 | $ | 2,627,739 | |||||
51
Geographic distributions of portfolio loans, based on origination, by category were as follows (dollars in thousands):
December 31, 2019 | |||||||||||||||
| Illinois |
| Missouri |
| Florida |
| Indiana |
| Total | ||||||
Commercial | $ | 1,220,088 | $ | 457,416 | $ | 20,589 | $ | 50,275 | $ | 1,748,368 | |||||
Commercial real estate |
| 1,782,442 |
| 679,217 |
| 150,935 |
| 180,823 |
| 2,793,417 | |||||
Real estate construction |
| 168,621 |
| 139,540 |
| 20,311 |
| 73,389 |
| 401,861 | |||||
Retail real estate |
| 1,139,173 |
| 412,811 |
| 99,976 |
| 41,809 |
| 1,693,769 | |||||
Retail other |
| 44,158 |
| 2,535 |
| 1,611 |
| 1,530 |
| 49,834 | |||||
Portfolio loans | $ | 4,354,482 | $ | 1,691,519 | $ | 293,422 | $ | 347,826 | $ | 6,687,249 | |||||
Allowance for loan losses |
|
|
|
|
|
|
|
|
| (53,748) | |||||
Portfolio loans, net |
|
|
|
|
|
|
|
| $ | 6,633,501 | |||||
December 31, 2018 | |||||||||||||||
| Illinois |
| Missouri |
| Florida |
| Indiana |
| Total | ||||||
Commercial | $ | 972,072 | $ | 394,043 | $ | 17,954 | $ | 21,037 | $ | 1,405,106 | |||||
Commercial real estate |
| 1,448,937 |
| 579,536 |
| 158,337 |
| 180,013 |
| 2,366,823 | |||||
Real estate construction |
| 78,489 |
| 122,385 |
| 17,859 |
| 69,464 |
| 288,197 | |||||
Retail real estate |
| 874,910 |
| 475,739 |
| 102,117 |
| 27,367 |
| 1,480,133 | |||||
Retail other |
| 24,849 |
| 1,294 |
| 1,455 |
| 571 |
| 28,169 | |||||
Portfolio loans | $ | 3,399,257 | $ | 1,572,997 | $ | 297,722 | $ | 298,452 | $ | 5,568,428 | |||||
Allowance for loan losses |
|
|
|
|
|
|
|
|
| (50,648) | |||||
Portfolio loans, net |
|
|
|
|
|
|
|
| $ | 5,517,780 | |||||
Portfolio loans increased $1.1 billion, or 20.1%, as of December 31, 2019 compared to December 31, 2018 as a result of the Banc Ed acquisition and organic growth. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased $883.5 million from December 31, 2018. Retail real estate and retail other loans increased $235.3 million from December 31, 2018.
Commitments to extend credit and standby letters of credit totaled $1.7 billion and $1.4 billion as of December 31, 2019 and 2018, respectively.
The following table sets forth remaining maturities of selected loans (excluding deferred loan fees and costs and purchase premiums and discounts and certain real estate-mortgage loans and installment loans to individuals) at December 31, 2019 (dollars in thousands):
| 1 Year or Less |
| 1 to 5 Years |
| Over 5 Years |
| Total | |||||
Commercial | $ | 1,005,048 | $ | 551,280 | $ | 191,320 | $ | 1,747,648 | ||||
Commercial real estate |
| 776,181 |
| 1,686,474 |
| 342,575 |
| 2,805,230 | ||||
Real estate construction |
| 233,816 |
| 129,906 |
| 38,759 |
| 402,481 | ||||
Total | $ | 2,015,045 | $ | 2,367,660 | $ | 572,654 | $ | 4,955,359 | ||||
Interest rate sensitivity of selected loans |
|
|
|
|
|
|
|
| ||||
Fixed rate | $ | 828,543 | $ | 2,192,334 | $ | 540,725 | $ | 3,561,602 | ||||
Adjustable rate |
| 1,186,502 |
| 175,326 |
| 31,929 |
| 1,393,757 | ||||
Total | $ | 2,015,045 | $ | 2,367,660 | $ | 572,654 | $ | 4,955,359 | ||||
52
Allowance for Loan Losses
The following table shows activity affecting the allowance for loan losses (dollars in thousands):
Years ended December 31, |
| |||||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| ||||||
Average portfolio loans outstanding during period | $ | 6,469,920 | $ | 5,533,549 | $ | 4,567,259 | $ | 3,394,352 | $ | 2,518,328 | ||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
| ||||||
Balance at beginning of period | $ | 50,648 | $ | 53,582 | $ | 47,795 | $ | 47,487 | $ | 47,453 | ||||||
Loans charged-off: |
|
|
|
|
|
|
|
|
|
| ||||||
Commercial | $ | (6,478) | $ | (3,968) | $ | (994) | $ | (6,598) | $ | (1,333) | ||||||
Commercial real estate |
| (3,257) |
| (4,352) |
| (1,965) |
| (470) |
| (1,462) | ||||||
Real estate construction |
| — |
| (97) |
| (48) |
| (24) |
| — | ||||||
Retail real estate |
| (1,162) |
| (1,815) |
| (2,691) |
| (2,106) |
| (1,534) | ||||||
Retail other |
| (863) |
| (712) |
| (541) |
| (458) |
| (365) | ||||||
Total charge-offs | $ | (11,760) | $ | (10,944) | $ | (6,239) | $ | (9,656) | $ | (4,694) | ||||||
Recoveries: |
|
|
|
|
|
|
|
|
|
| ||||||
Commercial | $ | 2,047 | $ | 1,251 | $ | 3,561 | $ | 1,266 | $ | 391 | ||||||
Commercial real estate |
| 308 |
| 449 |
| 716 |
| 123 |
| 1,491 | ||||||
Real estate construction |
| 551 |
| 218 |
| 458 |
| 441 |
| 284 | ||||||
Retail real estate |
| 1,084 |
| 1,327 |
| 1,563 |
| 2,317 |
| 729 | ||||||
Retail other |
| 464 |
| 336 |
| 425 |
| 267 |
| 233 | ||||||
Total recoveries | $ | 4,454 | $ | 3,581 | $ | 6,723 | $ | 4,414 | $ | 3,128 | ||||||
Net loan (charge-offs) recoveries | $ | (7,306) | $ | (7,363) | $ | 484 | $ | (5,242) | $ | (1,566) | ||||||
Provision for loan losses | $ | 10,406 | $ | 4,429 | $ | 5,303 | $ | 5,550 | $ | 1,600 | ||||||
Balance at end of period | $ | 53,748 | $ | 50,648 | $ | 53,582 | $ | 47,795 | $ | 47,487 | ||||||
Ratios: |
|
|
|
|
|
|
|
|
|
| ||||||
Net charge-offs (recoveries) to average portfolio loans |
| 0.11 | % |
| 0.13 | % |
| (0.01) | % |
| 0.15 | % |
| 0.06 | % | |
Allowance for loan losses to portfolio loans at period end |
| 0.80 | % |
| 0.91 | % |
| 0.97 | % |
| 1.23 | % |
| 1.81 | % | |
Our allowance for loan losses was $53.7 million, or 0.80% of portfolio loans, and $50.6 million, or 0.91% of portfolio loans, at December 31, 2019 and 2018, respectively. As a result of acquisitions, the Company is holding $1.7 billion of acquired loans that are carried net of a fair value adjustment of $20.2 million for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.
The following table sets forth the allowance for loan losses by loan categories and percentage of loans to total loans as of December 31 for each of the years indicated (dollars in thousands):
2019 | 2018 | 2017 | 2016 | 2015 |
| |||||||||||||||||||||
|
| % of |
|
| % of |
|
| % of |
|
| % of |
|
| % of |
| |||||||||||
Loans | Loans | Loans | Loans | Loans |
| |||||||||||||||||||||
to Total | to Total | to Total | to Total | to Total |
| |||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans |
| ||||||||||||||||
Commercial | $ | 18,291 |
| 26.2 | % | $ | 17,829 |
| 25.2 | % | $ | 14,779 |
| 25.6 | % | $ | 13,303 |
| 24.7 | % | $ | 13,115 |
| 24.9 | % | |
Commercial real estate |
| 21,190 |
| 41.8 | % |
| 21,137 |
| 42.5 | % |
| 21,813 |
| 42.7 | % |
| 20,623 |
| 42.6 | % |
| 18,604 |
| 45.8 | % | |
Real estate construction |
| 3,204 |
| 6.0 | % |
| 2,723 |
| 5.2 | % |
| 2,861 |
| 4.7 | % |
| 1,870 |
| 4.7 | % |
| 1,763 |
| 3.6 | % | |
Retail real estate |
| 10,495 |
| 25.3 | % |
| 8,471 |
| 26.6 | % |
| 13,783 |
| 26.5 | % |
| 11,648 |
| 27.6 | % |
| 13,714 |
| 25.1 | % | |
Retail other |
| 568 |
| 0.7 | % |
| 488 |
| 0.5 | % |
| 346 |
| 0.5 | % |
| 351 |
| 0.4 | % |
| 291 |
| 0.6 | % | |
Total | $ | 53,748 |
| 100.0 | % | $ | 50,648 |
| 100.0 | % | $ | 53,582 |
| 100.0 | % | $ | 47,795 |
| 100.0 | % | $ | 47,487 |
| 100.0 | % | |
53
As of December 31, 2019, management believed the level of the allowance and coverage of non-performing loans to be appropriate based upon the information available. However, additional losses may be identified in our loan portfolio as new information is obtained.
Provision for Loan Losses
The provision for loan losses is a current charge against income and represents an amount which management believes is sufficient to maintain an appropriate allowance for probable losses in the loan portfolio. In assessing the appropriateness of the allowance for loan losses, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, historical loan loss experience and credit quality of the portfolio. When a determination is made by management to charge-off a loan balance, a write-off is charged against the allowance for loan losses. We continue to attempt to identify problem loan situations on a proactive basis. Once problem loans are identified, adjustments to the provision for loan losses are made based upon all information available at that time.
The provision for loan losses was $10.4 million in 2019, $4.4 million in 2018 and $5.3 million in 2017. As a result of acquisitions, the Company is holding acquired loans that are carried net of a fair value adjustment for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. However, as the acquired loans renew and as the Company originates new loan production, it is necessary to establish an allowance for loan losses, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses.
Sensitive assets include non-accrual loans, loans on our classified loan reports and other loans identified as having more than reasonable potential for loss. Management reviews sensitive assets on at least a quarterly basis for changes in each applicable customer’s ability to pay and changes in valuation of underlying collateral in order to estimate probable losses. The majority of these loans are being repaid in conformance with their contracts.
Non-performing Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory guidelines. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Typically, loans are 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 allowance for loan losses to the fair value of our interest in the underlying collateral less estimated costs to sell. Our loan portfolio is collateralized primarily by real estate.
54
The following table sets forth information concerning non-performing loans and performing restructured loans at December 31 for each of the years indicated (dollars in thousands):
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| ||||||
Non-accrual loans | $ | 27,896 | $ | 34,997 | $ | 24,624 | $ | 21,423 | $ | 12,748 | ||||||
Loans 90+ days past due and still accruing |
| 1,611 |
| 1,601 |
| 2,741 |
| 131 |
| 15 | ||||||
Total non-performing loans | 29,507 | 36,598 | 27,365 | 21,554 | 12,763 | |||||||||||
Other real estate owned (“OREO”) | 3,057 | 376 | 1,283 | 2,518 | 783 | |||||||||||
Total non-performing assets | $ | 32,564 | $ | 36,974 | $ | 28,648 | $ | 24,072 | $ | 13,546 | ||||||
Performing restructured loans not included above | $ | 5,005 | $ | 8,446 | $ | 9,981 | $ | 10,652 | $ | 8,830 | ||||||
Allowance for loan losses | 53,748 | 50,648 | 53,582 | 47,795 | 47,487 | |||||||||||
Allowance for loan losses to portfolio loans | 0.80 | % | 0.91 | % | 0.97 | % | 1.23 | % | 1.81 | % | ||||||
Allowance for loan losses to non-performing loans | 182.2 | % | 138.4 | % | 195.8 | % | 221.7 | % | 372.1 | % | ||||||
Non-performing loans to portfolio loans | 0.44 | % | 0.66 | % | 0.50 | % | 0.56 | % | 0.49 | % | ||||||
Non-performing assets to portfolio loans and OREO | 0.49 | % | 0.66 | % | 0.52 | % | 0.62 | % | 0.52 | % | ||||||
Total non-performing loans and OREO were $32.6 million at December 31, 2019, compared to $37.0 million at December 31, 2018. Asset quality metrics remain dependent upon market-specific economic conditions, and specific measures may fluctuate from period to period.
Potential Problem Loans
Potential problem loans are those loans which are not categorized as impaired, restructured, non-accrual or 90+ days past due, but where current information indicates that the borrower may not be able to comply with loan repayment terms. Management assesses the potential for loss on such loans and considers the effect of any potential loss in determining its provision for probable loan losses. Potential problem loans totaled $74.6 million at December 31, 2019, compared to $70.9 million at December 31, 2018. Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral or other planned actions will result in full repayment of the debts. As of December 31, 2019, management identified no other loans that represent or result from trends or uncertainties which would be expected to materially impact future operating results, liquidity or capital resources.
Deposits
The following table shows the deposit mix as of the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||
Balance | % Total | Balance | % Total | Balance | % Total | |||||||||||||
Demand deposits, noninterest- bearing | $ | 1,832,619 |
| 23.2 | % | $ | 1,464,700 |
| 23.4 | % | $ | 1,597,421 |
| 26.1 | % | |||
Interest-bearing transaction deposits |
| 1,989,854 |
| 25.2 | % |
| 1,435,574 |
| 23.0 | % |
| 1,166,170 |
| 19.0 | % | |||
Saving deposits and money market deposits |
| 2,545,073 |
| 32.2 | % |
| 1,852,044 |
| 29.6 | % |
| 2,026,212 |
| 33.1 | % | |||
Time deposits |
| 1,534,850 |
| 19.4 | % |
| 1,497,003 |
| 24.0 | % |
| 1,336,162 |
| 21.8 | % | |||
Total | $ | 7,902,396 |
| 100.0 | % | $ | 6,249,321 |
| 100.0 | % | $ | 6,125,965 |
| 100.0 | % | |||
We focus on deepening our relationship with customers to foster core deposit growth, allowing us to reduce our reliance on wholesale funding. As a result of this and the Banc Ed acquisition, non-maturity deposits increased by $1.6 billion, or 34.0%, to $6.4 billion as of December 31, 2019. Excluding deposits acquired in the Banc Ed acquisition, non-maturity deposits increased $379.1 million. Additionally, brokered deposits were $18.0 million as of December 31, 2019 compared to $280.0 million as of December 31, 2018, a decrease of 93.6% from prior year. Time deposits as a percentage of total deposits decreased to 19.4% as of December 31, 2019 compared to 24.0% as of December 31, 2018. As time deposits mature, the Company is actively engaging our customers to renew at current market rates.
55
Borrowings
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Short-term borrowings include FHLB advances which mature in less than one year from date of origination.
On January 29, 2019, the Company entered into an Amended and Restated Credit Agreement providing for a $60.0 million term loan (the “Term Loan”) with a maturity date of November 30, 2023. The Term Loan has an annual interest rate of one-month LIBOR plus a spread of 1.50%. The proceeds of the Term Loan were used to fund the cash consideration related to the acquisition of Banc Ed. The Company had $54.0 million outstanding indebtedness on December 31, 2019, comprised of $6.0 million of short-term borrowings and $48.0 million of long-term debt. The Term Loan is redeemable by the Company at its option at any time prior to maturity.
The Amended and Restated Credit Agreement also retained the Company’s $20.0 million revolving facility with a maturity date of April 30, 2019. On April 19, 2019, the Company entered into an amendment to the Amended and Restated Credit Agreement to extend the maturity of its revolving loan facility to April 30, 2020. The revolving facility incurs a non-usage fee based on the undrawn amount. The Company had no outstanding balance under the revolving facility on December 31, 2019 or 2018.
The following table sets forth the distribution of short-term borrowings and weighted average interest rates thereon (dollars in thousands):
| Years Ending December 31, | |||||||||
2019 | 2018 | 2017 |
| |||||||
Securities sold under agreements to repurchase |
|
|
|
|
|
| ||||
Balance at end of period | $ | 205,491 | $ | 185,796 | $ | 304,566 | ||||
Weighted average interest rate at end of period |
| 1.05 | % |
| 1.05 | % |
| 0.57 | % | |
Maximum outstanding at any month end in year-to-date period | $ | 225,531 | $ | 267,596 | $ | 304,566 | ||||
Average daily balance for the year-to-date period | $ | 196,681 | $ | 234,239 | $ | 213,527 | ||||
Weighted average interest rate during period(1) |
| 1.19 | % |
| 0.69 | % |
| 0.46 | % | |
Short-term borrowings, FHLB advances |
|
|
|
|
|
| ||||
Balance at end of period | $ | 2,551 | $ | — | $ | 220,000 | ||||
Weighted average interest rate at end of period |
| 1.90 | % |
| — | % |
| 1.42 | % | |
Maximum outstanding at any month end in year-to-date period | $ | 99,739 | $ | 225,000 | $ | 234,600 | ||||
Average daily balance for the year-to-date period | $ | 27,495 | $ | 81,438 | $ | 84,201 | ||||
Weighted average interest rate during period(1) |
| 2.81 | % |
| 1.80 | % |
| 1.20 | % | |
| (1) | The weighted average interest rate is computed by dividing total interest for the period by the average daily balance outstanding. |
In addition to the Term Loan, long-term debt includes funds borrowed from the FHLB which totaled $35.6 million and $50.0 million at December 31, 2019 and 2018, respectively.
On May 25, 2017, the Company issued $40.0 million of 3.75% senior notes that mature on May 25, 2022. The senior notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017. The senior notes are not subject to optional redemption by the Company. Additionally, on May 25, 2017, the Company issued $60.0 million of fixed-to-floating rate subordinated notes that mature on May 25, 2027. The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 4.75% for the first five years after issuance and thereafter bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.919%, as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017 during the five year fixed-term and thereafter on February 25, May 25, August 25 and November 25 of each year, commencing on August 25, 2022. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. The senior notes and subordinated notes are unsecured obligations of the Company. Unamortized debt issuance costs related to the senior notes and subordinated
56
notes totaled $0.3 million and $0.8 million, respectively, at December 31, 2019. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $0.5 million and $0.9 million, respectively, at December 31, 2018.
In connection with the First Community acquisition, the Company assumed $15.3 million in subordinated debt, of which $9.8 million was simultaneously redeemed. A $0.3 million purchase accounting premium was recorded on the remaining balance of the subordinated debt. On September 30, 2018, the Company, at its option, redeemed the balance of the subordinated debt at a redemption price equal to the principal amount outstanding plus accrued but unpaid interest.
Junior Subordinated Debt Owed to Unconsolidated Trusts
First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrent with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The trust preferred securities are instruments that qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment. In connection with the Pulaski acquisition in 2016, the Company acquired similar statutory trusts maintained by Pulaski and the fair value adjustment is being accreted over the weighted average remaining life. The Company had $71.3 million and $71.2 million of junior subordinated debt owed to unconsolidated trusts at December 31, 2019 and 2018, respectively.
Liquidity
Liquidity management is the process by which we ensure that adequate liquid funds are available to meet the present and future cash flow obligations arising in the daily operations of our business. These financial obligations consist of needs for funds to meet commitments to borrowers for extensions of credit, fund capital expenditures, honor withdrawals by customers, pay dividends to stockholders and pay operating expenses. Our most liquid assets are cash and due from banks, interest-bearing bank deposits and federal funds sold. The balances of these assets are dependent on the Company’s operating, investing, lending, and financing activities during any given period.
Average liquid assets are summarized in the table below (dollars in thousands):
Years Ended December 31, |
| |||||||||
| 2019 |
| 2018 |
| 2017 |
| ||||
Cash and due from banks | $ | 114,619 | $ | 105,114 | $ | 92,184 | ||||
Interest-bearing bank deposits |
| 312,580 |
| 132,661 |
| 130,805 | ||||
Federal funds sold |
| 24 |
| 1,374 |
| 1,659 | ||||
Total | $ | 427,223 | $ | 239,149 | $ | 224,648 | ||||
Percent of average total assets |
| 4.5 | % |
| 3.1 | % |
| 3.6 | % | |
First Busey’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayments, and capital funds. Additional liquidity is provided by the ability to borrow from the FHLB, the Federal Reserve, First Busey’s revolving loan facility, or to utilize brokered deposits.
As of December 31, 2019, management believed that adequate liquidity existed to meet all projected cash flow obligations. We seek to achieve a satisfactory degree of liquidity by actively managing both assets and liabilities. Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.
The ability of the Company to pay cash dividends to its stockholders and to service its debt is dependent on the receipt of cash dividends from its subsidiaries. Under applicable regulatory requirements, an Illinois state-chartered bank such as Busey Bank may not pay dividends in excess of its net profits. Because Busey Bank had been in an accumulated deficit position from 2009 thru 2018, it was not able to pay dividends in prior years. With prior approval from its regulators,
57
however, an Illinois state-chartered bank in that situation was able to reduce its capital stock by amending its charter to decrease the authorized number of shares, and then make a subsequent distribution to its holding company. Using this approach, and with the approval of its regulators, Busey Bank has distributed funds to the Company, most recently in the amount of $40.0 million on October 12, 2018. Busey Bank returned to a positive retained earnings position in the second quarter of 2018 and, in 2019, returned to paying dividends.
Off-Balance-Sheet Arrangements
The 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 December 31, 2019 and 2018, we had outstanding loan commitments and standby letters of credit of $1.7 billion and $1.4 billion, respectively. The balance of commitments to extend credit represents future cash requirements and some of these commitments may expire without being drawn upon. We anticipate we will have sufficient funds available to meet current loan commitments, including loan applications received and in process prior to the issuance of firm commitments.
Contractual Obligations
We have entered into certain contractual obligations and other commitments which generally relate to funding of operations through deposits, debt issuance, and property and equipment leases.
The following table summarizes significant contractual obligations and other commitments as of December 31, 2019 (dollars in thousands):
|
|
|
|
| Junior |
|
|
|
|
|
| |||||||
Subordinated | Senior and | |||||||||||||||||
Debt Owed to | Subordinated Notes, | |||||||||||||||||
Certificates of | Operating | Unconsolidated | Long-term | net of unamortized | ||||||||||||||
Deposit | Leases | Trusts | Debt | issuance costs | Total | |||||||||||||
2020 | $ | 1,012,295 | $ | 2,408 | $ | — | $ | — | $ | — | $ | 1,014,703 | ||||||
2021 |
| 283,684 |
| 1,781 |
| — |
| 18,000 |
| — |
| 303,465 | ||||||
2022 |
| 127,593 |
| 1,378 |
| — |
| — |
| 39,674 |
| 168,645 | ||||||
2023 |
| 64,920 |
| 1,221 |
| — |
| 53,600 |
| — |
| 119,741 | ||||||
2024 |
| 46,347 |
| 1,022 |
| — |
| 12,000 |
| — |
| 59,369 | ||||||
Thereafter |
| 11 |
| 2,876 |
| 71,308 |
| — |
| 59,248 |
| 133,443 | ||||||
Total | $ | 1,534,850 | $ | 10,686 | $ | 71,308 | $ | 83,600 | $ | 98,922 | $ | 1,799,366 | ||||||
Commitments to extend credit and standby letters of credit | $ | 1,692,146 | ||||||||||||||||
Cash Flows
Net cash flows provided by operating activities totaled $80.8 million in 2019 compared to $202.5 million in 2018. Significant items affecting the cash flows provided by operating activities include net income, depreciation, amortization expenses, the provision for loan losses, deferred income taxes, gain on sales of mortgage loans, net of origination costs and activities related to the origination and sales of loans held for sale. Net cash used to originate loans held for sale totaled $25.7 million in 2019 compared to $79.4 million of net cash provided by loan sales in 2018. Fluctuations in sales are a function of changes in market rates for mortgage loans, which influence refinance activity.
Net cash provided by investing activities totaled $65.0 million in 2019 compared to $55.4 million used in investing activities in 2018. Significant items affecting cash flows from investing activities are those activities associated with managing the Company’s investment and loan portfolios and cash received/paid in acquisitions. The Company experienced a net increase in loans of $244.3 million in 2019 compared to $49.9 million in 2018, excluding acquired loans.
Net cash provided by financing activities totaled $143.6 million in 2019 compared to $260.5 million used in financing activities in 2018. Significant items affecting cash flows from financing activities are debt issuance, deposits, short-term
58
borrowings, long-term debt, payment of dividends and proceeds and redemption from stock issuances. Deposits, which represent the Company’s primary funding source, increased by $215.6 million in 2019 compared to an increase of $123.6 million in 2018, excluding acquired deposits. Securities sold under agreements to repurchase decreased $30.9 million in 2019 compared to $118.8 million in 2018.
Capital Resources
Capital Purchase Program Warrant
In connection with the Company’s participation in the Capital Purchase Program, the Company issued to Treasury a warrant to purchase shares of the Company’s common stock. At December 31, 2019, this warrant to purchase 191,278 shares of the Company’s common stock, at an exercise price of $39.21, remained outstanding.
Regulatory Capital
The ability of the Company to pay cash dividends to its stockholders and to service its debt is dependent on the receipt of cash dividends from its subsidiaries. Under applicable regulatory requirements, an Illinois state-chartered bank such as Busey Bank may not pay dividends in excess of its net profits. Because Busey Bank had been in an accumulated deficit position from 2009 thru 2018, it was not able to pay dividends in prior years. With prior approval from its regulators, however, an Illinois state-chartered bank in that situation was able to reduce its capital stock by amending its charter to decrease the authorized number of shares, and then make a subsequent distribution to its holding company. Using this approach, and with the approval of its regulators, Busey Bank has distributed funds to the Company, most recently in the amount of $40.0 million on October 12, 2018. Busey Bank returned to a positive retained earnings position in the second quarter of 2018 and, in 2019, returned to paying dividends.
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 minimum ratios of (i) Common Equity Tier 1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%. As of December 31, 2019, First Busey had a total capital to total risk-weighted asset ratio of 14.03%, a Tier 1 capital to risk-weighted asset ratio of 12.49%, Common Equity Tier 1 capital to risk-weighted asset ratio of 11.49% and a Tier 1 leverage ratio of 9.88%; Busey Bank had ratios of 14.92%, 14.19%, 14.19% and 11.19%, respectively. Management believes that no conditions or events have occurred since December 31, 2019 that would materially adversely change the Company’s or Busey Bank’s capital classifications.
New Accounting Pronouncements
The Company reviews new accounting standards as issued. Information relating to accounting pronouncements issued and applicable to the Company in 2019 appears in “Note 1. Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
Effects of Inflation
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salaries, wages and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, loans and deposits, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. For additional information regarding interest rates and changes in net interest income see Results of Operations - Average Balance Sheets and Interest Rates and Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
59
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of changes in asset values due to movements in underlying market rates and prices. Interest rate risk is a type of market risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting First Busey as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, have minimal impact or do not arise in the normal course of First Busey’s business activities.
First Busey has an asset-liability committee, whose policy is to meet at least quarterly, to review current market conditions and to structure the Consolidated Balance Sheets to optimize stability in net interest income in consideration of projected future changes in interest rates.
As interest rate changes do not impact all categories of assets and liabilities equally or simultaneously, the asset-liability committee primarily relies on balance sheet and income simulation analysis to determine the potential impact of changes in market interest rates on net interest income. In these standard simulation models, the balance sheet is projected over a one-year and a two-year time horizon and net interest income is calculated under current market rates and assuming permanent instantaneous shifts of +/-100, +200 and +300 basis points. The model assumes immediate and sustained shifts in the federal funds rate and other market rate indices and corresponding shifts in other non-market rate indices based on their historical changes relative to changes in the federal funds rate and other market indices. Assets and liabilities are assumed to remain constant as of measurement date; variable-rate assets and liabilities are repriced based on repricing frequency; and prepayment speeds on loans are projected for both declining and rising rate environments.
The interest rate risk of First Busey as a result of immediate and sustained changes in interest rates, expressed as a change in net interest income as a percentage of the net interest income calculated in the constant base model, was as follows:
Year-One: Basis Point Changes | |||||||||
| - 100 |
| +100 |
| +200 |
| +300 |
| |
December 31, 2019 |
| (5.94) | % | 5.39 | % | 10.24 | % | 15.01 | % |
December 31, 2018 |
| (3.58) | % | 1.08 | % | 2.01 | % | 2.88 | % |
| Year-Two: Basis Point Changes | ||||||||
| - 100 |
| +100 |
| +200 |
| +300 |
| |
December 31, 2019 |
| (8.19) | % | 6.96 | % | 13.16 | % | 19.28 | % |
December 31, 2018 |
| (5.13) | % | 1.97 | % | 3.70 | % | 5.32 | % |
Interest rate risk is monitored and managed within approved policy limits. The calculation of potential effects of hypothetical interest rate changes is based on numerous assumptions and should not be relied upon as indicative of actual results. Actual results would likely differ from simulated results due to the timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements are presented beginning on page 70, and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
60
Item 9A. 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 December 31, 2019, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Exchange Act was (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control Over Financial Reporting
First Busey’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s Consolidated Financial Statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2019, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
RSM US LLP, an independent registered public accounting firm that audited the Consolidated Financial Statements of the Company included in this Annual Report on Form 10-K, has issued an audit opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.”
61
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
To the Stockholders and the Board of Directors of First Busey Corporation
Opinion on the Internal Control Over Financial Reporting
We have audited First Busey Corporation and Subsidiaries' (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Financial Statements of the Company and our report dated February 27, 2020, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Financial Statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the Financial Statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Champaign, Illinois
February 27, 2020
62
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2019, 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.
Item 9B. Other information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
(a) Directors of the Registrant and Corporate Governance. Information required by this Item is incorporated herein by reference to First Busey’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of First Busey’s fiscal year-end under the captions “Proposal 1: Election of Directors,” “Delinquent Section 16(a) Reports,” and “Corporate Governance and Board of Directors Matters.”
(b) Executive Officers of the Registrant. The information required by this Item is incorporated herein by reference to Part I, Item I of this Form 10-K under the caption “Executive Officers.”
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to First Busey’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of First Busey’s fiscal year-end under the captions “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Management Compensation and Succession Committee Report,” “Compensation of Named Executive Officers,” and “Executive Management Compensation and Succession Committee Interlocks and Insider Participation.”
63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Stock Incentive Plans
The following table discloses the number of outstanding options, warrants and rights granted by First Busey to participants in equity compensation plans, as well as the number of securities remaining available for future issuance under these plans as of December 31, 2019. The table provides this information separately for equity compensation plans that have and have not been approved by security holders. Additional information regarding stock incentive plans is presented in “Note 14. Share-based Compensation” in the Notes to the Consolidated Financial Statements included pursuant to Item 8.
|
|
| (c) |
| ||||
Number of |
| |||||||
securities |
| |||||||
(a) | (b) | remaining for |
| |||||
Number of | Weighted- | future issuance |
| |||||
securities to be | average | under equity |
| |||||
issued upon | exercise price of | compensation |
| |||||
exercise of | outstanding | plans (excluding |
| |||||
outstanding | options, | securities |
| |||||
options, warrants | warrants and | reflected in |
| |||||
Plan Category |
| and rights |
| rights(1) |
| column (a)) |
| |
Equity compensation plans approved by stockholders(2) |
| 921,999 | (3) | $ | 22.00 |
| 912,226 | (4) |
Equity compensation plans not approved by stockholders |
| — |
| — |
| — | ||
Total |
| 921,999 | $ | 22.00 |
| 912,226 | ||
| (1) | The weighted average exercise price only relates to 53,185 stock options. |
| (2) | Includes outstanding awards under the First Busey Corporation 2010 Equity Incentive Plan, as amended, the Pulaski Financial Corp. 2006 Long-Term Incentive Plan, the Pulaski Financial Corp. 2002 Stock Option Plan, the First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan and the First Community Financial Partners, Inc. 2016 Equity Incentive Plan. |
| (3) | Includes 45,685 stock options with a weighted average exercise price of $23.40 assumed in connection with the acquisition of First Community Financial Partners, Inc. |
| (4) | Includes 557,301 shares reserved under the First Busey Corporation 2010 Equity Incentive Plan, 45,293 shares reserved under the First Busey Corporation Employee Stock Purchase Plan and 309,632 shares reserved under the First Community Financial Partners, Inc. 2016 Equity Incentive Plan. |
Other information required by Item 12 is incorporated herein by reference to First Busey’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of First Busey’s fiscal year-end under the caption “Stock Ownership of Certain Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to First Busey’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of First Busey’s fiscal year-end under the captions “Certain Relationships and Related-Person Transactions” and “Corporate Governance and Board of Directors Matters.”
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to First Busey’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of First Busey’s fiscal year-end under the caption “Audit and Related Fees.”
64
Part IV
Item 15. Exhibits and Financial Statement Schedules
Exhibits
A list of exhibits to this Form 10-K is set forth on the Exhibit Index immediately following the signature page hereto and is incorporated into this report by reference. Our Consolidated Financial Statements can be found immediately following the Exhibit Index.
Stockholders may obtain a copy of any of the exhibits by writing to First Busey Corporation, Corporate Secretary, at 100 W. University, Champaign, IL 61820, or by visiting the SEC’s EDGAR database at http://www.sec.gov. The Company’s SEC file number is 0-15950.
Item 16. Summary
None.
65
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
CONTENTS
70 | |
71 | |
72 | |
73 | |
76 | |
78 |
66
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of First Busey Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Busey Corporation and Subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 27, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
67
Allowance for Loan Losses - Qualitative Factors
As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses totaled $53,748,000, which consists of a general reserve ($48,895,000) and a specific reserve ($4,853,000) at December 31, 2019. Management estimates the allowance based on loan losses believed to be inherent in the Company’s loan portfolio, segmented by product type, geography and risk classification, at the balance sheet date. The Company’s allowance for loan losses consists of a general reserve which management develops based on historical loss ratios adjusted for qualitative factors not reflected in the historical loss experience as well as a specific reserve based on management’s identification of impaired loans. Historical loss ratios are an annualized rate based on the previous five years of loss history with more consideration given to the most recent loss experience. Management considers several qualitative factors, both internal and external to the Company, including management and staff; loan underwriting, policy and procedures; internal/external audit and loan review; valuation of underlying collateral; macro and local economic factors; impact of competition, legal and regulatory issues; nature and volume of loan portfolio; concentration of credit risk; net charge-off trends and non-accrual, past due and classified trends when determining the general reserve. The adjustment for qualitative factors requires a significant amount of judgement by management and involves a high degree of estimation.
We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
Our audit procedures related to the qualitative factor component of the allowance for loan losses include the following, among others:
| ◾ | We obtained an understanding of the relevant controls related to the qualitative factor portion of the allowance for loan losses and tested such controls for design and operating effectiveness, including management’s review of the allowance memo and calculation in support of qualitative factor adjustments |
| ◾ | We tested the completeness and accuracy of data used by management in determining qualitative factor adjustments by agreeing them to internal and external source data |
| ◾ | We tested management’s conclusions regarding the appropriateness of the qualitative factor adjustments and agreed the impact to the allowance for loan losses calculation. |
Business Combination - Fair Value of Acquired Performing Loans
As described in Notes 1 and 2 to the consolidated financial statements, on January 31, 2019, the Company completed its acquisition of The Banc Ed Corp for total consideration of $257.9 million. The 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. Assets acquired included loans with an estimated fair value as of January 31, 2019 of $873.3 million. This estimated fair value is comprised of acquired performing loans ($871.0 million) and those with signs of deteriorated credit quality ($2.3 million).
The Company utilized a discounted cash flow model to estimate the fair value of the acquired performing loans. This valuation approach applies various assumptions determined by management including probability of default, loss given default, prepayment and discount rates. We identified the fair value of acquired performing loans as of the acquisition date to be a critical audit matter as auditing the fair value of acquired performing loans requires significant auditor judgment as it is comprised of assumptions that are highly subjective and an increased audit effort involving the use of our valuation specialists.
68
Our audit procedures related to the fair value of acquired performing loans include the following, among others:
| ◾ | We obtained an understanding of the relevant controls related to the fair value of acquired performing loans and tested such controls for design and operating effectiveness, including controls addressing: |
| o | Completeness and accuracy of the information included in the loan trial balance utilized in the discounted cash flow model |
| o | Management review of the assumptions utilized in the discounted cash flow model |
| ◾ | We tested the completeness and accuracy of data included in the loan trial balance utilized in the discounted cash flow model |
| ◾ | With the assistance of our valuation specialists, we tested the reasonableness of significant assumptions such as probability of default, loss given default, prepayment and discount rates |
/s/ RSM US LLP
We or our predecessor firms have served as the Company's auditor since at least 1980, however, an earlier year could not be established.
Champaign, Illinois
February 27, 2020
69
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
| 2019 |
| 2018 | |||
(dollars in thousands) | ||||||
Assets | ||||||
Cash and due from banks | $ | | $ | | ||
Interest-bearing deposits | | | ||||
Total cash and cash equivalents | | | ||||
Debt securities available for sale |
| |
| | ||
Debt securities held to maturity (fair value 2019 ; 2018 $ |
| — |
| | ||
Equity securities | | | ||||
Loans held for sale, at fair value |
| |
| | ||
Portfolio loans (net of allowance for loan losses 2019 $ |
| |
| | ||
Premises and equipment, net |
| |
| | ||
Right of use asset | | — | ||||
Goodwill |
| |
| | ||
Other intangible assets, net |
| |
| | ||
Cash surrender value of bank owned life insurance |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity | ||||||
Liabilities | ||||||
Deposits: | ||||||
Noninterest-bearing | $ | | $ | | ||
Interest-bearing |
| |
| | ||
Total deposits | | | ||||
Securities sold under agreements to repurchase |
| |
| | ||
Short-term borrowings | | — | ||||
Long-term debt |
| |
| | ||
Senior notes, net of unamortized issuance costs | | | ||||
Subordinated notes, net of unamortized issuance costs | | | ||||
Junior subordinated debt owed to unconsolidated trusts | | | ||||
Lease liability | | — | ||||
Other liabilities |
| |
| | ||
Total liabilities | | | ||||
Outstanding commitments and contingent liabilities (see Note 16) | ||||||
Stockholders’ Equity | ||||||
Common stock, $ 2019 and |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Accumulated other comprehensive income (loss) |
| |
| ( | ||
Total stockholders’ equity before treasury stock | | | ||||
Treasury stock, at cost (2019 |
| ( |
| ( | ||
Total stockholders’ equity | | | ||||
Total liabilities and stockholders’ equity | $ | | $ | | ||
Common shares outstanding at period end | | | ||||
See accompanying Notes to Consolidated Financial Statements.
70
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2019, 2018 and 2017
| ||||||||
2019 |
| 2018 | 2017 | |||||
(dollars in thousands, except per share amounts) | ||||||||
Interest income: | ||||||||
Interest and fees on loans | $ | | $ | | $ | | ||
Interest and dividends on investment securities: | ||||||||
Taxable interest income | |
| |
| | |||
Non-taxable interest income | |
| |
| | |||
Other interest income | | |
| | ||||
Total interest income | |
| | | ||||
Interest expense: |
| |||||||
Deposits | |
| |
| | |||
Federal funds purchased and securities sold under agreements to repurchase | |
| |
| | |||
Short-term borrowings | |
| |
| | |||
Long-term debt | |
| | | ||||
Senior notes | | | | |||||
Subordinated notes | | |
| | ||||
Junior subordinated debt owed to unconsolidated trusts | |
| |
| | |||
Total interest expense | |
| |
| | |||
Net interest income | |
| |
| | |||
Provision for loan losses | |
| |
| | |||
Net interest income after provision for loan losses | |
| | | ||||
Non-interest income: |
| |||||||
Wealth management fees | |
| |
| | |||
Fees for customer services | |
| |
| | |||
Remittance processing | |
| |
| | |||
Mortgage revenue | |
| |
| | |||
Income on bank owned life insurance | | | | |||||
Net gains on sales of securities | |
| ( |
| | |||
Unrealized (losses) gains recognized on equity securities | ( | | — | |||||
Other income | |
| |
| | |||
Total non-interest income | |
| | | ||||
Non-interest expense: |
| |||||||
Salaries, wages and employee benefits | |
| |
| | |||
Data processing | |
| |
| | |||
Net occupancy expense of premises | |
| |
| | |||
Furniture and equipment expenses | |
| |
| | |||
Professional fees | | | | |||||
Amortization of intangible assets | |
| |
| | |||
Other expense | |
| |
| | |||
Total non-interest expense | |
| |
| | |||
Income before income taxes | |
| |
| | |||
Income taxes | |
| | | ||||
Net income | $ | | $ | | $ | | ||
Basic earnings per common share | $ | | $ | | $ | | ||
Diluted earnings per common share | $ | | $ | | $ | | ||
Dividends declared per share of common stock | $ | | $ | | $ | | ||
See accompanying Notes to Consolidated Financial Statements.
71
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2019, 2018 and 2017
| 2019 |
| 2018 |
| 2017 | ||||
(dollars in thousands) | |||||||||
Net income | $ | | $ | | $ | | |||
Other comprehensive income: | |||||||||
Unrealized gains (losses) on debt securities available for sale: | |||||||||
Net unrealized holding gains (losses) on debt securities available for sale, net of taxes of $( | | ( | ( | ||||||
Net unrealized losses on debt securities transferred from held to maturity to available for sale, net of taxes of $ | ( | — | — | ||||||
Reclassification adjustment for realized (gains) losses on debt securities available for sale included in net income, net of taxes of $ $ | ( |
| |
| ( | ||||
Net change in unrealized gains (losses) on debt securities available for sale | | ( | ( | ||||||
Unrealized gains (losses) on cash flow hedges: | |||||||||
Net unrealized holding (losses) gains on cash flow hedges, net of taxes of $ |
| ( |
| — |
| — | |||
Reclassification adjustment for realized losses (gains) on cash flow hedges included in net income, net of taxes of $( | | — | — | ||||||
Net change in unrealized gains (losses) on derivative instruments | ( | — | — | ||||||
Net change in accumulated other comprehensive income (loss) | | ( | ( | ||||||
Total comprehensive income | $ | | $ | | $ | | |||
See accompanying Notes to Consolidated Financial Statements.
72
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2019, 2018 and 2017
(dollars in thousands, except shares and per share data)
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Treasury | ||||||||||||||||
| Shares | Stock |
| Capital |
| (Deficit) |
| Income (loss) |
| Stock |
| Total | ||||||||
Balance, December 31, 2018 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net income | — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other comprehensive income | — |
| — |
| — |
| — |
| |
| — |
| | |||||||
Issuance of treasury stock for employee stock purchase plan | |
| — |
| |
| — |
| — |
| |
| | |||||||
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax | |
| — |
| ( |
| — |
| — |
| |
| ( | |||||||
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax | | — | ( | — | — | | | |||||||||||||
Stock issued for acquisition of Banc Ed, net of stock issuance costs | | | | — | — | — | | |||||||||||||
Repurchase of stock | ( | — | — | — | — | ( | ( | |||||||||||||
Cash dividends common stock at $ | — |
| — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Stock dividend equivalents restricted stock units at $ | — |
| — |
| |
| ( |
| — |
| — |
| — | |||||||
Stock-based compensation | — |
| — |
| |
| — |
| — |
| — |
| | |||||||
Balance, December 31, 2019 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
See accompanying Notes to Consolidated Financial Statements.
73
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Years Ended December 31, 2019, 2018 and 2017
(dollars in thousands, except shares and per share data)
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Treasury | ||||||||||||||||
Shares | Stock |
| Capital |
| (Deficit) |
| Income (loss) |
| Stock |
| Total | |||||||||
Balance, December 31, 2017 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net income |
| — |
| — |
| |
| — |
| — |
| | ||||||||
Other comprehensive loss |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
TCJA reclassification | — | — | — | | ( | — | — | |||||||||||||
Issuance of treasury stock for employee stock purchase plan | |
| — |
| ( |
| — |
| — |
| |
| | |||||||
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax | |
| — |
| ( | — | — | |
| ( | ||||||||||
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax | | — | ( | — | — | | | |||||||||||||
Cash dividends common stock at $ |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||||
Stock dividend equivalents restricted stock units at $ |
| — |
| |
| ( |
| — |
| — |
| — | ||||||||
Stock based employee compensation | — |
| |
| — |
| — |
| — | | ||||||||||
Balance, December 31, 2018 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
See accompanying Notes to Consolidated Financial Statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Years Ended December 31, 2019, 2018 and 2017
(dollars in thousands, except shares and per share data)
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Treasury | ||||||||||||||||
Shares | Stock |
| Capital |
| (Deficit) |
| Income (loss) |
| Stock |
| Total | |||||||||
Balance, December 31, 2016 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
Net income | — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other comprehensive loss | — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Issuance of treasury stock for employee stock purchase plan | |
| — |
| ( |
| — |
| — |
| |
| | |||||||
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax | |
| — |
| ( | — | — | |
| ( | ||||||||||
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax | | — | ( | — | — | | | |||||||||||||
Stock issued for acquisition of First Community, net of stock issuance costs | | | | — | — | — | | |||||||||||||
Stock issued for acquisition of Mid Illinois, net of stock issuance costs | | | | — | — | — | | |||||||||||||
Cash dividends common stock at $ | — |
| — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Stock dividend equivalents restricted stock units at $ | — |
| — |
| |
| ( |
| — |
| — |
| — | |||||||
Stock dividend accrued on restricted stock awards assumed with the Pulaski Financial Corp. acquisition at $ | — | — | ( | — | — | ( | ||||||||||||||
Return of equity trust shares | ( |
| — | — | — | — | ( |
| ( | |||||||||||
Stock based employee compensation | — |
| |
| — |
| — |
| — | | ||||||||||
Balance, December 31, 2017 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
See accompanying Notes to Consolidated Financial Statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2019, 2018 and 2017
2019 |
| 2018 | 2017 | |||||
(dollars in thousands) | ||||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses |
| |
| |
| | ||
Amortization of intangible assets | | | | |||||
Amortization of mortgage servicing rights | | | | |||||
Depreciation and amortization of premises and equipment |
| |
| |
| | ||
Net amortization (accretion) of premium (discount) on portfolio loans | ( | ( | ( | |||||
Net amortization (accretion) of premium (discount) on investment securities |
| |
| |
| | ||
Net amortization (accretion) of premium (discount) on time deposits | ( | ( | ( | |||||
Net amortization (accretion) of premium (discount) on FHLB advances and other borrowings | | | | |||||
Impairment of OREO | | | | |||||
Impairment of fixed assets held for sale |
| |
| |
| | ||
Impairment of leases | | | — | |||||
Change in fair value of loans held for sale, net | — | — | — | |||||
Change in fair value of equity securities, net | | ( | — | |||||
(Gain) loss on sales of securities, net |
| ( |
| |
| ( | ||
(Gain) loss on sale of loans, net |
| ( |
| ( |
| ( | ||
(Gain) loss on sale of OREO | ( | ( | ( | |||||
(Gain) loss on sale of premises and equipment | | | ( | |||||
(Gain) loss on life insurance proceeds | ( | ( | ( | |||||
Realized (gain) loss on preferred stock and equity securities | ( | | ( | |||||
Provision for deferred income taxes |
| |
| |
| | ||
Stock-based and non-cash compensation |
| |
| |
| | ||
Decrease in deferred compensation | ( | ( | ( | |||||
Increase in cash surrender value of bank owned life insurance |
| ( |
| ( |
| ( | ||
Mortgage loans originated for sale | ( | ( | ( | |||||
Proceeds from sales of mortgage loans | | | | |||||
Net change in operating assets and liabilities: | ||||||||
Decrease in other assets |
| |
| |
| | ||
(Decrease) increase in other liabilities |
| ( |
| |
| ( | ||
Net cash provided by operating activities | $ | | $ | | $ | | ||
Cash Flows from Investing Activities | ||||||||
Purchases of debt securities held to maturity | — | ( | ( | |||||
Purchase of equity securities | ( | — | — | |||||
Purchases of debt securities available for sale | ( | ( | ( | |||||
Purchase of FHLB stock | ( | — | — | |||||
Proceeds from sales of equity securities | | | — | |||||
Proceeds from sales of debt securities available for sale |
| |
| |
| | ||
Proceeds from paydowns and maturities of debt securities held to maturity | | | | |||||
Proceeds from paydowns and maturities of debt securities available for sale |
| |
| |
| | ||
Proceeds from the redemption of FHLB stock | | | | |||||
Net cash (received) paid in acquisitions | ( | — | | |||||
Net change in loans |
| ( |
| ( |
| ( | ||
Cash paid for premiums on bank-owned life insurance | ( | — | — | |||||
Purchases of premises and equipment | ( | ( | ( | |||||
Proceeds from life insurance | | — | — | |||||
Proceeds from disposition of premises and equipment |
| |
| |
| | ||
Capitalized expenditures on OREO | ( | — | — | |||||
Proceeds from sale of OREO |
| |
| |
| | ||
Net cash provided by (used in) investing activities | $ | | $ | ( | $ | ( | ||
(continued)
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2019, 2018 and 2017
| |||||||||
2019 |
| 2018 | 2017 | ||||||
(dollars in thousands) | |||||||||
Cash Flows from Financing Activities | |||||||||
Net change in deposits | $ | | $ | | $ | | |||
Net change in federal funds purchased and securities sold under agreements to repurchase |
| ( |
| ( |
| | |||
Proceeds from other borrowings | | — | | ||||||
Repayment of other borrowings | ( | ( | ( | ||||||
Net change in short-term FHLB advances | ( | ( | | ||||||
Proceeds from long-term FHLB advances | — | — | — | ||||||
Repayments of long-term FHLB advances | ( | — | ( | ||||||
Cash dividends paid | ( | ( | ( | ||||||
Purchase of treasury stock | ( | — | — | ||||||
Cash paid for withholding taxes on share-based payments |
| ( |
| ( |
| ( | |||
Proceeds from stock options exercised | | | | ||||||
Common stock issuance costs | ( | — | ( | ||||||
Net cash provided by (used in) financing activities | $ | | $ | ( | $ | | |||
Net increase (decrease) in cash and cash equivalents |
| |
| ( |
| | |||
Cash and cash equivalents, beginning of period |
| |
| |
| | |||
Cash and cash equivalents, ending of period | $ | | $ | | $ | | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||
Cash Payments for: | |||||||||
Interest | $ | | $ | | $ | | |||
Income taxes |
| |
| |
| | |||
Non-cash Investing and Financing Activities: | |||||||||
OREO acquired in settlement of loans |
| |
| |
| | |||
Other assets transferred to equity investments | — | | — | ||||||
Transfer of debt securities held to maturity to available for sale | | — | — | ||||||
See accompanying Notes to Consolidated Financial Statements.
77
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of operations
First Busey Corporation is a financial holding company organized under the laws of Nevada. The Company’s subsidiaries provide retail and commercial banking services and remittance processing, and offer a full range of financial products and services, including depository, lending, security brokerage services, investment management and fiduciary services, to individual, corporate, institutional and governmental customers through its locations in Illinois, Missouri, southwest Florida and Indianapolis, Indiana. The Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.
The significant accounting and reporting policies for the Company and its subsidiaries follow:
Principles of consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries which includes First Busey Risk Management, Inc., Deed of Trust Services Corporation and Busey Bank, including Busey Bank’s wholly-owned subsidiaries FirsTech, Inc., Pulaski Service Corporation and Busey Capital Management, Inc. The Company and its subsidiaries maintain various LLCs that hold specific assets for risk mitigation purposes and are consolidated into these Consolidated Financial Statements. All intercompany balances and transactions have been eliminated in consolidation.
The Consolidated Financial Statements exclude the following wholly-owned variable interest entities: First Busey Statutory Trust II, First Busey Statutory Trust III, First Busey Statutory Trust IV, Pulaski Financial Statutory Trust I and Pulaski Financial Statutory Trust II because the Company is not the primary beneficiary.
Use of estimates
In preparing the accompanying Consolidated Financial Statements in conformity with GAAP, the Company’s management is required to make estimates and assumptions that affect the amounts reported in the Financial Statements and the disclosures provided. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near-term relate to the fair value of investment securities, fair value of assets acquired and liabilities assumed in business combinations, goodwill, income taxes and the determination of the allowance for loan losses.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale debt securities and unrealized gains and losses on cash flow hedges, are reported as a separate component within the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).
Trust assets
Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit at the Company’s bank subsidiary, are not assets of the Company and, accordingly, are not included in the accompanying Consolidated Financial Statements. The Company had assets under care of $
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Cash and cash equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks and federal funds sold. Cash and cash equivalents have original maturities of three months or less. Accordingly, the carrying amount of such instruments is considered a reasonable estimate of fair value. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions and repurchase agreements.
The Company maintains its cash in deposit accounts the balance of which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on cash and cash equivalents.
Securities
Debt securities classified as held to maturity are those debt securities that the Company has the intent and ability to hold to maturity and are carried at amortized cost.
Debt securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on factors including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Debt securities available for sale are carried at fair value, with unrealized gains and losses reported in other comprehensive income (loss), net of taxes.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. With the adoption of Accounting Standards Update (“ASU”) 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities" the amortization period for certain callable debt securities held at a premium, are amortized to the earliest call date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Management evaluates debt securities for OTTI on a quarterly basis, or more frequently, if economic or market conditions warrant an evaluation. Declines in the fair value of debt securities below their amortized cost are evaluated to determine whether they are temporary or OTTI. If the Company (i) has the intent to sell a debt security or (ii) it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, the Company recognizes the entire unrealized loss in earnings as an OTTI loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The impairment is separated into (i) the amount of the total impairment related to the credit loss and (ii) the amount of total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income (loss).
With the adoption of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," equity securities are carried at fair value with changes in fair value recognized in earnings.
Loans held for sale
Loans held for sale include mortgage loans which the Company intends to sell to investors and/or the secondary mortgage market. Loans held for sale are recorded at fair value, as the Company has elected to apply the fair value method of accounting, with changes in fair value recognized in earnings. Fair value adjustments are recorded as an adjustment to mortgage revenues. The fair value of loans held for sale is measured using observable quoted market or contract prices or market price equivalents, consistent with those used by other market participants. Direct loan origination fees and costs related to loans accounted for at fair value are recognized when earned.
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Loan servicing
Servicing assets are recognized when servicing rights are acquired or retained through the sale of mortgage and government-guaranteed commercial loans. The unpaid principal balances of loans serviced by the Company for the benefit of others totaled $
Servicing rights are periodically evaluated for impairment based on the fair value of those rights as compared to book value. Fair values are estimated using discounted cash flows based on expected prepayment rates and other inputs. For purposes of measuring impairment, the servicing rights are stratified by one or more predominant characteristics of the underlying loans. The amount of valuation allowance recognized is the amount, if any, by which the amortized cost of the rights for each stratum exceeds its fair value. If the Company later determines that all or a portion of the impairment no longer exists for a particular group of loans, a reversal of the allowance may be recorded in current period earnings. The Company had
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned.
Portfolio loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at the principal balance outstanding, net of purchase premiums and discounts or net deferred origination fees or costs, charge-offs, and the allowance for loan losses.
Loan origination fees, net of certain direct loan origination costs, are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Company amortizes the net amount over the contractual life of the related loan.
Interest income is accrued daily on outstanding loan balances. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. Past due status is based on the contractual terms of the loan.
Interest accrued but not collected for loans that are placed on non-accrual status or charged-off is reversed against interest income. The interest on non-accrual loans is accounted for on the cost-recovery method, until returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled debt restructurings
The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where concessions have been granted to borrowers who have experienced financial difficulties. The Company will restructure a loan for its customer after evaluating whether the borrower is able to meet the terms of the loan over the long term, though unable to meet the terms of the loan in the near term due to individual circumstances.
The Company considers the customer’s past performance, previous and current credit history, the individual circumstances surrounding the customer’s current difficulties and the customer’s plan to meet the terms of the loan in the
80
future prior to restructuring the terms of the loan. Generally, restructurings consist of short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief or forbearance (debt forgiveness). A restructured loan that exceeds 90 days past due or is placed on non-accrual status, is classified as non-performing.
All TDRs are considered to be impaired for purposes of assessing the adequacy of the allowance for loan losses and for financial reporting purposes. When the Company modifies a loan in a TDR, it evaluates any possible impairment similar to other impaired loans based on present value of the expected future cash flows discounted at the loan’s original effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the Company determines that the fair value of the TDR is less than the recorded investment in the loan, impairment is recognized through a charge to the allowance for loan losses in the period of the modification and in periods subsequent to the modification.
Purchased credit-impaired loans
The Company holds loans acquired through business combinations, some of which have shown evidence of credit deterioration since origination. These purchased credit-impaired (“PCI”) loans are initially recorded at fair value on the acquisition date. Accordingly, the seller’s allowance for loan losses is not carried over or recorded as of the acquisition date.
PCI loans are reviewed individually or are aggregated into pools of loans based on common risk characteristics. The Company estimates the amount and timing of expected cash flows and the excess of the cash flows expected to be collected over the recorded investment, if material, is the accretable yield and is recognized as interest income over the life. The excess of the contractual cash flows over the cash flows expected to be collected is the non-accretable difference.
Over the life of the loans, expected cash flows continue to be estimated and any increases in expected cash flows over those expected at acquisition date are adjusted through the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows are recognized by recording an allowance for loan losses.
Allowance for loan losses
The allowance for loan losses represents an estimate of the amount of probable losses believed to be inherent in the Company’s loan portfolio at the Consolidated Balance Sheet date. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of the loan balance is probable. Subsequent recoveries, if any, are credited to the allowance. Overall, the Company believes the allowance methodology is consistent with prior periods and the balance was adequate to cover the estimated losses in the Company’s loan portfolio at December 31, 2019 and 2018.
The allowance for loan losses is calculated by segmenting the loan portfolio by product type, geography and risk classification. The Company’s loan portfolio consists of commercial, commercial real estate, real estate construction, retail real estate, and retail other loans. Segmentation based on product type captures the risk of credit loss inherent in each category including fluctuations in underlying collateral values, changes in operating cash flows, changes in borrower characteristics, and changes in economic and other factors. Segmentation by geography and risk classification further enhances Management’s evaluation of these factors in the assessment of the adequacy of the allowance for loan loss.
The allowance for loan loss consists of a general reserve and a specific reserve. The general portion of the Company’s allowance is developed based on historical loss ratios adjusted for qualitative factors which management believes capture inherent loss not reflected in historical loss experience. Historical loss ratios are an annualized rate based on the
81
previous five years of loss history with more consideration given to the most recent loss experience. Qualitative factors are estimated by considering risk factors both internal and external to the Company. Specifically, management considers the following when estimating qualitative factors: (i) Management & Staff; (ii) Loan Underwriting, Policy and Procedures; (iii) Internal/External Audit & Loan Review; (iv) Valuation of Underlying Collateral; (v) Macro and Local Economic Factors; (vi) Impact of Competition, Legal & Regulatory Issues; (vii) Nature and Volume of Loan Portfolio; (viii) Concentrations of Credit; (ix) Net Charge-Off Trends; and (x) Non-Accrual, Past Due and Classified Trends. Management evaluates the probable impact from the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis.
The specific portion of the Company’s allowance relates to loans that are identified as impaired, which includes non-performing loans, TDRs and other loans determined to be impaired. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect scheduled principal and interest payments when due according to the terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
If a loan is impaired, impairment is measured on a loan-by-loan basis for commercial and construction loans based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less cost to sell, if the loan is collateral dependent. Loans are considered collateral dependent if repayment is expected solely from the sale of the collateral. Collateral values are estimated using a combination of observable inputs, including recent appraisals discounted for collateral specific changes and current market conditions, and unobservable inputs based on customized discounting criteria.
Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment unless such loans are the subject of a TDR.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available.
Premises and equipment, net
Land is carried at cost less accumulated depreciation of depreciable land improvements. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. The estimated useful lives for premises and equipment are:
Asset Description |
| Estimated Useful Life | |||
Buildings and improvements |
| — | years | ||
Furniture and equipment |
| — | years | ||
Long-lived assets
Long-lived assets, including premises and equipment, right of use asset and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
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recoverable. An impairment loss is recognized when estimated undiscounted future cash flows from operations of the asset are less than the carrying value of the asset. The cash flows used for this analysis are those directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds its fair value.
Other real estate owned
OREO represents properties acquired through foreclosure or other proceedings in settlement of loans. OREO is recorded at the fair value of the property less estimated costs of disposal, which establishes a new cost basis. Any adjustment to fair value at the time of transfer to OREO is charged to the allowance for loan losses. OREO property is evaluated regularly to ensure the recorded amount is supported by its current fair value, and valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary. Revenue, expense, gains and losses from the operations of foreclosed assets are included in earnings.
Goodwill and other intangibles
Goodwill represents the excess of the consideration transferred in a business combination over the fair value of the net assets acquired. Goodwill is not amortized but is subject to at least annual impairment assessments. The Company has established December 31 as the annual impairment assessment date. As part of this analysis, the reporting unit's carrying value is compared to its fair value.
The Company estimates the fair value of its reporting units as of the measurement date utilizing valuation methodologies including the comparable transactions approach and the control premium approach. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. There was
Other intangible assets consists of core deposit and acquired customer relationship intangible assets arising from acquisitions and are amortized over their estimated useful lives.
Cash surrender value of bank owned life insurance
The Company has purchased or acquired through acquisitions life insurance policies on certain executives and senior officers. Life insurance is recorded at its cash surrender value, which estimates its fair value.
ASC Topic 715, Compensation—Retirement Benefits requires an employer to recognize a liability for post-employment benefits promised to an employee based on an arrangement between an employer and an employee. In an endorsement split-dollar arrangement, the employer owns and controls the policy, and the employer and employee split the life insurance policy’s cash surrender value and/or death benefits. If the employer agrees to maintain a life insurance policy during the employee’s retirement, the present value of the cost of maintaining the insurance policy would be accrued over the employee’s active service period. Similarly, if the employer agrees to provide the employee with a death benefit, the present value of the death benefit would be accrued over the employee’s active service period. The Company has an accrued liability, included in other liabilities, for these arrangements.
Transfers of financial assets
Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (i) the assets have been isolated from the Company, (ii) the transferee obtains the right to pledge or exchange the assets it receives, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
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Income taxes
The Company is subject to income taxes in the U.S. federal and various state jurisdictions. The Company and its subsidiaries file consolidated federal and state income tax returns with each subsidiary computing its taxes on a separate entity basis. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2015.
Under GAAP, a valuation allowance is required to be recognized if it is more likely than not that the deferred tax assets will not be realized. The determination of the recoverability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions.
Management believes that it is more likely than not that the deferred tax assets included in the accompanying Consolidated Financial Statements will be fully realized. The Company determined that
Positions taken in tax returns may be subject to challenge upon examination by the taxing authorities. Uncertain tax positions are initially recognized in the Consolidated Financial Statements when it is more likely than not the position will not be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in operating expenses. The Company had
At December 31, 2019, the Company was not under examination by any tax authority; however, Banc Ed, which the Company acquired on January 31, 2019, is under examination by the Illinois Department of Revenue for the 2009 to 2016 income tax filings.
Treasury Stock
Treasury stock acquired is recorded at cost. Treasury stock issued is valued based on the “first-in, first-out” method. Gains and losses on issuance are recorded as increases or decreases to additional paid-in capital.
Stock-based employee compensation
During the first quarter of 2010, the Company adopted the First Busey Corporation 2010 Equity Incentive Plan (“2010 Equity Plan”), which was approved at the annual stockholders meeting on May 19, 2010. During the second quarter of 2015, the Company adopted an amendment to revise some technical terms to the 2010 Equity Plan, which was approved at the annual stockholders meeting on May 20, 2015, and can be found as Appendix C of the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders. The Company grants share-based compensation awards to its employees and members of its board of directors as provided for under the Company’s 2010 Equity Plan. In addition, pursuant to the terms of the First Community 2016 Equity Incentive Plan, the Company may grant awards with respect to First Busey common stock to legacy employees and directors of First Community or its subsidiaries.
The Company’s equity incentive plans are designed to encourage ownership of its common stock by its employees and directors, to provide additional incentive for them to promote the success of the Company’s business, and to attract and retain talented personnel. All of the Company’s employees and directors and those of its subsidiaries are eligible to receive awards under the plans. See “Note 14. Share-based Compensation” for further discussion.
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The Company calculates the compensation cost of its non-vested stock awards (restricted stock units) based on the Company’s stock price on the grant date multiplied by the number of units granted. This cost is recorded over a specified requisite service period (i.e. vesting period) ranging from to
Segment disclosure
Operating segments are components of a business that (i) engage in business activities from which the component may earn revenues and incur expenses; (ii) has operating results that are reviewed regularly by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance; and (iii) for which discrete financial information is available. The Company’s operations are managed along
Business Combinations
Business combinations are accounted for under ASC Topic 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their estimated fair values as of that date. To determine the fair values, the Company may rely on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles.
Operating results are included with the Company’s results of operations since each date of acquisition. Acquisition related costs are costs the Company incurs to effect a business combination. Those costs may include legal, accounting, valuation, other professional or consulting fees, system conversions and marketing costs. The Company will account for acquisition related costs as expenses in the periods in which the costs are incurred and the services are received. Costs that the Company expects, but is not obligated to incur in the future, to effect its plan to exit an activity of an acquiree or to terminate the employment of an acquiree’s employees are not liabilities at the acquisition date. Instead, the Company will recognize these costs in its post-combination Financial Statements in accordance with other applicable accounting guidance.
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.
Interest Rate Swaps Designated as Cash Flow Hedges: Starting in the third quarter of 2019, the Company entered into derivative instruments designated as cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Change in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.
Interest Rate Lock Commitments. Commitments to originate loans held for sale (interest rate lock commitments), which primarily consist of commitments to originate fixed-rate residential mortgage loans, are recorded at their fair value in other assets or other liabilities in the Consolidated Financial Statements, with changes in the fair value of the
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corresponding derivative financial assets or liabilities recorded as either a charge or credit to mortgage revenues during the period in which the changes occurred.
Forward Sales Commitments. As a general rule, the Company economically hedges 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 value in other assets or other liabilities in the Consolidated Financial Statements. The Company does not designate these forward sales commitments for hedge accounting treatment, and accordingly, changes in fair value of the corresponding derivative financial asset or liability are recorded as either a charge or credit to mortgage revenue during the period in which the changes occur.
Interest Rate Swaps Not Designated as Hedges. The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. These derivatives are carried at their fair value in other assets or other liabilities in the Consolidated Financial Statements. Changes in fair value of the corresponding derivative financial asset or liability are recorded in non-interest income and expense.
Off-balance sheet arrangements
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Company’s exposure to credit loss is represented by the contractual amount of those commitments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as no condition established in the contract has been violated. These commitments are generally at variable interest rates and generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. These commitments may be secured based on management’s credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer’s obligation to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions and primarily have terms of
Fair value of financial instruments
Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in “Note 18. Fair Value Measurements.” Fair value estimates involve uncertainties and matters of significant
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judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Revenue
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” outlines a single model for companies to use in accounting for revenue arising from contracts with customers and supersedes most prior revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and establishes additional disclosures. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has evaluated its non-interest income and the nature of its contracts with customers and determined that further disaggregation of revenue beyond what is presented in the accompanying Consolidated Financial Statements was not necessary. The Company satisfies its performance obligations on its contracts with customers as services are rendered so there is limited judgment involved in applying Topic 606 that affects the determination of the timing and amount of revenue from contracts with customers.
Descriptions of the Company’s primary revenue generating activities that are within Topic 606, and are presented in the accompanying Consolidated Statements of Income as components of non-interest income, include wealth management fees, remittance processing, and fees for customer services. Wealth management fees represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and other fiduciary activities. Also included are fees received from a third party broker-dealer as part of a revenue sharing agreement for fees earned from customers that the Company refers to the third party. Revenue is recognized when the performance obligation is completed, which is generally monthly. Remittance processing represents transaction-based fees for pay processing solutions such as online bill payments, lockbox and walk-in payments. Revenue is recognized when the performance obligation is completed, which is generally monthly. Fees for customer services represent general service fees for monthly account maintenance and activity or transaction-based fees and consists of transaction-based revenue, time-based revenue, or item-based revenue. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
Leases
Effective January 1, 2019, a determination is made at inception if an arrangement contains a lease. For arrangements that contain a lease, the Company recognizes the lease on the balance sheet as a right of use asset and corresponding lease liability. Lease-related assets, or right of use assets, are recognized on the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.
Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. If not readily determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the Company used a borrowing rate that corresponded to the remaining lease term.
The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right of use asset and lease liability.
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Reclassifications
Reclassifications have been made to certain prior year account balances, with no effect on net income or stockholders’ equity, to be consistent with the classifications adopted as of and for the year ended December 31, 2019.
Subsequent events
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the Consolidated Financial Statements included in this Annual Report on Form 10-K were issued. On February 5, 2020, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by
Impact of recently adopted accounting standards
On January 1, 2019, the Company adopted ASU 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company made the following elections for all leases in connection with the adoption of this guidance:
| ● | The Company |
| ● | The Company did |
| ● | The Company elected the optional transition method that allows companies to use the effective date as the date of initial application on transition. As a result, the Company did not adjust comparative period financial information or make the newly required lease disclosures for periods before the effective date; |
| ● | The Company elected not to apply the above guidance to short-term leases; |
| ● | The Company elected to separate the lease components from the nonlease components and exclude the nonlease components from the right of use asset and lease liability; and |
| ● | The Company did not elect the land easement practical expedient. |
At the date of adoption, the Company recorded approximately $
ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 amends Topic 815 to reduce the cost and complexity of applying hedge accounting and expands the types of relationships that qualify for hedge accounting. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, requires all items that affect earnings to be presented in the same income statement line as the hedged item, provides for applying hedge accounting to additional hedging strategies, provides for new approaches to measuring the hedged item in fair value hedges of interest rate risk, and eases the requirements for effective testing and hedge documentation. This guidance was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. During the first quarter of 2019, the Company adopted this guidance, reassessed classification of certain investments, and transferred $
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ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Recently issued accounting standards
ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 implements a change from the current impaired loss model to an expected credit loss model over the life of an instrument, including loans and securities held to maturity. The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods with those years. The Company has executed a project plan to implement this guidance. The project plan included an assessment of data, development of methodologies, model validation, parallel runs, refining qualitative factors and forecast periods and evaluating related disclosures. Management is finalizing macroeconomic conditions and forecast assumptions to be used in our CECL model; however, we expect an initial increase to the allowance for credit losses, including the increase in reserve for unfunded commitments, of approximately
Internal controls over financial reporting specifically related to CECL have been designed and are being evaluated; however, all internal controls related to CECL implementation are not operational. The Company is in the final stages of completing the formal governance and approval process. Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.
Note 2. Acquisitions
First Community Financial Partners, Inc.
On July 2, 2017, the Company completed its acquisition of First Community, which was headquartered in Joliet, Illinois. First Busey operated First Community Financial Bank as a separate subsidiary from July 3, 2017 until November 3, 2017, when it was merged with and into Busey Bank. At that time, First Community Financial Bank’s banking centers became banking centers of Busey Bank.
Under the terms of the merger agreement with First Community, at the effective time of the acquisition, each share of First Community common stock issued and outstanding was converted into the right to receive
This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition. The total consideration paid, which was used to determine the amount of goodwill resulting from the transaction, also included the fair value of outstanding First Community stock options that were converted into options to purchase
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common shares of First Busey and cash paid out relating to stock options and restricted stock units not converted. As the total consideration paid for First Community exceeded the net assets acquired, goodwill of $
First Busey did not incur any expenses for the 12 months ended December 31, 2019 related to the acquisition of First Community and incurred $
The following table presents the fair value of First Community assets acquired and liabilities assumed as of July 2, 2017 (dollars in thousands):
| Fair Value | ||
Assets acquired: |
| ||
Cash and cash equivalents | $ | | |
Securities |
| | |
Loans held for sale |
| | |
Portfolio loans |
| | |
Premises and equipment |
| | |
OREO |
| | |
Other intangible assets |
| | |
Other assets |
| | |
Total assets acquired |
| | |
Liabilities assumed: |
|
| |
Deposits |
| | |
Other borrowings |
| | |
Other liabilities |
| | |
Total liabilities assumed |
| | |
Net assets acquired | $ | | |
Consideration paid: |
|
| |
Cash | $ | | |
Cash payout of options and restricted stock units |
| | |
Common stock |
| | |
Fair value of stock options assumed |
| | |
Total consideration paid | $ | | |
Goodwill | $ | | |
The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses. PCI loans were accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the
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aggregate principal outstanding and aggregate fair value of the acquired performing loans, including loans held for sale, was $
The following table provides the unaudited pro forma information for the results of operations for the 12 months ended December 31, 2017, as if the acquisition had occurred January 1, 2017. The pro forma results combine the historical results of First Community into the Company's Consolidated Statements of Income, including the impact of purchase accounting adjustments including loan discount accretion, intangible assets amortization, deposit accretion and premises accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2017. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions (dollars in thousands, except per share data):
Pro Forma | ||||
Year Ended | ||||
December 31, 2017 | ||||
Total revenues (net interest income plus non-interest income) | $ | | ||
Net income |
| | ||
Diluted earnings per common share |
| | ||
Mid Illinois Bancorp, Inc.
On October 1, 2017, the Company completed its acquisition of Mid Illinois and its wholly owned bank subsidiary South Side Bank, under which each share of Mid Illinois common stock issued and outstanding as of the effective time was converted into, at the election of the stockholder the right to receive, either (i) $
This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition. An adjustment to the fair value was recorded in the first quarter of 2018 as additional information became available. As the total consideration paid for Mid Illinois exceeded the net assets acquired, goodwill of $
First Busey did not incur any expenses for the 12 months ended December 31, 2019 related to the acquisition of Mid Illinois. First Busey incurred $
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The following table presents the fair value of Mid Illinois assets acquired and liabilities assumed as of October 1, 2017 (dollars in thousands):
Fair Value | |||
Assets acquired: |
| ||
Cash and cash equivalents | $ | | |
Securities |
| | |
Loans held for sale |
| | |
Portfolio loans |
| | |
Premises and equipment |
| | |
Other intangible assets |
| | |
Other assets |
| | |
Total assets acquired |
| | |
Liabilities assumed: | |||
Deposits |
| | |
Other borrowings |
| | |
Other liabilities |
| | |
Total liabilities assumed |
| | |
Net assets acquired | $ | | |
Consideration paid: | |||
Cash | $ | | |
Common stock |
| | |
Total consideration paid | $ | | |
Goodwill | $ | | |
The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses. PCI loans were accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the aggregate principal outstanding was $
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The Banc Ed Corp.
On January 31, 2019, the Company completed its acquisition of Banc Ed. TheBANK, Banc Ed’s wholly-owned bank subsidiary, was operated as a separate subsidiary from the completion of the acquisition until October 4, 2019 when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers of Busey Bank.
Under the terms of the Merger Agreement with Banc Ed, at the effective time of the acquisition, each share of Banc Ed common stock issued and outstanding was converted into the right to receive
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. Recorded fair value adjustments were disclosed as of March 31, 2019 and adjustments totaling $
First Busey incurred $
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The following table presents the fair value of Banc Ed assets acquired and liabilities assumed as of January 31, 2019 (dollars in thousands):
Fair Value | |||
Assets acquired: |
| ||
Cash and cash equivalents | $ | | |
Securities |
| | |
Loans held for sale |
| | |
Portfolio loans |
| | |
Premises and equipment |
| | |
Other intangible assets | | ||
Mortgage servicing rights |
| | |
Other assets |
| | |
Total assets acquired |
| | |
Liabilities assumed: | |||
Deposits |
| | |
Other borrowings |
| | |
Other liabilities |
| | |
Total liabilities assumed |
| | |
Net assets acquired | $ | | |
Consideration paid: | |||
Cash | $ | | |
Common stock |
| | |
Total consideration paid | $ | | |
Goodwill | $ | | |
The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses. PCI loans were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the aggregate principal balance outstanding and aggregate fair value of the acquired performing loans were $
The following table provides the unaudited pro forma information for the results of operations for the 12 months ended December 31, 2019 and 2018, as if the acquisition had occurred January 1, 2018. The pro forma results combine the historical results of Banc Ed into the Company’s Consolidated Statements of Income, including the impact of purchase accounting adjustments such as loan discount accretion, intangible assets amortization, deposit accretion and premises accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2018. No
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assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions (dollars in thousands, except per share amounts):
Years Ended December 31, | ||||||
2019 | 2018 | |||||
Total revenues (net interest income plus non-interest income) | $ | | $ | | ||
Net income |
| | | |||
Diluted earnings per common share |
| | | |||
Investors’ Security Trust Company
On August 31, 2019, the Company completed its acquisition by Busey Bank of IST, a Fort Myers, Florida wealth management firm. While the partnership is expected to add to the Company’s wealth management offerings, it is not expected to have any immediate, material impact on the Company’s earnings or overall business.
This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged was recorded at estimated fair values on the date of acquisition. Fair values are considered provisional until final fair values are determined or the measurement period has passed, but no later than one year from the acquisition date. Reviews of third party valuations are still being performed by management.
First Busey incurred $
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Note 3. Debt securities
The table below provides the amortized cost, unrealized gains and losses and fair values of debt securities summarized by major category (dollars in thousands):
|
|
| Gross |
| Gross |
|
| |||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
December 31, 2019: |
| Cost |
| Gains |
| Losses |
| Value | ||||
Debt securities available for sale | ||||||||||||
U.S. Treasury securities | $ | | $ | | $ | — | $ | | ||||
Obligations of U.S. government corporations and agencies |
| |
| |
| ( |
| | ||||
Obligations of states and political subdivisions |
| |
| |
| ( |
| | ||||
Commercial mortgage-backed securities | | | ( | | ||||||||
Residential mortgage-backed securities |
| |
| |
| ( |
| | ||||
Corporate debt securities |
| |
| |
| — |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
|
|
| Gross |
| Gross |
|
| |||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
December 31, 2018: |
| Cost |
| Gains |
| Losses |
| Value | ||||
Debt securities available for sale | ||||||||||||
U.S. Treasury securities | $ | | $ | | $ | ( | $ | | ||||
Obligations of U.S. government corporations and agencies |
| |
| |
| ( |
| | ||||
Obligations of states and political subdivisions |
| |
| |
| ( |
| | ||||
Commercial mortgage-backed securities | | — | ( | | ||||||||
Residential mortgage-backed securities |
| |
| |
| ( |
| | ||||
Corporate debt securities |
| |
| |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Debt securities held to maturity | ||||||||||||
Obligations of states and political subdivisions | $ | | $ | | $ | ( | $ | | ||||
Commercial mortgage-backed securities | | | ( | | ||||||||
Residential mortgage-backed securities | | | ( | | ||||||||
Total | $ | | $ | | $ | ( | $ | | ||||
In adopting ASU 2017-12, the Company reassessed the classification of certain investments during the first quarter of 2019 and reclassified $
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The amortized cost and fair value of debt securities as of December 31, 2019, by contractual maturity or pre-refunded date, are shown below. Mortgages underlying mortgage-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government agencies and corporations (dollars in thousands).
Debt securities available for sale | ||||||
| Amortized |
| Fair | |||
December 31, 2019: |
| Cost |
| Value | ||
Due in one year or less | $ | | $ | | ||
Due after one year through five years |
| |
| | ||
Due after five years through ten years |
| |
| | ||
Due after ten years |
| |
| | ||
Total | $ | | $ | | ||
Realized gains and losses related to sales and calls of securities available for sale are summarized as follows (dollars in thousands):
For the Years Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Gross security gains | $ | | $ | — | $ | | |||
Gross security (losses) | ( |
| ( |
| ( | ||||
Net gains (losses) on sales of securities(1) | $ | | $ | ( | $ | | |||
| (1) | Net gains (losses) on sales of securities reported on the Consolidated Statements of Income includes sale of equity securities, excluded in this table. |
Debt securities with carrying amounts of $
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, gross | 12 months or more, gross | Total, gross | |||||||||||||||
Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
December 31, 2019: | Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Debt securities available for sale | |||||||||||||||||
U.S. Treasury securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Obligations of U.S. government corporations and agencies | | ( | — | — | | ( | |||||||||||
Obligations of states and political subdivisions(2) | | ( | | — | | ( | |||||||||||
Commercial mortgage-backed securities | | ( | | ( | | ( | |||||||||||
Residential mortgage-backed securities |
| |
| ( |
| |
| ( |
| |
| ( | |||||
Corporate debt securities |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||
| (2) | Unrealized losses for greater than 12 months, gross, was less than one thousand dollars. |
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Less than 12 months, gross | 12 months or more, gross | Total, gross | |||||||||||||||
Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
December 31, 2018: | Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Debt securities available for sale | |||||||||||||||||
U.S. Treasury securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||
Obligations of U.S. government corporations and agencies | | ( | | ( | | ( | |||||||||||
Obligations of states and political subdivisions | | ( | | ( | | ( | |||||||||||
Commercial mortgage-backed securities | — | — | | ( | | ( | |||||||||||
Residential mortgage-backed securities |
| |
| ( |
| |
| ( |
| |
| ( | |||||
Corporate debt securities |
| |
| ( |
| |
| ( |
| |
| ( | |||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||
Debt securities held to maturity | |||||||||||||||||
Obligations of states and political subdivisions | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||
Commercial mortgage-backed securities | | ( | | ( | | ( | |||||||||||
Residential mortgage-backed securities | | ( | | ( | | ( | |||||||||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||
Debt securities are periodically evaluated for OTTI. As of December 31, 2019, the Company’s debt security portfolio consisted of
Note 4. Portfolio loans and allowance for loan losses
Distributions of portfolio loans were as follows (dollars in thousands):
December 31, | ||||||
| 2019 |
| 2018 | |||
Commercial | $ | | $ | | ||
Commercial real estate | | | ||||
Real estate construction | | | ||||
Retail real estate | | | ||||
Retail other | | | ||||
Portfolio loans | $ | | $ | | ||
Allowance for loan losses | ( | ( | ||||
Portfolio loans, net | $ | | $ | | ||
Net deferred loan origination costs included in the tables above were $
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The Company utilizes a loan grading scale to assign a risk grade to all of its loans. A description of the general characteristics of each grade is as follows:
| ● | Pass- This category includes loans that are all considered acceptable credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that meet or exceed industry standards. |
| ● | Watch- This category includes loans that warrant a higher than average level of monitoring to ensure that weaknesses do not cause the inability of the credit to perform as expected. These loans are not necessarily a problem due to other inherent strengths of the credit, such as guarantor strength, but have above average concern and monitoring. |
| ● | Special mention- This category is for “Other Assets Specially Mentioned” loans that have potential weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. |
| ● | Substandard- This category includes “Substandard” loans, determined in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. |
| ● | Substandard Non-accrual- This category includes loans that have all the characteristics of a “Substandard” loan with additional factors that make collection in full improbable. Such loans are placed on non-accrual status and may be dependent on collateral with a value that is difficult to determine. |
All loans are graded at their inception. Most commercial lending relationships that are $
The following table is a summary of risk grades segregated by category of portfolio loans (excluding accretable purchase accounting adjustments and clearings) (dollars in thousands):
December 31, 2019 | |||||||||||||||
|
|
| Special |
|
| Substandard | |||||||||
| Pass |
| Watch |
| Mention |
| Substandard |
| Non-accrual | ||||||
Commercial |
| $ | | $ | | $ | | $ | | $ | | ||||
Commercial real estate |
|
| |
| |
| |
| |
| | ||||
Real estate construction |
|
| |
| |
| |
| |
| | ||||
Retail real estate |
|
| |
| |
| |
| |
| | ||||
Retail other |
|
| |
| — |
| — |
| — |
| | ||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
December 31, 2018 | |||||||||||||||
|
|
| Special |
|
| Substandard | |||||||||
| Pass |
| Watch |
| Mention |
| Substandard |
| Non-accrual | ||||||
Commercial |
| $ | | $ | | $ | | $ | | $ | | ||||
Commercial real estate |
|
| |
| |
| |
| |
| | ||||
Real estate construction |
|
| |
| |
| |
| |
| | ||||
Retail real estate |
|
| |
| |
| |
| |
| | ||||
Retail other |
|
| |
| — |
| — |
| — |
| | ||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
99
An analysis of portfolio loans that are past due and still accruing or on a non-accrual status is as follows (dollars in thousands):
December 31, 2019 | ||||||||||||
Loans past due, still accruing | Non-accrual | |||||||||||
| 30-59 Days |
| 60-89 Days |
| 90+Days |
| Loans | |||||
Commercial | $ | | $ | | $ | | $ | | ||||
Commercial real estate |
| |
| |
| |
| | ||||
Real estate construction |
| |
| — |
| — |
| | ||||
Retail real estate |
| |
| |
| | | |||||
Retail other |
| |
| |
| — |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
December 31, 2018 | ||||||||||||
Loans past due, still accruing | Non-accrual | |||||||||||
| 30-59 Days |
| 60-89 Days |
| 90+Days |
| Loans | |||||
Commercial | $ | | $ | | $ | | $ | | ||||
Commercial real estate |
| |
| |
| — |
| | ||||
Real estate construction |
| |
| — |
| |
| | ||||
Retail real estate |
| |
| |
| |
| | ||||
Retail other |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
The gross interest income that would have been recorded in the years ended December 31, 2019, 2018 and 2017 if impaired loans had been current in accordance with their original terms was approximately $
A summary of TDR loans is as follows (dollars in thousands):
| December 31, | |||||
2019 |
| 2018 | ||||
In compliance with modified terms | $ | | $ | | ||
30 — 89 days past due |
| — |
| | ||
Included in non-performing loans |
| |
| | ||
Total | $ | | $ | | ||
Loans still outstanding, classified as TDRs during the 12 months ended December 31, 2019 consisted of
The gross interest income that would have been recorded in the 12 months ended December 31, 2019 and 2018 if performing TDRs had been in accordance with their original terms instead of modified terms was insignificant.
100
The following tables provide details of loans identified as impaired, segregated by category. The unpaid contractual principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan. The average recorded investment is calculated using the most recent four quarters (dollars in thousands).
December 31, 2019 | ||||||||||||||||||
| Unpaid |
| Recorded |
|
|
|
|
|
|
|
| |||||||
Contractual | Investment | Recorded | Total | Average | ||||||||||||||
Principal | with No | Investment | Recorded | Related | Recorded | |||||||||||||
| Balance |
| Allowance |
| with Allowance |
| Investment |
| Allowance |
| Investment | |||||||
Commercial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial real estate |
| |
| |
| |
| |
| |
| | ||||||
Real estate construction |
| |
| |
| — |
| |
| — |
| | ||||||
Retail real estate |
| |
| |
| |
| |
| |
| | ||||||
Retail other |
| |
| |
| — |
| |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
December 31, 2018 | ||||||||||||||||||
| Unpaid |
| Recorded |
|
|
|
|
|
|
|
| |||||||
Contractual | Investment | Recorded | Total | Average | ||||||||||||||
Principal | with No | Investment | Recorded | Related | Recorded | |||||||||||||
| Balance |
| Allowance |
| with Allowance |
| Investment |
| Allowance |
| Investment | |||||||
Commercial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial real estate |
| |
| |
| |
| |
| |
| | ||||||
Real estate construction |
| |
| |
| — |
| |
| — |
| | ||||||
Retail real estate |
| |
| |
| |
| |
| |
| | ||||||
Retail other |
| |
| |
| — |
| |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Management's evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.
Allowance for Loan Losses
The Company holds acquired loans from business combinations with uncollected principal balances. These loans are carried net of a fair value adjustment for credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. As the acquired loans renew, it is generally necessary to establish an allowance, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans. The recorded investment of all acquired loans totaled approximately $
The following table details activity in the allowance for loan losses. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories (dollars in thousands):
101
Year Ended December 31, 2019 | ||||||||||||||||||
|
|
| Commercial |
| Real Estate |
| Retail Real |
|
|
|
| |||||||
| Commercial |
| Real Estate |
| Construction |
| Estate |
| Retail Other |
| Total | |||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Provision for loan losses |
| |
| |
| ( |
| |
| |
| | ||||||
Charged-off |
| ( |
| ( |
| — |
| ( |
| ( |
| ( | ||||||
Recoveries |
| |
| |
| |
| |
| |
| | ||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Year Ended December 31, 2018 | ||||||||||||||||||
|
|
| Commercial |
| Real Estate |
| Retail Real |
|
|
|
| |||||||
| Commercial |
| Real Estate |
| Construction |
| Estate |
| Retail Other |
| Total | |||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Provision for loan losses |
| |
| |
| ( |
| ( |
| |
| | ||||||
Charged-off |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Recoveries |
| |
| |
| |
| |
| |
| | ||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Year Ended December 31, 2017 | ||||||||||||||||||
|
| Commercial |
| Real Estate |
| Retail Real |
|
| ||||||||||
| Commercial |
| Real Estate |
| Construction |
| Estate |
| Retail Other |
| Total | |||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Provision for loan losses |
| ( |
| |
| |
| |
| |
| | ||||||
Charged-off |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Recoveries |
| |
| |
| |
| |
| |
| | ||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
102
The following table presents the allowance for loan losses and recorded investments in portfolio loans by category (dollars in thousands):
As of December 31, 2019 | ||||||||||||||||||
|
| Commercial |
| Real Estate |
| Retail Real |
|
| ||||||||||
| Commercial |
| Real Estate |
| Construction |
| Estate |
| Retail Other |
| Total | |||||||
Allowance for loan losses | ||||||||||||||||||
Ending balance attributed to: | ||||||||||||||||||
Loans individually evaluated for impairment | $ | | $ | | $ | — | $ | | $ | — | $ | | ||||||
Loans collectively evaluated for impairment |
| |
| |
| |
| |
| |
| | ||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Loans: | ||||||||||||||||||
Loans individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Loans collectively evaluated for impairment |
| |
| | |
| |
| |
| | |||||||
PCI loans evaluated for impairment | | | | | — | | ||||||||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
As of December 31, 2018 | ||||||||||||||||||
|
| Commercial |
| Real Estate |
| Retail Real |
|
| ||||||||||
| Commercial |
| Real Estate |
| Construction |
| Estate |
| Retail Other |
| Total | |||||||
Allowance for loan losses | ||||||||||||||||||
Ending balance attributed to: | ||||||||||||||||||
Loans individually evaluated for impairment | $ | | $ | | $ | — | $ | | $ | — | $ | | ||||||
Loans collectively evaluated for impairment |
| |
| |
| |
| |
| |
| | ||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Loans: | ||||||||||||||||||
Loans individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Loans collectively evaluated for impairment |
| |
| |
| |
| |
| |
| | ||||||
PCI loans evaluated for impairment | | | — | | — | | ||||||||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
103
Note 5. OREO
OREO represents properties acquired through foreclosure or other proceedings in settlement of loans and is included in other assets in the accompanying Consolidated Balance Sheets. At December 31, 2019, the Company held $
The following table summarizes activity related to OREO (dollars in thousands):
Year Ended | Year Ended | |||||
| December 31, 2019 |
| December 31, 2018 | |||
OREO: |
| |||||
Beginning balance |
| $ | |
| $ | |
Additions, transfers from loans |
| |
| | ||
Additions, fair value from acquisition | | — | ||||
Sales of OREO |
| ( |
| ( | ||
Capitalized improvements | | — | ||||
Cash payments collected |
| ( |
| — | ||
Valuation allowance for OREO | ( | ( | ||||
Ending balance | $ | | $ | | ||
Note 6. Premises and Equipment, net
Premises and equipment, net are summarized as follows (dollars in thousands):
December 31, | ||||||
| 2019 |
| 2018 | |||
Land and improvements | $ | | $ | | ||
Buildings and improvements |
| |
| | ||
Furniture and equipment |
| |
| | ||
| |
| | |||
Less accumulated depreciation |
| |
| | ||
Total premises and equipment, net | $ | | $ | | ||
Depreciation expense was $
Note 7. Goodwill and Other Intangible Assets
Other than goodwill, the Company does not have any other intangible assets that are not amortized. The Company’s goodwill is associated with its
During 2019, the Company recorded, in the Banking operating segment, goodwill totaling $
104
of Banc Ed. Further, in 2019 the Company recorded, in the Wealth Management operating segment, goodwill totaling $
| Balance at |
| Balance at | |||
| December 31, 2019 |
| December 31, 2018 | |||
Goodwill: | ||||||
Banking | $ | | $ | | ||
Remittance Processing | | | ||||
Wealth Management |
| |
| | ||
Total goodwill | $ | | $ | | ||
Core deposit and customer relationship intangible assets are amortized over the estimated period benefited. Other intangible asset disclosures are as follows (dollars in thousands):
Balance at | 2019 | Balance at | 2018 | |||||||||
| December 31, 2019 |
| Amortization |
| December 31, 2018 |
| Amortization | |||||
Amortized intangible assets: | ||||||||||||
Core deposit intangible assets | $ | | $ | | $ | | $ | | ||||
Customer relationship intangible assets |
| |
| |
| |
| | ||||
$ | | $ | | $ | | $ | | |||||
|
| Customer | ||||
Core deposit | relationship | |||||
| intangible |
| intangible | |||
As of December 31, 2019: | ||||||
Gross carrying amount | $ | | $ | | ||
Accumulated amortization |
| |
| | ||
$ | | $ | | |||
Estimated amortization expense at December 31, 2019: | ||||||
2020 | $ | | $ | | ||
2021 |
| |
| | ||
2022 |
| |
| | ||
2023 |
| | | |||
2024 | | | ||||
Thereafter | | | ||||
$ | | $ | | |||
105
Note 8. Deposits
The composition of deposits is as follows (dollars in thousands):
December 31, 2019 | December 31, 2018 | |||||
Demand deposits, noninterest-bearing | $ | | $ | | ||
Interest-bearing transaction deposits |
| |
| | ||
Saving deposits and money market deposits |
| | | |||
Time deposits |
| |
| | ||
Total | $ | | $ | | ||
The Company held brokered savings deposits and money market deposits of $
The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $
As of December 31, 2019, the scheduled maturities of time deposits are as follows (dollars in thousands):
2020 | $ | |
2021 |
| |
2022 |
| |
2023 |
| |
2024 |
| |
Thereafter |
| |
$ | |
Note 9. 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.
Federal funds purchased are short-term borrowings that generally mature between one and 90 days. The Company had
Short-term borrowings include FHLB advances which mature in less than
On January 29, 2019, the Company entered into an Amended and Restated Credit Agreement providing for a $
The Amended and Restated Credit Agreement also retained the Company’s $
106
incurs a non-usage fee based on the undrawn amount. The Company had
Long-term debt is summarized as follows (dollars in thousands):
December 31, | December 31, | |||||
| 2019 |
| 2018 | |||
Notes payable, FHLB, ranging in original maturity from collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock. | $ | | $ | | ||
Term Loan | | — | ||||
Total long-term borrowings | $ | | $ | | ||
As of December 31, 2019, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from
On May 25, 2017, the Company issued $
Note 10. Junior Subordinated Debt Owed to Unconsolidated Trusts
First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrent with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The trust preferred securities are instruments that qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment. In connection with the Pulaski acquisition in 2016, the Company acquired similar statutory trusts maintained by Pulaski and the fair value adjustment is being accreted over the weighted average remaining life. The Company had $
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at par value at the stated maturity date or upon redemption. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated
107
notes. The Company’s obligations under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes, in which case the distributions on the trust preferred securities will also be deferred, for up to
Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a
The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $
Note 11. Regulatory Capital
The Company and the 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 Financial Statements. The capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Banking regulations identify five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2019 and 2018, all capital ratios of the Company and the Bank exceeded the well capitalized levels under the applicable regulatory capital adequacy guidelines. Management believes that no events or changes have occurred subsequent to December 31, 2019 that would change this designation.
108
The following tables summarize the applicable holding company and bank regulatory capital requirements (dollars in thousands):
Minimum |
| ||||||||||||||||
Minimum | To Be Well |
| |||||||||||||||
Actual | Capital Requirement | Capitalized |
| ||||||||||||||
Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||||||
As of December 31, 2019: | |||||||||||||||||
Total Capital (to Risk Weighted Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Tier 1 Capital (to Risk Weighted Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Tier 1 Capital (to Average Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % |
| N/A |
| N/A | |||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Minimum | |||||||||||||||||
Minimum | To Be Well | ||||||||||||||||
Actual | Capital Requirement | Capitalized | |||||||||||||||
Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||||||
As of December 31, 2018: | |||||||||||||||||
Total Capital (to Risk Weighted Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Tier 1 Capital (to Risk Weighted Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
Tier 1 Capital (to Average Assets) | |||||||||||||||||
Consolidated | $ | |
| | % | $ | |
| | % |
| N/A |
| N/A | |||
Busey Bank | $ | |
| | % | $ | |
| | % | $ | |
| | % | ||
In July 2013, the U.S. federal banking authorities approved the Basel III Rule for strengthening international capital standards. The Basel III Rule introduced a capital conservation buffer, composed entirely of Common Equity Tier 1, 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) Common Equity Tier 1 to risk-
109
weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The ability of the Company to pay cash dividends to its stockholders and to service its debt is dependent on the receipt of cash dividends from its subsidiaries. Under applicable regulatory requirements, an Illinois state-chartered bank such as Busey Bank may not pay dividends in excess of its net profits. Because Busey Bank had been in an accumulated deficit position from 2009 through 2018, it was not able to pay dividends in prior years. With prior approval from its regulators, however, an Illinois state-chartered bank in that situation was able to reduce its capital stock by amending its charter to decrease the authorized number of shares, and then make a subsequent distribution to its holding company. Using this approach, and with the approval of its regulators, Busey Bank has distributed funds to the Company, most recently in the amount of $
Note 12. Income Taxes
The components of income taxes consist of (dollars in thousands):
Years Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Current expense: | |||||||||
Federal | $ | | $ | | $ | | |||
State | | | | ||||||
Deferred expense: |
| ||||||||
Federal | ( | | | ||||||
State | | | | ||||||
Total income tax expense | $ | | $ | | $ | | |||
A reconciliation of federal and state income taxes at statutory rates to the income taxes included in the accompanying Consolidated Statements of Income is as follows:
Years Ended December 31, |
| ||||||
| 2019 |
| 2018 |
| 2017 |
| |
% of | % of | % of |
| ||||
Pretax | Pretax | Pretax |
| ||||
| Income |
| Income |
| Income |
| |
Income tax at federal statutory rate |
| | % | | % | | % |
Effect of: | |||||||
TCJA | — | % | — | % | | % | |
Tax-exempt interest, net |
| ( | % | ( | % | ( | % |
Stock incentive | ( | % | ( | % | ( | % | |
State income taxes, net |
| | % | | % | | % |
Income on bank owned life insurance |
| ( | % | ( | % | ( | % |
Tax credit investments | ( | % | — | % | — | % | |
Other, net |
| | % | — | % | ( | % |
| | % | | % | | % | |
On December 22, 2017, TCJA was signed into law and became effective January 2018. The TCJA reduced the corporate tax rate as well as adjusted tax rates, deductions and exemptions for individuals and businesses alike. The Company took a non-recurring, non-cash charge of $
110
Net deferred taxes at December 31, 2019 and 2018 in the accompanying Consolidated Balance Sheets, include the following amounts of deferred tax assets and liabilities (dollars in thousands).
| 2019 |
| 2018 | |||
Deferred tax assets: | ||||||
Unrealized losses on debt securities available for sale | $ | — | $ | | ||
Allowance for loan losses | | | ||||
Stock-based compensation |
| |
| | ||
Deferred compensation |
| |
| | ||
Affordable housing partnerships and other investments |
| |
| | ||
Purchase accounting adjustments | | | ||||
Accrued vacation |
| |
| | ||
Lease liability | | — | ||||
Employee costs |
| |
| | ||
Other |
| |
| | ||
$ | | $ | | |||
Deferred tax liabilities: | ||||||
Unrealized gains on debt securities available for sale | ( | — | ||||
Basis in premises and equipment |
| ( |
| ( | ||
Affordable housing partnerships and other investments | ( | ( | ||||
Purchase accounting adjustments | ( | ( | ||||
Mortgage servicing assets |
| ( |
| ( | ||
Basis in core deposit and customer intangible assets |
| ( |
| ( | ||
Deferred loan origination costs |
| ( |
| ( | ||
Lease right of use asset | ( | — | ||||
Unrealized gain on equity securities | ( | ( | ||||
Other |
| ( |
| ( | ||
$ | ( | $ | ( | |||
Net operating loss carryforward, net of valuation allowance |
| — |
| | ||
Net deferred tax (liability) asset | $ | ( | $ | | ||
At December 31, 2019, the Company had
Management believes that it is more likely than not that the other deferred tax assets included in the accompanying Consolidated Balance Sheets will be fully realized. The Company has determined that
Note 13. Employee Benefit Plans
Employees’ Stock Ownership Plan
Prior to 2014, the First Busey Corporation Employees' Stock Ownership Plan (“ESOP”) was available to all full-time employees who met certain age and length of service requirements. Effective in 2014, the ESOP was frozen, all shares were fully vested and there were no new contributions under the ESOP. On October 31, 2019 First Busey’s board of directors elected to terminate the ESOP and filed a determination letter in February 2020. Dividends on allocated shares of common stock are distributed directly to the participants. All shares held by the ESOP, which were acquired prior to the issuance of ASC Topic 718-40, Employee Stock Ownership Plans, are included in the computation of average common shares and common share equivalents. This accounting treatment is grandfathered under ASC Topic 718-40 for shares purchased prior to December 31, 1992.
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All shares held in the ESOP which were acquired prior to December 31, 1992 were allocated as of December 31, 2006. The number of shares and associated fair values were
Profit Sharing Plan
All full-time employees who meet certain age and service requirements are eligible to participate in the Company's profit-sharing plan. The contributions, if any, are determined solely by the boards of directors of the Company and its subsidiaries, and in no case may the annual contributions be greater than the amounts deductible for federal income tax purposes for that year.
The rights of the participants vest ratably over a
Deferred Compensation Plan
The Company had sponsored deferred compensation plans for executive officers for deferral of compensation. Effective March 28, 2018, the deferred compensation plan was terminated and account balances were distributed in April 2019. The 2019 deferred compensation liability was impacted by the Banc Ed acquisition. The deferred compensation expense reported was $
Note 14. Share-based Compensation
Overview
During the first quarter of 2010, the Company adopted the 2010 Equity Plan, which was approved at the annual stockholders meeting on May 19, 2010. During the second quarter of 2015, the Company adopted an amendment to the 2010 Equity Plan, which was approved at the annual stockholders meeting on May 20, 2015.
Subject to permitted adjustments for certain corporate transactions, the maximum number of shares that may be delivered to participants, or their beneficiaries, under the 2010 Equity Plan is
The 2010 Equity Plan's effective date was May 19, 2010. The 2010 Equity Plan will continue in effect until terminated by the board of directors; provided that no awards may be granted under the 2010 Equity Plan after the
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The following additional limits apply to awards under the 2010 Equity Plan. However, due to changes imposed by the TCJA, “performance-based compensation” only applies to arrangements subject to a written binding contract in effect on November 2, 2017, that have not subsequently been materially modified:
| ● | the maximum number of shares of stock that may be covered by options that are intended to be "performance-based compensation" which are granted to any one participant during any calendar year is |
| ● | the maximum number of shares of stock that may be covered by stock awards that are intended to be "performance-based compensation" which are granted to any one participant during any calendar year is |
| ● | the maximum dollar amount of cash incentive awards or cash-settled stock awards intended to be "performance-based compensation" payable to any one participant with respect to any calendar year is $ |
The Company grants share-based compensation awards to its employees and members of its board of directors as provided for under the Company’s 2010 Equity Plan. Further, in 2017, the Company registered
The Company currently grants share-based compensation in the form of restricted stock units and deferred stock units. The Company grants restricted stock units to members of management periodically throughout the year. Each restricted stock unit is equivalent to
Under the terms of the Company’s 2010 Equity Plan and First Community 2016 Equity Incentive Plan, the Company is allowed, but not required, to source stock option exercises and grants of restricted stock units and deferred stock units from its inventory of treasury stock. As of December 31, 2019, the Company held
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Stock Option Plan
In relation to the First Community acquisition, the Company assumed stock options that were previously issued under First Community incentive plans. The First Community Amended and Restated 2008 Equity Incentive Plan was approved by First Community shareholders. This plan was subsequently amended without approval by First Community shareholders to increase the number of shares available for issuance. The First Community 2016 Equity Incentive Plan was approved by First Community shareholders. At the effective time of the merger, each outstanding and unexercised option to purchase shares of First Community common stock held by an employee, whether vested or unvested, was converted into an option to purchase First Busey common stock. The converted option is equal to the number of shares of such First Community stock option multiplied by the option exchange ratio (rounded down to the nearest whole share), at an exercise price per share equal to the exercise price for each share of First Community common stock subject to such First Community stock option divided by the option exchange ratio (rounded up to the nearest whole cent). The option exchange ratio is the sum of the exchange ratio (
A summary of the status of the Company's stock option awards for the year ended December 31, 2019, and the changes during the year ended, is as follows:
2019 | ||||||
|
|
| Weighted- |
| ||
Average | ||||||
Exercise | ||||||
| Shares |
| Price |
| ||
Outstanding at beginning of year |
| | $ | |
| |
Converted options from First Community | — | — | ||||
Exercised |
| ( | |
| ||
Forfeited | ( | | ||||
Expired |
| ( |
| |
| |
Outstanding at end of year |
| | $ | |
| |
Exercisable at end of year |
| | $ | |
| |
The following table summarizes information about stock options outstanding at December 31, 2019:
Options | ||||||||||||||||
Options Outstanding | Exercisable | |||||||||||||||
|
|
|
|
|
| Weighted- |
|
|
|
|
|
| ||||
Weighted- | Average | |||||||||||||||
Range of | Average | Remaining | ||||||||||||||
Exercise | Exercise | Contractual | Intrinsic | Intrinsic | ||||||||||||
Prices |
| Number |
| Price |
| Life |
| Value |
| Number |
| Value | ||||
$ |
| | $ | |
|
| | |||||||||
| | | | |||||||||||||
| | | | |||||||||||||
| | $ | |
| $ | |
| | $ | | ||||||
The Company recorded $
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Restricted Stock Unit Plan
A summary of the changes in the Company’s restricted stock units for the year ended December 31, 2019 is as follows:
2019 | ||||||
|
|
| Weighted- |
| ||
Average | ||||||
Grant Date | ||||||
| Shares |
| Fair Value |
| ||
Outstanding at beginning of year |
| | $ | |
| |
Granted |
| |
| |
| |
Dividend equivalents earned |
| |
| |
| |
Vested |
| ( |
| |
| |
Forfeited |
| ( |
| |
| |
Outstanding at end of year |
| | $ | |
| |
Recipients earn quarterly dividend equivalents on their respective units which entitle the recipients to additional units. Therefore, dividends earned each quarter compound based upon the updated unit balances. Upon vesting/delivery, shares are expected (though not required) to be issued from treasury.
On July 5, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted
A description of restricted stock units granted in 2018 and 2017 under the terms of the 2010 Equity Plan or the First Community 2016 Equity Incentive Plan can be found in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2018 and 2017.
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Deferred Stock Unit Plan
A summary of the changes in the Company’s deferred stock units for the year ended December 31, 2019 is as follows:
2019 | ||||||
|
|
| Weighted- |
| ||
Average | ||||||
Grant Date | ||||||
| Shares |
| Fair Value |
| ||
Non-vested at beginning of year |
| | $ | |
| |
Granted |
| |
| |
| |
Dividend equivalents earned |
| |
| |
| |
Vested |
| ( |
| |
| |
Forfeited | ( | | ||||
Non-vested at end of year |
| | $ | |
| |
Outstanding at end of year |
| | $ | |
| |
On July 5, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted
A description of deferred stock units granted in 2018 and 2017 under the terms of the 2010 Equity Plan or First Community 2016 Equity Incentive Plan can be found in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2018 and 2017.
The Company issued
The Company recognized $
Note 15. Transactions with Related Parties
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with related parties which include directors, executive officers, chief credit officers, their immediate families and affiliated companies in which they have 10% or more beneficial ownership, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
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The following is an analysis of the changes in loans to related parties as a group during the year ended December 31, 2019 (dollars in thousands):
Balance at beginning of year |
| $ | |
Change in relationship |
| | |
New loans/advances |
| | |
Repayments | ( | ||
Balance at end of year | $ | |
Total unused commitments to directors and executive officers were $
Note 16. Outstanding Commitments and Contingent Liabilities
Legal Matters
The Company is a party to legal actions which arise in the normal course of its business activities. In the opinion of management, the ultimate resolution of these matters is not expected to have a material effect on the financial position or the results of operations of the Company.
Credit Commitments and Contingencies
A summary of the contractual amount of the Company’s exposure to off-balance-sheet risk relating to the Company’s commitments to extend credit and standby letters of credit follows (dollars in thousands):
| December 31, 2019 |
| December 31, 2018 | |||
Financial instruments whose contract amounts represent credit risk: | ||||||
Commitments to extend credit | $ | | $ | | ||
Standby letters of credit |
| |
| | ||
Note 17. 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 18. Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.
Interest Rate Swaps Designated as Cash Flow Hedges: Starting in the third quarter of 2019, the Company entered into derivative instruments designated as a cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Change in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.
Interest rate swaps with notional amounts totaling $
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A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):
| December 31, 2019 |
| December 31, 2018 | |||||
Notional amount | $ | | $ | — | ||||
Weighted average fixed pay rates |
| | % |
| — | % | ||
Weighted average variable 3 month LIBOR receive rates | | % | — | % | ||||
Weighted average maturity | yrs | yrs | ||||||
Unrealized gains (losses) | $ | ( | $ | — | ||||
Interest income (expense) recorded on these swap transactions were insignificant during the 12 months ended December 31, 2019. The Company expects an insignificant amount of the unrealized gain (loss) to be reclassified from Other Comprehensive Income (“OCI”) to interest expense during the next 12 months. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to December 31, 2019.
The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to cash flow derivative instruments for the periods presented (dollars in thousands):
Year Ended December 31, 2019 | ||||||||
Amount of (gain) loss recognized in OCI | Amount of (gain) loss reclassified from OCI to interest expense | |||||||
Interest rate contracts | $ | ( | $ | | ||||
The Company pledged $
Interest Rate Lock Commitments. At December 31, 2019 and 2018, the Company had issued $
Forward Sales Commitments. At December 31, 2019 and 2018, the Company had issued $
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The fair values of derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in the Consolidated Balance Sheets are summarized as follows (dollars in thousands):
| December 31, 2019 |
| December 31, 2018 | |||
Fair value recorded in other assets | $ | | $ | | ||
Fair value recorded in other liabilities |
| | | |||
The gross gains and losses on these derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in non-interest income and expense in the Consolidated Statements of Income for the 12 months ended December 31, 2019, 2018 and 2017 are summarized as follows (dollars in thousands):
December 31, 2019 | December 31, 2018 |
| December 31, 2017 | ||||||
Gross gains | $ | | $ | | $ | | |||
Gross (losses) |
| ( | ( | ( | |||||
Net gains (losses) | $ | | $ | ( | $ | | |||
The impact of the net gains or losses on derivative financial instruments related to interest rate lock commitments issued to residential loan customers for loans that will be held for sale and forward sales commitments to sell residential mortgage loans to loan investors are almost entirely offset by a corresponding change in the fair value of loans held for sale.
Interest Rate Swaps Not Designated as Hedges. The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. With notional values of $
The fair values of derivative assets and liabilities related to derivatives for customers for interest rate swaps recorded in the Consolidated Balance Sheets are summarized as follows (dollars in thousands):
| December 31, 2019 |
| December 31, 2018 | |||
Fair value recorded in other assets | $ | | $ | | ||
Fair value recorded in other liabilities | | |
The gross gains and losses on these derivative assets and liabilities recorded in non-interest income and expense in the Consolidated Statements of Income for the year ended December 31, 2019, 2018 and 2017 are summarized as follows (dollars in thousands):
December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||
Gross gains | $ | | $ | | $ | | |||
Gross losses | ( | ( | ( | ||||||
Net gains (losses) | $ | — | $ | — | $ | — | |||
The Company pledged $
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Note 18. Fair Value Measurements
The fair value of an asset or liability is the price that would be received by selling that asset or paid in transferring that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to those Company assets and liabilities that are carried at fair value.
In general, fair value is based upon quoted market prices, when available. If such quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable data. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect, among other things, counterparty credit quality and the company's creditworthiness as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Debt securities Available for Sale. Debt securities classified as available for sale are reported at fair value utilizing level 2 measurements. The Company obtains fair value measurements from an independent pricing service. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.
The independent pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. The models and processes take into account market conventions. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models.
The market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The independent pricing service also monitors market indicators, industry and economic events. For certain security types, additional inputs may be used or some of the market inputs may not be applicable. Evaluators may prioritize inputs differently on any given
120
day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day. Because the data utilized was observable, the securities have been classified as level 2.
Equity Securities. Equity securities are reported at fair value utilizing level 1 or level 2 measurements. For mutual funds, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and have been classified as level 1. For stock, quoted prices for identical or similar assets in markets that are not active are utilized and classified as level 2.
Loans Held for Sale. Loans held for sale are reported at fair value utilizing level 2 measurements. The fair value of the mortgage loans held for sale are measured using observable quoted market or contract prices or market price equivalents and are classified as level 2.
Derivative Assets and Derivative Liabilities. Derivative assets and derivative liabilities are reported at fair value utilizing level 2 measurements. The fair value of derivative assets and liabilities is determined based on prices that are obtained from a third-party which uses observable market inputs. Derivative assets and liabilities are classified as level 2.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
December 31, 2019 | Inputs |
| Inputs |
| Inputs |
| Fair Value | ||||
Debt securities available for sale | |||||||||||
U.S. Treasury securities | $ | — | $ | | $ | — | $ | | |||
Obligations of U.S. government corporations and agencies |
| — |
| |
| — |
| | |||
Obligations of states and political subdivisions |
| — |
| |
| — |
| | |||
Commercial mortgage-backed securities | — | | — | | |||||||
Residential mortgage-backed securities |
| — |
| |
| — |
| | |||
Corporate debt securities |
| — |
| |
| — |
| | |||
Equity securities | — |
| |
| — |
| | ||||
Loans held for sale | — | | — | | |||||||
Derivative assets | — | | — | | |||||||
Derivative liabilities | — | | — | | |||||||
Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
December 31, 2018 | Inputs |
| Inputs |
| Inputs |
| Fair Value | ||||
Debt securities available for sale | |||||||||||
U.S. Treasury securities | $ | — | $ | | $ | — | $ | | |||
Obligations of U.S. government corporations and agencies |
| — |
| |
| — |
| | |||
Obligations of states and political subdivisions |
| — |
| |
| — |
| | |||
Commercial mortgage-backed securities | — | | — | | |||||||
Residential mortgage-backed securities |
| — |
| |
| — |
| | |||
Corporate debt securities |
| — |
| |
| — |
| | |||
Equity securities | | — | — | | |||||||
Loans held for sale | — | | — | | |||||||
Derivative assets | — | | — | | |||||||
Derivative liabilities | — | | — | | |||||||
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).
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Impaired Loans. The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is identified as impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on non-accrual status and restructured loans in compliance with modified terms. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all impaired loan fair values have been classified as level 3.
OREO. Non-financial assets and non-financial liabilities measured at fair value include OREO (upon initial recognition or subsequent impairment). OREO properties are measured using a combination of observable inputs, including recent appraisals, and unobservable inputs. Due to the significance of the unobservable inputs, all OREO fair values have been classified as level 3.
Bank Property Held for Sale. Bank property held for sale represents certain banking center office buildings which the Company has closed and consolidated with other existing banking centers. Bank property held for sale is measured at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon discounted appraisals or real estate listing price. Due to the significance of the unobservable inputs, all bank property held for sale fair values have been classified as level 3.
The following table summarizes assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2019 and 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
| Inputs |
| Inputs |
| Inputs |
| Fair Value | |||||
December 31, 2019 | ||||||||||||
Impaired loans | $ | — | $ | — | $ | | $ | | ||||
OREO |
| — |
| — |
| |
| | ||||
Bank property held for sale |
| — |
| — |
| |
| | ||||
December 31, 2018 |
|
|
|
|
|
|
|
| ||||
Impaired loans | $ | — | $ | — | $ | | $ | | ||||
OREO |
| — |
| — |
| |
| | ||||
Bank property held for sale | — |
| — |
| |
| |
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The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized level 3 inputs to determine fair value (dollars in thousands):
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
Fair Value | Valuation | Unobservable | Range | |||||||||
Estimate |
| Techniques |
| Input |
| (Weighted Average) | ||||||
December 31, 2019 | ||||||||||||
Impaired loans | $ | |
| Appraisal of collateral |
| Appraisal adjustments |
| - | % | to | - | % |
(- | ||||||||||||
OREO |
| |
| Appraisal of collateral |
| Appraisal adjustments |
| - | % | to | - | % |
(- | ||||||||||||
Bank property held for sale | | Appraisal of collateral or real estate listing price | Appraisal adjustments | - | % | to | - | % | ||||
(- | ||||||||||||
December 31, 2018 | ||||||||||||
Impaired loans | $ | |
| Appraisal of collateral |
| Appraisal adjustments |
| - | % | to | - | % |
(- | ||||||||||||
OREO |
| |
| Appraisal of collateral |
| Appraisal adjustments |
| - | % | to | - | % |
(- | ||||||||||||
Bank property held for sale | | Appraisal of collateral or real estate listing price | Appraisal adjustments | - | % | to | - | % | ||||
(- | ||||||||||||
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The estimated fair values of financial instruments that are reported at amortized cost in the Company’s Consolidated Balance Sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (dollars in thousands):
December 31, 2019 | December 31, 2018 | ||||||||||
Carrying |
| Fair |
| Carrying |
| Fair | |||||
Amount |
| Value |
| Amount |
| Value | |||||
Financial assets: | |||||||||||
Level 1 inputs: | |||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | |||
Level 2 inputs: | |||||||||||
Debt securities held to maturity | — | — | | | |||||||
Accrued interest receivable |
| |
| |
| |
| | |||
Level 3 inputs: | |||||||||||
Portfolio loans, net |
| |
| |
| |
| | |||
Mortgage servicing rights | | | | | |||||||
Other servicing rights | | | | | |||||||
Financial liabilities: | |||||||||||
Level 2 inputs: | |||||||||||
Time deposits | $ | | $ | | $ | | $ | | |||
Securities sold under agreements to repurchase |
| |
| |
| |
| | |||
Short-term borrowings | | | — | — | |||||||
Long-term debt |
| |
| | |
| | ||||
Junior subordinated debt owed to unconsolidated trusts |
| |
| |
| |
| | |||
Accrued interest payable |
| |
| |
| |
| | |||
Level 3 inputs: | |||||||||||
Senior notes, net of unamortized issuance costs | | | | | |||||||
Subordinated notes, net of unamortized issuance costs | | | | | |||||||
In addition to the financial instruments in the above table, the Company owns Visa Class B shares, recorded at a nominal carrying value. These shares are subject to certain transfer restrictions currently and will be convertible into Visa Class A shares upon final resolution of certain litigation matters involving Visa. Further, the Company also owns private equity investments, and investments in limited partnerships, limited liability companies and other investments with a carrying value of $
Note 19. Earnings Per 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 restricted stock units were vested. At December 31, 2019,
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Earnings per common share have been computed as follows (dollars in thousands, except per share data):
For the Years Ended December 31, | |||||||||
2019 |
| 2018 |
| 2017 | |||||
Net income | $ | | $ | | $ | | |||
Shares: | |||||||||
Weighted average common shares outstanding |
| |
| |
| | |||
Dilutive effect of outstanding options, warrants and restricted stock units as determined by the application of the treasury stock method |
| |
| |
| | |||
Weighted average common shares outstanding, as adjusted for diluted earnings per share calculation |
| |
| |
| | |||
Basic earnings per common share | $ | | $ | | $ | | |||
Diluted earnings per common share | $ | | $ | | $ | | |||
Note 20. Accumulated Other Comprehensive Income (Loss)
The following table represents changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods below (dollars in thousands):
Year Ended | |||||||||||||||||||||
December 31, | |||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||
Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | |||||||||||||
Unrealized gains (losses) on debt securities available for sale: | |||||||||||||||||||||
Balance at beginning of period | $ | ( | | ( | $ | ( | | ( | $ | | ( | | |||||||||
Unrealized holding gains (losses) on debt securities available for sale, net | | ( | | ( | | ( | ( | | ( | ||||||||||||
Unrealized losses on debt securities transferred from held to maturity to available for sale | ( | | ( | — | — | — | — | — | — | ||||||||||||
Amounts reclassified from accumulated other comprehensive income, net | ( | | ( | | ( | | ( | | ( | ||||||||||||
Tax Cuts and Jobs Act of 2017 reclassification | — | — | — | — | ( | ( | — | — | — | ||||||||||||
Balance at end of period | $ | | ( | | $ | ( | | ( | $ | ( | | ( | |||||||||
Unrealized gains (losses) on cash flow hedges: | |||||||||||||||||||||
Balance at beginning of period | — | — | — | — | — | — | — | — | — | ||||||||||||
Unrealized holding gains (losses) on cash flow hedges, net | ( | | ( | — | — | — | — | — | — | ||||||||||||
Amounts reclassified from accumulated other comprehensive income, net | | ( | | — | — | — | — | — | — | ||||||||||||
Balance at end of period | $ | ( | | ( | $ | — | — | — | $ | — | — | — | |||||||||
Total accumulated other comprehensive income (loss) | $ | | ( | | $ | ( | | ( | $ | ( | | ( | |||||||||
125
Note 21. Operating Segments and Related Information
The Company has
The Company’s
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”. The Company accounts for intersegment revenue and transfers at current market value.
Following is a summary of selected financial information for the Company’s operating segments (dollars in thousands):
Goodwill | Total Assets | |||||||||||
| December 31, 2019 |
| December 31, 2018 |
| December 31, 2019 |
| December 31, 2018 | |||||
Banking | $ | | $ | | $ | | $ | | ||||
Remittance Processing |
| |
| |
| |
| | ||||
Wealth Management |
| |
| |
| |
| | ||||
Other |
| — |
| — |
| ( |
| ( | ||||
Totals | $ | $ | $ | | $ | |||||||
126
Years ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Net interest income: | |||||||||
Banking | $ | | $ | | $ | | |||
Remittance Processing | | | | ||||||
Wealth Management |
| — |
| |
| | |||
Other |
| ( |
| ( |
| ( | |||
Total net interest income | $ | | $ | | $ | | |||
Non-interest income: | |||||||||
Banking | $ | | $ | | $ | | |||
Remittance Processing |
| |
| |
| | |||
Wealth Management |
| |
| |
| | |||
Other |
| ( |
| ( |
| ( | |||
Total non-interest income | $ | | $ | | $ | | |||
Non-interest expense: | |||||||||
Banking | $ | | $ | | $ | | |||
Remittance Processing | | | | ||||||
Wealth Management | | | | ||||||
Other | | | | ||||||
Total non-interest expense | $ | | $ | | $ | | |||
Income before income taxes: | |||||||||
Banking | $ | | $ | | $ | | |||
Remittance Processing | | | | ||||||
Wealth Management | | | | ||||||
Other | ( | ( | ( | ||||||
Total income before income taxes | $ | | $ | | $ | | |||
Net income: | |||||||||
Banking | $ | | $ | | $ | | |||
Remittance Processing |
| |
| |
| | |||
Wealth Management |
| |
| |
| | |||
Other |
| ( |
| ( |
| ( | |||
Total net income | $ | | $ | | $ | | |||
Note 22. Leases
The Company has operating leases consisting primarily of equipment leases and real estate leases. The Company leases real estate property for bank branches, ATM locations, and office space with terms extending through 2032. As of December 31, 2019, the Company reported $
127
The following tables represents lease costs and other lease information for the periods presented (dollars in thousands):
Year Ended | |||
Lease Costs |
| December 31, 2019 | |
Operating lease costs | $ | | |
Variable lease costs |
| | |
Short-term lease costs | | ||
Sublease income | - | ||
Net lease cost | $ | | |
Other information | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating lease cash flows – Fixed payments | $ | | |
Operating lease cash flows – Liability reduction |
| | |
Right of use assets obtained during the period in exchange for operating lease liabilities | | ||
Weighted average lease term (in years) | |||
Weighted average discount rate | |||
At December 31, 2019, the Company was obligated under noncancelable operating leases for office space and other commitments. Rent expense under operating leases, included in net occupancy and equipment expense, was $
Rent commitments were as follows (dollars in thousands):
December 31, 2019 | ||
2020 | $ | |
2021 |
| |
2022 | ||
2023 | ||
2024 | ||
Thereafter | ||
Amounts representing interest | ( | |
Present value of net future minimum lease payments | $ | |
128
Note 23. Parent Company Only Financial Information
Condensed financial data for First Busey Corporation is presented below (dollars in thousands).
BALANCE SHEETS
December 31, | ||||||
| 2019 |
| 2018 | |||
ASSETS | ||||||
Cash and cash equivalents | $ | | $ | | ||
Securities equity investments | | | ||||
Investments in subsidiaries: | ||||||
Bank |
| |
| | ||
Non-bank |
| |
| — | ||
Premises and equipment, net |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Liabilities: | ||||||
Short-term borrowings | $ | | $ | — | ||
Long-term debt | | — | ||||
Senior notes, net of unamortized issuance costs | | | ||||
Subordinated notes, net of unamortized issuance costs | | | ||||
Junior subordinated debentures owed to unconsolidated trusts | | | ||||
Other liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Total stockholders' equity |
| |
| | ||
Total liabilities and stockholders' equity | $ | | $ | | ||
129
STATEMENTS OF INCOME
Years Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Operating income: | |||||||||
Dividends from subsidiaries: | |||||||||
Bank | $ | | $ | — | $ | — | |||
Non-bank |
| — |
| |
| | |||
Interest income |
| |
| |
| | |||
Security (losses) gains, net | ( | | — | ||||||
Other income |
| |
| |
| | |||
Total operating income |
| |
| |
| | |||
Expense: | |||||||||
Salaries, wages and employee benefits |
| |
| |
| | |||
Interest expense |
| |
| |
| | |||
Operating expense |
| |
| |
| | |||
Total expense |
| |
| |
| | |||
Income (loss) before income tax benefit and equity in undistributed (in excess of) net income of subsidiaries | |
| |
| ( | ||||
Income tax benefit |
| |
| |
| | |||
Income (loss) before equity in undistributed (in excess of) net income of subsidiaries |
| |
| |
| ( | |||
Equity in undistributed (in excess of) net income of subsidiaries: | |||||||||
Bank |
| |
| |
| | |||
Non-bank |
| |
| ( |
| | |||
Net income | $ | | $ | | $ | | |||
130
STATEMENTS OF CASH FLOWS
Years Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Cash Flows from Operating Activities | |||||||||
Net income | $ | | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||
Depreciation and amortization |
| |
| |
| | |||
Distributions less than net income of subsidiaries |
| ( |
| ( |
| ( | |||
Net security losses (gains) | | ( | — | ||||||
Stock-based compensation |
| |
| |
| | |||
Changes in assets and liabilities: | |||||||||
Decrease (increase) in other assets |
| ( |
| |
| ( | |||
Increase (decrease) in other liabilities |
| ( |
| |
| ( | |||
Net cash provided by (used in) operating Activities |
| |
| |
| ( | |||
Cash Flows from Investing Activities | |||||||||
Purchase of equity securities | ( | — | — | ||||||
Net cash (outlay) for business acquisition | ( | — | ( | ||||||
Purchases of premises and equipment |
| ( |
| ( |
| — | |||
Net cash (used in) investing activities |
| ( |
| ( |
| ( | |||
Cash Flows from Financing Activities | |||||||||
Proceeds from charter amendment with subsidiary bank |
| — |
| |
| | |||
Cash paid for withholding taxes on share based payments |
| ( |
| ( |
| ( | |||
Cash dividends paid |
| ( |
| ( |
| ( | |||
Repayments of debt | ( | ( | ( | ||||||
Proceeds from issuance of debt | | — | | ||||||
Proceeds from stock options exercised | | — | | ||||||
Purchase of treasury stock | ( | — | — | ||||||
Common stock issuance costs | ( | — | ( | ||||||
Net cash (used in) provided by financing activities |
| ( |
| ( |
| | |||
Net (decrease) increase in cash and due from subsidiary bank |
| ( |
| |
| | |||
Cash and cash equivalents, beginning of period |
| |
| |
| | |||
Cash and cash equivalents, ending of period | $ | | $ | | $ | | |||
131
Note 24. Unaudited Interim Financial Data
The following table reflects summarized unaudited quarterly data for the periods described (dollars in thousands, except per share data):
2019 | ||||||||||||
| December 31 |
| September 30 |
| June 30 |
| March 31 | |||||
Total interest income | $ | | $ | | $ | | $ | | ||||
Total interest expense |
| |
| |
| |
| | ||||
Net interest income |
| |
| |
| |
| | ||||
Provision for loan losses |
| |
| |
| |
| | ||||
Total non-interest income |
| |
| |
| |
| | ||||
Total non-interest expense |
| |
| |
| |
| | ||||
Income before income taxes |
| |
| |
| |
| | ||||
Income taxes |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Basic earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share | $ | | $ | | $ | | $ | | ||||
2018 | ||||||||||||
| December 31 |
| September 30 |
| June 30 |
| March 31 | |||||
Total interest income | $ | | $ | | $ | | $ | | ||||
Total interest expense |
| |
| |
| |
| | ||||
Net interest income |
| |
| |
| |
| | ||||
Provision for loan losses |
| |
| |
| |
| | ||||
Total non-interest income |
| |
| |
| |
| | ||||
Total non-interest expense |
| |
| |
| |
| | ||||
Income before income taxes |
| |
| |
| |
| | ||||
Income taxes |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Basic earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share | $ | | $ | | $ | | $ | | ||||
132
Exhibit Index
Exhibit |
| Description of Exhibit |
|---|---|---|
3.1 | ||
3.2 | ||
4.1 | Certain instruments defining the rights of holders of long-term debt of the First Busey, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the First Busey and its subsidiaries on a consolidated basis, have not been filed as exhibits. First Busey hereby agrees to furnish a copy of any of these agreements to the SEC upon request. | |
*4.2 | ||
10.1† | ||
10.2† | ||
10.3† | ||
10.4† | ||
10.5† | ||
10.6† | ||
10.7† | ||
133
Exhibit |
| Description of Exhibit |
|---|---|---|
10.8† | ||
10.9 | ||
10.10† | ||
10.11† | ||
10.12† | ||
10.13† | ||
10.14† | ||
10.15† | ||
10.16† | ||
10.17† | ||
10.18† | ||
10.19† |
134
Exhibit |
| Description of Exhibit |
|---|---|---|
10.20† | ||
10.21† | ||
10.22† | ||
10.23† | ||
10.24† | ||
10.25† | ||
10.26† | ||
10.27† | ||
10.28† | ||
10.29† | ||
10.30† | ||
135
Exhibit |
| Description of Exhibit |
|---|---|---|
10.31† | ||
10.32 | ||
10.33† | ||
10.34† | ||
10.35† | ||
10.36† | ||
10.37† | ||
*21.1 | ||
*23.1 | ||
*31.1 | ||
*31.2 | ||
*32.1 | ||
*32.2 | ||
101.INS | iXBRL Instance Document | |
101.SCH | iXBRL Taxonomy Extension Schema | |
101.CAL | iXBRL Taxonomy Extension Calculation Linkbase | |
136
Exhibit |
| Description of Exhibit |
|---|---|---|
101.LAB | iXBRL Taxonomy Extension Label Linkbase | |
101.PRE | iXBRL Taxonomy Extension Presentation Linkbase | |
101.DEF | iXBRL Taxonomy Extension Definition Linkbase | |
104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
* Filed herewith | |
** First Busey has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K. First Busey hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request. | |
† Management contract or compensatory plan |
137
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 2020 | ||
FIRST BUSEY CORPORATION | ||
BY | /s/ VAN A. DUKEMAN | |
Van A. Dukeman | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
BY | /s/ JEFFREY D. JONES | |
Jeffrey D. Jones | ||
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|---|---|---|---|---|
/s/ VAN A. DUKEMAN | President and Chief Executive Officer; Director | February 27, 2020 | ||
Van A. Dukeman | (Principal Executive Officer) | |||
/s/ JEFFREY D. JONES | Chief Financial Officer | February 27, 2020 | ||
Jeffrey D. Jones | (Principal Financial Officer and Principal Accounting Officer) | |||
/s/ GREGORY B. LYKINS | Chairman | February 27, 2020 | ||
Gregory B. Lykins | ||||
/s/ GEORGE BARR | Director | February 27, 2020 | ||
George Barr | ||||
/s/ STANLEY J. BRADSHAW | Director | February 27, 2020 | ||
Stanley J. Bradshaw | ||||
/s/ MICHAEL D. CASSENS | Director | February 27, 2020 | ||
Michael D. Cassens | ||||
/s/ DAVID J. DOWNEY | Director | February 27, 2020 | ||
David J. Downey | ||||
/s/ KAREN M. JENSEN | Director | February 27, 2020 | ||
Karen M. Jensen | ||||
138
Signature |
| Title |
| Date |
|---|---|---|---|---|
/s/ FREDERIC L. KENNEY | Director | February 27, 2020 | ||
Frederic L. Kenney | ||||
/s/ STEPHEN V. KING | Director | February 27, 2020 | ||
Stephen V. King | ||||
/s/ GEORGE T. SHAPLAND | Director | February 27, 2020 | ||
George T. Shapland | ||||
/s/ THOMAS G. SLOAN | Director | February 27, 2020 | ||
Thomas G. Sloan | ||||
139
EXHIBIT 4.2
DESCRIPTION OF THE COMPANY’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
The common stock of First Busey Corporation (the “Company,” which is also referred to herein as “we,” “our” or “us”) is registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. The following description of the material terms of the Company’s common stock is only a summary. This summary does not purport to be a complete description of the terms and conditions of the Company’s common stock and is subject to and qualified in its entirety by reference to the Company’s Amended and Restated Articles of Incorporation, as amended, which we refer to as the “Articles of Incorporation” and the Company’s Amended and Restated By-laws, which we refer to as the “Bylaws,” each of which are filed as an exhibit to the Company’s Annual Report on Form 10-K of which this exhibit is a part, as well as the Nevada General Corporation Law, which we refer to as the “NGCL,” and any other documents referenced in the summary and from which the summary is derived.
General
We have the authority to issue 66,666,667 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share.
The following description of the material terms of our capital stock is only a summary. This summary does not purport to be a complete description of the terms and conditions of our capital stock in all respects and is subject to and qualified in its entirety by reference to our Articles of Incorporation and Bylaws, as well as the NGCL, and any other documents referenced in the summary and from which the summary is derived.
Common Stock
General. Under our Articles of Incorporation, we have the authority to issue 66,666,667 shares of our common stock, par value $0.001 per share. Our common stock is listed for trading on the Nasdaq Global Select Market under the symbol "BUSE."
Each share of our common stock has the same relative rights and is identical in all respects to every other share of our common stock. Our shares of common stock are neither redeemable nor convertible, and the holders thereof have no preemptive or subscription rights to purchase any of our securities.
Voting Rights. Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders. There is no cumulative voting in the election of directors.
Liquidation Rights. Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive, pro rata, our assets which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding.
Dividends Payable on Shares of Common Stock. In general, the holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as our board of directors may from time to time determine. The ability of our board of directors to declare and pay dividends on our common stock may be affected by both general corporate law considerations and policies of the Board of Governors of the Federal Reserve, which we refer to herein as the “Federal Reserve,” applicable to bank holding companies. As a Nevada corporation, we are subject to the limitations of Nevada law, which allows us to pay dividends unless, after such dividend, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus any amount that would be needed if we were
to be dissolved at the time of the dividend payment to satisfy the preferential rights of stockholders whose preferential rights are superior to those receiving the dividend. As a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the cash payment of dividends on our common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred securities) in light of our earnings, capital adequacy and financial condition. As a general matter, the Federal Reserve indicates that the board of directors of a bank holding company should eliminate, defer or significantly reduce the dividends if: (i) the company's net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company's capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Anti-Takeover Provisions
General. Our Articles of Incorporation and Bylaws may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders. These provisions are summarized in the following paragraphs.
Authorized Shares of Capital Stock. Authorized but unissued shares of our common stock and preferred stock under our Articles of Incorporation could (within the limits imposed by applicable law and the rules of The Nasdaq Stock Market LLC) be issued in one or more transactions that could make a change of control of us more difficult, and therefore more unlikely. The additional authorized shares could be used to discourage persons from attempting to gain control of us by diluting the voting power of shares then outstanding or increasing the voting power of persons who would support the board of directors in a potential takeover situation, including by preventing or delaying a proposed business combination that is opposed by the board of directors although perceived to be desirable by some stockholders.
Limitations on Right to Call Special Meetings; Stockholder Proposal Notice Requirements. Under our Bylaws, a special meeting of our stockholders may be called only by the Chairman of our board of directors, our Chief Executive Officer or our President only after receiving the written request to hold a meeting from: (i) a majority of our board of directors; or (ii) stockholders owning at least 50% of the entire capital stock issued and outstanding and entitled to vote. Additionally, our Bylaws require that stockholder proposals meet certain advanced notice and minimum informational requirements. These provisions could have the effect of delaying until the next annual stockholders meeting stockholder actions which are favored by the holders of a majority of our outstanding voting securities.
State Anti-Takeover Laws. Although under our Articles of Incorporation we have opted not to be governed by Nevada's anti-takeover law known as the “Combination with Interested Stockholders Statute,” we may become subject to this provision in the future. In addition, the NGCL contains a “Control Share Acquisition Statute,” which does not currently apply to us.
The Combination with Interested Stockholders Statute prevents "interested stockholders" and an applicable Nevada corporation from entering into a "combination" unless certain conditions are met. A combination means, among other things, any merger or consolidation with an "interested stockholder," or any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, with an "interested stockholder" having: (a) an aggregate market value equal to more than 5% of the aggregate market value of the assets of the corporation; (b) an aggregate market value equal to more than 5% of the aggregate market value of all outstanding voting shares of the corporation; or (c) representing more than 10% of the earning power or net income of the corporation. An "interested stockholder" means the beneficial owner of 10% or more of the voting shares of a corporation, or an affiliate or associate of a corporation who at any time within two years immediately prior to the date in question was the beneficial owner of 10% or more of the voting shares of the corporation. A corporation may
not engage in a "combination" within two years after the interested stockholder acquired its shares unless the combination or the purchase of shares made by the interested stockholder is approved by the board of directors before the interested stockholder acquired such shares or the combination is approved by the board of directors and, at or after that time, the combination is approved at an annual or special meeting of the stockholders of the corporation representing at least 60% of the outstanding voting power held by disinterested stockholders. If such approval is not obtained, then after the expiration of the two-year period, the business combination may be consummated: (x) if the combination or the transaction in which the person became an interested stockholder was approved by the board of directors before the person became an interested stockholder; (y) if the combination is approved at an annual or special meeting of the stockholders of the corporation by a majority of the voting power held by disinterested stockholders; or (z) if the consideration to be paid by the interested stockholder for disinterested shares of common or preferred stock, as applicable, is at least equal to the highest of: (i) the highest price per share of such stock paid by the interested stockholder within the two years immediately preceding the date of the announcement of the combination or in the transaction in which the person became an interested stockholder, whichever is higher, plus interest from that date through the date of consummation of the combination and less any dividends paid during the same period; (ii) the market value per share of such stock on the date of the announcement of the combination or the date the interested stockholder acquired the shares, whichever is higher, plus interest from that date through the date of consummation of the combination and less any dividends paid during the same period; or (iii) the amount specified in the corporation's articles of incorporation, including in any certificate of designation for the class or series of shares are entitled upon the consummation of a transaction of a type encompassing the combination.
The Control Share Acquisition Statute prohibits an acquiror, under certain circumstances, from voting shares of a target corporation's stock after crossing certain threshold ownership percentages, unless the acquiror obtains the approval of the target corporation's stockholders. The Control Share Acquisition Statute specifies three thresholds: (a) one-fifth or more but less than one-third; (b) one-third or more but less than a majority; and (c) a majority or more, of the voting power of the corporation in the election of directors. Once an acquiror crosses one of the above thresholds, those shares acquired in such offer or acquisition and those shares acquired within the preceding ninety days become “Control Shares” and such Control Shares are deprived of the right to vote until disinterested stockholders restore the right. The Control Shares Acquisition Statute also provides that in the event Control Shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the Control Shares are entitled to demand payment for the fair value of their shares. The board of directors is to notify the stockholders after such an event has occurred that they have the right to receive the fair value of their shares in accordance with statutory procedures established generally for dissenters' rights. The Control Share Acquisition Statute currently does not apply to us because we do not have 100 or more stockholders of record who are residents of the State of Nevada.
Preferred Stock
We may issue up to 1,000,000 shares of preferred stock, $0.001 par value per share, from time to time in one or more series. Our board of directors, without further approval of the stockholders, has the authority to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of our common stock.
EXHIBIT 21.1
List of Subsidiaries of First Busey Corporation and State of Incorporation/Organization
Direct:
Busey Bank - Illinois
First Busey Risk Management - Nevada
Deed of Trust Services Corporation - Missouri
First Busey Statutory Trust II - Delaware
First Busey Statutory Trust III - Delaware
First Busey Statutory Trust IV - Delaware
Pulaski Financial Statutory Trust I - Connecticut
Pulaski Financial Statutory Trust II - Delaware
Indirect:
Busey Capital Management, Inc. - Illinois
Echo Holdings I, LLC - Florida
Echo Holdings II, LLC - Florida
Echo Holdings III, LLC - Florida
Echo Properties I, LLC - Florida
Echo Properties II, LLC - Florida
Echo Properties III, LLC - Florida
Echo Properties IV, LLC - Florida
Echo Properties V, LLC - Florida
Echo Properties VI, LLC - Florida
Echo Properties VII, LLC - Florida
Echo Properties VIII, LLC - Florida
Echo Properties IX, LLC - Florida
Echo Properties X, LLC - Florida
Echo Properties XI, LLC - Florida
Echo Properties XII, LLC - Florida
Echo Properties XIII, LLC - Florida
Echo Resources LLC - Illinois
First Community OREO LLC - Illinois
First Community OREO LLC III - Illinois
Goshen Millstone Condo I LLC - Missouri
Goshen Millstone Condo II LLC - Missouri
Goshen Millstone Land LLC - Missouri
Goshen Real Estate LLC - Illinois
Goshen Real Estate LLC, I - Illinois
Goshen Real Estate LLC, II - Illinois
Goshen Real Estate LLC, III - Illinois
Goshen Real Estate LLC, IV - Illinois
Goshen Real Estate LLC, V - Illinois
Goshen Real Estate of Illinois, LLC - Missouri
FirsTech, Inc. - Illinois
Pillar Properties I, LLC - Illinois
Pillar Properties II, LLC - Illinois
Pillar Properties III, LLC - Illinois
Pillar Properties IV, LLC - Illinois
Pillar Properties V, LLC - Illinois
Pillar Properties VI, LLC - Illinois
Pillar Properties VII, LLC - Illinois
Pillar Properties VIII, LLC - Illinois
Pillar Properties IX, LLC - Illinois
Pillar Properties X, LLC - Illinois
Pillar Properties XI, LLC - Illinois
Pillar Properties XII, LLC - Illinois
Pillar Properties XIII, LLC - Illinois
Pillar Properties XIV, LLC - Illinois
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Pillar Properties XV, LLC - Illinois
Pillar Properties XVI, LLC - Illinois
Pillar Properties XVII, LLC - Illinois
Pillar Properties XVIII, LLC - Illinois
Pillar Properties XIX, LLC - Illinois
Pillar Properties XX, LLC - Illinois
Priority Property Holdings, LLC - Missouri
Pulaski Service Corporation - Missouri
2
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (No. 333-167683, 333-145097, 333-115237 and 333-79217) on Forms S-8 and the Registration Statements (No. 333-221428 and 333-158358) on Forms S-3 of First Busey Corporation of our reports dated February 27, 2020 relating to the Consolidated Financial Statements and the effectiveness of internal control over financial reporting of First Busey Corporation, appearing in this Annual Report on Form 10-K of First Busey Corporation for the year ended December 31, 2019.
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/s/ RSM US LLP |
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Champaign, Illinois |
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February 27, 2020 |
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Van A. Dukeman, President and Chief Executive Officer of First Busey Corporation, certify that:
1) I have reviewed this Annual Report on Form 10-K of First Busey Corporation;
2) Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3) Based on my knowledge, the Financial Statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and
d) disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ VAN A. DUKEMAN |
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Van A. Dukeman |
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President and Chief Executive Officer |
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Date: February 27, 2020 |
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Jeffrey D. Jones, Chief Financial Officer of First Busey Corporation, certify that:
1) I have reviewed this Annual Report on Form 10-K of First Busey Corporation;
2) Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3) Based on my knowledge, the Financial Statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and
d) disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ JEFFREY D. JONES |
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Jeffrey D. Jones |
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Chief Financial Officer |
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Date: February 27, 2020 |
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EXHIBIT 32.1
The following certification is provided by the undersigned Chief Executive Officer of First Busey Corporation on the basis of such officer’s knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CERTIFICATION
I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the accompanying Annual Report of First Busey Corporation on Form 10-K for the year ended December 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Annual Report fairly presents, in all material respects, the financial condition and results of operations of First Busey Corporation as of and for the periods covered by the Annual Report.
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/s/ VAN A. DUKEMAN |
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Van A. Dukeman |
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President and Chief Executive Officer |
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Date: February 27, 2020 |
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EXHIBIT 32.2
The following certification is provided by the undersigned Chief Financial Officer of First Busey Corporation on the basis of such officer’s knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CERTIFICATION
I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the accompanying Annual Report of First Busey Corporation on Form 10-K for the year ended December 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Annual Report fairly presents, in all material respects, the financial condition and results of operations of First Busey Corporation as of and for the periods covered by the Annual Report.
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/s/ JEFFREY D. JONES |
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Jeffrey D. Jones |
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Chief Financial Officer |
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Date: February 27, 2020 |
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