EDGAR 10-K Filing

Company CIK: 314489
Filing Year: 2022
Filename: 314489_10-K_2022_0001558370-22-001928.json

---

ITEM 1. BUSINESS
ITEM 1. BUSINESS
Introduction
First Busey, a Nevada corporation organized in 1980, is a $12.9 billion financial holding company. First Busey conducts a broad range of financial services through its wholly-owned bank subsidiary, Busey 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
Over the last several years, First Busey completed the following acquisitions as part of our strategy to expand into new service areas and to provide broader coverage in areas where we already maintain a presence:
Acquisition Date
Companies Acquired
January 8, 2015
Herget Financial Corp. and its wholly-owned bank subsidiary, Herget Bank, National Association
April 30, 2016
Pulaski Financial Corp. and its wholly-owned subsidiary, Pulaski Bank, National Association
July 2, 2017
First Community Financial Partners, Inc. and its wholly-owned subsidiary, First Community Financial Bank
October 1, 2017
Mid Illinois Bancorp, Inc. and its wholly-owned subsidiary, South Side Trust & Savings Bank of Peoria
January 31, 2019
The Bank Ed Corp. and its wholly-owned subsidiary, TheBANK of Edwardsville
August 31, 2019
Investors' Security Trust Company
May 31, 2021
Cummins-American Corp. and its wholly-owned subsidiary, Glenview State Bank
Further information related to acquisitions made prior to January 1, 2021, has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition.
2021 Acquisition
On May 31, 2021, First Busey acquired CAC, the holding company for GSB, through a merger transaction. The partnership enhances the Company’s existing deposit, commercial banking, and wealth management presence in the Chicago-Naperville-Elgin, IL-IN-WI Metropolitan Statistical Area. First Busey operated GSB as a separate banking subsidiary until August 14, 2021, when it was merged with and into Busey Bank. At that time, all GSB banking centers became branches of Busey Bank.
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 payment technology solutions through FirsTech.
Busey Bank is an Illinois state-chartered bank organized in 1868 with its headquarters in Champaign, Illinois. Busey Bank has 46 banking centers in Illinois, eight in Missouri, three in southwest Florida, and one in Indianapolis, Indiana.
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.
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 central Illinois, northern Illinois (including the Chicago metropolitan area), the St. Louis, Missouri metropolitan area, southwest Florida, and central Indiana.
Busey Bank provides a full range of asset management, investment, brokerage, fiduciary, philanthropic advisory, tax preparation, and farm management services to individuals, businesses, and foundations through its Wealth Management business. As of December 31, 2021, $12.7 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. In addition, Busey Bank provides professional farm management and brokerage services to the agricultural industry.
FirsTech, a subsidiary of Busey Bank with offices across the Midwest, provides comprehensive and innovative payment technology solutions. Through our payment platform, which utilizes an API cloud-based platform, our technology provides for fully integrated payments capabilities. FirsTech's multi-channel payment platform allows businesses to collect payments from their customers across a variety of payment modules, ranging from online payment methods to offline payment methods, including but not limited to: text-based mobile bill pay, electronic payment concentration delivered to Automated Clearing House networks, money management and credit card networks, walk-in payment processing for customers at retail pay agents, customer service payments made over a telephone, direct debit services, and lockbox remittance processing for customers to make payments by mail. FirsTech also provides additional tools to help clients with billing, reconciliation, bill reminders, and treasury services. Our client base represents a diverse set of industries, but we generally cater to the utility, financial services (insurance companies, banks, and credit unions), and telecommunications industries. The Company continues to make strategic investments in FirsTech which include the creation of our new BaaS platform. This BaaS offering will provide white-labeled FirsTech architected payment technologies to financial institutions allowing them to offer payment solutions to their customer bases. FirsTech continues to roll out new products and services to the First Busey customer base and has subsequently commercialized this platform across a dozen banks. Initiated by onboarding two seasoned executives at the end of 2020, FirsTech is investing significantly across technology, human capital, and sales to expand its world class payments platform.
First Busey Risk Management, a wholly-owned subsidiary of First Busey, 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.
First Busey also has various other subsidiaries that are not significant to the consolidated entity.
First Busey’s operations are managed through three operating segments consisting of Banking, FirsTech, 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.
Banking Center Markets
Busey Bank has 46 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. Historically, the financial condition of the state of Illinois, in which the largest portion of Busey Bank’s customer base resides, has been characterized by low credit ratings and budget deficits. However, with the recent improvement in the state’s financial outlook, during the second half of 2021 Illinois received improved ratings from Moody’s Investor Service, S&P Global Ratings, and Fitch.
Busey Bank has eight 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. Twelve of our banking centers in Illinois are located within the boundaries of the St. Louis Metropolitan Statistical Area.
Busey Bank has three 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.
In November 2021, First Busey completed its previously announced service center closures as part of our Personal Banking Transformation Plan, which resulted in the consolidation of 17 branches across our various markets.
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, payment technology solution companies, fintech 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.
Busey 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. Busey Bank attracts a significant amount of deposits through its 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. Busey Bank competes for deposits by offering a variety of deposit accounts at competitive rates, high-quality customer service, convenient business hours, technology enabled solutions including internet and mobile banking, and convenient banking centers with interbranch deposit and withdrawal privileges.
Based on information obtained from the FDIC Summary of Deposits dated June 30, 2021, the most recent report available, Busey Bank ranked in the top 10 in total deposits in 12 Illinois counties:
As of June 30, 2021
Busey Bank
County
Market Share Ranking
Champaign
Macon
Madison
Shelby
Tazewell
Mclean
Peoria
Ford
Grundy
St. Clair
Livingston
Will
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 DFPR, the Federal Reserve, the FDIC and the CFPB. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S. 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.
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 Busey Bank may make; 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 Busey 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 in 2010, the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers (at the time, those with assets of $50 billion and greater), certain provisions of the law triggered at $10.0 billion in assets and the influence of other provisions filtered down in varying degrees to community banks over time, causing the Company’s compliance and risk management processes, and the costs thereof, to increase. The Regulatory Relief Act provided meaningful relief for banks and their holding companies that were not considered systemically important (amended to be those with assets under $250 billion). However, the $10.0 billion threshold remained in place for certain Dodd-Frank Act reforms that are now applicable to the Company, as discussed below.
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 businesses. 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 Busey Bank. 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 particular statutory and regulatory provisions.
COVID-19 Pandemic
Federal bank regulatory agencies, along with their state counterparts, issued a steady stream of guidance responding to the COVID-19 pandemic and they took a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These included, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic; and providing credit under the CRA for certain pandemic-related loans, investments, and public service. Because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews, and they have continued virtual examinations in 2022.
Reference is made to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Impact of COVID-19” below for further information on the impact of the COVID-19 pandemic. In addition, information as to selected topics is contained in the relevant sections of this Supervision and Regulation discussion provided below.
The $10.0 billion Threshold
As indicated in the introduction above, the Dodd-Frank Act included a number of requirements that triggered when a banking entity crossed over $10.0 billion in assets. Those included requirements for stress testing capital, maintenance of a risk committee, adherence to the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds, limitations on interchange fees for certain debit transactions, clearing of swap agreements, and examination and enforcement related to consumer financial services by the CFPB, in addition to a number of heightened reporting requirements. The Regulatory Relief Act eliminated the stress test and risk committee requirements for banking entities between $10.0 billion and $50 billion, but the other Dodd-Frank regulations and reporting requirements were not changed.
The Company crossed the $10.0 billion threshold in 2020. However, the federal bank regulatory agencies issued an Interim Final Rule on November 20, 2020, that provided temporary relief for certain community banking organizations as a result of growth in size from the COVID-19 response. That relief expired December 31, 2021.
The material consequences to the Company of crossing the $10.0 billion threshold are as follows:
Interchange Fees
The Durbin Amendment to the Dodd-Frank Act required the Federal Reserve to establish a maximum permissible interchange fee for many types of debit transactions. Interchange fees, also known as “swipe” fees, are charges that merchants pay to card-issuing banks, such as Busey Bank, for processing electronic payment transactions. The Federal Reserve set the maximum interchange fee at 21 cents, plus five basis points of the transaction value. The Federal Reserve also adopted a rule to allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. Durbin limitations are applicable to any banking entity with over $10.0 billion in assets and will be applicable to Busey Bank after a six-month transition period. Management believes that compliance with Durbin will materially reduce Busey Bank’s earnings on the covered debit transactions.
Volcker Rule
The Volcker Rule (also a part of the Dodd-Frank Act) restricts the ability of banking entities (holding companies and their affiliates) with over $10.0 billion in assets to sponsor or invest in private funds, or to engage in certain types of proprietary trading. In October 2019, the Federal Reserve, OCC, FDIC, Commodity Futures Trading Commission, and SEC finalized rules to tailor the application of the Volcker Rule based on the size and scope of a banking entity’s trading activities and to clarify and amend certain definitions, requirements, and exemptions. Banking entities have two years (with a possibility of extensions) to comply with the Volcker requirements after crossing the $10.0 billion threshold. The Company does not materially engage in the activities prohibited by the Volcker Rule; therefore, the application of the rule will not have a material effect on the operations of the Company and its subsidiaries.
CFPB Examination and Enforcement
Although the CFPB’s rules issued under federal consumer financial protection laws are applicable to all providers of consumer financial services, the CFPB only has examination and enforcement authority over banks with more than $10.0 billion in assets (measured over four consecutive quarters). Busey Bank continues to be examined for compliance with consumer laws by its primary federal regulatory agency, the FDIC, but the CFPB is in the process of assuming supervisory authority in that regard.
Clearing Swaps Agreements
Banks with over $10.0 billion in assets are required to clear swaps agreements on exchanges. The requirement was not deferred by the Interim Final Rule. Busey Bank began to comply with the exchange requirement beginning in 2021.
Risk Committee
The Dodd Frank Act required publicly traded bank holding companies with more than $10.0 billion in total consolidated assets to establish and maintain a risk committee. Pursuant to the Federal Reserve’s final rules issued under the Regulatory Relief Act, that threshold was increased to $50.0 billion. Although it is not yet required to have a risk committee in place, the Company established a committee comprised of holding company directors in 2018 to oversee risk matters in preparation for future growth.
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 generally are required to hold more capital than other businesses, which directly affects the Company’s earnings capabilities. Although capital historically has 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.
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.” The capital guidelines for U.S. banks beginning in 1989 have been based upon international capital accords, known as “Basel” rules, adopted by the 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 accords recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored into the calculations. Following the global financial crisis, 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
U.S. federal banking agencies adopted 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 regulations that were effective (with a number of phase-ins) in 2015. The Basel III Rule established capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously: it increased the required quantity and quality of capital; and it required a more complex, detailed, and calibrated assessment of risk in the calculation of risk weightings. 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 most bank and savings and loan holding companies. The Company and the Bank are each subject to the Basel III Rule as described below.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but also, in requiring that forms of capital be of higher quality to absorb loss, 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). The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and required deductions from Common Equity Tier 1 Capital in the event that such assets exceeded a percentage of a banking institution’s Common Equity Tier 1 Capital.
Minimum Capital Ratio Requirements
The Basel III Rule requires minimum capital ratios as follows:
● A ratio of Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;
● A ratio of Tier 1 Capital equal to 6% of risk-weighted assets;
● A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and
● A leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.
Capital Conservation Buffer
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 also must 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. Federal bank regulators released a joint statement in response to the COVID-19 pandemic reminding the industry that capital and liquidity buffers were meant to give banks the means to support the economy in adverse situations, and that the agencies would support banks that use the buffers for that purpose if undertaken in a safe and sound manner.
Well-Capitalized Requirements
The ratios described above are minimum standards 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 also could 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, 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 all of the following:
● 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
● 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, 2021: (i) Busey Bank was not subject to a directive from the FDIC to increase its capital and (ii) Busey Bank was well-capitalized, as defined by FDIC regulations. As of December 31, 2021, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the requirements to be well-capitalized. The Company also is in compliance with the capital conservation buffer.
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 depository 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.
Supervision and Regulation of the Company
General
The Company, as the sole stockholder of Busey Bank, is a bank holding company. As a bank holding company, the Company is registered with, and subject to regulation, supervision, and enforcement by, the Federal Reserve under the BHCA. The Company is legally obligated to act as a source of financial and managerial strength to Busey 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 Busey 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 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 “Item 1. Business-Supervision, Regulation and Other Factors-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 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, as long as the activity 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 Busey Bank must be well-capitalized, well-managed, and Busey Bank must have a least a satisfactory 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 “Item 1. Business-Supervision, Regulation and Other Factors-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 “Item 1. Business-Supervision, Regulation and Other Factors-The Role of Capital” above.
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, and this has come into play during the COVID-19 pandemic. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities and changes in the discount rate on bank borrowings. These tools 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 and 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. It 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.
Supervision and Regulation of Busey Bank
General
Busey Bank is an Illinois-chartered bank. Its deposit accounts are insured by the 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, Busey Bank is subject to the examination, supervision, reporting, and enforcement requirements of the DFPR, the chartering authority for Illinois banks. Busey Bank is also regulated by the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like Busey Bank, are not members of the Federal Reserve System.
Deposit Insurance
As an FDIC-insured institution, Busey 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. FDIC assessment rates for institutions that have more than $10.0 billion in assets, such as Busey Bank, are calculated based on a “scorecard” methodology that seeks to capture both the probability that an individual large institution will fail and the magnitude of the impact on the DIF if such a failure occurs, based primarily on the difference between the institution’s average of total assets and average tangible equity. The FDIC has the ability to make discretionary adjustments to the total score, up or down, based upon significant risk factors that are not adequately captured in the scorecard. For institutions like Busey Bank, after accounting for potential base-rate adjustments, the total assessment rate could range from 1.5 to 40 basis points on an annualized basis. An institution’s assessment is determined by multiplying its assessment rate by its assessment base, which is asset based.
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. The reserve ratio reached 1.36% as of September 30, 2018. As a result, the FDIC provided assessment credits to insured depository institutions, like Busey Bank at the time, 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 FDIC applied the small bank credits for quarterly assessment periods beginning July 1, 2019. However, the reserve ratio fell to 1.30% in 2020 because of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1.0 trillion in estimated insured deposits in the first half of 2020, stemming mainly from the COVID-19 pandemic. Although the FDIC could have ceased the small bank credits, it waived the requirement that the reserve ratio be at least 1.35% for full remittance of the remaining assessment credits, and it refunded all small bank credits as of September 30, 2020.
The DIF balance was $121.9 billion on September 30, 2021, up $1.4 billion from the end of the second quarter. The reserve ratio remained at 1.27%, as growth in the fund balance kept pace with growth in insured deposits. The FDIC staff continues to closely monitor the factors that affect the reserve ratio, and any change could impact FDIC assessments.
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, 2021, Busey Bank paid supervisory assessments to the DFPR totaling approximately $0.8 million.
Capital Requirements
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “Item 1. Business-Supervision, Regulation and Other Factors-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, 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 these rules do not, and will not, apply to Busey 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 Busey 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 Busey 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
Busey 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 Busey Bank.
Insider Transactions
Busey Bank is subject to certain restrictions imposed by federal law on “covered transactions” between Busey Bank and its “affiliates.” The Company is an affiliate of Busey 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 Busey 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 Busey 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 Busey Bank, or a principal stockholder of the Company, may obtain credit from banks with which Busey Bank maintains a correspondent relationship.
Safety and Soundness Standards/Risk Management
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 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, 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 risk 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 by the Company for 2022 are discussed under “Item 1A. Risk Factors” below. Busey 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
Busey 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 its customers. These laws require Busey Bank to periodically disclose its 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 Busey 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, Busey 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 Busey 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 law requires FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts) to provide liquidity. The amount of reserves is determined by the Federal Reserve based on tranches of zero, three, and ten percent of a bank’s transaction account deposits. However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the legally mandated reserve maintenance requirement. The action permits Busey Bank to loan or invest funds that previously were unavailable. The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.
Community Reinvestment Act Requirements
The CRA requires Busey 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 Busey Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of Busey Bank’s effectiveness in meeting its CRA requirements. In a joint statement responding to the COVID-19 pandemic, the bank regulatory agencies announced favorable CRA consideration for banks providing retail banking services and lending activities in their assessment areas, consistent with safe and sound banking practices, that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by the pandemic. Those activities include waiving certain fees, easing restrictions on out-of-state and non-customer checks, expanding credit products, increasing credit limits for creditworthy borrowers, providing alternative service options, and offering prudent payment accommodations. The joint statement also provided favorable CRA consideration for certain pandemic-related community development activities.
Anti-Money Laundering
The USA PATRIOT Act, the Bank Secrecy Act and other similar laws are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and have significant implications for FDIC-insured institutions and other businesses involved in the transfer of money. These laws mandate financial services companies to have policies and procedures with respect to measures designed to address 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 CRE is one example of regulatory concern. The interagency CRE Guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant CRE loan concentrations that may warrant greater supervisory scrutiny: (i) CRE 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 CRE 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 CRE concentrations. On December 18, 2015, 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. 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, 2021, Busey 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 Busey 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. The CFPB is in the process of assuming supervisory authority over Busey Bank in that regard.
Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing, and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property, and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The CFPB has from time to time released additional rules as to qualified mortgages and the borrower’s ability to repay. The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.
Supervision and Regulation of 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.
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 63, 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. from May 1998 until its merger with First Busey.
Robin N. Elliott. Mr. Elliott, age 45, 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 48, 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.
Monica L. Bowe. Ms. Bowe, age 48, has served as Chief Risk Officer of First Busey since January 2020. Prior to that, she served as Senior Director of Operational Risk Program Management at KeyBank, a subsidiary of KeyCorp headquartered in Cleveland, Ohio since 2015.
John J. Powers. Mr. Powers, age 66, has served as General Counsel of First Busey since December 2011. Prior to that, he was a stockholder of Meyer Capel, P.C., a law firm based in Champaign, Illinois, since 1998.
Amy L. Randolph. Mrs. Randolph, age 47, 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.
Human Capital
First Busey was built upon a strong commitment to associate, customer, stockholder, and community experiences. Our associates are the cornerstone of this unwavering commitment. Busey’s vision, Service Excellence in Everything We Do, starts with dedication to our associates. We are deeply humbled to be consistently recognized nationally and locally throughout our footprint for this steadfastness. Busey Bank has been named among America’s Best Banks by Forbes magazine. Ranked 52nd overall on the 2022 list, Busey was the top-ranked bank headquartered in Illinois, and only three other Illinois-based banks were included. The organization has also been named among American Banker’s Best Banks to Work For since 2016; voted as one of the Best Places to Work in Illinois since 2016; recognized as one of the 2018 & 2019 Top Workplaces in St. Louis; recognized as a Best Company to Work For in Florida since 2017; recognized among the Best Places to Work in Money Management since 2018 by Pensions & Investments; and recognized as a Best Place to Work in Indiana by the Indiana Chamber of Commerce since 2019 - all in addition to various wellness, training and development, philanthropic and other workplace awards. From exceeding the needs of customers and colleagues to serving our communities selflessly, our associates show unmatched dedication to Busey. Their shared experiences are what make these and other awards possible. Since we opened our doors over 150 years ago, we have maintained our core values, creating a strong foundation and shaping our inclusive culture.
First Busey remains committed to bringing diversity and inclusion to our organization, the banking profession, and the communities where we live and work. Busey is dedicated to attracting and retaining talent across a variety of backgrounds and experiences. A diverse team - one with varying beliefs and opinions - promotes productivity, creativity, and innovation, while better meeting and exceeding the needs of a diverse customer base. Recruiting, supporting, and retaining a diversified workforce with varying perspectives and ideas, while having an inclusive culture, is the foundation of our core values - One Busey. We strive to maintain an inclusive environment free from discrimination of any kind. Busey recognizes the richness diversity brings to our workplace. Our endeavors in this regard are reported to the Employee Benefit and Compensation Committee, which holds the organization accountable to this core value at the highest levels of management. We maintain an Affirmative Action Plan, the results of which - including proactive steps for inclusion - are reviewed by this same group. Busey supports and empowers women in the workplace as reflected in our gender-diverse workforce. In 2021, women comprised of 59% of Team Busey and made up 26% of our senior leadership, providing meaningful contributions not only within the organization but throughout the communities we serve.
Associate engagement is an important barometer of our cultural health. We regularly solicit feedback and understand views of our associates about their work environment and Busey’s culture. The results from engagement surveys are used to implement programs and processes designed to enhance engagement and improve the associate experience. One such way to keep associates informed and engaged is through our quarterly update calls, which are conducted by Busey leadership. The recordings are available for all associates. These calls provide important information about the financial health of the company, but more importantly they provide a cultural touchpoint to solidify Busey’s commitment to our number one asset - our associates. A tenet of our engaged culture is a commitment to investing in associates through unique, award-winning training and development programs. In 2021, 51% of our associate base engaged in talent and leadership development programs. As a result of these programs, 49% of Busey’s open roles were filled internally during 2021 by associates who were promoted or who transferred to new roles. Since 2017, Busey has been a proud recipient of the Association for Talent Development’s BEST Award, which is presented to organizations that demonstrate enterprise-wide success as a result of employee talent development.
Additionally, we care about the health and wellbeing of our associates and their families, as evidenced in the 97% participation rate in our innovative health and wellness program, B Well. Investments in B Well include a stress management component, lifesaving biometric screenings, a corporate health and wellness coach, health club reimbursements, and Health Savings Account (HSA) investments funded by the Company. Busey is honored to be recognized among the 2021 Illinois' Healthiest Employers, presented by Cigna and Crain’s Content Studio.
As of December 31, 2021, First Busey and our subsidiaries had a total of 1,463 full-time equivalents.
Geographic distribution of our associates is as follows:
As of December 31, 2021
Associates
Locations
Full-time
Part-time
Total
%
Banking center associates by location
Illinois
55.0
%
Missouri
9.7
%
Florida
-
4.1
%
Indiana
1.2
%
Banking center associates
1,050
70.0
%
Corporate office associates (1)
30.0
%
Total number of associates
1,427
1,499
100.0
%
Percentage of associates
95.2
%
4.8
%
(1) Corporate office associates work at our corporate headquarters in Illinois, in various banking centers, and remotely.
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 Reports, Quarterly Reports, Current Reports, and any 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 it 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.
Non-GAAP Financial Information
This Annual Report contains certain financial information determined by methods other than in accordance with GAAP. These measures include pre-provision net revenue, adjusted pre-provision net revenue, pre-provision net revenue to average assets, adjusted pre-provision net revenue to average assets, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted net interest income, adjusted net interest margin, adjusted noninterest income, adjusted noninterest expense, efficiency ratio, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per common 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 total net interest income in the case of pre-provision net revenue, adjusted pre-provision net revenue, pre-provision net revenue to average assets, and adjusted pre-provision net revenue to average assets; net income in the case of adjusted net income, adjusted diluted earnings per share, and adjusted return on average assets; total net interest income in the case of adjusted net interest margin; total noninterest income and total noninterest expense in the case of adjusted noninterest expense, efficiency ratio, and adjusted efficiency ratio; and total stockholders’ equity in the case of tangible common equity, tangible common equity to tangible assets, tangible book value per common share, and return on average tangible common equity, appears below. The Company believes the adjusted measures are useful for investors and management to understand the effects of certain non-recurring noninterest items and provide 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 (unaudited)
Pre-Provision Net Revenue, Adjusted Pre-Provision Net Revenue,
Pre-Provision Net Revenue to Average Assets, and Adjusted Pre-Provision Net Revenue to Average Assets (dollars in thousands)
Years Ended December 31,
Pre-provision net revenue
Net interest income
$
270,698
$
282,935
$
287,223
Noninterest income
132,804
118,265
116,415
Less net (gains) losses on sales of securities and unrealized (gains) losses recognized on equity securities
(3,070)
(1,331)
Noninterest expense
(261,780)
(234,197)
(258,794)
Total pre-provision net revenue
$
138,652
$
165,672
$
144,862
Adjustments to pre-provision net revenue
Acquisition and other restructuring expenses
17,351
10,711
20,094
Provision for unfunded commitments
(774)
1,822
-
Amortization of NMTC
5,563
2,311
1,200
Adjusted pre-provision net revenue
$
160,792
$
180,516
$
166,156
Average total assets
$
11,904,935
$
10,292,256
$
9,443,690
Reported: Pre-provision net revenue to average asset
1.16
%
1.61
%
1.53
%
Adjusted: Pre-provision net revenue to average assets
1.35
%
1.75
%
1.76
%
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited)
Adjusted Net Income, Adjusted Diluted Earnings Per Share, and
Adjusted Return on Average Assets
(dollars in thousands, except per share amounts)
Years Ended December 31,
Net income
$
123,449
$
100,344
$
102,953
Adjustments to net income
Acquisition expenses:
Salaries, wages, and employee benefits
7,347
-
4,083
Data processing
3,700
1,523
Lease or fixed asset impairment
-
Professional fees, occupancy, and other
2,599
8,477
Other restructuring costs:
Salaries, wages, and employee benefits
2,470
Data processing
-
-
Lease or fixed asset impairment
3,227
6,657
1,861
Professional fees, occupancy, and other
2,248
Related tax benefit
(3,692)
(2,327)
(4,618)
Adjusted net income
$
137,108
$
108,728
$
118,429
Dilutive average common shares outstanding
56,008,805
54,826,939
55,132,494
Reported: Diluted earnings per share
$
2.20
$
1.83
$
1.87
Adjusted: Diluted earnings per share
2.45
1.98
2.15
Average total assets
$
11,904,935
$
10,292,256
$
9,443,690
Reported: Return on average assets
1.04
%
0.97
%
1.09
%
Adjusted: Return on average assets
1.15
%
1.06
%
1.25
%
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited)
Adjusted Net Interest Margin
(dollars in thousands)
Years Ended December 31,
Net interest income
$
270,698
$
282,935
$
287,223
Adjustments to net interest income
Tax-equivalent adjustment
2,355
2,740
3,013
Acquisition-related purchase accounting accretion
(7,151)
(10,391)
(12,422)
Adjusted net interest income
$
265,902
$
275,284
$
277,814
Average interest-earning assets
$
10,978,116
$
9,417,938
$
8,590,262
Reported: Net interest margin
2.49
%
3.03
%
3.38
%
Adjusted: Net Interest margin
2.42
%
2.92
%
3.23
%
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited)
Adjusted Noninterest Expense, Efficiency Ratio, and Adjusted Efficiency Ratio
(dollars in thousands)
Years Ended December 31,
Net interest income
$
270,698
$
282,935
$
287,223
Tax-equivalent adjustment
2,355
2,740
3,013
Tax-equivalent interest income
$
273,053
$
285,675
$
290,236
Noninterest income
132,804
118,265
116,415
Less net (gains) losses on sales of securities and unrealized (gains) losses recognized on equity securities
(3,070)
(1,331)
Adjusted noninterest income
$
129,734
$
116,934
$
116,433
Noninterest expense
261,780
234,197
258,794
Amortization of intangible assets
(11,274)
(10,008)
(9,547)
Non-operating adjustments:
Salaries, wages, and employee benefits
(7,819)
(2,470)
(4,578)
Data processing
(3,700)
(56)
(2,350)
Lease or fixed asset impairment
(3,227)
(7,136)
(2,441)
Professional fees and other
(2,605)
(1,049)
(10,725)
Adjusted noninterest expense
$
233,155
$
213,478
$
229,153
Reported: Efficiency ratio (1)
62.19
%
55.68
%
61.29
%
Adjusted: Efficiency ratio (2)
57.89
%
53.02
%
56.35
%
(1) Calculated as total noninterest expense, less amortization charges, as a percentage of tax-equivalent net interest income, plus noninterest income, less security gains and losses.
(2) Calculated as adjusted noninterest expense, as a percentage of tax-equivalent net interest income plus noninterest income, less security gains and losses.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited)
Tangible Common Equity, Tangible Common Equity to Tangible Assets,
Tangible Book Value Per Common Share, Return on Average Tangible Common Equity
(dollars in thousands, except per share amounts)
As of December 31,
Total assets
$
12,859,689
$
10,544,047
Goodwill and other intangible assets, net
(375,924)
(363,521)
Tax effect of other intangible assets, net
16,254
14,556
Tangible assets
$
12,500,019
$
10,195,082
Total stockholders’ equity
1,319,112
1,270,069
Goodwill and other intangible assets, net
(375,924)
(363,521)
Tax effect of other intangible assets, net
16,254
14,556
Tangible common equity
$
959,442
$
921,104
Ending number of common shares outstanding
55,434,910
54,404,379
Tangible common equity to tangible assets (1)
7.68
%
9.03
%
Tangible book value per share
$
17.01
$
16.66
Average common equity
$
1,324,862
$
1,240,374
Average goodwill and other intangible assets, net
(372,593)
(368,624)
Average tangible common equity
$
952,269
$
871,750
Reported: Return on average tangible common equity
12.96
%
11.51
%
Adjusted: Return on average tangible common equity (2)
14.40
%
12.47
%
(1) Tax effected measure, 28.0% estimated deferred tax rate.
(2) Calculated using adjusted net income.
Special Cautionary Note Regarding Forward-Looking Statements
Statements contained in or incorporated by reference into this Annual Report that are not historical facts may constitute forward-looking statements within the meaning of Section 27A 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 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;
● the economic impact of any future terrorist threats or attacks, widespread disease or pandemics (including the COVID-19 pandemic), or other adverse external events that could cause economic deterioration or instability in credit markets;
● 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 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 associates;
● changes in consumer spending;
● unexpected results of current and/or future acquisitions, which may include failure to realize the anticipated benefits of acquisitions and the possibility that transaction costs may be greater than anticipated;
● unexpected outcomes of existing or new litigation involving First Busey;
● the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards
● changes in accounting policies and practices; and
● other factors and risks described under “Item 1A. Risk Factors” herein.
Because of those risks and other uncertainties, our actual future results, performance, 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.

---

ITEM 1A. RISK FACTORS
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
The COVID-19 pandemic continues to create disruptions that affect our business, financial condition, liquidity, and results of operations.
The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic. The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.
In the past year, the U.S. economy began to rebound from severe disruptions caused by the onset of the pandemic in March 2020. Economic conditions have begun to normalize with the availability of vaccines and treatments, increasing workforce employment and participation, the lessening of business and education restrictions, and demand for services beginning to return. The financial conditions of households and businesses was bolstered significantly by government stimulus, which contributed to the economic recovery but also brought about growing pains as evidenced by supply chain problems and rising prices. Although current economic conditions are more favorable than the prior year, the outlook for continued growth is characterized by elevated uncertainty with potential for unevenness across markets and sectors. Although household and business credit and liquidity is strong currently, further pandemic-related disruptions could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans; declines in assets under management, affecting wealth management revenues; negative impacts on regional economic conditions resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations, and deposit availability; and impacts on the implementation of our growth strategy. While the recovery this past year has been strong, the pace of growth in the U.S. and globally could decline as a result of rising inflation, higher interest rates, the pervasiveness of supply chain challenges across industries, and the persistence of the virus in variant forms.
Overall, we believe that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
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.
The Company currently conducts its banking operations in downstate Illinois; suburban Chicago, Illinois; the St. Louis, Missouri metropolitan area; central Indiana; and southwest Florida. Economic conditions within Busey’s markets were adversely impacted by the COVID-19 pandemic, and although conditions have improved this past year, elevated unemployment, economic decline, on-going business restrictions and operational uncertainty continue to impact the markets overall, and in particular, certain industry sectors. 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; furthermore, Illinois was one of three states in the country to lose population in the last decade. Notably, with the recent improvement in the state’s financial outlook, during the second half of 2021 Illinois received improved ratings from Moody’s Investor Service, S&P Global Ratings, and Fitch. 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. The partial shutdown of colleges and universities across the state may also impact businesses heavily reliant on the colleges and universities for revenue generation. Recent downturns in local operating 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.
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 FOMC. 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.
In March 2020, the Federal Reserve reduced the target federal funds rate and announced a $700.0 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic and reduced the interest it pays on excess reserves. The prolonged reduction in interest rates is likely to continue to have an adverse effect on our net interest income and margins and our profitability. The impact of the prolonged low rates will also continue to affect rate spreads and return on earning assets.
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 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 Federal Reserve has signaled that it will begin to increase rates, taper its quantitative easing program, and reduce its balance sheet of bonds and other assets in 2022, but will do so with the goal of avoiding abrupt or unpredictable changes in economic or financial conditions so as not to disrupt the financial systems, also known as “shocks;” despite this, the impact of these changes cannot be certain. Vulnerabilities in the financial system can amplify the impact of an initial shock following rate increases, potentially leading to unintended volatility, as well to disruptions in the provision of financial services, such as clearing payments, the provision of liquidity, and the availability of credit. Furthermore, asset liquidation pressures can be amplified by liquidity mismatches and the leverage of certain nonbank financial intermediaries such as hedge funds. The financial crisis in March 2020 also demonstrated that pressures on dealer intermediation can limit the availability of liquidity during times of market stress. Given the interconnectedness of the global financial system, these vulnerabilities could impact the Company’s business operations and financial condition.
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. On July 27, 2017, the United Kingdom Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. End dates for LIBOR have now been set, and U.S. Regulators have issued guidance as of October 2021 that urges market participants to address their existing LIBOR exposures and transition to robust and sustainable alternative rates by December 31, 2021. The Alternative Reference Rate Committee has proposed that 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, but has also advised market participants to conduct a comprehensive evaluation of any alternative reference rates being considered for use.
Contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties. Although the Company has actively worked to plan for the transition away from LIBOR, the transition is both complex and challenging and the downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact financial markets and individual institutions. If the Company’s selected alternative rate is based on a small transaction volume, it could be susceptible to volatility and disruption during times of market stress. Furthermore, if the Company fails to properly address legacy contracts by adding robust fallback positions, it will be exposed to interest rate risks and potential loss of yields. Finally, if the Company or other market participants fail to properly plan to implement alternative rates other than LIBOR, it could have an adverse effect on the Company and the financial system as a whole. In 2021, we began the transition to SOFR and other interest rate benchmarks in anticipation of the cessation of the publication of LIBOR.
Continued elevated levels of inflation could adversely impact our business and results of operations.
The U.S. has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7.0% in 2021. Continued levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse. For example, if interest rates were to rise in response to, or as a result of, elevated levels of inflation, the value of our securities portfolio would be negatively impacted. In addition, while we generally expect any inflation-related increases in our interest expense to be offset by increases in our interest revenue, inflation-driven increases in our levels of non-interest expense could negatively impact our results of operations. Continued elevated levels of inflation could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls. The duration and severity of the current inflationary period cannot be estimated with precision.
Labor shortages and failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition.
A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, decreased labor force size and participation rates as a result of the COVID-19 pandemic, expanded unemployment benefits offered in response to the ongoing COVID-19 pandemic, and other government actions. Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and increasingly competitive local labor market. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.
In addition, if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover, or labor inflation, caused by COVID-19 or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity, or cash flows.
Regulatory and Legal Risks
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition, or results of operations.
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 2021 change of the presidential administration and Congressional control has prompted new or revitalized financial services regulation. The extent and scope of potential financial regulations is hard to predict, but continued changes are expected to occur as leadership and priorities in various regulatory bodies shifts.
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 loans, achieve satisfactory interest spreads, and enter into acquisition and merger agreements, and could expose the Company to additional expense, including increased compliance costs. Appointments to the primary banking regulatory agencies affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Executive orders, 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.
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; fee-based products 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.
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 several years, increasing size through both organic growth and strategic acquisitions. 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 enhance certain reporting requirements. For example, as further discussed in the Supervision and Regulation section, the Dodd-Frank Act included a number of requirements that trigger when a banking entity crosses over $10.0 billion in assets. The Company anticipated crossing the $10.0 billion threshold for some time, and it did so in 2020.
On November 20, 2020, the federal bank regulatory agencies announced an Interim Final Rule, providing temporary relief for certain community banking organizations related to certain regulations and reporting requirements as a result of growth in size from the COVID-19 response. The Company has been provided temporary relief under this rule with respect to the interchange revenue impacts of the Durbin Amendment. The Company did not reduce its asset size back below the $10.0 billion threshold and has instead increased assets to $12.9 billion as of December 31, 2021. The relief expired December 31, 2021, and as a result, regulatory expectations, scrutiny, and reporting requirements are expected to continue to increase, and may affect the Company’s operations and strategies.
Laws impacting cannabis-related businesses in Illinois and other states 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 Busey 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 with a significant financial interest in such entities; or (ii) derive a material amount of revenue from providing products or services to, or other involvement with, such entities. Busey Bank is taking reasonable measures, including appropriate new account screening and customer due diligence measures, to ensure that existing and potential customers that operate in the states in which the Bank operates do not engage in any such activities. Nonetheless, shifts in Illinois law legalizing cannabis use, along with shifts in Missouri and Florida law allowing medicinal use and decriminalizing possession, have increased the number of direct and indirect cannabis-related businesses in some of the states in which the Company operates, and therefore increases the likelihood that Busey 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 Busey 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 locations, 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, delinquencies, and/or a need for increases in the provision for loan losses. When economic conditions decline or significant shifts in demand change, as they have during the COVID-19 pandemic, increases in non-performing loans, charge-offs, and delinquencies become more likely.
The Company estimates and establishes reserves for credit losses and maintains them at a level considered adequate by management to absorb probable credit 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. Adoption of CECL in 2020 resulted in additional reserves being set aside to protect against future credit losses. Although management believes the reserves are adequate to absorb losses on existing loans that may become uncollectible, management cannot guarantee that additional provisions for credit losses will not be required in the future.
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. Although it is hard to fully predict the affect the COVID-19 pandemic will have on the Company’s asset quality, it’s performance may be adversely affected if it experiences increases in non-performing loans and non-performing assets in the future.
Federal regulatory agencies, in consultation with FASB, issued updated guidance on March 22, 2020, for classifying loans as TDRs, which allowed banks to modify loans of customers stressed by COVID-19 without having to classify the loan as a TDR. While this updated guidance provided temporary relief for both borrowers and banks, these loan modifications may not be sufficient to keep the assets the Company holds from deteriorating if the duration of the pandemic is prolonged.
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 commercial, commercial real estate, and retail real estate loans. Thus, deterioration in economic conditions or real estate values could result in higher credit costs and losses to the Company. The global pandemic in 2020 significantly impacted both global and domestic markets and economies as shutdowns and restrictions to prevent the spread of the virus affected several different business sectors. Although many business sectors rebounded as restrictions lifted during 2021, the full impact of the shutdowns and restrictions, along with the effect of changing demands resulting from the pandemic cannot be known at this time. The Company has taken additional steps to quantify the potential risk and impacted industries that are likely to experience stress to cash flows and pose higher potential default risk.
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. 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.
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 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.
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.
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 result in realized losses, which could adversely affect the Company’s financial condition and results of operations.
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 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 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 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 and 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. Although the Company is not currently experiencing liquidity stress, pandemic-related market conditions remain uncertain. 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.
As indicated in the “Item 1A. Risk Factors-Economic and Market Risks” section above, 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.
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; suburban Chicago, Illinois; the 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, as well as other large technology corporations, 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, can apply for and receive credit, and can also complete transactions such as paying bills and/or transferring funds 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.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services. In addition to better serving clients, the effective use of technology increases efficiency and enables financial institutions to both reduce costs and service customers beyond the bank’s traditional branch footprint. Our future success will depend in part upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in our operations. Ultimately, if we fall behind in our ability to be adaptive and innovative, attracting new customers and 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.
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 continue to supplement organic growth through acquisitions, as we have in the past. There are risks associated with acquisition strategies, 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 either highly competitive or, conversely, 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 estimates and 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 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.
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. 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.
Further, the Company’s investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on the Company’s financial results. The Company invests in certain tax-advantaged projects promoting affordable housing, community development and other community revitalization projects. The Company’s investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. The Company is subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be realized. The possible inability to realize these tax credit and other tax benefits can have a negative impact on the Company’s financial results. The ultimate realization of the tax credits and other tax benefits depends upon having sufficient taxable income and on many factors outside of the Company’s control, including changes in the applicable tax code and the ability of the projects to be completed.
Operational Risks
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 is not commensurate with its risk profile, the Company could suffer unexpected losses and could be materially adversely affected.
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 events.
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. 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 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.
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. In the past year, a myriad of industries and institutions 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. In addition, cyber attackers have taken advantage of the pandemic to create campaigns to leverage individuals fears and uncertainties as well as capitalize on the increased number of transactions occurring on digital channels. The implementation of remote working arrangements that use virtual private networks, virtual conferencing services, and telecommunication technologies can increase insider risk, cybersecurity vulnerabilities, and other operational exposures. Industry trends in ransomware, phishing, and other intrusion methods have increased significantly and will continue to pose increased risk.
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, and their third-party providers, known as “supply chain risk,” to anticipate, detect,
or 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, debit card and other payment-related 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. Cyber-attacks or other breaches, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in breach and fraud-related losses as well as 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 sophistication and activities of malicious individuals and organizations have increased substantially. 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 incidents.
Customer or employee misconduct or fraud may affect operations, result in significant financial loss, and have an adverse impact on the Company’s reputation.
Misconduct by employees and customers could include hiding unauthorized activities, conducting improper or unauthorized activities, or improper use of confidential information. 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.
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 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 diverse and qualified staff with the appropriate level of experience and knowledge about its market areas so as to implement its community-based operating strategy. Recent changes in labor market conditions have contributed to heightened levels of employee attrition and increased competition for talent, which has in turn driven wage rates higher and may contribute to an increase in operating expenses. 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.
Climate change or other adverse external events could significantly impact the Company’s business.
Severe weather, natural disasters, geopolitical risks and acts of terrorism or war, widespread disease or pandemics, as is currently being experienced, and other adverse external events could have a significant impact on the Company’s ability to conduct business. Climate change, in particular, presents multi-faceted risks including: operational risk from the physical effects of climate events on our and our customers’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; and reputational risk from stakeholder concerns about our practices related to climate change.
Climate change exposes the Company to physical risk as its effects may lead to more frequent shifts in weather patterns and more extreme weather events that could damage, destroy, or otherwise impact the value or productivity of our properties and other assets; reduce the availability of insurance to cover losses; and/or disrupt our operations through prolonged outages. Such events and long-term shifts may also have a significant impact on our customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or collateral values, and other businesses and counterparties with whom we transact, which could have a broader impact on the economy, supply chains, and distribution networks.
Furthermore, banking regulators and other supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, we face regulatory risk of increasing focus on our resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
First Busey and Busey Bank’s headquarters are located at 100 West University Avenue, Champaign, Illinois. FirsTech’s headquarters is 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
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 DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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-Supervision and Regulation of the Company-Dividend Payments” and “Item 1. Business-Supervision, Regulation and Other Factors-Supervision and Regulation of Busey Bank-Dividend Payments” for further discussion of these matters.
As of February 24, 2022, First Busey Corporation had 55,290,645 shares of common stock outstanding held by 2,269 holders of record. Additionally, there were an estimated 11,536 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. On May 22, 2019, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by 1,000,000 shares, and on February 5, 2020, First Busey’s board of directors approved another amendment to increase the authorized shares under the repurchase program by an additional 2,000,000 shares. During the fourth quarter of 2021, the Company purchased 418,000 shares under the plan. At December 31, 2021, the Company had 535,824 shares that may still be purchased under the plan.
Period
Total Number of Shares Purchased
Weighted Average Price Paid per Common Share
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
October 1-31, 2021
158,000
$
25.62
158,000
795,824
November 1-30, 2021
124,000
$
27.00
124,000
671,824
December 1-31, 2021
136,000
$
26.55
136,000
535,824
Three Months Ended December 31, 2021
418,000
$
26.33
418,000
Year Ended December 31, 2021
1,323,000
$
24.98
1,323,000
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 S&P US BMI Banks - Midwest Region for the five years ended December 31, 2021.
Index
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
First Busey Corporation
$
100.00
$
99.63
$
83.80
$
97.03
$
79.59
$
104.07
S&P U.S. BMI Banks - Midwest Region
100.00
107.46
91.76
119.38
102.64
135.60
Nasdaq Composite
100.00
129.64
125.96
172.17
249.51
304.85
In prior years, the Company used the SNL Midwest Bank Index, which was retired as of August 7, 2021. The S&P U.S. BMI Banks - Midwest Region is deemed the closest replacement currently available.
Banks in the S&P U.S. BMI Banks - Midwest Region represent all Major Exchange Traded Banks in S&P Capital IQ’s coverage universe headquartered in Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Ohio, South Dakota, and Wisconsin.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2021, and 2020, and the results of operations for the years ended December 31, 2021, 2020, and 2019, of First Busey and its subsidiaries. It should be read in conjunction with “Item 1. Business,” 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 2021 as compared to 2020 can be found below. Comparison of 2020 to 2019 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report.
Impact of COVID-19
Although the progression of the COVID-19 pandemic in the U.S. has impacted First Busey’s results of operations, we continue to navigate the economic environment caused by COVID-19 effectively and prudently and remain resolute in our focus on serving our customers, communities, and associates while protecting our balance sheet. We remain vigilant, given that negative impacts of COVID-19, such as further margin compression and a deterioration in asset quality, could impact future quarters.
Effects on Our Market Areas
Our commercial and consumer banking products and services are delivered in Illinois, Missouri, Florida, and Indiana. Each state has taken different steps to reopen after COVID-19 thrust the country into lockdown starting in March 2020, and these efforts are subject to changes and delays based on case monitoring in each state.
Policy and Regulatory Developments
Federal, state, and local governments, and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic. Regulatory actions taken during 2021 include the following:
● On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion relief package providing a third round of Economic Impact Payments to millions of eligible Americans, expanding unemployment benefits and tax credits, providing additional assistance to small businesses, and creating a $10 billion homeowner assistance fund. This fund can be used toward delinquent mortgage payments and is intended to minimize foreclosures in the coming months. An additional $7.25 billion in PPP funding was provided, and eligibility criteria was expanded to include some non-profit organizations.
● On March 30, 2021, President Biden signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021, or until funding was exhausted. PPP funding for loans originated by lenders other than community financial institutions was exhausted as of May 6, 2021. All PPP funding was exhausted as of May 28, 2021.
Our Response
We have taken, and continue to take, numerous steps in response to the COVID-19 pandemic, including the following:
● First Busey offered a Financial Relief Program to qualifying customers designed to alleviate some of the financial hardships that they faced as a result of COVID-19. This program offered solutions for all types of customers-including retail, personal loan, and mortgage-as well as commercial clients and small businesses. The program included options for loan payment deferrals as well as certain fee waivers. As of December 31, 2021, we had 32 commercial loans remaining on interest-only payment deferrals representing $128.7 million in loans. In addition, as of December 31, 2021, we had two retail loans on payment deferrals representing $0.1 million.
● First Busey has served as a bridge for the PPP, actively helping existing and new business clients sign up for this important financial resource. The following table summarizes our PPP loans as of December 31, 2021 (dollars in thousand):
CARES
Economic Aid
PPP Loan
Act
Act
Totals
Customers with PPP loans processed/acquired
4,595
2,753
7,348
PPP loans originated/acquired
$
765,212
$
324,593
$
1,089,805
Customers with PPP loans outstanding
PPP loans outstanding
$
5,738
$
71,152
$
76,890
PPP loans outstanding, amortized cost
5,731
69,227
74,958
PPP loan balance forgiveness:
Received
$
746,899
$
252,131
$
999,030
Balances submitted to the SBA for forgiveness
1,952
5,144
7,096
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 our critical accounting estimates. The following policies could be deemed critical:
Fair Value of Debt Securities Available for Sale
The fair values of debt securities available for sale are measurements from an independent pricing service and are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.
Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
A debt security available for sale is impaired if the fair value of the security declines below its amortized cost basis. To determine the appropriate accounting, we must first determine if we intend to sell the security or if it is more likely than not that we will be required to sell the security before the fair value increases to at least the amortized cost basis. If either of those selling events is expected, we will write down the amortized cost basis of the security to its fair value. This is achieved by writing off any previously recorded allowance, if applicable, and recognizing any incremental impairment through earnings. If we do not intend to sell the security, nor believe it more likely than not that we will be required to sell the security before the fair value recovers to the amortized cost basis, we must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors.
We consider the following factors in assessing whether the decline is due to a credit loss:
● Extent to which the fair value is less than the amortized cost basis;
● Adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors);
● Payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
● Failure of the issuer of the security to make scheduled interest or principal payments; and
● Any changes to the rating of the security by a rating agency.
Impairment related to a credit loss must be measured using the discounted cash flow method. Credit loss recognition is limited to the fair value of the security. The impairment is recognized by establishing an allowance through provision for credit losses. Impairment related to noncredit factors is recognized in AOCI, net of applicable taxes.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the date of acquisition. Fair values are determined based on the definition of “fair value” defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed. Acquired loans are in the scope of ASC 326. However, the offset to record the allowance at the date of acquisition on acquired loans depends on whether or not the loan is classified as PCD. The allowance for PCD loans is recorded through a gross-up effect, while the allowance for acquired non-PCD loans is recorded through provision expense, consistent with originated loans. Thus, the determination of which loans are PCD and non-PCD can have a significant effect on the accounting for these loans.
Goodwill
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, we assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired.
Income Taxes
First Busey 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 Credit Losses
First Busey calculates the ACL at each reporting date. We recognize an allowance for the lifetime expected credit losses for the amount we do not expect to collect. Measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported book value. The calculation also contemplates that First Busey may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical credit loss information.
In determining the allowance, management relies predominantly on a disciplined credit review and approval process that extends to the full range of First Busey’s credit exposure. The ACL must be determined on a collective (pool) basis when similar risk characteristics exists. On a case-by-case basis, we may conclude a loan should be evaluated on an individual basis based on the disparate risk characteristics.
Loans deemed uncollectible are charged against and reduce the allowance. A provision for credit losses is charged to current expense and acts to replenish the ACL in order to maintain the allowance at a level that management deems adequate. Determining the allowance involves significant judgments and assumptions by management. Because of the nature of the judgments and assumptions made by management, actual results may differ from these judgments and assumptions.
Executive Summary
Operating Results
Results of our operations are presented below, segregated by operating segment (dollars in thousands):
Years Ended December 31,
Net income by operating segment
Banking
$
117,844
$
101,226
$
106,409
FirsTech
1,527
2,372
4,060
Wealth Management
18,570
13,181
11,135
Other
(14,492)
(16,435)
(18,651)
Net income
$
123,449
$
100,344
$
102,953
Operating Performance
Operating performance metrics presented in the table below have been derived from information used by management to monitor and manage our financial performance (dollars in thousands, except per share amounts):
Years Ended December 31,
Reported:
Net income
$
123,449
$
100,344
$
102,953
Adjusted:
Net income (1)
137,108
108,728
118,429
Reported:
Diluted earnings per common share
$
2.20
$
1.83
$
1.87
Adjusted:
Diluted earnings per common share (1)
2.45
1.98
2.15
Reported:
Pre-provision net revenue (1)
$
138,652
$
165,672
$
144,862
Adjusted:
Pre-provision net revenue (1)
160,792
180,516
166,156
Reported:
Pre-provision net revenue to average assets (1)
1.16
%
1.61
%
1.53
%
Adjusted:
Pre-provision net revenue to average assets (1)
1.35
%
1.75
%
1.76
%
(3) See “Item 1. Business-Non-GAAP Financial Information.”
On May 31, 2021, First Busey completed its acquisition of CAC, the holding company for GSB. GSB was operated as a separate banking subsidiary from June 1, 2021, until August 14, 2021, when it was merged with and into Busey Bank. At that time GSB’s seven banking centers became banking centers of Busey Bank. When we completed the GSB acquisition, we reset the baseline for the future financial performance of First Busey in a multitude of positive ways. With GSB now merged and integrated, we expect to see the full contribution of synergies of GSB reflected in our financial performance in the years ahead.
On November 19, 2021, 17 banking centers, two of which were previously GSB banking centers, were closed and consolidated, as part of the Company’s efforts to ensure a balance between its physical banking center network and robust digital banking services while also optimizing operating efficiency. Following the completion of these banking center closures and consolidations, the Company continues to operate a total of 58 banking centers across its markets.
First Busey views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pretax adjustments for 2021 included $13.6 million of expenses related to acquisitions and $3.7 million of expenses related to other restructuring costs. The reconciliation of non-GAAP measures (including pre-provision net revenue, adjusted pre-provision net revenue, pre-provision net revenue to average assets, adjusted pre-provision net revenue to average assets, adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, adjusted noninterest expense, efficiency ratio, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity), which First Busey believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Annual Report. See “Item 1. Business-Non-GAAP Financial Information.”
Combined, revenues from wealth management fees and payment technology solutions activities represented 53.8% of First Busey’s noninterest income in 2021, providing a balance to spread-based revenue from traditional banking activities. Further, noninterest income, excluding net securities gains (losses) represented 32.4% of total revenue for the year ended December 31, 2021.
Results of Operation - Three Years Ended December 31, 2021
Net Interest Income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets.
Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 21.0%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.
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.
Average Balance Sheets and Interest Rates
Average balances, income and expense, and yield rates are presented below for the periods indicated (dollars in thousands):
Years Ended December 31,
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
$
630,687
$
1,151
0.18
%
$
488,786
$
1,723
0.35
%
$
312,604
6,320
2.02
%
Investment securities:
U.S. Government obligations
180,041
1,692
0.94
%
135,204
2,915
2.16
%
300,805
7,323
2.43
%
Obligations of states and political subdivisions (1)
299,064
7,694
2.57
%
293,070
8,353
2.85
%
281,460
8,294
2.95
%
Other securities
2,876,714
37,166
1.29
%
1,411,826
29,857
2.11
%
1,187,026
31,335
2.64
%
Loans held for sale
21,803
2.32
%
82,106
2,184
2.66
%
38,447
1,275
3.32
%
Portfolio loans (1), (2)
6,969,807
252,946
3.63
%
7,006,946
284,306
4.06
%
6,469,920
304,700
4.71
%
Total interest-earning assets (1), (3)
$
10,978,116
$
301,155
2.74
%
$
9,417,938
$
329,338
3.50
%
$
8,590,262
$
359,247
4.18
%
Cash and due from banks
133,711
118,739
114,619
Premises and equipment
138,731
146,144
148,063
ACL
(97,397)
(88,248)
(52,284)
Other assets
751,774
697,683
643,030
Total assets
$
11,904,935
$
10,292,256
$
9,443,690
Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits
$
2,619,942
$
1,922
0.07
%
$
2,153,230
$
4,718
0.22
%
$
1,865,506
$
10,638
0.57
%
Savings and money market deposits
3,092,992
2,817
0.09
%
2,567,962
5,960
0.23
%
2,386,171
13,767
0.58
%
Time deposits
1,040,709
7,844
0.75
%
1,356,347
20,013
1.48
%
1,675,477
30,672
1.83
%
Federal funds purchased and repurchase agreements
218,454
0.10
%
187,811
0.35
%
196,681
2,348
1.19
%
Borrowings (4)
268,767
12,452
4.63
%
217,702
9,352
4.30
%
219,920
8,172
3.72
%
Junior subordinated debt issued to unconsolidated trusts
71,545
2,840
3.97
%
71,376
2,960
4.15
%
71,214
3,414
4.79
%
Total interest-bearing liabilities
$
7,312,409
$
28,102
0.38
%
$
6,554,428
$
43,663
0.67
%
$
6,414,969
$
69,011
1.08
%
Net interest spread (1)
2.36
%
2.83
%
3.10
%
Noninterest-bearing deposits
3,142,155
2,364,442
1,746,938
Other liabilities
125,509
133,012
95,656
Stockholders’ equity
1,324,862
1,240,374
1,186,127
Total liabilities and stockholders’ equity
$
11,904,935
$
10,292,256
$
9,443,690
Interest income / earning assets (1), (3)
$
10,978,116
$
301,155
2.74
%
$
9,417,938
$
329,338
3.50
%
$
8,590,262
$
359,247
4.18
%
Interest expense / earning assets
$
10,978,116
$
28,102
0.25
%
$
9,417,938
$
43,663
0.47
%
$
8,590,262
$
69,011
0.80
%
Net interest margin (1)
$
273,053
2.49
%
$
285,675
3.03
%
$
290,236
3.38
%
(4) On a tax-equivalent basis, assuming a federal income tax rate of 21.0%.
(5) Non-accrual loans have been included in average portfolio loans.
(6) Interest income includes a tax-equivalent adjustment of $2.4 million, $2.7 million, and $3.0 million for 2021, 2020 and 2019, respectively. Interest income includes $14.0 million and $15.2 million of fees, net of deferred costs related to PPP loans for 2021 and 2020, respectively.
(7) Includes short-term borrowings, long-term debt, senior and subordinated notes. Interest expense includes a non-usage fee on our revolving credit facility.
Average Balance Sheets and Interest Rates (continued)
Changes in Net Interest Income are presented in the table below:
Years Ended December 31,
2021 vs. 2020 Change Due To
2020 vs. 2019 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
$
$
(982)
$
(572)
$
2,369
$
(6,966)
$
(4,597)
Investment securities:
U.S. Government obligations
(1,988)
(1,223)
(3,650)
(758)
(4,408)
Obligations of state and political subdivisions
(827)
(659)
(277)
Other securities
22,213
(14,904)
7,309
5,359
(6,837)
(1,478)
Loans held for sale
(1,430)
(248)
(1,678)
1,204
(295)
Portfolio loans
(1,499)
(29,861)
(31,360)
23,979
(44,373)
(20,394)
Change in interest income
$
20,627
$
(48,810)
$
(28,183)
$
29,597
$
(59,506)
$
(29,909)
Increase (decrease) in interest expense
Interest-bearing transaction deposits
$
$
(3,651)
$
(2,796)
$
1,438
$
(7,358)
$
(5,920)
Savings and money market deposits
(4,074)
(3,143)
(8,576)
(7,807)
Time deposits
(3,923)
(8,246)
(12,169)
(5,281)
(5,378)
(10,659)
Federal funds purchased and repurchase agreements
(528)
(433)
(109)
(1,579)
(1,688)
Borrowings
2,289
3,100
1,180
Junior subordinated debt owed to unconsolidated trusts
(127)
(120)
(462)
(454)
Change in interest expense
$
$
(15,815)
$
(15,561)
$
(2,915)
$
(22,433)
$
(25,348)
Increase (decrease) in net interest income
$
20,373
$
(32,995)
$
(12,622)
$
32,512
$
(37,073)
$
(4,561)
Percentage (decrease) increase in net interest income over prior period
(4.4)
%
(1.6)
%
Earning Assets, Sources of Funds, and Net Interest Margin
Changes in average earning assets, sources of funds, and net interest margin are presented in the tables below (dollars in thousands):
Years Ended December 31,
Change
% Change
Average interest-earning assets
$
10,978,116
$
9,417,938
$
1,560,178
16.6
%
Average interest-bearing liabilities
7,312,409
6,554,428
757,981
11.6
%
Average noninterest-bearing deposits
3,142,155
2,364,442
777,713
32.9
%
Total average deposits
9,895,798
8,441,981
1,453,817
17.2
%
Total average liabilities
10,580,073
9,051,882
1,528,191
16.9
%
Average noninterest-bearing deposits as a percent of total average deposits
31.8
%
28.0
%
Total average deposits as a percent of total average liabilities
93.5
%
93.3
%
Years Ended December 31,
Change
% Change
Net interest income
Interest income, on a tax-equivalent basis (1)
$
301,155
$
329,338
$
(28,183)
(8.6)
%
Interest expense
28,102
43,663
(15,561)
(35.6)
%
Net interest income, on a tax equivalent basis (1)
$
273,053
$
285,675
$
(12,622)
(4.4)
%
Net interest margin (1), (2)
2.49
%
3.03
%
(1) Assuming a federal income tax rate of 21.0%.
(2) Net interest income expressed as a percentage of average earning assets, stated on a tax-equivalent basis.
The Consolidated Average Balance Sheets and interest rates were impacted in 2021 and 2020 by numerous factors surrounding COVID-19. Further, the 2021 Consolidated Average Balance Sheet was impacted by the CAC acquisition. The FOMC rate cuts during the first quarter of 2020 have contributed to the decline in net interest margin, as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities. Net interest margin has also been negatively impacted by existing loan amortization and paydowns at higher rates than new loan production, the sizeable balance of lower-yielding PPP loans, significant growth in the Company’s liquidity position, and the issuance of debt. Those impacts were partially offset by the Company’s efforts to lower deposit funding costs as well as the fees recognized on PPP loans.
First Busey remains substantially core deposit funded, with robust liquidity and significant market share in the communities we serve. As of December 31, 2021, our loan to deposit ratio was 66.8% and core deposits represented 98.7% of total deposits outstanding (excluding time deposits with balances greater than $250,000).
Net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 2.36% in 2021 compared to 2.83% in 2020 and 3.10% in 2019, each on a tax equivalent basis.
Annualized net interest margins for the quarterly periods indicated were as follows:
First Quarter
2.72
%
3.20
%
3.46
%
Second Quarter
2.50
%
3.03
%
3.43
%
Third Quarter
2.41
%
2.86
%
3.35
%
Fourth Quarter
2.36
%
3.06
%
3.27
%
Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies.
Noninterest Income
Changes in noninterest income are summarized in the tables below for the periods presented (dollars in thousands):
Year Ended December 31,
Change
% Change
Noninterest income
Wealth management fees
$
53,086
$
42,928
$
10,158
23.7
%
Fees for customer services
35,604
31,604
4,000
12.7
%
Payment technology solutions
18,347
15,628
2,719
17.4
%
Mortgage revenue
7,239
13,038
(5,799)
(44.5)
%
Income on bank owned life insurance
5,166
5,380
(214)
(4.0)
%
Net gains (losses) on sales of securities
1,724
(1,695)
(98.3)
%
Unrealized gains (losses) recognized on equity securities
3,041
(393)
3,434
873.8
%
Other income
10,292
8,356
1,936
23.2
%
Total noninterest income
$
132,804
$
118,265
$
14,539
12.3
%
Years Ended December 31,
Change
% Change
Noninterest income
Wealth management fees
$
42,928
$
38,561
$
4,367
11.3
%
Fees for customer services
31,604
36,683
(5,079)
(13.8)
%
Payment technology solutions
15,628
15,643
(15)
(0.1)
%
Mortgage revenue
13,038
11,703
1,335
11.4
%
Income on bank owned life insurance
5,380
5,795
(415)
(7.2)
%
Net gains (losses) on sales of securities
1,724
NM
Unrealized gains (losses) recognized on equity securities
(393)
(759)
48.2
%
Other income
8,356
8,048
3.8
%
Total noninterest income
$
118,265
$
116,415
$
1,850
1.6
%
Total noninterest income increased 12.3% to $132.8 million for the year ended December 31, 2021, compared to $118.3 million for the year ended December 31, 2020. Revenues from wealth management fees and payment technology solutions represented 53.8% for the year ended December 31, 2021, compared to 49.5% for the year ended December 31, 2020. Payment technology solutions revenue relates to our payment processing company, FirsTech.
Wealth management fees increased 23.7% to $53.1 million in 2021, compared to $42.9 million in 2020. Assets under care increased 24.5% to $12.7 billion as of December 31, 2021, compared to $10.2 billion at December 31, 2020. The increase in assets under care includes $1.2 billion related to assets obtained in the acquisition of CAC, with the remaining $1.3 million related to organic and market related growth.
Fees for customer services increased 12.7% to $35.6 million in 2021, compared to $31.6 million in 2020. Fees for customer services have been impacted since early 2020 by changing customer behaviors resulting from COVID-19, and government stimulus programs, and continue to rebound with improving economic conditions and customer activity levels.
Payment technology solutions revenue increased 17.4% to $18.3 million in 2021, compared to $15.6 million in 2020. Fluctuations in payment technology solutions revenue were primarily the result of increased payment and volume activity as well as growth in customers served by FirsTech. FirsTech operations add important diversity to our revenue stream while widening our array of service offerings to larger commercial clients both within our footprint and nationally. We are currently making strategic investments in FirsTech to further enhance future growth including further upgrades to the product and engineering teams to build an API first cloud-based platform to provide for fully integrated payment capabilities as well as the continued development of our BaaS platform.
Mortgage revenue decreased 44.5% to $7.2 million in 2021, compared to $13.0 million in 2020. Sold-loan mortgage volume declined in 2021 compared to 2020 due to a higher share of portfolio loan production in 2021.
Income on bank owned life insurance decreased 4.0% to $5.2 million in 2021, compared to $5.4 million in 2020, as a result of a decrease in earnings on the cash surrender value of the policies.
Other income increased 23.2% to $10.3 million in 2021 compared to $8.4 million in 2020. Other income variances are primarily driven by fluctuations in income generated from swap origination fees, commercial loan sales gains, and gains and losses on fixed asset disposal.
Noninterest Expense
Changes in noninterest expense are summarized in the tables below for the periods presented (dollars in thousands):
Year Ended December 31,
Change
% Change
Noninterest expense
Salaries, wages, and employee benefits
$
145,312
$
126,719
$
18,593
14.7
%
Data processing
21,862
16,426
5,436
33.1
%
Net occupancy expense of premises
18,346
17,607
4.2
%
Furniture and equipment expenses
8,301
9,550
(1,249)
(13.1)
%
Professional fees
7,549
8,396
(847)
(10.1)
%
Amortization of intangible assets
11,274
10,008
1,266
12.6
%
Interchange expense
5,792
4,810
20.4
%
Other expense
43,344
40,681
2,663
6.5
%
Total noninterest expense
$
261,780
$
234,197
$
27,583
11.8
%
Income taxes
$
33,374
$
27,862
$
5,512
19.8
%
Effective income tax rate
21.3
%
21.7
%
Efficiency ratio (1)
62.2
%
55.7
%
Adjusted efficiency ratio (1)
57.9
%
53.0
%
Full-time equivalent employees as of period-end
1,463
1,346
8.7
%
(1) For a reconciliation of efficiency ratio and adjusted efficiency ratio, both of which are non-GAAP financial measures, see “Item 1. Business-Non-GAAP Financial Information.”
Years Ended December 31,
Change
% Change
Noninterest expense
Salaries, wages, and employee benefits
$
126,719
$
140,473
$
(13,754)
(9.8)
%
Data processing
16,426
21,511
(5,085)
(23.6)
%
Net occupancy expense of premises
17,607
18,176
(569)
(3.1)
%
Furniture and equipment expenses
9,550
9,506
0.5
%
Professional fees
8,396
11,104
(2,708)
(24.4)
%
Amortization of intangible assets
10,008
9,547
4.8
%
Interchange expense
4,810
4,141
16.2
%
Other expense
40,681
44,336
(3,655)
(8.2)
%
Total noninterest expense
$
234,197
$
258,794
$
(24,597)
(9.5)
%
Income taxes
$
27,862
$
31,485
$
(3,623)
(11.5)
%
Effective income tax rate
21.7
%
23.4
%
Efficiency ratio (1)
55.7
%
61.3
%
Adjusted efficiency ratio (1)
53.0
%
56.3
%
Full-time equivalent employees as of period-end
1,346
1,531
(185)
(12.1)
%
(1) For a reconciliation of efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see “Item 1. Business-Non-GAAP Financial Information.”
Total noninterest expense increased to $261.8 million in 2021, compared to $234.2 million in 2020. Non-operating acquisition and other restructuring increased to $17.4 million in 2021, compared to $10.7 million in 2020, contributing $6.7 million of the total $27.6 million increase in noninterest expense. In addition, GSB’s results of operations were included in First Busey’s consolidated results of operations beginning June 1, 2021. We remain focused on expense discipline and have begun to realize synergies from the GSB merger and Personal Banking Transformation Plan, which resulted in the consolidation of 17 branches across our various markets.
Salaries, wages, and employee benefits increased to $145.3 million in 2021, compared to $126.7 million in 2020. Non-operating expenses contributed $5.3 million of the total $18.6 million increase. Salaries, wages, and employee benefit expenses were also impacted by increases in full-time equivalent employees since June 1, 2021, related to the CAC acquisition, and we began to see synergies in late August after GSB was merged into Busey Bank. We had a total of 1,463 full-time equivalents at December 31, 2021, compared to 1,346 at December 31, 2020. Current labor market trends reflect a shrinking labor supply, while job growth reflects increasing demand for a skilled workforce, putting further upward pressure on salaries, wages, and employee benefits.
Data processing expense increased to $21.9 million in 2021, compared to $16.4 million in 2020. Non-operating expenses comprised $3.6 million of the total $5.4 million increase. Data processing for 2021 also includes data processing related to CAC from June 1, 2021, until GSB merged with Busey Bank on August 14, 2021.
Combined, net occupancy expense of premises and furniture and equipment expenses decreased to $26.6 million in 2021, compared to $27.2 million in 2020. GSB added 7 branches on June 1, 2021. We closed 12 banking centers in October 2020, and completed the previously announced closure and consolidation of 17 banking centers, two of which were formerly GSB banking centers, in November 2021. The full benefit of reduction in expenses related to these locations will be realized in future periods as those properties are divested.
Professional fees decreased to $7.5 million in 2021, compared to $8.4 million in 2020, as a result of decreases in legal fees, audit and accounting fees, payroll service costs, and consulting fees. Excluding non-operating expenses, professional fees decreased from $7.8 million in 2020 to $5.9 million in 2021.
Amortization of intangible assets increased to $11.3 million in 2021, compared to $10.0 million in 2020, as a result of increases in intangible asset balances from the acquisition of CAC.
Interchange expense increased to $5.8 million in 2021, compared to $4.8 million in 2020, as a result of increased payment and volume activity at FirsTech.
Other expense increased to $43.3 million in 2021, compared to $40.7 million in 2020. Variances occurred across multiple expense categories, including NMTC amortization, regulatory expenses, marketing, business development, recruiting and onboarding, director compensation, and card service fees, partially offset by lower MSR valuation impairment, lower fixed asset impairment, and releases in the provision for unfunded commitments.
Efficiency Ratio (1)
The efficiency ratio is calculated as total noninterest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus noninterest income, less security gains and losses. The efficiency ratio, which is a measure commonly used by management and the banking industry, measures the amount of expense incurred to generate a dollar of revenue. The efficiency ratio was 62.2% in 2021, compared to 55.7% in 2020. Operating costs have been influenced by acquisition expenses and other restructuring costs, and the adjusted efficiency ratio1 was 57.9% for the year ended December 31, 2021, compared to 53.0% for the year ended December 31, 2020.
Income Taxes
The effective income tax rate, or income taxes divided by income before taxes, was 21.3%, 21.7%, and 23.4% for the years ended December 31, 2021, 2020, and 2019, respectively. The decrease in the effective tax rate was driven by an increase in tax exempt income, such as municipal bond interest and bank owned life insurance income, combined with the benefits received from various investments in federal and state tax credits, including an Illinois NMTC. We continue to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. As of December 31, 2021, we were not under examination by any tax authority.
Balance Sheet
Changes in significant items included in our Consolidated Balance Sheets are summarized in the table below (dollars in thousands):
As of December 31,
Change
% Change
Assets
Debt securities available for sale
$
3,981,251
$
2,261,187
$
1,720,064
76.1
%
Portfolio loans, net
7,101,111
6,713,129
387,982
5.8
%
Total assets
$
12,859,689
$
10,544,047
$
2,315,642
22.0
%
Liabilities
Deposits:
Noninterest-bearing
$
3,670,267
$
2,552,039
$
1,118,228
43.8
%
Interest-bearing
7,098,310
6,125,810
972,500
15.9
%
Total deposits
$
10,768,577
$
8,677,849
$
2,090,728
24.1
%
Securities sold under agreements to repurchase
$
270,139
$
175,614
$
94,525
53.8
%
Subordinated notes, net of unamortized issuance costs
182,773
182,226
0.3
%
Junior subordinated debt owed to unconsolidated trusts
71,635
71,468
0.2
%
Total liabilities
$
11,540,577
$
9,273,978
$
2,266,599
24.4
%
Stockholders’ equity
$
1,319,112
$
1,270,069
$
49,043
3.9
%
(1) For a reconciliation of the efficiency ratio and the adjusted efficiency ratio, both of which are non-GAAP financial measures, see “Item 1. Business-Non-GAAP Financial Information.”
Investment Securities
Debt securities available for sale are carried at fair value. As of December 31, 2021, the fair value of debt securities available for sale was $4.0 billion, and the amortized cost was also $4.0 billion. There were $22.4 million of gross unrealized gains and $54.7 million of gross unrealized losses for a net unrealized loss of $32.3 million. The net unrealized loss, net of tax, is recorded in stockholders’ equity. Equity securities are carried at fair value. As of December 31, 2021, the fair value of equity securities was $13.6 million.
The composition of debt securities available for sale was as follows (dollars in thousands):
As of December 31,
Debt securities available for sale
U.S. Treasury securities
$
165,762
$
27,837
$
51,737
Obligations of U.S. government corporations and agencies
38,470
69,519
163,000
Obligations of states and political subdivisions
306,869
304,711
268,291
Asset-backed securities
492,186
-
-
Commercial mortgage-backed securities
614,998
418,616
139,287
Residential mortgage-backed securities
2,069,313
1,368,315
921,966
Corporate debt securities
293,653
72,189
103,976
Debt securities available for sale, fair value
$
3,981,251
$
2,261,187
$
1,648,257
Debt securities available for sale, amortized cost
$
4,013,523
$
2,211,543
$
1,627,065
Fair value as a percentage of amortized cost
99.20
%
102.24
%
101.30
%
The primary purposes of our 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 $708.9 million, or 17.8% of total securities, at December 31, 2021, and $628.0 million, or 27.8% of total securities, at December 31, 2020.
By maturity date, fair values, and weighted average yields of debt securities available for sale as of December 31, 2021, 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
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Debt securities available for sale (1)
U.S. Treasury securities
$
47,546
0.19
%
$
118,216
0.21
%
$
-
-
%
$
-
-
%
Obligations of U.S. government corporations and agencies
16,566
2.55
%
17,906
2.52
%
3,998
0.66
%
-
-
%
Obligations of states and political subdivisions (2)
29,926
2.73
%
108,227
2.60
%
100,442
2.32
%
68,274
2.68
%
Asset-backed securities
-
-
%
-
-
%
29,498
1.27
%
462,688
1.26
%
Commercial mortgage-backed securities
13,522
1.99
%
71,509
1.37
%
54,104
1.56
%
475,863
1.53
%
Residential mortgage-backed securities
2.60
%
23,008
2.45
%
128,597
1.82
%
1,917,654
1.31
%
Corporate debt securities
22,234
1.15
%
224,607
1.03
%
45,418
2.92
%
1,394
3.00
%
Debt securities available for sale
$
129,848
1.43
%
$
563,473
1.31
%
$
362,057
2.00
%
$
2,925,873
1.37
%
(8) Securities are presented based upon final contractual maturity or pre-refunded date.
(9) Weighted average yield calculated on a tax-equivalent basis, assuming a federal income tax rate of 21.0%.
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, 2021, we did not have any non-U.S. Treasury securities or obligations of U.S. government corporations and agencies issued securities that exceeded 10% of our total stockholders’ equity.
Portfolio Loans
We believe that making sound and profitable loans is a necessary and desirable means of employing funds available for investment. First Busey maintains lending policies and procedures designed to focus lending efforts on the types, locations, and duration of loans most appropriate for its business model and markets. GSB’s policies were similar in nature to Busey Bank’s policies, and we are migrating the legacy GSB portfolio toward Busey Bank’s policies. While not specifically limited, we attempt to focus our lending on short to intermediate-term (0-10 years) loans in geographic areas within 125 miles of our lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or loans to existing customers of Busey Bank. We attempt to utilize government-assisted lending programs, such as the SBA and U.S. Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate, and guaranteed by individuals. Loans are expected to be repaid primarily from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.
Management reviews and approves Busey Bank’s lending policies and procedures on a regular basis. Management routinely (at least quarterly) reviews the ACL in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies, non-performing loans, and potential problem loans. Our underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship. Significant underwriting factors in addition to location, duration, a sound and profitable cash flow basis, and the borrower’s character, include the quality of the borrower’s financial history, the liquidity of the underlying collateral, and the reliability of the valuation of the underlying collateral.
As a matter of policy and practice, we limit the level of concentration exposure in any particular loan segment with the goal of maintaining a well-diversified loan portfolio. In anticipation of the potential risks associated with COVID-19, we took actions starting in early March 2020 to escalate the monitoring of susceptible industry sectors within our portfolio.
At no time is a borrower’s total borrowing relationship permitted to exceed Busey Bank’s regulatory lending limit. We generally limit such relationships to amounts substantially less than the regulatory limit. Loans to related parties, including executive officers and directors of First Busey and its subsidiaries, are reviewed for compliance with regulatory guidelines.
First Busey maintains an independent loan review department that reviews loans for compliance with our loan policy on a periodic basis. In addition, the loan review department reviews the risk assessments made by our credit department, lenders, and loan committees. Results of these reviews are presented to management and the audit committee at least quarterly.
Busey Bank’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 material percentage, 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. Cash flows of the underlying borrower, however, may not perform consistently with historical or projected information. Further, collateral securing loans may fluctuate in value due to individual economic or other factors. Busey Bank 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 our markets, provides for the majority of our commercial lending opportunities to be commercial real estate related, including multi-unit housing. As the majority of our loan portfolio is within the commercial real estate class, our 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 are generally guaranteed, in full or a material percentage, by the primary owners of the business. Repayment of 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 which we closely monitor.
Real Estate Construction Loans
Real estate construction loans are primarily commercial in nature. Loan proceeds are monitored by the Company and advanced for the improvement of real estate in which we hold a mortgage. Real estate construction loans will generally be guaranteed, in full or a material percentage, 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. 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, home equity lines of credit, and home equity loans. In 2021, we sold the majority of our newly originated 30-year fixed rate retail real estate loans to secondary market purchasers, while retaining a larger percentage of the 15-year fixed rate loans in our portfolio. As retail real estate loan underwriting is subject to specific regulations, we typically underwrite our retail real estate loans to conform to widely accepted standards. Several factors are considered in underwriting including the debt-to-income ratio and credit history of the borrower, as well as the value of the underlying real estate.
Retail Other Loans
Retail other loans consist of installment loans to individuals, including automotive loans and indirect lending. These loans are centrally underwritten utilizing the borrower’s financial history, including the FICO credit scoring, and information as to the underlying collateral. In 2021, associated with the CAC acquisition and purchased participations, retail other loans now also include whole-life loans which are secured by the cash value of life insurance policies. Repayment of retail other loans 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,
Portfolio loans
Commercial
$
1,943,886
$
2,014,576
$
1,748,368
$
1,405,106
$
1,414,631
Commercial real estate
3,119,807
2,892,535
2,793,417
2,366,823
2,354,684
Real estate construction
385,996
461,786
401,861
288,197
261,506
Retail real estate
1,512,976
1,407,852
1,693,769
1,480,133
1,460,801
Retail other
226,333
37,428
49,834
28,169
27,878
Portfolio loans
$
7,188,998
$
6,814,177
$
6,687,249
$
5,568,428
$
5,519,500
ACL
(87,887)
(101,048)
(53,748)
(50,648)
(53,582)
Portfolio loans, net
$
7,101,111
$
6,713,129
$
6,633,501
$
5,517,780
$
5,465,918
Geographic distributions of portfolio loans, based on origination, by category were as follows (dollars in thousands):
December 31, 2021
Illinois
Missouri
Florida
Indiana
Total
Portfolio loans
Commercial
$
1,372,584
$
463,085
$
55,180
$
53,037
$
1,943,886
Commercial real estate
2,063,681
691,969
191,303
172,854
3,119,807
Real estate construction
199,471
120,785
31,265
34,475
385,996
Retail real estate
1,124,486
235,083
96,563
56,844
1,512,976
Retail other
219,000
3,684
2,181
1,468
226,333
Total portfolio loans
$
4,979,222
$
1,514,606
$
376,492
$
318,678
$
7,188,998
ACL
(87,887)
Portfolio loans, net
$
7,101,111
December 31, 2020
Illinois
Missouri
Florida
Indiana
Total
Portfolio loans
Commercial
$
1,386,587
$
529,281
$
50,878
$
47,830
$
2,014,576
Commercial real estate
1,880,437
715,680
154,234
142,184
2,892,535
Real estate construction
192,971
115,227
57,381
96,207
461,786
Retail real estate
963,538
295,352
94,748
54,214
1,407,852
Retail other
32,678
2,415
1,188
1,147
37,428
Total portfolio loans
$
4,456,211
$
1,657,955
$
358,429
$
341,582
$
6,814,177
ACL
(101,048)
Portfolio loans, net
$
6,713,129
As of December 31, 2021, portfolio loan balances included balances acquired in the CAC acquisition. The Company generated $460.7 million in core loan growth, excluding PPP loans, over the last three quarters of 2021. Commercial balances - consisting of commercial, commercial real estate and real estate construction loans - excluding PPP loans, increased by $452.2 million, or 9.2%, during the year ended December 31, 2021. Retail real estate and retail other loans increased by $294.0 million, or 20.3%, during the year ended December 31, 2021. PPP loans decreased $371.4 million during the year ended December 31, 2021, to $75.0 million.
Commitments to extend credit and standby letters of credit increased $222.9 million, or 12.4%, to a total of $2.0 billion as of December 31, 2021, compared to $1.8 billion as of December 31, 2020.
The following table sets forth remaining maturities of selected loans (excluding deferred loan fees and costs, purchase premiums and discounts, and certain real estate-mortgage loans and installment loans to individuals) at December 31, 2021 (dollars in thousands). The determination of loan maturities is based on contractual loan terms. For the purposes of categorization within the table below, demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are considered to mature within one year. Maturities for non-contractual rollovers or extensions are determined based on the rate review date.
After 1 Year
After 5 Years
Within 1 Year
Through 5 Years
Through 15 Years
After 15 Years
Total
Selected Loans
Commercial
$
1,043,137
$
659,421
$
222,780
$
20,719
$
1,946,057
Commercial real estate
994,593
1,499,314
627,520
3,122,242
Real estate construction
214,680
121,293
53,877
390,356
Total selected loans
$
2,252,410
$
2,280,028
$
904,177
$
22,040
$
5,458,655
Selected loans maturing after one year are summarized below by interest rate sensitivity and loan category (dollars in thousands):
Interest Rate Sensitivity of Selected Loans
Fixed
Adjustable
Rate
Rate
Total
Selected loans maturing after 1 year
Commercial
$
862,688
$
40,232
$
902,920
Commercial real estate
1,967,626
160,023
2,127,649
Real estate construction
161,388
14,288
175,676
Total selected loans maturing after 1 year
$
2,991,702
$
214,543
$
3,206,245
Allowance for Credit Losses
The following table summarizes, by loan category, activity affecting the ACL and average portfolio loans outstanding for the year ended December 31, 2021, as well as the related ratios of net charge-offs (recoveries) to average portfolio loans (dollars in thousands):
Ratio of
Net Charge-offs
Average
(Recoveries)
Portfolio Loans
To Average
ACL
Outstanding
Portfolio Loans
ACL Balance, January 1, 2021
$
101,048
Day 1 PCD (1)
4,178
Net (charge-offs) recoveries and average portfolio loans by loan category:
Commercial
(1,397)
$
1,985,511
0.07
%
Commercial real estate
(666)
2,953,944
0.02
%
Real estate construction
450,713
(0.02)
%
Retail real estate
(76)
1,446,673
0.01
%
Retail other
(188)
132,966
0.14
%
Net (charge-offs) recoveries and average portfolio loans
(2,238)
$
6,969,807
0.03
%
Provision for credit losses
(15,101)
ACL Balance, December 31, 2021
$
87,887
(1) The Day 1 PCD is attributable to the CAC acquisition.
The following table summarizes the relationship between the ACL and total portfolio loans, as of the periods indicated (dollars in thousands):
As of December 31,
Portfolio loans
Portfolio loans, excluding PPP loans
$
7,114,040
$
6,367,774
$
6,687,249
PPP loans, amortized cost
74,958
446,403
-
Total portfolio loans
$
7,188,998
$
6,814,177
$
6,687,249
ACL
$
87,887
$
101,048
$
53,748
Ratios
ACL to portfolio loans
1.22
%
1.48
%
0.80
%
ACL to portfolio loans, excluding PPP loans
1.24
%
1.59
%
0.80
%
The following table sets forth the ACL by loan categories and percentage of loans to total loans as of December 31 for each of the years indicated (dollars in thousands):
% 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
ACL
Commercial
$
23,855
27.0
%
$
23,866
29.6
%
$
18,291
26.2
%
$
17,829
25.2
%
$
14,779
25.6
%
Commercial real estate
38,249
43.4
%
46,230
42.4
%
21,190
41.8
%
21,137
42.5
%
21,813
42.7
%
Real estate construction
5,102
5.4
%
8,193
6.8
%
3,204
6.0
%
2,723
5.2
%
2,861
4.7
%
Retail real estate
17,589
21.0
%
21,992
20.7
%
10,495
25.3
%
8,471
26.6
%
13,783
26.5
%
Retail other
3,092
3.2
%
0.5
%
0.7
%
0.5
%
0.5
%
Total ACL
$
87,887
100.0
%
$
101,048
100.0
%
$
53,748
100.0
%
$
50,648
100.0
%
$
53,582
100.0
%
The ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration, and other factors. As of December 31, 2021, management believed the level of the allowance 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 Credit Losses
The ACL is a significant estimate in our Consolidated Balance Sheet, affecting both earnings and capital. The methodology adopted influences, and is influenced by, Busey Bank’s overall credit risk management processes. The ACL is recorded in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date. The ACL is established through the provision for credit loss expense charged to income. We recorded a provision release of $15.1 million for the year ended December 31, 2021, reflecting improvements in macroeconomic conditions and asset quality, compared to a provision expense of $38.8 million and $10.4 million for the years ended December 31, 2020, and 2019, respectively.
Non-performing Loans and Non-performing Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory guidelines. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. Loans are returned to accrual status when all 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 ACL to the fair value of our interest in the underlying collateral less estimated costs to sell. Our loan portfolio is collateralized primarily by real estate.
The following table sets forth information concerning non-performing loans and performing restructured loans (dollars in thousands):
As of December 31,
Loans 30 - 89 days past due
$
6,261
$
7,578
$
14,271
$
7,121
$
12,897
Non-performing assets
Non-performing loans:
Non-accrual loans
15,946
22,930
27,896
34,997
24,624
Loans 90+ days past due and still accruing
1,371
1,611
1,601
2,741
Total non-performing loans
16,852
24,301
29,507
36,598
27,365
OREO and other repossessed assets
4,416
4,571
3,057
1,283
Total non-performing assets
$
21,268
$
28,872
$
32,564
$
36,974
$
28,648
Substandard (excludes 90+ days past due)
70,565
68,924
74,315
85,062
87,372
Classified assets
$
91,833
$
97,796
$
106,879
$
122,036
$
116,020
Performing TDRs (includes 30 - 89 days past due)
$
1,801
$
3,829
$
5,005
$
8,446
$
9,981
ACL
87,887
101,048
53,748
50,648
53,582
Ratios
ACL to non-accrual loans
551.15
%
440.68
%
192.67
%
144.72
%
217.60
%
ACL to non-performing loans
521.52
%
415.82
%
182.15
%
138.39
%
195.80
%
ACL to non-performing assets
413.24
%
349.99
%
165.05
%
136.98
%
187.04
%
Non-accrual loans to portfolio loans
0.22
%
0.34
%
0.42
%
0.63
%
0.45
%
Non-performing assets to total assets
0.17
%
0.27
%
0.34
%
0.48
%
0.41
%
Non-performing loans to portfolio loans
0.23
%
0.36
%
0.44
%
0.66
%
0.50
%
Non-performing loans to portfolio loans, excluding PPP loans
0.24
%
0.38
%
0.44
%
0.66
%
0.50
%
Non-performing assets to portfolio loans and OREO
0.30
%
0.42
%
0.49
%
0.66
%
0.52
%
Classified assets to Busey Bank Tier 1 Capital and ACL
6.91
%
8.47
%
9.72
%
14.28
%
14.69
%
Credit quality continues to be exceptionally strong. Total non-performing assets were $21.3 million at December 31, 2021, compared to $28.9 million at December 31, 2020. Asset quality metrics remain dependent upon market-specific economic conditions, and specific measures may fluctuate from period to period. Continued disciplined credit management resulted in non-performing loans as a percentage of portfolio loans of 0.23% at December 31, 2021, compared with 0.36% at December 31, 2020. If economic conditions were to deteriorate, we would expect the credit quality of our loan portfolio to decline and loan defaults to increase. Allowance coverage of non-performing loans increased to 521.5% at December 31, 2021, compared to 415.8% at December 31, 2020.
Classified assets, which includes non-performing assets and substandard loans, declined to $91.8 million at December 31, 2021, compared to $97.8 million at December 31, 2020. The ratio of classified assets to Busey Bank Tier 1 capital and ACL declined to 6.9% at December 31, 2021, from 8.5% at December 31, 2020.
Potential Problem Loans
Potential problem loans are loans classified as substandard which are not individually evaluated, restructured, non-accrual, or 90+ days past due, but where current information indicates that the borrower may not be able to comply with loan repayment terms. Management assesses the potential for loss on such loans and considers the effect of any potential loss in determining its provision for expected credit losses. Potential problem loans increased to $70.5 million at December 31, 2021, compared to $68.8 million at December 31, 2020. Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral, or other planned actions will result in full repayment of the debts. As of December 31, 2021, management identified no other loans that represent or result from trends or uncertainties which would be expected to materially impact future operating results, liquidity, or capital resources.
Deposits
The following table shows the deposit mix for each of the periods presented (dollars in thousands):
As of December 31,
Balance
% Total
Balance
% Total
Balance
% Total
Deposits
Non-maturity deposits:
Demand deposits, noninterest-bearing
$
3,670,267
34.1
%
$
2,552,039
29.4
%
$
1,832,619
23.2
%
Interest-bearing transaction deposits
2,720,417
25.2
%
2,263,093
26.1
%
1,989,854
25.2
%
Saving deposits and money market deposits
3,442,244
32.0
%
2,743,369
31.6
%
2,545,073
32.2
%
Total non-maturity deposits
9,832,928
91.3
7,558,501
87.1
6,367,546
80.6
Time deposits
935,649
8.7
%
1,119,348
12.9
%
1,534,850
19.4
%
Total deposits
$
10,768,577
100.0
%
$
8,677,849
100.0
%
$
7,902,396
100.0
%
Change in non-maturity deposits
2,274,427
1,190,955
Percent change in non-maturity deposits
30.1
%
18.7
%
We focus on deepening our relationship with customers to foster core deposit growth, allowing us to reduce our reliance on wholesale funding. Our 2021 deposit balances were impacted by the retention of PPP loan funding in customer deposit accounts, the impacts of economic stimulus, and other core deposit growth. Core deposits include non-brokered transaction accounts, money market deposit accounts, and time deposits of $250,000 or less. Time deposits as a percentage of total deposits decreased to 8.7% as of December 31, 2021, compared to 12.9% as of December 31, 2020. As time deposits mature, we are actively engaging our customers to renew at current market rates.
Deposits are federally insured up to the FDIC insurance limit of $250,000. When a portion of a deposit account exceeds the FDIC insurance limit, that portion is uninsured. The following table summarizes the uninsured portion of time deposits by maturity date (dollars in thousands):
As of
December 31, 2021
Uninsured time deposits by schedule of maturities
3 months or less
$
24,946
Over 3 months through 6 months
23,108
Over 6 months through 12 months
34,362
Thereafter
47,396
Uninsured time deposits
$
129,812
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 the date of origination, and the current portion of long-term debt due within 12 months.
On May 28, 2021, First Busey entered into a Second Amended and Restated Credit Agreement, pursuant to which we have access to (i) a $40.0 million revolving line of credit with a termination date of April 30, 2022, and (ii) a $60.0 million term loan with a maturity date of May 31, 2026. The loans have an annual interest rate of 1.75% plus the 1-month LIBOR rate. Proceeds of the term loan were used to fund a part of the cash portion of the merger consideration related to the acquisition of CAC and for general corporate purposes. The revolving credit facility incurs a non-usage fee based on any undrawn amounts. As of December 31, 2021, there was no balance outstanding on the revolving credit facility and a total of $54.0 million outstanding on the term loan, of which $12.0 million is short-term and $42.0 million is long-term.
The following table sets forth the distribution of short-term borrowings and weighted average interest rates thereon (dollars in thousands):
Years Ended December 31,
Securities sold under agreements to repurchase
Balance at end of period
$
270,139
$
175,614
$
205,491
Weighted average interest rate at end of period
0.08
%
0.13
%
1.05
%
Maximum outstanding at any month end in year-to-date period
$
270,139
$
210,529
$
225,531
Average daily balance for the year-to-date period
$
218,454
$
187,032
$
196,681
Weighted average interest rate during period (1)
0.10
%
0.35
%
1.19
%
Short-term borrowings, FHLB advances
Balance at end of period
$
5,678
$
4,658
$
2,551
Weighted average interest rate at end of period
0.36
%
0.43
%
1.90
%
Maximum outstanding at any month end in year-to-date period
$
5,678
$
4,658
$
99,739
Average daily balance for the year-to-date period
$
4,934
$
3,556
$
27,495
Weighted average interest rate during period (1)
0.41
%
0.53
%
2.81
%
Term loan, current portion due within 12 months
Balance at end of period
$
12,000
$
-
$
-
Weighted average interest rate at end of period
1.88
%
-
%
-
%
Maximum outstanding at any month end in year-to-date period
$
12,000
$
-
$
-
Average daily balance for the year-to-date period
$
7,167
$
-
$
-
Weighted average interest rate during period (1)
1.79
%
-
%
-
%
(10) 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 $4.1 million and $4.8 million at December 31, 2021, and 2020, respectively.
On May 25, 2017, we 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, we 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 3-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 First Busey.
On June 1, 2020, we issued $125.0 million of fixed-to-floating rate subordinated notes that mature on June 1, 2030. The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 5.25% for the first five years after issuance and thereafter bear interest at a floating rate equal to a three-month benchmark rate plus a spread of 5.11%, as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each June 1 and December 1, during the five-year fixed-term, and thereafter on March 1, June 1, September 1, and December 1 of each year, commencing on September 1, 2025. The subordinated notes have an optional redemption, in whole or in part, on any interest payment date on or after June 1, 2025. The subordinated notes are unsecured obligations of First Busey.
Unamortized debt issuance costs related to senior notes and subordinated notes are presented in the following table (dollars in thousands):
As of December 31,
Unamortized debt issuance costs
Senior notes issued in 2017
$
$
Subordinated notes issued in 2017
Subordinated notes issued in 2020
1,678
2,123
Total unamortized debt issuance costs
$
2,283
$
2,965
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. Proceeds from such issuances were used by the trusts to purchase junior subordinated notes of First Busey, which are the sole assets of each trust. Concurrent with the issuance of the trust preferred securities, we 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 First Busey, as Tier 1 regulatory capital. First Busey 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, we acquired similar statutory trusts previously maintained by Pulaski and the fair value adjustment is being accreted over their weighted average remaining life, with a balance of $3.0 million remaining to be accreted. We had $71.6 million and $71.5 million of junior subordinated debt owed to unconsolidated trusts at December 31, 2021, and 2020, 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. Balances of these assets are dependent on our 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,
Average liquid assets
Cash and due from banks
$
133,711
$
118,739
$
114,619
Interest-bearing bank deposits
630,687
488,786
312,580
Federal funds sold
-
-
Total average liquid assets
$
764,398
$
607,525
$
427,223
Average liquid assets as a percent of average total assets
6.4
%
5.9
%
4.5
%
First Busey’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayments, and capital funds. At December 31, 2021, cash and unencumbered securities on our Consolidated Balance Sheets totaled $4.1 billion. Additional liquidity is provided by the ability to borrow from the FHLB, the Federal Reserve, First Busey’s revolving credit facility, or to utilize brokered deposits, as summarized in the table below (dollars in thousands):
As of December 31,
Additional borrowing capacity available from:
FHLB
1,536,019
1,336,655
Federal Reserve
624,627
507,813
Revolving credit facility
40,000
20,000
Additional borrowing capacity
$
2,200,646
$
1,864,468
As of December 31, 2021, management believed that adequate liquidity existed to meet all projected cash flow obligations. We seek to achieve a satisfactory degree of liquidity by actively managing both assets and liabilities. Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.
Our ability to pay cash dividends to our stockholders and to service our debt is dependent on the receipt of cash dividends from our subsidiaries. Busey Bank paid dividends to First Busey totaling $60.0 million and $122.0 million for the years ended December 31, 2021, and 2020, respectively.
Off-Balance-Sheet Arrangements
Busey Bank routinely enters into commitments to extend credit and standby letters of credit in the normal course of business to meet the financing needs of its customers. As of December 31, 2021, and 2020, we had outstanding loan commitments and standby letters of credit of $2.0 billion and $1.8 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, excluding short-term borrowings, as of December 31, 2021, (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
Contractual obligations by schedule of maturities
$
643,826
$
2,271
$
-
$
-
$
39,944
$
686,041
191,995
2,098
-
16,056
-
210,149
70,111
1,650
-
12,000
-
83,761
16,149
1,413
-
12,000
-
29,562
12,834
1,164
-
6,000
-
19,998
Thereafter
2,766
71,635
-
182,773
257,908
Contractual obligations
$
935,649
$
11,362
$
71,635
$
46,056
$
222,717
$
1,287,419
Commitments to extend credit and standby letters of credit
$
2,016,207
Cash Flows
Net cash flows provided by operating activities totaled $162.0 million in 2021, compared to $163.2 million in 2020. Significant items affecting the cash flows provided by operating activities include net income; the provision for credit losses; depreciation and amortization; gain on sales of mortgage loans, net of origination costs and activities related to the origination and sales of loans held for sale; and stock-based compensation. Net cash used to originate mortgage loans held for sale totaled $31.7 million in 2021, compared to $38.7 million of in 2020. Fluctuations in sales are a function of changes in market rates for mortgage loans, which influence refinance activity. Our provision for credit losses reflects a reserve release of to $15.1 million in 2021, compared to a provision expense of $38.8 million in 2020, reflecting forecasted improvements in macroeconomic conditions and asset quality, partially offset by core loan growth. Stock-based compensation increased to $7.9 million in 2021, compared to $7.1 million in 2020.
Net cash used in investing activities totaled $829.2 million in 2021, compared to $729.5 million in 2020. Significant investment activities are those associated with managing First Busey’s investment and loan portfolios, as well as acquisition activities. We purchased $2.3 billion of debt securities in 2021, compared to $1.3 billion in 2020. Investing outflows were partially offset with $228.3 million net cash received in connection with the CAC acquisition in 2021.
Net cash provided by financing activities totaled $814.7 million in 2021, compared to $725.6 million in 2020. Significant items affecting cash flows from financing activities are debt issuance, deposits, short-term borrowings, long-term debt, payment of dividends, and proceeds and redemption from stock issuances. Deposits, which represent First Busey’s primary funding source, increased by $767.5 million in 2021, compared to an increase of $776.4 million in 2020, excluding acquired deposits.
Capital Resources
Our capital ratios are in excess of those required to be considered “well-capitalized” pursuant to applicable regulatory guidelines. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. In order to refrain from restrictions on dividends, equity repurchases, and discretionary bonus payments, banking institutions must maintain capital in excess of regulatory minimum capital requirements. The table below presents minimum capital ratios with capital buffer and December 31, 2021, capital ratios for First Busey and Busey Bank.
Minimum Capital
As of December 31, 2021
Requirements with
First Busey
Busey
Capital Buffer
Corporation
Bank
Common Equity Tier 1 Capital to Risk Weighted Assets
7.00
%
11.85
%
14.81
%
Tier 1 Capital to Risk Weighted Assets
8.50
%
12.73
%
14.81
%
Total Capital to Risk Weighted Assets
10.50
%
15.70
%
15.59
%
Leverage Ratio of Tier 1 Capital to Average Assets
6.50
8.52
%
9.91
%
Management believes that no conditions or events have occurred since December 31, 2021, that would materially adversely change First Busey’s or Busey Bank’s capital classifications.
New Accounting Pronouncements
We review new accounting standards as issued. Information relating to accounting pronouncements issued in 2021 and applicable to First Busey 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operation - Three Years Ended December 31, 2021-Average Balance Sheets and Interest Rates” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. Due to the current low interest rate environment, a downward adjustment in federal fund rates was not meaningful as of December 31, 2021, or 2020. The model assumes immediate and sustained shifts in the federal funds rate and other market rate indices and corresponding shifts in other non-market rate indices based on their historical changes relative to changes in the federal funds rate and other market indices. Assets and liabilities are assumed to remain constant as of the measurement date; variable-rate assets and liabilities are repriced based on repricing frequency; and prepayment speeds on loans are projected for both declining and rising rate environments.
The interest rate risk of First Busey as a result of immediate and sustained changes in interest rates, expressed as a change in net interest income as a percentage of the net interest income calculated in the constant base model, was as follows:
Year-One: Basis Point Changes
+100
+200
+300
December 31, 2021
8.77
%
17.19
%
25.64
%
December 31, 2020
7.40
%
14.16
%
20.20
%
Year-Two: Basis Point Changes
+100
+200
+300
December 31, 2021
9.51
%
18.22
%
26.84
%
December 31, 2020
9.59
%
17.95
%
25.40
%
Interest rate risk is monitored and managed within approved policy limits. The calculation of potential effects of hypothetical interest rate changes is based on numerous assumptions and should not be relied upon as indicative of actual results. Actual results would likely differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 49)
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Note 2 - Acquisitions
Note 3 - Debt Securities
Note 4 - Portfolio Loans and Allowance for Credit Losses
Note 5 - Other Real Estate Owned and Other Repossessed Assets
Note 6 - Premises and Equipment, net
Note 7 - Goodwill and Other Intangible Assets
Note 8 - Deposits
Note 9 - Borrowings
Note 10 - Junior Subordinated Debt Owed to Unconsolidated Trusts
Note 11 - Regulatory Capital
Note 12 - Income Taxes
Note 13 - Employee Benefit Plans
Note 14 - Stock-based Compensation
Note 15 - Transactions with Related Parties
Note 16 - Outstanding Commitments and Contingent Liabilities
Note 17 - Derivative Financial Instruments
Note 18 - Fair Value Measurements
Note 19 - Earnings Per Share
Note 20 - Accumulated Other Comprehensive Income (Loss)
Note 21 - Operating Segments and Related Information
Note 22 - Leases
Note 23 - Parent Company Only Financial Information
Report of Independent Registered Public Accounting Firm
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, 2021 and 2020, 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, 2021, and the related notes to the consolidated financial statements (collectively, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 24, 2022 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses - Adjustments to historical loss factors
As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for credit losses totaled $87.9 million, which consists of a reserve on loans collectively evaluated for impairment (a/k/a general reserve) of $84.3 million and a reserve on loans individually evaluated (a/k/a specific reserve) of $3.6 million at December 31, 2021. The allowance for credit losses is measured on a collective loan pool basis when similar risk characteristics exist. Loans that do not share similar risk characteristics are evaluated on an individual basis, at the balance sheet date. The measurement of expected credit losses on collectively evaluated loans is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the amortized cost basis. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions such as changes in unemployment rates, property values and other relevant factors.
The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical credit loss information.
We identified the adjustments to historical loss factors components of the allowance for credit losses as a critical audit matter as auditing the underlying adjustments 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 adjustments to historical factors within the allowance for credit losses include the following, among others:
● We obtained an understanding of the relevant controls related to the adjustments to historical factors in the calculation of the allowance for credit losses and tested such controls for design and operating effectiveness, including management’s review of the allowance memo and calculation in support of adjustments.
● We tested the completeness and accuracy of data used by management in determining adjustments to historical loss factors by agreeing the supporting data to internal or external source data.
● We tested management’s conclusions regarding the appropriateness of the adjustments, including magnitude and directional consistency, to historical loss factors and agreed the impact to the allowance for credit losses calculation.
Business Combination - Fair Value of Acquired Loans
As described in Notes 1 and 2 to the consolidated financial statements, on May 31, 2021, the Company completed its acquisition of Cummins-American Corp. (CAC). The Company recorded $6.3 million of goodwill as a result of the acquisition, which represents the excess of the purchase price over the fair value of net assets acquired using the acquisition method of accounting. The fair value determination of a loan portfolio requires greater levels of estimates and assumptions than the other assets acquired or liabilities assumed. Acquired loans are initially recorded at their acquisition-date fair values using Level 3 inputs. The Company prepared loan fair value adjustments that it believed a market participant might employ in estimating the fair value for the acquired loan portfolio. This analysis was performed for loans without signs of credit deterioration as well as those identified as purchase credit deteriorated (PCD). The acquired loan portfolio was recorded at an estimated fair value of $430.5 million at the acquisition date, of which $60.5 million was for PCD loans, without carryover of CAC’s previously established allowance for loan losses.
We identified the fair value of acquired loans as a critical audit matter, because of the judgments necessary to determine the fair value of the loan portfolio acquired, the high degree of auditor judgment involved and the extensive audit effort involved in testing management estimates and assumptions.
Our audit procedures related to the valuation of the acquired loan portfolio included the following, among others:
We obtained an understanding of the relevant controls related to the business combination, including the valuation of the acquired loan portfolio and management’s development of significant assumptions, and tested such controls for design and operating effectiveness.
● We obtained the valuation report prepared by a third party engaged by management, and gained an understanding of the valuation methodology applied, as well as key inputs and assumptions.
● We tested the completeness and accuracy of data inputs provided by management and utilized in the calculation performed by the third-party specialist.
● We utilized internal valuation specialists to assist in evaluating significant assumptions such as credit risk, expected lifetime losses, environmental factors, discount rates, expected payments and expected prepayments.
● We evaluated the appropriateness of management’s classification of PCD loans, and tested the propriety of the fair value adjustments applied to these loans.
We or our predecessor firms have served as the Company's auditor since at least 1980, however, an earlier year could not be established.
/s/ RSM US LLP
Champaign, Illinois
February 24, 2022
FIRST BUSEY CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
As of
December 31,
December 31,
Assets
Cash and cash equivalents:
Cash and due from banks
$
102,983
$
118,824
Interest-bearing deposits
733,112
569,713
Total cash and cash equivalents
836,095
688,537
Debt securities available for sale
3,981,251
2,261,187
Equity securities
13,571
5,530
Loans held for sale, at fair value
23,875
42,813
Portfolio loans (net of ACL of $87,887 at December 31, 2021; $101,048 at December 31, 2020)
7,101,111
6,713,129
Premises and equipment, net
136,147
135,191
Right of use assets
10,533
7,714
Goodwill
317,873
311,536
Other intangible assets, net
58,051
51,985
Cash surrender value of bank owned life insurance
176,940
176,405
Other assets
204,242
150,020
Total assets
$
12,859,689
$
10,544,047
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing
$
3,670,267
$
2,552,039
Interest-bearing
7,098,310
6,125,810
Total deposits
10,768,577
8,677,849
Securities sold under agreements to repurchase
270,139
175,614
Short-term borrowings
17,678
4,658
Long-term debt
46,056
4,757
Senior notes, net of unamortized issuance costs
39,944
39,809
Subordinated notes, net of unamortized issuance costs
182,773
182,226
Junior subordinated debt owed to unconsolidated trusts
71,635
71,468
Lease liabilities
10,591
7,757
Other liabilities
133,184
109,840
Total liabilities
11,540,577
9,273,978
Outstanding commitments and contingent liabilities (see Notes 16 and 22)
Stockholders’ Equity
Common stock, ($.001 par value; 100,000,000 shares authorized)
Additional paid-in capital
1,316,984
1,253,360
Retained earnings
92,463
20,830
AOCI
(23,758)
33,309
Total stockholders’ equity before treasury stock
1,385,747
1,307,555
Treasury stock at cost
(66,635)
(37,486)
Total stockholders’ equity
1,319,112
1,270,069
Total liabilities and stockholders’ equity
$
12,859,689
$
10,544,047
Shares
Common shares issued
58,116,970
55,910,733
Less treasury shares
(2,682,060)
(1,506,354)
Common shares outstanding
55,434,910
54,404,379
See accompanying Notes to Consolidated Financial Statements.
FIRST BUSEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
Years Ended December 31,
Interest income
Interest and fees on loans
$
252,097
$
284,959
$
304,193
Interest and dividends on investment securities:
Taxable interest income
41,787
35,364
41,090
Non-taxable interest income
3,765
4,552
4,631
Other interest income
1,151
1,723
6,320
Total interest income
298,800
326,598
356,234
Interest expense
Deposits
12,583
30,691
55,077
Federal funds purchased and securities sold under agreements to repurchase
2,348
Short-term borrowings
1,041
Long-term debt
2,608
Senior notes
1,598
1,598
1,599
Subordinated notes
9,918
6,995
2,924
Junior subordinated debt owed to unconsolidated trusts
2,840
2,960
3,414
Total interest expense
28,102
43,663
69,011
Net interest income
270,698
282,935
287,223
Provision for credit losses
(15,101)
38,797
10,406
Net interest income after provision for credit losses
285,799
244,138
276,817
Noninterest income
Wealth management fees
53,086
42,928
38,561
Fees for customer services
35,604
31,604
36,683
Payment technology solutions
18,347
15,628
15,643
Mortgage revenue
7,239
13,038
11,703
Income on bank owned life insurance
5,166
5,380
5,795
Net gains (losses) on sales of securities
1,724
Unrealized gains (losses) recognized on equity securities
3,041
(393)
(759)
Other income
10,292
8,356
8,048
Total noninterest income
132,804
118,265
116,415
Noninterest expense
Salaries, wages, and employee benefits
145,312
126,719
140,473
Data processing
21,862
16,426
21,511
Net occupancy expense of premises
18,346
17,607
18,176
Furniture and equipment expenses
8,301
9,550
9,506
Professional fees
7,549
8,396
11,104
Amortization of intangible assets
11,274
10,008
9,547
Interchange expense
5,792
4,810
4,141
Other expense
43,344
40,681
44,336
Total noninterest expense
261,780
234,197
258,794
Income before income taxes
156,823
128,206
134,438
Income taxes
33,374
27,862
31,485
Net income
$
123,449
$
100,344
$
102,953
Basic earnings per common share
$
2.23
$
1.84
$
1.88
Diluted earnings per common share
$
2.20
$
1.83
$
1.87
Dividends declared per share of common stock
$
0.92
$
0.88
$
0.84
See accompanying Notes to Consolidated Financial Statements.
FIRST BUSEY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31,
Net income
$
123,449
$
100,344
$
102,953
OCI:
Unrealized gains (losses) on debt securities available for sale:
Net unrealized holding gains (losses) on debt securities available for sale, net of taxes of $23,367, ($8,615), and ($7,525), respectively
(58,610)
21,561
18,905
Net unrealized (gains) losses on debt securities transferred from held to maturity to available for sale, net of taxes of $-, $-, and ($1,433), respectively
-
-
3,590
Reclassification adjustment for realized (gains) losses on debt securities available for sale included in net income, net of taxes of ($17), $496, and $210, respectively
(1,228)
(523)
Net change in unrealized gains (losses) on debt securities available for sale
(58,566)
20,333
21,972
Unrealized gains (losses) on cash flow hedges:
Net unrealized holding gains (losses) on cash flow hedges, net of taxes of ($294), $1,007, and $81, respectively
(2,526)
(202)
Reclassification adjustment for realized (gains) losses on cash flow hedges included in net income, net of taxes of ($304), ($216), and ($1), respectively
Net change in unrealized gains (losses) on cash flow hedges
1,499
(1,984)
(200)
Net change in AOCI
(57,067)
18,349
21,772
Total comprehensive income
$
66,382
$
118,693
$
124,725
See accompanying Notes to Consolidated Financial Statements.
FIRST BUSEY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands, except per share amounts)
Retained
Additional
Earnings
Total
Common
Paid-in
(Accumulated
Treasury
Stockholders'
Shares
Stock
Capital
Deficit)
AOCI
Stock
Equity
Balance, December 31, 2018
48,874,836
$
$
1,080,084
$
(72,167)
$
(6,812)
$
(6,190)
$
994,964
Net income
-
-
-
102,953
-
-
102,953
OCI, net of tax
-
-
-
-
21,772
-
21,772
Stock issued for acquisition of Banc Ed, net of stock issuance costs
6,725,152
166,274
-
-
-
166,281
Repurchase of stock
(943,396)
-
-
-
-
(24,292)
(24,292)
Issuance of treasury stock for ESPP
25,698
-
-
-
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax
92,996
-
(2,600)
-
-
(2,218)
Issuance of treasury stock for stock options exercised, net of shares redeemed and related tax
13,486
-
(104)
-
-
1,628
1,524
Cash dividends common stock at $0.84 per share
-
-
-
(45,171)
-
-
(45,171)
Stock dividend equivalents RSUs at $0.84 per share
-
-
(428)
-
-
-
Stock-based compensation
-
-
3,997
-
-
-
3,997
Balance, December 31, 2019
54,788,772
$
$
1,248,216
$
(14,813)
$
14,960
$
(27,985)
$
1,220,434
Cumulative effect of change in accounting principle (ASU 2016-13)
-
-
-
(15,922)
-
-
(15,922)
Net income
-
-
-
100,344
-
-
100,344
OCI, net of tax
-
-
-
-
18,349
-
18,349
Repurchase of stock
(531,114)
-
-
-
-
(12,272)
(12,272)
Issuance of treasury stock for ESPP
32,063
-
(59)
-
-
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax
106,589
-
(2,648)
-
-
2,013
(635)
Issuance of treasury stock for stock options exercised, net of shares redeemed and related tax
8,069
-
(51)
-
-
Cash dividends common stock at $0.88 per share
-
-
-
(48,012)
-
-
(48,012)
Stock dividend equivalents RSUs at $0.88 per share
-
-
(767)
-
-
-
Stock-based compensation
-
-
7,135
-
-
-
7,135
Balance, December 31, 2020
54,404,379
$
$
1,253,360
$
20,830
$
33,309
$
(37,486)
$
1,270,069
Net income
-
-
-
123,449
-
-
123,449
OCI, net of tax
-
-
-
-
(57,067)
-
(57,067)
Stock issued in acquisition, net of stock issuance costs
2,206,237
58,953
-
-
-
58,955
Repurchase of stock
(1,323,000)
-
-
-
-
(33,043)
(33,043)
Issuance of treasury stock for ESPP
30,390
-
(136)
-
-
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax
116,904
-
(4,109)
-
-
3,112
(997)
Cash dividends common stock at $0.92 per share
-
-
-
(50,764)
-
-
(50,764)
Stock dividend equivalents RSUs at $0.92 per share
-
-
1,052
(1,052)
-
-
-
Stock-based compensation
-
-
7,864
-
-
-
7,864
Balance, December 31, 2021
55,434,910
$
$
1,316,984
$
92,463
$
(23,758)
$
(66,635)
$
1,319,112
See accompanying Notes to Consolidated Financial Statements.
FIRST BUSEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
Cash Flows Provided by (Used in) Operating Activities
Net income
$
123,449
$
100,344
$
102,953
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses
(15,101)
38,797
10,406
Amortization of intangible assets
11,274
10,008
9,547
Amortization of mortgage servicing rights
5,292
5,667
2,710
Amortization of NMTC
5,563
2,311
1,200
Depreciation and amortization of premises and equipment
11,610
12,273
11,879
Net amortization (accretion) on portfolio loans
(11,545)
(15,372)
(3,383)
Net amortization (accretion) of premium (discount) on investment securities
24,251
9,716
6,106
Net amortization (accretion) of premium (discount) on time deposits
(1,142)
(933)
(1,648)
Net amortization (accretion) of premium (discount) on FHLB advances and other borrowings
Impairment of OREO and other repossessed assets
Impairment of fixed assets held for sale
3,227
6,901
2,026
Impairment of mortgage servicing rights
(639)
-
Impairment of leases
-
-
Unrealized (gains) losses recognized on equity securities
(3,041)
(Gain) loss on sales of equity securities, net
-
-
(8)
(Gain) loss on sales of debt securities, net
(29)
(1,724)
(733)
(Gain) loss on sales of loans, net
(9,323)
(26,999)
(16,819)
(Gain) loss on sales of OREO
(133)
(102)
(Gain) loss on sales of premises and equipment
(1,023)
(Gain) loss on life insurance proceeds
(1,257)
(1,270)
(1,604)
(Increase) decrease in cash surrender value of bank owned life insurance
(3,909)
(4,110)
(4,191)
Provision for deferred income taxes
4,665
(5,309)
Stock-based compensation
7,864
7,135
3,997
Increase (decrease) in deferred compensation
-
-
(6,781)
Mortgage loans originated for sale
(274,356)
(881,398)
(667,515)
Proceeds from sales of mortgage loans
306,074
920,050
641,778
Net change in operating assets and liabilities:
(Increase) decrease in other assets
7,203
(8,210)
4,197
Increase (decrease) in other liabilities
(28,096)
(6,551)
(7,380)
Net cash provided by (used in) operating activities
$
162,012
$
163,174
$
88,322
Cash Flows Provided by (Used in) Investing Activities
Purchases of equity securities
$
(11,017)
$
(13,123)
$
(550)
Purchases of debt securities available for sale
(2,298,055)
(1,282,199)
(408,941)
Purchases of FHLB stock
-
-
(3,700)
Proceeds from sales of equity securities
7,254
13,152
1,474
Proceeds from sales of debt securities available for sale
290,955
-
227,371
Proceeds from paydowns and maturities of debt securities held to maturity
-
-
14,422
Proceeds from paydowns and maturities of debt securities available for sale
868,083
665,744
541,753
Proceeds from the redemption of FHLB stock
-
-
5,369
Net cash received in (paid for) acquisitions (see Note 2)
228,279
-
(61,481)
Net (increase) decrease in loans
76,826
(113,744)
(251,855)
Cash paid for premiums on bank-owned life insurance
(124)
(120)
(6)
Proceeds from life insurance
4,755
2,696
3,915
Purchases of premises and equipment
(5,042)
(4,198)
(13,238)
Proceeds from disposition of premises and equipment
7,306
Capitalized expenditures on OREO
-
-
(2)
Proceeds from sales of OREO
1,590
1,439
2,481
Net cash provided by (used in) investing activities
$
(829,190)
$
(729,539)
$
57,436
(continued)
FIRST BUSEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
Years Ended December 31,
Cash Flows Provided by (Used in) Financing Activities
Net increase (decrease) in deposits
$
767,474
$
776,386
$
215,519
Net change in federal funds purchased and securities sold under agreements to repurchase
77,874
(29,877)
(30,904)
Proceeds from FHLB advances
5,000
4,000
-
Repayment of FHLB advances
(4,658)
(32,711)
(24,667)
Proceeds from other borrowings
72,500
142,634
60,000
Repayment of other borrowings
(18,500)
(74,000)
(6,000)
Cash dividends paid
(50,764)
(48,012)
(45,171)
Purchase of treasury stock
(33,043)
(12,272)
(24,292)
Cash paid for withholding taxes on stock-based payments
(997)
(635)
(863)
Proceeds from stock options exercised
-
Common stock issuance costs
(150)
-
(234)
Net cash provided by (used in) financing activities
$
814,736
$
725,614
$
143,557
Net increase (decrease) in cash and cash equivalents
147,558
159,249
289,315
Cash and cash equivalents, beginning of period
688,537
529,288
239,973
Cash and cash equivalents, ending of period
$
836,095
$
688,537
$
529,288
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest
$
25,374
$
53,601
$
70,577
Income taxes
12,542
22,195
24,725
Non-cash investing and financing activities:
OREO acquired in settlement of loans
1,610
2,867
4,872
Transfer of loans held for sale to portfolio loans
(4,808)
-
-
Transfer of debt securities held to maturity to available for sale
-
-
593,548
See accompanying Notes to Consolidated Financial Statements.
FIRST BUSEY CORPORATION
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 payment technology solutions, and offer a full range of financial products and services including depository, lending, security brokerage, investment management, and fiduciary services, to individual, corporate, institutional, and governmental customers through their 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 include First Busey Risk Management, Deed of Trust Services Corporation, and Busey Bank, including Busey Bank’s wholly-owned subsidiaries FirsTech, Pulaski Service Corporation, and Busey Capital Management, Inc. Operating results generated from acquired businesses are included with the Company’s results of operations starting from each date of acquisition. The Company and its subsidiaries maintain various LLCs that hold specific assets for risk mitigation purposes and are consolidated into these Consolidated Financial Statements. Intercompany balances and transactions have been eliminated in consolidation.
Because the Company is not the primary beneficiary, 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.
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 Consolidated Financial Statements and the disclosures provided. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near-term relate to the fair value of debt securities available for sale, fair value of assets acquired and liabilities assumed in business combinations, goodwill, income taxes, and the determination of the ACL.
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 Busey Bank, are not assets of the Company and, accordingly, are not included in the accompanying Consolidated Financial Statements. The Company had assets under care of $12.7 billion and $10.2 billion at December 31, 2021, and 2020, respectively.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash items in process of collection, amounts due from other banks, interest-bearing deposits held with other financial institutions, and federal funds sold. The carrying amount of these instruments is considered a reasonable estimate of fair value.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. The amortization period for certain callable debt securities held at a premium are amortized to the earliest call date, while discounts on debt securities are amortized to maturity. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Debt securities available for sale are not within the scope of CECL, however, the accounting for credit losses on these securities is affected by ASC 326-30. A debt security available for sale is impaired if the fair value of the security declines below its amortized cost basis. To determine the appropriate accounting, the Company must first determine if it intends to sell the security or if it is more likely than not that it will be required to sell the security before the fair value increases to at least the amortized cost basis. If either of those selling events is expected, the Company will write down the amortized cost basis of the security to its fair value. This is achieved by writing off any previously recorded allowance, if applicable, and recognizing any incremental impairment through earnings. If the Company neither intends to sell the security, nor believes it more likely than not will be required to sell the security, before the fair value recovers to the amortized cost basis, the Company must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors.
The Company considers the following factors in assessing whether the decline is due to a credit loss:
● Extent to which the fair value is less than the amortized cost basis
● Adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors)
● Payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future
● Failure of the issuer of the security to make scheduled interest or principal payments
● Any changes to the rating of the security by a rating agency
Impairment related to a credit loss must be measured using the discounted cash flow method. Credit loss recognition is limited to the fair value of the security. Impairment is recognized by establishing an ACL through provision for credit losses. Impairment related to noncredit factors is recognized in AOCI, net of applicable taxes. The Company did not recognize any impairment in 2021, 2020, or 2019.
Accrued interest receivable for debt securities available for sale totaled $11.4 million at December 31, 2021, and is excluded from the estimate of credit losses. Accrued interest receivable is reported in other assets on the Consolidated Balance Sheets.
Debt securities classified as held to maturity were those debt securities that the Company had the intent and ability to hold to maturity and were carried at amortized cost. The Company no longer carries debt securities classified as held to maturity.
Equity securities are carried at fair value with changes in fair value recognized in earnings.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 prices, 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.
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 $1.8 billion and are not included in the accompanying Consolidated Balance Sheets. Servicing rights are initially recorded at fair value which is determined using a valuation model that calculates the present value of estimated future net servicing income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The amortization of mortgage servicing rights is included in mortgage revenue. The amortization of government-guaranteed commercial loans is included in other income.
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, servicing rights are stratified by one or more predominant characteristics of the underlying loans. A valuation allowance is recognized in the amount by which the amortized cost of the rights for each stratum exceeds its fair value, if any. 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 an insignificant amount of impairment recorded at December 31, 2021, and had $0.6 million impairment recorded at December 31, 2020.
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 ACL.
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.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2021, the Company had $76.9 million in PPP loans outstanding, with an amortized cost of $75.0 million. In comparison, at December 31, 2020, the Company had $451.5 million in PPP loans outstanding, with an amortized cost of $446.4 million. The Company received fees totaling $20.1 million and $25.4 million, and incurred incremental direct origination costs of $4.2 million and $5.1 million, for the years ended December 31, 2021, and 2020, respectively, both of which have been deferred and are being amortized over the contractual life of these loans, subject to prepayment. The Company recognized $14.0 million and $15.2 million in net interest income for fees, net of deferred cost, during the years ended December 31, 2021, and 2020, respectively. As of December 31, 2021, $1.9 million in fees, net of deferred costs, remained to be recognized. PPP loans contain a forgiveness feature for funds spent on covered expenses, including both principal and accrued interest. Any remaining balance after loan forgiveness maintains a 100% government guarantee for the remaining term of the loan. The Company has implemented an online portal designed to streamline the PPP loan forgiveness process by providing a tool that borrowers can use to apply for forgiveness. As these loans are forgiven, the recognition of these fees and direct origination costs will be accelerated. As of December 31, 2021, the Company had received approximately $999.0 million in borrower loan forgiveness from the SBA and had submitted forgiveness applications to the SBA on behalf of borrowers for another $7.1 million.
Troubled debt restructurings
The Company’s loan portfolio includes certain loans that have been modified in a TDR, where concessions have been granted to borrowers who have experienced financial difficulties. The Company will restructure a loan for its customer after evaluating whether the borrower is able to meet the terms of the loan over the long term, though unable to meet the terms of the loan in the near term due to individual circumstances.
The Company considers the customer’s past performance, previous and current credit history, the individual circumstances surrounding the customer’s current difficulties, and the customer’s plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. Generally, restructurings consist of short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief, or forbearance (debt forgiveness). A restructured loan that exceeds 90 days past due or is placed on non-accrual status, is classified as non-performing.
All TDRs are individually evaluated for purposes of assessing the adequacy of the ACL and for financial reporting purposes. TDRs are evaluated using 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 ACL in the period of the modification and in periods subsequent to the modification.
Modified loans with payment deferrals that fall under the CARES Act or revised Interagency Statement that suspended requirements under GAAP related to TDR classifications are not included in the Company’s TDR totals.
Assets purchased with credit deterioration
On January 1, 2020, First Busey adopted ASC 326 using the prospective transition approach for financial assets PCD that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. In accordance with ASC 326, the amortized cost basis of PCD assets were adjusted to reflect an ACL for any remaining credit discount. Subsequent changes in expected cash flows will be adjusted through the ACL. The noncredit discount will be accreted into interest income at the effective interest rate as of January 1, 2020.
Subsequent to the adoption of ASC 326, acquired loans are separated into two categories based on the credit risk characteristics of the underlying borrowers as either PCD, for loans which have experienced more than insignificant credit deterioration since origination, or all other loans. At the date of acquisition, an ACL on PCD loans is determined and netted against the amortized cost basis of the individual loans. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. The ACL on PCD loans is recorded in the acquisition accounting and no provision for credit losses is recognized at the acquisition date. Subsequent changes to the ACL are recorded through provision expense. For all other loans, an ACL is established immediately after the acquisition through a charge to the provision for credit losses.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for credit losses
The ACL is a significant estimate in the Company’s Consolidated Financial Statements, affecting both earnings and capital. The ACL is a valuation account that is deducted from the portfolio loans’ amortized cost bases to present the net amount expected to be collected on the portfolio loans. Portfolio loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Recoveries will be recognized up to the aggregate amount of previously charged-off balances. The ACL is established through provision for credit loss expense charged to income.
A loan’s amortized cost basis is comprised of the unpaid principal balance of the loan, accrued interest receivable, purchase premiums or discounts, and net deferred origination fees or costs. The Company has estimated its allowance on the amortized cost basis, exclusive of government guaranteed loans and accrued interest receivable. The Company writes-off uncollectible accrued interest receivable in a timely manner and has elected to not measure an allowance for accrued interest receivable. The Company presents the aggregate amount of accrued interest receivable for all financial instruments in other assets on the Consolidated Balance Sheets and the balance of accrued interest receivable is disclosed in “Note 18. Fair Value Measurements.”
Our methodology influences, and is influenced by, the Company’s overall credit risk management processes. The ACL is managed in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis.
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the amortized cost basis. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions such as changes in unemployment rates, property values, and other relevant factors. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical credit loss information. The Company uses four quarters as its reasonable and supportable forecast period. Due to rapidly changing forecasts around the impact of COVID-19, the Company does not believe it has the current ability to incorporate reasonable and supportable forecasts into its CECL models extending beyond four quarters.
Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration, and other factors.
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
3 - 40
years
Furniture and equipment
3 - 10
years
Leases
A determination is made at inception if an arrangement contains a lease. For arrangements containing leases, the Company recognizes leases on the Consolidated Balance Sheets as right of use assets and corresponding lease liabilities. 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.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASC 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 its right of use assets and lease liabilities.
Long-lived assets
Long-lived assets, including premises and equipment, right of use assets, and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be 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. 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 and other repossessed assets
OREO and other repossessed assets represent properties and other assets acquired through foreclosure or other proceedings in settlement of loans. OREO and other repossessed assets are recorded at the fair value of the property or asset, less estimated costs of disposal, which establishes a new cost basis. Any adjustment to fair value at the time of transfer to OREO or other repossessed assets is charged to the ACL. OREO property and other repossessed assets are 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. OREO and other repossessed assets are included in other assets on the Consolidated Balance Sheets. 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, each 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 comparable company analysis and precedent transaction analysis. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. There was no impairment as of December 31, 2021, or 2020. See “Note 7. Goodwill and Other Intangible Assets” for further discussion.
Other intangible assets consist 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.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains a liability for post-employment benefits promised to an employee based on an arrangement between the Company and an employee. In an endorsement split-dollar life insurance 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 of $5.5 million as of December 31, 2021, included in other liabilities, for these arrangements, compared with $5.6 million as of December 31, 2020.
Other asset investments
The Company has invested in certain tax-advantaged projects promoting affordable housing, new markets, and historic rehabilitation. These investments are designed to generate returns primarily though the realization of federal and state income tax credits and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. In addition, the Company has private equities, which are primarily small business investment companies in the financial technology, agricultural, environmental, and affordable housing preservation markets. These investments are considered to be variable interest entities, and are accounted for under the equity method or deferral method, as appropriate. The Company is not required to consolidate variable interest entities in which it has concluded it does not have a controlling financial interest, and is not the primary beneficiary.
The following table summarizes the impact of the Company’s other asset investments on our Consolidated Balance Sheets for the periods indicated (dollars in thousands):
As of December 31,
Location
Other asset investments
Funded investments
Other assets
$
37,417
20,368
Unfunded investments
Other assets
52,765
16,776
Other asset investments
$
90,182
37,144
Unfunded investment obligations
Other liabilities
$
(52,765)
$
(16,776)
Further, 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.
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.
Income taxes
The Company is subject to income taxes in 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 2017.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 no valuation allowance was required as of December 31, 2021, or 2020.
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 no accruals for payments of interest and penalties at December 31, 2021, or 2020.
At December 31, 2021, the Company was not under examination by any tax authority.
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
The 2020 Equity Plan was approved by stockholders at the 2020 Annual Meeting of Stockholders. A description of the 2020 Equity Plan can be found in the Company’s Proxy Statement for the 2020 Annual Meeting of Stockholders filed on April 9, 2020. The 2020 Equity Plan replaces the 2010 Equity Incentive Plan and the First Community 2016 Equity Incentive Plan, which, from time to time, the Company used to grant equity awards to legacy employees of First Community. Under the terms of the 2020 Equity Plan, the Company has granted RSU, DSU and PSU awards.
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.
The Company grants RSU awards to members of management periodically throughout the year. Each RSU is equivalent to one share of the Company’s common stock. These units have requisite service periods ranging from one to five years, subject to accelerated vesting upon eligible retirement from the Company. Recipients earn quarterly dividend equivalents on their respective units which entitle the recipients to additional units. Therefore, dividends earned each quarter compound based upon the updated unit balances.
The Company grants DSU awards, which are RSU awards with a deferred settlement date, to its directors and advisory directors. Each DSU is equivalent to one share of the Company’s common stock. DSUs vest over a one-year period following the grant date. These units generally are subject to the same terms as RSUs under the Company’s 2020 Equity Plan, except that, following vesting, settlement occurs within 30 days following the earlier of separation from the board or a change in control of the Company. After vesting and prior to delivery, these units will continue to earn dividend equivalents.
The Company also grants PSU awards to members of management periodically throughout the year. Each PSU is equivalent to one share of the Company’s common stock. The number of units that ultimately vest will be determined based on the achievement of market or other performance goals, subject to accelerated service-based vesting conditions upon eligible retirement from the Company.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has outstanding stock options assumed from acquisitions.
In 2021, the stockholders of First Busey approved the 2021 ESPP, and since the purchase price under the plan is 85% of the fair market value of a share of common stock (a 15% discount to the market price), the plan is considered to be a compensatory plan under current accounting guidance. Therefore, the entire amount of the discount is recognized in salaries, wages, and employee benefits on the Consolidated Statements of Income.
See “Note 14. Stock-based Compensation” for further discussion.
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) have 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 three operating segments consisting of Banking, FirsTech, and Wealth Management. See “Note 21. Operating Segments and Related Information” for further discussion.
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 utilize 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 generated from acquired businesses are included with the Company’s results of operations starting from 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 accounts 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 recognizes these costs in its post-combination Consolidated 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
The Company entered into derivative instruments designated as cash flow hedges. For a derivative instrument that is designated and qualifies as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Interest Rate Lock Commitments
Interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the Consolidated Financial Statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Forward Sales Commitments
The Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the Consolidated Financial Statements. While such forward sales commitments generally served as an economic hedge to mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Risk Participation Agreements
The Company has entered into a risk participation agreement to manage the credit risk of its derivative position. This agreement transfers counterparty credit risk related to an interest rate swap to another financial institution. In this type of transaction, the Company (purchaser) has a swap agreement with a customer. The Company then enters into a risk participation agreement with a counterparty (seller), under which the counterparty receives a fee to accept a portion of the credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the Company for the counterparty's percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. If the customer defaults on the swap contract and the counterparty (seller) fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the Company’s claim against the customer under the terms of the swap agreement.
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.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer’s obligation to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions, and primarily have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property and equipment, and income producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer.
The Company estimates expected credit losses for off-balance sheet arrangements over the contractual period in which it is exposed to credit risk via a present contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the issuer. To be considered unconditionally cancelable for accounting purposes, the Company must have the ability to, at any time, with or without cause, refuse to extend credit under the commitment. Off-balance-sheet credit exposure segments share the same risk characteristics as portfolio loans. The Company incorporates a probability of funding and utilizes the ACL loss rates to calculate the reserve. The reserve for off-balance-sheet credit exposure is carried on the Consolidated Balance Sheets in other liabilities rather than as a component of the ACL. The reserve for off-balance-sheet credit exposure is adjusted as a provision for off-balance-sheet credit exposure reported as a component of noninterest expense in the accompanying Consolidated Statements of Income. Liabilities recorded as reserves for the Company’s off-balance sheet credit exposure under these commitments was $6.5 million as of December 31, 2021, and was $7.3 million as of December 31, 2020.
Fair value of financial instruments
Fair value of financial instruments is 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 judgment 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
ASC 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. ASC 606 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 ASC 606, and noninterest income. The Company has evaluated its noninterest 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 is 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 ASC 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 ASC 606, and are presented in the accompanying Consolidated Statements of Income as components of noninterest income, include wealth management fees, payment technology solutions, and fees for customer services.
Wealth Management Fees
Wealth management fees represent 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.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Payment Technology Solutions
Payment technology solutions revenue represents transaction-based fees for technology-driven payment solutions primarily for walk-in, lockbox, interactive voice recognition, and online bill payments through the Company’s subsidiary, FirsTech. Revenue is recognized when the performance obligation is completed, which is generally monthly.
Fees for Customer Services
Fees for customer services consist of time-based revenue from service fees for account maintenance, item-based revenue from fee-based activity, and transaction-based fee 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. Payments for such performance obligations are generally received at the time the performance obligations are satisfied.
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, 2021.
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. There were no significant subsequent events for the year ended December 31, 2021, through the filing date of these Consolidated Financial Statements.
Impact of recently adopted accounting standards
ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 clarifies the interaction between ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
ASU 2021-06 “Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants” amends certain disclosure requirements for banks and bank holding companies, as well as savings and loan organizations, by 1) simplifying loan category disclosure requirements, 2) requiring separate disclosure of the amounts of total loans, related allowance for losses, and unearned income, and 3) when a threshold is met, requires disclosure of the aggregate amount of loans to directors, executive officers, or principal holders of equity securities, or to any associate of such persons, including an explanation of changes in the amount of such loans, as well as disclosure of such loans that are past due, nonaccrual, or TDRs. This update was effective upon issuance on August 9, 2021, and applies prospectively. Adoption of this standard did not have a material impact on our results of operations or our consolidated financial statements.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently issued accounting standards
ASU 2021-04 “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” clarifies how an issuer should account for modifications or exchanges of equity-classified written call options (i.e. a warrant to purchase the issuer’s common stock). This accounting standard requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. This guidance is effective beginning January 1, 2022, and will be applied on a prospective basis. Adoption of this standard will not have a material impact on our financial position or results of operations.
ASU 2021-05 “Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments” amends the lessor’s classification of certain leases under ASC 842. Under this updated guidance, leases that would otherwise be classified as a sales-type or direct financing lease must be classified by a lessor as an operating lease when the following conditions are met: 1) the contract includes variable lease payments that do not depend on an index or rate and 2) classification as a sales-type or direct financing lease would result in recognition of a selling loss at lease commencement. This guidance is effective beginning January 1, 2022, and will be applied on a prospective basis. Adoption of this standard will not have a material impact on our financial position or results of operations.
ASU 2021-08 “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” requires measurement and recognition in accordance with Topic 606 for contract assets and contract liabilities acquired in a business combination. This update is effective beginning January 1, 2023, and may be adopted early. This standard applies prospectively to all business combinations that occur on or after the date it is adopted and, if applicable, retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application. We have not yet selected an adoption date and we are currently evaluating the effect on our financial position and results of operations.
ASU 2021-10 “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” establishes disclosure requirements for transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model. Disclosures required under this standard include 1) the types of transactions, 2) the accounting for those transactions, and 3) the effect of those transactions on the consolidated financial statements. This update is effective for annual periods beginning January 1, 2022, and applies prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application. Adoption of this standard will not have a material impact on our financial position or results of operations.
Note 2. Acquisitions
Cummins-American Corp.
Effective May 31, 2021, the Company completed its acquisition of CAC, the holding company for GSB. The partnership has enhanced the Company’s existing deposit, commercial banking, and wealth management presence in the Chicago-Naperville-Elgin, IL-IN-WI Metropolitan Statistical Area. GSB’s results of operations were included in the Company’s results of operations beginning June 1, 2021. First Busey operated GSB as a separate banking subsidiary until August 14, 2021, when it was merged with and into Busey Bank. At that time, all GSB banking centers became branches of Busey Bank.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the definitive agreement, each share of CAC common stock issued and outstanding as of the effective date was converted into the right to receive 444.4783 shares of First Busey common stock and $14,173.96 in cash, which reflects adjustments made to the cash consideration in accordance with the terms of the definitive agreement. The fair value of the common stock of First Busey issued as part of the consideration paid to the holders of CAC common stock was determined on the basis of the closing price of First Busey’s common shares on May 28, 2021, the last trading day immediately preceding the acquisition date of May 31, 2021. As additional consideration provided to CAC’s shareholders in the merger, CAC paid a special dividend to its shareholders in the amount of $60.0 million, or $12,087.58 per share of CAC common stock, on May 28, 2021.
This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged was recorded at estimated fair values on the date of acquisition. Fair values are subject to refinement for up to one year after the closing date as additional information regarding the closing date fair values becomes available. For the year ended December 31, 2021, $0.4 million of fair value adjustments were recorded as more information became available regarding unrecorded liabilities. The Company does not expect any further adjustments will be necessary.
As the total consideration paid for CAC exceeded the estimated fair value of net assets acquired, goodwill of $6.3 million was recorded as a result of the acquisition. The amount of goodwill recognized as a result of this transaction is expected to be fully tax deductible for federal income tax purposes in accordance with the Company’s election pursuant to Section 338(h)(10) of the Internal Revenue Code. Goodwill recorded for this transaction reflects synergies expected from the acquisition and expansion within the Chicago-Naperville-Elgin, IL-IN-WI Metropolitan Statistical Area, and was assigned to the Banking operating segment.
First Busey incurred $13.6 million in pre-tax expenses related to the acquisition of CAC for the year ended December 31, 2021, primarily for compensation expense, data processing expense, and professional fees, which are reported as components of noninterest expense in the accompanying Consolidated Statements of Income.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated fair values of the assets acquired and liabilities assumed, as well as the fair value of consideration transferred, were as follows (dollars in thousands):
CAC
May 31, 2021
Assets acquired
Cash and cash equivalents
$
298,637
Securities
702,367
Portfolio loans, net of ACL
430,470
Premises and equipment
17,034
Other intangible assets
17,340
Mortgage servicing rights
Other assets
8,176
Total assets acquired
1,474,653
Liabilities assumed
Deposits
1,315,671
Other borrowings
16,651
Other liabilities
19,205
Total liabilities assumed
1,351,527
Net assets acquired
$
123,126
Consideration paid:
Cash
$
70,358
Common stock
59,105
Total consideration paid
$
129,463
Goodwill
$
6,337
The fair value of PCD financial assets was $60.5 million on the date of acquisition. Gross contractual amounts receivable relating to the PCD financial assets was $65.2 million. The Company estimated, on the date of acquisition, that $4.2 million of the contractual cash flows specific to the PCD financial assets will not be collected.
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):
As of December 31, 2021
Amortized
Unrealized
Fair
Cost
Gross Gains
Gross Losses
Value
Debt securities available for sale
U.S. Treasury securities
$
166,768
$
$
(1,047)
$
165,762
Obligations of U.S. government corporations and agencies
37,579
-
38,470
Obligations of states and political subdivisions
300,602
7,760
(1,493)
306,869
Asset-backed securities
492,055
(164)
492,186
Commercial mortgage-backed securities
625,339
3,425
(13,766)
614,998
Residential mortgage-backed securities
2,095,104
8,889
(34,680)
2,069,313
Corporate debt securities
296,076
1,081
(3,504)
293,653
Total debt securities available for sale
$
4,013,523
$
22,382
$
(54,654)
$
3,981,251
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020
Amortized
Unrealized
Fair
Cost
Gross Gains
Gross Losses
Value
Debt securities available for sale
U.S. Treasury securities
$
27,481
$
$
-
$
27,837
Obligations of U.S. government corporations and agencies
67,406
2,162
(49)
69,519
Obligations of states and political subdivisions
292,940
11,779
(8)
304,711
Commercial mortgage-backed securities
408,716
10,212
(312)
418,616
Residential mortgage-backed securities
1,344,047
24,571
(303)
1,368,315
Corporate debt securities
70,953
1,237
(1)
72,189
Total debt securities available for sale
$
2,211,543
$
50,317
$
(673)
$
2,261,187
Amortized cost and fair value of debt securities, by contractual maturity or pre-refunded date, are shown below. Mortgages underlying mortgage-backed securities and asset-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government corporations and agencies (dollars in thousands):
As of December 31, 2021
Amortized
Fair
Cost
Value
Debt securities available for sale
Due in one year or less
$
129,260
$
129,848
Due after one year through five years
564,284
563,473
Due after five years through ten years
356,782
362,057
Due after ten years
2,963,197
2,925,873
Total debt securities available for sale
$
4,013,523
$
3,981,251
Realized gains and losses related to sales and calls of debt securities available for sale are summarized as follows (dollars in thousands):
Years Ended December 31,
Realized gains and losses on sales of debt securities
Gross security gains
$
$
1,732
$
1,318
Gross security (losses)
(514)
(8)
(585)
Net gains (losses) on sales of debt securities (1)
$
$
1,724
$
(1) Net gains (losses) on sales of securities reported on the Consolidated Statements of Income include the sale of equity securities, excluded in this table.
Debt securities with carrying amounts of $708.9 million on December 31, 2021, and $628.0 million on December 31, 2020, were pledged as collateral for public deposits, securities sold under agreements to repurchase, and for other purposes as required.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
As of December 31, 2021
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Debt securities available for sale
U.S. Treasury securities
$
163,653
$
(1,047)
$
-
$
-
$
163,653
$
(1,047)
Obligations of states and political subdivisions
92,680
(1,493)
-
-
92,680
(1,493)
Asset-backed securities
89,983
(164)
-
-
89,983
(164)
Commercial mortgage-backed securities
389,078
(10,186)
85,905
(3,580)
474,983
(13,766)
Residential mortgage-backed securities
1,700,187
(33,453)
20,538
(1,227)
1,720,725
(34,680)
Corporate debt securities
241,153
(3,504)
-
-
241,153
(3,504)
Total temporarily impaired securities
$
2,676,734
$
(49,847)
$
106,443
$
(4,807)
$
2,783,177
$
(54,654)
As of December 31, 2020
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Debt securities available for sale
Obligations of U.S. government corporations and agencies
$
-
$
-
$
4,957
$
(49)
$
4,957
$
(49)
Obligations of states and political subdivisions
(8)
-
-
(8)
Commercial mortgage-backed securities
129,655
(312)
-
-
129,655
(312)
Residential mortgage-backed securities
89,997
(300)
(3)
90,136
(303)
Corporate debt securities
1,499
(1)
-
-
1,499
(1)
Total temporarily impaired securities
$
221,913
$
(621)
$
5,096
$
(52)
$
227,009
$
(673)
No ACL was recorded in relation to the Company’s debt securities. The Company’s debt security portfolio consisted of 1,252 securities as of December 31, 2021, compared to 1,114 securities as of December 31, 2020. The number of debt securities in the investment portfolio in an unrealized loss position was 373 representing an unrealized loss of 1.4% of the aggregate fair value of debt securities as of December 31, 2021, compared to 23 securities representing an unrealized loss of 0.03% of the aggregate fair value of debt securities as of December 31, 2020. Unrealized losses were related to changes in market interest rates and market conditions that do not represent credit-related impairments. Furthermore, the Company does not intend to sell such securities and it is more likely than not that the Company will recover the amortized cost prior to being required to sell the debt securities. Full collection of the amounts due according to the contractual terms of the debt securities is expected; therefore, the impairment related to noncredit factors is recognized in AOCI, net of applicable taxes. As of December 31, 2021, the Company did not hold general obligation bonds of any single issuer, the aggregate of which exceeded 10% of the Company’s stockholders’ equity.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Portfolio Loans
Distributions of portfolio loans were as follows (dollars in thousands):
As of December 31,
Portfolio loans
Commercial
$
1,943,886
$
2,014,576
Commercial real estate
3,119,807
2,892,535
Real estate construction
385,996
461,786
Retail real estate
1,512,976
1,407,852
Retail other
226,333
37,428
Total portfolio loans
$
7,188,998
$
6,814,177
ACL
(87,887)
(101,048)
Portfolio loans, net
$
7,101,111
$
6,713,129
Net deferred loan origination costs included in the balances above were $9.0 million as of December 31, 2021, compared to $2.4 million as of December 31, 2020. Net accretable purchase accounting adjustments included in the balances above reduced loans by $8.8 million as of December 31, 2021, and by $10.9 million as of December 31, 2020. Commercial balances include loans originated under the PPP with an amortized cost of $75.0 million, as of December 31, 2021, compared to $446.4 million in loans originated under PPP included in the December 31, 2020, balance.
The Company purchased retail real estate loans totaling $32.2 million during the year ended December 31, 2021, compared to $43.9 million of retail real estate loan purchases during the year ended December 31, 2020.
Risk Grading
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 highly questionable and improbable. Such loans are placed on non-accrual status and may be dependent on collateral with a value that is difficult to determine.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All loans are graded at their inception. Commercial lending relationships that are $1.0 million or less are usually processed through an expedited underwriting process. Most commercial loans greater than $1.0 million are included in a portfolio review at least annually. Commercial loans greater than $0.35 million that have a grading of special mention or worse are typically reviewed on a quarterly basis. Interim reviews may take place if circumstances of the borrower warrant a more frequent review. GSB’s policies were similar in nature to Busey Bank’s policies and the Company is migrating the legacy GSB portfolio and grading toward the Busey Bank policies.
The following table is a summary of risk grades segregated by category of portfolio loans (dollars in thousands):
As of December 31, 2021
Special
Substandard
Pass
Watch
Mention
Substandard
Non-accrual
Total
Portfolio loans
Commercial
$
1,747,756
$
93,582
$
69,427
$
26,117
$
7,004
$
1,943,886
Commercial real estate
2,682,441
343,304
49,695
38,394
5,973
3,119,807
Real estate construction
369,797
13,793
2,400
-
385,996
Retail real estate
1,491,845
12,374
1,992
3,867
2,898
1,512,976
Retail other
226,262
-
-
-
226,333
Total portfolio loans
$
6,518,101
$
463,053
$
121,120
$
70,778
$
15,946
$
7,188,998
As of December 31, 2020
Special
Substandard
Pass
Watch
Mention
Substandard
Non-accrual
Total
Portfolio loans
Commercial
$
1,768,755
$
136,948
$
72,447
$
27,903
$
8,523
$
2,014,576
Commercial real estate
2,393,372
383,277
75,486
34,897
5,503
2,892,535
Real estate construction
434,681
24,481
2,546
461,786
Retail real estate
1,382,616
10,264
2,471
3,702
8,799
1,407,852
Retail other
37,324
-
-
-
37,428
Total portfolio loans
$
6,016,748
$
554,970
$
150,481
$
69,048
$
22,930
$
6,814,177
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk grades of portfolio loans, further sorted by origination year, are as follows (dollars in thousands):
As of December 31, 2021
Term Loans Amortized Cost Basis by Origination Year
Revolving
Risk Grade Ratings
Prior
loans
Total
Commercial
Pass
$
512,729
$
228,811
$
107,877
$
84,873
$
74,351
$
122,418
$
616,697
$
1,747,756
Watch
13,847
5,913
14,274
5,060
1,361
2,866
50,261
93,582
Special Mention
7,062
5,961
4,025
6,790
11,845
32,846
69,427
Substandard
3,595
3,362
3,136
1,855
1,125
5,459
7,585
26,117
Substandard non-accrual
4,126
-
2,000
7,004
Total commercial
541,359
239,348
131,390
95,813
83,947
142,640
709,389
1,943,886
Commercial real estate
Pass
969,548
637,550
425,850
235,928
200,373
198,002
15,190
2,682,441
Watch
51,560
38,820
123,324
48,088
46,761
32,608
2,143
343,304
Special Mention
9,542
7,060
6,585
10,098
6,357
9,870
49,695
Substandard
21,002
3,781
1,218
11,451
-
38,394
Substandard non-accrual
1,893
3,407
-
5,973
Total commercial real estate
1,051,764
687,392
557,336
307,458
257,419
240,922
17,516
3,119,807
Real estate construction
Pass
202,082
123,491
31,927
3,155
1,223
7,181
369,797
Watch
7,886
4,159
-
1,574
-
13,793
Special Mention
-
-
-
-
-
-
Substandard
-
2,400
-
-
-
-
-
2,400
Substandard non-accrual
-
-
-
-
-
-
-
-
Total real estate construction
209,968
130,050
31,987
3,155
2,312
1,343
7,181
385,996
Retail real estate
Pass
523,541
215,068
96,617
79,158
82,478
281,737
213,246
1,491,845
Watch
4,100
2,460
1,780
1,312
2,229
12,374
Special Mention
1,965
-
-
-
-
-
1,992
Substandard
1,369
1,687
3,867
Substandard non-accrual
-
1,705
2,898
Total retail real estate
531,210
217,850
98,409
80,557
83,213
285,279
216,458
1,512,976
Retail other
Pass
59,366
22,305
26,126
16,189
7,180
1,326
93,770
226,262
Watch
-
-
-
-
-
-
-
-
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Substandard non-accrual
-
-
-
Total retail other
59,400
22,315
26,126
16,203
7,193
1,326
93,770
226,333
Total portfolio loans
$
2,393,701
$
1,296,955
$
845,248
$
503,186
$
434,084
$
671,510
$
1,044,314
$
7,188,998
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020
Term Loans Amortized Cost Basis by Origination Year
Revolving
Risk Grade Ratings
Prior
loans
Total
Commercial
Pass
$
812,536
$
158,307
$
107,565
$
93,190
$
61,847
$
79,970
$
455,340
$
1,768,755
Watch
16,544
22,247
14,954
13,724
2,577
10,943
55,959
136,948
Special Mention
6,402
2,671
2,069
7,164
6,763
13,733
33,645
72,447
Substandard
7,772
3,791
2,371
1,939
1,233
9,978
27,903
Substandard non-accrual
3,045
2,168
2,000
8,523
Total commercial
843,404
190,061
127,410
118,185
72,647
105,947
556,922
2,014,576
Commercial real estate
Pass
717,559
503,977
360,573
384,843
180,555
227,068
18,797
2,393,372
Watch
88,297
110,526
90,412
33,734
32,887
27,023
383,277
Special Mention
16,490
8,858
10,490
10,505
7,102
21,808
75,486
Substandard
17,445
4,166
1,491
7,812
2,111
1,377
34,897
Substandard non-accrual
1,091
1,647
-
5,503
Total commercial real estate
840,882
628,303
463,787
437,776
222,941
278,923
19,923
2,892,535
Real estate construction
Pass
179,232
171,663
64,025
1,468
1,444
16,088
434,681
Watch
18,485
3,657
1,838
24,481
Special Mention
-
-
-
-
-
Substandard
2,400
-
-
-
-
-
2,546
Substandard non-accrual
-
-
-
-
-
-
Total real estate construction
200,184
175,330
64,362
3,306
1,071
1,445
16,088
461,786
Retail real estate
Pass
319,302
162,711
135,065
136,427
140,600
257,147
231,364
1,382,616
Watch
2,715
2,053
1,396
2,939
10,264
Special Mention
-
-
-
1,962
-
-
2,471
Substandard
1,631
3,702
Substandard non-accrual
1,147
4,815
1,193
8,799
Total retail real estate
324,112
164,938
137,163
137,949
144,101
263,826
235,763
1,407,852
Retail other
Pass
8,357
9,430
5,600
2,516
10,290
37,324
Watch
-
-
-
-
-
-
-
-
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Substandard non-accrual
Total retail other
8,371
9,437
5,605
2,531
10,291
37,428
Total portfolio loans
$
2,216,953
$
1,168,069
$
798,327
$
699,747
$
441,456
$
650,638
$
838,987
$
6,814,177
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past Due and Non-accrual Loans
An analysis of the amortized cost basis of portfolio loans that are past due and still accruing, or on a non-accrual status, is as follows (dollars in thousands):
As of December 31, 2021
Loans past due, still accruing
Non-accrual
30-59 Days
60-89 Days
90+Days
Loans
Past due and non-accrual loans
Commercial
$
$
$
$
7,004
Commercial real estate
-
5,973
Real estate construction
-
-
-
Retail real estate
3,312
1,830
2,898
Retail other
-
Total past due and non-accrual loans
$
3,964
$
2,297
$
$
15,946
As of December 31, 2020
Loans past due, still accruing
Non-accrual
30-59 Days
60-89 Days
90+Days
Loans
Past due and non-accrual loans
Commercial
$
$
-
$
-
$
8,523
Commercial real estate
-
-
-
5,503
Real estate construction
-
Retail real estate
6,248
1,305
8,799
Retail other
Total past due and non-accrual loans
$
6,794
$
$
1,371
$
22,930
Gross interest income recorded on 90+ days past due loans, and that would have been recorded on non-accrual loans if they had been accruing interest in accordance with their original terms, was $1.6 million, $1.8 million, and $2.3 million for the years ended December 31, 2021, 2020, and 2019, respectively. Interest collected on those loans and recognized on a cash basis that was included in interest income was $0.4 million for the year ended 2021, and was insignificant for the years ended December 31, 2020, and 2019.
Troubled Debt Restructurings
TDR loan balances are summarized as follows (dollars in thousands):
As of December 31,
TDRs
In compliance with modified terms
$
1,801
$
3,814
30 - 89 days past due
-
Non-performing TDRs
1,249
Total TDRs
$
2,352
$
5,078
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans that were designated as TDRs during the periods presented are summarized as follows (dollars in thousands):
Newly Designated TDRs
Recorded Investment (2)
Number of
Rate
Payment
Contracts (1)
Modification (3)
Modification (3)
December 31, 2021
Commercial
$
$
-
December 31, 2020
Commercial
$
$
-
Commercial real estate
-
Retail real estate
-
Total
$
$
December 31, 2019
Commercial
$
$
-
Commercial real estate (4)
-
-
Real estate construction
-
Total
$
$
-
(1) Total number of contracts that were newly designated as TDRs during years ended on the dates indicated.
(2) Recorded investment for newly designated TDR’s that were still outstanding as of the dates indicated.
(3) TDRs may include multiple concessions; those that include an interest rate concession and payment concession are shown in the rate modification columns.
(4) One commercial real estate TDR that was entered into during the year ended December 31, 2019, subsequently had payment defaults; it was then transferred to OREO by December 31, 2019.
Loans that were designated as TDRs and had subsequent defaults within 12 months are summarized in the table below (dollars in thousands). A default occurs when a loan is 90 days or more past due or transferred to non-accrual.
Year Ended December 31,
Defaults on loans designated as TDRs within the last 12 months
Commercial
$
-
$
-
$
-
Commercial real estate
-
-
3,277
Gross interest income that would have been recorded during the years ended December 31, 2021, 2020, and 2019, if TDRs had performed in accordance with their original terms compared with their modified terms, was insignificant.
Loans Modified Under the CARES Act or Interagency Statement
The CARES Act provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Federal regulatory agencies, in consultation with FASB, also issued an Interagency Statement to encourage financial institutions to work with borrowers affected by COVID-19, and updating guidance which allowed banks to modify loans of customers stressed by COVID-19 without having to classify the loan as a TDR. The Company’s TDR loan totals do not include the following modified loans with payment deferrals that fall under the CARES Act or Interagency Statement that suspended requirements under GAAP related to TDR classification (dollars in thousands):
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021
As of December 31, 2020
Number of
Recorded
Number of
Recorded
Contracts
Investment
Contracts
Investment
COVID-19 loan modifications
Commercial loans:
Full payment deferral (1)
-
$
-
$
37,150
Interest-only deferrals
128,730
85,270
Blended principal and interest and interest-only deferrals
-
-
86,204
Total commercial loans
128,730
208,624
Retail loans:
Mortgage and personal loan deferrals
47,671
Purchased home equity line of credit pool deferrals
-
-
Total retail loans
47,790
Total COVID-19 loans modifications
$
128,867
$
256,414
(1) Includes SBA loans with additional 90-day full payment deferrals granted by Busey.
Loans Evaluated Individually
The Company evaluates loans with disparate risk characteristics on an individual basis. The following tables provide details of loans evaluated individually, segregated by category. The unpaid principal balance represents the customer outstanding contractual principal balance excluding any partial charge-offs. Recorded investment represents the amortized cost of customer balances net of any partial charge-offs recognized on the loan. Average recorded investment is calculated using the most recent four quarters (dollars in thousands):
As of and for the Year Ended December 31, 2021
Unpaid
Recorded Investment
Average
Principal
With No
With
Related
Recorded
Balance
Allowance
Allowance
Total
Allowance
Investment
Loans evaluated individually
Commercial
$
10,247
$
$
6,490
$
6,988
$
3,564
$
8,791
Commercial real estate
6,456
5,750
-
5,750
-
6,390
Real estate construction
-
-
Retail real estate
2,514
2,345
2,370
4,093
Retail other
-
-
-
-
-
-
Total loans evaluated individually
$
19,489
$
8,865
$
6,515
$
15,380
$
3,589
$
19,556
As of and for the Year Ended December 31, 2020
Unpaid
Recorded Investment
Average
Principal
With No
With
Related
Recorded
Balance
Allowance
Allowance
Total
Allowance
Investment
Loans evaluated individually
Commercial
$
16,771
$
4,001
$
4,371
$
8,372
$
1,600
$
7,920
Commercial real estate
7,406
6,067
-
6,067
-
9,349
Real estate construction
-
-
Retail real estate
5,873
5,490
5,515
7,439
Retail other
-
-
-
-
-
Total loans evaluated individually
$
30,342
$
15,850
$
4,396
$
20,246
$
1,625
$
25,299
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. Collateral dependent loans are loans in which repayment is expected to be provided solely by the underlying collateral and there are no other available and reliable sources of repayment. Loans are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. The Company had $7.9 million and $14.8 million of collateral dependent loans secured by real estate or business assets as of December 31, 2021, and December 31, 2020, respectively.
Allowance for Credit Losses
Management estimates the ACL balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience beginning in 2010. As of December 31, 2021, the Company expects the markets in which it operates to experience continued economic uncertainty around the levels of delinquencies over the next four quarters. Management adjusted the historical loss experience for these expectations with an immediate reversion to historical loss rate beyond this forecast period. PPP loans were excluded from the ACL calculation as they are 100% government guaranteed.
The following tables summarize activity in the ACL. Allocation of a portion of the ACL to one category does not preclude its availability to absorb losses in other categories (dollars in thousands):
As of and for the Year Ended December 31, 2021
Commercial
Real Estate
Retail
Commercial
Real Estate
Construction
Real Estate
Retail Other
Total
ACL beginning balance
$
23,866
$
46,230
$
8,193
$
21,992
$
$
101,048
Day 1 PCD (1)
3,546
-
4,178
Provision for credit losses
(2,160)
(7,651)
(3,180)
(4,456)
2,346
(15,101)
Charged-off
(2,026)
(925)
(209)
(1,145)
(478)
(4,783)
Recoveries
1,069
2,545
ACL ending balance
$
23,855
$
38,249
$
5,102
$
17,589
$
3,092
$
87,887
(1) The Day 1 PCD is attributable to the CAC acquisition.
As of and for the Year Ended December 31, 2020
Commercial
Real Estate
Retail Real
Commercial
Real Estate
Construction
Estate
Retail Other
Total
Beginning balance, prior to adoption of ASC 326-30
$
18,291
$
21,190
$
3,204
$
10,495
$
$
53,748
Adoption of ASC 326-30
9,306
2,954
3,292
16,833
Provision for credit losses
10,832
17,511
1,452
9,050
(48)
38,797
Charged-off
(6,376)
(1,972)
(18)
(2,057)
(665)
(11,088)
Recoveries
1,212
2,758
ACL ending balance
$
23,866
$
46,230
$
8,193
$
21,992
$
$
101,048
As of and for the Year Ended December 31, 2019
Commercial
Real Estate
Retail Real
Commercial
Real Estate
Construction
Estate
Retail Other
Total
Beginning balance
$
17,829
$
21,137
$
2,723
$
8,471
$
$
50,648
Provision for credit losses
4,893
3,002
(70)
2,102
10,406
Charged-off
(6,478)
(3,257)
-
(1,162)
(863)
(11,760)
Recoveries
2,047
1,084
4,454
Ending balance
$
18,291
$
21,190
$
3,204
$
10,495
$
$
53,748
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the ACL and amortized cost of portfolio loans by category (dollars in thousands):
As of December 31, 2021
Portfolio Loans
ACL Attributed to Portfolio Loans
Collectively
Individually
Collectively
Individually
Evaluated for
Evaluated for
Evaluated for
Evaluated for
Impairment
Impairment
Total
Impairment
Impairment
Total
Portfolio loan category
Commercial
$
1,936,898
$
6,988
$
1,943,886
$
20,291
$
3,564
$
23,855
Commercial real estate
3,114,057
5,750
3,119,807
38,249
-
38,249
Real estate construction
385,724
385,996
5,102
-
5,102
Retail real estate
1,510,606
2,370
1,512,976
17,564
17,589
Retail other
226,333
-
226,333
3,092
-
3,092
Total portfolio loans and related ACL
$
7,173,618
$
15,380
$
7,188,998
$
84,298
$
3,589
$
87,887
As of December 31, 2020
Portfolio Loans
ACL Attributed to Portfolio Loans
Collectively
Individually
Collectively
Individually
Evaluated for
Evaluated for
Evaluated for
Evaluated for
Impairment
Impairment
Total
Impairment
Impairment
Total
Portfolio loan category
Commercial
$
2,006,204
$
8,372
$
2,014,576
$
22,266
$
1,600
$
23,866
Commercial real estate
2,886,468
6,067
2,892,535
46,230
-
46,230
Real estate construction
461,494
461,786
8,193
-
8,193
Retail real estate
1,402,337
5,515
1,407,852
21,967
21,992
Retail other
37,428
-
37,428
-
Total portfolio loans and related ACL
$
6,793,931
$
20,246
$
6,814,177
$
99,423
$
1,625
$
101,048
Note 5. Other Real Estate Owned and Other Repossessed Assets
OREO and other repossessed assets represent properties and other assets acquired through foreclosure or other proceedings in settlement of loans and is included in other assets in the accompanying Consolidated Balance Sheets. The following table summarizes the composition of the Company’s OREO and other repossessed asset balances as of the periods presented (dollars in thousands):
As of December 31,
OREO
Commercial
$
2,839
$
4,206
Residential
Total OREO
3,074
4,570
Other repossessed assets
1,342
OREO and other repossessed assets
$
4,416
$
4,571
The following table summarizes activity related to OREO and other repossessed assets (dollars in thousands):
As of and for the Years Ended December 31,
Changes in OREO and other repossessed assets
OREO and other repossessed assets beginning balance
$
4,571
$
3,057
Additions, transfers from loans
1,610
2,867
Sales
(1,721)
(1,282)
Cash payments collected
(43)
(3)
Impairment of OREO and other repossessed assets
(1)
(68)
OREO and other repossessed assets ending balance
$
4,416
$
4,571
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2021, the Company had $0.2 million of residential real estate in the process of foreclosure. The Company has elected to follow Federal Housing Finance Agency guidelines on single-family foreclosures and real estate owned evictions on portfolio loans, as well as all COVID-19 related state foreclosure and eviction orders.
Note 6. Premises and Equipment, net
Premises and equipment, net are summarized as follows (dollars in thousands):
As of December 31,
Premises and equipment
Land and improvements
$
45,595
$
40,762
Buildings and improvements
132,011
130,610
Furniture and equipment
54,473
53,766
Premises and equipment, gross
232,079
225,138
Accumulated depreciation
95,932
89,947
Premises and equipment, net
$
136,147
$
135,191
Depreciation expense was $11.6 million, $12.3 million, and $11.9 million for the years ended December 31, 2021, 2020, and 2019, respectively.
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 three operating segments, Banking, FirsTech, and Wealth Management. Goodwill is tested annually for impairment, and as part of this analysis, the reporting unit's carrying value is compared to its estimated fair value. Based on the impairment testing performed at December 31, 2021, there were no indicators of potential impairment based on the estimated fair value of those operating segments. All three operating segments have produced quarterly and annual earnings.
During 2021, in connection with the acquisition of CAC, the company recorded goodwill totaling $6.3 million and other intangible assets totaling $8.8 million in the Banking operating segment, as well as other intangible assets totaling $8.5 million in the Wealth Management segment. During 2020, the Company recorded other intangible assets totaling $0.4 million in the Wealth Management operating segment in connection with an asset acquisition.
The carrying amount of goodwill by operating segment is as follows (dollars in thousands):
As of December 31,
Goodwill
Banking
$
294,773
$
288,436
FirsTech
8,992
8,992
Wealth Management
14,108
14,108
Total goodwill
$
317,873
$
311,536
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Core deposit and customer relationship intangible assets are amortized over the estimated period benefited. Intangible asset disclosures are as follows (dollars in thousands):
As of and for the Years Ended December 31,
Customer
Customer
Core deposit
relationship
Core deposit
relationship
intangible
intangible
Total
intangible
intangible
Total
Intangibles
Intangible assets, gross
$
99,065
$
33,138
$
132,203
$
90,256
$
24,608
$
114,864
Accumulated amortization
55,161
18,991
74,152
46,909
15,970
62,879
Intangible assets, net
$
43,904
$
14,147
$
58,051
$
43,347
$
8,638
$
51,985
Amortization expense
$
8,253
$
3,021
$
11,274
$
7,753
$
2,255
$
10,008
Future expense for the amortization of intangible assets, as estimated, is summarized in the table below for the periods presented (dollars in thousands):
As of December 31, 2021
Customer
Core deposit
relationship
intangible
intangible
Total
Estimated amortization expense
$
8,315
$
3,313
$
11,628
7,616
2,816
10,432
6,902
2,318
9,220
5,956
1,887
7,843
5,227
1,479
6,706
Thereafter
9,888
2,334
12,222
Total estimated amortization expense
$
43,904
$
14,147
$
58,051
Note 8. Deposits
The composition of deposits is as follows (dollars in thousands):
As of December 31,
Deposits
Demand deposits, noninterest-bearing
$
3,670,267
$
2,552,039
Interest-bearing transaction deposits
2,720,417
2,263,093
Saving deposits and money market deposits
3,442,244
2,743,369
Time deposits
935,649
1,119,348
Total deposits
$
10,768,577
$
8,677,849
Additional information about our deposits is as follows (dollars in thousands):
As of December 31,
Brokered savings deposits and money market deposits
$
2,248
$
2,251
Brokered time deposits
5,257
Aggregate amount of time deposits with a minimum denomination of $100,000
454,649
568,735
Aggregate amount of time deposits with a minimum denomination that meets or exceeds the FDIC insurance limit of $250,000
137,449
192,563
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of time deposits are as follows (dollars in thousands):
As of
December 31, 2021
Time deposits by schedule of maturities
$
643,826
191,995
70,111
16,149
12,834
Thereafter
Time deposits
$
935,649
Note 9. Borrowings
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The underlying securities are held by the Company’s safekeeping agent. The Company may be required to provide additional collateral based on fluctuations in the fair value of the underlying securities. Securities sold under agreements to repurchase were as follows (dollars in thousands):
As of December 31,
Securities sold under agreements to repurchase
$
270,139
$
175,614
Weighted average rate for securities sold under agreements to repurchase
0.08
%
0.13
%
Term Loan
On May 28, 2021, the Company entered into a Second Amended and Restated Credit Agreement, pursuant to which the Company has access to (i) a $40.0 million revolving line of credit with a termination date of April 30, 2022, and (ii) a $60.0 million term loan with a maturity date of May 31, 2026. The loans have an annual interest rate of 1.75% plus the 1-month LIBOR rate. Proceeds of the term loan were used to fund a part of the cash portion of the merger consideration related to the acquisition of CAC and for general corporate purposes. The revolving credit facility incurs a non-usage fee based on any undrawn amounts. As of December 31, 2021, there was no balance outstanding on the revolving credit facility and a total of $54.0 million outstanding on the term loan, of which $12.0 million is short-term and $42.0 million is long-term. Quarterly payments on the term loan reduce the outstanding principal balance by $3.0 million each quarter.
Short-term Borrowings
Short-term borrowings are summarized as follows (dollars in thousands):
As of December 31,
Short-term borrowings
FHLB advances maturing in less than one year from date of origination, and the current portion of long-term FHLB advances due within 12 months
$
5,678
$
4,658
Term Loan, current portion due within 12 months
12,000
-
Total short-term debt
$
17,678
$
4,658
Federal funds purchased are short-term borrowings that generally mature between one and 90 days. The Company had no federal funds purchased as of December 31, 2021, or 2020.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term Debt
Long-term debt is summarized as follows (dollars in thousands):
As of December 31,
Long-term debt
Notes payable, FHLB, original maturity of 5 years, collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock
$
4,056
$
4,757
Term Loan
42,000
-
Total long-term debt
$
46,056
$
4,757
As of December 31, 2021, and 2020, funds borrowed from the FHLB, listed above, consisted of one variable-rate note maturing May 2023, with an interest rate of 3.04%.
Senior and subordinated notes
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 the 3-month LIBOR plus a spread of 2.919%, as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017, during the five-year fixed term and thereafter on February 25, May 25, August 25, and November 25 of each year, commencing on August 25, 2022. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. The senior notes and subordinated notes are unsecured obligations of the Company.
On June 1, 2020, the Company issued $125.0 million of fixed-to-floating rate subordinated notes that mature on June 1, 2030. The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 5.25% for the first five years after issuance and thereafter bear interest at a floating rate equal to a three-month benchmark rate plus a spread of 5.11%, as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each June 1 and December 1, during the five-year fixed-term, and thereafter on March 1, June 1, September 1, and December 1 of each year, commencing on September 1, 2025. The subordinated notes have an optional redemption, in whole or in part, on any interest payment date on or after June 1, 2025. The subordinated notes are unsecured obligations of the Company.
Unamortized debt issuance costs related to senior notes and subordinated notes are presented in the following table (dollars in thousands):
As of December 31,
Unamortized debt issuance costs
Senior notes issued in 2017
$
$
Subordinated notes issued in 2017
Subordinated notes issued in 2020
1,678
2,123
Total unamortized debt issuance costs
$
2,283
$
2,965
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 previously maintained by Pulaski and the fair value adjustment is being accreted over their weighted average remaining life, with a balance of $3.0 million remaining to be accreted. The Company had $71.6 million and $71.5 million of junior subordinated debt owed to unconsolidated trusts at December 31, 2021, and 2020, respectively, maturing in 2034 through 2036.
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at par value at the stated maturity date or upon redemption. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligations under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes, in which case the distributions on the trust preferred securities will also be deferred, for up to five years, but not beyond the stated maturity date.
For regulatory capital purposes, current banking regulations allow for the inclusion in Tier 1 Capital qualifying trust preferred securities issued prior to May 19, 2010, by bank holding companies with less than $15.0 billion of assets, but do not allow for additional Tier 1 Capital to be raised through the future issuance of trust preferred securities. As of December 31, 2021, 100% of the trust preferred securities qualified as Tier 1 Capital; however, once the Company reaches $15.0 billion in assets, its trust preferred securities will no longer quality as Tier 1 Capital.
Note 11. Regulatory Capital
The Company and Busey Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Capital amounts and classification also are subject to qualitative judgments by regulators about components, risk weightings, and other factors.
Banking regulations identify five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. As of December 31, 2021, and 2020, all capital ratios of the Company and Busey 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, 2021, that would change this designation.
On March 27, 2020, the FDIC and other federal banking agencies published an Interim Final Rule that provides those banking organizations adopting CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital and to phase in the aggregate impact of the deferral on regulatory capital over a subsequent three-year period. On August 26, 2020, the CECL final rule was finalized and was substantially similar to the Interim Final Rule. Under this final rule, because the Company has elected to use the deferral option, the regulatory capital impact of our transition adjustments recorded on January 1, 2020, from the adoption of CECL will be deferred for two years, until January 1, 2022. In addition, 25 percent of the ongoing impact of CECL on our ACL, retained earnings, and average total consolidated assets from January 1, 2020, through the end of the two-year deferral period, each as reported for regulatory capital purposes, will be added to the deferred transition amounts (“adjusted transition amounts”) and deferred for the two-year period. At the conclusion of the two-year period, the adjusted transition amounts will be phased-in for regulatory capital purposes at a rate of 25 percent per year, with the phased-in amounts included in regulatory capital at the beginning of each year.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 1, 2020, the Company issued $125.0 million of fixed-to-floating rate subordinated notes that mature on June 1, 2030, which qualify as Tier 2 capital for regulatory purposes.
The following tables summarize regulatory capital requirements applicable to the holding company and its subsidiary bank (dollars in thousands):
As of December 31, 2021
Minimum
Minimum
To Be Well
Actual
Capital Requirement
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Common Equity Tier 1 Capital to Risk Weighted Assets
Consolidated
$
995,874
11.85
%
$
378,334
4.50
%
$
546,482
6.50
%
Busey Bank
$
1,241,303
14.81
%
$
377,096
4.50
%
$
544,695
6.50
%
Tier 1 Capital to Risk Weighted Assets
Consolidated
$
1,069,874
12.73
%
$
504,445
6.00
%
$
672,594
8.00
%
Busey Bank
$
1,241,303
14.81
%
$
502,795
6.00
%
$
670,394
8.00
%
Total Capital to Risk Weighted Assets
Consolidated
$
1,320,187
15.70
%
$
672,594
8.00
%
$
840,742
10.00
%
Busey Bank
$
1,306,616
15.59
%
$
670,394
8.00
%
$
837,992
10.00
%
Leverage Ratio of Tier 1 Capital to Average Assets
Consolidated
$
1,069,874
8.52
%
$
502,336
4.00
%
N/A
N/A
Busey Bank
$
1,241,303
9.91
%
$
501,104
4.00
%
$
626,379
5.00
%
As of December 31, 2020
Minimum
Minimum
To Be Well
Actual
Capital Requirement
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Common Equity Tier 1 Capital to Risk Weighted Assets
Consolidated
$
909,033
12.43
%
$
329,071
4.50
%
$
475,325
6.50
%
Busey Bank
$
1,053,910
14.44
%
$
328,546
4.50
%
$
474,567
6.50
%
Tier 1 Capital to Risk Weighted Assets
Consolidated
$
983,033
13.44
%
$
438,761
6.00
%
$
585,015
8.00
%
Busey Bank
$
1,053,910
14.44
%
$
438,062
6.00
%
$
584,082
8.00
%
Total Capital to Risk Weighted Assets
Consolidated
$
1,245,997
17.04
%
$
585,015
8.00
%
$
731,269
10.00
%
Busey Bank
$
1,131,875
15.50
%
$
584,082
8.00
%
$
730,103
10.00
%
Leverage Ratio of Tier 1 Capital to Average Assets
Consolidated
$
983,033
9.79
%
$
401,717
4.00
%
N/A
N/A
Busey Bank
$
1,053,910
10.52
%
$
400,581
4.00
%
$
500,727
5.00
%
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2013, U.S. federal banking authorities approved the Basel III Rule for strengthening international capital standards. The Basel III Rule introduced a capital conservation buffer, composed entirely of Common Equity Tier 1 Capital, which is added to the minimum risk-weighted asset ratios. The capital conservation buffer is not a minimum capital requirement; however, banking institutions with a ratio of Common Equity Tier 1 Capital 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-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. Busey Bank paid dividends to the Company of $60.0 million during the year ended December 31, 2021, and $122.0 million during the year ended December 31, 2020.
Note 12. Income Taxes
The components of income taxes consist of (dollars in thousands):
Years Ended December 31,
Income tax expense
Current expense:
Federal
$
20,261
$
21,027
$
22,479
State
8,448
12,144
8,910
Deferred expense:
Federal
3,644
(3,657)
(380)
State
1,021
(1,652)
Total income tax expense
$
33,374
$
27,862
$
31,485
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,
Percent of pretax income
Income tax at federal statutory rate
21.0
%
21.0
%
21.0
%
Effect of:
Tax-exempt interest, net
(1.1)
%
(1.6)
%
(1.7)
%
Stock incentive
-
%
0.2
%
(0.1)
%
State income taxes, net
4.5
%
6.5
%
5.5
%
Income on bank owned life insurance
(0.7)
%
(0.9)
%
(0.9)
%
Tax credit investments
(3.6)
%
(3.2)
%
(1.3)
%
Other, net
1.2
%
(0.3)
%
0.9
%
Effective income tax rate
21.3
%
21.7
%
23.4
%
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred taxes, reported in other assets or other liabilities in the accompanying Consolidated Balance Sheets, include the following amounts of deferred tax assets and liabilities (dollars in thousands):
As of December 31,
Deferred taxes
Deferred tax assets:
ACL
$
25,884
$
30,332
Unrealized loss on cash flow hedge
Unrealized losses on securities available for sale
9,199
-
Stock-based compensation
4,204
2,975
Deferred compensation
Purchase accounting adjustments
1,213
4,470
Accrued vacation
Lease liabilities
2,893
2,142
Employee costs
2,847
1,598
Other
Total deferred tax assets
47,356
43,495
Deferred tax liabilities:
Unrealized gain on securities available for sale
-
(14,151)
Basis in premises and equipment
(1,347)
(348)
Affordable housing partnerships and other investments
(3,696)
(1,995)
Purchase accounting adjustments
(1,362)
(1,835)
Mortgage servicing assets
(2,853)
(3,418)
Basis in core deposit, customer intangible assets, and asset purchase goodwill
(9,485)
(12,714)
Deferred loan origination costs
(2,454)
(2,654)
Right of use assets
(2,877)
(2,130)
Unrealized gain on equity securities
(1,099)
(276)
Other
(560)
(405)
Total deferred tax liabilities
(25,733)
(39,926)
Net deferred tax asset
$
21,623
$
3,569
At December 31, 2021, the Company had state net operating loss carryforwards for Wisconsin and California, both of which were an insignificant amount and will begin to expire in the year 2041.
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 no valuation allowance is required for any deferred tax assets as of December 31, 2021, or 2020.
Note 13. Employee Benefit Plans
Active Benefit Plans
Profit-Sharing Plan
All associates who meet certain age and service requirements are eligible to participate in the Company's profit-sharing plan. Discretionary profit-sharing contributions and related expenses, if any, are approved solely by the First Busey board of directors, and in no case may annual contributions be greater than the amounts deductible for federal income tax purposes for that year.
The rights of participants in the profit-sharing plan vest ratably over a five-year period, except for the 401(k) Safe Harbor match component of the profit-sharing plan, which vests immediately.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Terminated Benefit Plans
Employees’ Stock Ownership Plan
Prior to 2014, the First Busey ESOP was available to all associates who met certain age and service requirements. Effective March 20, 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. First Busey filed a determination letter with the Internal Revenue Service on February 10, 2020. During 2020, First Busey received a favorable determination ruling from the Internal Revenue Service, and all plan assets were distributed by the end of the year.
Deferred Compensation Plan
The Company previously sponsored deferred compensation plans for executive officers for deferral of compensation. Effective March 28, 2018, the deferred compensation plans were terminated, and account balances were distributed in April 2019. There was no deferred compensation liability balance as of December 31, 2021, or 2020.
Benefit Plan Expenses
Expenses related to our employee benefit plans, reported in salaries, wages, and employee benefits in the accompanying Consolidated Statements of Income, are summarized in the table below (dollars in thousands):
Years Ended December 31,
Employee benefit plan expenses
Profit-sharing plan
$
6,531
$
5,982
$
5,777
Deferred compensation plan
-
-
Total employee benefit plan expenses
$
6,531
$
5,982
$
5,857
Note 14. Stock-based Compensation
Stock Options
The Company has outstanding stock options assumed from acquisitions. A summary of the status of, and changes in, the Company's stock option awards follows (dollars in thousands, except weighted-average exercise price):
As of and for the Year Ended December 31, 2021
Weighted-
Weighted-
Average
Average
Remaining
Exercise
Contractual
Intrinsic
Shares
Price
Life
Value
Outstanding at beginning of year
39,085
$
23.53
5.88
$
-
Exercised
-
-
Forfeited
-
-
Expired
(7,699)
23.53
Outstanding at end of year
31,386
$
23.53
4.88
$
Exercisable at end of year
31,386
$
23.53
4.88
$
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 Equity Plan
Under the terms of the 2020 Equity Plan, the Company has granted RSU, PSU, and DSU awards. The Company grants RSUs to members of management periodically throughout the year. Each RSU is equivalent to one share of the Company’s common stock. These units have requisite service periods ranging from one to five years, subject to accelerated vesting upon eligible retirement from the Company. Recipients earn quarterly dividend equivalents on their respective units which entitle the recipients to additional units. Therefore, dividends earned each quarter compound based upon the updated unit balances.
The Company also grants PSU awards to members of management periodically throughout the year. Each PSU is equivalent to one share of the Company’s common stock. The number of units that ultimately vest will be determined based on the achievement of market or other performance goals, subject to accelerated service-based vesting conditions upon eligible retirement from the Company.
The Company grants DSUs, which are restricted stock units with a deferred settlement date, to its directors and advisory directors. Each DSU is equivalent to one share of the Company’s common stock. DSUs vest over a one-year period following the grant date. These units generally are subject to the same terms as RSUs under the 2020 Equity Plan, except that, following vesting, settlement occurs within 30 days following the earlier of separation from the board or a change in control of the Company. After vesting and prior to delivery, these units will continue to earn dividend equivalents.
Upon exercise or vesting/delivery, shares are expected (though not required) to be issued from treasury.
Restricted Stock Unit, Performance-Based Restricted Stock Unit, and Deferred Stock Unit Awards
Changes in the Company’s RSU, PSU, and DSU awards are summarized as follows:
As of and for the Year Ended December 31, 2021
RSU Awards
PSU Awards
DSU Awards
Weighted-
Weighted-
Weighted-
Average
Average
Average
Grant Date
Grant Date
Grant Date
Shares
Fair Value
Shares (1)
Fair Value
Shares
Fair Value
Nonvested at beginning of period
1,017,038
$
23.87
15,724
$
16.25
34,263
$
17.18
Granted
260,231
24.26
99,159
23.91
35,664
24.59
Dividend equivalents earned
43,783
23.65
-
-
4,891
23.72
Vested
(143,242)
23.50
-
-
(40,683)
18.24
Forfeited
(29,883)
24.88
(968)
23.48
-
-
Nonvested at end of period
1,147,927
$
23.97
113,915
$
22.86
34,135
$
24.59
Vested and outstanding at end of period
97,297
$
22.02
(1) Shares for PSU awards represent target shares at grant date.
On March 24, 2021, under the terms of the 2020 Equity Plan, the Company granted 212,426 RSUs to members of management. The grant date fair value of the award totaled $5.2 million and will be recognized as compensation expense over the requisite service period ranging from one year to five years. The terms of these awards included an accelerated vesting provision upon eligible retirement from the Company, after a one-year minimum requisite service period. Subsequent to the requisite service period, the awards will become 100% vested. Further, the Company granted 33,288 DSUs to directors and advisory directors. The grant date fair value of the award totaled $0.8 million and will be recognized as compensation expense over the requisite service period of one year. Subsequent to the requisite service period, the awards will become 100% vested.
During the first quarter of 2021, the Company also granted a target of 70,815 market-based PSUs with a maximum award of 113,304 units. The actual number of units issued at the vesting date could range from 0% to 160% of the initial grant, depending on attaining the market-based total shareholder return performance goal. The grant date fair value of the award was $1.7 million and will be recognized in compensation expense over the performance period ending December 31, 2023.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further, during the first quarter of 2021, the Company granted a target of 28,344 PSUs with a maximum award of 39,682 units. The actual number of units issued at the vesting date could range from 0% to 140% of the initial grant, depending on attaining a performance goal based upon FirsTech’s compounded annual revenue growth rate. The grant date fair value of the award is $0.7 million and will be recognized in compensation expense over the performance period ending August 31, 2023, subject to achievement of the performance goal.
On May 19, 2021, under the terms of the 2020 Equity Plan, the Company granted 2,376 DSUs to directors. The grant date fair value of the award totaled $0.1 million and will be recognized as compensation expense over the requisite service period of one year. Subsequent to the requisite service period, the awards will become 100% vested.
On September 22, 2021, under the terms of the 2020 Equity Plan, the Company granted 47,805 RSUs to members of management. The grant date fair value of the award totaled $1.1 million and will be recognized as compensation expense over the requisite service period ranging from three year to five years. Subsequent to the requisite service period, the awards will become 100% vested.
A description of RSU, PSU and DSU awards granted in 2020 and 2019 under the terms of the 2020 Equity Plan, 2010 Equity Plan, or the First Community 2016 Equity Incentive Plan can be found in the Company’s Annual Reports for the years ended December 31, 2020, and 2019.
The Company issued 116,904 treasury shares in conjunction with the vesting of RSUs and settlement of DSUs in 2021. The difference between the number of shares issued and the number of vested units is due to shares issued under a net share settlement option.
2021 Employee Stock Purchase Plan
The 2021 ESPP was approved at the Company’s 2021 Annual Meeting of Stockholders, replacing the 2011 ESPP which terminated at the end of 2020. The purpose of the 2021 ESPP is to provide a means through which our employees may acquire a proprietary interest in the Company by purchasing shares of our common stock at a 15% discount through voluntary payroll deductions, to assist us in retaining the services of our employees and securing and retaining the services of new employees, and to provide incentives for our employees to exert maximum efforts toward our success. Under the terms of the 2021 ESPP, all participating employees will have equal rights and privileges. Substantially all of our employees are eligible to participate in the 2021 ESPP. Further details can be found within First Busey’s Definitive Proxy Statement filed with the SEC on April 8, 2021.
The first offering under the 2021 ESPP began on July 1, 2021. There were 569,610 shares available for issuance under the 2021 ESPP as of December 31, 2021.
Stock-based Compensation Expense
The Company recognized compensation expense related to non-vested RSU, PSU, and DSU awards, as well as the 2021 ESPP, as presented in the table below (dollars in thousands):
Years Ended December 31,
Stock-based compensation expense
Stock options (1)
$
-
$
-
$
RSU awards
5,809
6,493
3,249
PSU awards
-
DSU awards
2021 ESPP
-
-
Total stock-based compensation expense
$
7,864
$
7,135
$
3,997
(1) Stock option compensation expense recorded in 2019 was attributable to converted options related to the 2017 acquisition of First Community.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unamortized stock-based compensation expense is presented in the table below (dollars in thousands):
As of December 31,
Unamortized stock-based compensation
RSU awards
$
10,204
$
10,411
PSU awards
1,547
DSU awards
Total unamortized stock-based compensation
$
11,960
$
10,884
Weighted average period over which expense is to be recognized
2.9
yrs
3.0
yrs
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.
The following is an analysis of the changes in loans to related parties, as a group (dollars in thousands):
As of and for the Year Ended
December 31, 2021
Loans to related parties
Balance at beginning of year
$
41,921
Change in relationship
(2,033)
New loans/advances
31,761
Repayments
(29,092)
Balance at end of year
$
42,557
Loans to related parties did not include amounts that were past due, nonaccrual, or TDRs.
Additionally, total unused commitments to directors and executive officers were $8.6 million at December 31, 2021.
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 Company’s financial position or the results of operations.
Credit Commitments and Contingencies
A summary of the contractual amount of the Company’s exposure to off-balance-sheet risk relating to the Company’s commitments to extend credit and standby letters of credit follows (dollars in thousands):
As of December 31,
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit
$
1,983,655
$
1,754,370
Standby letters of credit
32,552
38,937
Total commitments
$
2,016,207
$
1,793,307
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Derivative Instruments Designated as Hedges
Interest Rate Swaps Designated as Cash Flow Hedges
The Company entered into derivative instruments designated as cash flow hedges. For a derivative instrument that is designated and qualifies as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.
Interest rate swaps with notional amounts totaling $50.0 million as of December 31, 2021, and $70.0 million as of December 31, 2020, were designated as cash flow hedges to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified 3-month LIBOR benchmark interest rate on the Company’s junior subordinated debt owed to unconsolidated trusts and were determined to be highly effective during the period. A $20.0 million swap matured on September 17, 2021, and the Company has one remaining swap. The gross aggregate fair value of the swaps of $1.0 million as of December 31, 2021, and $3.1 million as of December 31, 2020, is recorded in other liabilities in the Consolidated Balance Sheets, with changes in fair value recorded net of tax in other comprehensive income (loss). The Company expects its hedge to remain highly effective during the remaining term of the swap.
A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):
As of December 31,
Notional amount
$
50,000
$
70,000
Weighted average fixed pay rates
1.79
%
1.80
%
Weighted average variable 3-month LIBOR receive rates
0.20
%
0.22
%
Weighted average maturity, in years
2.71
yrs
2.85
yrs
Unrealized gains (losses), net of tax
$
(685)
$
(2,184)
The Company expects $0.2 million of the unrealized gain (loss) to be reclassified from OCI to interest expense during the next three months. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to December 31, 2021.
Interest income (expense) recorded on swap transactions was as follows for the periods presented (dollars in thousands):
Years Ended December 31,
Interest income (expense) on swap transactions
$
(1,067)
$
(758)
$
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the net gains (losses) recorded in AOCI and the Consolidated Statements of Comprehensive Income relating to cash flow derivative instruments for the periods presented (dollars in thousands):
Years Ended December 31,
Unrealized gains (losses) on cash flow hedges
Gain (loss) recognized in OCI, net of tax
$
$
(2,526)
$
(202)
(Gain) loss reclassified from OCI to interest expense, net of tax
Net change in unrealized gains (losses) on cash flow hedges
$
1,499
$
(1,984)
$
(200)
The Company pledged $1.0 million and $3.2 million in cash to secure its obligation under these contracts at December 31, 2021, and 2020, respectively.
Derivative Instruments Not Designated as Hedges
Interest Rate Swaps
The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into equal and offsetting derivative agreements with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $491.4 million and $395.0 million, at December 31, 2021, and 2020, respectively. These derivatives generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Amounts and fair values of derivative assets and liabilities related to customer interest rate swaps, included in other assets and other liabilities in the Consolidated Balance Sheets, are summarized as follows (dollars in thousands):
As of December 31, 2021
Derivative Asset
Derivative Liability
Notional
Fair
Notional
Fair
Amount
Value
Amount
Value
Derivatives not designated as hedging instruments
Interest rate swaps - pay floating, receive fixed
$
404,572
$
17,839
$
86,784
$
2,259
Interest rate swaps - pay fixed, receive floating
86,784
2,259
404,572
17,839
Total derivatives not designated as hedging instruments
$
491,356
$
20,098
$
491,356
$
20,098
As of December 31, 2020
Derivative Asset
Derivative Liability
Notional
Fair
Notional
Fair
Amount
Value
Amount
Value
Derivatives not designated as hedging instruments
Interest rate swaps - pay floating, receive fixed
$
394,954
$
32,685
$
-
$
-
Interest rate swaps - pay fixed, receive floating
-
-
394,954
32,685
Total derivatives not designated as hedging instruments
$
394,954
$
32,685
$
394,954
$
32,685
Changes in fair value of these derivative assets and liabilities are recorded in noninterest expense in the Consolidated Statements of Income and summarized as follows (dollars in thousands):
Years Ended December 31,
Location
Interest rate swaps
Pay floating, receive fixed
Noninterest expense
$
(12,587)
$
20,331
$
10,915
Pay fixed, receive floating
Noninterest expense
12,587
(20,331)
(10,915)
Net change in fair value of interest rate swaps
$
-
$
-
$
-
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company pledged $26.3 million and $36.0 million in cash to secure its obligation under these contracts at December 31, 2021, and 2020, respectively.
Risk Participation Agreement
In addition, the Company has entered into one risk participation agreement in conjunction with a loan participation with another financial institution to manage the credit risk exposure related to a customer-facing swap. The notional amount of the risk participation agreement was $4.0 million, and it had an insignificant fair value as of December 31, 2021. This risk participation agreement matures in 2028.
Mortgage Banking Derivatives
Interest Rate Lock Commitments
Interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the Consolidated Balance Sheets, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Forward Sales Commitments
The Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the Consolidated Balance Sheets. While such forward sales commitments generally served as an economic hedge to mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.
Amounts and fair values of mortgage banking derivatives included in the Consolidated Balance Sheets are summarized as follows (dollars in thousands):
As of December 31, 2021
As of December 31, 2020
Notional
Fair
Notional
Fair
Location
Amount
Value
Amount
Value
Derivatives with positive fair value
Interest rate lock commitments
Other assets
$
19,384
$
$
45,004
$
1,201
Forward sales commitments
Other assets
1,884
Mortgage banking derivatives recorded in other assets
$
21,268
$
$
45,982
$
1,233
Derivatives with negative fair value
Interest rate lock commitments
Other liabilities
$
$
$
$
Forward sales commitments
Other liabilities
41,002
84,964
2,662
Mortgage banking derivatives recorded in other liabilities
$
41,501
$
$
85,082
$
2,663
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net gains (losses) relating to these derivative instruments are summarized as follows for the periods presented (dollars in thousands):
Years Ended December 31,
Location
Net gains (losses)
Interest rate lock commitments
Mortgage revenue
$
1,702
$
9,667
$
3,988
Forward sales commitments
Mortgage revenue
(4,045)
(18,329)
(6,751)
Net gains (losses)
$
(2,343)
$
(8,662)
$
(2,763)
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.
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.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities Available for Sale
Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid, and other market information. Because many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.
The independent pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. Models and processes take into account market conventions. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements, and sector news into the evaluated pricing applications and models.
Market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The independent pricing service also monitors market indicators, industry, and economic events. For certain security types, additional inputs may be used or some of the market inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day. Because the data utilized was observable, the securities have been classified as Level 2.
Equity Securities
Equity securities are reported at fair value utilizing Level 1 or Level 2 inputs. As applicable for mutual funds, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and are classified as Level 1. For stock, quoted prices for identical or similar assets in markets that are not active are utilized and classified as Level 2.
Loans Held for Sale
Loans held for sale are reported at fair value utilizing Level 2 inputs. 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 estimated fair value utilizing Level 2 inputs and are included in other assets or other liabilities on the Consolidated Balance Sheets. Derivative balances consist of interest rate swaps and a risk participation agreement where there is no significant deterioration in the counterparties (loan customers) credit risk since origination of the interest rate swap or risk participation agreement, as well as mortgage banking derivatives, including interest rate lock commitments and forward sales commitments.
The Company values its derivative assets and liabilities using market prices provided by third parties which use primarily observable market inputs. For purposes of potential valuation adjustments to our derivative positions, the Company evaluates the credit risk of its counterparties as well as its own credit risk. Accordingly, the Company has considered factors such as the likelihood of default, expected loss given default, net exposures, and remaining contractual life, among other things, in determining if any estimated fair value adjustments related to credit risk are required. The Company reviews counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure. No credit changes in counterparty credit were identified.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2021, and 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
As of December 31, 2021
Level 1
Level 2
Level 3
Total
Inputs
Inputs
Inputs
Fair Value
Debt securities available for sale:
U.S. Treasury securities
$
-
$
165,762
$
-
$
165,762
Obligations of U.S. government corporations and agencies
-
38,470
-
38,470
Obligations of states and political subdivisions
-
306,869
-
306,869
Asset-backed securities
-
492,186
-
492,186
Commercial mortgage-backed securities
-
614,998
-
614,998
Residential mortgage-backed securities
-
2,069,313
-
2,069,313
Corporate debt securities
-
293,653
-
293,653
Equity securities
-
13,571
-
13,571
Loans held for sale
-
23,875
-
23,875
Derivative assets
-
20,314
-
20,314
Derivative liabilities
-
21,501
-
21,501
As of December 31, 2020
Level 1
Level 2
Level 3
Total
Inputs
Inputs
Inputs
Fair Value
Debt securities available for sale:
U.S. Treasury securities
$
-
$
27,837
$
-
$
27,837
Obligations of U.S. government corporations and agencies
-
69,519
-
69,519
Obligations of states and political subdivisions
-
304,711
-
304,711
Commercial mortgage-backed securities
-
418,616
-
418,616
Residential mortgage-backed securities
-
1,368,315
-
1,368,315
Corporate debt securities
-
72,189
-
72,189
Equity securities
-
5,530
-
5,530
Loans held for sale
-
42,813
-
42,813
Derivative assets
-
33,918
-
33,918
Derivative liabilities
-
38,403
-
38,403
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Loans Evaluated Individually
The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. If the collateral value is not sufficient, a specific reserve is recorded. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of unobservable inputs, fair values of individually evaluated collateral dependent loans have been classified as Level 3.
OREO
Non-financial assets measured at fair value include OREO (upon initial recognition or subsequent impairment). OREO properties are measured using a combination of observable inputs, including recent appraisals, and unobservable inputs. Due to the significance of unobservable inputs, all OREO fair values have been classified as Level 3.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and is included in premises and equipment, net on the Consolidated Balance Sheets. Fair values were based upon discounted appraisals or real estate listing price. Due to the significance of unobservable inputs, fair values of all bank property held for sale have been classified as Level 3.
The following tables summarize assets and liabilities measured at fair value on a non-recurring basis for the periods presented, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
As of December 31, 2021
Level 1
Level 2
Level 3
Total
Inputs
Inputs
Inputs
Fair Value
Loans evaluated individually, net of related allowance
$
-
$
-
$
2,926
$
2,926
OREO with subsequent impairment
-
-
Bank property held for sale with impairment
-
-
10,103
10,103
As of December 31, 2020
Level 1
Level 2
Level 3
Total
Inputs
Inputs
Inputs
Fair Value
Loans evaluated individually, net of related allowance
$
-
$
-
$
2,771
$
2,771
OREO with subsequent impairment
-
-
Bank property held for sale with impairment
-
-
10,676
10,676
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands):
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Valuation
Unobservable
Range
December 31, 2021:
Estimate
Techniques
Input
(Weighted Average)
Loans evaluated individually, net of related allowance
$
2,926
Appraisal of collateral
Appraisal adjustments
-50.0
%
to
-100.0
%
(-55.1)
%
OREO with subsequent impairment
Appraisal of collateral
Appraisal adjustments
-33.0
%
to
-100.0
%
(-67.9)
%
Bank property held for sale with impairment
10,103
Appraisal of collateral or real estate listing price
Appraisal adjustments
-0.7
%
to
-70.1
%
(-41.3)
%
December 31, 2020:
Loans evaluated individually, net of related allowance
$
2,771
Appraisal of collateral
Appraisal adjustments
-30.0
%
to
-100.0
%
(-37.0)
%
OREO with subsequent impairment
Appraisal of collateral
Appraisal adjustments
-25.0
%
to
-100.0
%
(-54.5)
%
Bank property held for sale with impairment
10,676
Appraisal of collateral or real estate listing price
Appraisal adjustments
-6.2
%
to
-64.9
%
(-42.8)
%
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
As of December 31, 2021
As of December 31, 2020
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
Financial assets
Level 1 inputs:
Cash and cash equivalents
$
836,095
$
836,095
$
688,537
$
688,537
Level 2 inputs:
Accrued interest receivable
31,064
31,064
33,240
33,240
Level 3 inputs:
Portfolio loans, net
7,101,111
7,161,466
6,713,129
6,755,425
Mortgage servicing rights
8,608
12,133
10,912
11,107
Other servicing rights
1,830
2,268
1,434
1,966
Financial liabilities
Level 2 inputs:
Time deposits
$
935,649
$
935,778
$
1,119,348
$
1,132,107
Securities sold under agreements to repurchase
270,139
270,139
175,614
175,614
Short-term borrowings
17,678
17,673
4,658
4,661
Long-term debt
46,056
46,164
4,757
5,014
Junior subordinated debt owed to unconsolidated trusts
71,635
63,586
71,468
59,943
Accrued interest payable
2,728
2,728
3,401
3,401
Level 3 inputs:
Senior notes, net of unamortized issuance costs
39,944
40,400
39,809
40,104
Subordinated notes, net of unamortized issuance costs
182,773
195,600
182,226
187,697
Note 19. Earnings Per Common Share
Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding, which include deferred stock units that are vested but not delivered. Diluted earnings per common share is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s outstanding stock options and warrants were exercised, stock units were vested, and ESPP shares were issued.
Earnings per common share have been computed as follows (dollars in thousands, except per share amounts):
Years Ended December 31,
Net income
$
123,449
$
100,344
$
102,953
Shares:
Weighted average common shares outstanding
55,369,476
54,567,429
54,851,652
Dilutive effect of outstanding options, warrants, and stock units as determined by the application of the treasury stock method
635,221
259,510
280,842
Dilutive effect of ESPP shares
4,108
-
-
Weighted average common shares outstanding, as adjusted for diluted earnings per share calculation
56,008,805
54,826,939
55,132,494
Basic earnings per common share
$
2.23
$
1.84
$
1.88
Diluted earnings per common share
$
2.20
$
1.83
$
1.87
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares that were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive are summarized in the table below for the periods presented:
Years Ended December 31,
Anti-dilutive common stock equivalents
Options
-
39,085
-
RSU and DSU awards
72,800
159,408
201,029
PSU awards
93,026
7,862
-
Total anti-dilutive common stock equivalents
165,826
206,355
201,029
Note 20. Accumulated Other Comprehensive Income (Loss)
The following table represents changes in AOCI by component, net of tax, for the periods below (dollars in thousands):
Year Ended December 31, 2021
Before Tax
Tax Effect
Net of Tax
Unrealized gains (losses) on debt securities available for sale
Balance at beginning of period
$
49,644
$
(14,151)
$
35,493
Unrealized holding gains (losses) on debt securities available for sale, net
(81,977)
23,367
(58,610)
Amounts reclassified from AOCI, net
(17)
Balance at end of period
(32,272)
9,199
(23,073)
Unrealized gains (losses) on cash flow hedges
Balance at beginning of period
(3,055)
(2,184)
Unrealized holding gains (losses) on cash flow hedges, net
1,030
(294)
Amounts reclassified from AOCI, net
1,067
(304)
Balance at end of period
(958)
(685)
Total AOCI
$
(33,230)
$
9,472
$
(23,758)
Year Ended December 31, 2020
Before Tax
Tax Effect
Net of Tax
Unrealized gains (losses) on debt securities available for sale
Balance at beginning of period
$
21,192
$
(6,032)
$
15,160
Unrealized holding gains (losses) on debt securities available for sale, net
30,176
(8,615)
21,561
Amounts reclassified from AOCI, net
(1,724)
(1,228)
Balance at end of period
49,644
(14,151)
35,493
Unrealized gains (losses) on cash flow hedges
Balance at beginning of period
(280)
(200)
Unrealized holding gains (losses) on cash flow hedges, net
(3,533)
1,007
(2,526)
Amounts reclassified from AOCI, net
(216)
Balance at end of period
(3,055)
(2,184)
Total AOCI
$
46,589
$
(13,280)
$
33,309
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2019
Before Tax
Tax Effect
Net of Tax
Unrealized gains (losses) on debt securities available for sale
Balance at beginning of period
$
(9,528)
$
2,716
$
(6,812)
Unrealized holding gains (losses) on debt securities available for sale, net
26,430
(7,525)
18,905
Unrealized losses on debt securities transferred from held to maturity to available for sale
5,023
(1,433)
3,590
Amounts reclassified from AOCI, net
(733)
(523)
Balance at end of period
21,192
(6,032)
15,160
Unrealized gains (losses) on cash flow hedges
Balance at beginning of period
-
-
-
Unrealized holding gains (losses) on cash flow hedges, net
(283)
(202)
Amounts reclassified from AOCI, net
(1)
Balance at end of period
(280)
(200)
Total AOCI
$
20,912
$
(5,952)
$
14,960
Note 21. Operating Segments and Related Information
The Company has three reportable operating segments: Banking, FirsTech, and Wealth Management. The Company’s operating segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. The Banking operating segment provides a full range of banking services to individual and corporate customers through its banking center network in Illinois; the St. Louis, Missouri metropolitan area; southwest Florida; and Indianapolis, Indiana. The FirsTech operating segment provides solutions for online bill payments, lockbox, and walk-in payments. The Wealth Management operating segment provides a full range of asset management, investment, brokerage, fiduciary, philanthropic advisory, tax preparation, and farm management services to individuals, businesses, and foundations.
The 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. The “other” category included in the tables below consists of the Parent Company, First Busey Risk Management, and the elimination of intercompany transactions (dollars in thousands):
Goodwill
Total Assets
As of December 31,
As of December 31,
Operating segment
Banking
$
294,773
$
288,436
$
12,746,833
$
10,462,673
FirsTech
8,992
8,992
47,481
46,553
Wealth Management
14,108
14,108
65,587
46,504
Other
-
-
(212)
(11,683)
Consolidated total
$
317,873
$
311,536
$
12,859,689
$
10,544,047
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31,
Net interest income
Banking
$
285,678
$
294,728
$
296,754
FirsTech
Wealth Management
-
-
-
Other
(15,059)
(11,872)
(9,607)
Total net interest income
$
270,698
$
282,935
$
287,223
Noninterest income
Banking
$
59,393
$
61,043
$
63,613
FirsTech
19,629
16,548
16,450
Wealth Management
53,082
43,429
39,075
Other
(2,755)
(2,723)
Total noninterest income
$
132,804
$
118,265
$
116,415
Noninterest expense
Banking
$
205,905
$
185,445
$
211,559
FirsTech
17,574
13,279
10,990
Wealth Management
29,198
26,086
24,534
Other
9,103
9,387
11,711
Total noninterest expense
$
261,780
$
234,197
$
258,794
Income before income taxes
Banking
$
154,267
$
131,529
$
138,401
FirsTech
2,134
3,348
5,536
Wealth Management
23,884
17,343
14,541
Other
(23,462)
(24,014)
(24,040)
Total income before income taxes
$
156,823
$
128,206
$
134,438
Net income
Banking
$
117,844
$
101,226
$
106,409
FirsTech
1,527
2,372
4,060
Wealth Management
18,570
13,181
11,135
Other
(14,492)
(16,435)
(18,651)
Total net income
$
123,449
$
100,344
$
102,953
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Leases
Busey as the Lessee
The Company has operating leases consisting primarily of equipment leases and real estate leases for banking centers, ATM locations, and office space. The following table summarizes lease related information and balances the Company reported in its Consolidated Balance Sheets for the periods presented (dollars in thousands):
As of December 31,
Lease balances
Right of use assets
$
10,533
$
7,714
Lease liabilities
10,591
7,757
Supplemental information
Year through which lease terms extend
Weighted average remaining lease term (in years)
6.47
5.93
Weighted average discount rate
2.16
%
2.82
%
The following table represents lease costs and cash flows related to leases for the periods presented (dollars in thousands):
Years Ended December 31,
Lease costs
Operating lease costs
$
2,464
$
2,524
$
2,364
Variable lease costs
Short-term lease costs
Total lease cost (1)
$
3,053
$
2,975
$
2,880
Cash flows related to leases
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease cash flows - Fixed payments
$
2,417
$
2,526
$
2,296
Operating lease cash flows - Liability reduction
2,217
2,289
2,010
Right of use assets obtained during the period in exchange for operating lease liabilities (2)
5,818
(1) Rent expense is included in net occupancy and equipment expense in the Consolidated Statements of Income.
(2) The year ended December 31, 2021, includes $0.4 million related to a lease obtained in the acquisition of CAC.
At December 31, 2021, the Company was obligated under noncancelable operating leases for office space and other commitments.
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future undiscounted lease payments with initial terms of one year or more, are as follows (dollars in thousands):
As of
December 31, 2021
Rent commitments
$
2,271
2,098
1,650
1,413
1,164
Thereafter
2,766
Total undiscounted cash flows
11,362
Less: Amounts representing interest
Present value of net future minimum lease payments
$
10,591
Busey as the Lessor
Busey occasionally leases parking lots and office space to outside parties. Further, in connection with the acquisition of CAC, the Company acquired two office buildings in Glenview, IL and one office building in Northbrook, IL, along with operating leases for space within these buildings that is rented to outside parties. Revenues recorded in connection with these leases and reported in other income on our Consolidated Statements of Income are summarized as follows (dollars in thousands):
Years Ended December 31,
Rental income
$
$
$
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Parent Company Only Financial Information
Condensed financial data for First Busey Corporation is presented below.
CONDENSED BALANCE SHEETS
(dollars in thousands)
As of December 31,
Assets
Cash and cash equivalents
$
78,217
$
129,183
Equity securities
13,571
5,530
Investments in subsidiaries:
Bank
1,565,226
1,417,130
Non-bank
2,812
2,746
Premises and equipment, net
Other assets
22,444
21,664
Total assets
$
1,682,300
$
1,576,304
Liabilities and Stockholders' Equity
Liabilities:
Short-term borrowings
$
12,000
$
-
Long-term debt
42,000
-
Senior notes, net of unamortized issuance costs
39,944
39,809
Subordinated notes, net of unamortized issuance costs
182,773
182,226
Junior subordinated debentures owed to unconsolidated trusts
71,635
71,468
Other liabilities
14,836
12,732
Total liabilities
363,188
306,235
Total stockholders' equity
1,319,112
1,270,069
Total liabilities and stockholders' equity
$
1,682,300
$
1,576,304
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
(dollars in thousands)
Years Ended December 31,
Operating income:
Dividends from subsidiaries:
Bank
$
60,000
$
122,000
$
70,000
Non-bank
1,745
-
-
Interest income
Unrealized gains (losses) recognized on equity securities
3,041
(393)
(759)
Other income
12,109
10,083
10,224
Total operating income
76,974
131,844
79,906
Expense:
Salaries, wages, and employee benefits
17,914
16,205
15,288
Interest expense
15,163
12,056
10,054
Operating expense
7,429
7,685
8,960
Total expense
40,506
35,946
34,302
Income (loss) before income tax benefit and equity in undistributed (in excess of) net income of subsidiaries
36,468
95,898
45,604
Income tax benefit
8,974
7,727
5,389
Income (loss) before equity in undistributed (in excess of) net income of subsidiaries
45,442
103,625
50,993
Equity in undistributed (in excess of) net income of subsidiaries:
Bank
77,941
(5,221)
51,604
Non-bank
1,940
Net income
$
123,449
$
100,344
$
102,953
FIRST BUSEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
Cash Flows Provided by (Used in) Operating Activities
Net income
$
123,449
$
100,344
$
102,953
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
Distributions more (less) than net income of subsidiaries
(78,007)
3,281
(51,961)
Unrealized (gains) losses recognized on equity securities
(3,041)
Stock-based compensation
7,864
7,135
3,997
Changes in assets and liabilities:
(Increase) decrease in other assets
(1,186)
(4,279)
Increase (decrease) in other liabilities
(3,302)
(5,772)
(1,280)
Net cash provided by (used in) operating activities
46,659
106,434
50,609
Cash Flows Provided by (Used in) Investing Activities
Purchases of equity securities
(5,000)
-
(520)
Net cash paid for acquisitions
(61,656)
-
(90,722)
Purchases of premises and equipment
(15)
(19)
(31)
Net cash provided by (used in) investing activities
(66,671)
(19)
(91,273)
Cash Flows Provided by (Used in) Financing Activities
Cash paid for withholding taxes on stock-based payments
(997)
(635)
(863)
Cash dividends paid
(50,764)
(48,012)
(45,171)
Repayments of borrowings
(18,500)
(74,000)
(6,000)
Proceeds from issuance of debt
72,500
142,634
60,000
Proceeds from stock options exercised
-
Purchase of treasury stock
(33,043)
(12,272)
(24,292)
Common stock issuance costs
(150)
-
(234)
Net cash provided (used in) by financing activities
(30,954)
7,816
(16,391)
Net increase (decrease) in cash and cash equivalents
(50,966)
114,231
(57,055)
Cash and cash equivalents, beginning of period
129,183
14,952
72,007
Cash and cash equivalents, ending of period
$
78,217
$
129,183
$
14,952

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2021, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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, 2021, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer, and several other members of our senior management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Exchange Act was (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
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, 2021, 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 COSO in 2013. As permitted, management excluded from its assessment of internal control over financial reporting GSB from June 1, 2021, through August 14, 2021. This interim period from the acquisition date until GSB was merged into Busey Bank consisted of 74 days and GSB did not represent a material percentage of the Company’s net income, and GSB’s balance sheet accounted for 11.9% of the Company’s consolidated total assets as of the acquisition date. Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2021, 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, has issued an audit opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.”
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
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, 2021, 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, 2021, 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 24, 2022, expressed an unqualified opinion.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Glenview State Bank from its assessment of internal control over financial reporting from June 1, 2021 through August 14, 2021 because it was acquired by the Company in a purchase business combination on May 31, 2021 and merged into Busey Bank on August 14, 2021. We have also excluded Glenview State Bank from our audit of internal control over financial reporting for the period from June 1, 2021 through August 14, 2021. Glenview State Bank was a wholly owned subsidiary whose net income did not represent a material percentage of the Company’s net income, and whose balance sheet accounted for 11.9% of the Company’s consolidated total assets as of the acquisition date.
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 24, 2022

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2022 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
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to First Busey’s Proxy Statement for its 2022 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.”

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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, 2021. 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. Stock-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
and rights
rights (1)
column (a))
Equity compensation plans
Approved by stockholders (2)
1,427,421
(3)
$
23.53
1,597,235
(4)
Not approved by stockholders
-
-
-
Total as of December 31, 2021
1,427,421
$
23.53
1,597,235
(1) The weighted average exercise price only relates to 31,386 stock options.
(2) Includes outstanding awards under the First Busey Corporation 2020 Equity Incentive Plan, the First Busey Corporation 2010 Equity Incentive Plan, as amended, the First Community Amended and Restated 2008 Equity Incentive Plan and the First Community 2016 Equity Incentive Plan.
(3) Balance includes stock options assumed in connection with the acquisition of First Community.
(4) Shares are reserved under the First Busey Corporation 2020 Equity Incentive Plan and 2021 ESPP in the amounts of 1,027,625 and 569,610, respectively.
Other information required by Item 12 is incorporated herein by reference to First Busey’s Proxy Statement for its 2022 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
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 2022 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 ACCOUNTING FEES AND SERVICES
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 2022 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.”
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules
Our Consolidated Financial Statements are included as part of this Annual Report in “Part II, Item 8. Financial Statements and Supplementary Data,” as follows:
Report of Independent Registered Public Accounting Firm (PCAOB ID 49)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports on Internal Control Over Financial Reporting are included as part of this Annual Report in “Part II, Item 9A. Controls and Procedures,” as follows:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
(PCAOB ID 49)
Exhibits
A list of exhibits to this Annual Report is set forth on the Exhibit Index beginning on page 143, and is incorporated into this Annual Report by reference.
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.