FIRST BUSEY CORP /NV/ - Interim / Quarterly Report 2019

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended 9/30/2019

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 0-15950

FIRST BUSEY CORPORATION

(Exact name of registrant as specified in its charter)


Nevada		37-1078406
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 W. University Ave. Champaign , Illinois		61820
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: ( 217 ) 365-4544

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer ☐
Non-accelerated filer	☐	Smaller reporting company ☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol (s)	Name of each exchange on which registered
Common Stock , $.001 par value	BUSE	The Nasdaq Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at November 7, 2019
Common Stock, $.001 par value		55,047,777

Table of Contents

FIRST BUSEY CORPORATION

FORM 10-Q

September 30, 2019

Table of Contents

Part I	FINANCIAL INFORMATION	—

Item 1.	FINANCIAL STATEMENTS	3
	CONSOLIDATED BALANCE SHEETS	4
	CONSOLIDATED STATEMENTS OF INCOME	5
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	6
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	7
	CONSOLIDATED STATEMENTS OF CASH FLOWS	9
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	11
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	42
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61
Item 4.	CONTROLS AND PROCEDURES	62

Part II	OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	62
Item 1A.	RISK FACTORS	62
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	63
Item 3.	DEFAULTS UPON SENIOR SECURITIES	63
Item 4.	MINE SAFETY DISCLOSURES	63
Item 5.	OTHER INFORMATION	63
Item 6.	EXHIBITS	64
	SIGNATURES	65

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2019		December 31, 2018
	(dollars in thousands)
Assets
Cash and due from banks	$	139,523	$	128,838
Interest-bearing deposits		385,934		111,135
Total cash and cash equivalents		525,457		239,973

Debt securities available for sale		1,701,005		697,685
Debt securities held to maturity (fair value 2019 $ 15,399 ; 2018 $ 603,360 )		15,170		608,660
Equity securities		5,690		6,169
Loans held for sale, at fair value		70,345		25,895
Portfolio loans (net of allowance for loan losses 2019 $ 52,965 ; 2018 $ 50,648 )		6,616,450		5,517,780
Premises and equipment, net		153,641		117,672
Right of use asset		9,979		—
Goodwill		322,699		267,685
Other intangible assets, net		58,624		32,873
Cash surrender value of bank owned life insurance		172,512		128,491
Other assets		102,188		59,474
Total assets	$	9,753,760	$	7,702,357
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	1,779,490	$	1,464,700
Interest-bearing		6,150,976		4,784,621
Total deposits		7,930,466		6,249,321

Securities sold under agreements to repurchase		202,500		185,796
Short-term borrowings		29,739		—
Long-term debt		85,106		50,000
Senior notes, net of unamortized issuance costs		39,640		39,539
Subordinated notes, net of unamortized issuance costs		59,222		59,147
Junior subordinated debt owed to unconsolidated trusts		71,269		71,155
Lease liability		10,101		—
Other liabilities		109,736		52,435
Total liabilities		8,537,779		6,707,393

Outstanding commitments and contingent liabilities (see Note 11 )

Stockholders’ Equity
Common stock, $ .001 par value, authorized 66,666,667 shares; 55,910,733 shares issued 2019 and 49,185,581 shares issued 2018		56		49
Additional paid-in capital		1,247,560		1,080,084
Accumulated deficit		( 31,868 )		( 72,167 )
Accumulated other comprehensive income (loss)		17,391		( 6,812 )
Total stockholders’ equity before treasury stock		1,233,139		1,001,154

Treasury stock, at cost (2019 713,456 shares; 2018 310,745 shares)		( 17,158 )		( 6,190 )
Total stockholders’ equity		1,215,981		994,964
Total liabilities and stockholders’ equity	$	9,753,760	$	7,702,357

Common shares outstanding at period end		55,197,277		48,874,836

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018
	(dollars in thousands, except per share amounts)
Interest income:
Interest and fees on loans	$	78,083	$	63,589	$	227,903	$	186,839
Interest and dividends on investment securities:
Taxable interest income		10,247		7,357		31,583		19,670
Non-taxable interest income		1,180		1,166		3,456		3,630
Other interest income		2,181		649		4,496		1,580
Total interest income		91,691		72,761		267,438		211,719
Interest expense:
Deposits		14,753		8,946		41,407		21,837
Federal funds purchased and securities sold under agreements to repurchase		579		426		1,789		1,139
Short-term borrowings		200		324		885		1,257
Long-term debt		700		245		2,020		622
Senior notes		400		400		1,199		1,199
Subordinated notes		731		792		2,193		2,379
Junior subordinated debt owed to unconsolidated trusts		852		854		2,658		2,383
Total interest expense		18,215		11,987		52,151		30,816
Net interest income		73,476		60,774		215,287		180,903
Provision for loan losses		3,411		758		8,039		4,024
Net interest income after provision for loan losses		70,065		60,016		207,248		176,879
Non-interest income:
Fees for customer services		9,842		7,340		27,635		21,576
Trust fees		7,689		6,324		24,122		20,573
Commissions and brokers’ fees, net		1,132		881		3,216		2,860
Remittance processing		3,780		3,630		11,277		10,588
Mortgage revenue		3,331		1,272		8,127		4,488
Net gains on sales of securities		296		—		112		160
Unrealized gains (losses) recognized on equity securities		65		—		( 735 )		—
Other income		4,801		2,406		11,023		6,896
Total non-interest income		30,936		21,853		84,777		67,141
Non-interest expense:
Salaries, wages and employee benefits		38,747		26,024		105,356		80,315
Net occupancy expense of premises		4,652		3,761		13,365		11,271
Furniture and equipment expenses		2,489		1,715		6,936		5,418
Data processing		5,032		4,016		15,049		12,391
Amortization of intangible assets		2,360		1,445		6,866		4,450
Other expense		14,841		8,968		45,732		30,429
Total non-interest expense		68,121		45,929		193,304		144,274
Income before income taxes		32,880		35,940		98,721		99,746
Income taxes		8,052		9,081		24,339		26,108
Net income	$	24,828	$	26,859	$	74,382	$	73,638

Basic earnings per common share	$	0.45	$	0.55	$	1.36	$	1.51
Diluted earnings per common share	$	0.45	$	0.55	$	1.35	$	1.50
Dividends declared per share of common stock	$	0.21	$	0.20	$	0.63	$	0.60

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(dollars in thousands)
Net income	$	24,828	$	26,859	$	74,382	$	73,638
Other comprehensive income (loss):
Unrealized gains (losses) on debt securities available for sale:
Net unrealized holding gains (losses) on debt securities available for sale, net of taxes of $( 1,423 ) , $ 860 , $( 8,552 ) and $ 3,830 , respectively		3,568		( 2,159 )		21,453		( 9,609 )
Net unrealized gains on debt securities transferred from held to maturity to available for sale, net of taxes of $- , $- , $( 1,363 ) and $- , respectively		—		—		3,417		—
Reclassification adjustment for realized (gains) losses on debt securities available for sale included in net income, net of taxes of $ 85 , $- , $ 29 and $- , respectively		( 212 )		—		( 75 )		—
Net change in unrealized gains (losses) on debt securities available for sale		3,356		( 2,159 )		24,795		( 9,609 )

Unrealized gains (losses) on cash flow hedges:
Net unrealized holding gains (losses) on cash flow hedges, net of taxes of $ 239 , $- , $ 239 and $- , respectively		( 598 )		—		( 598 )		—
Reclassification adjustment for realized (gains) losses on cash flow hedges included in net income, net of taxes of $( 3 ) , $- , $( 3 ) and $- , respectively		6		—		6		—
Net change in unrealized gains (losses) on derivative instruments		( 592 )		—		( 592 )		—
Net change in accumulated other comprehensive income (loss)		2,764		( 2,159 )		24,203		( 9,609 )
Total comprehensive income (loss)	$	27,592	$	24,700	$	98,585	$	64,029

See accompanying notes to unaudited consolidated financial statements.

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FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(dollars in thousands, except per share amounts)


								Accumulated
				Additional				Other
		Common		Paid-in		Accumulated		Comprehensive		Treasury
	Shares	Stock		Capital		(Deficit)		Income (loss)		Stock		Total
For the Three Months Ended September 30, 2019
Balance, June 30, 2019	55,386,636	$	56	$	1,246,160	$	( 44,878 )	$	14,627	$	( 12,357 )	$	1,203,608
Net income	—		—		—		24,828		—		—		24,828
Other comprehensive income	—		—		—		—		2,764		—		2,764
Repurchase of stock	( 194,062 )		—		—		—		—		( 4,890 )		( 4,890 )
Issuance of treasury stock for employee stock purchase plan	4,378		—		21		—		—		83		104
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	—		—		( 6 )		—		—		—		( 6 )
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	325		—		( 6 )		—		—		6		—
Cash dividends common stock at $ 0.21 per share	—		—		—		( 11,632 )		—		—		( 11,632 )
Stock dividend equivalents restricted stock units at $ 0.21 per share	—		—		186		( 186 )		—		—		—
Stock-based compensation	—		—		1,205		—		—		—		1,205
Balance, September 30, 2019	55,197,277	$	56	$	1,247,560	$	( 31,868 )	$	17,391	$	( 17,158 )	$	1,215,981

For the Nine Months Ended September 30, 2019
Balance, December 31, 2018	48,874,836	$	49	$	1,080,084	$	( 72,167 )	$	( 6,812 )	$	( 6,190 )	$	994,964
Net income	—		—		—		74,382		—		—		74,382
Other comprehensive income	—		—		—		—		24,203		—		24,203
Stock issued in acquisition of Banc Ed, net of stock issuance costs	6,725,152		7		166,274		—		—		—		166,281
Repurchase of stock	( 527,396 )		—		—		—		—		( 13,323 )		( 13,323 )
Issuance of treasury stock for employee stock purchase plan	20,528		—		100		—		—		389		489
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	91,032		—		( 2,541 )		—		—		345		( 2,196 )
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	13,125		—		( 97 )		—		—		1,621		1,524
Cash dividends common stock at $ 0.63 per share	—		—		—		( 33,579 )		—		—		( 33,579 )
Stock dividend equivalents restricted stock units at $ 0.63 per share	—		—		504		( 504 )		—		—		—
Stock-based compensation	—		—		3,236		—		—		—		3,236
Balance, September 30, 2019	55,197,277	$	56	$	1,247,560	$	( 31,868 )	$	17,391	$	( 17,158 )	$	1,215,981

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited)

(dollars in thousands, except per share amounts)


								Accumulated
				Additional				Other
		Common		Paid-in		Accumulated		Comprehensive		Treasury
	Shares	Stock		Capital		(Deficit)		Income (loss)		Stock		Total
For the Three Months Ended September 30, 2018
Balance, June 30, 2018	48,776,404	$	49	$	1,082,323	$	( 104,504 )	$	( 10,865 )	$	( 9,821 )	$	957,182
Net income	—		—		—		26,859		—		—		26,859
Other comprehensive loss	—		—		—		—		( 2,159 )		—		( 2,159 )
Issuance of treasury stock for employee stock purchase plan	3,080		—		33		—		—		58		91
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	72,805		—		( 4,184 )		—		—		3,121		( 1,063 )
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	8,020		—		( 138 )		—		—		178		40
Cash dividends common stock at $ 0.20 per share	—		—		—		( 9,756 )		—		—		( 9,756 )
Stock dividend equivalents restricted stock units at $ 0.20 per share	—		—		133		( 131 )		—		—		2
Stock-based compensation	—		—		944		—		—		—		944
Balance, September 30, 2018	48,860,309	$	49	$	1,079,111	$	( 87,532 )	$	( 13,024 )	$	( 6,464 )	$	972,140

For the Nine Months Ended September 30, 2018
Balance, December 31, 2017	48,684,943	$	49	$	1,084,889	$	( 132,122 )	$	( 2,810 )	$	( 15,003 )	$	935,003
Net income	—		—		—		73,638		—		—		73,638
Other comprehensive loss	—		—		—		—		( 9,609 )		—		( 9,609 )
Tax Cuts and Jobs Act of 2017 reclassification	—		—		—		605		( 605 )		—		—
Issuance of treasury stock for employee stock purchase plan	14,828		—		( 295 )		—		—		724		429
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	104,637		—		( 6,059 )		—		—		4,924		( 1,135 )
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	55,901		—		( 2,505 )		—		—		2,891		386
Cash dividends common stock at $ 0.60 per share	—		—		—		( 29,238 )		—		—		( 29,238 )
Stock dividend equivalents restricted stock units at $ 0.60 per share	—		—		415		( 415 )		—		—		—
Stock-based compensation	—		—		2,666		—		—		—		2,666
Balance, September 30, 2018	48,860,309	$	49	$	1,079,111	$	( 87,532 )	$	( 13,024 )	$	( 6,464 )	$	972,140

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2019		2018
	(dollars in thousands)
Cash Flows from Operating Activities
Net income	$	74,382	$	73,638
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		8,039		4,024
Amortization of intangible assets		6,866		4,450
Amortization of Mortgage Servicing Rights ("MSR")		2,061		1,153
Depreciation and amortization of premises and equipment		8,701		7,158
Net amortization (accretion) of premium (discount) on portfolio loans		( 8,300 )		( 8,615 )
Net amortization (accretion) of premium (discount) on investment securities		4,538		6,545
Net amortization (accretion) of premium (discount) on time deposits		( 1,243 )		( 191 )
Net amortization (accretion) of premium (discount) on Federal Home Loan Bank ("FHLB") advances and other borrowings		216		109
Impairment of other real estate owned ("OREO")		26		—
Impairment of fixed assets held for sale		—		817
Impairment of MSR		1,822		—
Change in fair value of loans held for sale, net		( 1,022 )		—
Change in fair value of equity securities, net		735		( 2,699 )
(Gain) loss on sales of securities, net		( 112 )		( 160 )
(Gain) loss on sale of loans, net		( 11,022 )		( 7,805 )
(Gain) loss on sale of OREO		( 81 )		—
(Gain) loss on sale of premises and equipment		114		186
(Gain) loss life insurance proceeds		( 1,509 )		—
Provision for deferred income taxes		3,816		4,696
Stock-based and non-cash compensation		3,236		2,666
Decrease in deferred compensation		( 3,339 )		—
Increase in cash surrender value of bank owned life insurance		( 3,050 )		( 926 )
Mortgage loans originated for sale		( 468,227 )		( 336,169 )
Proceeds from sales of mortgage loans		437,525		406,205
Net change in operating assets and liabilities:
(Increase) decrease in other assets		1,746		( 2,580 )
(Decrease) in other liabilities		( 3,603 )		( 5,366 )
Net cash provided by operating activities	$	52,315	$	147,136

Cash Flows from Investing Activities
Purchases of debt securities held to maturity		—		( 217,767 )
Purchases of debt securities available for sale		( 296,806 )		( 122,954 )
Purchase of FHLB stock		( 3,700 )		( 25,990 )
Proceeds from sales of securities classified held to maturity		—		31,815
Proceeds from sales of equity securities		958		920
Proceeds from sales of debt securities available for sale		227,371		—
Proceeds from paydowns and maturities of debt securities held to maturity		14,422		—
Proceeds from paydowns and maturities of debt securities available for sale		366,624		115,522
Proceeds from the redemption of FHLB stock		3,720		23,379
Net cash (paid) in acquisitions		( 61,481 )		—
Net change in loans		( 227,069 )		( 104,195 )
Cash paid for premiums on bank-owned life insurance		( 3 )		—
Purchases of premises and equipment		( 10,746 )		( 10,436 )
Proceeds from life insurance		3,915		—
Proceeds from disposition of premises and equipment		393		26
Capitalized expenditures on OREO		( 2 )		—
Proceeds from sale of OREO		2,071		4,275
Net cash provided by (used in) investing activities	$	19,667	$	( 305,405 )

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


	Nine Months Ended September 30,
	2019		2018
	(dollars in thousands)
Cash Flows from Financing Activities
Net change in deposits	$	243,184	$	69,796
Net change in federal funds purchased and securities sold under agreements to repurchase		( 33,895 )		( 48,660 )
Proceeds from other borrowings		60,000		—
Repayment of FHLB advances, net		( 3,479 )		( 20,000 )
Repayment of other borrowings		( 4,500 )		( 5,500 )
Cash dividends paid		( 33,579 )		( 29,238 )
Purchase of treasury stock		( 13,323 )		—
Cash paid for withholding taxes on share-based payments		( 841 )		( 1,136 )
Proceeds from stock options exercised		169		387
Common stock issuance costs		( 234 )		—
Net cash provided by (used in) financing activities	$	213,502	$	( 34,351 )

Net increase (decrease) in cash and cash equivalents		285,484		( 192,620 )
Cash and cash equivalents, beginning of period		239,973		353,272

Cash and cash equivalents, ending of period	$	525,457	$	160,652

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash Payments for:
Interest	$	51,230	$	26,665
Income taxes		15,205		20,127

Non-cash Investing and Financing Activities:
OREO acquired in settlement of loans		2,349		3,706
Transfer of debt securities held to maturity to available for sale		573,639		—

See accompanying notes to unaudited consolidated financial statements.

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FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Significant Accounting Policies

Basis of Financial Statement Presentation

When preparing these unaudited consolidated financial statements of First Busey Corporation and its subsidiaries (“First Busey,” “Company,” “we,” or “our”), a Nevada corporation, we have assumed that you have read the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). These interim unaudited consolidated financial statements serve to update our 2018 Form 10-K and may not include all information and notes necessary to constitute a complete set of financial statements.

We prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the current period presentation. These reclassifications did not have a material impact on our consolidated financial condition or results of operations.

In our opinion, the unaudited consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On October 4, 2019 TheBANK of Edwardsville (“TheBANK”) was merged with and into Busey Bank. On October 15, 2019, the Company began operations of First Busey Risk Management, Inc. (“First Busey Risk Management”), a new formed wholly-owned subsidiary of First Busey. First Busey Risk Management, incorporated in Nevada, is a captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Busey Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. First Busey Risk Management is subject to regulations of the State of Nevada and will be subject to periodic examinations by the Nevada Division of Insurance. Other than these events, there were no significant subsequent events for the quarter ended September 30, 2019 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

Use of Estimates

In preparing the accompanying unaudited consolidated financial statements in conformity with GAAP, the Company’s management is required to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities, fair value of assets acquired and liabilities assumed in business combinations, goodwill, income taxes and the determination of the allowance for loan losses.

Leases

Effective January 1, 2019, a determination is made at inception if an arrangement contains a lease. For arrangements that contain a lease, the Company recognizes the lease on the balance sheet as a right of use asset and corresponding lease liability. Lease-related assets, or right of use assets, are recognized on the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

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Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. If not readily determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the Company used a borrowing rate that corresponded to the remaining lease term.

The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability.

Impact of recently adopted accounting standards

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02 “Leases (Topic 842) and all subsequent ASUs that modified Topic 842. The Company made the following elections for all leases in connection with the adoption of this guidance:

● The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs;

● The Company did not elect the hindsight practical expedient ;

● The Company elected the optional transition method that allows companies to use the effective date as the date of initial application on transition. As a result, the Company did not adjust comparative period financial information or make the newly required lease disclosures for periods before the effective date;

● The Company elected not to apply the above guidance to short-term leases;

● The Company elected to separate the lease components from the nonlease components and exclude the nonlease components from the right-of-use asset and lease liability; and

● The Company did not elect the land easement practical expedient.

At the date of adoption, the Company recorded approximately $ 8.1 million on its Consolidated Balance Sheets to reflect the right of use asset and associated lease liability . The Company utilized its incremental borrowing rate, on a collateralized basis, for the remaining contractual lease term.

ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 amends Topic 815 to reduce the cost and complexity of applying hedge accounting and expands the types of relationships that qualify for hedge accounting. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, requires all items that affect earnings to be presented in the same income statement line as the hedged item, provides for applying hedge accounting to additional hedging strategies, provides for new approaches to measuring the hedged item in fair value hedges of interest rate risk, and eases the requirements for effective testing and hedge documentation. This guidance was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. During the first quarter of 2019, t he Company adopted this guidance, reassessed classification of certain investments, and transferred $ 573.6 million of securities from held to maturity to available for sale.

ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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Recently issued accounting standards

ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 implements a change from the current impaired loss model to an expected credit loss model over the life of an instrument, including loans and securities held to maturity. The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods with those years. The Company is executing a project plan to implement this guidance. The project plan includes an assessment of data, development of methodologies, model validation, parallel runs, refining qualitative factors and forecast periods and evaluating related disclosures. The Company is currently assessing the impact of adopting ASU 2016-13, which will be significantly influenced by the composition, characteristics and quality of the loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.

Note 2: Acquisition

The Banc Ed Corp.

On January 31, 2019, the Company completed its acquisition of The Banc Ed Corp. (“Banc Ed”). TheBANK, Banc Ed’s wholly-owned bank subsidiary, was operated as a separate subsidiary from the completion of the acquisition until October 4, 2019 when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers of Busey Bank.

Under the terms of the merger agreement with Banc Ed, at the effective time of the acquisition, each share of Banc Ed common stock issued and outstanding was converted into the right to receive 8.2067 shares of the Company’s common stock, cash in lieu of fractional shares and $ 111.53 in cash consideration per share. The market value of the 6.7 million shares of First Busey common stock issued at the effective time of the acquisition was approximately $ 166.5 million based on First Busey’s closing stock price of $ 24.76 on January 31, 2019.

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged was recorded at estimated fair values on the date of acquisition. Fair values are considered provisional until final fair values are determined or the measurement period has passed, but no later than one year from the acquisition date. Reviews of third party valuations are still being performed by management. Therefore amounts are subject to change and could change materially from the provisional amounts disclosed below. During the quarter ended September 30, 2019, the Company adjusted the provisional fair value estimates of Banc Ed’s assets acquired and liabilities assumed. Adjustments included a $ 0.1 million decrease to premises and equipment and a $ 0.3 decrease to other liabilities with a corresponding decrease to goodwill of $ 0.2 million.

First Busey incurred $ 6.5 million and $ 11.5 million in pre-tax expenses related to the acquisition of Banc Ed for the three and nine months ended September 30, 2019, respectively, primarily for salaries, wages and employee benefits, professional and legal fees and deconversion expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Statements of Income.

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The following table presents the estimated fair value of Banc Ed’s assets acquired and liabilities assumed as of January 31, 2019 (dollars in thousands) :


	Estimated
	Fair Value
Assets acquired:
Cash and cash equivalents	$	42,013
Securities		692,716
Loans held for sale		2,157
Portfolio loans		873,336
Premises and equipment		31,804
Other intangible assets		32,617
Mortgage servicing rights		6,946
Other assets		57,296
Total assets acquired		1,738,885

Liabilities assumed:
Deposits		1,439,203
Other borrowings		63,439
Other liabilities		24,760
Total liabilities assumed		1,527,402

Net assets acquired	$	211,483

Consideration paid:
Cash	$	91,400
Common stock		166,515
Total consideration paid	$	257,915

Goodwill	$	46,432

The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20, Receivables-Nonrefundable Fees and Other Costs , and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses. Purchased credit impaired (“PCI”) loans were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality . As of the acquisition date, the aggregate principal balance outstanding and aggregate fair value of the acquired performing loans were $ 889.3 million and $ 871.0 million, respectively. The difference between the carrying value and aggregate fair value of $ 17.0 million will be accreted over the estimated remaining life of the respective loans in a manner that approximates the level yield method. As of the acquisition date, the aggregate principal balance outstanding of PCI loans totaled $ 3.9 million and the aggregate fair value of PCI loans totaled $ 2.3 million. The accretable discount of $ 0.2 million on PCI loans represents the amount by which the undiscounted expected cash flows on such loans exceed their carrying value. The amount by which the contractual payments exceeds the undiscounted expected cash flows represents the non-accretable difference. The difference between contractually required payments at the acquisition date and the cash flow expected to be collected is referred to as the non-accretable difference. Further, the excess of cash flows expected at acquisition over the fair value is referred to as the accretable yield. At September 30, 2019, the carrying value of PCI loans acquired from Banc Ed was $ 1.5 million.

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Since the acquisition date, Banc Ed earned total revenues of $ 53.7 million and net income of $ 9.5 million, which are included in the Company’s unaudited Consolidated Statements of Income for the nine months ended September 30, 2019. The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 30, 2019 and 2018, as if the acquisition had occurred January 1, 2018. The pro forma results combine the historical results of Banc Ed into the Company’s unaudited Consolidated Statements of Income, including the impact of purchase accounting adjustments including loan discount accretion, intangible assets amortization, deposit accretion and premises accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2018. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions ( dollars in thousands, except per share amounts) :


		Pro Forma
		Three Months Ended September 30,			Nine Months Ended September 30,
		2019		2018		2019	2018
Total revenues (net interest income plus non- interest income)	$	104,543	$	101,001	$	305,709	$	306,472
Net income		30,811		31,641		84,742		87,972
Diluted earnings per common share		0.55		0.57		1.51		1.60

Investors’ Security Trust Company

On August 31, 2019, the Company completed the previously announced acquisition by Busey Bank of Investors’ Security Trust Company (“IST”), a Fort Myers, Florida wealth management firm. While the partnership is expected to add to the Company’s wealth management offerings, it is not expected to have any immediate, material impact on the Company’s earnings or overall business.

First Busey incurred $ 0.5 million and $ 0.7 million in pre-tax expenses related to the acquisition of IST for the three and nine months ended September 30, 2019, respectively, primarily for professional and legal fees, which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Statements of Income.

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Note 3: Securities

The table below provides the amortized cost, unrealized gains and losses and fair values of debt securities summarized by major category (dollars in thousands) :


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2019:	Cost		Gains		Losses		Value
Debt securities available for sale
U.S. Treasury securities	$	51,395	$	262	$	( 6 )	$	51,651
Obligations of U.S. government corporations and agencies		202,393		3,273		( 53 )		205,613
Obligations of states and political subdivisions		263,345		5,733		( 16 )		269,062
Commercial mortgage-backed securities		121,338		2,248		( 18 )		123,568
Residential mortgage-backed securities		914,320		12,674		( 607 )		926,387
Corporate debt securities		123,061		1,668		( 5 )		124,724
Total	$	1,675,852	$	25,858	$	( 705 )	$	1,701,005

Debt securities held to maturity
Obligations of states and political subdivisions	$	15,170	$	229	$	—	$	15,399


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018:	Cost		Gains		Losses		Value
Debt securities available for sale
U.S. Treasury securities	$	25,824	$	1	$	( 414 )	$	25,411
Obligations of U.S. government corporations and agencies		53,096		7		( 761 )		52,342
Obligations of states and political subdivisions		171,131		484		( 1,571 )		170,044
Commercial mortgage-backed securities		2,003		—		( 61 )		1,942
Residential mortgage-backed securities		322,646		245		( 7,143 )		315,748
Corporate debt securities		132,513		61		( 376 )		132,198
Total	$	707,213	$	798	$	( 10,326 )	$	697,685

Debt securities held to maturity
Obligations of states and political subdivisions	$	33,947	$	68	$	( 87 )	$	33,928
Commercial mortgage-backed securities		59,054		11		( 1,003 )		58,062
Residential mortgage-backed securities		515,659		1,748		( 6,037 )		511,370
Total	$	608,660	$	1,827	$	( 7,127 )	$	603,360

In adopting ASU 2017-12, the Company reassessed the classification of certain investments during the first quarter of 2019 and transferred $ 573.6 million of securities from held to maturity to available for sale. The transfer occurred at fair value and had a related unrealized loss of $ 4.8 million recorded in other comprehensive income.

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The amortized cost and fair value of debt securities, by contractual maturity or pre-refunded date, are shown below. Mortgages underlying mortgage-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government agencies and corporations (dollars in thousands) .


	Debt securities available for sale		Debt securities held to maturity
	Amortized	Fair	Amortized	Fair
September 30, 2019:	Cost	Value	Cost	Value
Due in one year or less	$ 128,897	$ 129,230	$ 2,215	$ 2,218
Due after one year through five years	407,251	413,491	11,834	12,006
Due after five years through ten years	248,270	253,453	1,121	1,175
Due after ten years	891,434	904,831	—	—
Total	$ 1,675,852	$ 1,701,005	$ 15,170	$ 15,399

Realized gains and losses related to sales and calls of debt securities available for sale are summarized as follows (dollars in thousands) :


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Gross security gains	$	298	$	—	$	689	$	—
Gross security (losses)		( 1 )		—		( 585 )		—
Net (losses) gains on sales of securities (1)	$	297	$	—	$	104	$	—

(1) Net (losses) gains on sales of securities reported on the unaudited Consolidated Statements of Income includes sale of equity securities, excluded in this table.

Debt securities with carrying amounts of $ 768.7 million and $ 498.3 million on September 30, 2019 and December 31, 2018, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

The following information pertains to debt securities with gross unrealized losses, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (dollars in thousands):



	For less than				For greater
	12 months, gross				than 12 months, gross				Total, gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2019:	Value		Losses		Value		Losses		Value		Losses
Debt securities available for sale
U.S. Treasury securities	$	—	$	—	$	9,982	$	( 6 )	$	9,982	$	( 6 )
Obligations of U.S. government corporations and agencies		6,938		( 45 )		6,481		( 8 )		13,419		( 53 )
Obligations of states and political subdivisions		4,949		( 11 )		9,129		( 5 )		14,078		( 16 )
Commercial mortgage-backed securities		3,913		( 11 )		9,702		( 7 )		13,615		( 18 )
Residential mortgage-backed securities		43,372		( 47 )		57,319		( 560 )		100,691		( 607 )
Corporate debt securities		485		( 2 )		5,595		( 3 )		6,080		( 5 )
Total temporarily impaired securities	$	59,657	$	( 116 )	$	98,208	$	( 589 )	$	157,865	$	( 705 )

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	For less than				For greater
	12 months, gross				than 12 months, gross				Total, gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018:	Value		Losses		Value		Losses		Value		Losses
Debt securities available for sale
U.S. Treasury securities	$	995	$	( 4 )	$	24,343	$	( 410 )	$	25,338	$	( 414 )
Obligations of U.S. government corporations and agencies		749		( 3 )		50,744		( 758 )		51,493		( 761 )
Obligations of states and political subdivisions		49,893		( 460 )		77,651		( 1,111 )		127,544		( 1,571 )
Commercial mortgage-backed securities		—		—		1,942		( 61 )		1,942		( 61 )
Residential mortgage-backed securities		48,387		( 496 )		247,573		( 6,647 )		295,960		( 7,143 )
Corporate debt securities		90,713		( 268 )		15,083		( 108 )		105,796		( 376 )
Total temporarily impaired securities	$	190,737	$	( 1,231 )	$	417,336	$	( 9,095 )	$	608,073	$	( 10,326 )

Debt securities held to maturity
Obligations of states and political subdivisions	$	9,531	$	( 33 )	$	9,538	$	( 54 )	$	19,069	$	( 87 )
Commercial mortgage-backed securities		12,067		( 212 )		45,041		( 791 )		57,108		( 1,003 )
Residential mortgage-backed securities		77,071		( 974 )		245,128		( 5,063 )		322,199		( 6,037 )
Total temporarily impaired securities	$	98,669	$	( 1,219 )	$	299,707	$	( 5,908 )	$	398,376	$	( 7,127 )

Debt securities are periodically evaluated for other-than-temporary impairment (“OTTI”). As of September 30, 2019, the Company’s debt security portfolio consisted of 1,208 securities. The total number of debt securities in the investment portfolio in an unrealized loss position as of September 30, 2019 was 74 and represented an unrealized loss of 0.44 % of the aggregate fair value. The unrealized losses relate to changes in market interest rates and market conditions that do not represent credit-related impairments. Furthermore, the Company does not intend to sell such securities and it is more likely than not that the Company will recover the amortized cost prior to being required to sell the debt securities. Full collection of the amounts due according to the contractual terms of the debt securities is expected; therefore, the Company does not consider these investments to be OTTI at September 30, 2019. As of September 30, 2019, the Company did not hold general obligation bonds of any single issuer, the aggregate of which exceeded 10% of the Company’s stockholders’ equity.

Note 4: Portfolio loans

The distribution of portfolio loans is as follows (dollars in thousands) :


	September 30,		December 31,
	2019		2018
Commercial	$	1,680,491	$	1,405,106
Commercial real estate		2,793,380		2,366,823
Real estate construction		426,559		288,197
Retail real estate		1,717,555		1,480,133
Retail other		51,430		28,169
Portfolio loans	$	6,669,415	$	5,568,428

Allowance for loan losses		( 52,965 )		( 50,648 )
Portfolio loans, net	$	6,616,450	$	5,517,780

Net deferred loan origination costs included in the table above were $ 5.4 million as of September 30, 2019 and $ 5.6 million as of December 31, 2018. Net accretable purchase accounting adjustments included in the table above reduced loans by $ 22.5 million as of September 30, 2019 and $ 13.9 million as of December 31, 2018.

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The Company utilizes a loan grading scale to assign a risk grade to all of its loans. A description of the general characteristics of each grade is as follows:

● Pass - This category includes loans that are all considered acceptable credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that meet or exceed industry standards.

● Watch- This category includes loans that warrant a higher than average level of monitoring to ensure that weaknesses do not cause the inability of the credit to perform as expected. These loans are not necessarily a problem due to other inherent strengths of the credit, such as guarantor strength, but have above average concern and monitoring.

● Special mention- This category is for “Other Assets Specially Mentioned” loans that have potential weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

● Substandard- This category includes “Substandard” loans, determined in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

● Substandard Non-accrual- This category includes loans that have all the characteristics of a “Substandard” loan with additional factors that make collection in full highly questionable and improbable. Such loans are placed on non-accrual status and may be dependent on collateral with a value that is difficult to determine.

All loans are graded at their inception. Most commercial lending relationships that are $ 1.0 million or less are processed through an expedited underwriting process. If the credit receives a pass grade, it is aggregated into a homogenous pool of either: $ 0.35 million or less, or $ 0.35 million to $ 1.0 million. These pools are monitored on a regular basis and reviewed annually. Most commercial loans greater than $ 1.0 million are included in a portfolio review at least annually. Commercial loans greater than $ 0.35 million that have a grading of special mention or worse are reviewed on a quarterly basis. Interim reviews may take place if circumstances of the borrower warrant a more timely review.

The following table is a summary of risk grades segregated by category of portfolio loans (excluding accretable purchase accounting adjustments and clearings) (dollars in thousands) :


	September 30, 2019
			Special		Substandard
	Pass	Watch	Mention	Substandard	Non-accrual
Commercial	$ 1,393,420	$ 167,439	$ 63,516	$ 47,765	$ 10,708
Commercial real estate	2,474,248	189,443	91,689	38,018	11,852
Real estate construction	397,377	24,050	5,151	1,130	611
Retail real estate	1,670,187	14,231	7,565	7,963	8,591
Retail other	51,752	79	—	13	65
Total	$ 5,986,984	$ 395,242	$ 167,921	$ 94,889	$ 31,827

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	December 31, 2018
			Special		Substandard
	Pass	Watch	Mention	Substandard	Non-accrual
Commercial	$ 1,126,257	$ 172,449	$ 47,000	$ 42,532	$ 17,953
Commercial real estate	2,106,711	137,214	85,148	36,205	10,298
Real estate construction	268,069	14,562	3,899	1,888	18
Retail real estate	1,448,964	6,425	6,792	5,435	6,698
Retail other	26,707	—	—	—	30
Total	$ 4,976,708	$ 330,650	$ 142,839	$ 86,060	$ 34,997

An analysis of portfolio loans that are past due and still accruing or on a non-accrual status is as follows (dollars in thousands) :


	September 30, 2019
	Loans past due, still accruing			Non-accrual
	30-59 Days	60-89 Days	90+Days	Loans
Commercial	$ 464	$ 584	$ 698	$	10,708
Commercial real estate	474	3,040	222		11,852
Real estate construction	229	198	—		611
Retail real estate	4,119	3,252	354		8,591
Retail other	66	8	2		65
Total	$ 5,352	$ 7,082	$ 1,276	$	31,827


	December 31, 2018
	Loans past due, still accruing			Non-accrual
	30-59 Days	60-89 Days	90+Days	Loans
Commercial	$ 158	$ 140	$ 775	$ 17,953
Commercial real estate	148	558	—	10,298
Real estate construction	121	—	58	18
Retail real estate	4,578	1,368	766	6,698
Retail other	48	2	2	30
Total	$ 5,053	$ 2,068	$ 1,601	$ 34,997

The gross interest income that would have been recorded in the three months ended September 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $ 0.5 million and $ 0.4 million, respectively. The gross interest income that would have been recorded in the nine months ended September 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $ 1.6 million and $ 1.1 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant for the three and nine months ended September 30, 2019 and 2018.

A summary of troubled debt restructurings (“TDR”) loans is as follows (dollars in thousands) :


	September 30,	December 31,
	2019	2018
In compliance with modified terms	$ 8,778	$ 8,319
30 — 89 days past due	—	127
Included in non-performing loans	3,557	392
Total	$ 12,335	$ 8,838

Loans classified as a TDR during the three and nine months ended September 30, 2019 included one commercial loan for short-term interest rate relief, with a recorded investment of $ 0.3 million. There were no loans classified as TDRs during the three months ended September 30, 2018. Loans classified as a TDR during the nine months ended September

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30, 2018 included one retail real estate modification for short-term interest rate relief, with a recorded investment of $ 0.1 million.

The gross interest income that would have been recorded in the three and nine months ended September 30, 2019 and 2018 if TDRs had performed in accordance with their original terms compared with their modified terms was insignificant.

One commercial real estate TDR, with a recorded investment of $ 3.2 million, that was entered into during the last 12 months, was subsequently classified as non-performing and had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual) during the nine months ended September 30, 2019. There were no TDRs that were entered into during the prior twelve months that were subsequently classified as non-performing and had payment defaults during the three and nine months ended September 30, 2018.

At September 30, 2019, the Company had $ 3.1 million of residential real estate in the process of foreclosure.

The following tables provide details of loans identified as impaired, segregated by category. The unpaid contractual principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan. The average recorded investment is calculated using the most recent four quarters (dollars in thousands) .


	September 30, 2019
	Unpaid	Recorded
	Contractual	Investment		Recorded		Total			Average
	Principal	with No		Investment		Recorded	Related		Recorded
	Balance	Allowance		with Allowance		Investment	Allowance		Investment
Commercial	$ 16,593	$	9,237	$	3,262	$ 12,499	$	2,671	$ 16,070
Commercial real estate	19,011		8,566		8,823	17,389		2,497	18,104
Real estate construction	1,071		929		—	929		—	759
Retail real estate	14,869		13,141		474	13,615		474	13,569
Retail other	98		67		—	67		—	37
Total	$ 51,642	$	31,940	$	12,559	$ 44,499	$	5,642	$ 48,539


	December 31, 2018
	Unpaid	Recorded
	Contractual	Investment	Recorded	Total			Average
	Principal	with No	Investment	Recorded	Related		Recorded
	Balance	Allowance	with Allowance	Investment	Allowance		Investment
Commercial	$ 21,442	$ 6,858	$ 12,001	$ 18,859	$	4,319	$ 13,364
Commercial real estate	19,079	13,082	4,498	17,580		1,181	18,077
Real estate construction	478	453	—	453		—	712
Retail real estate	14,418	13,196	61	13,257		61	14,110
Retail other	117	33	—	33		—	40
Total	$ 55,534	$ 33,622	$ 16,560	$ 50,182	$	5,561	$ 46,303

Management's evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The Company holds acquired loans from business combinations with uncollected principal balances. These loans are carried net of a fair value adjustment for credit risk and interest rates and are only included in the allowance calculation

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to the extent that the reserve requirement exceeds the fair value adjustment. As the acquired loans renew, it is generally necessary to establish an allowance, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans. The recorded investment of all acquired loans as of September 30, 2019 totaled approximately $ 1.7 billion.

The following table details activity in the allowance for loan losses. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories (dollars in thousands) :


	As of and for the Three Months Ended September 30, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	16,733	$	20,188	$	3,305	$	10,613	$	536	$	51,375
Provision for loan losses		463		3,167		( 359 )		( 86 )		226		3,411
Charged-off		( 817 )		( 1,168 )		—		( 226 )		( 288 )		( 2,499 )
Recoveries		147		33		164		221		113		678
Ending balance	$	16,526	$	22,220	$	3,110	$	10,522	$	587	$	52,965

	As of and for the Nine Months Ended September 30, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	17,829	$	21,137	$	2,723	$	8,471	$	488	$	50,648
Provision for loan losses		3,417		1,981		54		2,212		375		8,039
Charged-off		( 5,187 )		( 1,183 )		—		( 943 )		( 596 )		( 7,909 )
Recoveries		467		285		333		782		320		2,187
Ending balance	$	16,526	$	22,220	$	3,110	$	10,522	$	587	$	52,965


	As of and for the Three Months Ended September 30, 2018
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	17,586	$	23,047	$	2,915	$	9,293	$	464	$	53,305
Provision for loan losses		2,388		( 1,291 )		( 15 )		( 399 )		75		758
Charged-off		( 1,144 )		( 62 )		—		( 695 )		( 286 )		( 2,187 )
Recoveries		136		58		32		423		218		867
Ending balance	$	18,966	$	21,752	$	2,932	$	8,622	$	471	$	52,743

	As of and for the Nine Months Ended September 30, 2018
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	14,779	$	21,813	$	2,861	$	13,783	$	346	$	53,582
Provision for loan losses		7,111		1,154		22		( 4,609 )		346		4,024
Charged-off		( 3,841 )		( 1,487 )		( 97 )		( 1,637 )		( 608 )		( 7,670 )
Recoveries		917		272		146		1,085		387		2,807
Ending balance	$	18,966	$	21,752	$	2,932	$	8,622	$	471	$	52,743

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The following table presents the allowance for loan losses and recorded investments in portfolio loans by category (dollars in thousands) :


	As of September 30, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance for loan losses
Ending balance attributed to:
Loans individually evaluated for impairment	$	2,671	$	2,497	$	—	$	474	$	—	$	5,642
Loans collectively evaluated for impairment		13,855		19,723		3,110		10,048		587		47,323
Ending balance	$	16,526	$	22,220	$	3,110	$	10,522	$	587	$	52,965

Loans:
Loans individually evaluated for impairment	$	12,481	$	14,954	$	494	$	12,693	$	67	$	40,689
Loans collectively evaluated for impairment		1,667,992		2,775,991		425,630		1,703,940		51,363		6,624,916
PCI loans evaluated for impairment		18		2,435		435		922		—		3,810
Ending balance	$	1,680,491	$	2,793,380	$	426,559	$	1,717,555	$	51,430	$	6,669,415


	As of December 31, 2018
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance for loan losses
Ending balance attributed to:
Loans individually evaluated for impairment	$	4,319	$	1,181	$	—	$	61	$	—	$	5,561
Loans collectively evaluated for impairment		13,510		19,956		2,723		8,410		488		45,087
Ending balance	$	17,829	$	21,137	$	2,723	$	8,471	$	488	$	50,648

Loans:
Loans individually evaluated for impairment	$	18,441	$	15,318	$	453	$	13,159	$	33	$	47,404
Loans collectively evaluated for impairment		1,386,247		2,349,243		287,744		1,466,876		28,136		5,518,246
PCI loans evaluated for impairment		418		2,262		—		98		—		2,778
Ending balance	$	1,405,106	$	2,366,823	$	288,197	$	1,480,133	$	28,169	$	5,568,428

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Note 5: Deposits

The composition of deposits is as follows (dollars in thousands) :


	September 30, 2019	December 31, 2018
Demand deposits, noninterest-bearing	$ 1,779,490	$	1,464,700
Interest-bearing transaction deposits	2,039,095		1,435,574
Saving deposits and money market deposits	2,458,910		1,852,044
Time deposits	1,652,971		1,497,003
Total	$ 7,930,466	$	6,249,321

The Company held brokered saving deposits and money market deposits of $ 14.7 million and $ 17.5 million at September 30, 2019 and December 31, 2018, respectively.

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $ 899.3 million and $ 673.7 million at September 30, 2019 and December 31, 2018, respectively. The aggregate amount of time deposits with a minimum denomination that meets or exceeds the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 was approximately $ 309.2 million and $ 264.1 million at September 30, 2019 and December 31, 2018, respectively. The Company held brokered time deposits of $ 57.3 million and $ 262.5 million at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, the scheduled maturities of time deposits are as follows (dollars in thousands) :


October 1, 2019 – September 30, 2020	$	468,221
October 1, 2020 – September 30, 2021		167,271
October 1, 2021 – September 30, 2022		80,492
October 1, 2022 – September 30, 2023		55,019
October 1, 2023 – September 30, 2024		881,935
Thereafter		33
	$	1,652,971

Note 6: Borrowings

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The underlying securities are held by the Company’s safekeeping agent. The Company may be required to provide additional collateral based on fluctuations in the fair value of the underlying securities.

Short-term borrowings include FHLB advances which mature in less than one year from date of origination.

On January 29, 2019, the Company entered into an Amended and Restated Credit Agreement providing for a $ 60.0 million term loan (the “Term Loan”) with a maturity date of November 30, 2023. The Term Loan has an annual interest rate of one-month LIBOR plus a spread of 1.50 % . The proceeds of the Term Loan were used to fund the cash consideration related to the acquisition of Banc Ed. The Company had $ 55.5 million outstanding indebtedness on September 30, 2019, comprised of $ 6.0 million of short-term debt and $ 49.5 million of long-term debt.

The Amended and Restated Credit Agreement also retained the Company’s $ 20.0 million revolving facility with a maturity date of April 30, 2019. On April 19, 2019, the Company entered into an amendment to the Amended and Restated Credit Agreement to extend the maturity of its revolving loan facility to April 30, 2020. The revolving facility incurs a non-usage fee based on the undrawn amount. The Company had no outstanding balance under the revolving facility on September 30, 2019 or December 31, 2018.

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Long-term debt is summarized as follows (dollars in thousands) :


	September 30,		December 31,
	2019		2018
Notes payable, FHLB, ranging in original maturity from seven to 10 years , collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock.	$	35,606	$	50,000
Notes payable		49,500		—
Total long-term borrowings	$	85,106	$	50,000

As of September 30, 2019, long-term debt from the FHLB consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 1.57 % to 3.04 % . The weighted average rate on the long-term advances was 1.80 % as of September 30, 2019. As of December 31, 2018, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 2.20 % to 2.41 % . The weighted average rate on the long-term advances was 2.28 % as of December 31, 2018.

On May 25, 2017, the Company issued $ 40.0 million of 3.75 % senior notes that mature on May 25, 2022. The senior notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017. The senior notes are not subject to optional redemption by the Company. Additionally, on May 25, 2017, the Company issued $ 60.0 million of fixed-to-floating rate subordinated notes that mature on May 25, 2027. The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 4.75 % for the first five years after issuance and thereafter bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.919 % , as calculated on each applicable determination date. The subordinated notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017 during the five year fixed-term and thereafter on February 25, May 25, August 25 and November 25 of each year, commencing on August 25, 2022. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. The senior notes and subordinated notes are unsecured obligations of the Company. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $ 0.4 million and $ 0.8 million, respectively, at September 30, 2019. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $ 0.5 million and $ 0.9 million, respectively, at December 31, 2018.

Note 7: Junior Subordinated Debt Owed to Unconsolidated Trusts

First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrent with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The trust preferred securities are instruments that qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment. In connection with the acquisition of Pulaski Financial Corp. (“Pulaski”) in 2016, the Company acquired similar statutory trusts maintained by Pulaski and the fair value adjustment is being accreted over the weighted average remaining life. The Company had $ 71.3 million and $ 71.2 million of junior subordinated debt owed to unconsolidated trusts at September 30, 2019 and December 31, 2018, respectively.

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at par value at the stated maturity date or upon redemption. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes.

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The Company’s obligations under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes, in which case the distributions on the trust preferred securities will also be deferred, for up to five years , but not beyond the stated maturity date.

Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25 % limitation to all core (Tier 1) capital elements, net of goodwill and other intangible assets less any associated deferred tax liability. As of September 30, 2019, 100 % of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.

The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $ 15.0 billion of assets, they may be retained, subject to certain restrictions. Because the Company has assets of less than $ 15.0 billion, it is able to maintain its trust preferred proceeds as capital, but the Company has to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

Note 8: Earnings Per Common Share

Earnings per common share have been computed as follows (in thousands, except per share data) :


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	24,828	$	26,859	$	74,382	$	73,638
Shares:
Weighted average common shares outstanding		55,410		48,892		54,783		48,828
Dilutive effect of outstanding options, warrants and restricted stock units as determined by the application of the treasury stock method		236		355		275		388

Weighted average common shares outstanding, as adjusted for diluted earnings per share calculation		55,646		49,247		55,058		49,216

Basic earnings per common share	$	0.45	$	0.55	$	1.36	$	1.51

Diluted earnings per common share	$	0.45	$	0.55	$	1.35	$	1.50

Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding, which include deferred stock units that are vested but not delivered.

Diluted earnings per common share is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s outstanding stock options and warrants were exercised and restricted stock units were vested. At September 30, 2019, 385,322 outstanding restricted stock units and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents. At September 30, 2018, 172,571 outstanding restricted stock equivalents and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents.

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Note 9: Accumulated Other Comprehensive Income (Loss)

The following table represents changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods below (dollars in thousands) :


		Three Months Ended
		September 30,
		2019						2018
		Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect		Net of Tax
Unrealized gains (losses) on debt securities available for sale:
Balance at beginning of period	$	20,459	$	( 5,832 )	$	14,627	$	( 15,197 )	$	4,332	$	( 10,865 )
Unrealized holding gains (losses) on debt securities available for sale, net		4,991		( 1,423 )		3,568		( 3,019 )		860		( 2,159 )
Unrealized gains on debt securities transferred from held to maturity to available for sale		—		—		—		—		—		—
Amounts reclassified from accumulated other comprehensive income, net		( 297 )		85		( 212 )		—		—		—
Tax Cuts and Jobs Act of 2017 reclassification		—		—		—		—		—		—
Balance at end of period	$	25,153	$	( 7,170 )	$	17,983	$	( 18,216 )	$	5,192	$	( 13,024 )

Unrealized gains (losses) on cash flow hedges:
Balance at beginning of period		—		—		—		—		—		—
Unrealized holding gains (losses) on cash flow hedges, net		( 837 )		239		( 598 )		—		—		—
Amounts reclassified from accumulated other comprehensive income, net		9		( 3 )		6		—		—		—
Balance at end of period	$	( 828 )	$	236	$	( 592 )	$	—	$	—	$	—
Total accumulated other comprehensive income (loss)	$	24,325	$	( 6,934 )	$	17,391	$	( 18,216 )	$	5,192	$	( 13,024 )

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		Nine Months Ended
		September 30,
		2019				2018
		Before Tax	Tax Effect	Net of Tax		Before Tax	Tax Effect	Net of Tax
Unrealized gains (losses) on debt securities available for sale:
Balance at beginning of period	$	( 9,528 )	2,716	( 6,812 )	$	( 4,777 )	1,967	( 2,810 )
Unrealized holding gains (losses) on debt securities available for sale, net		30,005	( 8,552 )	21,453		( 13,439 )	3,830	( 9,609 )
Unrealized gains on debt securities transferred from held to maturity to available for sale		4,780	( 1,363 )	3,417		—	—	—
Amounts reclassified from accumulated other comprehensive income, net		( 104 )	29	( 75 )		—	—	—
Tax Cuts and Jobs Act of 2017 reclassification		—	—	—		—	( 605 )	( 605 )
Balance at end of period	$	25,153	( 7,170 )	17,983	$	( 18,216 )	5,192	( 13,024 )

Unrealized gains (losses) on cash flow hedges:
Balance at beginning of period		—	—	—		—	—	—
Unrealized holding gains (losses) on cash flow hedges, net		( 837 )	239	( 598 )		—	—	—
Amounts reclassified from accumulated other comprehensive income, net		9	( 3 )	6		—	—	—
Balance at end of period	$	( 828 )	236	( 592 )	$	—	—	—
Total accumulated other comprehensive income (loss)	$	24,325	( 6,934 )	17,391	$	( 18,216 )	5,192	( 13,024 )

Note 10: Share-based Compensation

The Company currently grants share-based compensation in the form of restricted stock units (“RSUs”) and deferred stock units (“DSUs”). The Company grants RSUs to members of management periodically throughout the year. Each RSU is equivalent to one share of the Company’s common stock. These units have requisite service periods ranging from one to five years . The Company annually grants share-based awards in the form of DSUs, which are RSUs with a deferred settlement date, to its board of directors and advisory directors. Each DSU is equivalent to one share of the Company’s common stock. The DSUs vest over a twelve-month period following the grant date or on the date of the next Annual Meeting of Stockholders, whichever is earlier. These units generally are subject to the same terms as RSUs under the Company’s 2010 Equity Plan or the First Community 2016 Equity Plan, except that, following vesting, settlement occurs within 30 days following the earlier of separation from the board or a change in control of the Company. Subsequent to vesting and prior to delivery, these units will continue to earn dividend equivalents. The Company also has outstanding stock options granted prior to 2011 and stock options assumed from acquisitions.

A description of the 2010 Equity Incentive Plan, which was amended in 2015, can be found in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders. A description of the First Community 2016 Equity Incentive Plan can be found in the Proxy Statement of First Community Financial Partners, Inc. for the 2016 Annual Meeting of Stockholders.

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Stock Option Plan

A summary of the status of and changes in the Company's stock option awards for the nine months ended September 30, 2019 follows:


		Weighted-	Weighted-
		Average	Average
		Exercise	Remaining Contractual
	Shares	Price	Term
Outstanding at beginning of period	87,600	$ 20.58
Exercised	( 23,561 )	17.69
Forfeited	( 3,003 )	23.53
Expired	( 5,767 )	17.38
Outstanding at end of period	55,269	$ 21.99	6.11
Exercisable at end of period	39,825	$ 21.39	5.71

The Company recorded an insignificant amount and $ 0.1 million in stock option compensation expense for the three and nine months ended September 30, 2019, related to the converted options from First Community. The Company recorded $ 0.1 million and $ 0.2 million in stock option compensation expense for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, the Company had an insignificant amount of unrecognized stock option expense. This cost is expected to be recognized the fourth quarter of 2019.

Restricted Stock Unit Plan

A summary of the changes in the Company’s stock unit awards for the nine months ended September 30, 2019, is as follows:


		Weighted-	Director	Weighted-
	Restricted	Average	Deferred	Average
	Stock	Grant Date	Stock	Grant Date
	Units	Fair Value	Units	Fair Value
Non-vested at beginning of period	690,495	$ 26.14	20,449	$ 27.93
Granted	216,411	26.73	20,984	26.78
Dividend equivalents earned	17,559	26.07	1,961	26.07
Vested	( 104,760 )	18.40	( 20,723 )	31.18
Forfeited	( 4,712 )	30.47	( 1,523 )	31.62
Non-vested at end of period	814,993	$ 27.26	21,148	$ 23.17
Outstanding at end of period	814,993	$ 27.26	89,831	$ 23.36

Recipients earn quarterly dividend equivalents on their respective units which entitle the recipients to additional units. Therefore, dividends earned each quarter compound based upon the updated unit balances. Upon vesting/delivery, shares are expected (though not required) to be issued from treasury.

On July 5, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted 185,400 RSUs to members of management, and under the terms of the First Community 2016 Equity Incentive Plan, granted 10,644 RSUs to members of management who were legacy First Community employees. As the stock price on the grant date of July 5, 2019 was $ 26.78 , total compensation cost to be recognized is $ 5.3 million. This cost will be recognized over a period of five years . Subsequent to the requisite service period, the awards will become 100 % vested . Further, the Company granted 8,775 RSUs, under the terms of the 2010 Equity Incentive Plan, to the Chairman of the Board. As the stock price on the grant date of July 5, 2019 was $ 26.78 , total compensation cost to be recognized is $ 0.2 million. This cost will be recognized over a period of five years . Subsequent to the requisite service period, the awards will become 100 % vested. Finally, on September 25, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted 11,592 RSUs to a member of management. As the stock price on the grant date of September 25, 2019 was $ 25.88 , total compensation

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cost to be recognized is $ 0.3 million. This cost will be recognized over a period of three years . Subsequent to the requisite service period, the awards will become 100 % vested.

On July 5, 2019, under the terms of the 2010 Equity Incentive Plan, the Company granted 17,549 DSUs to directors, and under the terms of the First Community 2016 Equity Incentive Plan, granted 1,867 DSUs to a director who was a legacy First Community director. In addition, under the terms of the 2010 Equity Incentive Plan, the Company granted 1,568 advisory DSUs to advisory directors. As the stock price on the grant date of July 5, 2019 was $ 26.78 , total compensation cost to be recognized is $ 0.6 million. These costs will be recognized over the requisite service period of one year from the date of grant or the next Annual Meeting of Stockholders, whichever is earlier.

The Company recognized $ 1.2 million and $ 0.9 million of compensation expense related to both non-vested RSUs and DSUs for the three months ended September 30, 2019 and 2018, respectively. The Company recognized $ 3.1 million and $ 2.5 million of compensation expense related to both non-vested RSUs and DSUs for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $ 14.0 million of total unrecognized compensation cost related to these non-vested stock awards. This cost is expected to be recognized over a period of 3.6 years.

As of September 30, 2019, 535,377 shares remain available for issuance pursuant to the Company’s 2010 Equity Incentive Plan, 50,463 shares remain available for issuance pursuant to the Company’s Employee Stock Purchase Plan and 297,216 shares remain available for issuance pursuant to the First Community 2016 Equity Incentive Plan.

Note 11: Outstanding Commitments and Contingent Liabilities

Legal Matters

The Company is a party to legal actions which arise in the normal course of its business activities. In the opinion of management, the ultimate resolution of these matters is not expected to have a material effect on the financial position or the results of operations of the Company.

Credit Commitments and Contingencies

A summary of the contractual amount of the Company’s exposure to off-balance-sheet risk relating to the Company’s commitments to extend credit and standby letters of credit follows (dollars in thousands) :


	September 30, 2019		December 31, 2018
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,664,799	$	1,398,483
Standby letters of credit		40,073		32,156

Note 12: Regulatory Capital

The Company and the subsidiary banks are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Banking regulations identify five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of September 30, 2019 and December 31, 2018, all capital ratios of the Company and the subsidiary banks exceeded the well capitalized levels under the applicable regulatory capital adequacy guidelines. Management believes that no events or changes have occurred subsequent to September 30, 2019 that would change this designation.

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The following tables summarize the applicable holding company and bank regulatory capital requirements (dollars in thousands) :


									Minimum
					Minimum				To Be Well
	Actual				Capital Requirement				Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019:
Total Capital (to Risk Weighted Assets)
Consolidated	$	1,020,195	13.71	%	$	595,295	8.00	%	$	744,118	10.00	%
Busey Bank	$	883,146	13.93	%	$	507,070	8.00	%	$	633,837	10.00	%
TheBANK	$	198,244	18.08	%	$	87,743	8.00	%	$	109,678	10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	907,230	12.19	%	$	446,471	6.00	%	$	595,295	8.00	%
Busey Bank	$	830,995	13.11	%	$	380,303	6.00	%	$	507,070	8.00	%
TheBANK	$	197,430	18.00	%	$	65,807	6.00	%	$	87,743	8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	833,230	11.20	%	$	334,854	4.50	%	$	483,677	6.50	%
Busey Bank	$	830,995	13.11	%	$	285,227	4.50	%	$	411,994	6.50	%
TheBANK	$	197,430	18.00	%	$	49,356	4.50	%	$	71,291	6.50	%

Tier 1 Capital (to Average Assets)
Consolidated	$	907,230	9.78	%	$	371,129	4.00	%		N/A	N/A
Busey Bank	$	830,995	11.12	%	$	298,943	4.00	%	$	373,679	5.00	%
TheBANK	$	197,430	10.55	%	$	74,851	4.00	%	$	93,563	5.00	%


									Minimum
					Minimum				To Be Well
	Actual				Capital Requirement				Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2018:
Total Capital (to Risk Weighted Assets)
Consolidated	$	894,572	14.83	%	$	482,638	8.00	%	$	603,297	10.00	%
Busey Bank	$	854,351	14.19	%	$	481,701	8.00	%	$	602,126	10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	783,924	12.99	%	$	361,978	6.00	%	$	482,638	8.00	%
Busey Bank	$	803,703	13.35	%	$	361,276	6.00	%	$	481,701	8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	709,924	11.77	%	$	271,484	4.50	%	$	392,143	6.50	%
Busey Bank	$	803,703	13.35	%	$	270,957	4.50	%	$	391,382	6.50	%

Tier 1 Capital (to Average Assets)
Consolidated	$	783,924	10.36	%	$	302,704	4.00	%		N/A	N/A
Busey Bank	$	803,703	10.64	%	$	302,232	4.00	%	$	377,789	5.00	%

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In July 2013, the U.S. federal banking authorities approved the Basel III Rule for strengthening international capital standards. The Basel III Rule introduced a capital conservation buffer, composed entirely of Common Equity Tier 1 Capital (“CET1”), which is added to the minimum risk-weighted asset ratios. The capital conservation buffer is not a minimum capital requirement; however, banking institutions with a ratio of CET1 to risk-weighted assets below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. In order to refrain from restrictions on dividends, equity repurchases and discretionary bonus payments, banking institutions must maintain minimum ratios of (i) CET1 to risk-weighted assets of at least 7.00%, (ii) Tier 1 capital to risk-weighted assets of at least 8.50%, and (iii) Total capital to risk-weighted assets of at least 10.50%.

The ability of the Company to pay cash dividends to its stockholders and to service its debt is dependent on the receipt of cash dividends from its subsidiaries. Under applicable regulatory requirements, an Illinois state-chartered bank such as Busey Bank may not pay dividends in excess of its net profits. Because Busey Bank had been in an accumulated deficit position from 2009 thru 2018, it was not able to pay dividends in prior years. With prior approval from its regulators, however, an Illinois state-chartered bank in that situation was able to reduce its capital stock by amending its charter to decrease the authorized number of shares, and then make a subsequent distribution to its holding company. Using this approach, and with the approval of its regulators, Busey Bank has distributed funds to the Company, most recently in the amount of $ 40.0 million on October 12, 2018. Busey Bank returned to a positive retained earnings position in the second quarter of 2018 and, in 2019, returned to paying dividends.

Note 13: Operating Segments and Related Information

The Company has three reportable operating segments, Banking, Remittance Processing and Wealth Management. The Banking operating segment provides a full range of banking services to individual and corporate customers through its banking center network in Illinois, St. Louis, Missouri metropolitan area, southwest Florida and through its banking center in Indianapolis, Indiana. Banking services for Busey Bank and TheBANK are aggregated into the banking operating segment as they have similar operations and activities. The Remittance Processing operating segment provides for online bill payments, lockbox and walk-in payments. The Wealth Management operating segment provides a full range of asset management, investment and fiduciary services to individuals, businesses and foundations, tax preparation, philanthropic advisory services and farm and brokerage services.

The Company’s three operating segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. The “other” category consists of the Parent Company and the elimination of intercompany transactions.

The segment financial information provided below has been derived from information used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies in the “Note 1. Significant Accounting Policies” to Form 10-K. The Company accounts for intersegment revenue and transfers at current market value.

Following is a summary of selected financial information for the Company’s operating segments (dollars in thousands) :


	Goodwill				Total Assets
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018

Banking	$	293,431	$	246,999	$	9,704,121	$	7,656,709
Remittance Processing		8,992		8,992		43,138		39,278
Wealth Management		20,276		11,694		28,587		20,992
Other		—		—		( 22,086 )		( 14,622 )
Totals	$	322,699	$	267,685	$	9,753,760	$	7,702,357

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net interest income:
Banking	$	75,955	$	62,578	$	222,537	$	186,103
Remittance Processing		20		17		56		49
Wealth Management		—		110		—		304
Other		( 2,499 )		( 1,931 )		( 7,306 )		( 5,553 )
Total net interest income	$	73,476	$	60,774	$	215,287	$	180,903

Non-interest income:
Banking	$	18,301	$	11,196	$	46,743	$	33,827
Remittance Processing		4,088		4,042		12,386		11,812
Wealth Management		8,994		7,391		27,721		23,840
Other		( 447 )		( 776 )		( 2,073 )		( 2,338 )
Total non-interest income	$	30,936	$	21,853	$	84,777	$	67,141

Non-interest expense:
Banking	$	56,593	$	37,034	$	158,659	$	116,275
Remittance Processing		2,746		2,718		8,099		7,808
Wealth Management		6,043		4,307		17,356		13,921
Other		2,739		1,870		9,190		6,270
Total non-interest expense	$	68,121	$	45,929	$	193,304	$	144,274

Income before income taxes:
Banking	$	34,252	$	35,982	$	102,582	$	99,631
Remittance Processing		1,362		1,341		4,343		4,053
Wealth Management		2,951		3,194		10,365		10,223
Other		( 5,685 )		( 4,577 )		( 18,569 )		( 14,161 )
Total income before income taxes	$	32,880	$	35,940	$	98,721	$	99,746

Net income:
Banking	$	25,731	$	26,486	$	76,837	$	73,235
Remittance Processing		972		957		3,102		2,896
Wealth Management		2,184		2,280		7,670		7,332
Other		( 4,059 )		( 2,864 )		( 13,227 )		( 9,825 )
Total net income	$	24,828	$	26,859	$	74,382	$	73,638

Note 14: Derivative Financial Instruments

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale, forward sales commitments to sell residential mortgage loans to investors and interest rate swaps with customers and other third parties. See “Note 15: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.

Interest Rate Swaps Designated as Cash Flow Hedges: Starting in the third quarter of 2019, the Company entered into derivative instruments designated as a cash flow hedges. For derivative instruments that are designated and qualify as a

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cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Interest rate swaps with notional amounts totaling $ 70.0 million as of September 30, 2019 were designated as cash flow hedges to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified 3 month LIBOR benchmark interest rate on the Company’s junior subordinated debt owed to unconsolidated trusts and were determined to be fully effective during the period. As such, no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps of $ 0.8 million is recorded in other liabilities in the unaudited consolidated financial statements at September 30, 2019, with changes in fair value recorded in other comprehensive income. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.

A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands) :


	September 30, 2019			December 31, 2018
Notional amount	$	70,000		$	—
Weighted average fixed pay rates		1.80	%		—	%
Weighted average receive rates		2.12	%		—	%
Weighted average maturity		4.11	yrs		—	yrs
Unrealized gains (losses)	$	592		$	—

Interest income (expense) recorded on these swap transactions were insignificant during the three and nine months ended September 30, 2019. The Company expects $ 0.1 million of the unrealized gain to be reclassified from Other Comprehensive Income (“OCI”) to interest expense during the next 12 months. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2019.

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the unaudited Consolidated Statements of Income relating to cash flow derivative instruments for the periods presented (dollars in thousands) :


	Three Months Ended September 30, 2019
		Amount of (gain) loss recognized in OCI (effective portion)		Amount of (gain) loss reclassified from OCI to interest income		Amount of (gain) loss recognized in other non-interest income (ineffective portion)
Interest rate contracts	$	( 598 )	$	( 6 )	$	—


	Nine Months Ended September 30, 2019
		Amount of (gain) loss recognized in OCI (effective portion)		Amount of (gain) loss reclassified from OCI to interest income		Amount of (gain) loss recognized in other non-interest income (ineffective portion)
Interest rate contracts	$	( 598 )	$	( 6 )	$	—

The Company pledged $ 0.8 million in cash to secure its obligation under these contracts at September 30, 2019.

Interest Rate Lock Commitments . At September 30, 2019 and December 31, 2018, the Company had issued $ 135.6 million and $ 27.2 million, respectively, of unexpired interest rate lock commitments to loan customers. Such interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited consolidated financial

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statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Forward Sales Commitments . At September 30, 2019 and December 31, 2018, the Company had issued $ 189.5 million and $ 48.6 million, respectively, of unexpired forward sales commitments to mortgage loan investors. Typically, the Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited consolidated financial statements. While such forward sales commitments generally served as an economic hedge to the mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The fair values of derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands) :


	September 30, 2019	December 31, 2018
Fair value recorded in other assets	$ 1,182	$	624
Fair value recorded in other liabilities	1,707		1,205

The gross gains and losses on these derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in non-interest income and expense in the unaudited Consolidated Statements of Income are summarized as follows (dollars in thousands) :


	Three Months Ended September 30,			Nine Months Ended September 30,
	2019	2018		2019	2018
Gross gains	$ 1,655	$	641	$ 4,662	$	2,396
Gross (losses)	( 1,706 )		( 561 )	( 4,773 )		( 2,669 )
Net gains (losses)	$ ( 51 )	$	80	$ ( 111 )	$	( 273 )

The impact of the net gains or losses on derivative financial instruments related to interest rate lock commitments issued to residential loan customers for loans that will be held for sale and forward sales commitments to sell residential mortgage loans to loan investors are almost entirely offset by a corresponding change in the fair value of loans held for sale.

Interest Rate Swaps Not Designated as Hedges. The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. With notional values of $ 511.4 million and $ 243.7 million at September 30, 2019 and December 31, 2018, respectively, these contracts support variable rate, commercial loan relationships totaling $ 255.7 million and $ 121.8 million, respectively. These derivatives generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The fair values of derivative assets and liabilities related to derivatives for customers for interest rate swaps recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands) :


		September 30, 2019		December 31, 2018
Fair value recorded in other assets	$	16,643	$	1,438
Fair value recorded in other liabilities		16,643		1,438

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The gross gains and losses on these derivative assets and liabilities recorded in non-interest income and non-interest expense in the unaudited Consolidated Statements of Income are summarized as follows (dollars in thousands) :


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Gross gains	$	4,695	$	724	$	15,205	$	2,167
Gross losses		( 4,695 )		( 724 )		( 15,205 )		( 2,167 )
Net gains (losses)	$	—	$	—	$	—	$	—

The Company pledged $ 18.6 million and $ 1.0 million in cash to secure its obligation under these contracts at September 30, 2019 and December 31, 2018, respectively.

Note 15: Fair Value Measurements

The fair value of an asset or liability is the price that would be received by selling that asset or paid in transferring that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to those Company assets and liabilities that are carried at fair value.

In general, fair value is based upon quoted market prices, when available. If such quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable data. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect, among other things, counterparty credit quality and the company's creditworthiness as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Debt securities available for sale. Debt securities available for sale are reported at fair value utilizing level 2 measurements. The Company obtains fair value measurements from an independent pricing service. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.

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The independent pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. The models and processes take into account market conventions. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models.

The market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The independent pricing service also monitors market indicators, industry and economic events. For certain security types, additional inputs may be used or some of the market inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day. Because the data utilized was observable, the securities have been classified as level 2.

Equity Securities. Equity securities are reported at fair value utilizing level 1 or level 2 measurements. For mutual funds, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and have been classified as level 1. For stock, quoted prices for identical or similar assets in markets that are not active are utilized and classified as level 2.

Loans Held for Sale. Loans held for sale are reported at fair value utilizing level 2 measurements. The fair value of the mortgage loans held for sale are measured using observable quoted market or contract prices or market price equivalents and are classified as level 2.

Derivative Assets and Derivative Liabilities . Derivative assets and derivative liabilities are reported at fair value utilizing level 2 measurements. The fair value of derivative assets and liabilities is determined based on prices that are obtained from a third-party which uses observable market inputs. Derivative assets and liabilities are classified as level 2.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands) :


	Level 1		Level 2		Level 3		Total
September 30, 2019	Inputs		Inputs		Inputs		Fair Value
Debt securities available for sale
U.S. Treasury securities	$	—	$	51,651	$	—	$	51,651
Obligations of U.S. government corporations and agencies		—		205,613		—		205,613
Obligations of states and political subdivisions		—		269,062		—		269,062
Commercial mortgage-backed securities		—		123,568		—		123,568
Residential mortgage-backed securities		—		926,387		—		926,387
Corporate debt securities		—		124,724		—		124,724
Equity securities		—		5,690		—		5,690
Loans held for sale		—		70,345		—		70,345
Derivative assets		—		17,825		—		17,825
Derivative liabilities		—		19,177		—		19,177

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	Level 1		Level 2		Level 3		Total
December 31, 2018	Inputs		Inputs		Inputs		Fair Value
Debt securities available for sale
U.S. Treasury securities	$	—	$	25,411	$	—	$	25,411
Obligations of U.S. government corporations and agencies		—		52,342		—		52,342
Obligations of states and political subdivisions		—		170,044		—		170,044
Commercial mortgage-backed securities		—		1,942		—		1,942
Residential mortgage-backed securities		—		315,748		—		315,748
Corporate debt securities		—		132,198		—		132,198
Equity securities		6,169		—		—		6,169
Loans held for sale		—		25,895		—		25,895
Derivative assets		—		2,062		—		2,062
Derivative liabilities		—		2,643		—		2,643

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Impaired Loans . The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is identified as impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on non-accrual status and restructured loans in compliance with modified terms. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all impaired loan fair values have been classified as level 3.

OREO. Non-financial assets and non-financial liabilities measured at fair value include OREO (upon initial recognition or subsequent impairment). OREO properties are measured using a combination of observable inputs, including recent appraisals, and unobservable inputs. Due to the significance of the unobservable inputs, all OREO fair values have been classified as level 3.

Bank Property Held for Sale. Bank property held for sale represents certain banking center office buildings which the Company has closed and consolidated with other existing banking centers. Bank property held for sale is measured at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon discounted appraisals or real estate listing price. Due to the significance of the unobservable inputs, all bank property held for sale fair values have been classified as level 3.

The following table summarizes assets and liabilities measured at fair value on a non-recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands) :


	Level 1	Level 2	Level 3	Total
	Inputs	Inputs	Inputs	Fair Value
September 30, 2019
Impaired loans	$ —	$ —	$ 6,917	$ 6,917
OREO	—	—	55	55
Bank property held for sale	—	—	1,832	1,832


December 31, 2018
Impaired loans	$	—	$ —	$ 10,999	$ 10,999
OREO		—	—	55	55
Bank property held for sale		—	—	1,832	1,832

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The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized level 3 inputs to determine fair value (dollars in thousands) :


	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable	Range
	Estimate		Techniques	Input	(Weighted Average)
September 30, 2019
Impaired loans	$	6,917	Appraisal of collateral	Appraisal adjustments	- 5.6	%	to	- 100.0	%
					(- 39.2 )%
OREO		55	Appraisal of collateral	Appraisal adjustments	- 25.0	%	to	- 100.0	%
					(- 65.0 )%
Bank property held for sale		1,832	Appraisal of collateral or real estate listing price	Appraisal adjustments	- 0.0	%	to	- 35.1	%
					(- 28.3 )%

December 31, 2018
Impaired loans	$	10,999	Appraisal of collateral	Appraisal adjustments	- 3.3	%	to	- 100.0	%
					(- 24.1 )%
OREO		55	Appraisal of collateral	Appraisal adjustments	- 25.0	%	to	- 100.0	%
					(- 65.0 )%
Bank property held for sale		1,832	Appraisal of collateral or real estate listing price	Appraisal adjustments	- 0.0	%	to	- 35.1	%
					(- 28.3 )%

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The estimated fair values of financial instruments that are reported at amortized cost in the Company’s unaudited Consolidated Balance Sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (dollars in thousands) :


	September 30, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	525,457	$	525,457	$	239,973	$	239,973
Level 2 inputs:
Debt securities held to maturity		15,170		15,399		608,660		603,360
Accrued interest receivable		29,408		29,408		22,314		22,314
Level 3 inputs:
Portfolio loans, net		6,616,450		6,630,255		5,517,780		5,473,063
Mortgage servicing rights		9,276		11,410		3,315		11,051
Other servicing rights		1,039		1,676		781		1,443

Financial liabilities:
Level 2 inputs:
Time deposits	$	1,652,971	$	1,654,955	$	1,497,003	$	1,482,301
Securities sold under agreements to repurchase		202,500		202,500		185,796		185,796
Short-term borrowings		29,739		29,835		—		—
Long-term debt		85,106		85,238		50,000		49,873
Junior subordinated debt owed to unconsolidated trusts		71,269		73,292		71,155		65,182
Accrued interest payable		7,487		7,487		6,568		6,568
Level 3 inputs:
Senior notes, net of unamortized issuance costs		39,640		40,144		39,539		39,452
Subordinated notes, net of unamortized issuance costs		59,222		60,971		59,147		58,186

A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s 2018 Form 10-K.

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Note 16: Leases

The Company has operating leases consisting primarily of equipment leases and real estate leases. The Company leases real estate property for bank branches, ATM locations, and office space with terms extending through 2032. As of September 30, 2019, the Company reported $ 10.0 million of right-of-use asset and $ 10.1 million lease liability in its unaudited Consolidated Balance Sheets.

The following tables represents lease costs and other lease information for the periods presented (dollars in thousands) :


	Three Months Ended		Nine Months Ended
Lease Costs	September 30, 2019		September 30, 2019
Operating lease costs	$	619	$	1,736
Variable lease costs		133		363
Short-term lease costs		46		69
Sublease income		-		-
Net lease cost	$	798	$	2,168

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease cash flows – Fixed payments	$	605	$	1,688
Operating lease cash flows – Liability reduction		526		1,479
Right of use assets obtained during the period in exchange for operating lease liabilities		159		923
Weighted average lease term (in years)		6.73		6.73
Weighted average discount rate		3.04 %		3.04 %

At September 30, 2019, the Company was obligated under noncancelable operating leases for office space and other commitments. Rent expense under operating leases, included in net occupancy and equipment expense, was $ 0.8 million and $ 0.6 million for the three months ended September 30, 2019 and 2018, respectively. Rent expense under operating leases, included in net occupancy and equipment expense, was $ 2.2 million and $ 1.9 million for the nine months ended September 30, 2019 and 2018, respectively.

Rent commitments were as follows (dollars in thousands) :


	September 30, 2019
2019	$	613
2020		2,386
2021		1,763
2022		1,375
2023		1,217
Thereafter		3,895
Amounts representing interest		( 1,148 )
Present value of net future minimum lease payments	$	10,101

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of the financial condition as of September 30, 2019 (unaudited), as compared with December 31, 2018, and the results of operations for the three and nine months ended September 30, 2019 (unaudited), as compared to the three and nine months ended September 30, 2018 (unaudited). Management’s discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s 2018 Form 10-K.

EXECUTIVE SUMMARY

Operating Results

The Company reported net income for the third quarter of 2019 of $24.8 million, or $0.45 per diluted common share, as compared to $24.1 million, or $0.43 per diluted common share, for the second quarter of 2019 and $26.9 million, or $0.55 per diluted common share, for the third quarter of 2018. Adjusted net income (1) for the third quarter of 2019 was $30.5 million, or $0.55 per diluted common share, as compared to $29.5 million, or $0.53 per diluted common share, for the second quarter of 2019 and $27.0 million, or $0.55 per diluted common share, for the third quarter of 2018.

Year-to-date net income through September 30, 2019 was $74.4 million, or $1.35 per diluted common share, compared to net income of $73.6 million, or $1.50 per diluted common share, for the comparable period of 2018. Year-to-date adjusted net income (1) for the first nine months of 2019 was $86.6 million, or $1.57 per diluted common share, compared to $77.5 million, or $1.58 per diluted common share for the first nine months of 2018.

The Company views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP. Non-operating pretax adjustments for the third quarter of 2019 were $7.0 million of expenses related to acquisitions and $0.7 million of expenses related to other restructuring costs. The reconciliation of non-GAAP measures (including adjusted net income, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible book value, tangible book value per share and return on average tangible common equity), which the Company believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Quarterly Report on Form 10-Q in the “Non-GAAP Financial Information” section.

On January 31, 2019, the Company completed its acquisition of Banc Ed, the holding company for TheBANK. First Busey operated TheBANK as a separate subsidiary from the completion of the acquisition until October 4, 2019, when it was merged with and into Busey Bank. At that time, TheBANK’s banking centers became banking centers of Busey Bank. When we completed the Banc Ed acquisition, we reset the baseline for the future financial performance of First Busey in a multitude of positive ways. With TheBANK now merged and integrated, we expect to see the full contribution and synergies of TheBANK reflected in the Company’s financial performance in the quarters ahead.

On October 4, 2019, in addition to TheBANK being merged into Busey Bank, the Company partnered with a new core provider. The core conversion positions the combined organization for future growth. Strategic process improvements and investments in technology platforms will allow the Company to serve customers more efficiently and effectively for years to come.

On August 31, 2019, the Company completed the previously announced acquisition by Busey Bank of IST, a Fort Myers, Florida wealth management firm, which had $471.1 million in assets under care. Through this transaction, Busey Bank and IST broaden the expertise and raise the level of service available to clients—from individuals and families to institutions and foundations—and remain committed to their founding principles of being active community stewards and providing the highest level of personal service to clients delivered by experienced, local professionals.

(1) For a reconciliation of adjusted net income, a non-GAAP financial measure, see “Non-GAAP Financial Information” included in this Quarterly Report on Form 10-Q.

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In addition to the successful integration of these acquisitions, we are pleased to report net organic loan growth of $137.3 million in the third quarter, with total portfolio loans increasing to $6.67 billion at September 30, 2019 from $6.53 billion at June 30, 2019. This is the result of focused initiatives and effort on the part of our associates across our markets and was accomplished while maintaining our conservative credit principles.

Asset Quality

The Company reported non-performing loans of $33.1 million at September 30, 2019 and June 30, 2019 as compared to $36.6 million at December 31, 2018. Non-performing loans were 0.50% of total portfolio loans as of September 30, 2019 compared to 0.51% as of June 30, 2019 and 0.66% as of December 31, 2018. With a continued commitment to asset quality and the strength of our balance sheet, near-term loan losses are expected to remain generally low. While these results are encouraging, asset quality metrics can be generally influenced by market-specific economic conditions, and specific measures may fluctuate from period to period. The key metrics are as follows (dollars in thousands) :


	As of
	September 30,			June 30			December 31,			September 30,
	2019			2019			2018			2018
Portfolio loans	$	6,669,415		$	6,532,126		$	5,568,428		$	5,623,741
Allowance for loan losses		52,965			51,375			50,648			52,743
Loans 30-89 days past due		12,434			18,040			7,121			8,189
Non-performing loans
Non-accrual loans		31,827			32,816			34,997			40,395
Loans 90+ days past due		1,276			258			1,601			364
Total non-performing loans		33,103			33,074			36,598			40,759
Other non-performing assets		926			936			376			1,093
Total non-performing assets		34,029			34,010			36,974			41,852
Allowance as a percentage of non-performing loans		160.0	%		155.3	%		138.4	%		129.4	%
Allowance for loan losses to portfolio loans		0.79	%		0.79	%		0.91	%		0.94	%

Economic Conditions of Markets at September 30, 2019

Busey Bank has 44 banking centers serving Illinois. Our Illinois markets of Champaign, Macon, McLean, and Peoria counties and Southwest Chicago feature several Fortune 1000 companies. Those organizations, coupled with large healthcare and higher education sectors, anchor the communities in which they are located and have provided a comparatively stable foundation for housing, employment and small business. TheBANK had 17 banking centers in Southern Illinois, which became banking centers of Busey Bank on October 4, 2019. The financial condition of the state of Illinois, in which the largest portion of the Company’s customer base resides, is characterized by low credit ratings and budget deficits.

Busey Bank has 13 banking centers serving the St. Louis metropolitan area, all of which are located in the city of St. Louis or the adjacent counties of St. Louis County and St. Charles County. The bi-state metropolitan area includes seven counties in Missouri and eight counties in Illinois; therefore, the Company’s geographic concentration in only three of these 15 counties gives the Company expansion opportunities into neighboring counties. St. Louis has a diverse economy with major employment sectors including health care, financial services, professional and business services, and retail.

Busey Bank has five banking centers in southwest Florida, which has experienced job growth and an expanded housing market over the last several years.

Busey Bank has one banking center in the Indianapolis, Indiana area. Indianapolis is the most populous city of Indiana with a diverse economy and it is headquarters to many large corporations.

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Net interest income

Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets.

Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes an income tax rate of 21%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.

The following tables show our Consolidated Average Balance Sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the periods shown. All average information is provided on a daily average basis.

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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

(UNAUDITED)


	Three Months Ended September 30,
	2019						2018
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate (5)		Balance		Expense		Rate (5)
Assets
Interest-bearing bank deposits and federal funds sold	$	400,587		2,181	2.16	%	$	134,202	$	649	1.92	%
Investment securities:
U.S. Government obligations		278,612		1,688	2.40	%		152,865		632	1.64	%
Obligations of states and political subdivisions (1)		287,659		2,118	2.92	%		280,041		1,816	2.57	%
Other securities		1,213,795		7,936	2.59	%		984,802		6,384	2.57	%
Loans held for sale		42,418		298	2.79	%		28,661		317	4.39	%
Portfolio loans (1), (2)		6,558,519		78,248	4.73	%		5,551,753		63,537	4.54	%
Total interest-earning assets (1), (3)	$	8,781,590	$	92,469	4.18	%	$	7,132,324	$	73,335	4.08	%

Cash and due from banks		115,378						103,798
Premises and equipment		150,714						119,773
Allowance for loan losses		(52,014)						(54,017)
Other assets		664,101						500,430
Total assets	$	9,659,769					$	7,802,308

Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits	$	1,953,201	$	2,924	0.59	%	$	1,294,628	$	1,305	0.40	%
Savings and money market deposits		2,442,620		3,828	0.62	%		1,913,838		1,650	0.34	%
Time deposits		1,690,557		8,001	1.88	%		1,576,191		5,991	1.51	%
Federal funds purchased and repurchase agreements		184,637		579	1.24	%		234,729		426	0.72	%
Borrowings (4)		215,271		2,031	3.74	%		213,164		1,761	3.28	%
Junior subordinated debt issued to unconsolidated trusts		71,232		852	4.75	%		71,082		854	4.77	%
Total interest-bearing liabilities	$	6,557,518	$	18,215	1.10	%	$	5,303,632	$	11,987	0.90	%

Net interest spread (1)					3.08	%					3.18	%

Noninterest-bearing deposits		1,780,645						1,492,709
Other liabilities		108,773						44,143
Stockholders’ equity		1,212,833						961,824
Total liabilities and stockholders’ equity	$	9,659,769					$	7,802,308


Interest income / earning assets (1), (3)	$	8,781,590	$	92,469	4.18	%	$	7,132,324	$	73,335	4.08	%
Interest expense / earning assets	$	8,781,590	$	18,215	0.83	%	$	7,132,324	$	11,987	0.67	%
Net interest margin (1)			$	74,254	3.35	%			$	61,348	3.41	%

(1) On a tax-equivalent basis and assuming an 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 $0.8 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively.

(4) Includes short-term and long-term borrowings. Interest expense includes a non-usage fee on revolving loan.

(5) Annualized.

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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

(UNAUDITED)


	Nine Months Ended September 30,
	2019						2018
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate (5)		Balance		Expense		Rate (5)
Assets
Interest-bearing bank deposits and federal funds sold	$	279,406		4,496	2.15	%	$	122,768	$	1,580	1.72	%
Investment securities:
U.S. Government obligations		321,814		5,905	2.45	%		156,450		1,917	1.64	%
Obligations of states and political subdivisions (1)		282,850		6,236	2.95	%		293,258		5,677	2.59	%
Other securities		1,195,405		23,817	2.66	%		896,288		16,670	2.49	%
Loans held for sale		28,326		677	3.20	%		31,785		966	4.06	%
Portfolio loans (1), (2)		6,406,779		228,539	4.77	%		5,531,087		186,622	4.51	%
Total interest-earning assets (1), (3)	$	8,514,580	$	269,670	4.23	%	$	7,031,636	$	213,432	4.06	%

Cash and due from banks		111,623						105,038
Premises and equipment		146,115						119,580
Allowance for loan losses		(51,498)						(54,056)
Other assets		631,452						504,892
Total assets	$	9,352,272					$	7,707,090

Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits	$	1,825,473	$	7,891	0.58	%	$	1,224,545	$	2,758	0.30	%
Savings and money market deposits		2,350,289		10,113	0.58	%		1,981,281		4,811	0.32	%
Time deposits		1,709,142		23,403	1.83	%		1,452,477		14,268	1.31	%
Federal funds purchased and repurchase agreements		194,189		1,789	1.23	%		242,733		1,139	0.63	%
Borrowings (4)		223,352		6,297	3.77	%		247,004		5,457	2.95	%
Junior subordinated debt issued to unconsolidated trusts		71,194		2,658	4.99	%		71,046		2,383	4.48	%
Total interest-bearing liabilities	$	6,373,639	$	52,151	1.09	%	$	5,219,086	$	30,816	0.79	%

Net interest spread (1)					3.14	%					3.27	%

Noninterest-bearing deposits		1,715,701						1,494,016
Other liabilities		89,719						47,313
Stockholders’ equity		1,173,213						946,675
Total liabilities and stockholders’ equity	$	9,352,272					$	7,707,090


Interest income / earning assets (1), (3)	$	8,514,580	$	269,670	4.23	%	$	7,031,636	$	213,432	4.06	%
Interest expense / earning assets	$	8,514,580	$	52,151	0.81	%	$	7,031,636	$	30,816	0.59	%
Net interest margin (1)			$	217,519	3.42	%			$	182,616	3.47	%

(1) On a tax-equivalent basis and assuming an 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 $2.2 million and $1.7 million for the nine months ended September 30, 2019 and 2018, respectively.

(4) Includes short-term and long-term borrowings. Interest expense includes a non-usage fee on revolving loan.

(5) Annualized.

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Earning Assets, Sources of Funds and Net Interest Margin

Total average interest-earning assets increased $1.7 billion, or 23.1%, to $8.8 billion for the three months ended September 30, 2019, as compared to $7.1 billion for the same period in 2018. Total average interest-earning assets increased $1.5 billion, or 21.1%, to $8.5 billion for the nine months ended September 30, 2019, as compared to $7.0 billion for the same period of 2018.

Total average interest-bearing liabilities increased $1.3 billion, or 23.6%, to $6.6 billion for the three months ended September 30, 2019 as compared to $5.3 billion for the same period in 2018. Total average interest-bearing liabilities increased $1.2 billion, or 22.1%, to $6.4 billion for the nine months ended September 30, 2019 as compared to $5.2 billion for the same period of 2018. Average noninterest-bearing deposits increased $287.9 million, or 19.3%, to $1.8 billion for the three months ended September 30, 2019, as compared to $1.5 billion for the same period of 2018. Average noninterest-bearing deposits increased $221.7 million, or 14.8%, to $1.7 billion for the nine months ended September 30, 2019, as compared to $1.5 billion for the same period of 2018.

Interest income, on a tax-equivalent basis, increased $19.2 million, or 26.1%, to $92.5 million for the three months ended September 30, 2019, compared to $73.3 million in the same period of 2018. Interest income, on a tax-equivalent basis, increased $56.3 million, or 26.3%, to $269.7 million for the nine months ended September 30, 2019, compared to $213.4 million in same period of 2018. The interest income increase related primarily to the increase in average loan balances. Interest expense increased during the three months ended September 30, 2019 by $6.2 million to $18.2 million, compared to $12.0 million in the same period of 2018. Interest expense increased during the nine months ended September 30, 2019 by $21.4 million to $52.2 million, compared to $30.8 million in the same period of 2018.

Net interest income, on a tax-equivalent basis, increased $12.9 million, or 21.0%, for the three months ended September 30, 2019 as compared to the same period of 2018. Net interest income, on a tax-equivalent basis, increased $34.9 million, or 19.1%, for the nine months ended September 30, 2019 as compared to the same period of 2018.

Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, decreased to 3.35% for the three months ended September 30, 2019, compared to 3.41% for the same period of 2018, and decreased to 3.42% for the nine months ended September 30, 2019, compared to 3.47% for the same period of 2018. Net of purchase accounting accretion and amortization, (1) the net interest margin for the three months ended September 30, 2019 was 3.22%, a decrease from 3.29% for the same period in 2018, and was 3.27% for the nine months ended September 30, 2019, a decrease from 3.31% for the same period of 2018.

Higher aggregate yields from loan production partially offset increases in funding costs in 2019 as compared to 2018. Funding costs in 2019 increased from 2018, primarily due to resetting of time deposit rates to reflect market rates and additional borrowings in conjunction with funding the Banc Ed acquisition. The Federal Open Market Committee lowered Federal Funds Target rates for the first time in 11 years on July 31, 2019 and then again on September 18, 2019, for a combined decrease of 50 basis points during the third quarter. This contributed to the decline in net interest margin for the quarter ended September 30, 2019 as compared to the quarter ended June 30, 2019, as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities. Subsequent to quarter end, on October 30, 2019, the Federal Open Market Committee lowered Federal Funds Target rates another 25 basis points.

The quarterly net interest margins were as follows:


	2019	2018
First Quarter	3.46 %	3.51 %
Second Quarter	3.43 %	3.50 %
Third Quarter	3.35 %	3.41 %
Fourth Quarter	— %	3.38 %

(1) For a reconciliation of net interest margin net of purchase accounting accretion and amortization, a non-GAAP financial measure, see “Non-GAAP Financial Information” included in this Quarterly Report on Form 10-Q.

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The net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.08% for the three months ended September 30, 2019 compared to 3.18% in the same period of 2018, and was 3.14% for the nine months ended September 30, 2019, compared to 3.27% for the same period of 2018, each on a tax-equivalent basis.

Management attempts to mitigate the effects of the interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies. Please refer to the Notes to Consolidated Financial Statements in the Company’s 2018 Form 10-K for accounting policies underlying the recognition of interest income and expense.

Non-interest income

( dollars in thousands ):


	Three Months Ended September 30,								Nine Months Ended September 30,
					$		%						$		%
	2019		2018		Change		Change		2019		2018		Change		Change
Fees for customer services	$	9,842	$	7,340	$	2,502	34.1	%	$	27,635	$	21,576	$	6,059	28.1 %
Trust fees		7,689		6,324		1,365	21.6	%		24,122		20,573		3,549	17.3 %
Commissions and brokers’ fees, net		1,132		881		251	28.5	%		3,216		2,860		356	12.4 %
Remittance processing		3,780		3,630		150	4.1	%		11,277		10,588		689	6.5 %
Mortgage revenue		3,331		1,272		2,059	161.9	%		8,127		4,488		3,639	81.1 %
Net (losses) gains on sales of securities		296		—		296	100.0	%		112		160		(48)	(30.0) %
Unrealized (losses) gains recognized on equity securities		65		—		65	100.0	%		(735)		—		(735)	(100.0) %
Other income		4,801		2,406		2,395	99.5	%		11,023		6,896		4,127	59.8 %
Total non-interest income	$	30,936	$	21,853	$	9,083	41.6	%	$	84,777	$	67,141	$	17,636	26.3 %

Total non-interest income of $30.9 million for the third quarter of 2019 increased as compared to $21.9 million in the third quarter of 2018. Total non-interest income of $84.8 million for the nine months ended September 30, 2019 increased as compared to $67.1 million for the same period of 2018. Revenues from trust fees, commissions and brokers’ fees, and remittance processing activities represented 40.7% of the Company’s non-interest income for the quarter ended September 30, 2019, providing a complement to spread-based revenue from traditional banking activities.

Fees for customer services increased 34.1% and 28.1% for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018 as a result of the Banc Ed acquisition. Evolving regulation, product changes and changing behaviors by our customer base also impact fees for customer services.

Trust fees and commissions and brokers’ fees were $8.8 million for the third quarter of 2019 an increase from $7.2 million for the third quarter of 2018. Trust fees and commissions and brokers’ fees increased to $27.3 million for the first nine months of 2019 compared to $23.4 million for the first nine months of 2018. First Busey’s wealth management division ended the third quarter of 2019 with $9.4 billion in assets under care.

Remittance processing revenue from the Company’s subsidiary, FirsTech, of $3.8 million for the third quarter of 2019 increased compared to $3.6 million for the third quarter of 2018. Remittance processing revenue for the nine months ended September 30, 2019 was $11.3 million, an increase of 6.5%, compared to $10.6 million during the same period of 2018. FirsTech has seen a relative slowdown in new business onboarding as compared to recent quarters that showed significant growth, which is consistent with the business’ typical sales cycle.

The mortgage line of business generated $3.3 million of revenue in the third quarter of 2019, an increase compared to $1.3 million of revenue in the third quarter of 2018. Mortgage revenue for the first nine months of 2019 was $8.1 million, an increase over the comparable period of 2018 of $4.5 million, following a long period of restructuring and additional revenue from TheBANK. A decline in prevailing market rates for mortgages also contributed to increased production in recent periods .

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Other income increased to $4.8 million and $11.0 million for the three and nine months ended September 30, 2019, respectively, across multiple revenue sources, including swap fee income, bank owned life insurance income and additional income from TheBANK.

Non-interest expense

( dollars in thousands ):


	Three Months Ended September 30,										Nine Months Ended September 30,
							$		%								$		%
	2019			2018			Change		Change		2019			2018			Change		Change
Salaries, wages and employee benefits	$	38,747		$	26,024		$	12,723	48.9	%	$	105,356		$	80,315		$	25,041	31.2	%
Net occupancy expense of premises		4,652			3,761			891	23.7	%		13,365			11,271			2,094	18.6	%
Furniture and equipment expenses		2,489			1,715			774	45.1	%		6,936			5,418			1,518	28.0	%
Data processing		5,032			4,016			1,016	25.3	%		15,049			12,391			2,658	21.5	%
Amortization of intangible assets		2,360			1,445			915	63.3	%		6,866			4,450			2,416	54.3	%
Other expense		14,841			8,968			5,873	65.5	%		45,732			30,429			15,303	50.3	%
Total non-interest expense	$	68,121		$	45,929		$	22,192	48.3	%	$	193,304		$	144,274		$	49,030	34.0	%

Income taxes	$	8,052		$	9,081		$	(1,029)	(11.3)	%	$	24,339		$	26,108		$	(1,769)	(6.8)	%
Effective rate on income taxes		24.5	%		25.3	%						24.7	%		26.2	%

Efficiency ratio		62.7	%		53.5	%						61.6	%		56.0	%
Full-time equivalent employees as of period-end		1,595			1,298

Total non-interest expense of $68.1 million for the three months ended September 30, 2019 increased as compared to $45.9 million for the same period in 2018. Total non-interest expense of $193.3 million for the nine months ended September 30, 2019 increased as compared to $144.3 million for the same period in 2018. Total non-interest expenses have been influenced by acquisition expenses and other restructuring costs. For the third quarter of 2019, adjusted non-interest expenses (1) , including amortization, were $60.5 million compared to reported non-interest expense of $68.1 million.

Salaries, wages and employee benefits were $38.7 million in the third quarter of 2019, an increase from $26.0 million from the third quarter of 2018. In the first nine months of 2019, salaries, wages and employee benefits increased to $105.4 million compared to $80.3 million for the same period of 2018. For the three and nine months ended September 30, 2019, salaries, wages and employee benefits included $3.9 million and $4.2 million, respectively, of non-operating expenses (1) . Total full-time equivalents (“FTE”) at September 30, 2019 were 1,595 compared to 1,298 at September 30, 2018. Included in the September 30, 2019 FTE are 293 FTEs of TheBANK.

Combined net occupancy expense of premises and furniture and equipment expenses was $7.1 million for the three months ended September 30, 2019 and $5.5 million for the three months ended September 30, 2018. Combined net occupancy expense of premises and furniture and equipment expenses was $20.3 million for the nine months ended September 30, 2019 and $16.7 million for the nine months ended September 30, 2018. The increase is primarily due to TheBANK adding 17 banking centers to our banking center network.

Data processing expense in the third quarter of 2019 of $5.0 million increased compared to $4.0 million in the third quarter of 2018. In the first nine months of 2019, data processing expense increased to $15.0 million compared to $12.4 million for the same period of 2018. For the three and nine months ended September 30, 2019, data processing included $0.3 million and $1.0 million, respectively, of non-operating expenses (1) , related to payment of conversion expenses. Data processing for 2019 also includes data processing related to TheBANK.

(1) For a reconciliation of adjusted non-interest expenses and non-operating expenses, non-GAAP financial measures, see “Non-GAAP Financial Information”.

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Amortization of intangible assets increased to $2.4 million for the three months ended September 30, 2019 compared to $1.4 million for the three months ended September 30, 2018 and increased to $6.9 million for the nine months ended September 30, 2019 compared to $4.5 million for the nine months ended September 30, 2018, as a result of the Banc Ed acquisition.

Other expense in the third quarter of 2019 of $14.8 million increased compared to $9.0 million in the third quarter of 2018. In the first nine months of 2019, other expense increased to $45.7 million compared to $30.4 million for the same period of 2018. For the three and nine months ended September 30, 2019, other expenses included $3.6 million and $11.3 million, respectively, of non-operating expenses (1) which primarily includes professional and legal expenses and check card conversion expenses.

The effective income tax rate of 24.5% and 24.7% for the three and nine months ended September 30, 2019, was lower than the combined federal and state statutory rate of approximately 28% due to tax exempt interest income, such as municipal bond interest and bank owned life insurance income, and investments in various federal and state tax credits.

The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. At September 30, 2019, the Company was not under examination by any tax authority.

The efficiency ratio (1) is calculated as total non-interest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus non-interest income, less security gains and losses. The efficiency ratio, which is a measure commonly used by management and the banking industry, measures the amount of expense incurred to generate a dollar of revenue. The efficiency ratio was 62.7% for the quarter ended September 30, 2019 compared to 63.6% for the quarter ended June 30, 2019 and 53.5% for the quarter ended September 30, 2018. The adjusted efficiency ratio (1) was 55.4% for the quarter ended September 30, 2019, 56.6% for the quarter ended June 30, 2019, and 53.3% for the quarter ended September 30, 2018. The efficiency ratio for the first nine months of 2019 was 61.6% compared to 56.0% for the first nine months of 2018. The adjusted efficiency ratio (1) was 56.1% for the first nine months of 2019 compared to 54.2% for the first nine months of 2018. Total non-interest expenses have been influenced by acquisition expenses and other restructuring costs. While acquisition expenses may have a negative impact on the efficiency ratios, the Company expects to realize operating efficiencies creating a positive impact in future years. The Company remains focused on expense discipline.

(1) For a reconciliation of non-operating expenses, efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see “Non-GAAP Financial Information”.

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FINANCIAL CONDITION

Significant Consolidated Balance Sheet Items (dollars in thousands) :


	September 30,		December 31,
	2019		2018		$ Change		% Change
Assets
Debt securities available for sale	$	1,701,005	$	697,685	$	1,003,320	143.8	%
Debt securities held to maturity		15,170		608,660		(593,490)	(97.5)	%
Portfolio loans, net		6,616,450		5,517,780		1,098,670	19.9	%

Total assets	$	9,753,760	$	7,702,357	$	2,051,403	26.6	%

Liabilities
Deposits:
Noninterest-bearing	$	1,779,490	$	1,464,700	$	314,790	21.5	%
Interest-bearing		6,150,976		4,784,621		1,366,355	28.6	%
Total deposits	$	7,930,466	$	6,249,321	$	1,681,145	26.9	%

Securities sold under agreements to repurchase	$	202,500	$	185,796	$	16,704	9.0	%
Short-term borrowings		29,739		—		29,739	100.0	%
Long-term debt		85,106		50,000		35,106	70.2	%
Senior notes, net of unamortized issuance costs		39,640		39,539		101	0.3	%
Subordinated notes, net of unamortized issuance costs		59,222		59,147		75	0.1	%
Junior subordinated debt owed to unconsolidated trusts		71,269		71,155		114	0.2	%

Total liabilities	$	8,537,779	$	6,707,393	$	1,830,386	27.3	%

Stockholders’ equity	$	1,215,981	$	994,964	$	221,017	22.2	%

Portfolio Loans

The Company believes that making sound and profitable loans is a necessary and desirable means of employing funds available for investment. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations and duration of loans most appropriate for its business model and markets. While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or loans to existing customers of the banks. The Company attempts to utilize government-assisted lending programs, such as the Small Business Administration and United States Department of Agriculture lending programs, when prudent. Generally, loans are collateralized by assets, primarily real estate and guaranteed by individuals. The loans are expected to be repaid primarily from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Management reviews and approves the Company’s lending policies and procedures on a regular basis. Management routinely (at least quarterly) reviews the Company’s allowance for loan losses in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company’s underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship. Significant underwriting factors in addition to location, duration, a sound and profitable cash flow basis and the borrower’s character include the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

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At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s regulatory lending limit. The Company generally limits such relationships to amounts substantially less than the regulatory limit. Loans to related parties, including executive officers and directors of the Company and its subsidiaries, are reviewed for compliance with regulatory guidelines by the Company’s board of directors at least annually.

The Company maintains an independent loan review department that reviews the loans for compliance with the Company’s loan policy on a periodic basis. In addition, the loan review department reviews the risk assessments made by the Company’s credit department, lenders and loan committees. Results of these reviews are presented to management and the audit committee at least quarterly.

The Company’s lending activities can be summarized into five primary areas: commercial loans, commercial real estate loans, real estate construction loans, retail real estate loans and retail other loans. A description of each of the lending areas can be found in the Company’s 2018 Form 10-K. The significant majority of the Company’s portfolio lending activity occurs in its Illinois and Missouri markets, with the remainder in the Indiana and Florida markets.

Geographic distributions of portfolio loans by category were as follows (dollars in thousands) :


	September 30, 2019
	Illinois		Missouri		Florida		Indiana		Total
Commercial	$	1,178,779	$	452,177	$	17,590	$	31,945	$	1,680,491
Commercial real estate		1,825,972		616,169		153,855		197,384		2,793,380
Real estate construction		194,044		128,864		29,342		74,309		426,559
Retail real estate		1,159,727		421,731		100,222		35,875		1,717,555
Retail other		47,121		1,675		1,380		1,254		51,430
Portfolio loans	$	4,405,643	$	1,620,616	$	302,389	$	340,767	$	6,669,415

Allowance for loan losses										(52,965)
Portfolio loans, net									$	6,616,450


	December 31, 2018
	Illinois		Missouri		Florida		Indiana		Total
Commercial	$	972,072	$	394,043	$	17,954	$	21,037	$	1,405,106
Commercial real estate		1,448,937		579,536		158,337		180,013		2,366,823
Real estate construction		78,489		122,385		17,859		69,464		288,197
Retail real estate		874,910		475,739		102,117		27,367		1,480,133
Retail other		24,849		1,294		1,455		571		28,169
Portfolio loans	$	3,399,257	$	1,572,997	$	297,722	$	298,452	$	5,568,428

Allowance for loan losses										(50,648)
Portfolio loans, net									$	5,517,780

Portfolio loans increased $1.1 billion, or 19.8%, as of September 30, 2019 compared to December 31, 2018, as a result of the Banc Ed acquisition and organic loan growth. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased $840.3 million from December 31, 2018. Retail real estate and retail other loans increased $260.7 million from December 31, 2018.

Allowance for Loan Losses

The Company recorded net charge-offs of $1.8 million for the third quarter of 2019 and $5.7 million for the nine months ended September 30, 2019. The allowance for loan loss as a percentage of portfolio loans was 0.79% at September 30, 2019 and June 30, 2019 as compared to 0.91% at December 31, 2018. The decline in the allowance coverage ratio in

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2019 is primarily attributed to the Banc Ed acquisition. Acquired loans are initially recorded at their acquisition date fair value, so a separate allowance is not initially recognized. An allowance is recorded subsequent to acquisition to the extent the reserve requirement exceeds the recorded fair value adjustment.

Provision for Loan Losses

The provision for loan losses is a current charge against income and represents an amount which management believes is sufficient to maintain an appropriate allowance for known and probable losses in the loan portfolio. In assessing the appropriateness of the allowance for loan losses, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, historical loan loss experience and credit quality of the portfolio. When a determination is made by management to charge-off a loan balance, a write-off is charged against the allowance for loan losses. We continue to attempt to identify problem loan situations on a proactive basis. Once problem loans are identified, adjustments to the provision for loan losses are made based upon all information available at that time.

The provision for loan losses was $3.4 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively, and was $8.0 million and $4.0 million for the nine months ended September 30, 2019 and 2018, respectively. As a result of acquisitions, the Company is holding acquired loans that are carried net of a fair value adjustment for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. However, as the acquired loans renew and as the Company originates new loan production, it is necessary to establish an allowance for loan losses, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses.

Sensitive assets include non-accrual loans, loans on our classified loan reports and other loans identified as having more than reasonable potential for loss. Management reviews sensitive assets on at least a quarterly basis for changes in each applicable customer’s ability to pay and changes in valuation of underlying collateral in order to estimate probable losses. The majority of these loans are being repaid in conformance with their contracts.

Non-performing Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory guidelines. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Typically, loans are collateral dependent. When a collateral dependent loan is classified as non-accrual it is appropriately reserved or charged down through the allowance for loan losses to the fair value of our interest in the underlying collateral less estimated costs to sell. Our loan portfolio is collateralized primarily by real estate.

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The following table sets forth information concerning non-performing loans as of each of the dates indicated (dollars in thousands) :


	September 30,			June 30,			December 31,			September 30,
	2019			2019			2018			2018
Non-accrual loans	$	31,827		$	32,816		$	34,997		$	40,395
Loans 90+ days past due and still accruing		1,276			258			1,601			364
Total non-performing loans		33,103			33,074			36,598			40,759
OREO		926			936			376			1,093
Total non-performing assets	$	34,029		$	34,010		$	36,974		$	41,852

Allowance for loan losses	$	52,965		$	51,375		$	50,648		$	52,743
Allowance for loan losses to portfolio loans		0.79	%		0.79	%		0.91	%		0.94	%
Allowance for loan losses to non-performing loans		160.0	%		155.3	%		138.4	%		129.4	%
Non-performing loans to portfolio loans		0.5	%		0.5	%		0.7	%		0.7	%
Non-performing assets to portfolio loans and OREO		0.5	%		0.5	%		0.7	%		0.7	%

Total non-performing assets were $34.0 million at September 30, 2019 and June 30, 2019, compared to $37.0 million at December 31, 2018. Non-performing assets as a percentage of portfolio loans and OREO continued to be favorably low at 0.5% on September 30, 2019. Asset quality metrics can be generally influenced by market-specific economic conditions beyond the control of the Company, and specific measures may fluctuate from quarter to quarter.

Potential Problem Loans

Potential problem loans are those loans which are not categorized as impaired, restructured, non-accrual or 90+ days past due, but where current information indicates that the borrower may not be able to comply with loan repayment terms. Management assesses the potential for loss on such loans and considers the effect of any potential loss in determining its provision for probable loan losses. Potential problem loans totaled $82.8 million at September 30, 2019, compared to $70.9 million at December 31, 2018. Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral or other planned actions will result in full repayment of the debts. As of September 30, 2019, management identified no other loans that represent or result from trends or uncertainties which would be expected to materially impact future operating results, liquidity or capital resources.

LIQUIDITY

Liquidity management is the process by which we ensure that adequate liquid funds are available to meet the present and future cash flow obligations arising in the daily operations of our business. These financial obligations consist of needs for funds to meet commitments to borrowers for extensions of credit, fund capital expenditures, honor withdrawals by customers, pay dividends to stockholders and pay operating expenses. Our most liquid assets are cash and due from banks, interest-bearing bank deposits and federal funds sold. The balances of these assets are dependent on the Company’s operating, investing, lending, and financing activities during any given period.

First Busey’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayments, and capital funds. Additional liquidity is provided by the ability to borrow from the FHLB, the Federal Reserve, First Busey’s revolving credit facility, or to utilize brokered deposits. As of September 30, 2019, the Company had additional capacity to borrow from the FHLB and Federal Reserve of $1.1 billion and $479.4 million, respectively. Additionally, the Company has an unused revolving credit facility of $20.0 million.

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As of September 30, 2019, management believed that adequate liquidity existed to meet all projected cash flow obligations. We seek to achieve a satisfactory degree of liquidity by actively managing both assets and liabilities. Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.

OFF-BALANCE-SHEET ARRANGEMENTS

The banks routinely enter into commitments to extend credit and standby letters of credit in the normal course of business to meet the financing needs of its customers. As of September 30, 2019 and December 31, 2018, we had outstanding loan commitments and standby letters of credit of $1.7 billion and $1.4 billion, respectively. The balance of commitments to extend credit represents future cash requirements and some of these commitments may expire without being drawn upon. We anticipate we will have sufficient funds available to meet current loan commitments, including loan applications received and in process prior to the issuance of firm commitments.

CAPITAL RESOURCES

Our capital ratios are in excess of those required to be considered “well-capitalized” pursuant to applicable regulatory guidelines. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. In order to refrain from restrictions on dividends, equity repurchases and discretionary bonus payments, bank holding companies and their subsidiary banks are required to maintain, including the capital conservation buffer, a total capital to total risk-weighted asset ratio of not less than 10.50%, Tier 1 capital to total risk-weighted asset ratio of not less than 8.50%, Common Equity Tier 1 capital to total risk-weighted asset ratio of not less than 7.00% and a Tier 1 leverage ratio of not less than 4.00%. The Basel III Rule was fully phased-in on January 1, 2019. See “Note 12: Regulatory Capital” for ratios and further discussion.

NON-GAAP FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q contains certain financial information determined by methods other than in accordance with GAAP. These measures include adjusted net income, adjusted return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets and adjusted return on average tangible common equity. Management uses these non-GAAP measures, together with the related GAAP measures, to analyze the Company’s performance and to make business decisions. Management also uses these measures for peer comparisons.

A reconciliation to what management believes to be the most direct compared GAAP financial measures, for example, net income in the case of adjusted net income and adjusted return on average assets, total net interest income, total non-interest income and total non-interest expense in the case of adjusted efficiency ratio and total stockholders’ equity in the case of the tangible book value per share, appear below. The Company believes each of the adjusted measures is useful for investors and management to understand the effects of certain non-recurring non-interest items and provides additional perspective on the Company’s performance over time as well as comparison to the Company’s peers.

These non-GAAP disclosures have inherent limitations and are not audited. They should not be considered in isolation or as a substitute for the results reported in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Tax effected numbers included in these non-GAAP disclosures are based on estimated statutory rates.

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Reconciliation of Non-GAAP Financial Measures — Adjusted Net Income and Return on Average Assets

(dollars in thousands)


	Three Months Ended										Nine Months Ended
	September 30,			June 30,			September 30,				September 30,			September 30,
	2019			2019			2018				2019			2018
Net income	$	24,828		$	24,085		$	26,859		$	74,382		$	73,638
Acquisition expenses
Salaries, wages, and employee benefits		3,673			43			—			3,716			1,233
Data processing		172			327			—			506			406
Other (includes professional and legal)		3,100			3,293			167			7,598			2,224
Lease impairment		—			415			—			415			—
Other restructuring costs
Salaries, wages, and employee benefits		182			275			—			457			417
Data processing		84			292			—			476			—
Fixed asset impairment		—			—			—			—			817
Other (includes professional and legal)		459			826			—			1,452			—
MSR valuation impairment		—			1,822			—			1,822			—
Related tax benefit		(1,963)			(1,880)			(20)			(4,177)			(1,217)
Adjusted net income	$	30,535		$	29,498		$	27,006		$	86,647		$	77,518

Average total assets	$	9,659,769		$	9,522,678		$	7,802,308		$	9,352,272		$	7,707,090

Reported : Return on average assets (1)		1.02	%		1.01	%		1.37	%		1.06	%		1.28	%
Adjusted : Return on average assets (1)		1.25	%		1.24	%		1.37	%		1.24	%		1.34	%

(1) Annualized measure

Reconciliation of Non-GAAP Financial Measures — Adjusted Net Interest Margin

(dollars in thousands)


	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2019			2019			2018			2019			2018

Reported : Net interest income	$	73,476		$	73,428		$	60,774		$	215,287		$	180,903
Tax-equivalent adjustment		778			777			574			2,232			1,713
Purchase accounting accretion		(2,974)			(3,471)			(2,273)			(9,439)			(8,698)
Adjusted : Net interest income	$	71,280		$	70,734		$	59,075		$	208,080		$	173,918

Average interest-earning assets	$	8,781,590		$	8,666,136		$	7,132,324		$	8,514,580		$	7,031,636

Reported : Net interest margin (1)		3.35	%		3.43	%		3.41	%		3.42	%		3.47	%
Adjusted : Net Interest margin (1)		3.22	%		3.27	%		3.29	%		3.27	%		3.31	%

(1) Annualized measure

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Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio

(dollars in thousands)


	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,				September 30,			September 30,
	2019			2019			2018			2019			2018
Reported : Net Interest income	$	73,476		$	73,428		$	60,774		$	215,287		$	180,903
Tax-equivalent adjustment		778			777			574			2,232			1,713
Tax-equivalent interest income	$	74,254		$	74,205		$	61,348		$	217,519		$	182,616

Reported : Non-interest income		30,936			27,896			21,853			84,777			67,141
Net (losses) gains on sales of securities and unrealized (losses) gains recognized on equity securities		361			(1,026)			—			(623)			160
Adjusted: Non-interest income	$	30,575		$	28,922		$	21,853		$	85,400		$	66,981

Reported : Non-interest expense		68,121			68,020			45,929			193,304			144,274
Amortization of intangible assets		(2,360)			(2,412)			(1,445)			(6,866)			(4,450)
Non-operating adjustments:
Salaries, wages, and employee benefits		(3,855)			(318)			—			(4,173)			(1,650)
Data processing		(256)			(619)			—			(982)			(406)
Other		(3,559)			(6,356)			(167)			(11,287)			(2,596)
Adjusted: Non-interest expense	$	58,091		$	58,315		$	44,317		$	169,996		$	135,172

Reported : Efficiency ratio		62.73	%		63.62	%		53.47	%		61.55	%		56.02	%
Adjusted : Efficiency ratio		55.42	%		56.55	%		53.26	%		56.12	%		54.16	%

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Reconciliation of Non-GAAP Financial Measures — Tangible common equity to tangible assets, Tangible book value per share, Return on average tangible common equity

(dollars in thousands)


	As of and for the Three Months Ended
	September 30,			June 30,			September 30,
	2019			2019			2018

Total Assets	$	9,753,760		$	9,612,667		$	7,889,385
Goodwill and other intangible assets, net		(381,323)			(375,327)			(301,963)
Tax effect of other intangible assets, net		16,415			17,075			8,912
Tangible assets	$	9,388,852		$	9,254,415		$	7,596,334

Total stockholders’ equity		1,215,981			1,203,608			972,140
Goodwill and other intangible assets, net		(381,323)			(375,327)			(301,963)
Tax effect of other intangible assets, net		16,415			17,075			8,912
Tangible common equity	$	851,073		$	845,356		$	679,089

Tangible common equity to tangible assets (1)		9.06	%		9.13	%		8.94	%
Tangible book value per share	$	15.12		$	14.95		$	13.72

Average stockholders’ common equity	$	1,212,833		$	1,195,802		$	961,824
Average goodwill and other intangible assets, net		(377,601)			(376,851)			(302,914)
Average tangible stockholders’ common equity	$	835,232		$	818,951		$	658,910

Reported : Return on average tangible common equity (2)		11.79	%		11.80	%		16.17	%
Adjusted : Return on average tangible common equity (2), (3)		14.50	%		14.45	%		16.26	%


		Nine Months Ended
		September 30,			September 30,
		2019			2018
Average stockholders’ common equity	$	1,173,213		$	946,675
Average goodwill and other intangible assets, net		(369,104)			(304,738)
Average tangible stockholders’ common equity	$	804,109		$	641,937

Reported : Return on average tangible common equity (2)		12.37	%		15.34	%
Adjusted : Return on average tangible common equity (2), (3)		14.41	%		16.15	%

(1) Tax-effected measure
(2) Annualized measure
(3) Calculated using adjusted net income

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FORWARD-LOOKING STATEMENTS

Statements made in this document, other than those concerning historical financial information, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events. A number of factors, many of which are beyond our ability to control or predict, could cause actual results to differ materially from those in our forward-looking statements. These factors include, among others, the following: (i) the strength of the local, state, national and international economy (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations); (ii) changes in state and federal laws, regulations and governmental policies concerning the Company’s general business; (iii) changes in interest rates and prepayment rates of the Company’s assets; (iv) increased competition in the financial services sector and the inability to attract new customers; (v) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (vi) the loss of key executives or employees; (vii) changes in consumer spending; (viii) unexpected results of current and/or future acquisitions, which may include failure to realize the anticipated benefits of any acquisition and the possibility that transaction costs may be greater than anticipated; (ix) unexpected outcomes of existing or new litigation involving the Company; (x) the economic impact of any future terrorist threats or attacks; (xi) the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards; and (xii) changes in accounting policies and practices. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including additional factors that could materially affect its financial results, is included in the Company’s filings with the Securities and Exchange Commission.

CRITICAL ACCOUNTING ESTIMATES

Critical accounting estimates are those that are critical to the portrayal and understanding of First Busey’s financial condition and results of operations and require management to make assumptions that are difficult, subjective or complex. These estimates involve judgments, assumptions and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially different financial condition or materially different results of operations is a reasonable likelihood. Further, changes in accounting standards could impact the Company’s critical accounting estimates.

Our significant accounting policies are described in Note 1 of the Company’s 2018 Form 10-K. The majority of these accounting policies do not require management to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material. However, the following policies could be deemed critical:

Fair Value of Investment Securities . The fair values of investment securities are measurements from an independent pricing service and are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.

Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of debt securities below their amortized cost are evaluated to determine whether such declines are temporary or OTTI. If the Company (i) has the intent to sell a debt security or (ii) will more-likely-than-not be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire decline in fair value as an OTTI loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The decline in fair value is separated into the amount of impairment related to the credit loss and the amount of impairment related to all other factors. The amount of the impairment related

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to credit loss is recognized in earnings, and the amount of impairment related to all other factors is recognized in other comprehensive income (loss).

Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations . Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the date of acquisition. Fair values are determined based on the definition of “fair value” defined in FASB ASC Topic 820 — Fair Value Measurement as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed. At the date of acquisition, when loans have evidence of credit deterioration since origination and it is probable that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. At each future reporting date, the Company re-estimates the expected cash flows of the loans. Subsequent decreases in the expected cash flows will generally result in a provision for loan losses. Subsequent increases in the expected cash flows will generally be offset against the allowance for loan losses to the extent an allowance has been established or will be recognized as interest income prospectively.

Goodwill. Goodwill represents the excess of purchase price over the fair value of net assets acquired using the acquisition method of accounting. Determining the fair value often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Goodwill is not amortized, instead, the Company assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired.

Income Taxes. The Company estimates income tax expense based on amounts expected to be owed to federal and state tax jurisdictions. Estimated income tax expense is reported in the unaudited Consolidated Statements of Income. Accrued and deferred taxes, as reported in other assets or other liabilities in the unaudited Consolidated Balance Sheets, represent the net estimated amount due to or to be received from taxing jurisdictions either currently or in the future. Management judgment is involved in estimating accrued and deferred taxes, as it may be necessary to evaluate the risks and merits of the tax treatment of transactions, filing positions, and taxable income calculations after considering tax-related statutes, regulations and other relevant factors. Because of the complexity of tax laws and interpretations, interpretation is subject to judgment.

Allowance for Loan Losses. First Busey has established an allowance for loan losses which represents its estimate of the probable losses inherent in the loan portfolio as of the date of the consolidated financial statements and reduces the total loans outstanding by an estimate of uncollectible loans. Loans deemed uncollectible are charged against and reduce the allowance. A provision for loan losses is charged to current expense and acts to replenish the allowance for loan losses in order to maintain the allowance at a level that management deems adequate. Acquired loans from business combinations with uncollected principal balances are carried net of a fair value adjustment for credit and interest rates. These loans are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. However, as the acquired loans renew, it is generally necessary to establish an allowance which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans.

To determine the adequacy of the allowance for loan losses, a formal analysis is completed quarterly to assess the risk within the loan portfolio. This assessment is reviewed by the Company’s senior management. The analysis includes a review of historical performance, dollar amount and trends of past due loans, dollar amount and trends in non-performing loans, certain impaired loans, and loans identified as sensitive assets. Sensitive assets include non-accrual loans, past-due loans, loans on First Busey’s watch loan reports and other loans identified as having probable potential for loss.

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The allowance consists of specific and general components. The specific component considers loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when either the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying amount of that loan. The general component covers non-classified loans and classified loans not considered impaired and is based on historical loss experience adjusted for qualitative factors. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss experience.

A loan is considered to be impaired when, based on current information and events, it is probable First Busey will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreement. When a loan becomes impaired, management generally calculates the impairment based on the fair value of the collateral, if the loan is collateral-dependent or based on the discounted cash flows of the loan at the loan’s effective interest rate. The amount of impairment and any subsequent changes are recorded through a charge to the provision for loan losses. For collateral dependent loans, the allowance is based upon the estimated fair value, net of selling costs, of the applicable collateral. The required allowance or actual loss on an impaired loan could differ significantly if the ultimate fair value of the collateral is significantly different from the fair value estimate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of changes in asset values due to movements in underlying market rates and prices. Interest rate risk is a type of market risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting First Busey as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, have minimal impact or do not arise in the normal course of First Busey’s business activities.

First Busey has an asset-liability committee, whose policy is to meet at least quarterly, to review current market conditions and to structure the Consolidated Balance Sheets to optimize stability in net interest income in consideration of projected future changes in interest rates.

As interest rate changes do not impact all categories of assets and liabilities equally or simultaneously, the asset-liability committee primarily relies on balance sheet and income simulation analysis to determine the potential impact of changes in market interest rates on net interest income. In these standard simulation models, the balance sheet is projected over a one-year and a two-year time horizon and net interest income is calculated under current market rates and assuming permanent instantaneous shifts of +/-100, +200, and +300 basis points. The model assumes immediate and sustained shifts in the federal funds rate and other market rate indices and corresponding shifts in other non-market rate indices based on their historical changes relative to changes in the federal funds rate and other market indices. Assets and liabilities are assumed to remain constant as of the measurement date; variable-rate assets and liabilities are repriced based on repricing frequency; and prepayment speeds on loans are projected for both declining and rising rate environments.

The interest rate risk of First Busey as a result of immediate and sustained changes in interest rates, expressed as a change in net interest income as a percentage of the net interest income calculated in the constant base model, was as follows:


	Year-One: Basis Point Changes
	- 100		+100		+200		+300

September 30, 2019	(4.84)	%	2.50	%	4.81	%	6.98	%

December 31, 2018	(3.58)	%	1.08	%	2.01	%	2.88	%

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	Year-Two: Basis Point Changes
	- 100		+100		+200		+300

September 30, 2019	(7.22)	%	4.00	%	7.36	%	10.53	%

December 31, 2018	(5.13)	%	1.97	%	3.70	%	5.32	%

Interest rate risk is monitored and managed within approved policy limits. The calculation of potential effects of hypothetical interest rate changes is based on numerous assumptions and should not be relied upon as indicative of actual results. Actual results would likely differ from simulated results due to the timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act was carried out as of September 30, 2019, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Exchange Act was (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2019, First Busey did not make any changes in its internal control over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As part of the ordinary course of business, First Busey and its subsidiaries are parties to litigation that is incidental to their regular business activities.

There is no material pending litigation, other than ordinary routine litigation incidental to its business, in which First Busey or any of its subsidiaries is involved or of which any of their property is the subject. Furthermore, there is no pending legal proceeding that is adverse to First Busey in which any director, officer or affiliate of First Busey, or any associate of any such director or officer, is a party, or has a material interest.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A of Part I of the Company’s 2018 Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 3, 2015, First Busey’s board of directors authorized the Company to repurchase up to an aggregate of 666,667 shares of its common stock. The repurchase plan has no expiration date and replaced the prior repurchase plan originally approved in 2008. On May 22, 2019, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by 1,000,000 shares. During the quarter, the Company repurchased 194,062 shares at an average price of $25.19 per share. At September 30, 2019, the Company had 805,938 shares that may still be purchased under the plan.


Period	Total number of shared purchased	Average price paid per share	Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum number of Shares that May Yet Be Repurchased Under the Program
July 1-31, 2019	—	—	—	1,000,000
August 1-31, 2019	64,062	$ 24.72	64,062	935,938
September 1-30, 2019	130,000	$ 25.43	130,000	805,938

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

10.1	—	Employment Agreement by and between First Busey Corporation and Jeffrey D. Jones, dated July 26, 2019 (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on July 26, 2019 (Commission No. 0-15950), and incorporated herein by reference).

*31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a).

*31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a).

*32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Chief Executive Officer.

*32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Chief Financial Officer.

101.INS		iXBRL Instance Document

101.SCH		iXBRL Taxonomy Extension Schema

101.CAL		iXBRL Taxonomy Extension Calculation Linkbase

101.LAB		iXBRL Taxonomy Extension Label Linkbase

101.PRE		iXBRL Taxonomy Extension Presentation Linkbase

101.DEF		iXBRL Taxonomy Extension Definition Linkbase

104		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST BUSEY CORPORATION

(Registrant)

—	By:	/s/ VAN A. DUKEMAN
		Van A. Dukeman
		President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ JEFFREY D. JONES
		Jeffrey D. Jones
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date: November 7, 2019

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FIRST BUSEY CORP /NV/ Interim / Quarterly Report 2019

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