EDGAR 10-K Filing

Company CIK: 314489
Filing Year: 2021
Filename: 314489_10-K_2021_0001558370-21-001864.json

---

ITEM 1. BUSINESS
Item 1. Business
Introduction
First Busey, a Nevada corporation organized in 1980, is a $10.5 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 five years the Company has made several 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. In 2015, First Busey acquired Herget Financial Corp. and its wholly-owned bank subsidiary, Herget Bank. In 2016 First Busey acquired Pulaski and its wholly-owned bank subsidiary, Pulaski Bank. In 2017, First Busey acquired First Community and its wholly-owned bank subsidiary, First Community Financial Bank. Also in 2017, First Busey acquired Mid Illinois and its wholly-owned bank subsidiary, South Side Bank. Further information related to these acquisitions has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition.
On January 31, 2019, First Busey acquired Banc Ed and its wholly-owned bank subsidiary, TheBANK. First Busey operated TheBANK as a separate bank subsidiary from February 1, 2019, until October 4, 2019, when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers of Busey Bank.
On August 31, 2019, the Company acquired IST, a Fort Myers, Florida wealth management firm.
On January 19, 2021, the Company and CAC, the holding company for GSB, jointly announced the signing of a definitive agreement pursuant to which the Company will acquire CAC and GSB through a merger transaction. The partnership will enhance the Company’s existing deposit, commercial banking and wealth management presence in the Chicago-Naperville-Elgin, IL-IN-WI Metropolitan Statistical Area. It is anticipated GSB will be merged with and into Busey Bank at a date following the completion of the merger. At the time of the bank merger, GSB banking centers will become banking centers of Busey Bank.
Under the terms of the merger agreement, CAC’s stockholders will have the right to receive 444.4783 shares of First Busey’s common stock and $27,969.67 in cash for each share of common stock of CAC with total consideration to consist of approximately 73% cash and 27% stock. Based upon the closing price of Busey’s common stock of $23.54 on January 15, 2021, the implied per share purchase price is $38,432.69 with an aggregate transaction value of approximately $190.8 million. The merger agreement provides that the cash consideration to be paid in the merger will be funded with a combination of cash from First Busey and a special dividend to be paid by CAC to its shareholders. Specifically, immediately prior to closing and subject to the completion of all closing conditions, CAC will cause GSB to pay a one-time special cash dividend of $60.0 million to CAC and, upon receipt, CAC will declare and issue a $60.0 million special cash dividend to CAC’s shareholders, which will be used to fund, in part, the cash consideration to be paid to CAC’s shareholders at closing. The transaction is expected to close in the second quarter of 2021, subject to customary closing conditions and required approvals, including the approval of CAC’s stockholders.
See “Note 2. Acquisitions” in the Notes to the Consolidated Financial Statements for further information relating to acquisitions.
Subsidiaries of First Busey
First Busey conducts the business of banking, related banking services, asset management, brokerage, and fiduciary services through Busey Bank and retail payment processing through FirsTech.
Busey Bank is an Illinois state-chartered bank organized in 1868 with its headquarters in Champaign, Illinois. Busey Bank has 53 banking centers in Illinois, 10 in Missouri, four 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.
Further, Busey Bank provides asset management, investment, and fiduciary services to individuals, businesses, and foundations. As of December 31, 2020, $10.2 billion of assets were under care. For individuals, Busey Bank provides investment management, trust and estate advisory services, and financial planning. For businesses, it provides investment management, business succession planning, and employee retirement plan services. For foundations, Busey Bank provides investment management, investment strategy consulting, and fiduciary services. Brokerage-related services are offered by Busey Investment Services, a division of Busey Bank, through a third-party arrangement with Raymond James Financial Services. In addition, Busey Bank provides professional farm management and brokerage services to the agricultural industry.
Busey Bank’s principal sources of income are interest and fees on loans and investments, wealth management fees and service fees. Principal expenses are interest paid on deposits and general operating expenses. Busey Bank’s primary markets are Illinois, the St. Louis, Missouri metropolitan area, southwest Florida, and central Indiana.
Busey Bank’s subsidiary, FirsTech, which has offices in Decatur, Illinois and Clayton, Missouri, offers payment processing solutions including: walk-in payment processing for payments delivered by customers to retail pay agents; online bill payment solutions for payments made by customers on a billing company’s website; customer service payments for payments accepted over the telephone; mobile bill pay; direct debit services; electronic concentration of payments delivered by the Automated Clearing House network; money management software and credit card networks; and lockbox remittance processing of payments delivered by mail. As of December 31, 2020, FirsTech had approximately 5,800 agent locations across the U.S.
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.
The Company’s operations are managed through three operating segments consisting of Banking, Remittance Processing, and Wealth Management. See “Note 21. Operating Segments and Related Information” in the Notes to the Consolidated Financial Statements for an analysis of segment operations.
Banking Center Markets
Busey Bank has 53 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. However, the financial condition of the state of Illinois, in which the largest portion of the Company’s customer base resides, is characterized by low credit ratings and budget deficits.
Busey Bank has 10 banking centers in Missouri. St. Louis, Missouri has a diverse economy with major employment sectors including health care, financial services, professional and business services, and retail. Fourteen of our banking centers in Illinois are located within the boundaries of the St. Louis Metropolitan Statistical Area.
Busey Bank has four banking centers in southwest Florida, an area which has experienced above average population growth, job growth, and an expanded housing market over the last several years.
Busey Bank has one banking center in the Indianapolis, Indiana area, which is the most populous city of Indiana with a diverse economy, including the headquarters of many large corporations.
Competition
Busey Bank competes actively with national and state banks, savings and loan associations, and credit unions for deposits and loans mainly in Illinois; the St. Louis, Missouri metropolitan area; southwest Florida; and central Indiana. Busey Bank competes for real estate and other loans primarily on the basis of type of loan, interest rates and loan fees, and the quality of services provided. Busey Bank and FirsTech compete with other financial institutions, including asset management and trust companies, security broker/dealers, personal loan companies, insurance companies, finance companies, leasing companies, mortgage companies, remittance processing companies, 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.
The Bank faces substantial competition in attracting deposits from other commercial banks, savings institutions, money market and mutual funds, credit unions, insurance agencies, brokerage firms, and other investment vehicles. Customers for banking services are generally influenced by convenience, quality of service, personal contacts, price of services, and availability of products. The Bank attracts a significant amount of deposits through 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. The Bank competes for deposits by offering a variety of deposit accounts at competitive rates, high-quality customer service, convenient business hours, internet and mobile banking, and convenient banking centers with interbranch deposit and withdrawal privileges.
Based on information obtained from the FDIC Summary of Deposits dated June 30, 2020, the most recent report available, Busey Bank ranked in the top 10 in total deposits in 12 Illinois counties: first in Champaign County; fifth in Ford County; fifth in Grundy County; seventh in Livingston County; first in Macon County; first in Madison County; fifth in McLean County; second in Peoria County; third in Shelby County; sixth in St. Clair County; third in Tazewell County; and seventh in Will County. First Busey believes that it effectively competes with other banks, thrifts, and financial institutions in its market areas.
Supervision, Regulation and Other Factors
General
FDIC-insured institutions, like Busey Bank, as well as their holding companies and affiliates, are extensively regulated under federal and state law. As a result, the Company’s growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the 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 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 $50.0 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. Then, in May 2018, the Regulatory Relief Act was enacted to provide meaningful relief for banks and their holding that were not considered systemically important (defined by amendment to be those with assets under $100.0 billion). However, the $10.0 billion threshold remained in place for certain Dodd-Frank Act reforms that will become applicable to the Company in 2021, 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 business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. 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, beginning with a discussion of the impact of the COVID-19 pandemic on the banking industry. It does not describe all of the statutes, regulations, and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
COVID-19 Pandemic
Federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of guidance responding to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, 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 encouraging loan workouts; and providing credit under the CRA for certain pandemic-related loans, investments, and public services. 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.
Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC also has acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
Reference is made to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19” for information on the CARES Act, the PPP, and the Federal Reserve’s lending facilities and for discussions of the economic impact of the COVID-19 pandemic. In addition, information as to selected topics, such as the impact on capital requirements, dividend payments, reserves, and CRA, is contained in the relevant sections of this Supervision, Regulation and Other Factors discussion.
The $10.0 Billion Threshold
As indicated in the introduction above, the Dodd-Frank Act included a number of requirements 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 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 $50.0 billion, but the other Dodd-Frank regulations and reporting requirements were not changed.
The Company has anticipated crossing the $10.0 billion threshold for some time, and it did so 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. Under the Interim Final Rule, which applies to financial institutions with less than $10.0 billion in total assets as of December 31, 2019, the asset growth of such banks in 2020 and 2021 will not trigger some of the new regulatory requirements until January 1, 2022.
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, or “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 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 following expiration of the COVID-19 Deferment and after a six-month transition period. Management believes that compliance with Durbin will materially reduce Busey Bank’s earnings on 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 Rule requirements after crossing the $10.0 billion threshold. Given such two-years, the banking agencies determined not to include the application of the Volker Rule in the relief granted by the COVID-19 Deferment. 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). As a result, Busey Bank continues to be examined for compliance with consumer laws by its primary federal regulatory agency, the FDIC. Once it has reported more than $10.0 billion in total assets for four consecutive quarters, the CFPB will assume supervisory authority.
Clearing Swap Agreements
Banks with over $10.0 billion in assets are required to clear swap 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
Pursuant to the Federal Reserve’s final rules issued under the Regulatory Relief Act, publicly traded bank holding companies with between $10.0 billion and $50.0 billion of total consolidated assets, including the Company, are not required to maintain a risk committee. Although it was not yet required to have a risk committee in place at the time, 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 are generally required to hold more capital than other businesses, which directly affects the Company’s earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.
Capital Levels
Banks have been required to hold minimum levels of capital based on guidelines established by 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 weighted (the theory being that riskier assets should require more capital) and that off-balance-sheet credit exposures needed to be factored in the calculations. Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the BCBS, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.
The Basel III Rule
In July 2013, the U.S. federal banking agencies approved implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of binding regulations by each of the regulatory agencies. The Basel III Rule increased the required quantity and quality of capital and required more detailed categories of risk weighting of riskier, more opaque assets. For nearly every class of assets, the Basel III Rule requires 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 Busey 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 in requiring that forms of capital be of higher quality to absorb loss, it also 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.
The Basel III Rule requires minimum capital ratios as follows:
● A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;
● A ratio of minimum 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 minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.
In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7.0% 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 in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.
Under the capital regulations of the FDIC and Federal Reserve, in order to be well-capitalized, a banking organization must maintain:
● A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;
● A ratio of Tier 1 Capital to total risk-weighted assets of 8.0% or more;
● A ratio of Total Capital to total risk-weighted assets of 10.0% or more; and
● A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5.0% 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, 2020: (i) Busey Bank was not subject to a directive from the FDIC to increase its capital and (ii) the Bank was well-capitalized, as defined by FDIC regulations. As of December 31, 2020, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the requirements to be well-capitalized. The Company is also 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 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 “-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 and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. The Company has elected to operate as a financial holding company. In order to maintain its status as a financial holding company, the Company and 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 “-The Role of Capital” above.
Dividend Payments
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies. As a Nevada corporation, the Company is subject to the limitations of Nevada law, which allows the Company to pay dividends unless, after such dividend, (i) the Company would not be able to pay its debts as they become due in the usual course of business or (ii) the Company’s total assets would be less than the sum of its total liabilities plus any amount that would be needed, if the Company were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to the rights of the stockholders receiving the distribution.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer, or significantly reduce dividends to stockholders if: (i) the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “-The Role of Capital” above.
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 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 that were 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 become evident 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 means are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation
The Company’s common stock is registered with the SEC under the Securities Act 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 FDIC’s Deposit Insurance Fund 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 following expiration of the COVID-19 Deferment, 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, exceeding the statutory required minimum. 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 then fell to 1.30% in 2020 as a result of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 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.
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, 2020, Busey Bank paid supervisory assessments to the DFPR totaling approximately $0.6 million.
Capital Requirements
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “-The Role of Capital” above.
Liquidity Requirements
Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source, and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against
constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While 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 its subsidiary bank. Under Illinois banking law, Illinois-chartered banks generally may pay dividends only out of undivided profits. The DFPR may restrict the declaration or payment of a dividend by an Illinois-chartered bank. The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an 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, 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 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 risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. Bank regulators have identified key risk themes for 2021 as: credit risk management given projected weaker economic conditions and commercial and residential real estate concentration risk management. The agencies will also be monitoring banks for their transition away from LIBOR as a reference rate, compliance risk management related to COVID-19 pandemic-related activities, Bank Secrecy Act/anti-money laundering compliance, cybersecurity, planning for and implementation of the CECL accounting standard, and CRA performance. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
Privacy and Cybersecurity
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 their 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. Reserves are maintained on deposit at the Federal Reserve Banks. Reserve requirements are subject to annual adjustment by the Federal Reserve, and, for 2020, the Federal Reserve had determined that the first $16.9 million of otherwise reservable balances had a zero percent reserve requirement; for transaction accounts aggregating between $16.9 million to $127.5 million, the reserve requirement was 3% of those transaction account balances; and for net transaction accounts in excess of $127.5 million, the reserve requirement was
10% of the aggregate amount of total transaction account balances in excess of $127.5 million. 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 reserve maintenance requirement. This action permits Busey Bank to loan or invest funds that were previously 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, 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 is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers, and other businesses involved in the transfer of money. The USA PATRIOT Act, along with other legal authority, mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.
Concentrations in Commercial Real Estate
Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. CRE Guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2020, 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 will assume supervisory authority over Busey Bank once the bank has reported over $10.0 billion in assets for four consecutive quarters.
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, most recently in October 2020. The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.
Supervision and Regulation of First Busey Risk Management
First Busey Risk Management, incorporated in Nevada, is a captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Busey Risk Management is subject to regulations of the State of Nevada and periodic examinations by the Nevada Division of Insurance.
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 62, 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 from May 1998 until its merger with First Busey.
Monica L. Bowe. Mrs. Bowe, age 47, 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.
Robin N. Elliott. Mr. Elliott, age 44, 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 47, 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.
John J. Powers. Mr. Powers, age 65, 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 46, 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. As a testament to Busey’s commitment to its associates, the organization was named among American Banker’s Best Banks to Work For since 2016; voted as one of the Best Places to Work in Illinois by associates since 2016; recognized as one of the 2018 & 2019 Top Workplaces in St. Louis; a Best Company to Work For in Florida since 2017; among the Best Places to Work in Money Management since 2018 by Pensions & Investments; and the 2020 Best Place to Work in Indiana by the Indiana Chamber of Commerce - all in addition to various wellness, training and development, philanthropic and other workplace awards. Busey appreciates our associates contributing their best to the organization each day. 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.
Busey is committed to diversity and inclusion within 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 diverse workforce with varying perspectives and ideas, while having an inclusive culture, is the foundation of Busey’s core values - One Busey. We strive to maintain an inclusive environment free from discrimination of any kind. We recognize 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 2020, women comprised of 61% of Team Busey and made up 38% 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, and why 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 associate quarterly updates. Busey leadership conducts quarterly update calls, which are recorded and available for all associates. These calls provide important information about the financial health of the company, but more importantly are 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 training and development. Over 50% of our associate base participates in some type of formal training and leadership development curriculum. Since 2017, Busey is a proud recipient of the BEST Award Association’s for Talent Development, which is presented to organizations that demonstrate enterprise-wide success as a result of employee talent development.
Additionally, we care about the health and well-being of our associates and their families. Busey experiences a 94% associate 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 2020 Illinois' Healthiest Employers.
Importantly during 2020, Busey initiated our pandemic response plan, expanding social-distancing practices and remote work capabilities to ensure the safety of our associates. Busey has also instituted a new Emergency Sick Leave policy for all full-time and part-time associates in response to COVID-19. Busey implemented an associate assistance fund to help associates with unexpected expenses due to the pandemic. Associates were provided with 80 hours of emergency
sick leave in addition to their regular sick benefits, which enabled them to take care of themselves and their families as effected by COVID-19.
As of December 31, 2020, First Busey and our subsidiaries had a total of 1,346 full-time equivalents.
Geographic distribution of our associates is as follows:
As of December 31, 2020
Associates
Locations
Full-time
Part-time
Total
%
Banking center associates:
Illinois
55.5
%
Missouri
11.4
%
Florida
4.0
%
Indiana
-
1.3
%
Banking center associates
1,003
72.2
%
Corporate office associates (1)
27.8
%
Total
1,302
1,389
100.0
%
Percentage of associates
93.7
%
6.3
%
(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 Report, Quarterly Reports, Current Reports, and amendments thereto, as soon as reasonably practicable after such reports are filed or furnished with the SEC, and in any event, on the same day as such filing with the SEC. Reference to this website does not constitute incorporation by reference of the information contained on the website and 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 adjusted pre-provision net revenue, adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity. Management uses these non-GAAP measures, together with the related GAAP measures, to analyze the Company’s performance and to make business decisions. Management also uses these measures for peer comparisons.
A reconciliation to what management believes to be the most direct compared GAAP financial measures - specifically net income in the case of adjusted net income, adjusted earnings per share, and adjusted return on average assets; total net interest income in the case of adjusted net interest margin; total non-interest income and total non-interest expense in the case of adjusted efficiency ratio; and total stockholders’ equity in the case of tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity - appears below (dollars in thousands, except per share data). The Company believes the adjusted measures are useful for investors and management to understand the effects of certain non-recurring non-interest items and provides additional perspective on the Company’s performance over time as well as comparison to the Company’s peers.
These non-GAAP disclosures have inherent limitations and are not audited. They should not be considered in isolation or as a substitute for the results reported in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Tax effected numbers included in these non-GAAP disclosures are based on estimated statutory rates and effective rates as appropriate.
Reconciliation of Non-GAAP Financial Measures - Adjusted Pre-Provision Net Revenue
(unaudited, dollars in thousands)
Years Ended December 31,
Net interest income
$
282,935
$
287,223
$
241,406
Non-interest income
118,265
116,415
89,993
Less net (gains) losses on sales of securities and unrealized (gains) losses recognized on equity securities
(1,331)
(331)
Non-interest expense
(234,197)
(258,794)
(193,043)
Pre-provision net revenue
$
165,672
$
144,862
$
138,025
Acquisition and other restructuring expenses
10,711
20,094
6,000
Provision for unfunded commitments
1,822
-
-
New Market Tax Credit amortization
2,311
1,200
-
Adjusted: pre-provision net revenue
$
180,516
$
166,156
$
144,025
Average total assets
$
10,292,256
$
9,443,690
$
7,742,142
Reported: Pre-provision net revenue to average assets
1.61
%
1.53
%
1.78
%
Adjusted: Pre-provision net revenue to average assets
1.75
%
1.76
%
1.86
%
Reconciliation of Non-GAAP Financial Measures - Adjusted Net Income, Adjusted Earnings Per Share and Adjusted Return on Average Assets
(unaudited, dollars in thousands, except per share data)
Years Ended December 31,
Reported: Net income
$
100,344
$
102,953
$
98,928
Acquisition expenses:
Salaries, wages, and employee benefits
-
4,083
1,233
Data processing
1,523
Lease or fixed asset impairment
-
Professional fees and other
8,477
2,486
Other restructuring costs:
Salaries, wages, and employee benefits
2,470
1,058
Data processing
-
-
Fixed asset impairment
6,657
1,861
Professional fees and other
2,248
-
Related tax benefit
(2,327)
(4,618)
(1,451)
Adjusted: Net income
$
108,728
$
118,429
$
103,477
Dilutive average common shares outstanding
54,826,939
55,132,494
49,215,455
Reported: Diluted earnings per share
$
1.83
$
1.87
$
2.01
Adjusted: Diluted earnings per share
1.98
2.15
2.10
Average total assets
$
10,292,256
$
9,443,690
$
7,742,142
Reported: Return on average assets
0.97
%
1.09
%
1.28
%
Adjusted: Return on average assets
1.06
%
1.25
%
1.34
%
Reconciliation of Non-GAAP Financial Measures - Adjusted Net Interest Margin
(unaudited, dollars in thousands)
Years Ended December 31,
Reported: Net interest income
$
282,935
$
287,223
$
241,406
Tax-equivalent adjustment
2,740
3,013
2,258
Acquisition-related purchase accounting accretion
(10,391)
(12,422)
(10,550)
Adjusted: Net interest income
$
275,284
$
277,814
$
233,114
Average interest-earning assets
$
9,417,938
$
8,590,262
$
7,067,710
Reported: Net interest margin
3.03
%
3.38
%
3.45
%
Adjusted: Net Interest margin
2.92
%
3.23
%
3.30
%
Reconciliation of Non-GAAP Financial Measures - Adjusted Efficiency Ratio
(unaudited, dollars in thousands)
Years Ended December 31,
Reported: Net Interest income
$
282,935
$
287,223
$
241,406
Tax-equivalent adjustment
2,740
3,013
2,258
Tax-equivalent interest income
$
285,675
$
290,236
$
243,664
Reported: Non-interest income
118,265
116,415
89,993
Less net (gains) losses on sales of securities and unrealized (gains) losses recognized on equity securities
(1,331)
(331)
Adjusted: Non-interest income
$
116,934
$
116,433
$
89,662
Reported: Non-interest expense
234,197
258,794
193,043
Amortization of intangible assets
(10,008)
(9,547)
(5,854)
Non-operating adjustments:
Salaries, wages, and employee benefits
(2,470)
(4,578)
(2,291)
Data processing
(56)
(2,350)
(406)
Lease or fixed asset impairment
(7,136)
(2,441)
(817)
Professional fees and other
(1,049)
(10,725)
(2,041)
Adjusted: Non-interest expense
$
213,478
$
229,153
$
181,634
Reported: Efficiency ratio
55.68
%
61.29
%
56.16
%
Adjusted: Efficiency ratio
53.02
%
56.35
%
54.49
%
Reconciliation of Non-GAAP Financial Measures - Tangible Common Equity, Tangible Common Equity to Tangible Assets, Tangible Book Value per Share, and Return on Average Tangible Common Equity
(unaudited, dollars in thousands, except per share data)
As of December 31,
Total Assets
$
10,544,047
$
9,695,729
Goodwill and other intangible assets, net
(363,521)
(373,129)
Tax effect of other intangible assets, net
14,556
17,247
Tangible assets
$
10,195,082
$
9,339,847
Total stockholders’ equity
1,270,069
1,220,434
Goodwill and other intangible assets, net
(363,521)
(373,129)
Tax effect of other intangible assets, net
14,556
17,247
Tangible common equity
$
921,104
$
864,552
Ending number of common shares outstanding
54,404,379
54,788,772
Tangible common equity to tangible assets(1)
9.03
%
9.26
%
Tangible book value per share
$
16.66
$
15.46
Average common equity
$
1,240,374
$
1,186,127
Average goodwill and other intangible assets, net
(368,624)
(371,666)
Average tangible common equity
$
871,750
$
814,461
Reported: Return on average tangible common equity
11.51
%
12.64
%
Adjusted: Return on average tangible common equity(2)
12.47
%
14.54
%
(1) Tax effected measure, 28% 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 (including the impact of the new presidential administration);
● 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 employees;
● 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 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;
● the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards;
● changes in accounting policies and practices, including FASB’s CECL impairment standards; and
● other factors and risks described under “Risk Factors” herein.
Because of those risks and other uncertainties, our actual future results, performance, or achievement, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of our future results.
You should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. We are not undertaking an obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under federal securities law. We qualify all of our forward-looking statements by these cautionary statements.

---

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 created an economic recession and caused severe financial disruptions that adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, and results of operations.
The extent to which COVID-19 will continue to negatively 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 a significant portion of 2021 as the world attempts to gain control over the virus. The impact that the virus continues to have on global markets, the economy, business restrictions, and employment is ongoing as a projected return to normal operating conditions is unknown.
The outbreak of COVID-19 has negatively affected a subset of our customers’ businesses, and continued 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 negative impacts on the implementation of our growth strategy. Although governmental authorities have introduced a number of programs designed to soften the impact of COVID-19 on small businesses, once these programs expire our borrowers may not be able to satisfy their financial obligations. Until the pandemic subsides, we expect draws on lines of credit, reduced revenues in our businesses, and increased customer and client defaults.
In general, business activity, employment rates, income levels and other measures of economic activity have been negatively affected by the COVID-19 pandemic. The speed and strength of any economic recovery from the pandemic is subject to a high degree of uncertainty, but is expected to be affected by further developments in the pandemic. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our markets; the development, distribution, and supply of vaccines, therapies, and other public health initiatives to control the spread of the disease; the nature and size of federal economic stimulus, and other governmental efforts; and the possibility of additional state lockdown or stay-at-home orders in our markets in response to the recent surge in the number of COVID-19 cases.
The initial distribution of vaccines has been slow, and there may continue to be challenges with producing and distributing sufficient quantities of the vaccines. If the general public is unwilling or unable to access effective vaccines and therapies, this may also prolong the COVID-19 pandemic. In addition, new variants of COVID-19 may increase the spread or severity of COVID-19 and previously developed vaccines and therapies may not be as effective against new COVID-19 variants.
Overall, we believe that the economic impact from COVID-19 will be severe 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, 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 resulting in significant increases in unemployment, economic decline, partial business shutdowns, operational uncertainty, and significant impact to 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. 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. In addition, the Federal Reserve reduced the interest it pays on excess reserves. Reductions in interest rates, especially if prolonged, are likely to continue to have an adverse effect our net interest income and margins and our profitability. In December 2020, the FOMC held the target rate at its effective floor of 0.00-0.25% with panelists projecting the target rate to remain at these levels through 2021 and potentially 2022. The impact of the prolonged low rates will continue to
affect rate spreads and return on earning assets. Although the FOMC has not indicated it would further reduce rates to a negative position, the potential for further adjustments that would take interest rates to below 0%, or effectively below 0%, cannot be ruled out. If rates were further reduced, it could have a materially adverse effect on the Company’s profitability.
The Company’s wealth management business may also be negatively impacted by changes in general economic conditions and the conditions in the financial and securities markets, which could affect the values of assets held under care. Management contracts generally provide for fees payable for wealth management services based on the market value of assets under care. Because most of the Company’s contracts provide for a fee based on market values of securities, declines in securities prices may have an adverse effect on the Company’s results of operations from this business. Market declines and reductions in the value of customers’ wealth management accounts, could also result in the loss of wealth management customers, including those who are also banking customers.
The 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 U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021 and on November 30, 2020, the Federal Reserve, FDIC, and OCC issued supervisory guidance encouraging banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. The ARRC has proposed that the SOFR is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has proposed a paced-market transition plan to SOFR from U.S. dollar-LIBOR and organizations are working on industry-wide and company-specific transition plans relating to derivatives and cash markets exposed to LIBOR.
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 continues to actively work toward 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.
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 recent change of the presidential administration and Congressional control could prompt new or revitalized financial services regulation. The extent and scope of potential financial regulations is hard to predict, but changes are expected to occur as leadership in various regulatory bodies is anticipated to shift in light of the new controlling party.
Moreover, federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs, and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.
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, and achieve satisfactory interest spreads, and could expose the Company to additional expense, including increased compliance costs. New appointments to the
primary banking regulatory agencies may affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.
These rule and regulatory changes may also require the Company to invest significant management attention and resources so as to make necessary changes to operations in order to comply. In addition to the expense and uncertainty related to increased regulation, the financial services industry in recent years has faced more intense scrutiny from regulatory agencies in the examination process and more aggressive enforcement of regulations on both the federal and state levels, particularly with respect to mortgage-related practices and other consumer compliance matters, and compliance with the Bank Secrecy Act, anti-money laundering laws, and the USA PATRIOT Act, which focuses on money laundering in the form of terrorist financing. Federal law grants substantial enforcement powers to financial services’ regulators including, among other things, the ability to assess significant civil or criminal monetary penalties, fines, or restitution; to issue cease and desist orders; and to initiate injunctive actions against banking organizations. These enforcement actions may be initiated for violations of laws or regulations and for unsafe or unsound practices. If the Company were the subject of an enforcement action, it could have an adverse impact on the Company.
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 has 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. Programs, including the PPP, caused many community banking organizations to experience rapid and unexpected increases in size, which generally are expected to be temporary. Under the interim rule, which applies to financial institutions with less than $10 billion in total assets as of December 31, 2019, community banks that have crossed a relevant threshold will have until 2022 to either reduce their size or prepare for new regulatory and reporting standards. Asset growth in 2020 or 2021 will not trigger new regulatory requirements for the banks until January 1, 2022. The Company will be provided relief under this rule with respect to the interchange revenue impacts of Durbin. There is potential that changes in future regulatory expectations could impact the business operationally, strategically, or financially.
Laws impacting cannabis-related businesses in Illinois may have an impact on the Company’s operations and risk profile.
The Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Starting January 1, 2020, however, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase marijuana for recreational use from licensed dispensaries. It is 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 who have a significant financial interest in such entities; and (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 do not engage in any such activities. Nonetheless, the shift in Illinois law is increasing the number of direct and indirect cannabis-related businesses in Illinois, and therefore increasing the likelihood that 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, 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 loan losses and maintains them at a level considered adequate by management to absorb probable loan losses based on a continual analysis of the Company’s portfolio and market environment. These reserves represent the Company’s estimate of probable losses in the portfolio at each balance sheet date and are based upon other relevant information available.
In 2016, the FASB published CECL, which requires recording loss estimates for the life of the instrument for loans, a change from the 40-year standard in which losses are recorded under the “incurred loss” concept. 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 and subsequent business restrictions are 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 mortgage, commercial, and industrial loans, and secured by real estate. Thus, deterioration in economic conditions or real estate values could result in higher credit costs and losses to the Company. The 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. Several sectors have been impacted significantly and have both direct and indirect impacts from associated businesses. For example, in-person dining and shopping restrictions significantly impacted cash flows for these entities, which could also impact several retail CRE and rental space borrowers from the lack of cash flows. The Company has taken additional steps to quantify the potential risk and impacted industries that are likely to experience the highest 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.
As a participating lender in the PPP, the Company is subject to additional risks of litigation from its customers or other parties regarding the processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
Since the opening of the PPP in March 2020, several banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company may be exposed to the risk of similar litigation, from both customers and non-customers that approached the banks regarding PPP loans, concerning their processes and procedures used in processing applications for PPP loans. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition, and results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Company, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to ambiguity in the laws, rules, and guidance regarding the operation of the PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
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.
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.
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.
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. Customers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Increased competition in the Company’s markets may result in reduced loans, deposits, and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, the Company may not be able to compete successfully against current and future competitors. If the Company is unable to attract and retain banking and wealth management customers, it may be unable to grow its loan and deposit portfolios or its wealth management commissions, which could adversely affect its business, results of operations, and financial condition.
Rapid speed of disruptive innovations enabled by new and emerging technologies and/or other market forces may outpace the Company’s ability to compete.
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 reduce costs. 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, 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. On January 19, 2021, we announced the execution of a merger agreement for the acquisition of CAC, the holding company for GSB. 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. Additionally, the COVID-19 pandemic could contribute to a sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being recorded for that period.
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 proves ineffective, 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.
The implementation of a remote workforce to help mitigate potential COVID-19 spread caused a rapid shift in operations across several business lines and departments requiring processes and the delivery of services to be amended and adopted rapidly while in a stressed environment.
The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic area in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market area, including because of illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
The Company implemented an initiative to deploy a remote workforce when able to help combat against the spread of the COVID-19 virus. The deployment of the remote workforce required policies and procedures to be amended while also still serving the needs and demand of the community. The implementation of teleworking strategies using virtual private networks, virtual conferencing services, and telecommunication technologies can increase insider risk, cybersecurity vulnerabilities, and other operational exposures. Cyber attackers have taken advantage of the pandemic to create campaigns to leverage individuals fears and uncertainties. Industry trends in ransomware, phishing, and other intrusion methods have increased and will continue to pose increased risk while the Company’s operations remain partially remote.
A breach in the security of the Company’s systems could disrupt its businesses, result in the disclosure of confidential information, damage its reputation, and create significant financial and legal exposure for the Company.
Although the Company devotes significant resources to maintain and regularly upgrade systems and processes designed to protect the security of its computer systems, software, networks, and other technology assets, these measures do not provide absolute security. Several healthcare institutions, government agencies, technology providers, and other companies have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means.
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 and debit card transactions that typically involve the transmission of sensitive information regarding the Company’s customers through various third-parties, including merchant acquiring banks, payment processors, payment card networks, and its processors. Cyber-attacks or other breaches, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material adverse effect on the Company’s business.
Penetration or circumvention of the Company’s security systems could result in serious negative consequences for the Company, including significant disruption of the Company’s operations, misappropriation of confidential information of the Company or that of its customers or employees, or damage to computers or systems of the Company and those of its customers and counterparties. Such events could result in violations of applicable privacy and other laws, financial loss to the Company or its customers, loss of confidence in the Company’s security measures, customer dissatisfaction, significant litigation exposure and harm to the Company’s reputation, all of which would adversely affect the Company.
These risks have increased for all financial institutions globally as new technologies, the use of the Internet and telecommunications technologies, including mobile devices, to conduct financial and other business transactions, and the sophistication and activities of malicious individuals and organizations have increased. 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 strongly by its ability to attract and retain management experienced in banking and financial services and familiar with the communities in its market areas. The Company’s ability to retain executive officers, current management teams, lending and retail banking officers, and administrative staff of its subsidiaries continues to be important to the successful implementation of its strategy. In addition, the Company’s ability to retain key personnel at acquired financial institutions is vitally important to the Company’s strategy to grow through mergers and acquisitions. Also critical is the Company’s ability to attract and retain qualified staff with the appropriate level of experience and knowledge about its market areas so as to implement its community-based operating strategy. The unexpected loss of services of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business, financial condition, and results of operation.
Damage resulting from negative publicity could harm the Company’s reputation and adversely impact its business and financial condition.
The Company’s ability to attract and maintain customers, investors, and employees is contingent upon maintaining trust. Negative public opinion could result from the Company’s actual or alleged conduct in a number of activities, including, but not limited to, employee misconduct, a failure or perceived failure to deliver appropriate standards of service and quality or to treat customers fairly, faulty lending practices, compliance failures, security breaches, corporate governance, sharing or inadequate protection of customer information, failure to comply with laws or regulations, and actions taken by government regulators and community organizations in response to that conduct. The results of such actual or alleged misconduct could include customer dissatisfaction, inability to attract potential acquisition prospects, litigation, and heightened regulatory scrutiny, all of which could lead to lost revenue, higher operating costs, and harm to the Company’s reputation. No assurance can be made, despite the cost or efforts made by the Company to address the issues arising from reputational harm, that results could not adversely affect the Company’s business, financial condition, and results of operations.
Severe weather, natural disasters, acts of terrorism or war, widespread disease or pandemics, or other adverse external events could significantly impact the Company’s business.
As the Company’s operating and market footprint continues to grow, severe weather, natural disasters, acts of terrorism or war, widespread disease or pandemics, as is currently being experienced, and other adverse external events could have a significant impact on the Company’s ability to conduct business. The Company’s current footprint poses a wide variety of potential adverse events that could impact the Company in various ways. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company’s business, which in turn, could have a material adverse effect on the financial condition and results of operation.

---

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 are located at 130 North Water Street, Decatur, Illinois. These facilities, which are owned by the Company, house the executive and primary administrative offices of each respective entity. First Busey and its subsidiaries also own or lease other facilities, such as banking centers of Busey Bank, for business operations.
The Company considers its properties to be suitable and adequate for its present needs. None of the properties are subject to any material encumbrance.

---

ITEM 3. LEGAL PROCEEDINGS
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-Regulation and Supervision of Company-Dividend Payments and Regulation” and “Item 1. Business-Supervision, Regulation and Other Factors-Regulation and Supervision of Busey Bank-Dividend Payments” for further discussion of these matters.
As of February 25, 2021, First Busey Corporation had 54,404,379 shares of common stock outstanding held by 2,273 holders of record. Additionally, there were an estimated 11,360 beneficial holders whose stock was held in street name by brokerage houses and nominees as of that date.
Stock Repurchases
On February 3, 2015, First Busey’s board of directors authorized the Company to repurchase up to an aggregate of 666,667 shares of its common stock. The repurchase plan has no expiration date and replaced the prior repurchase plan originally approved in 2008. On May 22, 2019, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by 1,000,000 shares, 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 2020, the Company repurchased 123,264 shares in a private transaction in connection with the termination of the ESOP. At December 31, 2020, the Company had 1,858,824 shares that may still be purchased under the plan.
Period
Total Number of Shares Purchased
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, 2020
-
$
-
-
1,982,088
November 1-30, 2020
123,264
$
21.12
123,264
1,858,824
December 1-31, 2020
-
$
-
-
1,858,824
Performance Graph
The following graph compares First Busey’s performance, as measured by the change in price of its common stock plus reinvested dividends, with the Nasdaq Composite and the SNL Midwest Bank Index for the five years ended December 31, 2020.
Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
First Busey Corporation
$
100.00
$
154.02
$
153.46
$
129.08
$
149.45
$
122.59
SNL Midwest Bank Index
100.00
133.61
143.58
122.61
159.51
136.96
Nasdaq Composite
100.00
108.97
141.37
137.39
187.87
272.53
Banks in the SNL Midwest Bank Index represent all Major Exchange Traded Banks in SNL’s coverage universe headquartered in Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Selected Consolidated Financial Information
The following selected financial data (dollars in thousands, except per share data), as of and for each of the periods indicated, has been derived from First Busey’s audited Consolidated Financial Statements and the results of operations for each period. This financial data should be read in conjunction with the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included in this Annual Report.
Balance Sheet Items
Debt securities available for sale
$
2,261,187
$
1,648,257
$
697,685
$
872,682
$
759,811
Securities held to maturity
-
-
608,660
443,550
47,820
Loans held for sale
42,813
68,699
25,895
94,848
256,319
Portfolio loans
6,814,177
6,687,249
5,568,428
5,519,500
3,878,900
Allowance for credit losses
101,048
53,748
50,648
53,582
47,795
Total assets
10,544,047
9,695,729
7,702,357
7,860,640
5,425,170
Tangible assets(1)
10,195,082
9,339,847
7,410,346
7,563,606
5,311,271
Total deposits
8,677,849
7,902,396
6,249,321
6,125,965
4,374,298
Short-term debt(2)
180,272
214,042
185,796
524,566
264,157
Long-term debt
4,757
83,600
50,000
50,000
80,000
Senior notes, net of unamortized issuance costs
39,809
39,674
39,539
39,404
-
Subordinated notes, net of unamortized issuance costs
182,226
59,248
59,147
64,715
-
Junior subordinated debt owed to unconsolidated trusts
71,468
71,308
71,155
71,008
70,868
Stockholders’ equity
1,270,069
1,220,434
994,964
935,003
594,314
Tangible common stockholders’ equity(3)
921,104
864,552
702,953
637,969
480,415
Results of Operations
Interest income
$
326,598
$
356,234
$
286,033
$
224,302
$
164,889
Interest expense
43,663
69,011
44,627
20,936
10,229
Net interest income
282,935
287,223
241,406
203,366
154,660
Provision for credit losses
38,797
10,406
4,429
5,303
5,550
Net income
100,344
102,953
98,928
62,726
49,694
Per Share Data
Diluted earnings
$
1.83
$
1.87
$
2.01
$
1.45
$
1.40
Cash dividends
0.88
0.84
0.80
0.72
0.68
Book value(4)
23.34
22.28
20.36
19.21
15.54
Tangible book value(5)
16.66
15.46
14.21
12.88
12.37
Closing stock price
21.55
27.50
24.54
29.94
30.78
Other Information
Return on average assets
0.97
%
1.09
%
1.28
%
1.00
%
1.00
%
Return on average common equity
8.09
%
8.68
%
10.36
%
8.48
%
9.59
%
Net interest margin(6)
3.03
%
3.38
%
3.45
%
3.58
%
3.42
%
Equity to assets ratio(7)
12.05
%
12.56
%
12.33
%
11.75
%
10.42
%
Dividend payout ratio(8)
48.09
%
44.92
%
39.80
%
49.66
%
48.57
%
(1) Total assets less goodwill and tax effected intangible assets, see Non-GAAP Financial Information.
(2) Includes federal funds purchased, securities sold under agreements to repurchase, and short-term borrowings.
(3) Common equity less goodwill and tax effected intangible assets, see Non-GAAP Financial Information.
(4) Total common equity divided by shares outstanding as of period end.
(5) Total common equity less goodwill and intangible assets divided by shares outstanding as of period end, see Non-GAAP Financial Information.
(6) Tax-equivalent net interest income divided by average earning assets.
(7) Average common equity divided by average total assets.
(8) Ratio calculated using only common stock dividends and diluted earnings per share.

---

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, 2020 and 2019, and the results of operations for the years ended December 31, 2020, 2019, and 2018, of First Busey and its subsidiaries. It should be read in conjunction with “Item 1. Business,” “Item 6. Selected Financial Data,” the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included in this Annual Report.
Detailed discussion and analysis of the financial condition and results of operation for 2020 as compared to 2019 can be found below. Comparison of 2019 to 2018 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2019 Annual Report.
Impact of COVID-19
In the face of the challenges and risks posed by COVID-19, the Company remains resolute in its focus on protecting the strength and flexibility of its balance sheet. The progression of the COVID-19 pandemic in the United States began to negatively impact the Company’s results of operations during the first quarter of 2020. In future quarters, COVID-19 is expected to have a complex and continued adverse impact on the economy, the banking industry and First Busey, all subject to a high degree of uncertainty as it relates to both duration and severity. Primary areas of potential future impact to the Company may include further margin compression, increased provision expense, a deterioration in credit quality and lower fees for customer services.
Effects on Our Market Areas.
Our commercial and consumer banking products and services are delivered in Illinois, Missouri, Indiana, and Florida. Each state has experienced a dramatic increase in unemployment claims as a result of the curtailment of business activities. 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, including the following:
● The Federal Reserve decreased the Federal Funds Target Rate by 50 basis points on March 3, 2020, and by another 100 basis points on March 15, 2020.
● On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as PPP. Under the PPP, small businesses, sole proprietorships, independent contractors, and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to limitations and eligibility criteria. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. The Bank participated as a lender in this program. In addition, the CARES Act provides 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.
● On April 7, 2020, federal banking regulators issued a revised Interagency Statement which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. Further, the statement made it clear that institutions generally do not need to categorize COVID-19-related modifications as TDRs if certain requirements are met and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.
● On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which provides for five loan facilities with total potential funding of up to $600 billion. The Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility are three credit facilities that provide eligible business borrowers impacted by COVID-19 with financing in amounts of $250 thousand to $300 million depending on the facility. Similarly, the Nonprofit Organization New Loan Facility and the Nonprofit Organization Expanded Loan Facility provide eligible not-for-profit organizations with financing in amounts of $250 thousand to $10 million. As of December 31, 2020, the Company had minimal participation in the Main Street Business Lending Program.
● On November 20, 2020, federal bank regulatory agencies issued an Interim Final Rule that provided temporary relief for certain community banking organizations as a result of growth in size from the COVID-19 response. Under the Interim Final Rule, which applies to financial institutions with less than $10.0 billion in total assets as of December 31, 2019, the asset growth of such banks in 2020 and 2021 will not trigger some of the new regulatory requirements until January 1, 2022.
● On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900 billion COVID-19 relief package that included an additional $285 billion in PPP funding, and further extended TDR relief from the CARES Act. On January 6, 2021, the SBA issued Interim Final Rules related to first and second draw loans under the PPP. The Company is actively assisting customers under the extended PPP programs.
Effects on Our Business
The COVID-19 pandemic will continue to have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant, transportation, long-term healthcare, and retail industries will continue to endure significant economic distress. This will adversely affect their ability to repay existing indebtedness and could adversely impact the value of collateral pledged to Busey Bank. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be significantly adversely affected.
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, 2020, the Company had 98 commercial loans on payment deferrals representing $208.6 million in loans, consisting of $37.1 million in full payment deferrals, $85.3 million in interest only deferrals, and $86.2 million in blended deferrals. In addition, as of December 31, 2020 the Company had 351 mortgage/personal loans on payment deferrals representing $47.7 million in loans and an additional loan for $0.1 million related to a purchased home equity lines of credit pool.
● First Busey has served as a bridge for the PPP, actively helping existing and new business clients sign up for this important financial resource, and originated a total of $749.4 million in PPP loans representing 4,569 new and existing customers. At December 31, 2020, First Busey had $451.5 million in PPP loans outstanding, with an amortized cost of $446.4 million, representing 2,922 customers. As of December 31, 2020, the Company had received approximately $287.8 million in borrower loan forgiveness from the SBA and had submitted forgiveness applications to the SBA on behalf of borrowers for another $167.4 million.
● First Busey initiated its pandemic response plan, expanding social-distancing practices and remote work capabilities to ensure the safety of its associates. The Company has also instituted a new Emergency Sick Leave policy for all full-time and part-time associates.
● First Busey suspended open-market share repurchases under its share repurchase plan on March 16, 2020. During the fourth quarter of 2020, the Company repurchased 123,264 shares in a private transaction in connection with the termination of the ESOP.
● First Busey completed a successful public offering on June 1, 2020 of $125.0 million of 5.25% fixed-to-floating rate subordinated notes maturing in 2030. This enhanced the Company’s strong liquidity position and qualifies as Tier 2 capital for regulatory purposes.
Critical Accounting Estimates
First Busey has established various accounting policies that govern the application of GAAP in the preparation of its Consolidated Financial Statements. Significant accounting policies are described in “Note 1. Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
Critical accounting estimates are those that are critical to the portrayal and understanding of First Busey’s financial condition and results of operations and require management to make assumptions that are difficult, subjective, or complex. These estimates involve judgments, assumptions, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially different financial condition or materially different results of operations is a reasonable likelihood. Further, changes in accounting standards could impact the Company’s critical accounting estimates. The following policies could be deemed critical:
Fair Value of Debt Securities Available for Sale. The fair values of debt securities available for sale are measurements from an independent pricing service and are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.
Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
Debt securities available for sale are not within the scope of CECL, however, the accounting for credit losses on these securities is affected by ASC 326-30. A debt security available for sale is impaired if the fair value of the security declines below its amortized cost basis. To determine the appropriate accounting, the Company must first determine if it intends to sell the security or if it is more likely than not that it will be required to sell the security before the fair value increases to at least the amortized cost basis. If either of those selling events is expected, the Company will write down the amortized cost basis of the security to its fair value. This is achieved by writing off any previously recorded allowance, if applicable, and recognizing any incremental impairment through earnings. If the Company does not intend to sell the security nor believes it more likely than not will be required to sell the security before the fair value recovers to the amortized cost basis, the Company must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors.
The Company considers the following factors in assessing whether the decline is due to a credit loss:
● 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. The impairment is recognized by establishing an allowance through provision for credit losses. Impairment related to noncredit factors is recognized in accumulated other comprehensive income, net of applicable taxes.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations. Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the date of acquisition. Fair values are determined based on the definition of “fair value” defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed. Acquired loans are in the scope of ASC 326. 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, the Company assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired. The Company will continue to monitor events around COVID-19 and its potential impact on goodwill.
Income Taxes. The Company estimates income tax expense based on amounts expected to be owed to federal and state tax jurisdictions. Estimated income tax expense is reported in the Consolidated Statements of Income. Accrued and deferred taxes, as reported in other assets or other liabilities in the Consolidated Balance Sheets, represent the net estimated amount due to or to be received from taxing jurisdictions either currently or in the future. Management judgment is involved in estimating accrued and deferred taxes, as it may be necessary to evaluate the risks and merits of the tax treatment of transactions, filing positions, and taxable income calculations after considering tax-related statutes, regulations, and other relevant factors. Because of the complexity of tax laws and interpretations, interpretation is subject to judgment.
Allowance for Credit Losses. The Company calculates the allowance for credit losses at each reporting date. The Company recognizes an allowance for the lifetime expected credit losses for the amount the Company does not expect to collect. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported book value. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical credit loss information.
In determining the allowance, management relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The allowance for credit losses must be determined on a collective (pool) basis when similar risk characteristics exists. On a case-by-case basis, the Company may conclude a loan should be evaluated on an individual basis based on the disparate risk characteristics.
Loans deemed uncollectible are charged against and reduce the allowance. A provision for credit losses is charged to current expense and acts to replenish the allowance for credit losses 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 (dollars in thousands)
Years Ended December 31,
Net income by operating segment:
Banking
$
101,226
$
106,409
$
97,369
Remittance Processing
2,372
4,060
3,710
Wealth Management
13,181
11,135
9,372
Other
(16,435)
(18,651)
(11,523)
Net income
$
100,344
$
102,953
$
98,928
Operating Performance
Operating performance metrics presented in the table below have been derived from information used by management to monitor and manage the financial performance of the Company (dollars in thousands, except per share amounts):
Years Ended December 31,
Reported:
Net income
$
100,344
$
102,953
$
98,928
Adjusted:
Net income (1)
108,728
118,429
103,477
Reported:
Diluted earnings per common share
$
1.83
$
1.87
$
2.01
Adjusted:
Diluted earnings per common share (1)
1.98
2.15
2.10
Reported:
Pre-provision net revenue (1)
$
165,672
$
144,862
$
138,025
Adjusted:
Pre-provision net revenue (1)
180,516
166,156
144,025
Reported:
Pre-provision net revenue to average assets (1)
1.61
%
1.53
%
1.78
%
Adjusted:
Pre-provision net revenue to average assets (1)
1.75
%
1.76
%
1.86
%
(1) See Non-GAAP Financial Information.
In accordance with the Company’s previously announced plans, 12 banking centers were closed on October 23, 2020, 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. These actions reduced the Company’s banking centers in operation from 80 to 68.
The Company views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pretax adjustments for 2020 were $1.4 million of expenses related to acquisitions and $9.3 million of expenses related to other restructuring costs. The reconciliation of non-GAAP measures (including adjusted pre-provision net revenue, adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity), which the Company believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Annual Report. See Non-GAAP Financial Information.
Revenues from trust fees, commissions and brokers’ fees, and remittance processing activities represented 49.3% of the Company’s non-interest income in 2020, providing a balance to spread-based revenue from traditional banking
activities. Further, non-interest income, excluding net securities gains (losses) represented 29.2% of total revenue for the year ended December 31, 2020.
The Company continues to navigate the economic environment caused by COVID-19 effectively and prudently. The Company entered this crisis from a position of strength and remains resolute in its focus on serving its customers, communities and associates while protecting its balance sheet. Nevertheless, the Company remains vigilant, given that the negative impacts of COVID-19 are expected to continue in future quarters as the course of the economic recovery remains unclear. These negative impacts may include further margin compression, increased provision expense, lower customer service fees and a deterioration in asset quality.
Results of Operation - Three Years Ended December 31, 2020
Net Interest Income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets.
Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes an income tax rate of 21%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.
The following tables (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
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
$
488,786
$
1,723
0.35
%
$
312,604
6,320
2.02
%
$
134,035
$
2,491
1.86
%
Investment securities:
U.S. Government obligations
135,204
2,915
2.16
%
300,805
7,323
2.43
%
152,086
2,501
1.64
%
Obligations of states and political subdivisions(1)
293,070
8,353
2.85
%
281,460
8,294
2.95
%
284,262
7,386
2.60
%
Other securities
1,411,826
29,857
2.11
%
1,187,026
31,335
2.64
%
934,112
23,654
2.53
%
Loans held for sale
82,106
2,184
2.66
%
38,447
1,275
3.32
%
29,666
1,241
4.18
%
Portfolio loans(1), (2)
7,006,946
284,306
4.06
%
6,469,920
304,700
4.71
%
5,533,549
251,018
4.54
%
Total interest-earning assets(1), (3)
$
9,417,938
$
329,338
3.50
%
$
8,590,262
$
359,247
4.18
%
$
7,067,710
$
288,291
4.08
%
Cash and due from banks
118,739
114,619
105,114
Premises and equipment
146,144
148,063
119,388
Allowance for credit losses
(88,248)
(52,284)
(53,789)
Other assets
697,683
643,030
503,719
Total assets
$
10,292,256
$
9,443,690
$
7,742,142
Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits
$
2,153,230
$
4,718
0.22
%
$
1,865,506
$
10,638
0.57
%
$
1,257,491
$
4,532
0.36
%
Savings and money market deposits
2,567,962
5,960
0.23
%
2,386,171
13,767
0.58
%
1,958,435
6,968
0.36
%
Time deposits
1,356,347
20,013
1.48
%
1,675,477
30,672
1.83
%
1,491,363
21,101
1.41
%
Federal funds purchased and repurchase agreements
187,811
0.35
%
196,681
2,348
1.19
%
234,587
1,626
0.69
%
Borrowings (4)
217,702
9,352
4.30
%
219,920
8,172
3.72
%
234,076
7,150
3.05
%
Junior subordinated debt issued to unconsolidated trusts
71,376
2,960
4.15
%
71,214
3,414
4.79
%
71,065
3,250
4.57
%
Total interest-bearing liabilities
$
6,554,428
$
43,663
0.67
%
$
6,414,969
$
69,011
1.08
%
$
5,247,017
$
44,627
0.85
%
Net interest spread(1)
2.83
%
3.10
%
3.23
%
Noninterest-bearing deposits
2,364,442
1,746,938
1,492,242
Other liabilities
133,012
95,656
47,934
Stockholders’ equity
1,240,374
1,186,127
954,949
Total liabilities and stockholders’ equity
$
10,292,256
$
9,443,690
$
7,742,142
Interest income / earning assets(1), (3)
$
9,417,938
$
329,338
3.50
%
$
8,590,262
$
359,247
4.18
%
$
7,067,710
$
288,291
4.08
%
Interest expense / earning assets
$
9,417,938
$
43,663
0.47
%
$
8,590,262
$
69,011
0.80
%
$
7,067,710
$
44,627
0.63
%
Net interest margin(1)
$
285,675
3.03
%
$
290,236
3.38
%
$
243,664
3.45
%
(1) On a tax-equivalent basis, assuming a federal income tax rate of 21%.
(2) Non-accrual loans have been included in average portfolio loans.
(3) Interest income includes a tax-equivalent adjustment of $2.7 million, $3.0 million, and $2.3 million for 2020, 2019 and 2018, respectively. For 2020, interest income includes $15.2 million of fees, net of deferred costs related to PPP loans.
(4) 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,
2020 vs. 2019 Change Due To
2019 vs. 2018 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
$
2,369
$
(6,966)
$
(4,597)
$
3,573
$
$
3,829
Investment securities:
U.S. Government obligations
(3,650)
(758)
(4,408)
3,233
1,589
4,822
Obligations of state and political subdivisions
(277)
(73)
Other securities
5,359
(6,837)
(1,478)
6,640
1,041
7,681
Loans held for sale
1,204
(295)
(288)
Portfolio loans
23,979
(44,373)
(20,394)
43,800
9,882
53,682
Change in interest income
$
29,597
$
(59,506)
$
(29,909)
$
57,495
$
13,461
$
70,956
Increase (decrease) in interest expense:
Interest-bearing transaction deposits
$
1,438
$
(7,358)
$
(5,920)
$
2,770
$
3,336
$
6,106
Savings and money market deposits
(8,576)
(7,807)
1,584
5,215
6,799
Time deposits
(5,281)
(5,378)
(10,659)
2,832
6,739
9,571
Federal funds purchased and repurchase agreements
(109)
(1,579)
(1,688)
(298)
1,020
Borrowings
1,180
1,022
Junior subordinated debt owed to unconsolidated trusts
(462)
(454)
Change in interest expense
$
(2,915)
$
(22,433)
$
(25,348)
$
6,994
$
17,390
$
24,384
Increase (decrease) in net interest income
$
32,512
$
(37,073)
$
(4,561)
$
50,501
$
(3,929)
$
46,572
Percentage (decrease) increase in net interest income over prior period
(1.6)
%
19.1
%
Earning Assets, Sources of Funds, and Net Interest Margin
The Consolidated Average Balance Sheets and interest rates were impacted in 2020 by numerous factors surrounding COVID-19. The FOMC lowered Federal Funds Target Rates for the first time in 11 years on July 31, 2019, and then again on September 18, 2019 and October 30, 2019, for a combined decrease of 75 basis points during 2019. In response to the potential economic risks posed by COVID-19, the FOMC took further action during the first quarter of 2020 by lowering the Federal Funds Target Rate by 50 basis points on March 3, 2020, followed by an additional 100 basis point reduction on March 15, 2020. These rate cuts contributed to the reported decline in net interest margin, as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities.
Net interest margin was also negatively impacted by the sizeable balance of lower-yielding PPP loans, the Company’s significant liquidity position, and the issuance of subordinated debt completed during the second quarter. Those impacts were partially offset by the Company’s efforts to lower deposit funding costs as well as the fees recognized related to the PPP loans.
The Company remains substantially core deposit funded, with solid liquidity and significant market share in the communities we serve.
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 2.83% in 2020 compared to 3.10% in 2019 and 3.23% in 2018, each on a tax equivalent basis.
Changes in average earning assets, sources of funds, and net interest margin are presented in the tables below (dollars in thousands):
As of December 31,
Change
% Change
Average interest-earning assets
$
9,417,938
$
8,590,262
$
827,676
9.6
%
Average interest-bearing liabilities
6,554,428
6,414,969
139,459
2.2
%
Average noninterest-bearing deposits
2,364,442
1,746,938
617,504
35.3
%
Total average deposits
8,441,981
7,674,092
767,889
10.0
%
Total average liabilities
9,051,882
8,257,563
794,319
9.6
%
Average noninterest-bearing deposits as a percent of total average deposits
28.0
%
22.8
%
Total average deposits as a percent of total average liabilities
93.3
%
92.9
%
Years Ended December 31,
Change
% Change
Interest income, on a tax-equivalent basis
$
329,338
$
359,247
$
(29,909)
(8.3)
%
Interest expense
43,663
69,011
(25,348)
(36.7)
%
Net interest income, on a tax equivalent basis
$
285,675
$
290,236
$
(4,561)
(1.6)
%
Net interest margin
3.03
%
3.38
%
Annualized net interest margins for the quarterly periods indicated were as follows:
First Quarter
3.20
%
3.46
%
3.51
%
Second Quarter
3.03
%
3.43
%
3.50
%
Third Quarter
2.86
%
3.35
%
3.41
%
Fourth Quarter
3.06
%
3.27
%
3.38
%
The increase in the fourth quarter 2020 margin over the third quarter 2020 margin includes 17 basis points related to accelerated fee recognition on PPP loan forgiveness. Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies.
Non-interest Income
Changes in non-interest income are summarized in the tables below for the periods presented (dollars in thousands):
Years Ended December 31,
Change
% Change
Wealth management fees
$
42,928
$
38,561
$
4,367
11.3
%
Fees for customer services
31,604
36,683
(5,079)
(13.8)
%
Remittance processing
15,396
15,042
2.4
%
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
8,588
8,649
(61)
(0.7)
%
Total non-interest income
$
118,265
$
116,415
$
1,850
1.6
%
Years Ended December 31,
Change
% Change
Wealth management fees
$
38,561
$
30,974
$
7,587
24.5
%
Fees for customer services
36,683
28,879
7,804
27.0
%
Remittance processing
15,042
14,345
4.9
%
Mortgage revenue
11,703
5,545
6,158
111.1
%
Income on bank owned life insurance
5,795
3,726
2,069
55.5
%
Net gains (losses) on sales of securities
(1,831)
2,572
NM
Unrealized gains (losses) recognized on equity securities
(759)
2,162
(2,921)
135.1
%
Other income
8,649
6,193
2,456
39.7
%
Total non-interest income
$
116,415
$
89,993
$
26,422
29.4
%
Total non-interest income of $118.3 million for the year ended December 31, 2020, increased $1.9 million from $116.4 million for the year ended December 31, 2019.
Wealth management fees increased to $42.9 million, or 11.3%, in 2020 compared to $38.6 million in 2019. As of December 31, 2020, assets under care were $10.2 billion compared to $9.7 billion at December 31, 2019. The Wealth Management division experienced strong new account activity in 2020. Market volatility related to COVID-19 and general economic conditions may impact fees in future quarters.
Fees for customer services decreased to $31.6 million in 2020 as compared to $36.7 million in 2019. Fees for customer services have been impacted in 2020 due to changing customer behaviors resulting from COVID-19, and to a lesser extent from fee waivers provided in connection with the Company’s Financial Relief Program.
Remittance processing revenue relates to our payment processing company, FirsTech. Remittance processing revenue of $15.4 million in 2020 increased compared to $15.0 million in 2019. Remittance processing adds important diversity to our revenue stream while widening our array of service offerings to larger commercial clients within our footprint and nationally. The Company is currently making strategic investments in FirsTech to enhance future growth.
Mortgage revenue of $13.0 million in 2020 increased $1.3 million compared to $11.7 million in 2019. A decline in prevailing market rates for mortgages contributed to increased production and associated gain on sales in recent periods. General economic conditions and interest rate volatility may impact fees in future quarters.
Income on bank owned life insurance decreased $0.4 million, or 7.2%, in 2020 compared to 2019, primarily as a result of a decrease in life insurance proceeds.
Other income primarily includes commercial loan sale gains, card-based incentive income, program fee income, and swap origination fee income. Other income of $8.6 million in 2020 was comparable to 2019.
Non-interest Expense (dollars in thousands)
Changes in non-interest expense are summarized in the tables below for the periods presented (dollars in thousands):
Years Ended December 31,
Change
% Change
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 non-interest expense
$
234,197
$
258,794
$
(24,597)
(9.5)
%
Income taxes
$
27,862
$
31,485
$
(3,623)
(11.5)
%
Effective rate on income taxes
21.7
%
23.4
%
Efficiency ratio
55.7
%
61.3
%
Full-time equivalent employees as of period-end
1,346
1,531
Years Ended December 31,
Change
% Change
Salaries, wages, and employee benefits
$
140,473
$
107,844
$
32,629
30.3
%
Data processing
21,511
16,383
5,128
31.3
%
Net occupancy expense of premises
18,176
14,803
3,373
22.8
%
Furniture and equipment expenses
9,506
7,233
2,273
31.4
%
Professional fees
11,104
5,389
5,715
106.0
%
Amortization of intangible assets
9,547
5,854
3,693
63.1
%
Interchange expense
4,141
3,626
14.2
%
Other expense
44,336
31,911
12,425
38.9
%
Total non-interest expense
$
258,794
$
193,043
$
65,751
34.1
%
Income taxes
$
31,485
$
34,999
$
(3,514)
(10.0)
%
Effective rate on income taxes
23.4
%
26.1
%
Efficiency ratio
61.3
%
56.2
%
Full-time equivalent employees as of period-end
1,531
1,270
Total non-interest expense of $234.2 million in 2020 decreased by $24.6 million as compared to $258.8 million in 2019. The Company remains focused on expense discipline and has seen expense reductions as a result of its branch closures, strategic actions in response to COVID-19, and the realization of remaining expense savings from prior acquisitions.
Salaries, wages, and employee benefits were $126.7 million in 2020 compared to $140.5 million for the same period of 2019. Total full-time equivalents at December 31, 2020, was 1,346 compared to 1,531 at December 31, 2019, a decline of 12.1% year-over-year.
Data processing expense in 2020 decreased to $16.4 million compared to $21.5 million for the same period of 2019. The 2019 data processing included $2.4 million of non-operating expenses, related to the payment of merger and conversion expenses. Data processing for 2019 also includes data processing related to TheBANK from January 31, 2019, until merged with Busey Bank on October 4, 2019.
Combined net occupancy expense of premises and furniture and equipment expenses of $27.2 million in 2020 decreased as compared to $27.7 million in 2019. The Company closed 12 banking centers in October 2020. The full benefit of reduction in expenses related to these locations will be realized in future periods as those properties are divested. The Company opened four banking centers and closed six banking centers in 2019.
Professional fees of $8.4 million in 2020 decreased by $2.7 million as compared to $11.1 million in 2019. Professional fees were influenced in 2019 primarily by acquisition expenses.
Amortization of intangible assets was $10.0 million in 2020 as compared to $9.5 million in 2019 as a result of increases in intangible asset balances from acquisitions made in 2019.
Interchange expense increased $0.7 million, or 16.2%, to $4.8 million as of December 31, 2020, compared to $4.1 million as of December 31, 2019, as a result of increased payment and volume activity at FirsTech.
Other expense of $40.7 million in 2020 decreased as compared to $44.3 million in 2019. Variances are across multiple expense categories, including business development and marketing expenses, fixed asset and lease impairment, and acquisition-related check card service expense.
The efficiency ratio is calculated as total non-interest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus non-interest income, less security gains and losses. The efficiency ratio, which is a measure commonly used by management and the banking industry, measures the amount of expense incurred to generate a dollar of revenue. The efficiency ratio was 55.7% in 2020 as compared to 61.3% in 2019. Operating costs have been influenced by acquisition expenses and other restructuring costs and the adjusted efficiency ratio1 was 53.0% for the year ended December 31, 2020, compared with 56.4% for the year ended December 31, 2019.
Income Taxes
The effective income tax rate, or income taxes divided by income before taxes, was 21.7%, 23.4%, and 26.1% for the years ended December 31, 2020, 2019, and 2018, respectively. The decrease in the effective tax rate was primarily driven by an increase in tax exempt income combined with the benefits received from tax credit investments. The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis.
1 For a reconciliation of efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see Non-GAAP Financial Information.
Balance Sheet
Changes in significant Balance Sheet items are presented in the table below (dollars in thousands):
As of December 31,
Change
% Change
Assets
Debt securities available for sale
$
2,261,187
$
1,648,257
$
612,930
37.2
%
Portfolio loans, net
6,713,129
6,633,501
79,628
1.2
%
Total assets
$
10,544,047
$
9,695,729
$
848,318
8.7
%
Liabilities
Deposits:
Noninterest-bearing
$
2,552,039
$
1,832,619
$
719,420
39.3
%
Interest-bearing
6,125,810
6,069,777
56,033
0.9
%
Total deposits
$
8,677,849
$
7,902,396
$
775,453
9.8
%
Securities sold under agreements to repurchase
$
175,614
$
205,491
$
(29,877)
(14.5)
%
Senior notes, net of unamortized issuance costs
39,809
39,674
0.3
%
Subordinated notes, net of unamortized issuance costs
182,226
59,248
122,978
207.6
%
Junior subordinated debt owed to unconsolidated trusts
71,468
71,308
0.2
%
Total liabilities
$
9,273,978
$
8,475,295
$
798,683
9.4
%
Stockholders’ equity
$
1,270,069
$
1,220,434
$
49,635
4.1
%
Investment Securities
Debt securities available for sale are carried at fair value. Debt securities held to maturity are carried at amortized cost. Equity securities are carried at fair value. As of December 31, 2020, the fair value of debt securities available for sale was $2.3 billion, and the amortized cost was $2.2 billion. There were $50.3 million of gross unrealized gains and $0.7 million of gross unrealized losses for a net unrealized gain of $49.6 million. The net unrealized gain, net of tax, is recorded in stockholders’ equity. As of December 31, 2020, the Company did not have any debt securities held to maturity. As of December 31, 2020, the fair value of equity securities was $5.5 million.
The composition of debt securities available for sale was as follows (dollars in thousands):
As of December 31,
Available for sale securities:
U.S. Treasury securities
$
27,837
$
51,737
$
25,411
Obligations of U.S. government corporations and agencies
69,519
163,000
52,342
Obligations of states and political subdivisions
304,711
268,291
170,044
Commercial mortgage-backed securities
418,616
139,287
1,942
Residential mortgage-backed securities
1,368,315
921,966
315,748
Corporate debt securities
72,189
103,976
132,198
Fair value of securities available for sale
$
2,261,187
$
1,648,257
$
697,685
Amortized cost
$
2,211,543
$
1,627,065
$
707,213
Fair value as a percentage of amortized cost
102.24
%
101.30
%
98.65
%
The composition of debt securities held to maturity was as follows (dollars in thousands):
As of December 31,
Held to maturity securities:
Obligations of states and political subdivisions
$
-
$
-
$
33,928
Commercial mortgage-backed securities
-
-
58,062
Residential mortgage-backed securities
-
-
511,370
Fair value of securities held to maturity
$
-
$
-
$
603,360
Amortized cost
$
-
$
-
$
608,660
Fair value as a percentage of amortized cost
-
%
-
%
99.13
%
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 $628.0 million, or 27.8% of total securities, and $704.7 million, or 42.8% of total securities, at December 31, 2020 and 2019, respectively.
Maturities, fair values, and weighted average yields of debt securities available for sale as of December 31, 2020, were (dollars in thousands):
Due after 1 year
Due after 5 years
Due after
Due in 1 year or less
through 5 years
through 10 years
10 years
Weighted
Weighted
Weighted
Weighted
Fair
Average
Fair
Average
Fair
Average
Fair
Average
Available for sale(1)
Value
Yield
Value
Yield
Value
Yield
Value
Yield
U.S. Treasury securities
$
25,679
2.01
%
$
2,158
2.45
%
$
-
-
%
$
-
-
%
Obligations of U.S. government corporations and agencies
28,249
2.03
%
33,770
2.51
%
7,500
1.19
%
-
-
%
Obligations of states and political subdivisions(2)
21,223
3.12
%
111,647
2.88
%
110,433
2.47
%
61,408
2.79
%
Commercial mortgage-backed securities
8,970
2.06
%
70,068
1.73
%
38,607
2.20
%
300,971
1.73
%
Residential mortgage-backed securities
3.90
%
14,319
2.87
%
95,940
2.38
%
1,258,051
1.55
%
Corporate debt securities
38,087
3.32
%
15,871
2.98
%
15,379
4.20
%
2,852
2.95
%
Total
$
122,213
2.62
%
$
247,833
2.51
%
$
267,859
2.46
%
$
1,623,282
1.63
%
(1) Securities are presented based upon final contractual maturity or pre-refunded date.
(2) Weighted average yield calculated on a tax-equivalent basis, assuming a federal income tax rate of 21%.
We consider many factors in determining the composition of our investment portfolio including, but not limited to, credit quality, duration, interest rate risk, liquidity, tax-equivalent yield, regulatory, and overall portfolio allocation. As of December 31, 2020, the Company did not have any non-U.S. Treasury securities or obligations of U.S. government corporations and agencies issued securities that exceeded 10% of the Company’s total stockholders’ equity.
Portfolio Loans
The Company believes that making sound and profitable loans is a necessary and desirable means of employing funds available for investment. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations, and duration of loans most appropriate for its business model and markets. While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or loans to existing customers of the bank. The Company attempts to utilize government-assisted lending programs, such as the SBA and U.S. Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate, and guaranteed by individuals. Loans are expected to be repaid primarily from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.
Management reviews and approves the Company’s lending policies and procedures on a regular basis. Management routinely (at least quarterly) reviews the Company’s allowance for credit losses in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and non-performing and potential problem loans. The Company’s underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship. Significant underwriting factors in addition to location, duration, a sound and profitable cash flow basis, and the borrower’s character include the quality of the borrower’s financial history, the liquidity of the underlying collateral, and the reliability of the valuation of the underlying collateral.
At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s regulatory lending limit. The Company generally limits such relationships to amounts substantially less than the regulatory limit. Loans to related parties, including executive officers and directors of the Company and its subsidiaries, are reviewed for compliance with regulatory guidelines by the Company’s board of directors at least annually.
The Company maintains an independent loan review department that reviews loans for compliance with the Company’s loan policy on a periodic basis. In addition, the loan review department reviews the risk assessments made by the Company’s credit department, lenders, and loan committees. Results of these reviews are presented to management and the audit committee at least quarterly.
The Company’s lending can be summarized into five primary areas: commercial loans, commercial real estate loans, real estate construction loans, retail real estate loans, and retail other loans.
Commercial Loans
Commercial loans typically comprise working capital loans or business expansion loans, including loans for asset purchases and other business loans. Commercial loans will generally be guaranteed, in full or a significant amount, by the primary owners of the business. Commercial loans are made based primarily on the historical and projected cash flow of the underlying borrower and secondarily on the underlying assets pledged as collateral by the borrower. 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. The Company has established minimum standards and underwriting guidelines for all commercial loan types.
Commercial Real Estate Loans
The commercial environment, along with the academic presence in some of the Company’s markets, provides for the majority of the Company’s commercial lending opportunities to be commercial real estate related, including multi-unit housing. As the majority of the Company’s loan portfolio is within the commercial real estate class, the Company’s goal is to maintain a high quality, geographically diverse portfolio of commercial real estate loans. Commercial real estate loans are subject to underwriting standards and guidelines similar to commercial loans. Commercial real estate loans are generally guaranteed, in full or a significant amount, 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 that are closely monitored by the Company.
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 the Company holds a mortgage. Real estate construction loans will generally be guaranteed, in full or a significant amount, by the developer or primary owners of the business. These loans are subject to underwriting standards and guidelines similar to commercial loans. The loan generally must be supported by an adequate “as completed” value of the underlying project. In addition to the underlying project, the financial history of the developer and business owners weighs significantly in determining approval. 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 2020, the Company sold the majority of its newly originated fixed rate retail real estate loans to secondary market purchasers. As retail real estate loan underwriting is subject to specific regulations, the Company typically underwrites its retail real estate loans to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.
Retail Other Loans
Retail other loans consist of installment loans to individuals, including automotive loans. These loans are centrally underwritten utilizing the borrower’s financial history, including the FICO credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower.
The composition of our portfolio loans as of the dates indicated was as follows (dollars in thousands):
As of December 31,
Commercial
$
2,014,576
$
1,748,368
$
1,405,106
$
1,414,631
$
959,888
Commercial real estate
2,892,535
2,793,417
2,366,823
2,354,684
1,654,164
Real estate construction
461,786
401,861
288,197
261,506
182,078
Retail real estate
1,407,852
1,693,769
1,480,133
1,460,801
1,069,060
Retail other
37,428
49,834
28,169
27,878
13,710
Portfolio loans
$
6,814,177
$
6,687,249
$
5,568,428
$
5,519,500
$
3,878,900
Allowance
(101,048)
(53,748)
(50,648)
(53,582)
(47,795)
Portfolio loans, net
$
6,713,129
$
6,633,501
$
5,517,780
$
5,465,918
$
3,831,105
Geographic distributions of portfolio loans, based on origination, by category were as follows (dollars in thousands):
December 31, 2020
Illinois
Missouri
Florida
Indiana
Total
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
Portfolio loans
$
4,456,211
$
1,657,955
$
358,429
$
341,582
$
6,814,177
Allowance
(101,048)
Portfolio loans, net
$
6,713,129
December 31, 2019
Illinois
Missouri
Florida
Indiana
Total
Commercial
$
1,220,088
$
457,416
$
20,589
$
50,275
$
1,748,368
Commercial real estate
1,782,442
679,217
150,935
180,823
2,793,417
Real estate construction
168,621
139,540
20,311
73,389
401,861
Retail real estate
1,139,173
412,811
99,976
41,809
1,693,769
Retail other
44,158
2,535
1,611
1,530
49,834
Portfolio loans
$
4,354,482
$
1,691,519
$
293,422
$
347,826
$
6,687,249
Allowance
(53,748)
Portfolio loans, net
$
6,633,501
Portfolio loans increased $126.9 million, or 1.9%, as of December 31, 2020, compared to December 31, 2019, primarily as a result of PPP loans in our Commercial loans category. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans), excluding PPP loans, decreased $21.2 million from December 31, 2019. Retail real estate and retail other loans decreased $298.3 million from December 31, 2019.
Commitments to extend credit and standby letters of credit totaled $1.8 billion and $1.7 billion as of December 31, 2020 and 2019, respectively.
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, 2020 (dollars in thousands):
Less Than 1 Year
1 to 5 Years
Over 5 Years
Total
Commercial
$
796,332
$
992,559
$
231,112
$
2,020,003
Commercial real estate
934,140
1,593,791
370,276
2,898,207
Real estate construction
218,850
183,242
62,528
464,620
Total
$
1,949,322
$
2,769,592
$
663,916
$
5,382,830
Interest rate sensitivity of selected loans
Fixed rate
$
753,385
$
2,589,506
$
619,833
$
3,962,724
Adjustable rate
1,195,937
180,086
44,083
1,420,106
Total
$
1,949,322
$
2,769,592
$
663,916
$
5,382,830
Allowance for Credit Losses
The following table shows activity affecting the allowance for credit losses (dollars in thousands):
Years Ended December 31,
Average portfolio loans outstanding during period
$
7,006,946
$
6,469,920
$
5,533,549
$
4,567,259
$
3,394,352
Allowance for credit losses:
Balance at beginning of period
$
53,748
$
50,648
$
53,582
$
47,795
$
47,487
Adoption of ASC 326
16,833
-
-
-
-
Loans charged-off:
Commercial
$
(6,376)
$
(6,478)
$
(3,968)
$
(994)
$
(6,598)
Commercial real estate
(1,972)
(3,257)
(4,352)
(1,965)
(470)
Real estate construction
(18)
-
(97)
(48)
(24)
Retail real estate
(2,057)
(1,162)
(1,815)
(2,691)
(2,106)
Retail other
(665)
(863)
(712)
(541)
(458)
Total charge-offs
$
(11,088)
$
(11,760)
$
(10,944)
$
(6,239)
$
(9,656)
Recoveries:
Commercial
$
$
2,047
$
1,251
$
3,561
$
1,266
Commercial real estate
Real estate construction
Retail real estate
1,212
1,084
1,327
1,563
2,317
Retail other
Total recoveries
$
2,758
$
4,454
$
3,581
$
6,723
$
4,414
Net loan (charge-offs) recoveries
$
(8,330)
$
(7,306)
$
(7,363)
$
$
(5,242)
Provision for credit losses
$
38,797
$
10,406
$
4,429
$
5,303
$
5,550
Balance at end of period
$
101,048
$
53,748
$
50,648
$
53,582
$
47,795
Ratios:
Net charge-offs (recoveries) to average portfolio loans
0.12
%
0.11
%
0.13
%
(0.01)
%
0.15
%
Allowance for credit losses to portfolio loans at period end
1.48
%
0.80
%
0.91
%
0.97
%
1.23
%
The allowance as a percentage of portfolio loans was 1.48% at December 31, 2020, compared to 0.80% of portfolio loans, at December 31, 2019. Excluding PPP loans, the allowance for credit losses as a percentage of loans outstanding was 1.59% at December 31, 2020. 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. If economic conditions deteriorate further than current forecast factors as a result of COVID-19, the Company would expect the provision for credit losses to increase in future periods.
The following table sets forth the allowance for credit losses 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
Commercial
$
23,866
29.6
%
$
18,291
26.2
%
$
17,829
25.2
%
$
14,779
25.6
%
$
13,303
24.7
%
Commercial real estate
46,230
42.4
%
21,190
41.8
%
21,137
42.5
%
21,813
42.7
%
20,623
42.6
%
Real estate construction
8,193
6.8
%
3,204
6.0
%
2,723
5.2
%
2,861
4.7
%
1,870
4.7
%
Retail real estate
21,992
20.7
%
10,495
25.3
%
8,471
26.6
%
13,783
26.5
%
11,648
27.6
%
Retail other
0.5
%
0.7
%
0.5
%
0.5
%
0.4
%
Total
$
101,048
100.0
%
$
53,748
100.0
%
$
50,648
100.0
%
$
53,582
100.0
%
$
47,795
100.0
%
As of December 31, 2020, 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 allowance for credit losses is a significant estimate in the Company’s 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 allowance for credit losses 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 allowance for credit losses is established through provision for credit loss expense charged to income. The provision for credit losses was $38.8 million, $10.4 million, and $4.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. The increase in provision expense in 2020 can be attributed to the adoption of CECL in combination with the impacts of the COVID-19 pandemic on the economy.
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 allowance for credit losses to the fair value of our interest in the underlying collateral less estimated costs to sell. Our loan portfolio is collateralized primarily by real estate.
The following table sets forth information concerning non-performing loans and performing restructured loans as of December 31 for each of the years indicated (dollars in thousands):
As of December 31,
Loans 30-89 days past due
$
7,578
$
14,271
$
7,121
$
12,897
$
4,090
Non-accrual loans
22,930
27,896
34,997
24,624
21,423
Loans 90+ days past due and still accruing
1,371
1,611
1,601
2,741
Total non-performing loans
24,301
29,507
36,598
27,365
21,554
OREO
4,571
3,057
1,283
2,518
Total non-performing assets
$
28,872
$
32,564
$
36,974
$
32,564
$
24,072
Performing TDRs
$
3,814
$
5,005
$
8,446
$
9,981
$
10,652
Allowance
101,048
53,748
50,648
53,582
47,795
Allowance to portfolio loans
1.48
%
0.80
%
0.91
%
0.97
%
1.23
%
Allowance to portfolio loans, excluding PPP loans
1.59
%
0.80
%
0.91
%
0.97
%
1.23
%
Allowance to non-performing loans
415.82
%
182.15
%
138.39
%
195.80
%
221.75
%
Non-performing assets to total assets
0.27
%
0.34
%
0.48
%
0.41
%
0.44
%
Non-performing loans to portfolio loans
0.36
%
0.44
%
0.66
%
0.50
%
0.56
%
Non-performing loans to portfolio loans, excluding PPP loans
0.38
%
0.44
%
0.66
%
0.50
%
0.56
%
Non-performing assets to portfolio loans and OREO
0.42
%
0.49
%
0.66
%
0.52
%
0.62
%
Total non-performing assets were $28.9 million at December 31, 2020, compared to $32.6 million at December 31, 2019. 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 0.36% at December 31, 2020, compared with 0.44% at December 31, 2019. If economic conditions deteriorate further as a result of COVID-19, the Company would expect the credit quality of our loan portfolio to decline and loan defaults to increase. Allowance coverage of non-performing loans has increased significantly from 182.15% at December 31, 2019, to 415.82% at December 31, 2020.
Potential Problem Loans
Potential problem loans are those loans which are not categorized as impaired, restructured, non-accrual, or 90+ days past due, but where current information indicates that the borrower may not be able to comply with loan repayment terms. Management assesses the potential for loss on such loans and considers the effect of any potential loss in determining its provision for probable credit losses. Potential problem loans totaled $68.8 million at December 31, 2020, compared to $74.6 million at December 31, 2019. 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, 2020, 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
Non-maturity deposits:
Demand deposits, noninterest-bearing
$
2,552,039
29.4
%
$
1,832,619
23.2
%
$
1,464,700
23.4
%
Interest-bearing transaction deposits
2,263,093
26.1
%
1,989,854
25.2
%
1,435,574
23.0
%
Saving deposits and money market deposits
2,743,369
31.6
%
2,545,073
32.2
%
1,852,044
29.6
%
Total non-maturity deposits
7,558,501
87.1
6,367,546
80.6
4,752,318
76.0
Time deposits
1,119,348
12.9
%
1,534,850
19.4
%
1,497,003
24.0
%
Total deposits
$
8,677,849
100.0
%
$
7,902,396
100.0
%
$
6,249,321
100.0
%
Change in non-maturity deposits
1,190,955
1,615,228
Percent change in non-maturity deposits
18.7
%
34.0
%
We focus on deepening our relationship with customers to foster core deposit growth, allowing us to reduce our reliance on wholesale funding. Our 2020 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. Time deposits as a percentage of total deposits decreased to 12.9% as of December 31, 2020, compared to 19.4% as of December 31, 2019. As time deposits mature, the Company is actively engaging our customers to renew at current market rates.
Borrowings
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Securities sold under agreements to repurchase were $175.6 million at December 31, 2020, with a weighted average rate of 0.13%. Short-term borrowings include $4.7 million in FHLB advances which mature in less than one year from the date of origination.
On January 29, 2019, the Company entered into an Amended and Restated Credit Agreement providing for a $60.0 million Term Loan with a maturity date of November 30, 2023. The Term Loan has an annual interest rate of one-month LIBOR plus a spread of 1.50%. The proceeds of the Term Loan were used to fund the cash consideration related to the acquisition of Banc Ed. The Company, at its option, repaid the balance of the Term Loan during the first quarter of 2020.
The Amended and Restated Credit Agreement retained the Company’s $20.0 million revolving credit facility with a maturity date of April 30, 2019. On April 19, 2019, the Company entered into an amendment to the Amended and Restated Credit Agreement to extend the maturity of its revolving credit facility to April 30, 2020. On April 24, 2020, the revolving credit facility’s maturity was again extended by amendment for one year, to April 30, 2021, with an annual interest rate of one-month LIBOR plus a spread of 1.75%. The revolving credit facility incurs a non-usage fee based on the undrawn amount. The Company had no outstanding balance under the revolving facility on December 31, 2020 or 2019.
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
$
175,614
$
205,491
$
185,796
Weighted average interest rate at end of period
0.13
%
1.05
%
1.05
%
Maximum outstanding at any month end in year-to-date period
$
210,529
$
225,531
$
267,596
Average daily balance for the year-to-date period
$
187,032
$
196,681
$
234,239
Weighted average interest rate during period(1)
0.35
%
1.19
%
0.69
%
Short-term borrowings, FHLB advances
Balance at end of period
$
4,658
$
2,551
$
-
Weighted average interest rate at end of period
0.43
%
1.90
%
-
%
Maximum outstanding at any month end in year-to-date period
$
4,658
$
99,739
$
225,000
Average daily balance for the year-to-date period
$
3,556
$
27,495
$
81,438
Weighted average interest rate during period(1)
0.53
%
2.81
%
1.80
%
(1) The weighted average interest rate is computed by dividing total interest for the period by the average daily balance outstanding.
Long-term debt includes funds borrowed from the FHLB which totaled $4.8 million and $35.6 million at December 31, 2020 and 2019, respectively.
On May 25, 2017, the Company issued $40.0 million of 3.75% senior notes that mature on May 25, 2022. The senior notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017. The senior notes are not subject to optional redemption by the Company. Additionally, on May 25, 2017, the Company issued $60.0 million of fixed-to-floating rate subordinated notes that mature on May 25, 2027. The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 4.75% for the first five years after issuance and thereafter bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.919%, as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017, during the five year fixed-term and thereafter on February 25, May 25, August 25, and November 25 of each year, commencing on August 25, 2022. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. The senior notes and subordinated notes are unsecured obligations of the Company.
To further enhance the Company’s strong capital and liquidity positions, 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 related to:
Senior notes issued in 2017
$
$
Subordinated notes issued in 2017
Subordinated notes issued in 2020
2,123
-
Total unamortized debt issuance costs
$
2,965
$
1,078
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 maintained by Pulaski and the fair value adjustment is being accreted over the weighted average remaining life. The Company had $71.5 million and $71.3 million of junior subordinated debt owed to unconsolidated trusts at December 31, 2020 and 2019, 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 the Company’s operating, investing, lending, and financing activities during any given period.
Average liquid assets are summarized in the table below (dollars in thousands):
Years Ended December 31,
Cash and due from banks
$
118,739
$
114,619
$
105,114
Interest-bearing bank deposits
488,786
312,580
132,661
Federal funds sold
-
1,374
Average liquid assets
$
607,525
$
427,223
$
239,149
Average liquid assets as a percent of average total assets
5.9
%
4.5
%
3.1
%
First Busey’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayments, and capital funds. At December 31, 2020, cash and unencumbered securities on our Consolidated Balance Sheets totaled $2.3 billion. Additional liquidity is provided by the ability to borrow from the FHLB, the Federal Reserve, First Busey’s revolving loan facility, or to utilize brokered deposits. As of December 31, 2020, the Company had additional capacity to borrow from the FHLB and Federal Reserve of $1.3 billion and $507.8 million, respectively. The Company has the ability to pledge PPP loans as collateral to either the FHLB or Federal Reserve Discount Window to increase the availability to borrow against any potential short-term funding needs.
As of December 31, 2020, management believed that adequate liquidity existed to meet all projected cash flow obligations. We seek to achieve a satisfactory degree of liquidity by actively managing both assets and liabilities. Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.
The ability of the Company to pay cash dividends to its stockholders and to service its debt is dependent on the receipt of cash dividends from its subsidiaries. Busey Bank paid dividends to the Company of $122.0 million and $70.0 million during 2020 and 2019, respectively.
Off-Balance-Sheet Arrangements
The Bank routinely enters into commitments to extend credit and standby letters of credit in the normal course of business to meet the financing needs of its customers. As of December 31, 2020 and 2019, we had outstanding loan commitments and standby letters of credit of $1.8 billion and $1.7 billion, respectively. The balance of commitments to extend credit represents future cash requirements and some of these commitments may expire without being drawn upon. We anticipate we will have sufficient funds available to meet current loan commitments, including loan applications received and in process prior to the issuance of firm commitments.
Contractual Obligations
We have entered into certain contractual obligations and other commitments which generally relate to funding of operations through deposits, debt issuance, and property and equipment leases.
The following table summarizes significant contractual obligations and other commitments as of December 31, 2020 (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
$
775,495
$
1,983
$
-
$
-
$
-
$
777,478
195,906
1,555
-
-
39,809
237,270
83,862
1,358
-
4,757
-
89,977
48,761
-
-
-
49,718
15,293
-
-
-
16,133
Thereafter
1,792
71,468
-
182,226
255,517
Contractual obligations
$
1,119,348
$
8,485
$
71,468
$
4,757
$
222,035
$
1,426,093
Commitments to extend credit and standby letters of credit
$
1,793,307
Cash Flows
Net cash flows provided by operating activities totaled $169.3 million in 2020 compared to $80.8 million in 2019. Significant items affecting the cash flows provided by operating activities include net income, the provision for credit losses, deferred income taxes, gain on sales of mortgage loans, net of origination costs, and activities related to the origination and sales of loans held for sale, and compensation. Net cash used to originate mortgage loans held for sale totaled $38.7 million in 2020 compared to $25.7 million of in 2019. Fluctuations in sales are a function of changes in market rates for mortgage loans, which influence refinance activity. The Company’s provision for credit losses increased to $38.8 million in 2020 compared to $10.4 million in 2019, due in part to the adoption of CECL. Stock-based and non-cash compensation increased to $7.1 million in 2020, compared with a net compensation decrease of $4.0 million in 2019 related to termination of the Company’s deferred compensation plan.
Net cash used in investing activities totaled $735.7 million in 2020 compared to $65.0 million provided by investing activities in 2019. Significant items affecting cash flows from investing activities are those activities associated with
managing the Company’s investment and loan portfolios. Purchases of debt securities were $1.3 billion in 2020 compared to $408.9 million in 2019.
Net cash provided by financing activities totaled $725.6 million in 2020 compared to $143.6 million in 2019. 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 the Company’s primary funding source, increased by $776.4 million in 2020 compared to an increase of $215.5 million in 2019, 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, 2020, capital ratios for First Busey and Busey Bank.
Minimum Capital
As of December 31, 2020
Requirements with
First Busey
Busey
Capital Buffer
Corporation
Bank
Total Capital to Risk Weighted Assets
10.50
%
17.04
%
15.50
%
Tier 1 Capital to Risk Weighted Assets
8.50
%
13.44
%
14.44
%
Common Equity Tier 1 Capital to Risk Weighted Assets
7.00
%
12.43
%
14.44
%
Tier 1 Capital to Average Assets
9.79
%
10.52
%
Management believes that no conditions or events have occurred since December 31, 2020, that would materially adversely change the Company’s or Busey Bank’s capital classifications.
New Accounting Pronouncements
The Company reviews new accounting standards as issued. Information relating to accounting pronouncements issued and applicable to the Company in 2020 appears in “Note 1. Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
Effects of Inflation
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salaries, wages, and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, loans, and deposits, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. For additional information regarding interest rates and changes in net interest income see “Results of Operations - Average Balance Sheets and Interest Rates” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

---

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 at December 31, 2020. The model assumes immediate and sustained shifts in the federal funds rate and other market rate indices and corresponding shifts in other non-market rate indices based on their historical changes relative to changes in the federal funds rate and other market indices. Assets and liabilities are assumed to remain constant as of the measurement date; variable-rate assets and liabilities are repriced based on repricing frequency; and prepayment speeds on loans are projected for both declining and rising rate environments.
The interest rate risk of First Busey as a result of immediate and sustained changes in interest rates, expressed as a change in net interest income as a percentage of the net interest income calculated in the constant base model, was as follows:
Year-One: Basis Point Changes
- 100
+100
+200
+300
December 31, 2020
NM
7.40
%
14.16
%
20.20
%
December 31, 2019
(5.94)
%
5.39
%
10.24
%
15.01
%
Year-Two: Basis Point Changes
- 100
+100
+200
+300
December 31, 2020
NM
9.59
%
17.95
%
25.40
%
December 31, 2019
(8.19)
%
6.96
%
13.16
%
19.28
%
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
The Consolidated Financial Statements are presented beginning on page 79, and incorporated herein by reference.

---

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 year ended December 31, 2020, 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, 2020, 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, 2020, 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, 2020, 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. Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2020, 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, 2020. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, 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
To the Stockholders and the Board of Directors of
First Busey Corporation
Opinion on the Internal Control Over Financial Reporting
We have audited First Busey Corporation and Subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, 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, 2020, 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 25, 2021, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Champaign, Illinois
February 25, 2021

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other information
None.
Part III

---

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 2021 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 2021 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, 2020. 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
Plan Category
and rights
rights(1)
column (a))
Equity compensation plans approved by stockholders(2)
1,177,154
(3)
$
23.53
1,432,803
(4)
Equity compensation plans not approved by stockholders
-
-
-
Total
1,177,154
$
23.53
1,432,803
(1) The weighted average exercise price only relates to 39,085 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 Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan and the First Community Financial Partners, Inc. 2016 Equity Incentive Plan.
(3) Balance includes stock options assumed in connection with the acquisition of First Community Financial Partners, Inc.
(4) All shares are reserved under the First Busey Corporation 2020 Equity Incentive Plan.
Other information required by Item 12 is incorporated herein by reference to First Busey’s Proxy Statement for its 2021 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 2021 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 2021 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. Exhibits and Financial Statement Schedules
Exhibits
A list of exhibits to this Annual Report is set forth on the Exhibit Index immediately preceding the Signatures page, and is incorporated into this Annual Report by reference. Our Consolidated Financial Statements can be found immediately following the Report of Independent Registered Public Accounting Firm.
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.