UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended 9/6/30/~~2017~~2018

o¨ 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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	x		Accelerated filer o¨
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company o¨
Emerging growth company	o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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 8, 2017~~August 7, 2018
Common Stock, $.001 par value		~~48,634,644~~48,777,809

Table of Contents

FIRST BUSEY CORPORATION

FORM 10-Q

June 30, 2018

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017

(Unaudited)

	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
	(dollars in thousands)						(dollars in thousands)
Assets
Cash and cash equivalents (interest-bearing 2017 $111,455; 2016 $75,006)	$	214,381		$	166,706
Securities available for sale, at fair value	708,247			759,811
Securities held to maturity, at amortized cost	281,975			47,820
Cash and cash equivalents (interest-bearing 2018 $126,402; 2017 $234,889)							$	230,730		$	353,272
Securities available for sale							871,338			872,682
Securities held to maturity							507,780			443,550
Securities equity investments							5,689			5,378
Loans held for sale	139,696			256,319			33,974			94,848
Portfolio loans (net of allowance for loan losses 2017 $51,035; 2016 $47,795)	5,034,829			3,831,105
Portfolio loans (net of allowance for loan losses 2018 $53,305; 2017 $53,582)							5,501,982			5,465,918
Premises and equipment, net	100,642			77,861			119,835			116,913
Goodwill	218,796			102,814			267,685			269,346
Other intangible assets, net	28,766			18,462			35,722			38,727
Cash surrender value of bank owned life insurance	101,104			79,720			127,965			126,737
Deferred tax asset, net	23,407			20,224			16,665			17,296
Other assets	61,946			64,328			56,179			55,973
Total assets	$	6,913,789		$	5,425,170		$	7,775,544		$	7,860,640
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	1,321,439		$	1,134,133		$	1,496,671		$	1,597,421
Interest-bearing	4,051,844			3,240,165			4,667,241			4,528,544
Total deposits	$	5,373,283		$	4,374,298		$	6,163,912		$	6,125,965

Securities sold under agreements to repurchase	219,071			189,157			240,109			304,566
Short-term borrowings	212,850			75,000			150,000			220,000
Long-term debt	50,000			80,000			50,000			50,000
Senior notes, net of unamortized issuance costs	39,370			—			39,472			39,404
Subordinated notes, net of unamortized issuance costs	64,745			—			64,653			64,715
Junior subordinated debt owed to unconsolidated trusts	70,973			70,868			71,081			71,008
Other liabilities	47,429			41,533			39,135			49,979
Total liabilities	$	6,077,721		$	4,830,856		$	6,818,362		$	6,925,637

Commitments and contingencies (See “Note 14: Outstanding Commitments and Contingent Liabilities”)
Commitments and contingencies (See Note 13)
Stockholders’ Equity
Common stock, $.001 par value, authorized 66,666,667 shares; shares issued 2017 46,070,078; 2016 38,869,519	46			39
Common stock, $.001 par value, authorized 66,666,667 shares; shares issued 2018 and 2017 49,185,581							$	49		$	49
Additional paid-in capital	988,972			781,716			1,082,323			1,084,889
Accumulated deficit	(135,552		)	(163,689		)	(104,504		)	(132,122		)
Accumulated other comprehensive income	459			36
Accumulated other comprehensive loss							(10,865		)	(2,810		)
Total stockholders’ equity before treasury stock	$	853,925		$	618,102		$	967,003		$	950,006

Common stock shares held in treasury at cost, 2017 550,937; 2016 633,232	(17,857		)	(23,788		)
Common stock shares held in treasury at cost, 2018 409,177; 2017 500,638							(9,821		)	(15,003		)
Total stockholders’ equity	$	836,068		$	594,314		$	957,182		$	935,003
Total liabilities and stockholders’ equity	$	6,913,789		$	5,425,170		$	7,775,544		$	7,860,640

Common shares outstanding at period end	45,519,141			38,236,287			48,776,404			48,684,943

See accompanying notes to unaudited Consolidated Financial Statements.

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

(Unaudited)

	2017		2016		2018		2017
	(dollars in thousands, except per share amounts)				(dollars in thousands, except per share amounts)
Interest income:
Interest and fees on loans	$	138,595	$	104,333	$	123,250	$	81,833
Interest and dividends on investment securities:
Taxable interest income	12,339		10,585		13,244		7,650
Non-taxable interest income	2,521		2,332		2,464		1,453
Total interest income	$	153,455	$	117,250	$	138,958	$	90,936
Interest expense:
Deposits	$	8,058	$	4,998	$	12,891	$	4,207
Federal funds purchased and securities sold under agreements to Repurchase	618		274
Federal funds purchased and securities sold under agreements to repurchase					713		327
Short-term borrowings	521		461		933		74
Long-term debt	421		155		377		280
Senior notes	562		—		799		162
Subordinated notes	1,098		—		1,587		299
Junior subordinated debt owed to unconsolidated trusts	1,857		1,337		1,529		1,208
Total interest expense	$	13,135	$	7,225	$	18,829	$	6,557
Net interest income	$	140,320	$	110,025	$	120,129	$	84,379
Provision for loan losses	2,494		4,050		3,266		1,000
Net interest income after provision for loan losses	$	137,826	$	105,975	$	116,863	$	83,379
Non-interest income:
Trust fees	$	17,088	$	15,112	$	14,249	$	12,017
Commissions and brokers’ fees, net	2,239		2,095		1,979		1,473
Remittance processing	8,581		8,558		6,958		5,704
Fees for customer services	18,658		17,074		14,236		12,081
Mortgage revenue	8,430		9,091		3,216		4,904
Security gains, net	1,143		1,230		160		853
Other	4,774		3,008		4,490		3,044
Total non-interest income	$	60,913	$	56,168	$	45,288	$	40,076
Non-interest expense:
Salaries, wages and employee benefits	$	67,448	$	55,575	$	54,291	$	41,951
Net occupancy expense of premises	10,025		8,300		7,510		6,311
Furniture and equipment expenses	5,123		4,564		3,703		3,338
Data processing	13,290		12,677		8,375		6,235
Amortization of intangible assets	3,675		3,157		3,005		2,389
Regulatory expense	1,803		2,274
Other	19,962		16,904		21,461		14,163
Total non-interest expense	$	121,326	$	103,451	$	98,345	$	74,387
Income before income taxes	$	77,413	$	58,692	$	63,806	$	49,068
Income taxes	26,980		20,453		17,027		17,419
Net income	$	50,433	$	38,239	$	46,779	$	31,649
Basic earnings per common share	$	1.24	$	1.12	$	0.96	$	0.83
Diluted earnings per common share	$	1.23	$	1.11	$	0.95	$	0.82
Dividends declared per share of common stock	$	0.54	$	0.51	$	0.40	$	0.36

See accompanying notes to unaudited Consolidated Financial Statements.

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

(Unaudited)

	2017		2016		2018		2017
	(dollars in thousands, except per share amounts)				(dollars in thousands, except per share amounts)
Interest income:
Interest and fees on loans	$	56,762	$	43,002	$	62,290	$	41,236
Interest and dividends on investment securities:
Taxable interest income	4,689		3,398		6,831		4,047
Non-taxable interest income	1,068		788		1,204		726
Total interest income	$	62,519	$	47,188	$	70,325	$	46,009
Interest expense:
Deposits	$	3,851	$	2,099	$	6,904	$	2,163
Federal funds purchased and securities sold under agreements to Repurchase	291		102
Federal funds purchased and securities sold under agreements to repurchase					372		204
Short-term borrowings	447		263		457		27
Long-term debt	141		55		213		167
Senior notes	400		—		399		162
Subordinated notes	799		—		794		299
Junior subordinated debt owed to unconsolidated trusts	649		538		814		621
Total interest expense	$	6,578	$	3,057	$	9,953	$	3,643
Net interest income	$	55,941	$	44,131	$	60,372	$	42,366
Provision for loan losses	1,494		1,950		2,258		500
Net interest income after provision for loan losses	$	54,447	$	42,181	$	58,114	$	41,866
Non-interest income:
Trust fees	$	5,071	$	4,520	$	6,735	$	5,827
Commissions and brokers’ fees, net	766		740		883		751
Remittance processing	2,877		2,803		3,566		2,859
Fees for customer services	6,577		6,495		7,290		6,095
Mortgage revenue	3,526		4,842		1,573		2,770
Security gains, net	290		11
Security gains (losses), net					160		(4		)
Other	1,730		1,334		2,595		1,764
Total non-interest income	$	20,837	$	20,745	$	22,802	$	20,062
Non-interest expense:
Salaries, wages and employee benefits	$	25,497	$	21,716	$	25,472	$	20,061
Net occupancy expense of premises	3,714		3,401		3,689		3,126
Furniture and equipment expenses	1,785		1,836		1,790		1,719
Data processing	5,753		4,430		4,030		3,306
Amortization of intangible assets	1,286		1,282		1,490		1,182
Regulatory expense	778		802
Other	8,126		5,948		10,834		7,374
Total non-interest expense	$	46,939	$	39,415	$	47,305	$	36,768
Income before income taxes	$	28,345	$	23,511	$	33,611	$	25,160
Income taxes	9,561		8,089		8,749		8,681
Net income	$	18,784	$	15,422	$	24,862	$	16,479
Basic earnings per common share	$	0.41	$	0.40	$	0.51	$	0.43
Diluted earnings per common share	$	0.41	$	0.40	$	0.51	$	0.43
Dividends declared per share of common stock	$	0.18	$	0.17	$	0.20	$	0.18

See accompanying notes to unaudited Consolidated Financial Statements.

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

(dollars in thousands)

Net income

$
18,784

$
15,422

$
50,433

$
38,239

Other comprehensive income (loss), before tax:

Securities available for sale:

Unrealized net gains (losses) on securities:

Unrealized net holding gains (losses) arising during period

$
563

$
(2,017
)
$
1,864

$
8,582

Reclassification adjustment for (gains) included in net income

(290
)
(11
)
(1,143
)
(1,230
)
Other comprehensive income (loss), before tax

$
273

$
(2,028
)
$
721

$
7,352

Income tax expense (benefit) related to items of other comprehensive income

119

(815
)
298

2,934

Other comprehensive income (loss), net of tax

$
154

$
(1,213
)
$
423

$
4,418

Comprehensive income

$
18,938

$
14,209

$
50,856

$
42,657

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
	(dollars in thousands)
Net income	$	24,862		$	16,479	$	46,779		$	31,649
Other comprehensive (loss) income, before tax:
Securities available for sale:
Unrealized net (losses) gains on securities:
Unrealized net holding (losses) gains arising during period	$	(1,506	)	$	728	$	(10,260	)	$	1,301
Reclassification adjustment for losses (gains) included in net income	(160		)	4		(160		)	(853		)
Other comprehensive (loss) income, before tax	$	(1,666	)	$	732	$	(10,420	)	$	448
Income tax (benefit) expense related to items of other comprehensive income	(475		)	292		(2,970		)	179
Other comprehensive (loss) income, net of tax	$	(1,191	)	$	440	$	(7,450	)	$	269
Comprehensive income	$	23,671		$	16,919	$	39,329		$	31,918

See accompanying notes to unaudited Consolidated Financial Statements.

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

(Unaudited)

(dollars in thousands, except per share amounts)

Accumulated

Additional

Other

Common

Paid-in

Accumulated

Comprehensive

Treasury

Stock

Capital

Deficit

Income (loss)

Stock

Total

Balance, December 31, 2015

$
29

$
591,053

$
(190,265
)
$
2,340

$
(29,971
)
$
373,186

Net income

—

—

38,239

—

—

38,239

Other comprehensive income

—

—

—

4,418

—

4,418

Stock issued in acquisition of Pulaski, net of stock issuance costs

10

195,188

—

—

—

195,198

Issuance of treasury stock for employee stock purchase plan

—

(552
)
—

—

805

253

Net issuance of treasury stock for restricted stock unit vesting and related tax benefit

—

(2,929
)
—

—

2,668

(261
)
Net issuance of stock options exercised, net of shares redeemed

—

(923
)
—

—

923

—

Cash dividends common stock at $0.51 per share

—

—

(16,253
)
—

—

(16,253
)
Stock dividend equivalents restricted stock units at $0.51 per share

—

263

(263
)
—

—

—

Stock dividend accrued on restricted stock awards assumed with the Pulaski acquisition at $0.17 per share

—

—

(10
)
—

—

(10
)
Stock-based employee compensation

—

1,309

—

—

—

1,309

Return of equity trust shares

—

—

—

—

(5
)
(5
)

Balance, September 30, 2016

$
39

$
783,409

$
(168,552
)
$
6,758

$
(25,580
)
$
596,074

Balance, December 31, 2016

$
39

$
781,716

$
(163,689
)
$
36

$
(23,788
)
$
594,314

Net income

—

—

50,433

—

—

50,433

Other comprehensive income

—

—

—

423

—

423

Stock issued in acquisition of First Community, net of stock issuance costs

7

211,575

—

—

—

211,582

Issuance of treasury stock for employee stock purchase plan

—

(452
)
—

—

841

389

Net issuance of treasury stock for restricted stock unit vesting and related taxes

—

(5,221
)
—

—

4,862

(359
)
Net issuance of stock options exercised, net of shares redeemed

—

(923
)
—

—

1,088

165

Cash dividends common stock at $0.54 per share

—

—

(21,944
)
—

—

(21,944
)
Stock dividend equivalents restricted stock units at $0.54 per share

—

342

(342
)
—

—

—

Stock dividend accrued on restricted stock awards assumed with the Pulaski Financial Corp. acquisition at $0.54 per share

—

—

(10
)
—

—

(10
)
Stock-based employee compensation

—

1,935

—

—

—

1,935

Return of 28,648 equity trust shares

—

—

—

—

(860
)
(860
)

Balance, September 30, 2017

$
46

$
988,972

$
(135,552
)
$
459

$
(17,857
)
$
836,068

									Accumulated
			Additional						Other
	Common		Paid-in			Accumulated			Comprehensive			Treasury
	Stock		Capital			Deficit			Income (loss)			Stock			Total
Balance, December 31, 2016	$	39	$	781,716		$	(163,689	)	$	36		$	(23,788	)	$	594,314

Net income	—		—			31,649			—			—			31,649
Other comprehensive income	—		—			—			269			—			269
Issuance of treasury stock for employee stock purchase plan	—		(361		)	—			—			664			303
Net issuance of treasury stock for restricted stock unit vesting and related tax benefit	—		(969		)	—			—			914			(55		)
Net issuance of stock options exercised, net of shares redeemed	—		(784		)	—			—			921			137
Cash dividends common stock at $0.36 per share	—		—			(13,764		)	—			—			(13,764		)
Stock dividend equivalents restricted stock units at $0.36 per share	—		181			(181		)	—			—			—
Stock dividend accrued on restricted stock awards assumed with the Pulaski Financial Corp. acquisition at $0.36 per share	—		—			(11		)	—			—			(11		)
Return of 28,648 equity trust shares	—		—			—			—			(860		)	(860		)
Stock-based compensation	—		1,133			—			—			—			1,133
Balance, June 30, 2017	$	39	$	780,916		$	(145,996	)	$	305		$	(22,149	)	$	613,115


Balance, December 31, 2017	$	49	$	1,084,889		$	(132,122	)	$	(2,810	)	$	(15,003	)	$	935,003

Net income	—		—			46,779			—			—			46,779
Other comprehensive loss	—		—			—			(7,450		)	—			(7,450		)
Tax Cuts and Jobs Act (“TCJA”) of 2017 reclassification	—		—			605			(605		)	—			—
Issuance of treasury stock for employee stock purchase plan	—		(328		)	—			—			666			338
Net issuance of treasury stock for restricted stock unit vesting and related tax benefit	—		(1,875		)	—			—			1,803			(72		)
Net issuance of stock options exercised, net of shares redeemed	—		(2,367		)	—			—			2,713			346
Cash dividends common stock at $0.40 per share	—		—			(19,482		)	—			—			(19,482		)
Stock dividend equivalents restricted stock units at $0.40 per share	—		282			(284		)	—			—			(2		)
Stock-based compensation	—		1,722			—			—			—			1,722
Balance, June 30, 2018	$	49	$	1,082,323		$	(104,504	)	$	(10,865	)	$	(9,821	)	$	957,182

See accompanying notes to unaudited Consolidated Financial Statements.

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

(Unaudited)

	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Cash Flows from Operating Activities
Net income	$	50,433		$	38,239		$	46,779		$	31,649
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based and non-cash compensation	1,935			1,309			1,722			1,133
Depreciation	6,084			5,330			4,748			3,862
Amortization of intangible assets	3,675			3,157			3,005			2,389
Premises and equipment impairment							817			—
Provision for loan losses	2,494			4,050			3,266			1,000
Provision for deferred income taxes	(3,480		)	(1,948		)	3,601			2,031
Amortization of security premiums and discounts, net	4,172			5,407			4,485			2,543
Accretion of premiums and discounts on time deposits, trust preferred securities and borrowing, net	(232		)	(529		)
Accretion of premiums and discounts on time deposits and trust preferred securities, net							(49		)	(198		)
Accretion of premiums and discounts on portfolio loans, net	(6,329		)	(4,329		)	(6,375		)	(3,270		)
Net security gains	(1,143		)	(1,230		)
Security gains, net							(160		)	(853		)
Change in equity securities, net							(1,071		)	—
Gain on sales of mortgage loans, net of origination costs	(36,911		)	(8,130		)	(5,095		)	(26,136		)
Mortgage loans originated for sale	(1,166,083		)	(1,218,032		)	(219,252		)	(758,338		)
Proceeds from sales of mortgage loans	1,314,779			1,139,884			285,221			866,635
Net (gains) losses on disposition of premises and equipment	(57		)	36
Premises and equipment impairment	—			650
Net losses (gains) on disposition of premises and equipment							105			(56		)
Increase in cash surrender value of bank owned life insurance	(1,604		)	(1,257		)	(1,228		)	(888		)
Change in assets and liabilities:
Decrease in other assets	14,049			5,790			1,393			7,879
(Decrease) increase in other liabilities	(5,513		)	1,125			(12,981		)	4,839
Increase (decrease) in interest payable	1,650			(61		)
Decrease (increase) in income taxes receivable	1,435			(1,073		)
Net cash provided by (used in) operating activities before activities	$	179,354		$	(31,612	)
Increase in interest payable							1,618			396
Decrease in income taxes receivable							1,214			523
Net cash provided by operating activities before activities							$	111,763		$	135,140

Cash Flows from Investing Activities
Proceeds from sales of securities classified available for sale	134,515			49,378			—			127,287
Proceeds from sales of securities classified held to maturity	—			399
Proceeds from sales of securities classified equity							920			—
Proceeds from maturities of securities classified available for sale	154,435			183,329			82,817			103,249
Proceeds from maturities of securities classified held to maturity	6,358			1,333			18,033			2,819
Purchase of securities classified available for sale	(128,425		)	(121,633		)	(93,591		)	(116,327		)
Purchase of securities classified held to maturity	(185,201		)	(2,103		)	(85,050		)	(164,803		)
Net (increase) decrease in portfolio loans	(98,040		)	62,154
Net (increase) in portfolio loans							(36,080		)	(32,403		)
Proceeds from disposition of premises and equipment	622			864			2			611
Proceeds from sale of other real estate owned (“OREO”) properties	4,069			3,911			722			3,765
Purchases of premises and equipment	(11,336		)	(6,748		)	(8,594		)	(6,054		)
Net cash received in acquisitions	29,947			25,575
Proceeds from the redemption of Federal Home Loan Bank (“FHLB”) stock	8,213			17,640
Purchase of FHLB stock	(3,891		)	(23,478		)
Net cash (used in) provided by investing activities	$	(88,734	)	$	190,621
Proceeds from the redemption of Federal Home Loan Bank (“FHLB”) stock, net							2,114			6,001
Net cash used in investing activities							$	(118,707	)	$	(75,855	)

(continued on next page)

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

(Unaudited)

	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Cash Flows from Financing Activities
Net decrease in certificates of deposit	$	(92,596	)	$	(131,917	)
Net decrease in demand, money market and savings deposits	(42,414		)	(48,112		)
Net increase in securities sold under agreements to repurchase	4,443			16,551
Proceeds from short-term borrowings, net	53,150			67,700
Repayment of long-term advances	(39,800		)	(4,906		)
Net increase (decrease) in certificates of deposit							$	138,466		$	(64,286	)
Net (decrease) increase in demand, money market and savings deposits							(100,397		)	84,468
Net (decrease) in securities sold under agreements to repurchase							(64,457		)	(10,560		)
Repayment of short-term borrowings							(70,000		)	(25,000		)
Net proceeds from issuance of senior debt	39,326			—			—			39,351
Net proceeds from issuance of subordinated debt	58,986			—			—			59,022
Cash dividends paid	(21,971		)	(16,263		)	(19,482		)	(13,764		)
Value of shares surrendered upon vesting to satisfy tax withholding obligations of stock-based compensation	(1,975		)	(261		)	(74		)	(1,259		)
Proceeds from stock options exercised	165			—			346			137
Common stock issuance costs	(259		)	(246		)
Net cash (used in) financing activities	$	(42,945	)	$	(117,454	)
Net increase in cash and cash equivalents	$	47,675		$	41,555
Net cash (used in) provided by financing activities							$	(115,598	)	$	68,109
Net (decrease) increase in cash and cash equivalents							$	(122,542	)	$	127,394
Cash and cash equivalents, beginning of period	$	166,706		$	319,280		$	353,272		$	166,706
Cash and cash equivalents, ending of period	$	214,381		$	360,835		$	230,730		$	294,100

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash payments for:
Interest	$	11,485		$	6,658		$	17,212		$	6,162
Income taxes	$	19,369		$	13,900		$	4,322		$	13,116
Non-cash investing and financing activities:
Real estate acquired in settlement of loans	$	477		$	2,175		$	3,125		$	258

See accompanying notes to unaudited Consolidated Financial Statements.

FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: ~~Basis of Presentation~~Accounting Policies

~~The accompanying~~Basis of Financial Statement Presentation

When preparing these unaudited Consolidated Financial Statements of First Busey Corporation and its subsidiaries (“First ~~Busey”~~Busey,” “Company,” “we,” or ~~the “Company”~~“our”), a Nevada corporation, we have ~~been~~assumed that you have read the audited Consolidated Financial Statements included in our 2017 Form 10-K. These interim unaudited Consolidated Financial Statements serve to update our 2017 Form 10-K and may not include all information and notes necessary to constitute a complete set of Financial Statements.

We prepared ~~pursuant~~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 ~~rules and regulations~~current period presentation, which did not have a material impact on our consolidated financial condition or results of the Securities and Exchange Commission (“SEC”) for interim financial information and with the instructions to Form 10-Q, and do not include certain information and footnote disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 on file with the SEC.operations.

~~The accompanying Consolidated Balance Sheet as of December 31, 2016, which has been derived from audited financial statements, and~~In our opinion, the unaudited Consolidated Financial Statements ~~have been prepared in accordance with GAAP and~~ reflect all normal, recurring adjustments ~~that are, in the opinion of management, necessary~~needed to present fairly our results for the ~~fair presentation of the financial position and results of operations as of the dates and for the periods presented. All such adjustments are of a normal recurring nature.~~interim periods. The results of operations for ~~the three and nine months ended September 30, 2017~~interim periods are not necessarily indicative of the results that may be expected for the full year ~~ending December 31, 2017.~~or any other interim period.

~~On April~~We have also considered the impact of subsequent events on these unaudited Consolidated Financial Statements. There were no significant subsequent events for the quarter ended June 30, 2016, First Busey acquired Pulaski Financial Corp., a Missouri corporation (“Pulaski”), and its wholly-owned bank subsidiary, Pulaski Bank, National Association (“Pulaski Bank”). First Busey operated Pulaski Bank as a separate banking subsidiary from May 1, 2016 until November 4, 2016, when it was merged with and into Busey Bank. At that time, Pulaski Bank’s branches became branches2018 through the issuance date of Busey Bank. On February 6, 2017, the Company entered into an Agreement and Plan of Merger (“FCFP Merger Agreement”) with First Community Financial Partners, Inc., an Illinois corporation (“First Community”). On July 2, 2017, the Company completed its acquisition of First Community, pursuant to which each share of First Community common stock issued and outstanding was converted into the right to receive 0.396 shares of the Company’s common stock, cash in lieu of fractional shares and $1.35 cash consideration per share. First Busey operated First Community Financial Bank, First Community’s wholly-owned bank subsidiary prior to the acquisition, as a separate banking subsidiary from July 3, 2017 until November 3, 2017, when it was merged with and into Busey Bank. At that time, First Community Financial Bank’s banking offices became branches of Busey Bank. Thethese unaudited Consolidated Financial Statements include the accounts of the Company, Busey Bank and Busey Bank’s wholly-owned subsidiaries, FirsTech, Inc. and Pulaski Service Corporation (as of the date of acquisition, April 30, 2016), First Community Financial Bank (as of the date of acquisition, July 2, 2017) and Busey Wealth Management, Inc. and its wholly-owned subsidiary, Busey Trust Company.

~~All material intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified~~that warranted adjustment to ~~conform to the current presentation with no effect on net income~~ or ~~stockholders’ equity.~~

On March 13, 2017, the Company entered into an Agreement and Plan of Merger (“MIB Merger Agreement”) with Mid Illinois Bancorp, Inc., an Illinois corporation (“Mid Illinois”). On October 1, 2017, the Company completed its acquisition of Mid Illinois, under which each share of Mid Illinois common stock issued and outstanding as of the effective time was converted into, at the election of the stockholder, the right to receive either (i) $227.94 in cash (the “Cash Consideration Option”), (ii) 7.5149 shares of the Company’s common stock, or (iii) mixed consideration of $68.38 in cash and 5.2604 shares of the Company’s common stock, subject to certain adjustments and proration. In the aggregate, total consideration consisted of 70% stock and 30% cash. Mid Illinois stockholders electing the Cash Consideration Option were subject to proration under the terms of the MIB Merger Agreement and ultimately received a mixture of cash and stock consideration. It is anticipated that South Side Trust & Savings Bank of Peoria, Mid Illinois’s wholly-owned bank subsidiary (“South Side”) prior to the acquisition, will be merged with and into Busey Bankdisclosure in the first quarter of 2018. At the time of the bank merger, South Side’s banking offices will become branches of Busey Bank. As of September 30, 2017, Mid Illinois had total consolidated assets of $656.7 million, total loans of $370.0 million and total deposits of $505.6 million. The unaudited Consolidated Financial ~~Statements in this Form 10-Q do not include the accounts~~Statements.

Use of ~~Mid Illinois.~~Estimates

In preparing the accompanying unaudited Consolidated Financial Statements, the Company’s management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the ~~financial statements~~Financial Statements and the reported amounts of revenues and expenses for the reporting period.

Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the fair value of available for sale investment securities, the fair value of assets acquired and liabilities assumed in business combinations and the determination of the allowance for loan losses.

10Recently Issued Accounting Standards

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 outlines a single model for companies to use in accounting for revenue arising from contracts with customers and supersedes most prior revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and establishes additional disclosures. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has evaluated ~~subsequent events for potential recognition and/or disclosure through~~its non-interest income and the ~~date~~nature of its contracts with customers and determined that further disaggregation of revenue beyond what is presented in the accompanying unaudited Consolidated Financial Statements was not necessary. The Company satisfies its performance obligations on its contracts with customers as services are rendered so there is limited judgement involved in applying Topic 606 that significantly affects the determination of the timing and amount of revenue from contracts with customers.

Descriptions of the Company’s primary revenue generating activities that are within Topic 606, and are presented in the accompanying unaudited Consolidated Statements of Income as components of non-interest income, include trust fees, commission and brokers’ fees, net, remittance processing, and fees for customer services. Trust fees and commission and brokers’ fees, net, represents monthly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and other fiduciary activities. Also included are fees received from a third party broker-dealer as part of a revenue

sharing agreement for fees earned from customers that the Company refers to the third party. Revenue is recognized when the performance obligation is completed, which is generally monthly. Remittance processing represents transaction-based fees for pay processing solutions such as online bill payments, lockbox and walk-in payments. Revenue is recognized when the performance obligation is completed, which is generally monthly. Fees for customer services represents general service fees for monthly account maintenance and activity or transaction-based fees and consists of transaction-based revenue, time-based revenue, or item-based revenue. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. The adoption of this guidance on January 1, 2018 did not change the method in which non-interest income is recognized therefore a cumulative effect adjustment to retained earnings was not necessary.

ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires: equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets; eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Balance Sheet; and requires an entity to present separately in other comprehensive income (loss) the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk when the fair value option has been elected for the liability. ASU 2016-01 was effective on January 1, 2018 and the adoption of this guidance resulted in separate classification of equity securities previously included in available for sale securities on the Consolidated Financial Statements. There was no cumulative effect adjustment recorded with the adoption of this ~~Quarterly Report~~guidance.

ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” was issued in February 2018. ASU 2018-02 allows companies to make a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for the effects of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate by the TCJA. The Company adopted this guidance in the first quarter of 2018 with no impact on ~~Form 10-Q were issued. On October 1, 2017, First Busey completed~~total stockholders’ equity or net income.

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 intends to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the ~~Mid Illinois acquisition.~~Consolidated Balance Sheet as a lease liability and a right-of-use asset. The ~~financial results~~guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of ~~Mid Illinois are not recognized in this Form 10-Q. On October 12, 2017 a return~~cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, ASU 2018-11, “Leases (Topic 842): Targeted Improvements” was issued to allow companies to choose to recognize the cumulative effect of ~~capital~~applying the new standard to leased assets and ~~associated surplus~~liabilities as an adjustment to the opening balance of retained earnings rather than recasting prior year results when they adopt the standard. The Company ~~from Busey Bank was executed as discussed in “Note 15: Capital.” In addition,~~is evaluating the impact this guidance will have on November 3, 2017, First Community Financial Bank was merged with and into Busey Bank. Other than these events, there were no significant subsequent events for the quarter ended September 30, 2017 through the issuance date of these unauditedits Consolidated Financial Statements and related disclosures. Where the Company is a lessee, the Company expects an increase in assets and liabilities to record the right of use asset and the lease liability.

ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 implements a change from current impaired loss model to an expected credit losses over the life of an instrument, including loans and securities held to maturity. The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods with those years. The Company has developed and is executing a project plan to implement this guidance. As part of that ~~warranted adjustment~~project plan, the Company will evaluate the impact this guidance will have on its Consolidated Financial Statements and related disclosures.

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 is intended to ~~or disclosure in~~simplify goodwill impairment testing by eliminating the ~~unaudited~~second step of the analysis which required an entity to determine the fair value of its assets and liabilities as of the impairment test date. Instead, ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. This guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

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 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its 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 expand 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 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” was issued in June 2018. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

Note 2: Acquisitions

~~Pulaski Financial Corp.~~

On April 30, 2016, First Busey completed its acquisition of Pulaski, which was headquartered in St. Louis, Missouri. Pulaski Bank, which was Pulaski’s wholly-owned bank subsidiary prior to the acquisition, offered a full line of quality retail and commercial banking products through thirteen full-service branch offices in the St. Louis metropolitan area. The operating results of Pulaski are included with the Company’s results of operations since the date of acquisition. First Busey operated Pulaski Bank as a separate subsidiary from May 1, 2016 until November 4, 2016, when it was merged with and into Busey Bank. At that time, Pulaski Bank’s branches became branches of Busey Bank.

Under the terms of the definitive agreement, at the effective time of the acquisition, each share of Pulaski common stock issued and outstanding was converted into the right to receive 0.79 shares of First Busey common stock and cash in lieu of fractional shares. The market value of the 9.4 million shares of First Busey common stock issued at the effective time of the acquisition was approximately $193.0 million based on First Busey’s closing stock price of $20.44 on April 29, 2016. In addition, all of the options to purchase shares of Pulaski common stock that were outstanding at the acquisition date were converted into options to purchase shares of First Busey common stock, adjusted for the 0.79 exchange ratio.

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition. The total consideration paid, which was used to determine the amount of goodwill resulting from the transaction, also included the fair value of outstanding Pulaski stock options that were converted into options to purchase common shares of First Busey. As the total consideration paid for Pulaski exceeded the net assets acquired, goodwill of $77.3 million was recorded as a result of the acquisition. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and the enhanced revenue opportunities from the Company’s broader service capabilities in the St. Louis market, is not tax deductible, and was assigned to the Banking operating segment.

First Busey incurred an insignificant amount of expenses related to the acquisition of Pulaski for the three and nine months ended September 30, 2017. First Busey incurred $0.8 million and $3.1 million in pre-tax expenses related to the acquisition of Pulaski for the three and nine months ended September 30, 2016, respectively, including professional and legal fees of $0.2 million and $1.1 million, respectively, to directly consummate the acquisition, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements. The remainder of the expenses primarily related to data processing conversion expenses and restructuring expenses.

~~The following table presents the assets acquired and liabilities assumed of Pulaski as of April 30, 2016 and their fair value estimates~~ ~~(dollars in thousands)~~:

As Recorded by
Pulaski

Fair Value
Adjustments

As Recorded by
First Busey

Assets acquired:

Cash and cash equivalents

$
25,580

$
—

$
25,580

Securities

47,895

105
(a)
48,000

Loans held for sale

184,856

—

184,856

Portfolio loans

1,243,913

(14,452
)(b)
1,229,461

Premises and equipment

17,236

(667
)(c)
16,569

OREO

5,022

(2,534
)(d)
2,488

Goodwill

3,939

(3,939
)(e)
—

Other intangible assets

—

15,468
(f)
15,468

Other assets

70,365

(122
)(g)
70,243

Total assets acquired

1,598,806

(6,141
)
1,592,665

Liabilities assumed:

Deposits

1,226,906

1,102
(h)
1,228,008

Other borrowings

205,840

906
(i)
206,746

Trust preferred securities

19,589

(3,805
)(j)
15,784

Other liabilities

24,594

(612
)(k)
23,982

Total liabilities assumed

1,476,929

(2,409
)
1,474,520

Net assets acquired

$
121,877

$
(3,732
)
$
118,145

Consideration paid:

Cash

$
5

Common stock

192,990

Fair value of stock options assumed

2,454

Total consideration paid

195,449

Goodwill

$
77,304

~~Explanation:~~

~~(a)~~ ~~Fair value adjustments of the securities portfolio as of the acquisition date.~~

~~(b)~~ Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the allowance for loan losses recorded by Pulaski. $16.9 million is expected to be accreted over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method.

~~(c)~~ Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment. The reduction in depreciation expense will be recorded using the straight-line method over the estimated useful life associated with each type of premises and equipment adjusted.

~~(d)~~ ~~Fair value adjustment based on the Company’s evaluation of the acquired OREO portfolio.~~

~~(e)~~ ~~Eliminate Pulaski’s existing goodwill.~~

~~(f)~~ ~~Recording of the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum of years digits method over a 14 year useful life.~~

~~(g)~~ ~~Fair value adjustment of other assets at the acquisition date.~~

~~(h)~~ ~~Fair value adjustment to time deposits. Amount to be amortized over two years in a manner that approximates the level yield method.~~

~~(i)~~ ~~Fair value adjustment to the FHLB borrowings. Such borrowings were repaid shortly after the acquisition date, so there was no premium amortization.~~

~~(j)~~ Fair value adjustment to the trust preferred securities at the acquisition date. Amount to be accreted over the weighted average remaining life of 18 years in a manner that approximates the level yield method.

~~(k)~~ ~~Fair value adjustment of other liabilities at the acquisition date.~~

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, which are loans with evidence of credit quality deterioration at the date of acquisition, were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the aggregate principal outstanding and aggregate fair value of the acquired performing loans, including loans held for sale, both rounded to $1.4 billion. The difference between the aggregate principal balance outstanding and aggregate fair value of $16.6 million is expected to be accreted over the estimated four year 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 $21.2 million and the aggregate fair value of PCI loans totaled $9.7 million, which became such loans’ new carrying value. At September 30, 2017, PCI loans related to this transaction with a carrying value of $1.0 million were outstanding. Material activity includes PCI loans with a carrying value of $6.2 million sold to outside parties in the third quarter of 2016 and a commercial PCI loan with a carrying value of $1.6 million collected in the fourth quarter of 2016. For PCI loans, 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. The accretable yield, as of the acquisition date, of $0.3 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method; however, the majority was accelerated in 2016 as a result of the third quarter loan sale and fourth quarter collection.

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2016, as if the acquisition had occurred January 1, 2016. The pro forma results combine the historical results of Pulaski in the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium 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, 2016. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that had been recognized are included in net income in the table below ~~(dollars in thousands)~~:

Pro Forma

Nine Months Ended

September 30, 2016

Total revenues (net interest income plus non-interest income)

$
184,677

Net income

36,408

Diluted earnings per common share

0.94

First Community Financial Partners, Inc.

On July 2, 2017, the Company completed its acquisition of First Community Financial Partners, Inc. (“First Community”), which was headquartered in Joliet, ~~Illinois.~~Illinois and its wholly owned bank subsidiary, First Community Financial Bank. Founded in 2004, First Community operated nine ~~branches~~banking centers in Will, DuPage and Grundy ~~counties,~~Counties, which encompass portions of the southwestern suburbs of Chicago. The operating results of First Community are included with the Company’s results of operations since the date of acquisition. First Busey operated First Community Financial Bank as a separate subsidiary from July 3, 2017 until November 3, 2017, when it was merged with and into Busey Bank. At that time, First Community Financial Bank’s ~~branches~~banking centers became ~~branches~~banking centers of Busey Bank.

Under the terms of the ~~FCFP Merger Agreement,~~merger agreement with First Community, at the effective time of the acquisition, each share of First Community common stock issued and outstanding was converted into the right to receive 0.396 shares of the Company’s common stock, cash in lieu of fractional shares and $1.35 cash consideration per share. The market value of the 7.2 million shares of First Busey common stock issued at the effective time of the acquisition was approximately $211.1 million based on First Busey’s closing stock price of $29.32 on June 30, 2017. In addition, certain options to purchase shares of First Community common stock that were outstanding at the acquisition date were converted into options to purchase shares of First Busey common stock, adjusted for the 0.44 option exchange ratio, and the fair value was included in the purchase price. Further, the purchase price included cash payouts relating to unconverted stock options and restricted stock units outstanding as of the acquisition date.

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition. ~~Fair values are subject to refinement for up to one year after the closing date of July 2, 2017 as additional information regarding the closing date fair values become available.~~ The total consideration paid, which was used to determine the amount of goodwill resulting from the transaction, also included the fair value of outstanding First Community stock options that were converted into options to purchase common shares of First Busey and cash paid out relating to stock options and restricted stock units not converted. As the total consideration paid for First Community exceeded the net assets acquired, goodwill of $116.0 million was recorded as a result of the acquisition. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and the greater revenue opportunities from the Company’s broader service capabilities in the Chicagoland area, is not tax deductible, and was assigned to the Banking operating segment.

First Busey did not incur any expenses related to the acquisition of First Community for the three months ended June 30, 2018. First Busey incurred ~~$2.9~~$0.1 million in pre-tax expenses related to the acquisition of First Community for the six months ended June 30, 2018, primarily for professional and legal fees. First Busey incurred $0.2 million and ~~$3.7~~$0.8 million in pre-tax expenses related to the acquisition of First Community for the three and ~~nine~~six months ended ~~September~~June 30, 2017, respectively, ~~including~~primarily for professional and legal fees, ~~of $0.7 million and $1.5 million, respectively, to directly consummate the acquisition,~~ all of which ~~were~~are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements. ~~The remainder of the expenses primarily related to data processing conversion expenses and restructuring expenses.~~

The following table presents the fair value estimates of First Community assets acquired and liabilities assumed as of July 2, 2017 ~~and their fair value estimates~~ (dollars in thousands):

As Recorded by
First Community

Fair Value
Adjustments

As Recorded by
First Busey

Assets acquired:

Cash and cash equivalents

$
60,686

$
—

$
60,686

Securities

166,046

(203
)(a)
165,843

Loans held for sale

905

—

905

Portfolio loans, net

1,103,987

(7,404
)(b)
1,096,583

Premises and equipment

21,682

(3,588
)(c)
18,094

OREO

915

(193
)(d)
722

Other intangible assets

701

13,278
(e)
13,979

Other assets

41,644

111
(f)
41,755

Total assets acquired

1,396,566

2,001

1,398,567

Liabilities assumed:

Deposits

1,134,584

(229
)(g)
1,134,355

Other borrowings

125,471

280
(h)
125,751

Other liabilities

11,503

359
(i)
11,862

Total liabilities assumed

1,271,558

410

1,271,968

Net assets acquired

$
125,008

$
1,591

$
126,599

Consideration paid:

Cash

$
24,557

Cash payout of options and restricted stock units

6,182

Common stock

211,120

Fair value of stock options assumed

722

Total consideration paid

242,581

Goodwill

$
115,982

~~Explanation:~~

	As Recorded by First Busey
Assets acquired:
Cash and cash equivalents	$	60,686
Securities	165,843
Loans held for sale	905
Portfolio loans	1,096,583
Premises and equipment	18,094
OREO	722
Other intangible assets	13,979
Other assets	41,755
Total assets acquired	1,398,567

Liabilities assumed:
Deposits	1,134,355
Other borrowings	125,751
Other liabilities	11,862
Total liabilities assumed	1,271,968

Net assets acquired	$	126,599

Consideration paid:
Cash	$	24,557
Cash payout of options and restricted stock units	6,182
Common stock	211,120
Fair value of stock options assumed	722
Total consideration paid	242,581

Goodwill	$	115,982

~~(a)~~ ~~Fair value adjustments of the securities portfolio as of the acquisition date.~~

~~(b)~~ Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the allowance for loan losses recorded by First Community. $15.0 million is expected to be accreted over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method.

~~(d)~~ ~~Fair value adjustment based on the Company’s evaluation of the acquired OREO portfolio.~~

~~(e)~~ Elimination of First Community’s existing core deposit intangible asset and recording of the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum of years digits method over a 14 year useful life.

~~(f)~~ ~~Fair value adjustment of other assets at the acquisition date.~~

~~(g)~~ ~~Fair value adjustment to time deposits. Amount to be accreted over two years in a manner that approximates the level yield method.~~

~~(h)~~ ~~Fair value adjustment to borrowings. Amount to be amortized over the 15 month remaining life of debt in a manner that approximates the level yield method.~~

~~(i)~~ ~~Fair value adjustment of other liabilities at the acquisition date.~~

For PCI loans, 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. The accretable yield, as of the acquisition date, of $0.6 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield ~~method.~~method; however, $0.2 million of the accretable yield was accelerated in 2017 as a result of collections of PCI loan balances.

~~Since the acquisition date, First Community Financial Bank earned total revenues of $14.4 million and net income of $3.1 million, which are included in the~~ ~~Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2017.~~ The following table provides the unaudited pro forma information for the results of operations for the three and ~~nine~~six months ended ~~September~~June 30, 2017, ~~and 2016,~~ as if the acquisition had occurred January 1, ~~2016.~~2017. The pro forma results combine the historical results of First Community into the Company’s unaudited Consolidated Statements of Income, including the impact of purchase accounting adjustments ~~including~~for loan discount accretion, intangible assets amortization ~~deposit accretion~~ and ~~premises~~deposit accretion, net of taxes. ~~The 2016 pro forma results reflect Pulaski pro forma information as well, which is shown separately above.~~ 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, ~~2016.~~2017. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the merger related expenses that have been recognized are included in net income in the table below (dollars in ~~thousands)~~thousands, except per share amount):

Pro Forma

Pro Forma

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Total revenues (net interest income plus non-interest income)

$
75,952

$
77,624

$
227,858

$
220,558

Net income

14,854

19,360

54,478

46,836

Diluted earnings per common share

0.32

0.42

1.19

1.02

15

Pro Forma

Three Months Ended

Six Months Ended

June 30, 2017

June 30, 2017

Total revenues (net interest income plus non-interest income)

$
78,122

$
152,227

Net income

21,462

40,149

Diluted earnings per common share

0.47

0.87

Mid Illinois Bancorp, Inc.

On October 1, 2017, the Company completed its acquisition of Mid Illinois Bancorp, Inc. (“Mid Illinois”) and its wholly owned bank subsidiary, South Side Trust & Savings Bank of Peoria (“South Side Bank”), under which each share of Mid Illinois common stock issued and outstanding as of the effective time was converted into, at the election of the stockholder the right to receive, either (i) $227.94 in cash, (ii) 7.5149 shares of the Company’s common stock, or (iii) mixed consideration of $68.38 in cash and 5.2604 shares of the Company’s common stock, subject to certain adjustments and proration. In the aggregate, total consideration consisted of 70% stock and 30% cash. Mid Illinois stockholders electing the ~~Cash Consideration Option~~cash consideration option were subject to proration under the terms of the ~~MIB Merger Agreement~~merger agreement with Mid Illinois and ultimately received a mixture of cash and stock consideration. ~~It is anticipated that~~First Busey operated South Side ~~will be~~Bank as a separate bank subsidiary from October 2, 2017 until March 16, 2018, when it was merged with and into Busey ~~Bank in the first quarter of 2018.~~Bank. At ~~the~~that time, ~~of the bank merger,~~ South ~~Side’s~~Side Bank’s banking ~~offices will become branches~~centers became banking centers of Busey Bank. Founded in 1922, South Side operates as a state chartered commercial and trust bank with thirteen branches located within the greater Peoria area. South Side also owns Mid-Illinois Insurance Services, Inc. As of September 30, 2017, Mid Illinois had total consolidated assets of $656.7 million, total loans of $370.0 million and total deposits of $505.6 million.

This transaction ~~will be~~was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged ~~will be~~were recorded at their estimated fair values on the date of acquisition. ~~Fair~~An adjustment to the fair value ~~assessments are incomplete~~was recorded in the first quarter of 2018 as ~~of the filing date of this Form 10-Q.~~additional information became available. Fair values are subject to refinement for up to one year after the closing date of October 1, ~~2017. This acquisition is a subsequent event and~~2017; however, the ~~financial results of~~Company does not expect any further adjustments will be necessary. As the total consideration paid for Mid Illinois ~~are~~exceeded the net assets acquired, goodwill of $48.9 million was recorded as a result of the acquisition. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and expansion within the greater Peoria area, is not ~~recognized in this Form 10-Q.~~tax deductible, and was assigned to the Banking operating segment.

First Busey incurred $0.2 million and ~~$0.4~~$3.1 million of pre-tax expenses related to the acquisition of Mid Illinois for the three and six months ended June 30, 2018, respectively, primarily for salaries, wages and employee benefits expense, professional and legal fees and data conversion expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements. First Busey incurred $0.1 million and $0.2 million in pre-tax expenses related to the acquisition of Mid Illinois for the three and ~~nine~~six months ended ~~September~~June 30, 2017, respectively, primarily for legal fees, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.
The following table presents the fair value estimates of Mid Illinois assets acquired and liabilities assumed as of October 1, 2017 (dollars in thousands):

As Recorded by
First Busey

Assets acquired:

Cash and cash equivalents

$
39,443

Securities

208,003

Loans held for sale

5,031

Portfolio loans

356,651

Premises and equipment

16,551

Other intangible assets

11,531

Other assets

29,564

Total assets acquired

666,774

Liabilities assumed:

Deposits

505,917

Other borrowings

61,040

Other liabilities

10,497

Total liabilities assumed

577,454

Net assets acquired

$
89,320

Consideration paid:

Cash

$
40,507

Common stock

97,702

Total consideration paid

138,209

Goodwill

$
48,889

~~Note 3: Recent Accounting Pronouncements~~
~~Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).”~~ ~~ASU 2014-09 outlines a single model for companies to use~~The loans acquired in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and will also require additional disclosures. The new authoritative guidance was originally effective for reporting periods after December 15, 2016.   In August 2015, ~~ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)”~~ was issued to delay the effective date of ASU 2014-09 by one year. The FASB issued four subsequent ASUs in 2016 which are intended to improve and clarify the implementation guidance related to ASU 2014-09. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company is substantially complete with its overall assessment of non-interest income and reviewing of related contracts potentially affected by the guidance. The Company’s assessment indicates the adoption of this guidance should not materially change the method in which non-interest income is recognized. In addition, the Company is evaluating the expanded disclosure requirement. The Company plans to adopt the guidance on January 1, 2018 with a cumulative effect adjustment to retained earnings, if such adjustment is deemed to be material.
~~ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”~~ ~~ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by, among other things, requiring: equity investments, with certain exceptions, to be measured~~transaction were recorded at fair value with ~~changes in~~no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses. PCI loans were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the aggregate principal outstanding was $362.4 million and aggregate fair value ~~recognized~~of the acquired performing loans was $357.0 million, including loans held for sale. The difference between the aggregate principal balance outstanding and aggregate fair value of $5.4 million is expected to be accreted over the estimated four year remaining life of the respective loans in ~~net income;~~a manner that approximates the level yield method. As of the acquisition date, the aggregate principal balance outstanding of PCI loans totaled $7.6 million and the aggregate fair value of PCI loans totaled $4.7 million, which became such loans’ new carrying value. At June 30, 2018, PCI loans related to ~~use~~this transaction with a carrying value of $0.1 million were outstanding, with the ~~exit price notion when measuring~~decrease primarily relating to loan sales. For PCI loans, 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. The accretable yield, as of ~~financial instruments~~the acquisition date, of $0.1 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method; however, this was accelerated in 2018 due to loan sales of PCI loans.
The Company had $4.5 million of banking center real estate in the Peoria market at June 30, 2018 that was no longer in use and was classified as bank properties held for ~~disclosure purposes; separate presentation~~sale, which was recorded at the lower of ~~financial assets and financial liabilities by measurement category and form of financial assets on the Balance Sheet~~amortized cost or ~~the accompanying notes to the Consolidated Financial Statements; eliminating the requirement to disclose the method and significant assumptions used to estimate the~~estimated fair value ~~that is required~~less estimated cost to be disclosed for financial instruments measured at amortized cost on the Balance Sheet; and requiring an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 will be effective on January 1, 2018 and the Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements and related disclosures.
~~ASU 2016-02, “Leases (Topic 842).”~~ ASU 2016-02 intends to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the Balance Sheet as a lease liability and a right-of-use asset. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption.sell.  The Company ~~is evaluating the impact this guidance will have on its Consolidated Financial Statements and related disclosures.~~
16

~~ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”~~ ASU 2016-13 implements a comprehensive change in estimating the allowances for loan losses from the current model of losses inherent in the loan portfolio to a current expected credit loss model that generally is expected to result in earlier recognition of allowances for losses. Further, purchase accounting rules have been modified as well as credit losses on held to maturity debt securities. ASU 2016-13 will be effective in the first quarter of 2020. The Company has an implementation team working through the provisions of ASU 2016-13, including evaluating the impact this guidance will have on its Consolidated Financial Statements and related disclosures.
~~ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”~~ ASU 2016-15 provides clarification regarding how certain cash receipts and cash payment are presented and classified in the Consolidated Statements of Cash Flows. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact to its Consolidated Financial Statements.
~~ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”~~ ASU 2016-16 is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will require adoption on a modified retrospective basis through a cumulative-effect adjustment to retained earnings, and early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
~~ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”~~ ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions of assets or businesses. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, and is not expected to have a significant impact to the Company’s Consolidated Financial Statements.
~~ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”~~ ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis. ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognizerecognized an impairment charge ~~for any amount by which the carrying amount exceeds the reporting unit’s fair value,~~of $0.8 million related to ~~the extent that the loss recognized does not exceed the~~these properties, resulting in a net amount of ~~goodwill allocated to that reporting unit. This guidance~~bank properties held for sale of $3.7 million at June 30, 2018 which is ~~effective for annual~~included in premises and ~~interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.~~equipment, net.
~~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 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.
~~ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.”~~ ASU 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards, including stock options, require an entity to apply modification accounting under Topic 718. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.
17

Note 4:3: Securities

~~Securities~~The table below provides the amortized cost, unrealized gains and losses and fair values of securities are ~~classified as held to maturity when First Busey has the ability and management has the intent to hold those~~summarized by major category (dollars in thousands):

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

June 30, 2018:

Available for sale

U.S. Treasury securities(1)

$
61,035

$
—

$
(1,077
)
$
59,958

Obligations of U.S. government corporations and agencies

96,454

4

(1,961
)
94,497

Obligations of states and political subdivisions

249,092

441

(2,879
)
246,654

Residential mortgage-backed securities

363,309

233

(9,487
)
354,055

Corporate debt securities

116,645

45

(516
)
116,174

Total

$
886,535

$
723

$
(15,920
)
$
871,338

Held to maturity

Obligations of states and political subdivisions

$
38,870

$
60

$
(164
)
$
38,766

Commercial mortgage-backed securities

60,282

—

(1,562
)
58,720

Residential mortgage-backed securities

408,628

74

(9,473
)
399,229

Total

$
507,780

$
134

$
(11,199
)
$
496,715

(1)The gross unrealized gains on U.S. Treasury securities ~~to maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts.~~ was less than one thousand dollars.

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

December 31, 2017:

Available for sale

U.S. Treasury securities

$
60,829

$
7

$
(488
)
$
60,348

Obligations of U.S. government corporations and agencies

104,807

1

(1,143
)
103,665

Obligations of states and political subdivisions

280,216

1,160

(1,177
)
280,199

Residential mortgage-backed securities

400,661

612

(3,837
)
397,436

Corporate debt securities

30,946

132

(44
)
31,034

Total

$
877,459

1,912

(6,689
)
872,682

Held to maturity

Obligations of states and political subdivisions

$
41,300

$
228

$
(64
)
$
41,464

Commercial mortgage-backed securities

60,474

41

(297
)
60,218

Residential mortgage-backed securities

341,776

25

(2,431
)
339,370

Total

$
443,550

$
294

$
(2,792
)
$
441,052

Securities are classified as available for sale when First Busey may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. Securities are classified as held to maturity when First Busey has the ability and management has the intent to hold those securities to maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts.
The ~~amortized cost, unrealized gains and losses and~~Company held equity securities, consisting of money market mutual funds, with fair values of $5.7 million at June 30, 2018. The Company held equity securities, ~~are summarized as follows~~ ~~(dollars~~consisting of common stock and money market mutual funds, with fair values of $0.8 million and $4.6 million, respectively, at December 31, 2017. The Company recorded $0.1 million of unrealized losses recorded in ~~thousands)~~:non-interest income in the accompanying unaudited Consolidated Financial Statements during the six months ended June 30, 2018, related to recording the common stock at fair value. The common stock was sold in the second quarter of 2018 and realized security gains recorded during the three and six months ended June 30, 2018 was $0.2 million.

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

September 30, 2017:

Available for sale

U.S. Treasury securities

$
60,799

$
74

$
(73
)
$
60,800

Obligations of U.S. government corporations and agencies

64,827

17

(388
)
64,456

Obligations of states and political subdivisions

215,912

1,470

(274
)
217,108

Residential mortgage-backed securities

330,098

1,570

(1,875
)
329,793

Corporate debt securities

32,608

267

(7
)
32,868

Total debt securities

704,244

3,398

(2,617
)
705,025

Mutual funds and other equity securities

3,222

—

—

3,222

Total

$
707,466

$
3,398

$
(2,617
)
$
708,247

Held to maturity

Obligations of states and political subdivisions

$
42,403

$
440

$
(6
)
$
42,837

Commercial and residential mortgage-backed securities

239,572

613

(534
)
239,651

Total

$
281,975

$
1,053

$
(540
)
$
282,488

18

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

December 31, 2016:

Available for sale

U.S. Treasury securities

$
74,784

$
185

$
(25
)
$
74,944

Obligations of U.S. government corporations and agencies

79,577

46

(496
)
79,127

Obligations of states and political subdivisions

154,438

1,093

(593
)
154,938

Residential mortgage-backed securities

303,641

1,390

(2,782
)
302,249

Corporate debt securities

142,836

630

(123
)
143,343

Total debt securities

755,276

3,344

(4,019
)
754,601

Mutual funds and other equity securities

4,475

735

—

5,210

Total

$
759,751

$
4,079

$
(4,019
)
$
759,811

Held to maturity

Obligations of states and political subdivisions

$
44,333

$
122

$
(160
)
$
44,295

Commercial mortgage-backed securities

3,487

23

(122
)
3,388

Total

$
47,820

$
145

$
(282
)
$
47,683

The amortized cost and fair value of debt securities as of ~~September~~June 30, ~~2017,~~2018, by contractual maturity or pre-refunded date, are shown ~~below~~ ~~(dollars in thousands)~~~~. Mutual funds and other equity securities do not have stated maturity dates and therefore are not included in the following maturity summary.~~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.~~corporations (dollars in thousands).

Available for sale

Held to maturity

Available for sale

Held to maturity

Amortized

Fair

Amortized

Fair

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

Cost

Value

Cost

Value

Due in one year or less

$
51,883

$
51,964

$
2,882

$
2,884

$
77,340

$
77,103

$
8,505

$
8,484

Due after one year through five years

249,272

249,465

59,859

60,116

324,776

320,789

58,742

57,794

Due after five years through ten years

97,011

98,295

37,867

38,116

164,557

162,163

30,266

29,571

Due after ten years

306,078

305,301

181,367

181,372

319,862

311,283

410,267

400,866

Total

$
704,244

$
705,025

$
281,975

$
282,488

$
886,535

$
871,338

$
507,780

$
496,715

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016

2018

2017

2018

2017

Gross security gains

$
290

$
136

$
1,259

$
1,381

$
—

$
1

$
—

$
969

Gross security (losses)

—

(125
)
(116
)
(151
)

—

(5
)
—

(116
)
Net security gains

$
290

$
11

$
1,143

$
1,230

Security (losses) gains, net(1)

$
—

$
(4
)
$
—

$
853

(1)Security gains, net reported on the Consolidated Statements of Income in 2018 relate to the sale of equity securities as noted above.

~~The tax provision for the net realized gains and losses was $0.1 million and $0.4 million for the three and nine months ended September 30, 2017, respectively.~~ The tax provision for the net realized gains and losses was insignificant for the three months ended ~~September~~June 30, ~~2016~~2017. The tax provision for the net realized gains and losses was ~~$0.4~~$0.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.

Investment securities with carrying amounts of ~~$571.9~~$593.5 million and ~~$547.2~~$638.2 million on ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

19

Information pertaining to securities with gross unrealized losses at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):

Continuous unrealized
losses existing for less than
12 months, gross

Continuous unrealized
losses existing for greater
than 12 months, gross

Total, gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

June 30, 2018:

Available for sale

U.S. Treasury securities

$
59,885

$
(1,077
)
$
—

$
—

$
59,885

$
(1,077
)
Obligations of U.S. government corporations and agencies

69,054

(1,284
)
24,593

(677
)
93,647

(1,961
)
Obligations of states and political subdivisions

195,490

(2,668
)
14,978

(211
)
210,468

(2,879
)
Residential mortgage-backed securities

246,040

(5,288
)
84,148

(4,199
)
330,188

(9,487
)
Corporate debt securities

84,425

(516
)
—

—

84,425

(516
)
Total temporarily impaired securities

$
654,894

$
(10,833
)
$
123,719

$
(5,087
)
$
778,613

$
(15,920
)

Held to maturity

Obligations of states and political subdivisions

$
27,304

$
(164
)
$
—

$
—

$
27,304

$
(164
)
Commercial mortgage-backed securities

56,453

(1,398
)
2,267

(164
)
58,720

(1,562
)
Residential mortgage-backed securities

359,073

(9,473
)
—

—

359,073

(9,473
)
Total temporarily impaired securities

$
442,830

$
(11,035
)
$
2,267

$
(164
)
$
445,097

$
(11,199
)

Continuous unrealized
losses existing for less than
12 months, gross

Continuous unrealized
losses existing for greater
than 12 months, gross

Total, gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

September 30, 2017:

Available for sale

U.S. Treasury securities

$
24,538

$
(73
)
$
—

$
—

$
24,538

$
(73
)
Obligations of U.S. government corporations and agencies

61,129

(388
)
—

—

61,129

(388
)
Obligations of states and political subdivisions

66,122

(193
)
6,844

(81
)
72,966

(274
)
Residential mortgage-backed securities

141,154

(1,854
)
1,602

(21
)
142,756

(1,875
)
Corporate debt securities

1,643

(3
)
485

(4
)
2,128

(7
)
Total temporarily impaired securities

$
294,586

$
(2,511
)
$
8,931

$
(106
)
$
303,517

$
(2,617
)

Held to maturity

Obligations of states and political subdivisions(1)

$
4,552

$
(6
)
$
86

$
—

$
4,638

$
(6
)
Commercial and residential mortgage-backed securities

86,891

(534
)
—

—

86,891

(534
)
Total temporarily impaired securities

$
91,443

$
(540
)
$
86

$
—

$
91,529

$
(540
)
~~(1)Unrealized losses existing for greater than 12 months, gross, was less than one thousand dollars.~~

Continuous unrealized
losses existing for less than
12 months, gross

Continuous unrealized
losses existing for greater
than 12 months, gross

Total, gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

December 31, 2016:

Available for sale

U.S. Treasury securities

$
9,997

$
(25
)
$
—

$
—

$
9,997

$
(25
)
Obligations of U.S. government corporations and agencies

46,209

(496
)
—

—

46,209

(496
)
Obligations of states and political subdivisions

64,832

(585
)
1,154

(8
)
65,986

(593
)
Residential mortgage-backed securities

168,898

(2,782
)
—

—

168,898

(2,782
)
Corporate debt securities

32,749

(123
)
—

—

32,749

(123
)
Total temporarily impaired securities

$
322,685

$
(4,011
)
$
1,154

$
(8
)
$
323,839

$
(4,019
)

Held to maturity

Obligations of states and political subdivisions

$
24,558

$
(160
)
$
—

$
—

$
24,558

$
(160
)
Commercial mortgage-backed securities

2,385

(122
)
—

—

2,385

(122
)
Total temporarily impaired securities

$
26,943

$
(282
)
$
—

$
—

$
26,943

$
(282
)
20

Continuous unrealized
losses existing for less than
12 months, gross

Continuous unrealized
losses existing for greater
than 12 months, gross

Total, gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

December 31, 2017:

Available for sale

U.S. Treasury securities

$
59,773

$
(488
)
$
—

$
—

$
59,773

$
(488
)
Obligations of U.S. government corporations and agencies

78,610

(636
)
24,831

(507
)
103,441

(1,143
)
Obligations of states and political subdivisions

162,213

(1,027
)
12,045

(150
)
174,258

(1,177
)
Residential mortgage-backed securities

223,261

(1,428
)
90,930

(2,409
)
314,191

(3,837
)
Corporate debt securities

16,176

(44
)
—

—

16,176

(44
)
Total temporarily impaired securities

$
540,033

$
(3,623
)
$
127,806

$
(3,066
)
$
667,839

$
(6,689
)

Held to maturity

Obligations of states and political subdivisions

$
17,939

$
(64
)
$
—

$
—

$
17,939

$
(64
)
Commercial mortgage-backed securities

44,514

(214
)
2,374

(83
)
46,888

(297
)
Residential mortgage-backed securities

277,826

(2,431
)
—

—

277,826

(2,431
)
Total temporarily impaired securities

$
340,279

$
(2,709
)
$
2,374

$
(83
)
$
342,653

$
(2,792
)

Securities are periodically evaluated for other-than-temporary impairment (“OTTI”). The total number of securities in the investment portfolio in an unrealized loss position as of ~~September~~June 30, ~~2017~~2018 was ~~250,~~834, and represented a loss of ~~0.79%~~2.17% of the aggregate carrying value. As of ~~September~~June 30, ~~2017,~~2018, 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 securities. Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be OTTI at ~~September~~June 30, ~~2017.~~2018.

The Company had available for sale obligations of state and political subdivisions with ~~aggregate~~a fair ~~values~~value of ~~$217.1~~$246.6 million and ~~$154.9~~$280.2 million as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. In addition, the Company had held to maturity obligations of state and political subdivisions with ~~aggregate~~a fair ~~values~~value of ~~$42.8~~$38.8 million and ~~$44.3~~$41.5 million as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

As of ~~September~~June 30, ~~2017,~~2018, the ~~aggregate~~ fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of ~~$224.4~~$239.2 million of general obligation bonds and ~~$35.5~~$46.2 million of revenue bonds issued by ~~350~~405 issuers, primarily consisting of states, counties, cities, towns, villages and school districts. The Company held investments in general obligation bonds in 3035 states, ~~(including the District of Columbia),~~ including ~~seven~~eight states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 1821 states, including ~~two~~three states where the aggregate fair value exceeded $5.0 million.

As of December 31, ~~2016,~~2017, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of ~~$163.6~~$271.7 million of general obligation bonds and ~~$35.6~~$50.0 million of revenue bonds issued by ~~260~~446 issuers, primarily consisting of states, counties, cities, towns, villages and school districts. The Company held investments in general obligation bonds in 2936 states (including the District of Columbia), including ~~seven~~nine states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 1622 states, including ~~two~~three states where the aggregate fair value exceeded $5.0 million.

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuers’ state (dollars in thousands):

~~September~~June 30, ~~2017:~~2018:

Average Exposure

Average Exposure

Number of

Amortized

Fair

Per Issuer

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Issuers

Cost

Value

(Fair Value)

Illinois

108

$
94,616

$
95,355

$
883

89

$
88,096

$
87,384

$
982

Wisconsin

29

19,713

19,511

673

Texas

45

25,639

25,287

562

Michigan

35

20,543

20,841

595

27

14,243

14,316

530

Wisconsin

35

24,000

24,071

688

Ohio

20

15,068

14,969

748

Pennsylvania

20

13,170

13,196

660

18

10,995

10,970

609

Texas

31

18,946

19,040

614

Ohio

10

10,692

10,712

1,071

New Jersey

13

6,435

6,472

498

14

6,319

6,277

450

Missouri

9

5,582

5,533

615

Other

56

34,572

34,684

619

94

55,629

54,924

584

Total general obligations bonds

308

$
222,974

$
224,371

$
728

345

$
241,284

$
239,171

$
693

December 31, ~~2016:~~2017:

Average Exposure

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Illinois

70

$
59,120

$
59,182

$
845

Michigan

38

23,233

23,472

618

Wisconsin

31

21,390

21,479

693

Pennsylvania

10

10,242

10,235

1,023

Texas

16

10,731

10,702

669

Ohio

10

11,009

11,005

1,100

Iowa

3

5,332

5,345

1,782

Other

43

22,028

22,192

516

Total general obligations bonds

221

$
163,085

$
163,612

$
740

21

Average Exposure

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Illinois

97

$
95,340

$
95,344

$
983

Wisconsin

41

27,852

27,809

678

Texas

46

27,485

27,514

598

Michigan

34

19,641

19,849

584

Ohio

20

15,172

15,162

758

Pennsylvania

18

12,189

12,174

676

New Jersey

15

7,755

7,760

517

Missouri

10

5,759

5,747

575

Minnesota

8

5,657

5,667

708

Other

92

54,649

54,633

594

Total general obligations bonds

381

$
271,499

$
271,659

$
713

The general obligation bonds are diversified across many issuers, with ~~$3.4~~$3.9 million and $4.0 million being the largest exposure to a single issuer at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017, respectively. Accordingly, as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company did not hold general obligation bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the general obligation bonds in the Company’s portfolio, ~~98.8%~~99.3% had been rated by at least one nationally recognized ~~statistical~~ rating organization and ~~1.2%~~0.7% were unrated, based on the aggregate fair value as of ~~September~~June 30, ~~2017. Of the general obligation bonds in the Company’s portfolio, 98.4% had been rated by at least one nationally recognized statistical rating organization~~2018 and ~~1.6% were unrated, based on the fair value as of~~ December 31, ~~2016.~~2017.

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuers’ state (dollars in thousands):

~~September~~June 30, ~~2017:~~2018:

Average Exposure

Average Exposure

Number of

Amortized

Fair

Per Issuer

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Issuers

Cost

Value

(Fair Value)

Indiana

8

$
8,707

$
8,832

$
1,104

14

$
11,953

$
11,894

$
850

Missouri

5

7,048

6,987

1,397

Illinois

9

6,895

6,953

773

6

5,622

5,561

927

Other

25

19,739

19,789

792

35

22,055

21,807

623

Total revenue bonds

42

$
35,341

$
35,574

$
847

60

$
46,678

$
46,249

$
771

December 31, ~~2016:~~2017:

Average Exposure

Average Exposure

Number of

Amortized

Fair

Per Issuer

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Issuers

Cost

Value

(Fair Value)

Indiana

10

$
11,207

$
11,244

$
1,124

14

$
12,001

$
12,054

$
861

Missouri

6

7,376

7,336

1,223

Illinois

7

7,321

7,275

1,039

7

6,477

6,456

922

Other

22

17,158

17,102

777

38

24,163

24,158

636

Total revenue bonds

39

$
35,686

$
35,621

$
913

65

$
50,017

$
50,004

$
769

The revenue bonds are diversified across many issuers and revenue sources with ~~$3.6~~$3.5 million and ~~$3.5~~$3.6 million being the largest exposure to a single issuer at each of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Accordingly, as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company did not hold revenue bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the revenue bonds in the Company’s portfolio, ~~98.6%~~100.0% had been rated by at least one nationally recognized ~~statistical~~ rating organization ~~and 1.4% were unrated, based on the fair value~~ as of ~~September~~June 30, ~~2017.~~2018. Of the revenue bonds in the Company’s portfolio, ~~97.1%~~99.4% had been rated by at least one nationally recognized ~~statistical~~ rating organization and ~~2.9%~~0.6% were unrated, based on the fair value as of December 31, ~~2016.~~2017. Some of the primary types of revenue bonds held in the Company’s portfolio include: primary education or government building lease rentals secured by ad valorem taxes, utility systems secured by utility system net revenues, housing authorities secured by mortgage loans or principal receipts on mortgage loans, secondary education secured by student fees/tuitions, and pooled issuances (i.e. bond bank) consisting of multiple underlying municipal obligors.

At ~~September~~June 30, ~~2017, substantially~~2018, all of the Company’s obligations of state and political subdivision securities are owned by its subsidiary ~~banks~~, bank, which ~~have~~has adopted First Busey’s investment policy requiring that state and political subdivision securities purchased be investment grade. Such investment policy also limits the amount of rated state and political subdivision securities to an aggregate 100% of the subsidiary ~~banks’~~bank’s total capital (as defined by federal regulations) at the time of purchase and an aggregate 15% of total capital for unrated state and political subdivision securities issued by municipalities having taxing authority or located in counties/micropolitan statistical areas/metropolitan statistical areas in which an office is located. The investment policy states “Fixed income investments that are not US Treasuries, US Agencies or US Instrumentalities, should be analyzed prior to acquisition to determine that the security has (1) low risk of default by the obligor, and (2) the full and timely repayment of principal and interest is expected over the expected life of the investment.”

All securities in First Busey’s obligations of state and political subdivision securities portfolio are subject to periodic review. Factors that may be considered as part of monitoring of state and political subdivision securities include credit rating changes by nationally recognized ~~statistical~~ rating organizations, market valuations, third-party municipal credit analysis, which may include indicative information regarding the issuer’s capacity to pay, market and economic data and such other factors as are available and relevant to the security or the issuer such as its budgetary position and sources, strength and stability of taxes and/or other revenue.
22

Note 5:4: Loans held for sale

Loans held for sale totaled ~~$139.7~~$34.0 million and ~~$256.3~~$94.8 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The amount of loans held for sale decreased from December 31, ~~2016,~~2017, due to lower ~~mortgage~~origination volumes and ~~increased delivery efficiency in 2017.~~the timing of sales. Loans held for sale generate net interest income until loans are delivered to investors, at which point mortgage revenue will be recognized.

The following is a summary of mortgage revenue (dollars in thousands):

Three Months Ended
September  30,

Nine Months Ended
September 30,

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016

2018

2017

2018

2017

Premiums received on sales of mortgage loans, including fair value adjustments

$
11,366

$
15,344

$
33,582

$
24,463

$
2,878

$
10,065

$
6,985

$
22,216

Less direct origination costs

(8,398
)
(10,874
)
(26,433
)
(16,628
)

(1,810
)
(7,648
)
(4,829
)
(18,035
)
Less provisions to liability for loans sold

(25
)
(75
)
(200
)
(125
)

(47
)
(150
)
(109
)
(175
)
Mortgage servicing revenues

583

447

1,481

1,381

552

503

1,169

898

Mortgage revenue

$
3,526

$
4,842

$
8,430

$
9,091

$
1,573

$
2,770

$
3,216

$
4,904

Note 6:5: Portfolio loans

~~Distributions~~The distribution of portfolio loans ~~were~~at June 30, 2018 and December 31, 2017 is as follows (dollars in thousands):

September 30,
2017

December 31,
2016

June 30,
2018

December 31,
2017

Commercial

$
1,319,908

$
959,888

$
1,446,061

$
1,414,631

Commercial real estate

2,215,299

1,654,164

2,355,225

2,354,684

Real estate construction

247,256

182,078

274,967

261,506

Retail real estate

1,288,852

1,069,060

1,449,476

1,460,801

Retail other

14,549

13,710

29,558

27,878

Portfolio loans

$
5,085,864

$
3,878,900

$
5,555,287

$
5,519,500

Less allowance for loan losses

51,035

47,795

53,305

53,582

Portfolio loans, net

$
5,034,829

$
3,831,105

$
5,501,982

$
5,465,918

Net deferred loan origination costs included in the table above were ~~$4.0~~$5.3 million as of ~~September~~June 30, ~~2017~~2018 and ~~$2.5~~$4.1 million as of December 31, ~~2016.~~2017. Net accretable purchase accounting adjustments included in the table above reduced loans by ~~$21.5~~$18.0 million as of ~~September~~June 30, ~~2017~~2018 and ~~$12.7~~$23.6 million as of December 31, ~~2016.~~2017.

The Company believes that making sound loans is a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its stockholders, depositors, and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. 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 might be originated outside of these areas, but such loans are generally residential mortgage loans originated for sale in the secondary market ~~and reported in~~or are loans ~~held for sale balances or~~ to existing customers of the Bank. 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, of the borrowers 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 routine basis. The policies for legacy First Community ~~Financial~~and South Side Bank loans are similar in nature to Busey Bank’s policies and the Company is migrating ~~First~~
23

~~Community Financial Bank’s~~such loan production towards the Busey Bank policies. 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. The integrity and character of the borrower are significant factors in the Company’s loan underwriting decisions. As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out. Additional significant underwriting factors beyond location, duration, a sound and profitable cash flow basis and the borrower’s character include the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s regulatory lending limit and 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 Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. 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.

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 strong credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that exceed industry standards and loan policy guidelines and loans that exhibit acceptable credit fundamentals.

·                  Watch- This category includes loans on management’s “Watch List” and is intended to be utilized on a temporary basis for a pass grade borrower where a significant risk-modifying action is anticipated in the near future.

·                  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.

·                  Doubtful- This category includes “Doubtful” 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.
24

Portfolio loans in the highest grades, represented by the pass and watch categories, totaled ~~$4.9~~$5.3 billion at ~~September~~June 30, ~~2017, compared to $3.7 billion~~2018 and December 31, ~~2016.~~2017. Portfolio loans in the lowest grades, represented by the special mention, substandard and doubtful categories, totaled ~~$174.1~~$237.2 million at ~~September~~June 30, ~~2017,~~2018, compared to ~~$165.5~~$193.8 million at December 31, ~~2016.~~2017.

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

June 30, 2018

September 30, 2017

Pass

Watch

Special
Mention

Substandard

Doubtful

Pass

Watch

Special
Mention

Substandard

Doubtful

Commercial

$
1,107,709

$
134,287

$
38,283

$
35,885

$
7,215

$
1,192,414

$
137,423

$
43,455

$
65,337

$
9,135

Commercial real estate

2,050,678

108,687

23,040

31,374

13,313

2,127,522

147,242

36,408

46,430

8,597

Real estate construction

198,095

41,056

5,750

3,119

610

252,778

15,644

3,846

3,257

23

Retail real estate

1,264,840

6,414

6,184

3,001

6,247

1,417,838

8,401

7,933

5,316

7,385

Retail other

15,036

—

—

—

45

29,787

—

7

27

75

Total

$
4,636,358

$
290,444

$
73,257

$
73,379

$
27,430

$
5,020,339

$
308,710

$
91,649

$
120,367

$
25,215

December 31, 2017

December 31, 2016

Pass

Watch

Special
Mention

Substandard

Doubtful

Pass

Watch

Special
Mention

Substandard

Doubtful

Commercial

$
826,163

$
70,260

$
26,951

$
26,941

$
11,685

$
1,175,421

$
141,776

$
51,366

$
43,933

$
5,285

Commercial real estate

1,507,513

69,145

40,775

35,385

5,154

2,169,420

130,056

21,151

36,482

11,997

Real estate construction

134,574

39,936

8,033

994

47

212,952

41,292

3,880

3,071

608

Retail real estate

1,050,671

6,586

2,793

2,158

4,484

1,436,156

6,883

5,162

4,135

6,714

Retail other

13,691

27

2

—

53

28,300

9

—

7

20

Total

$
3,532,612

$
185,954

$
78,554

$
65,478

$
21,423

$
5,022,249

$
320,016

$
81,559

$
87,628

$
24,624

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 provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of the principal due. Loans may be returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

25

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

September 30, 2017

Loans past due, still accruing

Non-accrual

30-59 Days

60-89 Days

90+ Days

Loans

Commercial

$
1,699

$
369

$
—

$
7,215

Commercial real estate

3,139

802

—

13,313

Real estate construction

—

—

—

610

Retail real estate

3,674

1,838

439

6,247

Retail other

31

4

—

45

Total

$
8,543

$
3,013

$
439

$
27,430

December 31, 2016

June 30, 2018

Loans past due, still accruing

Non-accrual

Loans past due, still accruing

Non-accrual

30-59 Days

60-89 Days

90+ Days

Loans

30-59 Days

60-89 Days

90+Days

Loans

Commercial

$
165

$
363

$
37

$
11,685

$
122

$
—

$
—

$
9,135

Commercial real estate

478

256

—

5,154

1,504

349

750

8,597

Real estate construction

—

—

—

47

599

123

—

23

Retail real estate

2,394

364

94

4,484

6,093

1,177

390

7,385

Retail other

55

15

—

53

47

3

2

75

Total

$
3,092

$
998

$
131

$
21,423

$
8,365

$
1,652

$
1,142

$
25,215

December 31, 2017

Loans past due, still accruing

Non-accrual

30-59 Days

60-89 Days

90+Days

Loans

Commercial

$
1,615

$
323

$
1,808

$
5,285

Commercial real estate

1,856

2,737

—

11,997

Real estate construction

—

—

—

608

Retail real estate

4,840

1,355

933

6,714

Retail other

166

5

—

20

Total

$
8,477

$
4,420

$
2,741

$
24,624

A loan is classified as impaired when, based on current information and events, it is probable the Company will be unable to collect scheduled principal and interest payments when due according to the terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans graded substandard or doubtful and loans classified as a troubled debt restructuring (“TDR”) are reviewed by the Company for potential impairment.

Impairment is measured on a loan-by-loan basis for commercial and construction loans based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. PCI loans are considered impaired. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment unless such loans are the subject of a restructuring agreement.

The gross interest income that would have been recorded in the three and ~~nine~~six months ended ~~September~~June 30, 2018 if impaired loans had been current in accordance with their original terms was $0.3 million and $0.7 million, respectively. The gross interest income that would have been recorded in the three and six months ended June 30, 2017 if impaired loans had been current in accordance with their original terms was ~~$0.4~~$0.2 million and ~~$0.9~~$0.5 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~~six months ended ~~September~~June 30, 2018 and 2017.

The Company’s loan portfolio includes certain loans that have been modified in a TDR, where concessions have been granted to borrowers who have experienced financial difficulties. The Company will restructure a loan for its customer after evaluating whether the borrower is able to meet the terms of the loan over the long term, though unable to meet the terms of the loan in the near term due to individual circumstances.

26

The Company considers the customer’s past performance, previous and current credit history, the individual circumstances surrounding the customer’s current difficulties and the customer’s plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. Generally, ~~all five primary areas~~restructurings consist of ~~lending are restructured through~~ short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief or forbearance (debt forgiveness). Once a restructured loan exceeds 90 days past due or is placed on non-accrual status, it is classified as non-performing. A summary of restructured loans ~~as of September 30, 2017 and December 31, 2016~~ is as follows ~~(dollars~~(dollars in thousands):

September 30, 2017

December 31, 2016

Restructured loans:

In compliance with modified terms

$
11,813

$
10,593

30 – 89 days past due

125

59

Included in non-performing loans

2,890

1,285

Total

$
14,828

$
11,937

June 30,
2018

December 31,
2017

In compliance with modified terms

$
9,096

$
9,873

30 — 89 days past due

22

108

Included in non-performing loans

1,734

1,919

Total

$
10,852

$
11,900

All TDRs are considered to be impaired for purposes of assessing the adequacy of the allowance for loan losses and for financial reporting purposes. When the Company modifies a loan in a TDR, it evaluates any possible impairment similar to other impaired loans based on present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the Company determines that the fair value of the TDR is less than the recorded investment in the loan, impairment is recognized through an allowance estimate in the period of the modification and in periods subsequent to the modification.

Performing loans classified as a TDR during the three and six months ended ~~September~~June 30, ~~2017~~2018 included one retail real estate modification for short-term interest rate relief, with a recorded investment of ~~$0.2~~$0.1 million. Performing loans classified as TDRs during the ~~nine~~three and six months ended ~~September~~June 30, 2017 included one commercial modification for short-term principal payment relief, with a recorded investment of ~~$1.7~~$1.6 million and ~~two~~one retail real estate ~~modifications~~modification for short-term interest rate relief, with a recorded investment of ~~$0.5 million.~~
Performing loans classified as TDRs during the three months ended September 30, 2016 included one retail real estate modification for short-term principal payment relief, with a recorded investment of $0.2 million. Performing loans classified as TDRs during the nine months ended September 30, 2016 included three commercial real estate modifications for short-term principal payment relief, with a recorded investment of $0.3 ~~million and three retail real estate modifications for short-term principal payment relief, with a recorded investment of $0.5~~ million.

The gross interest income that would have been recorded in the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 if performing TDRs had been performing in accordance with their original terms compared with their modified terms was insignificant.

There were no TDRs that were entered into during the last twelve months that were 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 three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~
2018. There were no ~~TDRs that were entered into during the prior twelve months that subsequently were classified as non-performing and had payment defaults during the three months ended September 30, 2016.~~ TDRs that were entered into during the prior twelve months that were subsequently classified as non-performing and had payment defaults during the ~~nine~~three and six months ended ~~September~~June 30, ~~2016 consisted of one retail real estate modification totaling $0.1 million and one insignificant retail other modification.~~2017.
27

The following tables provide details of impaired loans, segregated by ~~category~~ ~~(dollars in thousands)~~.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.~~quarters (dollars in thousands).

June 30, 2018

September 30, 2017

Unpaid
Contractual
Principal
Balance

Recorded
Investment
with No
Allowance

Recorded
Investment
with
Allowance

Total
Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Unpaid
Contractual
Principal
Balance

Recorded
Investment
with No
Allowance

Recorded
Investment
with
Allowance

Total
Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Commercial

$
10,995

$
5,461

$
3,558

$
9,019

$
1,477

$
10,153

$
11,787

$
6,932

$
2,343

$
9,275

$
1,272

$
9,386

Commercial real estate

25,055

17,797

2,038

19,835

818

14,132

16,614

12,029

3,494

15,523

1,246

17,423

Real estate construction

1,048

1,024

—

1,024

—

664

440

415

—

415

—

836

Retail real estate

17,206

14,484

25

14,509

25

12,277

17,029

14,171

25

14,196

25

14,244

Retail other

66

45

—

45

—

75

162

78

—

78

—

46

Total

$
54,370

$
38,811

$
5,621

$
44,432

$
2,320

$
37,301

$
46,032

$
33,625

$
5,862

$
39,487

$
2,543

$
41,935

December 31, 2017

December 31, 2016

Unpaid
Contractual
Principal
Balance

Recorded
Investment
with No
Allowance

Recorded
Investment
with
Allowance

Total
Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Unpaid
Contractual
Principal
Balance

Recorded
Investment
with No
Allowance

Recorded
Investment
with
Allowance

Total
Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Commercial

$
16,955

$
8,060

$
3,835

$
11,895

$
1,535

$
10,127

$
10,604

$
7,192

$
191

$
7,383

$
138

$
10,184

Commercial real estate

12,922

9,036

3,118

12,154

1,778

8,939

22,218

16,472

1,964

18,436

704

15,195

Real estate construction

518

483

11

494

11

793

1,040

1,016

—

1,016

—

692

Retail real estate

13,112

11,733

385

12,118

140

13,102

18,517

14,957

25

14,982

25

13,009

Retail other

139

53

3

56

3

171

40

20

—

20

—

44

Total

$
43,646

$
29,365

$
7,352

$
36,717

$
3,467

$
33,132

$
52,419

$
39,657

$
2,180

$
41,837

$
867

$
39,124

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

The allowance for loan losses represents an estimate of the amount of probable losses believed to be inherent in the Company’s loan portfolio at the Consolidated Balance Sheet date. The allowance for loan losses is calculated geographically, by class of loans. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Overall, the Company believes the allowance methodology is consistent with prior periods and the balance was adequate to cover the estimated losses in the Company’s loan portfolio at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

The general portion of the Company’s allowance contains two components: (i) a component for historical loss ratios, and (ii) a component for adversely graded loans. The historical loss ~~ratios~~ratio component is an annualized loss rate calculated using a sum-of-years digits weighted 20-quarter historical average.

The Company’s component for adversely graded loans attempts to quantify the additional risk of loss inherent in the special mention and substandard portfolios. The substandard portfolio has an additional allocation of 3.0% placed on such loans, which is an estimate of the additional loss inherent in these loan grades based upon a review of overall historical charge-offs. As of ~~September~~June 30, ~~2017,~~2018, the Company believed this reserve remained adequate. Special mention loans have an additional allocation of 1.0% placed on such loans, which is an estimate of the additional loss inherent in these loan grades. As of ~~September~~June 30, ~~2017,~~2018, the Company believed this reserve remained adequate.

The specific portion of the Company’s allowance relates to loans that are impaired, which includes non-performing loans, TDRs and other loans determined to be impaired. Impaired loans are excluded from the determination of the general allowance for non-impaired loans and are allocated specific reserves as discussed above.
28

Impaired loans are reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using a combination of observable inputs, including recent appraisals discounted for collateral specific changes and current market conditions, and unobservable inputs based on customized discounting criteria.

The general reserve quantitative allocation that is based upon historical charge off rates is adjusted for qualitative factors based on current general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) Management & Staff; (ii) Loan Underwriting, Policy and Procedures; (iii) Internal/External Audit & Loan Review; (iv) Valuation of Underlying Collateral; (v) Macro and Local Economic Factors; (vi) Impact of Competition, Legal & Regulatory Issues; (vii) Nature and Volume of Loan Portfolio; (viii) Concentrations of Credit; (ix) Net Charge-Off Trends; and (x) Non-Accrual, Past Due and Classified Trends. Management evaluates the probable impact from the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis.
Based on each component’s risk factor, a qualitative adjustment to the reserve may be applied to the appropriate loan categories. ~~During the third quarter of 2017, the Company did not make adjustments to any qualitative factors.~~ The Company ~~will continue to monitor~~monitors its qualitative factors on a quarterly basis.

The Company holds acquired loans from business combinations with uncollected principal balances. These loans are carried net of a fair value adjustment for credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. ~~However, as~~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 balance of all acquired loans ~~which did not require a related allowance for loan losses~~ as of ~~September~~June 30, ~~2017~~2018 totaled approximately ~~$1.7~~$1.5 billion.

The following ~~tables detail~~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, 2017

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

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Beginning balance

$
12,928

$
20,124

$
2,161

$
13,681

$
307

$
49,201

$
17,577

$
22,090

$
2,799

$
9,836

$
347

$
52,649

Provision for loan losses

336

418

64

654

22

1,494

Provision for loan loss

1,720

909

35

(548
)
142

2,258

Charged-off

(60
)
(69
)
—

(482
)
(74
)
(685
)

(1,916
)
(110
)
—

(412
)
(115
)
(2,553
)
Recoveries

318

403

36

223

45

1,025

205

158

81

417

90

951

Ending balance

$
13,522

$
20,876

$
2,261

$
14,076

$
300

$
51,035

Ending Balance

$
17,586

$
23,047

$
2,915

$
9,293

$
464

$
53,305

As of and for the Six Months Ended June 30, 2018

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Beginning balance

$
14,779

$
21,813

$
2,861

$
13,783

$
346

$
53,582

Provision for loan loss

4,723

2,445

37

(4,210
)
271

3,266

Charged-off

(2,697
)
(1,425
)
(97
)
(942
)
(322
)
(5,483
)
Recoveries

781

214

114

662

169

1,940

Ending Balance

$
17,586

$
23,047

$
2,915

$
9,293

$
464

$
53,305

As of and for the Nine Months Ended September 30, 2017

As of and for the Three Months Ended June 30, 2017

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Beginning balance

$
13,303

$
20,623

$
1,870

$
11,648

$
351

$
47,795

$
13,260

$
19,848

$
2,021

$
12,978

$
335

$
48,442

Provision for loan losses

(1,885
)
1,477

1

2,894

7

2,494

(1,572
)
1,279

(197
)
1,020

(30
)
500

Charged-off

(241
)
(1,758
)
(48
)
(1,574
)
(257
)
(3,878
)

(78
)
(1,101
)
(48
)
(641
)
(93
)
(1,961
)
Recoveries

2,345

534

438

1,108

199

4,624

1,318

98

385

324

95

2,220

Ending balance

$
13,522

$
20,876

$
2,261

$
14,076

$
300

$
51,035

$
12,928

$
20,124

$
2,161

$
13,681

$
307

$
49,201

As of and for the Three Months Ended September 30, 2016

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Beginning balance

$
10,146

$
20,275

$
1,623

$
12,979

$
335

$
45,358

Provision for loan losses

1,502

(786
)
212

1,002

20

1,950

Charged-off

(374
)
(19
)
—

(860
)
(112
)
(1,365
)
Recoveries

92

37

169

1,506

100

1,904

Ending balance

$
11,366

$
19,507

$
2,004

$
14,627

$
343

$
47,847

29

As of and for the Nine Months Ended September 30, 2016

As of and for the Six Months Ended June 30, 2017

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Beginning balance

$
13,115

$
18,604

$
1,763

$
13,714

$
291

$
47,487

$
13,303

$
20,623

$
1,870

$
11,648

$
351

$
47,795

Provision for loan losses

2,747

1,110

(83
)
104

172

4,050

(2,221
)
1,059

(63
)
2,240

(15
)
1,000

Charged-off

(5,248
)
(301
)
(24
)
(1,305
)
(327
)
(7,205
)

(181
)
(1,689
)
(48
)
(1,092
)
(183
)
(3,193
)
Recoveries

752

94

348

2,114

207

3,515

2,027

131

402

885

154

3,599

Ending balance

$
11,366

$
19,507

$
2,004

$
14,627

$
343

$
47,847

$
12,928

$
20,124

$
2,161

$
13,681

$
307

$
49,201

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

As of September 30, 2017

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Amount allocated to:

Loans individually evaluated for impairment

$
1,477

$
818

$
—

$
25

$
—

$
2,320

Loans collectively evaluated for impairment

12,045

20,058

2,261

14,051

300

48,715

Ending balance

$
13,522

$
20,876

$
2,261

$
14,076

$
300

$
51,035

Loans:

Loans individually evaluated for impairment

$
8,557

$
10,991

$
443

$
12,139

$
45

$
32,175

Loans collectively evaluated for impairment

1,310,889

2,195,464

246,232

1,274,343

14,504

5,041,432

PCI loans evaluated for impairment

462

8,844

581

2,370

—

12,257

Ending balance

$
1,319,908

$
2,215,299

$
247,256

$
1,288,852

$
14,549

$
5,085,864

As of December 31, 2016

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Amount allocated to:

Loans individually evaluated for impairment

$
1,535

$
1,778

$
11

$
140

$
3

$
3,467

Loans collectively evaluated for impairment

11,768

18,845

1,859

11,508

348

44,328

Ending balance

$
13,303

$
20,623

$
1,870

$
11,648

$
351

$
47,795

Loans:

Loans individually evaluated for impairment

$
11,834

$
11,147

$
494

$
11,644

$
56

$
35,175

Loans collectively evaluated for impairment

947,993

1,642,010

181,584

1,056,942

13,654

3,842,183

PCI loans evaluated for Impairment

61

1,007

—

474

—

1,542

Ending balance

$
959,888

$
1,654,164

$
182,078

$
1,069,060

$
13,710

$
3,878,900

30

As of June 30, 2018

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Amount allocated to:

Loans individually evaluated for impairment

$
1,272

$
1,246

$
—

$
25

$
—

$
2,543

Loans collectively evaluated for impairment

16,314

21,801

2,915

9,268

464

50,762

Ending balance

$
17,586

$
23,047

$
2,915

$
9,293

$
464

$
53,305

Loans:

Loans individually evaluated for impairment

$
8,846

$
13,173

$
415

$
12,926

$
78

$
35,438

Loans collectively evaluated for impairment

1,436,786

2,339,702

274,552

1,435,280

29,480

5,515,800

PCI loans evaluated for impairment

429

2,350

—

1,270

—

4,049

Ending balance

$
1,446,061

$
2,355,225

$
274,967

$
1,449,476

$
29,558

$
5,555,287

As of December 31, 2017

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Amount allocated to:

Loans individually evaluated for impairment

$
138

$
704

$
—

$
25

$
—

$
867

Loans collectively evaluated for impairment

14,641

21,109

2,861

13,758

346

52,715

Ending balance

$
14,779

$
21,813

$
2,861

$
13,783

$
346

$
53,582

Loans:

Loans individually evaluated for impairment

$
6,572

$
11,491

$
435

$
12,673

$
20

$
31,191

Loans collectively evaluated for impairment

1,407,248

2,336,248

260,490

1,445,819

27,858

5,477,663

PCI loans evaluated for impairment

811

6,945

581

2,309

—

10,646

Ending balance

$
1,414,631

$
2,354,684

$
261,506

$
1,460,801

$
27,878

$
5,519,500

Note 7:6: OREO

OREO represents properties acquired through foreclosure or other proceedings in settlement of loans and is included in other assets in the accompanying Consolidated Balance Sheets. OREO is held for sale and is recorded at the date of foreclosure at the fair value of the properties less estimated costs of disposal, which establishes a new cost basis. Any adjustment to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Properties are evaluated regularly to ensure each recorded amount is supported by its current fair value, and valuation allowances to reduce the carrying amount due to subsequent declines in fair value less estimated costs to dispose are recorded as necessary. Revenue, expense, gains and losses from the operations of foreclosed assets are included in operations. At ~~September~~June 30, 2018, the Company held $3.3 million in commercial OREO, $0.4 million in residential OREO and an insignificant amount of other repossessed assets. At December 31, 2017, the Company held ~~$1.1~~$1.2 million in commercial OREO, $0.1 million in residential OREO and an insignificant amount of other repossessed assets. At ~~December 31, 2016, the Company held $2.0 million in commercial OREO, $0.5 million in residential OREO and an insignificant amount of other repossessed assets. At September~~June 30, ~~2017~~2018 the Company had ~~$1.2~~$1.7 million of residential real estate in the process of foreclosure.

The following table summarizes activity related to OREO (dollars in thousands):

Nine Months Ended
September 30, 2017

Year Ended
December 31, 2016

Six Months Ended
June 30, 2018

Year Ended
December 31, 2017

Beginning balance

$
2,518

$
783

$
1,283

$
2,518

Additions, transfers from loans

477

2,775

3,125

1,417

Additions, fair value from Pulaski acquisition

—

2,488

Additions, fair value from First Community acquisition

722

—

—

722

Additions, fair value from Mid Illinois acquisition

—

60

Proceeds from sales of OREO

(4,069
)
(4,498
)

(722
)
(5,024
)
Gain on sales of OREO

1,566

999

26

1,632

Valuation allowance for OREO

(42
)
(29
)

(18
)
(42
)
Ending balance

$
1,172

$
2,518

$
3,694

$
1,283

Note 8:7: Deposits

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

September 30,
2017

December 31,
2016

June 30, 2018

December 31, 2017

Demand deposits, noninterest-bearing

$
1,321,439

$
1,134,133

$
1,496,671

$
1,597,421

Interest-bearing transaction deposits

1,189,573

1,032,928

1,238,876

1,166,170

Saving deposits and money market deposits

1,860,078

1,421,037

1,953,859

2,026,212

Time deposits

1,002,193

786,200

1,474,506

1,336,162

Total

$
5,373,283

$
4,374,298

$
6,163,912

$
6,125,965

~~Interest-bearing~~The Company held brokered interest-bearing transaction deposits ~~included $56.7~~of $5.0 million ~~and $36.9 million of reciprocal brokered transaction deposits~~ at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016, respectively. Savings~~2017. The Company held brokered saving deposits and money market deposits ~~included $72.2~~of $51.0 million and ~~$22.2~~$75.1 million ~~of reciprocal brokered deposits~~ at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately ~~$513.1~~$620.1 million and ~~$350.7~~$578.9 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 ~~$178.9~~$217.7 million and ~~$70.7~~$197.9 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016, respectively. National deposits of $0.6 million and $0.1 million were included in the balance of time deposits as of September 30,~~ 2017, ~~and December 31, 2016,~~ respectively. The Company ~~had reciprocal~~held brokered time deposits of ~~$58.4~~$311.8 million and ~~$93.4~~$247.7 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016, respectively, included in the balance of time deposits. Further, the Company had brokered deposits of $42.6 million at September 30,~~ 2017, ~~and December 31, 2016, which are included in the balance of time deposits.~~respectively.
31

As of ~~September~~June 30, ~~2017,~~2018, the scheduled maturities of time deposits are as follows (dollars in thousands):

October 1, 2017 — September 30, 2018

$
641,038

October 1, 2018 — September 30, 2019

246,685

October 1, 2019 — September 30, 2020

48,839

October 1, 2020 — September 30, 2021

28,023

October 1, 2021 — September 30, 2022

37,391

Thereafter

217

$
1,002,193

July 1, 2018 — June 30, 2019

$
1,062,338

July 1, 2019 — June 30, 2020

238,719

July 1, 2020 — June 30, 2021

63,516

July 1, 2021 — June 30, 2022

65,582

July 1, 2022 — June 30, 2023

44,289

Thereafter

62

$
1,474,506

Note 9:8: 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 ~~May 5, 2017,~~April 30, 2018, the Company entered into ana third amendment to ~~a credit agreement with a correspondent bank to~~ extend athe maturity of this revolving loan facility from April 30, 2018 to ~~the Company in~~April 30, 2019, to decrease the maximum principal amount offrom $40.0 ~~million. The loan has an~~million to $20.0 million, and to amend and restate the annual interest ~~rate of 2.50% plus the one-month LIBOR rate and has a maturity date of April 30, 2018.~~rate. The loan also bears a non-usage fee calculated based on the average daily principal balance of the loan outstanding during the prior fiscal quarter. The Company had no outstanding amount on ~~September~~June 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

The following table sets forth the distribution of securities sold under agreements to repurchase and short-term borrowings and weighted average interest rates (dollars in thousands):

September 30,
2017

December 31,
2016

June 30,
2018

December 31,
2017

Securities sold under agreements to repurchase

Balance at end of period

$
219,071

$
189,157

$
240,109

$
304,566

Weighted average interest rate at end of period

0.51
%
0.30
%

0.69
%
0.57
%
Maximum outstanding at any month end in year-to-date period

$
235,536

$
216,293

$
267,596

$
304,566

Average daily balance for the year-to-date period

$
186,277

$
181,474

$
246,100

$
213,527

Weighted average interest rate during period(1)

0.44
%
0.22
%

0.58
%
0.46
%

Short-term borrowings, FHLB advances

Balance at end of period

$
212,850

$
75,000

$
150,000

$
220,000

Weighted average interest rate at end of period

1.20
%
0.63
%

2.02
%
1.42
%
Maximum outstanding at any month end in year-to-date period

$
212,850

$
236,700

$
225,000

$
234,600

Average daily balance for the year-to-date period

$
54,329

$
96,698

$
110,083

$
84,201

Weighted average interest rate during period(1)

1.14
%
0.53
%

1.63
%
1.20
%

Short-term borrowings, revolving loan

Balance at end of period

$
—

$
—

Weighted average interest rate at end of period

—
%
—
%
Maximum outstanding at any month end in year-to-date period

$
—

$
10,000

Average daily balance for the year-to-date period

$
—

$
2,596

Weighted average interest rate during period(1) (2)

—
%
4.78
%

(1)The weighted average interest rate is computed by dividing total annualized interest for the year-to-date period by the average daily balance outstanding.
~~(2)~~    ~~Includes interest and non-usage fee.~~
32

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

September 30,
2017

December 31,
2016

Notes payable, FHLB, ranging in original maturity from nineteen months to ten years, collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock.

$
50,000

$
80,000

June 30,
2018

December 31,
2017

Notes payable, FHLB, ranging in original maturity from nineteen months to ten years, collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock.

$
50,000

$
50,000

As of June 30, 2018, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 1.60% to 1.87%. The weighted average rate on the long-term advances was 1.71% as of June 30, 2018. As of December 31, 2017, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from ~~0.75%~~1.10% to 1.06%. The weighted average rate on these long-term advances was 0.87% as of September 30, 2017. As of December 31, 2016, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 0.35% to 0.54%1.32%. The weighted average rate on the long-term advances was ~~0.41%~~1.19% as of December 31, ~~2016.~~2017.

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. 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, are at an initial rate of 4.75% for five years and thereafter at an annual floating rate equal to three-month LIBOR plus a spread of 2.919%. 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 each 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 $0.5 million and $0.9 million, respectively, at June 30, 2018. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled $0.6 million and $1.0 million, respectively, at ~~September 30,~~December 31, 2017. The Company used the net proceeds from the offering to finance a portion of the cash consideration for its acquisition of First Community, to redeem a portion of First Community subordinated debentures in July 2017, and to finance a portion of the cash consideration for its acquisition of Mid Illinois in October 2017, with the remaining proceeds ~~to be~~ used for general corporate purposes.

In relation to the First Community acquisition, the Company assumed $15.3 million in subordinated debt, of which $9.8 million was simultaneously redeemed. The remaining $5.5 million was issued on September 30, 2013, matures on September 30, 2021 and bears interest payable quarterly, at an annual interest rate of 8.625%. Beginning on September 30, 2018, the Company may, at its option, redeem the note at a redemption price equal to the principal amount outstanding plus accrued but unpaid interest. A $0.3 million purchase accounting premium was recorded on the remaining subordinated debt.

Note ~~10:~~9: Junior Subordinated Debt Owed to Unconsolidated Trusts

First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrent with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The trust preferred securities are instruments that qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment. In connection with the Pulaski acquisition in 2016, the Company acquired similar statutory trusts maintained by Pulaski ~~which were adjusted to~~and the fair ~~value.~~value adjustment is being accreted over the weighted average remaining life. The Company had ~~$71.0~~$71.1 million and ~~$70.9~~$71.0 million of junior subordinated debt owed to unconsolidated trusts at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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.
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. ~~The Company does not expect to exercise this right.~~
33

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~~June 30, ~~2017,~~2018, 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 being 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 ~~11:~~10: Earnings Per Common Share

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

2018

2017

2018

2017

Net income available to common stockholders

$
18,784

$
15,422

$
50,433

$
38,239

$
24,862

$
16,479

$
46,779

$
31,649

Shares:

Weighted average common shares outstanding

45,324

38,256

40,669

34,009

48,815

38,311

48,796

38,302

Dilutive effect of outstanding options, warrants and restricted stock units as determined by the application of the treasury stock method

440

398

400

309

409

441

407

444

Weighted average common shares outstanding, as adjusted for diluted earnings per share calculation

45,764

38,654

41,069

34,318

49,224

38,752

49,203

38,746

Basic earnings per common share

$
0.41

$
0.40

$
1.24

$
1.12

$
0.51

$
0.43

$
0.96

$
0.83

Diluted earnings per common share

$
0.41

$
0.40

$
1.23

$
1.11

$
0.51

$
0.43

$
0.95

$
0.82

Basic earnings per share are computed by dividing net income available to common stockholders 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 are computed using the treasury stock method and ~~reflects~~reflect the potential dilution that could occur if the Company’s outstanding stock options and warrants were exercised and restricted stock units were vested. Stock options, warrants and restricted stock units for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect and are excluded from the calculation. At ~~September~~June 30, ~~2017, 78,540 outstanding options and~~2018, 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents. At ~~September~~June 30, ~~2016, 28,350~~2017, 10,850 outstanding options, ~~132,017~~128,622 restricted stock units and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents.

Note ~~12:~~11: Share-based Compensation

The Company grants share-based compensation awards to its employees and members of its board of directors as provided for under the Company’s 2010 Equity Incentive Plan. In addition, pursuant to the terms of the First Community 2016 Equity Incentive Plan, the Company may grant awards with respect to First Busey common stock to legacy employees and directors of First Community or its subsidiaries. Permissible awards under the plan include, but are not limited to, non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and restricted stock units.
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. Each DSU is equivalent to one share of the Company’s common stock. The DSUs vest ~~over a twelve-month period following~~on the first anniversary of 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 Incentive Plan or the First Community 2016 Equity Incentive 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.~~2011 and stock options assumed from acquisitions.
34

Under the terms of the Company’s 2010 Equity Incentive Plan and the First Community 2016 Equity Incentive Plan, the Company is allowed, but not required, to source stock option exercises and grants of RSUs and DSUs from its inventory of treasury stock. As of ~~September~~June 30, ~~2017,~~2018, the Company held ~~550,937~~409,177 shares in treasury. On February 3, 2015, First Busey announced that its board of directors approved a repurchase plan under which the Company is authorized 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 ~~that was~~ originally approved in 2008. During 2015, the Company purchased 333,333 shares under this repurchase plan. At ~~September~~June 30, ~~2017~~2018 the Company had 333,334 shares that may still be purchased under the plan.

~~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.~~ The Company’s 2010 Equity Incentive Plan is designed to encourage ownership of its common stock by its employees and directors, to provide additional incentive for them to promote the success of the Company’s business, and to attract and retain talented personnel. All of the Company’s employees and directors, and those of its subsidiaries, are eligible to receive awards under the plan.

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.
Stock Option Plan
In relation to the First Community acquisition, the Company assumed stock options that were previously issued under shareholder approved First Community incentive plans. At the effective time of the merger, each outstanding and unexercised option to purchase shares of First Community common stock held by an employee, whether vested or unvested, was converted into an option to purchase First Busey common stock. The converted option is equal to the number of shares of such First Community stock option multiplied by the option exchange ratio (rounded down to the nearest whole share), at an exercise price per share equal to the exercise price for each share of First Community common stock subject to such First Community stock option divided by the option exchange ratio (rounded up to the nearest whole cent). The option exchange ratio is the sum of the exchange ratio (0.396) multiplied by the closing sales price of a share of First Busey common stock on the NASDAQ Global Select Market on June 30, 2017, plus the cash consideration ($1.35), divided by the closing sales price of a share of First Busey common stock on the NASDAQ Global Select Market on June 30, 2017. Each First Community stock option assumed and converted continues to be subject to the same terms and conditions, as applicable immediately prior to the effective time.

A summary of the status of and changes in the Company’s stock option awards for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 follows:

Shares

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining Contractual
Term

Shares

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining Contractual
Term

Outstanding at beginning of year

209,382

$
15.13

213,428

$
16.97

Converted options from First Community

121,360

21.41

Granted

—

—

Exercised

(20,924
)
12.36

(70,817
)
14.20

Forfeited

(3,080
)
23.53

(12,627
)
21.66

Expired

(10,850
)
58.05

(2,565
)
16.41

Outstanding at end of period

295,888

$
16.24

3.53

127,419

$
18.06

4.49

Exercisable at end of period

217,348

$
13.61

1.51

88,750

$
15.68

2.80

The Company recorded an insignificant amount and $0.1 million in stock option compensation expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, respectively, related to the converted options from First Community. The Company did not record any stock option compensation expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. As of ~~September~~June 30, ~~2017,~~2018, the Company had ~~$0.6~~$0.3 million of unrecognized stock option expense. This cost is expected to be recognized over a period of ~~2.1~~1.4 years.
35

Restricted Stock Unit Plan

A summary of the changes in the Company’s stock unit awards for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, is as follows:

Weighted-

Director

Weighted-

Weighted-

Director

Weighted-

Restricted

Average

Deferred

Average

Restricted

Average

Deferred

Average

Stock

Grant Date

Stock

Grant Date

Stock

Grant Date

Stock

Grant Date

Units

Fair Value

Units

Fair Value

Units

Fair Value

Units

Fair Value

Non-vested at beginning of year

552,610

$
18.45

35,038

$
21.04

587,763

$
22.68

42,411

$
25.47

Granted

143,235

30.34

18,330

29.61

—

—

—

—

Dividend equivalents earned

10,053

29.58

1,715

29.61

7,657

30.76

1,565

30.76

Vested

(116,498
)
14.73

(18,716
)
22.97

(994
)
19.70

(19,686
)
29.69

Forfeited

(9,932
)
17.87

—

—

(1,494
)
26.19

—

—

Non-vested at end of period

579,468

$
22.34

36,367

$
24.77

592,932

$
22.78

24,290

$
22.39

Outstanding at end of period

579,468

$
22.34

113,504

$
20.49

592,932

$
22.78

90,337

$
21.10

Recipients earn quarterly dividend equivalents on their respective ~~units. These dividend equivalents are not paid out during the vesting period, but instead~~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 January 25, 2017, under the terms of the 2010 Equity Incentive Plan, the Company granted 11,404 RSUs to a member of management. As the stock price on the grant date of January 25, 2017 was $30.69, total compensation cost to be recognized is $0.4 million. This cost will be recognized over a period of five years.   Subsequent to the requisite service period, the award will vest 100%.
On June 13, 2017, under the terms of the 2010 Equity Incentive Plan, the Company granted 128,622 RSUs to executives and members of management. As the stock price on the grant date of June 13, 2017 was $30.33, total compensation cost to be recognized is $3.9 million. This cost will be recognized over a period of five years.   Subsequent to the requisite service period, the awards will vest 100%.
~~On August 1, 2017~~ under the terms of the 2010 Equity Incentive Plan, the Company granted 3,209 RSUs to members of management. As the stock price on the grant date of August 1, 2017 was $29.61, total compensation cost to be recognized is $0.1 million. This cost will be recognized over a period of five years. Subsequent to the requisite service period, the awards will vest 100%.
The Company recognized ~~$0.7~~$0.8 million and ~~$0.5~~$0.6 million of compensation expense related to non-vested ~~stock units~~RSUs and DSUs for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The Company recognized ~~$1.9~~$1.6 million and ~~$1.3~~$1.1 million of compensation expense related to non-vested ~~stock units~~RSUs and DSUs for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. As of ~~September~~June 30, ~~2017,~~2018, there was ~~$8.7~~$6.8 million of total unrecognized compensation cost related to these non-vested ~~stock units.~~RSUs and DSUs. This cost is expected to be recognized over a period of ~~3.7~~3.3 years.
As of June 30, 2018, 888,097 shares remain available for issuance pursuant to the Company’s 2010 Equity Incentive Plan, 75,636 shares remain available for issuance pursuant to the Company’s Employee Stock Purchase Plan and 318,701 shares remain available for issuance pursuant to the First Community 2016 Equity Incentive Plan.

Note ~~13:~~12: Income Taxes

At ~~September~~June 30, ~~2017,~~2018, the Company was not under examination by any tax authority.

Note ~~14:~~13: 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.
36

Credit Commitments and Contingencies

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited Consolidated Balance Sheets.

The Company’s exposure to credit loss is represented by the contractual amount of those commitments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 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, 2017

December 31, 2016

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit

$
1,265,398

$
875,077

Standby letters of credit

33,273

20,145

June 30, 2018

December 31, 2017

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit

$
1,349,676

$
1,300,294

Standby letters of credit

34,673

37,231

Commitments to extend credit are agreements to lend to a customer as long as no condition established in the contract has been violated. These commitments are generally at variable interest rates and generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer’s obligation to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions and primarily have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property and equipment, and income producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, no amounts were recorded as liabilities for the Company’s potential obligations under these guarantees.

~~Other Commitments~~
~~From time to time, the Company will sign contracts for construction projects relating to the Company’s facilities.~~
~~Note 15:~~Note 14: Capital

The ability of the Company to pay cash dividends to its stockholders and to service its debt was historically 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 ~~has~~had been in a retained earnings deficit position since 2009, it ~~has~~was not ~~been~~ able to pay ~~dividends since that time.~~dividends. With prior approval from its regulators, however, an Illinois state-chartered bank in ~~this~~that situation ~~may be~~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, the most recent of which was $40.0 million on October 12, 2017. The Company expects to seek regulatory approval for ~~additional~~a final capital distributions from Busey Bank in ~~future periods until such time as Busey Bank is no longer in a retained earnings deficit.~~2018 and return to cash dividends thereafter.

The Company and ~~both of its subsidiary banks~~Busey Bank are subject to regulatory capital requirements administered by federal and/or state agencies that involve the quantitative measure of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Quantitative measures established by regulations to ensure capital adequacy require the Company and ~~both of its subsidiary banks~~Busey Bank to maintain minimum dollar amounts and ratios of such to risk weighted assets (as defined in the regulations and set forth in the table below) of total capital, Tier 1 capital and Common Equity Tier 1 capital, and for the ~~banks,~~bank, Tier 1 capital to average assets. Failure to meet minimum capital requirements may cause regulatory bodies to initiate certain discretionary and/or mandatory actions that, if undertaken, could have a direct material effect on our ~~financial~~
37

~~statements.~~unaudited Consolidated Financial Statements. The Company, as a financial holding company, is required to be “well capitalized” in the capital categories shown in the table below. As of ~~September~~June 30, ~~2017,~~2018, the Company and ~~both of its subsidiary banks~~Busey Bank met all capital adequacy requirements to which they were subject, including the guidelines to be considered “well capitalized.”

The Dodd-Frank Act established minimum capital levels for bank holding companies on a consolidated basis. The components of Tier 1 capital are restricted to capital instruments that, at the time of signing, were considered to be Tier 1 capital for insured depository institutions. Under this legislation, the Company is able to maintain its trust preferred securities as Tier 1 capital, but it will have to comply with new capital mandates in other respects, and it will not be able to raise Tier 1 capital through the issuance of trust preferred securities in the future.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rule required by the Dodd-Frank Act. The Basel III Rule is applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally non-public bank holding companies with consolidated assets of less than $1.0 billion). The Basel III Rule not only increased most of the required minimum regulatory capital ratios, but they also introduced a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.

The Basel III Rule also expanded the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that generally qualified as Tier 1 Capital under the old guidelines no longer qualify, or their qualifications will change, as the Basel III Rule is being fully implemented.

The Basel III Rule also permitted banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income (loss), which did not affect regulatory capital. First Busey and ~~both of its subsidiary banks~~Busey Bank made this election in the first quarter of 2015 to avoid variations in the level of their capital depending on fluctuations in the fair value of their securities portfolio. The Basel III Rule maintained the general structure of the prompt corrective action framework, while incorporating increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio. Under the final capital rules that became effective on January 1, 2015, there was a requirement for a Common Equity Tier 1 capital conservation buffer of 2.5% of risk weighted assets which is in addition to the other minimum risk based capital standards in the rule. Failure to maintain the buffer will result in restrictions on the Company’s ability to make capital distributions, including the payment of dividends, and to pay discretionary bonuses to executive officers. The capital buffer requirement is being phased-in over three years beginning in 2016.

The June 30, 2018 table below includes the ~~1.25%~~1.875% increase as of January 1, ~~2017~~2018 in the minimum capital requirement ratios. The capital buffer requirement effectively raises the minimum required Common Equity Tier 1 Capital ratio to 7.0%, the Tier 1 Capital ratio to 8.5%, and the Total Capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. As of ~~September~~June 30, 2018 and December 31, 2017, the Company ~~and both of its subsidiary banks were~~was in compliance with the current phase of the Basel III Rule and management believes that the Company ~~and both of its subsidiary banks~~ would meet all capital adequacy requirements under the Basel III Rule on a fully phased-in basis as if such requirements had been in effect (dollars in thousands).

38

Minimum

Actual

Capital Requirement with
Capital Buffer

Minimum To Be
Well Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of June 30, 2018:

Total Capital (to Risk Weighted Assets)

Consolidated

$
865,366

14.42
%
$
592,648

9.875
%
$
600,150

10.00
%
Busey Bank

$
837,823

14.03
%
$
589,537

9.875
%
$
596,999

10.00
%

Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$
746,561

12.44
%
$
472,618

7.875
%
$
480,120

8.00
%
Busey Bank

$
784,518

13.14
%
$
470,137

7.875
%
$
477,599

8.00
%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$
672,561

11.21
%
$
382,596

6.375
%
$
390,098

6.50
%
Busey Bank

$
784,518

13.14
%
$
380,587

6.375
%
$
388,050

6.50
%

Tier 1 Capital (to Average Assets)

Consolidated

$
746,561

10.13
%
$
294,897

4.00
%
N/A

N/A

Busey Bank

$
784,518

10.68
%
$
293,941

4.00
%
$
367,427

5.00
%

Actual

Minimum
Capital Requirement with
Capital Buffer

Minimum To Be
Well Capitalized

Minimum

Amount

Ratio

Amount

Ratio

Amount

Ratio

Actual

Capital Requirement with
Capital Buffer

Minimum To Be
Well Capitalized

As of September 30, 2017:

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2017:

Total Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)

Consolidated

$
790,889

14.38
%
$
508,861

9.25
%
$
550,120

10.00
%

$
837,183

14.15
%
$
547,265

9.25
%
$
591,638

10.00
%
Busey Bank

$
601,898

14.19
%
$
392,377

9.25
%
$
424,191

10.00
%

$
704,807

12.78
%
$
509,978

9.25
%
$
551,327

10.00
%
First Community Financial Bank

$
125,857

10.34
%
$
112,542

9.25
%
$
121,667

10.00
%
South Side Bank

$
84,914

22.61
%
$
34,744

9.25
%
$
37,561

10.00
%

Tier 1 Capital (to Risk Weighted Assets)
Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$
674,354

12.26
%
$
398,837

7.25
%
$
440,096

8.00
%

$
718,101

12.14
%
$
428,937

7.25
%
$
473,310

8.00
%
Busey Bank

$
552,496

13.02
%
$
307,539

7.25
%
$
339,353

8.00
%

$
651,432

11.82
%
$
399,713

7.25
%
$
441,062

8.00
%
First Community Financial Bank

$
124,224

10.21
%
$
88,209

7.25
%
$
97,334

8.00
%
South Side Bank

$
84,707

22.55
%
$
27,232

7.25
%
$
30,049

8.00
%

Equity Tier 1 Capital (to Risk Weighted Assets) Common

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$
600,886

10.92
%
$
316,319

5.75
%
$
357,578

6.50
%

$
644,633

10.90
%
$
340,192

5.75
%
$
384,565

6.50
%
Busey Bank

$
552,496

13.02
%
$
243,910

5.75
%
$
275,724

6.50
%

$
651,432

11.82
%
$
317,013

5.75
%
$
358,363

6.50
%
First Community Financial Bank

$
124,224

10.21
%
$
69,959

5.75
%
$
79,084

6.50
%
South Side Bank

$
84,707

22.55
%
$
21,598

5.75
%
$
24,415

6.50
%

Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Average Assets)

Consolidated

$
674,354

10.18
%
$
265,020

4.00
%
N/A

N/A

$
718,101

9.78
%
$
293,588

4.00
%
N/A

N/A

Busey Bank

$
552,496

10.61
%
$
208,351

4.00
%
$
260,438

5.00
%

$
651,432

9.80
%
$
265,847

4.00
%
$
332,309

5.00
%
First Community Financial Bank

$
124,224

8.94
%
$
55,590

4.00
%
$
69,487

5.00
%
South Side Bank

$
84,707

12.75
%
$
26,571

4.00
%
$
33,214

5.00
%

Note ~~16:~~15: Operating Segments and Related Information

The Company has three reportable operating segments, Banking, Remittance Processing and Wealth Management. The Banking operating segment provides a full range of banking services to individual and corporate customers through its ~~branch~~banking center network in Illinois, St. Louis, Missouri metropolitan area, southwest Florida and through its ~~branch~~banking center in Indianapolis, Indiana. ~~Banking services for Busey Bank and First Community Financial Bank 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 ~~the internal accounting system~~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 Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.
39

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

Goodwill

Total Assets

Goodwill

Total Assets

September 30,
2017

December 31,
2016

September 30,
2017

December 31,
2016

June 30,
2018

December 31,
2017

June 30,
2018

December 31,
2017

Banking

$
198,110

$
82,128

$
6,853,998

$
5,369,669

$
246,999

$
248,660

$
7,719,424

$
7,809,738

Remittance Processing

8,992

8,992

33,971

32,379

8,992

8,992

36,572

34,646

Wealth Management

11,694

11,694

29,770

28,351

11,694

11,694

32,103

32,077

Other

—

—

(3,950
)
(5,229
)

—

—

(12,555
)
(15,821
)
Totals

$
218,796

$
102,814

$
6,913,789

$
5,425,170

$
267,685

$
269,346

$
7,775,544

$
7,860,640

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Net interest income:

Banking

$
57,589

$
44,645

$
143,496

$
111,206

Remittance Processing

15

13

44

41

Wealth Management

87

77

233

207

Other

(1,750
)
(604
)
(3,453
)
(1,429
)
Total net interest income

$
55,941

$
44,131

$
140,320

$
110,025

Non-interest income:

Banking

$
12,338

$
12,684

$
33,550

$
31,404

Remittance Processing

3,032

2,891

9,061

8,827

Wealth Management

5,941

5,477

19,649

17,545

Other

(474
)
(307
)
(1,347
)
(1,608
)
Total non-interest income

$
20,837

$
20,745

$
60,913

$
56,168

Non-interest expense:

Banking

$
38,697

$
31,278

$
97,318

$
80,217

Remittance Processing

2,190

2,091

6,476

6,538

Wealth Management

3,896

5,090

11,840

12,899

Other

2,156

956

5,692

3,797

Total non-interest expense

$
46,939

$
39,415

$
121,326

$
103,451

Income before income taxes:

Banking

$
29,736

$
24,102

$
77,234

$
58,343

Remittance Processing

856

813

2,629

2,330

Wealth Management

2,132

463

8,042

4,853

Other

(4,379
)
(1,867
)
(10,492
)
(6,834
)
Total income before income taxes

$
28,345

$
23,511

$
77,413

$
58,692

Net income:

Banking

$
18,942

$
15,590

$
49,546

$
37,716

Remittance Processing

505

486

1,567

1,394

Wealth Management

1,237

284

4,760

2,902

Other

(1,900
)
(938
)
(5,440
)
(3,773
)
Total net income

$
18,784

$
15,422

$
50,433

$
38,239

40

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

Net interest income:

Banking

$
62,109

$
43,365

$
123,525

$
85,907

Remittance Processing

16

15

32

29

Wealth Management

100

90

194

146

Other

(1,853
)
(1,104
)
(3,622
)
(1,703
)
Total net interest income

$
60,372

$
42,366

$
120,129

$
84,379

Non-interest income:

Banking

$
11,734

$
10,758

$
22,631

$
21,212

Remittance Processing

3,987

3,005

7,770

6,029

Wealth Management

7,808

6,691

16,449

13,708

Other

(727
)
(392
)
(1,562
)
(873
)
Total non-interest income

$
22,802

$
20,062

$
45,288

$
40,076

Non-interest expense:

Banking

$
37,855

$
29,331

$
79,241

$
58,621

Remittance Processing

2,624

2,174

5,090

4,286

Wealth Management

4,703

3,980

9,614

7,944

Other

2,123

1,283

4,400

3,536

Total non-interest expense

$
47,305

$
36,768

$
98,345

$
74,387

Income before income taxes:

Banking

$
33,730

$
24,292

$
63,649

$
47,498

Remittance Processing

1,379

847

2,712

1,773

Wealth Management

3,205

2,801

7,029

5,910

Other

(4,703
)
(2,780
)
(9,584
)
(6,113
)
Total income before income taxes

$
33,611

$
25,160

$
63,806

$
49,068

Net income:

Banking

$
24,904

$
15,855

$
46,749

$
30,604

Remittance Processing

986

508

1,939

1,062

Wealth Management

2,288

1,675

5,052

3,523

Other

(3,316
)
(1,559
)
(6,961
)
(3,540
)
Total net income

$
24,862

$
16,479

$
46,779

$
31,649

Note ~~17:~~16: Derivative Financial Instruments

The Company originates and purchases 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 loan investors, and interest rate ~~swaps and foreign currency forward contracts.~~swaps. See ~~“Note 18:~~“Note 17: Fair Value ~~Measurements”~~Measurements” for further discussion of the fair value measurement of such derivatives.

Interest Rate Lock Commitments. At ~~September~~June 30, 2018 and December 31, 2017, the Company had issued ~~$152.2~~$89.9 million and $51.7 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 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~~June 30, 2018 and December 31, 2017, the Company had issued ~~$276.6~~$121.7 million and $139.7 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. 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 interest rate lock commitments and forward sales commitments recorded in the unaudited Consolidated Balance Sheets are summarized as follows ~~(dollars~~(dollars in thousands)::

September 30, 2017

December 31, 2016

June 30, 2018

December 31, 2017

Fair value recorded in other assets

$
1,440

$
6,403

$
760

$
675

Fair value recorded in other liabilities

3,083

3,098

1,054

2,148

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 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 are summarized as follows (dollars in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016

2018

2017

2018

2017

Gross gains

$
3,822

$
10,596

$
12,629

$
18,867

$
1,023

$
4,942

$
1,755

$
8,807

Gross (losses)

(3,083
)
(10,034
)
(11,102
)
(19,804
)

(1,054
)
(4,228
)
(2,108
)
(8,019
)
Net gains (losses)

$
739

$
562

$
1,527

$
(937
)

$
(31
)
$
714

$
(353
)
$
788

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.~~Swaps ~~Beginning in the second quarter of 2017, the~~. The Company entered into interest rate swap contracts to manage the interest rate risk exposure associated with specific commercial loan relationships, at the time such loans were originated. The Company offsets each customer derivative with a bank counterparty. With a notional ~~value~~values of ~~$162.9~~$190.6 million and $161.3 million at ~~September~~June 30, 2018 and December 31, 2017, respectively, these contracts support variable rate, commercial loan relationships totaling ~~$81.4 million.~~$95.3 million and $80.7 million, respectively. While these swap derivatives generally worked together as an economic interest rate hedge, 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.
41

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

September 30, 2017

June 30, 2018

December 31, 2017

Fair value recorded in other assets

$
1,089

$
1,705

$
262

Fair value recorded in other liabilities

1,089

1,705

262

The gross gains and losses on derivative assets and liabilities related to interest rate swaps recorded in non-interest income and expense in the unaudited Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 are summarized as follows (dollars in thousands)::

Three months ended

Nine months ended

Three Months Ended June 30,

Six Months Ended June 30,

September 30, 2017

September 30, 2017

2018

2017

2018

2017

Gross gains

$
128

$
429

$
489

$
301

$
1,443

$
301

Gross losses

(128
)
(429
)
Gross (losses)

(489
)
(301
)
(1,443
)
(301
)
Net gains (losses)

$
—

$
—

$
—

$
—

$
—

$
—

First Busey had $0.3 million in securities pledged to secure its obligation under these contracts at June 30, 2018. First Busey had $2.0 million in cash and $0.4 million in securities pledged to secure its obligation under ~~these~~ contracts at ~~September 30,~~December 31, 2017.
~~Foreign Currency Derivatives.~~ The Company had originated certain loan agreements that settled in non-U.S. dollar denominations. At September 30, 2017, there were no outstanding gross balances of such loans. The Company had entered into foreign currency forward contracts to mitigate the economic effect of fluctuations in foreign currency exchange rates on non-U.S. dollar denominated loans, when balances were outstanding. While such forward contracts generally served as an economic hedge to certain loans, 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 gross gains and losses on these derivative assets and liabilities recorded in non-interest income and expense in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2017 was insignificant.

Note ~~18:~~17: 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. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an 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.

42

There were no transfers between levels during the quarter ended ~~September~~June 30, ~~2017.~~2018.

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. ~~The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.~~ 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. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates; therefore, estimates of fair value after the Consolidated Balance Sheet date may differ significantly from the amounts presented herein.
Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing level ~~1 and level~~ 2 measurements. For mutual funds and other equity securities, 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 in ASC Topic 820. For all other securities, theThe Company obtains fair value measurements from an independent pricing service. ~~The independent pricing service evaluations are based on market data.~~ 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, ~~as appropriate through processes~~focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.

~~In addition, the~~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. ~~Information of this nature is a trigger to acquire further market data.~~ 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 in ASC Topic 820.

Securities Equity Investments. Securities classified as equity investments are reported at fair value utilizing level 1 measurements. For mutual funds and other equity securities, 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 in ASC Topic 820.
Loans ~~held~~Held for ~~sale.~~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 in ASC Topic 820.

Derivative Assets and Derivative Liabilities. Derivative assets and derivative liabilities are reported at fair value utilizing level 2 measurements. ~~Derivative instruments with positive fair values are reported as assets and derivative instruments with negative fair value are reported as liabilities.~~ The fair value of derivative assets and liabilities is determined based on prices that are obtained from a ~~third-party. Values of derivative~~third-party which uses observable market inputs. Derivative assets and liabilities ~~are primarily based on observable inputs and~~ are classified as level 2 in ASC Topic 820.
43

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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, 2017

Securities available for sale

U.S. Treasury securities

$
—

$
60,800

$
—

$
60,800

Obligations of U.S. government corporations and agencies

—

64,456

—

64,456

Obligations of states and political subdivisions

—

217,108

—

217,108

Residential mortgage-backed securities

—

329,793

—

329,793

Corporate debt securities

—

32,868

—

32,868

Mutual funds and other equity securities

3,222

—

—

3,222

Loans

Loans held for sale

—

139,696

—

139,696

Derivative assets

Derivative financial assets

—

2,529

—

2,529

Derivative liabilities

Derivative financial liabilities

—

4,172

—

4,172

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Inputs

Inputs

Inputs

Fair Value

Inputs

Inputs

Inputs

Fair Value

December 31, 2016

June 30, 2018

Fair value adjusted through comprehensive income:

Securities available for sale

U.S. Treasury securities

$
—

$
74,944

$
—

$
74,944

$
—

$
59,958

$
—

$
59,958

Obligations of U.S. government corporations and agencies

—

79,127

—

79,127

—

94,497

—

94,497

Obligations of states and political subdivisions

—

154,938

—

154,938

—

246,654

—

246,654

Residential mortgage-backed securities

—

302,249

—

302,249

—

354,055

—

354,055

Corporate debt securities

—

143,343

—

143,343

—

116,174

—

116,174

Mutual funds and other equity securities

5,210

—

—

5,210

Loans

Fair value adjusted through current period earnings:

Securities equity investments

5,689

—

—

5,689

Loans held for sale

—

256,319

—

256,319

—

33,974

—

33,974

Derivative assets

—

2,465

—

2,465

Derivative financial assets

—

6,403

—

6,403

Derivative liabilities

—

2,759

—

2,759

Foreign currency forward contracts

—

7

—

7

Derivative financial liabilities

—

3,098

—

3,098

Level 1

Level 2

Level 3

Total

Inputs

Inputs

Inputs

Fair Value

December 31, 2017

Securities available for sale

U.S. Treasury securities

$
—

$
60,348

$
—

$
60,348

Obligations of U.S. government corporations and agencies

—

103,665

—

103,665

Obligations of states and political subdivisions

—

280,199

—

280,199

Residential mortgage-backed securities

—

397,436

—

397,436

Corporate debt securities

—

31,034

—

31,034

Securities equity investments

5,378

—

—

5,378

Loans held for sale

—

94,848

—

94,848

Derivative assets

—

937

—

937

Derivative liabilities

—

2,410

—

2,410

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 loans at fair value on a recurring basis. However, periodically, a loan is considered 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 in ASC Topic 820.

44

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 based on customized discounting criteria. Due to the significance of the unobservable inputs, all OREO fair values have been classified as level 3 in ASC Topic 820.

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 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 in ASC Topic 820.
The following table summarizes assets and liabilities measured at fair value on a non-recurring basis as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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

Level 1

Level 2

Level 3

Total

Inputs

Inputs

Inputs

Fair Value

Inputs

Inputs

Inputs

Fair Value

September 30, 2017

June 30, 2018

Impaired loans

$
—

$
—

$
3,301

$
3,301

$
—

$
—

$
3,319

$
3,319

OREO

—

—

16

16

—

—

55

55

Bank property held for sale

—

—

3,711

3,711

December 31, 2016

December 31, 2017

Impaired loans

$
—

$
—

$
3,885

$
3,885

$
—

$
—

$
1,313

$
1,313

OREO(1)

—

—

—

—

—

—

—

—

(1)OREO fair value was less than one thousand dollars.
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

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Range

Fair Value

Valuation

Unobservable

Range

Estimate

Techniques

Input

(Weighted Average)

Estimate

Techniques

Input

(Weighted Average)

September 30, 2017

June 30, 2018

Impaired loans

$
3,301

Appraisal of collateral

Appraisal adjustments

-21.3% to -100.0%
(-32.6)%

$
3,319

Appraisal of collateral

Appraisal adjustments

-0.1% to -100.0%
(-36.5)%

OREO

16

Appraisal of collateral

Appraisal adjustments

-71.9% to -100.0%
(-88.4)%

55

Appraisal of collateral

Appraisal adjustments

-25.0% to -100.0%
(-65.0)%

December 31, 2016

Bank property held for sale

3,711

Appraisal of collateral or real estate listing price

Appraisal adjustments

-0.0% to -35.1%
(-18.0)%

December 31, 2017

Impaired loans

$
3,885

Appraisal of collateral

Appraisal adjustments

-19.2% to -100.0%
(-38.4)%

$
1,313

Appraisal of collateral

Appraisal adjustments

-20.3% to -100.0%
(-30.8)%

OREO(1)

—

Appraisal of collateral

Appraisal adjustments

-100.0%
(-100.0)%

—

Appraisal of collateral

Appraisal adjustments

-100.0%
(-100.0)%

(1)OREO fair value was less than one thousand dollars.
45

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

September 30, 2017

December 31, 2016

June 30, 2018

December 31, 2017

Carrying

Fair

Carrying

Fair

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Amount

Value

Amount

Value

Financial assets:

Level 1 inputs:

Cash and cash equivalents

$
214,381

$
214,381

$
166,706

$
166,706

$
230,730

$
230,730

$
353,272

$
353,272

Level 2 inputs:

Securities held to maturity

281,975

282,488

47,820

47,683

507,780

496,715

443,550

441,052

Accrued interest receivable

19,780

19,780

15,562

15,562

22,476

22,476

22,591

22,591

Level 3 inputs:

Portfolio loans, net

5,034,829

5,043,585

3,831,105

3,841,760

5,501,982

5,423,322

5,465,918

5,361,406

Mortgage servicing rights

3,168

7,314

3,074

7,803

3,502

10,813

3,680

8,635

Other servicing rights

204

921

—

—

390

1,041

280

901

Financial liabilities:

Level 2 inputs:

Deposits

$
5,373,283

$
5,370,642

$
4,374,298

$
4,368,891

Time deposits(2)

$
1,474,506

$
1,461,928

$
—

$
—

Deposits(2)

—

—

6,125,965

6,119,135

Securities sold under agreements to repurchase

219,071

219,071

189,157

189,157

240,109

240,109

304,566

304,566

Short-term borrowings

212,850

212,850

75,000

75,000

150,000

150,000

220,000

220,000

Long-term debt

50,000

50,000

80,000

80,000

50,000

50,000

50,000

50,000

Junior subordinated debt owed to unconsolidated trusts

70,973

70,973

70,868

70,868

71,081

71,081

71,008

71,008

Accrued interest payable

3,122

3,122

987

987

4,198

4,198

2,581

2,581

Level 3 inputs:

Senior notes, net of unamortized issuance costs

39,370

39,776

—

—

39,472

38,328

39,404

39,104

Subordinated notes, net of unamortized issuance costs

64,745

66,186

—

—

64,653

63,103

64,715

64,350

(2)In connection with the adoption of ASU 2016-01 in 2018, only deposits with stated maturities are required to be disclosed.
ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016 or is described below.~~2017.
The fair value of other servicing rights relates to servicing that First Busey provides on Small Business Association loans and is estimated by discounting the future cash flows and classified as level 3 in ASC Topic 820. The fair value of senior and subordinated notes, net of unamortized issuance costs, is estimated based on the rates currently available to the Company with similar terms, remaining maturity and credit spread and classified as level 3 in ASC Topic 820.

Note ~~19:~~18: Liability for Loans Sold

The Company records an estimated liability for probable amounts due to the Company’s loan investors under contractual obligations related to residential mortgage loans originated for sale that were previously sold and became delinquent or defaulted, or were determined to contain certain documentation or other underwriting deficiencies. Under standard representations and warranties and early payment default clauses in the Company’s mortgage sale agreements, the Company could be required to repurchase mortgage loans sold to investors or reimburse the investors for losses incurred on loans in the event of borrower default within a defined period after origination (generally 90 days), or in the event of breaches of contractual representations or warranties made at the time of sale that are not remedied within a defined period after the Company receives notice of such breaches (generally 90 days). In addition, the Company may be required to refund the profit received from the sale of a loan to an investor if the borrower pays off the loan within a defined period after origination, which is generally 120 days.
46

The Company ~~establishes a mortgage~~records an estimated liability for probable amounts due to the Company’s loan investors under these obligations. This repurchase liability ~~related to these events that reflects management’s estimate of losses on loans for which the Company could have a repurchase obligation~~is determined based on a combination of ~~factors. Such~~ factors ~~incorporate~~including the volume of loans sold in current and previous ~~periods,~~periods; borrower default ~~expectations,~~expectations; historical investor repurchase demand and appeals success ~~rates (where the investor rescinds the demand based on a cure of the defect or acknowledges that the loan satisfies the investor’s applicable representations and warranties),~~rates; and estimated loss severity. Payments made to investors as reimbursement for losses incurred are charged against the mortgage repurchase liability. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. The difference between the loan’s fair value and the payment made to investors as reimbursement for losses incurred is charged to the mortgage repurchase liability. Subsequent to repurchase, such loans are carried as portfolio loans on the Company’s Consolidated Balance Sheets. Loans repurchased with deteriorated credit quality at the date of repurchase are accounted for under ASC Topic 310-30.

The liability for loans sold of $2.0 million and $2.1 million at ~~September~~June 30, 2018 and December 31, 2017, respectively, represents the Company’s best estimate of the probable losses that the Company will incur for various early default provisions and contractual representations and warranties associated with the sales of mortgage loans and is included in other liabilities in the accompanying Consolidated Balance Sheets. Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. In addition, the Company generally does not service the loans that it ~~sells~~has sold to investors and is generally unable to track the remaining unpaid balances or delinquency status after sale. As a result, there may be a range of possible losses in excess of the estimated liability that cannot be estimated. Management maintains regular contact with the Company’s investors to monitor and address their repurchase demand practices and concerns.
47

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 of First Busey ~~Corporation and its subsidiaries (referred to herein as “First Busey,” “Company,” “we,” or “our”)~~ at ~~September~~June 30, ~~2017~~2018 (unaudited), as compared with December 31, 2017 and June 30, 2017 ~~(unaudited), December 31, 2016 and September 30, 2016~~ (unaudited), and the results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 (unaudited) and ~~2016~~2017 (unaudited), and the three months ended ~~June 30, 2017~~March 31, 2018 (unaudited) when applicable. Management’s discussion and analysis should be read in conjunction with the Company’s ~~consolidated financial statements~~unaudited Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

EXECUTIVE SUMMARY

~~Acquisitions~~
During the first quarter of 2017, First Busey announced the signing of two definitive agreements to acquire First Community, headquartered in Joliet, Illinois, and Mid Illinois, headquartered in Peoria, Illinois. On July 2, 2017, the Company completed its acquisition of First Community and financial results are reflected in September 30, 2017 balances. The acquisition of First Community allows the Company to significantly expand its geographic presence into attractive southwest suburbs of Chicago. On October 1, 2017, the Company completed its acquisition of Mid Illinois. The Mid Illinois acquisition is a subsequent event and the financial results of Mid Illinois are not recognized in this Form 10-Q. The acquisition of Mid Illinois enhances the Company’s existing deposit, commercial banking and trust and investment presence in the greater Peoria area.
Operating Results

~~First Busey’s~~The Company’s net income for the ~~third~~second quarter of ~~2017~~2018 was ~~$18.8~~$24.9 million, or ~~$0.41~~$0.51 per diluted common ~~share. The Company reported~~share, compared to net income of $21.9 million, or $0.45 per diluted common share, for the first quarter of 2018 and net income of $16.5 million, or $0.43 per diluted common share, for the second quarter of ~~2017 and~~2017. Adjusted net ~~income~~income(1) for the second quarter of ~~$15.4~~2018 was $25.6 million, or ~~$0.40~~$0.52 per diluted common share, compared to $24.9 million, or $0.51 per diluted common share, for the ~~third~~first quarter of ~~2016.    First Community Financial Bank’s net income of $3.1~~2018 and $16.7 million, ~~had a positive impact on the results~~or $0.43 per diluted common share, for the ~~third~~second quarter of ~~2017 and this acquisition resets the baseline for financial performance in future quarters in a multitude of positive ways. The Company’s year-to-date~~2017.
Year-to-date net income through ~~September~~June 30, ~~2017~~2018 was ~~$50.4~~$46.8 million, or ~~$1.23~~$0.95 per diluted common share, compared to net income of ~~$38.2~~$31.6 million, or ~~$1.11~~$0.82 per diluted common share, for the comparable period of ~~2016.~~
During the third quarter of 2017, the Company incurred $3.0 million of pre-tax expenses related to acquisitions, compared to $0.3 million in the second quarter of 2017, which primarily consisted of legal, professional, restructuring, and data processing expenses. During the nine months ended September 30, 2017, the Company incurred $4.4 million of pre-tax acquisition costs and one-time restructuring costs. Excluding these items, the Company’s operating earnings, a non-GAAP financial measure,2017. Year-to-date adjusted net income(1) for the ~~third quarter~~first six months of ~~2017 would have been $20.6~~2018 was $50.5 million, or ~~$0.45~~$1.03 per diluted common share, ~~and $53.1~~compared to $32.5 million or ~~$1.29~~$0.84 per diluted common share for 2017. The results were favorably impacted by the ~~year-to-date~~acquisition of First Community, since the closing of the transaction on July 2, 2017, and Mid Illinois, since the closing of the transaction on October 1, 2017.
For the second quarter of 2018, return on average assets and return on average tangible common equity were 1.30% and 15.59%, respectively, on a basis in accordance with GAAP. Based on adjusted net income(1), return on average assets was 1.34% and return on average tangible common equity was 16.04% for the same period.
For the six months ended June 30, 2018, return on average assets was 1.23%, an increase from 1.20% for the same period of 2017. Based on adjusted net income(1), return on average assets for the first six months of 2018 was 1.33% compared to 1.23% for the comparable period of 2017. Return on average tangible common equity was 14.90% for the first six months of 2018 compared to 13.30% for the same period of 2017. Return on average tangible common equity based on adjusted net income(1) was 16.08% for the first half of 2018 compared to 13.65% for the first half of 2017.
The Company views certain non-operating items including, but not limited to, acquisition-related and restructuring charges, as adjustments to net income. Non-operating adjustments for the second quarter of 2018 were expenses related to acquisitions, including $0.8 million in fixed asset impairments and $0.1 million of data processing conversion and other acquisition-related expenses. The reconciliation of non-GAAP measures (including adjusted net income, ~~through September 30, 2017.~~adjusted efficiency ratio, adjusted return on average assets, return on average tangible common equity, tangible book value and tangible book value per share), which the Company believes facilitates the assessment of its banking operations and peer comparability, is included in tabular form in this Quarterly Report on Form 10-Q in the “Non-GAAP Financial Information” section.

Revenues from trust fees, commissions and brokers’ fees, and remittance processing activities represented ~~41.8% and 45.8%~~49.0% of the Company’s non-interest income for the ~~third~~ quarter ~~and year~~ ended ~~September~~June 30, ~~2017, respectively,~~2018, providing a balance to revenue from traditional banking activities. Two of the Company’s acquisitions, Pulaski Financial Corp. and First Community, had no legacy fee income in these businesses; therefore, the addition of these fee-based service offerings in the corresponding acquired bank markets is expected to continue providing attractive growth opportunities in future periods.

~~Trust fees and commissions and brokers’ fees~~(1)For a reconciliation of $5.8 million for the third quarter of 2017 decreased seasonally from $6.6 million for the second quarter of 2017 and increased from $5.3 million for the third quarter of 2016. Trust fees and commissions and brokers’ fees grew to $19.3 million for the first nine months of 2017, compared to $17.2 million for the same period of 2016. Netadjusted net income, from the wealth management segment decreased to $1.2 million for the third quarter of 2017, compared to $1.7 million for the second quarter of 2017, but increased from $0.3 million for the third quarter of 2016 which was reduced by restructuring costs of $1.3 million in that period designed to increase efficiency and drive down future costs. Net income from the wealth management segment increased to $4.8 million for the first nine months of 2017 compared to $2.9 million for the same period of 2016, a ~~notable 64.0% increase.~~non-GAAP financial measure, see “Non-GAAP Financial Information.”
Remittance processing revenue of $2.9 million for the third quarter of 2017 remained comparable to the second quarter of 2017 and increased slightly from $2.8 million in the third quarter of 2016. For the first nine months of 2017, remittance processing revenue remained relatively stable at $8.6 million, compared to the same period of 2016. Net income from the remittance processing segment was also stable at $0.5 million for the second and third quarter of 2017 as well as the third quarter of 2016.
48

~~Net income from the remittance processing segment grew to $1.6 million for the nine months ended September 30, 2017, compared to $1.4 million for the nine months ended September 30, 2016.~~
Mortgage revenue increased to $3.5 million in the third quarter of 2017 from $2.8 million in the second quarter of 2017, but decreased from $4.8 million for the third quarter of 2016, as mortgage rates and associated costs increased, while purchase inventory declined. Mortgage revenue of $8.4 million decreased for the nine months ended September 30, 2017, compared to $9.1 million for the nine months ended September 30, 2016.
Commercial loans remain a driver of balance sheet growth, while credit costs remain low. Favorable mix changes continue to occur across our deposit base as our relationship model builds ongoing efficiency into funding sources; all indicators of ongoing balance sheet strength.
Asset Quality

~~While much internal~~We remain committed to our focus ~~has been directed toward~~on quality balance sheet growth and ~~managing the integration~~our credit metrics remain solid. As of ~~its recent acquisitions, the Company’s commitment~~June 30, 2018, non-performing loans decreased to ~~credit quality remains strong.~~$26.4 million, compared to $33.6 million as of March 31, 2018, and increased from $20.1 million as of June 30, 2017. Non-performing loans were ~~0.55%~~0.47% of total portfolio loans as of ~~September~~June 30, ~~2017,~~2018, compared to 0.61% as of March 31, 2018 and 0.51% as of June 30, 2017 and 0.53% as of September 30, 2016. As of September 30, 2017, non-performing loans increased to $27.9 million, compared to $20.1 million as of June 30, 2017 and $20.1 million as of September 30, 2016 as a result of the First Community acquisition.2017.

The Company recorded net charge-offs of $1.6 million for the second quarter of 2018, a decrease compared to $1.9 million for the first quarter of 2018, and an increase compared to net recoveries of $0.3 million for the ~~third and~~ second ~~quarters of 2017, a decrease from the net recoveries of $0.5 million for the third~~ quarter of ~~2016.~~2017. The ~~Company recorded net recoveries of $0.7 million for the first nine months of 2017, a favorable decrease from the net charge-offs of $3.7 million for the same period of 2016. Allowance~~allowance for loan ~~losses~~loss as a percentage of portfolio loans was ~~1.00%~~0.96% at ~~September~~June 30, ~~2017, a decrease from~~2018 as compared to 0.95% at March 31, 2018 and 1.25% at June 30, ~~2017 and 1.26% at September 30, 2016.~~2017. As a result of acquisitions, the Company is holding acquired loans that are carried net of a fair value adjustment for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. The Company recorded provision for loan losses of ~~$1.5~~$2.3 million in the ~~third~~second quarter of ~~2017, an increase from~~2018, compared to $1.0 million in the first quarter of 2018 and $0.5 million in the second quarter of ~~2017, but a decrease from $2.0 million in the third quarter of 2016.~~2017. The Company recorded provision for loan losses of ~~$2.5~~$3.3 million ~~for~~in the first ~~nine~~six months of ~~2017, including $1.5~~2018 and $1.0 million ~~recorded on new and renewed First Community Financial Bank loan production. The Company recorded provision expense of $4.1 million for~~in the first ~~nine~~six months of ~~2016.~~
With a continued commitment to asset quality and the strength of our Consolidated Balance Sheets, 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.2017.

The key metrics are as follows (dollars in thousands):

As of and for the Three Months Ended

As of and for the Three Months Ended

September 30,

June 30,

March 31,

December 31,

June 30,

March 31,

December 31,

September 30,

2017

2017

2017

2016

2018

2018

2017

2017

Portfolio loans

$
5,085,864

$
3,920,464

$
3,872,952

$
3,878,900

$
5,555,287

$
5,531,453

$
5,519,500

$
5,085,864

Commercial loans(1)

3,782,463

2,828,261

2,799,193

2,796,130

4,076,253

4,061,181

4,030,821

3,782,463

Allowance for loan losses

51,035

49,201

48,442

47,795

53,305

52,649

53,582

51,035

Non-performing loans

Non-accrual loans

27,430

18,935

20,544

21,423

25,215

32,588

24,624

27,430

Loans 90+ days past due

439

1,123

311

131

1,142

995

2,741

439

Loans 30-89 days past due

11,556

6,953

9,804

4,090

10,017

9,506

12,897

11,556

Other non-performing assets

1,172

480

739

2,518

Non-performing assets to portfolio loans and non- performing assets

0.6
%
0.5
%
0.6
%
0.6
%
OREO

3,694

1,001

1,283

1,172

Non-performing assets to portfolio loans and non-performing assets

0.5
%
0.6
%
0.5
%
0.6
%
Allowance as a percentage of non-performing loans

183.1
%
245.3
%
232.3
%
221.7
%

202.2
%
156.8
%
195.8
%
183.1
%
Allowance for loan losses to portfolio loans

1.0
%
1.3
%
1.3
%
1.2
%

0.96
%
0.95
%
0.97
%
1.0
%

(1)Includes loans categorized as commercial, commercial real estate and real estate construction.

49

Economic Conditions of Markets

~~As of September 30, 2017, Busey Bank had 28 banking centers serving Illinois and First Community Financial Bank had nine~~The Company has 44 banking centers serving Illinois. Our primary downstate Illinois markets of Champaign, Macon, McLean and Peoria counties are anchored by several strong, well-recognized and stable organizations. Champaign County is home to the University of Illinois — Urbana/Champaign (“U of I”), the University’s primary campus. U of I has in excess of 44,000 students. Additionally, Champaign County healthcare providers serve a significant area of downstate Illinois and western Indiana. Macon County is home to the North American headquarters for Archer Daniels Midland (“ADM”), a Fortune 100 company and one of the largest agricultural processors in the world. ADM’s presence in Macon County supports many derivative businesses in the agricultural processing arena. Additionally, Macon County is home to Millikin University, and its healthcare providers serve a significant role in the market. McLean County is home to State Farm, Country Financial, Illinois State University and Illinois Wesleyan University. State Farm, a Fortune 100 company, is the largest employer in McLean County, and Country Financial and the universities provide additional stability to a growing area of downstate Illinois. Peoria County is home to Caterpillar Inc. operations, a Fortune 100 company, and Bradley University, in addition to a large healthcare presence serving much of the western portion of downstate Illinois. The institutions noted above,Those organizations, coupled with a large agricultural sector, anchor the communities in which they are located, and have provided a comparatively stable foundation for housing, employment and small business. The First Community acquisition ~~provides~~provided the Company entrance into the demographically and economically attractive southwest suburban markets of the greater Chicagoland area and is part of the Company’s strategy of expanding into markets with both population and commercial density in the Midwest. ~~The October 1, 2017 acquisition of Mid Illinois adds 13 additional Illinois banking centers in the greater Peoria area.~~

The State of Illinois, where a large portion of the Company’s customer base is located, continues to be one of the most troubled of any state in the United States with pension under-funding, continued budget deficits and a declining credit outlook. Additionally, the Company is located in markets with significant universities and healthcare companies, which rely heavily on state funding and contracts. Any possible payment lapses by the State of Illinois to its vendors and government sponsored entities may have negative effects on our primary market areas.

The 2016 acquisition of Pulaski expanded our presence into the St. Louis, Missouri metropolitan area, which is the largest metropolitan area in Missouri and the twentieth largest in the United States. The bi-state metropolitan area includes seven counties in Missouri and eight counties in Illinois. The area is home to 17 Fortune 1000 companies, including Express Scripts, Emerson Electric, Centene and Monsanto. St. Louis has a diverse economy with its major employment sectors including health care, financial services, professional and business services, and retail. 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. St. ~~Charles County has been one of~~Louis, Missouri is the ~~fastest-growing~~largest metropolitan area in Missouri and the twentieth largest in the United States. The bi-state metropolitan area includes seven counties in ~~the country for decades. The county features a cross-section of industry, as well as extensive retail~~Missouri and ~~some agriculture.~~eight counties in Illinois. The Company’s geographic concentration in only three of the 15 counties included in the St. Louis metropolitan area gives the Company tremendous 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. St. Charles County has been one of the fastest-growing counties in the country for decades and features a cross-section of industry, as well as extensive retail and some agriculture.
Busey Bank has five banking centers in southwest Florida. Southwest Florida has shown continuing signs of improvement in areas such as job growth and the housing market over the last several years.

Busey Bank has one banking center in the Indianapolis, Indiana area, which is the most populous city of Indiana with a diverse economy. Many large corporations are headquartered in Indianapolis and it is host to numerous conventions and sporting events annually. ~~In 2017, the Company has been working to expand its presence in Indianapolis.~~
50

OPERATING PERFORMANCE

Net interest income

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

Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes ~~a federal~~an income tax rate of 26% in 2018 and 35%. in 2017. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.

The following tables show our Consolidated Average Balance Sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the periods shown. The tables also show, for the periods indicated, a summary of the changes in interest earned and interest expense resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on changes due to rate and changes due to volume. All average information is provided on a daily average basis.
51

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES
THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND ~~2016~~2017 (UNAUDITED)

Change in income/

Change in income/

2017

2016

expense due to(1)

2018

2017

expense due to

Average

Income/

Yield/

Average

Income/

Yield/

Average

Average

Total

Average

Income/

Yield/

Average

Income/

Yield/

Average

Average

Total

Balance

Expense

Rate(6)

Balance

Expense

Rate(6)

Volume

Yield/Rate

Change

Balance

Expense

Rate(6)

Balance

Expense

Rate(6)

Volume

Yield/Rate

Change

(dollars in thousands)

(dollars in thousands)

Assets

Interest-bearing bank deposits and federal funds sold

$
110,976

$
348

1.24
%
$
205,861

$
217

0.42
%
$
(135
)
$
266

$
131

$
115,599

$
508

1.76
%
$
182,562

$
454

1.00
%
$
(208
)
$
262

$
54

Investment securities

U.S. Government obligations

135,404

564

1.65
%
192,882

564

1.16
%
(197
)
197

—

155,009

636

1.65
%
144,653

487

1.35
%
37

112

149

Obligations of states and political subdivisions(1)

260,421

1,919

2.92
%
212,799

1,546

2.89
%
355

18

373

290,802

1,986

2.74
%
186,547

1,411

3.03
%
723

(148
)
575

Other securities

613,530

3,502

2.26
%
427,882

2,283

2.12
%
1,056

163

1,219

862,392

5,328

2.48
%
480,064

2,811

2.35
%
2,354

163

2,517

Loans held for sale

127,369

1,205

3.75
%
257,893

2,393

3.69
%
(1,228
)
40

(1,188
)

27,516

299

4.36
%
104,420

1,000

3.84
%
(820
)
119

(701
)
Portfolio loans(1) (2)

5,035,025

55,971

4.41
%
3,797,567

41,031

4.30
%
13,834

1,106

14,940

5,533,168

62,310

4.52
%
3,892,327

40,608

4.18
%
18,262

3,440

21,702

Total interest-earning assets(1) (3)

$
6,282,725

$
63,509

4.01
%
$
5,094,884

$
48,034

3.75
%
$
13,685

$
1,790

$
15,475

$
6,984,486

$
71,067

4.08
%
$
4,990,573

$
46,771

3.76
%
$
20,348

$
3,948

$
24,296

Cash and due from banks

100,004

75,242

102,640

75,959

Premises and equipment

99,284

80,956

120,595

78,728

Allowance for loan losses

(51,380
)

(45,761
)

(53,521
)

(49,260
)

Other assets

430,744

293,897

499,341

265,074

Total Assets

$
6,861,377

$
5,499,218

$
7,653,541

$
5,361,074

Liabilities and Stockholders’ Equity

Interest-bearing transaction deposits

$
1,204,141

$
703

0.23
%
$
858,525

$
280

0.13
%
$
143

$
280

$
423

$
1,214,863

$
782

0.26
%
$
1,021,986

$
333

0.13
%
$
73

$
376

$
449

Savings and money market deposits

1,867,388

1,093

0.23
%
1,629,988

627

0.15
%
82

384

466

2,004,299

1,641

0.33
%
1,493,040

678

0.18
%
230

733

963

Time deposits

1,010,224

2,055

0.81
%
859,107

1,192

0.55
%
238

625

863

1,400,548

4,481

1.28
%
743,308

1,152

0.62
%
1,511

1,818

3,329

Short-term borrowings:

Repurchase agreements and federal funds purchased

215,776

291

0.54
%
188,557

102

0.22
%
17

172

189

Repurchase agreements

235,678

372

0.63
%
176,735

204

0.46
%
78

90

168

Other (4)

139,204

447

1.27
%
147,032

263

0.71
%
(15
)
199

184

96,429

457

1.90
%
2,198

27

4.93
%
457

(27
)
430

Long-term debt(5)

158,267

1,340

3.36
%
80,000

55

0.27
%
103

1,182

1,285

154,123

1,406

3.66
%
120,141

628

2.10
%
214

564

778

Junior subordinated debt owed to unconsolidated trusts

70,939

649

3.63
%
70,802

538

3.02
%
1

110

111

71,046

814

4.60
%
70,904

621

3.51
%
1

192

193

Total interest-bearing liabilities

$
4,665,939

$
6,578

0.56
%
$
3,834,011

$
3,057

0.32
%
$
569

$
2,952

$
3,521

$
5,176,986

$
9,953

0.77
%
$
3,628,312

$
3,643

0.40
%
$
2,564

$
3,746

$
6,310

Net interest spread(1)

3.45
%

3.43
%

3.31
%

3.36
%

Noninterest-bearing deposits

1,328,770

1,023,963

1,492,251

1,091,696

Other liabilities

44,453

52,398

40,173

36,178

Stockholders’ equity

822,215

588,846

944,131

604,888

Total Liabilities and Stockholders’ Equity

$
6,861,377

$
5,499,218

$
7,653,541

$
5,361,074

Interest income / earning assets(1) (3)

$
6,282,725

$
63,509

4.01
%
$
5,094,884

$
48,034

3.75
%

$
6,984,486

$
71,067

4.08
%
$
4,990,573

$
46,771

3.76
%

Interest expense / earning assets

$
6,282,725

$
6,578

0.41
%
$
5,094,884

$
3,057

0.24
%

$
6,984,486

$
9,953

0.57
%
$
4,990,573

$
3,643

0.29
%

Net interest margin(1)

$
56,931

3.60
%

$
44,977

3.51
%
$
13,116

$
(1,162
)
$
11,954

$
61,114

3.51
%

$
43,128

3.47
%
$
17,784

$
202

$
17,986

(1)On a tax-equivalent basis assuming ~~a federal~~an income tax rate of 26% in 2018 and 35%. in 2017.
(2)Non-accrual loans have been included in average portfolio loans.
(3)Interest income includes a tax-equivalent adjustment of ~~$1.0 million and~~ $0.8 million for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016, respectively.~~2017.
(4)Includes federal funds purchased, FHLB advances and revolving loan. Interest expense includes a non-usage fee on the revolving loan.
(5)Includes FHLB long-term debt, senior notes and subordinated notes.
(6)Annualized.
52

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES
~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND ~~2016~~2017 (UNAUDITED)

Change in income/

Change in income/

2017

2016

expense due to(1)

2018

2017

expense due to

Average

Income/

Yield/

Average

Income/

Yield/

Average

Average

Total

Average

Income/

Yield/

Average

Income/

Yield/

Average

Average

Total

Balance

Expense

Rate(6)

Balance

Expense

Rate(6)

Volume

Yield/Rate

Change

Balance

Expense

Rate(6)

Balance

Expense

Rate(6)

Volume

Yield/Rate

Change

(dollars in thousands)

(dollars in thousands)

Assets

Interest-bearing bank deposits and federal funds sold

$
128,835

$
980

1.02
%
$
254,434

$
888

0.47
%
$
(587
)
$
679

$
92

$
116,956

$
931

1.61
%
$
137,826

$
632

0.92
%
$
(122
)
$
421

$
299

Investment securities

U.S. Government obligations

142,377

1,504

1.41
%
195,168

1,678

1.15
%
(511
)
337

(174
)

158,272

1,285

1.64
%
145,922

940

1.30
%
85

260

345

Obligations of states and political subdivisions(1)

214,264

4,762

2.97
%
215,436

4,616

2.86
%
(26
)
172

146

299,976

4,073

2.74
%
190,803

2,843

3.00
%
1,502

(272
)
1,230

Other securities

521,044

8,971

2.30
%
437,577

6,991

2.13
%
1,402

578

1,980

851,297

10,286

2.44
%
474,034

5,469

2.33
%
4,547

270

4,817

Loans held for sale

123,508

3,443

3.73
%
133,216

3,776

3.79
%
(274
)
(59
)
(333
)

33,372

649

3.92
%
121,546

2,238

3.71
%
(1,708
)
119

(1,589
)
Portfolio loans(1) (2)

4,267,393

136,260

4.27
%
3,254,698

101,398

4.16
%
32,187

2,675

34,862

5,520,584

123,240

4.50
%
3,877,215

80,289

4.18
%
36,273

6,678

42,951

Total interest-earning assets(1) (3)

$
5,397,421

$
155,920

3.86
%
$
4,490,529

$
119,347

3.55
%
$
32,191

$
4,382

$
36,573

$
6,980,457

$
140,464

4.06
%
$
4,947,346

$
92,411

3.77
%
$
40,577

$
7,476

$
48,053

Cash and due from banks

85,037

69,267

105,667

77,516

Premises and equipment

85,507

73,112

119,481

78,505

Allowance for loan losses

(49,793
)

(46,899
)

(54,076
)

(48,986
)

Other assets

325,061

225,637

507,162

271,342

Total Assets

$
5,843,233

$
4,811,646

$
7,658,691

$
5,325,723

Liabilities and Stockholders’ Equity

Interest-bearing transaction deposits

$
1,081,515

$
1,316

0.16
%
$
802,051

$
576

0.10
%
$
247

$
493

$
740

$
1,188,922

$
1,452

0.25
%
$
1,019,185

$
613

0.12
%
$
117

$
722

$
839

Savings and money market deposits

1,606,943

2,349

0.20
%
1,458,431

1,640

0.15
%
143

566

709

2,015,561

3,160

0.32
%
1,474,562

1,256

0.17
%
476

1,428

1,904

Time deposits

844,874

4,393

0.70
%
691,485

2,782

0.54
%
693

918

1,611

1,389,595

8,279

1.20
%
760,829

2,338

0.62
%
2,781

3,160

5,941

Short-term borrowings:

Repurchase agreements and federal funds purchased

186,282

618

0.44
%
177,074

274

0.21
%
15

329

344

Repurchase agreements

246,802

713

0.58
%
171,290

327

0.38
%
176

210

386

Other (4)

54,329

521

1.28
%
93,762

461

0.66
%
56

4

60

110,083

933

1.71
%
11,188

74

1.33
%
833

26

859

Long-term debt(5)

119,756

2,081

2.32
%
80,000

155

0.26
%
113

1,813

1,926

154,122

2,763

3.62
%
100,181

741

1.49
%
555

1,467

2,022

Junior subordinated debt owed to unconsolidated trusts

70,904

1,857

3.50
%
63,762

1,337

2.80
%
161

359

520

71,028

1,529

4.34
%
70,887

1,208

3.44
%
2

319

321

Total interest-bearing liabilities

$
3,964,603

$
13,135

0.44
%
$
3,366,565

$
7,225

0.29
%
$
1,428

$
4,482

$
5,910

$
5,176,113

$
18,829

0.73
%
$
3,608,122

$
6,557

0.37
%
$
4,940

$
7,332

$
12,272

Net interest spread(1)

3.42
%

3.26
%

3.33
%

3.40
%

Noninterest-bearing deposits

1,163,440

912,006

1,494,680

1,079,405

Other liabilities

40,188

39,915

48,923

38,020

Stockholders’ equity

675,002

493,160

938,975

600,176

Total Liabilities and Stockholders’ Equity

$
5,843,233

$
4,811,646

$
7,658,691

$
5,325,723

Interest income / earning assets(1) (3)

$
5,397,421

$
155,920

3.86
%
$
4,490,529

$
119,347

3.55
%

$
6,980,457

$
140,464

4.06
%
$
4,947,346

$
92,411

3.77
%

Interest expense / earning assets

$
5,397,421

$
13,135

0.32
%
$
4,490,529

$
7,225

0.21
%

$
6,980,457

$
18,829

0.55
%
$
4,947,346

$
6,557

0.27
%

Net interest margin(1)

$
142,785

3.54
%

$
112,122

3.34
%
$
30,763

$
(100
)
$
30,663

$
121,635

3.51
%

$
85,854

3.50
%
$
35,637

$
144

$
35,781

(1)On a tax-equivalent basis assuming ~~a federal~~an income tax rate of 26% in 2018 and 35%. in 2017.
(2)Non-accrual loans have been included in average portfolio loans.
(3)Interest income includes a tax-equivalent adjustment of ~~$2.5 million and $2.1~~$1.5 million at ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.
(4)Includes federal funds purchased, FHLB advances and revolving loan. Interest expense includes a non-usage fee on the revolving loan.
(5)Includes FHLB long-term debt, senior notes and subordinated notes.
(6)Annualized.
53

The Consolidated Average Balance Sheets and interest rates were impacted by the ~~July 2,~~ 2017 acquisitions of First Community ~~acquisition.~~and Mid Illinois, along with organic growth. Total average interest-earning assets increased ~~$1.2~~$2.0 billion, or ~~23.3%~~40.0%, to ~~$6.3~~$7.0 billion for the three month period ended ~~September~~June 30, ~~2017,~~2018, as compared to ~~$5.1~~$5.0 billion for the same period in ~~2016.~~2017. Total average interest-earning assets increased ~~$906.9 million,~~$2.1 billion, or ~~20.2%~~41.1%, to ~~$5.4~~$7.0 billion for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2018, as compared to ~~$4.5~~$4.9 billion for the same period in ~~2016.~~2017. Total average interest-bearing liability balances increased ~~$831.9 million,~~$1.6 billion, or ~~21.7%~~42.7%, to ~~$4.7~~$5.2 billion for the three month period ended ~~September~~June 30, ~~2017,~~2018, as compared to ~~$3.8~~$3.6 billion for the same period in ~~2016.~~2017. Total average interest-bearing liability balances increased ~~$598.0 million,~~$1.6 billion, or ~~17.8%~~43.5%, to ~~$4.0~~$5.2 billion for the ~~nine~~six month period ended ~~September~~June 30, ~~2017, from $3.4~~2018, as compared to $3.6 billion for the same period in ~~2016.~~2017.
Interest income, on a tax-equivalent basis, increased $24.3 million, or 51.9%, to $71.1 million for the three month period ended June 30, 2018, as compared to $46.8 million in the same period of 2017. Interest income, on a tax-equivalent basis, increased $48.1 million, or 52.0%, to $140.5 million for the six month period ended June 30, 2018, as compared to $92.4 million in the same period of 2017. The interest income increases related primarily to the increase in loan volumes. Interest expense increased during the three month period ended June 30, 2018 by $6.3 million to $10.0 million from $3.7 million in the same period of 2017. Interest expense increased during the six month period ended June 30, 2018 by $12.3 million to $18.8 million from $6.5 million in the same period of 2017. The interest expense increases were the result of increases in deposits and borrowings related to the 2017 acquisitions of First Community and Mid Illinois and rising interest rates.

Net interest income, on a tax-equivalent basis, increased ~~$12.0~~$18.0 million for the three month period ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period of ~~2016.~~2017. Net interest income, on a tax-equivalent basis, increased ~~$30.7~~$35.8 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period of ~~2016.~~2017. The Federal Open Market Committee announced that the federal funds rate increased from 1.50% to 1.75% on March ~~15,~~21, 2018 and then on June 13, 2018 that the federal funds rate increased from 1.75% to 2.00%. In 2017, ~~that~~for comparison, the federal funds rate increased from 0.75% to 1.00%, on March 15, 2017, and then ~~announced another rate increase~~from 1.00% to 1.25% on June 15, ~~2017 from 1.00% to 1.25%. These~~2017. The Company expects the increases in interest rates ~~were~~to be modestly favorable to net interest income ~~in 2017 and~~for the ~~Company expects a similar impact in future periods. However,~~remainder of 2018; however, rising interest rates could result in decreased demand for first mortgages as well as mortgage refinancing, activities which contribute to a portion of the Company’s mortgage revenue.

Net interest margin

Net interest margin, our net interest income expressed as a percentage of average earning assets stated on a tax-equivalent basis, increased to ~~3.60%~~3.51% for the three month period ended ~~September~~June 30, ~~2017,~~2018, compared to ~~3.51%~~3.47% for the same period in ~~2016~~2017, and increased to ~~3.54%~~3.51% for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018, compared to ~~3.34%~~3.50% for the same period in ~~2016.~~
2017. Net ~~of amortization and accretion~~ of purchase accounting ~~adjustments,~~accretion and amortization(1), the net interest margin for the ~~third quarter of~~three month period ended June 30, 2018 was 3.34%, steady with the same period in 2017, and was ~~3.40%, an increase from 3.30%~~3.33% for the ~~third quarter of 2016. Net of amortization and accretion of purchase accounting adjustments, the net interest margin for the first nine months was 3.37%, an increase~~six month period ended June 30, 2018, a decrease from ~~3.19%~~3.36% for the same period ~~for 2016.~~in 2017.

Quarterly net interest margins for 2018 and 2017 were as follows:

2017

2016

2018

2017

First Quarter

3.53
%
3.10
%

3.52
%
3.53
%
Second Quarter

3.47
%
3.32
%

3.51
%
3.47
%
Third Quarter

3.60
%
3.51
%

—

3.60
%
Fourth Quarter

—

3.63
%

—

3.68
%

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, also on a tax-equivalent basis, was ~~3.45%~~3.31% for the three month period ended ~~September~~June 30, ~~2017,~~2018, compared to ~~3.43%~~3.36% for the same period in ~~2016~~2017 and was ~~3.42%~~3.33% for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2018, compared to ~~3.26%~~3.40% for the same period in ~~2016.~~2017.

Management attempts to mitigate the effects of the ~~interest rate~~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 Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 for accounting policies underlying the recognition of interest income and expense.

54

(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.”
Non-interest income (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

$
Change

%
Change

2017

2016

$
Change

%
Change

2018

2017

$
Change

%
Change

2018

2017

$
Change

%
Change

Trust fees

$
5,071

$
4,520

$
551

12.2
%
$
17,088

$
15,112

$
1,976

13.1
%

$
6,735

$
5,827

$
908

15.6
%
$
14,249

$
12,017

$
2,232

18.6
%
Commissions and brokers’ fees, net

766

740

26

3.5
%
2,239

2,095

144

6.9
%

883

751

132

17.6
%
1,979

1,473

506

34.4
%
Remittance processing

2,877

2,803

74

2.6
%
8,581

8,558

23

0.3
%

3,566

2,859

707

24.7
%
6,958

5,704

1,254

22.0
%
Fees for customer services

6,577

6,495

82

1.3
%
18,658

17,074

1,584

9.3
%

7,290

6,095

1,195

19.6
%
14,236

12,081

2,155

17.8
%
Mortgage revenue

3,526

4,842

(1,316
)
(27.2
)%
8,430

9,091

(661
)
(7.3
)%

1,573

2,770

(1,197
)
(43.2
)%
3,216

4,904

(1,688
)
(34.4
)%
Security gains, net

290

11

279

NM

1,143

1,230

(87
)
(7.1
)%
Security (losses) gains, net

160

(4
)
164

NM

160

853

(693
)
(81.2
)%
Other income

1,730

1,334

396

29.7
%
4,774

3,008

1,766

58.7
%

2,595

1,764

831

47.1
%
4,490

3,044

1,446

47.5
%
Total non-interest income

$
20,837

$
20,745

$
92

0.4
%
$
60,913

$
56,168

$
4,745

8.4
%

$
22,802

$
20,062

$
2,740

13.7
%
$
45,288

$
40,076

$
5,212

13.0
%

NM=Not Meaningful

Total non-interest income of ~~$20.8~~$22.8 million for the three month period ended ~~September~~June 30, ~~2017~~2018 increased ~~slightly~~by 13.7% as compared to ~~$20.7~~$20.1 million for the same period in ~~2016.~~2017. Total non-interest income of ~~$60.9~~$45.3 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 increased by ~~8.4%~~13.0% as compared to ~~$56.2~~$40.1 million for the same period in ~~2016, which was inclusive~~2017. The increases reflect organic growth as well as the 2017 acquisitions of ~~$1.0 million of non-interest income from~~ First Community ~~since the transaction closed on July 2, 2017. All categories of non-interest income reflected growth, outside of mortgage revenue~~ and ~~security gains, net, which are discussed below.~~Mid Illinois.

Combined Wealth Management revenue, consisting of trust fees and commissions and brokers’ fees, net, increased to ~~$5.8~~$7.6 million for the three months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$5.3~~$6.6 million for the three months ended ~~September~~June 30, ~~2016~~2017 and increased to ~~$19.3~~$16.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$17.2~~$13.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016. As~~2017. Market expansion and increasing assets under care drove fee income. Further, two of the Company’s acquisitions, Pulaski and First Community, had no legacy ~~trust~~ fee income in these businesses; therefore, the addition of ~~this~~these fee-based service ~~offering~~offerings in ~~their~~the corresponding acquired bank markets is expected to provide attractive growth opportunities in future periods.

Remittance processing revenue from the Company’s subsidiary, FirsTech, Inc., of ~~$2.9~~$3.6 million for the three months ended ~~September~~June 30, ~~2017~~2018 increased ~~slightly~~ compared to ~~$2.8~~$2.9 million for the same period of ~~2016.~~2017. For the first ~~nine~~six months of ~~2017,~~2018, remittance processing revenue ~~remained stable at $8.6 million. Remittance processing~~increased to $7.0 million compared to $5.7 million for the same period of 2017. The positive 2018 results are a reflection of new customer activity and volume increases from existing customers. FirsTech, Inc. adds important diversity to our revenue stream while widening our array of service offerings to larger commercial clients within our footprint and nationally.

Fees for customer services increased to ~~$6.6~~$7.3 million for the three month period ended ~~September~~June 30, ~~2017~~2018 as compared to ~~$6.5~~$6.1 million for the same period of ~~2016~~2017 and increased to ~~$18.7~~$14.2 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 as compared to ~~$17.1~~$12.1 million for the same period of ~~2016.~~2017. Evolving regulation, product changes and changing behaviors by our client base may impact the fees for customer services in future periods.

Mortgage revenue decreased to ~~$3.5~~$1.6 million for the three month period ended ~~September~~June 30, ~~2017~~2018 compared to ~~$4.8~~$2.8 million for the same period of ~~2016. Mortgage revenue~~2017 and decreased to ~~$8.4~~$3.2 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 compared to ~~$9.1~~$4.9 million for the same period of ~~2016, due~~2017. 2018 results reflect lower origination volumes, the timing of sales, and the realignment of mortgage origination resources to ~~lower~~the Company’s branch market areas through the sale of certain mortgage ~~volumes and increased delivery efficiency~~locations in the fourth quarter of 2017.

Security gains, net, increased $0.3 million for the three month period ended September 30, 2017 compared to the same period of 2016. Security gains, net, decreased $0.1 million for the nine month period ended September 30, 2017 compared to the same period of 2016. Security gains, net, vary based on the Company’s decisions around selling securities. In the first quarter of 2017, the Company sold 100% risk weighted investments and reinvested in 20% risk weighted investments at higher yields to better manage capital, while also producing higher future returns.

Other income increased ~~to $1.7 million~~47.1% for the three ~~month period~~months ended ~~September~~June 30, ~~2017 as~~2018 compared to ~~$1.3 million for~~ the same period of ~~2016~~2017 and increased ~~to $4.8 million~~47.5% for the ~~nine month period~~six months ended ~~September~~June 30, ~~2017 as~~2018 compared to ~~$3.0 million for~~ the same period of ~~2016. The other income increase is~~2017 across multiple revenue ~~sources, with swap origination fee income and fluctuations in private equity investments driving the greater part of the increase.~~sources.
55

Non-interest expense (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

$
Change

%
Change

2017

2016

$
Change

%
Change

2018

2017

$
Change

%
Change

2018

2017

$
Change

%
Change

Salaries, wages and employee benefits

$
25,497

$
21,716

$
3,781

17.4
%
$
67,448

$
55,575

$
11,873

21.4
%

$
25,472

$
20,061

$
5,411

27.0
%
$
54,291

$
41,951

$
12,340

29.4
%
Net occupancy expense of premises

3,714

3,401

313

9.2
%
10,025

8,300

1,725

20.8
%

3,689

3,126

563

18.0
%
7,510

6,311

1,199

19.0
%
Furniture and equipment expenses

1,785

1,836

(51
)
(2.8
)%
5,123

4,564

559

12.2
%

1,790

1,719

71

4.1
%
3,703

3,338

365

10.9
%
Data processing

5,753

4,430

1,323

29.9
%
13,290

12,677

613

4.8
%

4,030

3,306

724

21.9
%
8,375

6,235

2,140

34.3
%
Amortization of intangible assets

1,286

1,282

4

0.3
%
3,675

3,157

518

16.4
%

1,490

1,182

308

26.1
%
3,005

2,389

616

25.8
%
Regulatory expense

778

802

(24
)
(3.0
)%
1,803

2,274

(471
)
(20.7
)%
Other expense

8,126

5,948

2,178

36.6
%
19,962

16,904

3,058

18.1
%

10,834

7,374

3,460

46.9
%
21,461

14,163

7,298

51.5
%
Total non-interest expense

$
46,939

$
39,415

$
7,524

19.1
%
$
121,326

$
103,451

$
17,875

17.3
%

$
47,305

$
36,768

$
10,537

28.7
%
$
98,345

$
74,387

$
23,958

32.2
%

Income taxes

$
9,561

$
8,089

$
1,472

18.2
%
$
26,980

$
20,453

$
6,527

31.9
%

$
8,749

$
8,681

$
68

0.8
%
$
17,027

$
17,419

$
(392
)
(2.3
)%
Effective rate on income taxes

33.7
%
34.4
%

34.9
%
34.8
%

26.0
%
34.5
%

26.7
%
35.5
%

Efficiency ratio

58.9
%
58.0
%

58.1
%
60.0
%

54.7
%
56.3
%

57.2
%
57.6
%

Full-time equivalent employees as of period-end

1,382

1,320

1,288

1,238

Total non-interest expense of ~~$46.9~~$47.3 million for the three month period ended ~~September~~June 30, ~~2017~~2018 increased as compared to ~~$39.4~~$36.8 million for the same period in ~~2016.~~2017. Total non-interest expense of ~~$121.3~~$98.3 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 increased as compared to ~~$103.5~~$74.4 million for the same period in ~~2016, which was inclusive~~2017. Pre-tax non-operating expenses of ~~$8.0~~$1.0 million impacted the three month period ended June 30, 2018 while pre-tax non-operating expenses of ~~non-interest expense from First Community since~~$0.3 million impacted the ~~transaction closed on July 2,~~same period of 2017. ~~Acquisition~~Pre-tax non-operating expenses ~~relating to~~of $4.5 million impacted the ~~acquisition~~six month period ended June 30, 2018 while pre-tax non-operating expenses of ~~First Community and Mid Illinois have~~$1.3 million impacted ~~and are expected to~~the same period 2017. We continue to ~~impact non-interest~~examine expenses across all areas of the Company and remain focused on expense ~~throughout 2017, while acquisition expenses related to~~discipline, with an emphasis on the ~~Pulaski acquisition impacted 2016.~~ones outlined below.

Salaries, wages and employee benefits expense of $25.5 million increased ~~$3.8~~$5.4 million for the three month period ended ~~September~~June 30, ~~2017~~2018 as compared to the same period in ~~2016~~2017 and increased ~~$11.9~~$12.3 million, to ~~$67.4~~$54.3 million, for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 as compared to the same period of ~~2016.~~2017. The increase was primarily as a result of an increased number of employees resulting from the First Community ~~acquisition added 136 full-time~~and Mid Illinois acquisitions. In addition, restructuring costs designed to address the changing needs of our organization as we seek to balance growth with efficiency, negatively impacted the six month period ended June 30, 2018 by $1.7 million. Full-time equivalent employees ~~to the Company’s headcount~~totaled 1,288 at June 30, 2018, down from 1,347 at December 31, 2017, and ~~also resulted in restructuring costs of $0.7 million in the third quarter of 2017, with expected cost reductions in future periods.~~up from 1,238 at June 30, 2017.

Combined net occupancy expense of premises and furniture and equipment expenses of $5.5 million and ~~$15.1~~$11.2 million for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2018, respectively, increased compared to the same periods in ~~2016.~~2017. The ~~Pulaski acquisition~~2017 acquisitions added ~~13 banking centers and several loan production offices. The First Community acquisition added nine~~21 banking centers. We continue to evaluate our ~~branch~~banking center network and ~~operations for appropriate cost control measures while seeking improvements~~five banking centers were closed in ~~service delivery to our customers.~~the first quarter of 2018.

Data processing expense for the three month period ended ~~September~~June 30, ~~2017~~2018 of ~~$5.8~~$4.0 million increased from ~~$4.4~~$3.3 million for the same period of ~~2016.~~2017. Data processing expense for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 of ~~$13.3~~$8.4 million ~~increased~~decreased from ~~$12.7~~$6.2 million for the same period of ~~2016.~~2017. Variances are largely related to ~~payment of~~ deconversion expenses related to ~~acquisitions, which were $1.3 million for the three and nine months ended September 30, 2017.~~acquisitions.

Amortization of intangible assets increased for the three and ~~nine~~six month periods ended ~~September~~June 30, 2017 compared to the same periods in 2016 related to the Pulaski and First Community acquisitions. Amortization of intangible assets is expected to increase in future periods related to the Mid Illinois acquisition.
~~Regulatory expense decreased 3.0% and 20.7% for the three and nine month periods ended September 30, 2017, respectively,~~2018 compared to the same period in ~~2016.~~2017 as a result of the First Community and Mid Illinois acquisitions.

Other expense of ~~$8.1~~$10.8 million for the three month period ended ~~September~~June 30, ~~2017~~2018 increased ~~$2.2~~$3.5 million compared to the same period in ~~2016.~~2017. Other expense of ~~$20.0~~$21.5 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 increased ~~$3.0~~$7.3 million compared to the same period in ~~2016. The increase was~~2017 across multiple expense categories, including fluctuations in gains and ~~included pretax~~losses on OREO sales, business development and acquisition ~~costs of $1.1 million for the three month period ended September 30, 2017 and $2.1 million for the nine month period ended September 30, 2017.~~related check card service expense.
56

The effective rate on income taxes, or income taxes divided by income before taxes, of ~~33.7%~~26.0% and ~~34.9%~~26.7% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively, was lower than the combined federal and state statutory rate of approximately ~~40%~~28% due to tax preferred interest income, such as municipal bond interest and bank owned life insurance income, accounting for a
portion of our taxable income. As taxable income increases, we expect our effective tax rate to increase. The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. Effective July 1, 2017, the combined Illinois corporate income tax rate and replacement tax rate increased from 7.75% to 9.50%~~, which is reflected~~.   Effective January 1, 2018 in ~~current period expenses and will have an impact on~~connection with the ~~Company’s~~TCJA, the corporate federal tax ~~expense in future periods.~~rate was reduced from 35.0% to 21.0%.

The efficiency ~~ratio~~ratio(1) represents 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 ~~non-GAAP financial~~ measure commonly used by management and the investment community in the banking industry, measures the amount of expense that is incurred to generate a dollar of revenue. The efficiency ratio of ~~58.9%~~54.7% for the three month period ended ~~September~~June 30, ~~2017 increased~~2018 improved from ~~58.0%~~56.3% in the comparable period in ~~2016~~2017 and the efficiency ratio of ~~58.1%~~57.2% for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 improved from ~~60.0%~~57.6% in the comparable period in ~~2016. Expenses relating to~~2017. Operating costs have been influenced by acquisitions and the ~~First Community~~adjusted efficiency ratio(1), excluding the impact of such acquisition costs among other items, was 53.6% and ~~Mid Illinois~~55.8% for the three month periods ended June 30, 2018 and 2017, respectively. The adjusted efficiency ratio(1) was 54.5% and 56.5% for the six month periods ended June 30, 2018 and 2017, respectively. While acquisition expenses may have a negative impact on the efficiency ~~ratio for the remainder of 2017; however,~~ratios, the Company expects to realize operating efficiencies creating a positive impact in future years. Further, the Company started to see greater operating efficiencies from the South Side integration beginning in the second quarter of 2018. We will continue to examine appropriate avenues to improve ~~efficiency.~~efficiency and remain consistently focused on expense discipline.
(1)For a reconciliation of efficiency ratio and adjusted efficiency ratio, non-GAAP financial measures, see “Non-GAAP Financial Information.”

FINANCIAL CONDITION

Significant Consolidated Balance Sheet items (dollars in thousands):

September 30,
2017

December 31,
2016

$ Change

% Change

June 30,
2018

December 31,
2017

$ Change

% Change

Assets

Securities available for sale

$
708,247

$
759,811

$
(51,564
)
(6.8
)%

$
871,338

$
872,682

$
(1,344
)
(0.2
)%
Securities held to maturity

281,975

47,820

234,155

489.7
%

507,780

443,550

64,230

14.5
%
Loans held for sale

139,696

256,319

(116,623
)
(45.5
)%

33,974

94,848

(60,874
)
(64.2
)%
Portfolio loans, net

5,034,829

3,831,105

1,203,724

31.4
%

5,501,982

5,465,918

36,064

0.7
%

Total assets

$
6,913,789

$
5,425,170

$
1,488,619

27.4
%

$
7,775,544

$
7,860,640

$
(85,096
)
(1.1
)%

Liabilities

Deposits:

Noninterest-bearing

$
1,321,439

$
1,134,133

$
187,306

16.5
%

$
1,496,671

$
1,597,421

$
(100,750
)
(6.3
)%
Interest-bearing

4,051,844

3,240,165

811,679

25.1
%

4,667,241

4,528,544

138,697

3.1
%
Total deposits

$
5,373,283

$
4,374,298

$
998,985

22.8
%

$
6,163,912

$
6,125,965

$
37,947

0.6
%

Securities sold under agreements to repurchase

$
219,071

$
189,157

$
29,914

15.8
%

$
240,109

$
304,566

$
(64,457
)
(21.2
)%
Short-term borrowings

212,850

75,000

137,850

183.8
%

150,000

220,000

(70,000
)
(31.8
)%
Long-term debt

50,000

80,000

(30,000
)
(37.5
)%

50,000

50,000

—

—
%
Senior notes, net of unamortized issuance costs

39,370

—

39,370

100.0
%

39,472

39,404

68

0.2
%
Subordinated notes, net of unamortized issuance costs

64,745

—

64,745

100.0
%

64,653

64,715

(62
)
(0.1
)%
Junior subordinated debt owed to unconsolidated trusts

70,973

70,868

105

0.1
%

71,081

71,008

73

0.1
%

Total liabilities

$
6,077,721

$
4,830,856

$
1,246,865

25.8
%

$
6,818,362

$
6,925,637

$
(107,275
)
(1.5
)%

Stockholders’ equity

$
836,068

$
594,314

$
241,754

40.7
%

$
957,182

$
935,003

$
22,179

2.4
%

~~Our~~In the first half of 2018, we continued to emphasize our key priorities ~~continue to focus around~~- balance sheet strength, profitability and growth ~~in that order. The Company’s balance sheet was significantly impacted by the First Community acquisition in the third quarter~~- achieved within a framework of ~~2017. At the date of the acquisition, the fair value of First Community’s total assets was $1.4 billion, including $1.1 billion in loans,~~safety and ~~the fair value of total deposits was $1.1 billion.~~
57

On May 25, 2017, the Company completed an offering of $40.0 million of 3.75% senior notes due May 25, 2022 and $60.0 million of 4.75% fixed-to-floating rate subordinated notes due May 25, 2027. The Company used the net proceeds from the offering to finance a portion of the cash consideration for its acquisition of First Community, to redeem a portion of First Community subordinated debentures in July 2017, and to finance a portion of the cash consideration for its acquisition of Mid Illinois in October 2017, with the remaining proceeds to be used for general corporate purposes.
~~With our strong~~soundness. Our capital position ~~an attractive core funding base,~~remains strong and we continue to focus on a sound credit ~~foundation,~~foundation. We believe our emphasis on commercial banking and ~~an active~~wealth management, supplemented by our remittance processing activities, will drive growth ~~plan, we are well positioned for~~in the remainder of ~~2017~~2018 and moving into 2018. New partnerships with talented bankers in St. Louis, Peoria and the Chicagoland area bring an expanding pool of business opportunities to generate value and diversity across new markets.beyond.
Loans Held for Sale

Loans held for sale totaled ~~$139.7~~$34.0 million and ~~$256.3~~$94.8 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The amount of loans held for sale decreased from December 31, ~~2016,~~2017, due to lower origination volumes in 2018. Lower origination volumes are a reflection of the realignment of mortgage ~~volumes and increased delivery efficiency~~origination resources to the Company’s branch market areas through the sale of certain mortgage locations in the fourth quarter of 2017. Loans held for sale generate net interest income until loans are delivered to investors, at which point mortgage revenue will be recognized.

Portfolio Loans

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

September 30, 2017

June 30, 2018

Illinois

Missouri

Florida

Indiana

Total

Illinois

Missouri

Florida

Indiana

Total

Commercial

$
897,720

$
360,490

$
19,529

$
42,169

$
1,319,908

$
988,777

$
414,808

$
18,750

$
23,726

$
1,446,061

Commercial real estate

1,381,730

526,765

145,955

160,849

2,215,299

1,465,222

585,258

158,250

146,495

2,355,225

Real estate construction

88,748

71,874

21,490

65,144

247,256

92,607

107,137

13,038

62,185

274,967

Retail real estate

663,773

510,771

97,800

16,508

1,288,852

831,694

494,651

100,978

22,153

1,449,476

Retail other

13,072

614

863

—

14,549

25,242

2,628

1,123

565

29,558

Portfolio loans

$
3,045,043

$
1,470,514

$
285,637

$
284,670

$
5,085,864

$
3,403,542

$
1,604,482

$
292,139

$
255,124

$
5,555,287

Less allowance for loan losses

51,035

53,305

Portfolio loans, net

$
5,034,829

$
5,501,982

December 31, 2016

December 31, 2017

Illinois

Missouri

Florida

Indiana

Total

Illinois

Missouri

Florida

Indiana

Total

Commercial

$
565,853

$
346,204

$
19,207

$
28,624

$
959,888

$
974,392

$
378,424

$
19,005

$
42,810

$
1,414,631

Commercial real estate

878,018

470,126

150,940

155,080

1,654,164

1,505,819

547,200

147,360

154,305

2,354,684

Real estate construction

53,142

71,430

12,789

44,717

182,078

87,084

74,662

26,209

73,551

261,506

Retail real estate

479,026

468,212

105,620

16,202

1,069,060

835,287

509,500

98,112

17,902

1,460,801

Retail other

12,250

565

895

—

13,710

26,230

685

961

2

27,878

Portfolio loans

$
1,988,289

$
1,356,537

$
289,451

$
244,623

$
3,878,900

$
3,428,812

$
1,510,471

$
291,647

$
288,570

$
5,519,500

Less allowance for loan losses

47,795

53,582

Portfolio loans, net

$
3,831,105

$
5,465,918

Portfolio loans increased ~~$1.2 billion,~~$35.8 million, or ~~31.1%~~0.6%, as of ~~September~~June 30, ~~2017~~2018 compared to December 31, ~~2016 as a result of the First Community acquisition and organic growth.~~2017. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased ~~$986.4~~$45.4 million from December 31, ~~2016.~~2017. Retail real estate and retail other loans ~~increased $220.6~~decreased $9.6 million from December 31, ~~2016. First Community Financial Bank experienced strong~~2017. 2018 loan growth ~~for~~was driven by organic originations, particularly in the ~~third quarter of 2017, increasing gross portfolio loan balances by $37.3 million since the July 2, 2017 acquisition. In addition, Busey Bank saw growth in its~~ Missouri ~~and Indiana markets where active growth efforts are underway.~~
58

market. Relationship banking, rather than transactional banking, remains a focus for the Company. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the lending relationship.

Allowance for Loan Losses

Our allowance for loan losses was ~~$51.0~~$53.3 million, or ~~1.0%~~0.96% of portfolio loans, and ~~$47.8~~$53.6 million, or ~~1.2%~~0.97% of portfolio loans, at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. As ~~a result~~ of acquisitions, the Company is holding $1.7 billion of acquired loans that are carried net of a fair value adjustment of $21.5 million for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.
Typically, when we move loans into non-accrual status, the loans are collateral dependent and 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.
~~As of September~~June 30, ~~2017,~~2018, management believed the level of the allowance and coverage of non-performing loans to be appropriate based upon the information available.   However, additional losses may be identified in our loan portfolio as new information is obtained. We may need to provide for additional loan losses in the future as management continues to identify potential problem loans and gains further information concerning existing problem loans.
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 ~~reflects management’s analysis of additional allowance~~ for loan losses was $3.3 million and $1.0 million at June 30, 2018 and 2017, 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 ~~cover~~establish an allowance for losses, which represents an amount that, in management’s opinion, will be adequate to absorb probable losses in our loan portfolio. The provision for loan losses decreased to $1.5 million for the third quarter of 2017 compared to $2.0 million in the same period of 2016. The provision for loan losses for the nine months ended September 30, 2017 decreased to $2.5 million compared to $4.1 million in the same period of 2016. First Community Financial Bank recorded $1.5 million in provision expense in the third quarter of 2017 related to new and renewed production.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 provisions. 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.

59Typically, loans are collateral dependent. When a collateral dependent loan is classified as non-accrual it is 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.

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

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

June 30,
2018

March 31,
2018

December 31,
2017

September 30,
2017

Non-accrual loans

$
27,430

$
18,935

$
20,544

$
21,423

$
25,215

$
32,588

$
24,624

$
27,430

Loans 90+ days past due and still accruing

439

1,123

311

131

1,142

995

2,741

439

Total non-performing loans

$
27,869

$
20,058

$
20,855

$
21,554

$
26,357

$
33,583

$
27,365

$
27,869

OREO

$
1,172

$
480

$
739

$
2,518

$
3,694

$
1,001

$
1,283

$
1,172

Total non-performing assets

$
29,041

$
20,538

$
21,594

$
24,072

$
30,051

$
34,584

$
28,648

$
29,041

Allowance for loan losses

$
51,035

$
49,201

$
48,442

$
47,795

$
53,305

$
52,649

$
53,582

$
51,035

Allowance for loan losses to portfolio loans

1.0
%
1.3
%
1.3
%
1.2
%

0.96
%
0.95
%
0.97
%
1.00
%
Allowance for loan losses to non-performing loans

183.1
%
245.3
%
232.3
%
221.7
%

202.2
%
156.8
%
195.8
%
183.1
%
Non-performing loans to portfolio loans, before allowance for loan losses

0.5
%
0.5
%
0.5
%
0.6
%

0.5
%
0.6
%
0.5
%
0.5
%
Non-performing loans and OREO to portfolio loans, before allowance for loan losses

0.6
%
0.5
%
0.6
%
0.6
%

0.5
%
0.6
%
0.5
%
0.6
%

~~The September 30, 2017 asset metrics reflect the post combination results of acquiring First Community.~~ Total non-performing assets were ~~$29.0~~$30.1 million at ~~September~~June 30, ~~2017,~~2018, compared to ~~$24.1~~$28.6 million at December 31, ~~2016.~~2017. Non-performing assets as a percentage of total loans and non-performing assets continued to be favorably low at ~~0.6%~~0.5% on ~~September~~June 30, ~~2017.~~2018. 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 present loan repayment terms. Management assesses the potential for loss on such loans as it would with other problem loans and has considered the effect of any potential loss in determining its provision for probable loan losses. Potential problem loans totaled ~~$56.4~~$106.1 million at ~~September~~June 30, ~~2017,~~2018, compared to ~~$50.2~~$70.4 million at December 31, ~~2016.~~2017. 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~~June 30, ~~2017,~~2018, management identified no other loans that represent or result from trends or uncertainties which management reasonably expected to materially impact future operating results, liquidity or capital resources. As of September 30, 2017, management was not aware of any information about any other credits which caused management to have serious doubts as to the ability of such borrower(s) to comply with the loan repayment terms.

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 loan facility, or to utilize brokered deposits.

As of ~~September~~June 30, ~~2017,~~2018, 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.

60

OFF-BALANCE-SHEET ARRANGEMENTS

At ~~September~~June 30, 2018 and December 31, 2017 the Company had outstanding standby letters of credit of ~~$33.3~~$34.7 million and $37.2 million, respectively, and commitments to extend credit of $1.3 billion to its customers. Since these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. These commitments are made in the ordinary course of business to meet the financing needs of the Company’s customers. As of ~~September~~June 30, ~~2017,~~2018, no amounts were recorded as liabilities for the Company’s potential obligations under these 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.~~bank. 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. For ~~2017,~~2018, the guidelines, including the capital conservation buffer, required bank holding companies and their subsidiary ~~banks~~bank to maintain a total capital to total risk-weighted asset ratio of not less than ~~9.25%~~9.875%, Tier 1 capital to total risk-weighted asset ratio of not less than ~~7.25%~~7.875%, Common Equity Tier 1 capital to total risk-weighted asset ratio of not less than ~~5.75%~~6.375% and a Tier 1 leverage ratio of not less than 4.00%. These minimum capital requirements will increase annually until the Basel III Rule is fully phased-in on January 1, 2019. As of ~~September~~June 30, ~~2017,~~2018, First Busey had a total capital to total risk-weighted asset ratio of ~~14.38%~~14.42%, a Tier 1 capital to risk-weighted asset ratio of ~~12.26%~~12.44%, Common Equity Tier 1 capital to risk-weighted asset ratio of ~~10.92%~~11.21% and a Tier 1 leverage ratio of ~~10.18%~~10.13%; Busey Bank had ratios of ~~14.19%~~14.03%, ~~13.02%~~13.14%, ~~13.02%~~13.14% and ~~10.61%, respectively; and First Community Financial Bank had ratios of 10.34%, 10.21%, 10.21% and 8.94%~~10.68%, respectively.
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 ~~acquisition and other notable pre-tax items, operating earnings,~~adjusted net income, adjusted return on average assets, adjusted net interest margin, ~~net of amortization~~adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets and ~~accretion of purchase accounting adjustments, and efficiency ratios.~~return on average common equity. Management uses these non-GAAP measures, together with the related GAAP measures, ~~in analysis of~~to analyze the Company’s performance and ~~in making~~to make business decisions. Management also uses these measures for peer comparisons.

~~Management~~A reconciliation to what management believes ~~that operating earnings,~~to be the most direct compared GAAP financial measures, specifically net income in the case of adjusted ~~for acquisition~~net income and ~~other notable pre-tax items, is useful in assessing our core operating performance and in understanding the primary drivers of our~~adjusted return on average assets, total net interest income, total non-interest income and total non-interest expense ~~when comparing periods. Management~~in the case of adjusted efficiency ratio and total stockholders’ equity in the case of the tangible book value per share, appears below (dollars in thousands, except per share data). The Company believes ~~that operating earnings~~each of the adjusted measures is a useful ~~measure because it excludes expenses that can significantly fluctuate from acquisition to acquisition. In addition, management believes that excluding these expenses provides~~for investors and ~~analysts a measure~~management to ~~better~~ understand the effects of certain non-interest items and provides additional perspective on the Company’s ~~primary operations when comparing~~performance over time as well as comparison to the ~~periods presented.~~Company’s peers.

~~Operating earnings reconciliation~~ ~~(dollars in thousands)~~:

Three Months Ended
September 30, 2017

Nine Months Ended
September 30, 2017

Net income

$
18,784

$
50,433

Mid Illinois acquisition:

Data processing

6

40

Other

139

350

First Community acquisition:

Salaries, wages, and employee benefits

720

720

Data processing

1,240

1,287

Other

891

1,679

Pulaski acquisition

17

40

Other restructuring costs

46

261

Related tax benefit

(1,195
)
(1,681
)
Operating earnings

$
20,648

$
53,129

61

~~Management believes that efficiency ratios are standard financial measures used in the banking industry to evaluate performance.~~
~~The~~These non-GAAP disclosures ~~contained herein~~have inherent limitations and are not audited. They should not be ~~viewed~~considered in isolation or as ~~substitutes~~a substitute for the results ~~determined to be~~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.

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

Three Months Ended

Six Months Ended

June 30,
2018

March 31,
2018

June 30,
2017

June 30,
2018

June 30,
2017

Net income

$
24,862

$
21,917

$
16,479

$
46,779

$
31,649

Acquisition expenses

Salaries, wages and employee benefits

—

1,233

—

1,233

—

Data processing

34

372

81

406

86

Other (includes professional and legal)

107

1,950

266

2,057

1,017

Other restructuring costs

Salaries, wages and employee benefits

—

417

—

417

215

Fixed asset impairments

817

—

—

817

—

Related tax benefit

(230
)
(967
)
(139
)
(1,197
)
(486
)
Adjusted net income

$
25,590

$
24,922

$
16,687

$
50,512

$
32,481

Average total assets

$
7,653,541

$
7,663,899

$
5,361,074

$
7,658,691

$
5,325,723

Reported: Return on average assets(1)

1.30
%
1.16
%
1.23
%
1.23
%
1.20
%
Adjusted: Return on average assets(1)

1.34
%
1.32
%
1.25
%
1.33
%
1.23
%
(1)Annualized measure
Reconciliation of Non-GAAP Financial Measures — Adjusted Net Interest Margin

Three Months Ended

Six Months Ended

June 30,
2018

March 31,
2018

June 30,
2017

June 30,
2018

June 30,
2017

Reported: Net interest income

$
60,372

$
59,757

$
42,366

$
120,129

$
84,379

Tax-equivalency adjustment

742

764

762

1,506

1,475

Less: Purchase accounting amortization

(3,015
)
(3,410
)
(1,630
)
(6,425
)
(3,481
)
Adjusted: Net interest income

$
58,099

$
57,111

$
41,498

$
115,210

$
82,373

Average interest-earning assets

$
6,984,486

$
6,976,383

$
4,990,573

$
6,980,457

$
4,947,346

Reported: Net interest margin(1)

3.51
%
3.52
%
3.47
%
3.51
%
3.50
%
Adjusted: Net Interest margin(1)

3.34
%
3.32
%
3.34
%
3.33
%
3.36
%
(1)Annualized measure
Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio

Three Months Ended

Six Months Ended

June 30,
2018

March 31,
2018

June 30,
2017

June 30,
2018

June 30,
2017

Reported: Net Interest income

$
60,372

$
59,757

$
42,366

$
120,129

$
84,379

Tax-equivalency adjustment

742

764

762

1,506

1,475

Tax equivalent interest income

$
61,114

$
60,521

$
43,128

$
121,635

$
85,854

Reported: Non-interest income

22,802

22,486

20,062

45,288

40,076

Less: Security gain (loss), net

160

—

(4
)
160

853

Adjusted: Non-interest income

$
22,642

$
22,486

$
20,066

$
45,128

$
39,223

Reported: Non-interest expense

47,305

51,040

36,768

98,345

74,387

Less:

Amortization

(1,490
)
(1,515
)
(1,182
)
(3,005
)
(2,389
)
Non-operating adjustments:

Salaries, wages and employee benefits

—

(1,650
)
—

(1,650
)
—

Data processing

(34
)
(372
)
(81
)
(406
)
(86
)
Other

(924
)
(1,505
)
(266
)
(2,429
)
(1,232
)
Adjusted: Non-interest expense

$
44,857

$
45,998

$
35,239

$
90,855

$
70,680

Reported: Efficiency ratio

54.70
%
59.66
%
56.31
%
57.17
%
57.56
%
Adjusted: Efficiency ratio

53.56
%
55.41
%
55.76
%
54.48
%
56.51
%
Reconciliation of Non-GAAP Financial Measures — Tangible common equity to tangible assets, Tangible book value per share, Return on average tangible common equity

As of

June 30,
2018

March 31,
2018

June 30,
2017

Total assets

$
7,775,544

$
7,778,746

$
5,531,367

Less:

Goodwill and other intangible assets, net

(303,407
)
(304,897
)
(118,887
)
Tax effect of goodwill and other intangible assets, net

9,288

9,675

6,435

Tangible assets

$
7,481,425

$
7,483,524

$
5,418,915

Total stockholders’ equity

957,182

942,146

613,115

Less:

Goodwill and other intangible assets, net

(303,407
)
(304,897
)
(118,887
)
Tax effect of goodwill and other intangible assets, net

9,288

9,675

6,435

Tangible stockholders’ equity

$
663,063

$
646,924

$
500,663

Tangible common equity to tangible assets(1)

8.86
%
8.64
%
9.24
%
Tangible book value per share

$
13.40

$
13.08

$
12.92

Three Months Ended

June 30,
2018

March 31,
2018

June 30,
2017

Average stockholders’ common equity

$
944,131

$
933,762

$
604,888

Less: Average goodwill and intangibles, net

(304,379
)
(306,968
)
(119,644
)
Average tangible stockholders’ common equity

$
639,752

$
626,794

$
485,244

Reported: Return on average tangible common equity(2)

15.59
%
14.18
%
13.62
%
Adjusted: Return on average tangible common equity(2),(3)

16.04
%
16.13
%
13.79
%
Return on average common equity(2)

10.56
%
9.52
%
10.93
%

Six Months Ended

June 30,
2018

June 30,
2017

Average stockholders’ common equity

$
938,975

$
600,176

Less: Average goodwill and intangibles, net

(305,666
)
(120,249
)
Average tangible stockholders’ common equity

$
633,309

$
479,927

Reported: Return on average tangible common equity(2)

14.90
%
13.30
%
Adjusted: Return on average tangible common equity(2),(3)

16.08
%
13.65
%
Return on average common equity(2)

10.05
%
10.63
%
(1)Tax-effected measure
(2)Annualized measure
(3)Calculated using adjusted net income
FORWARD-LOOKING STATEMENTS

Statements made in this report, 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 ~~First Busey.~~the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of ~~First Busey’s~~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, national and international ~~economy;~~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 ~~First Busey’s~~the Company’s general business; (iii) changes in interest rates and prepayment rates of ~~First Busey’s~~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 ~~the~~any acquisition and the possibility that ~~the~~ transaction costs may be greater than anticipated; (ix) unexpected outcomes of existing or new litigation involving ~~First Busey;~~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 ~~First Busey~~the Company and its business, including additional factors that could materially affect its financial results, is included in ~~First Busey’s~~the Company’s filings with the ~~SEC.~~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, ~~estimates~~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 Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. 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 Available for Sale Investment Securities.Securities are classified as held to maturity when First Busey has the ability and management has the intent to hold those securities to maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts. First Busey had $282.0 million of securities classified as held to maturity at September 30, 2017. First Busey had no securities classified as trading at September 30, 2017. Securities are classified as available for sale when First Busey ~~may decide to sell those~~determines it is possible the securities could be sold in the future due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. ~~They~~Securities classified as available for sale are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive ~~income. As of September 30, 2017, First Busey had $708.2 million of~~income (loss). For securities classified as available for ~~sale.~~
62

~~For equity securities, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date. For all other securities, we obtain~~sale, fair value measurements from an independent pricing ~~service. The fair value measurements consider~~service 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.   ~~Due to the limited nature of the market for certain securities, the fair value and potential sale proceeds could be materially different in the event of a sale.~~

Realized securities gains or losses are reported ~~in security gains (losses), net~~ in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of securities below their amortized cost are evaluated to determine whether they are temporary or OTTI. If the Company (a) has the intent to sell a debt security or (b) will more-likely-than-not be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire ~~unrealized loss~~decline in ~~earnings~~fair value as an OTTI loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The ~~impairment~~decline in fair value is separated into the amount of ~~the total~~ impairment related to the credit loss and the amount of ~~total~~ impairment related to all other factors. The amount of the ~~total OTTI~~impairment related to ~~the~~ credit loss is recognized in earnings, and the amount of impairment related to all other factors is recognized in other comprehensive ~~income.~~income (loss).
The Company also evaluates whether the decline in fair value of an equity security is temporary or OTTI. In determining whether an unrealized loss on an equity security is temporary or OTTI, management considers various factors including the magnitude and duration of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the equity security to forecasted recovery.

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. ~~Analysis is conducted under~~Fair values are determined based on the ~~standard~~definition of ~~fair value which is~~“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 ~~the remainder of~~other assets acquired or liabilities assumed. At the date of acquisition, when ~~the~~ 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. ~~The~~At each future reporting date, the Company ~~must estimate~~re-estimates the expected cash flows ~~at each future reporting date.~~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.

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 ~~financial statements~~unaudited 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. This provision~~expense and acts to replenish the allowance for loan losses ~~and~~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.
63

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 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 present value of expected future cash flows discounted at the loan’s effective interest rate. If the loan is collateral dependent, the fair value of the collateral is used to measure the amount of impairment. The amount of impairment and any subsequent changes are recorded through a charge to the provision for loan losses. For collateral dependent loans, First Busey has determined the required allowance on these loans based upon the estimated fair value, net of selling costs, of the applicable collateral. The required allowance or actual losses on these impaired loans could differ significantly if the ultimate fair value of the collateral is significantly different from the fair value estimates used by First Busey in estimating such potential losses.
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 to attempt to structure the Consolidated Balance Sheets to ensure stable net interest income despite potential changes in interest ~~rates with all other variables constant.~~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~~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~~balance sheet is projected over a year-one time horizon and a year-two time horizon, and net interest income is calculated under current market rates and then assuming permanent instantaneous shifts of +/-100, ~~+/-200, +/-300~~+200, +300 and ~~+/-400~~+400 basis points. Management measures such changes assuming immediate and sustained shifts in the federal funds rate and other market rate indices and the 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. The model assumes assets and liabilities remain constant at the measurement date balances. The model uses repricing frequency on all variable-rate assets and liabilities. Prepayment speeds on loans have been adjusted to incorporate expected prepayment speeds in both a declining and rising rate environment.

As of September 30, 2017, due to the current interest rate environment, a downward adjustment below -100 basis points in federal fund rates was not meaningful. As of December 31, 2016, a downward adjustment in federal fund rates was not meaningful. Utilizing this measurement concept, the interest rate risk of First Busey due to an immediate and sustained change 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

-400

-300

-200

-100

+100

+200

+300

+400

September 30, 2017

NM

NM

NM

1.46
%
0.37
%
0.15
%
(0.23
)%
(1.14
)%

December 31, 2016

NM

NM

NM

NM

(0.29
)%
(1.20
)%
(2.42
)%
(3.86
)%

Year-One: Basis Point Changes

-100

+100

+200

+300

+400

June 30, 2018

(3.15
)%
(0.03
)%
(0.22
)%
(0.42
)%
(0.48
)%

December 31, 2017

0.34
%
(0.72
)%
(1.61
)%
(2.56
)%
(3.52
)%

Year-Two: Basis Point Changes

-100

+100

+200

+300

+400

June 30, 2018

(4.67
)%
0.74
%
1.33
%
1.78
%
2.12
%

December 31, 2017

(2.65
)%
1.53
%
2.91
%
4.14
%
5.22
%

64

Year-Two: Basis Point Changes

-400

-300

-200

-100

+100

+200

+300

+400

September 30, 2017

NM

NM

NM

(0.13
)%
3.01
%
4.68
%
5.86
%
6.16
%

December 31, 2016

NM

NM

NM

NM

2.17
%
3.12
%
3.63
%
3.56
%
~~The~~Interest rate risk is monitored and managed within approved policy limits. The calculation of potential effects of hypothetical interest rate changes ~~was~~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. The above results do not take into account any management action to mitigate potential risk.
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 ~~Securities~~ Exchange Act ~~of 1934, as amended (the “Exchange Act”))~~ was carried out as of ~~September~~June 30, ~~2017,~~2018, 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~~June 30, ~~2017,~~2018, 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 is (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~~June 30, ~~2017,~~2018, 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~~The Company has made the following addition to the risk factors disclosed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017:
Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.
In recent months, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory tariffs against products from the United States, including agricultural products. Additional tariffs and retaliatory tariffs may be imposed in the future by the United States and these and other countries. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.

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 that was originally approved in 2008. There were no purchases made by or on behalf of First Busey of shares of its common stock during the quarter ended ~~September~~June 30, ~~2017.~~2018. At ~~September~~June 30, ~~2017,~~2018, the Company had 333,334 shares that may still be purchased under the plan.
65

ITEM 3.DEFAULTS UPON SENIOR SECURITES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.OTHER INFORMATION

~~(a)~~None.
~~(b)~~                                 ~~None.~~
ITEM 6. EXHIBITS~~EXHIBITS~~

*10.1
Form of Director Deferred Stock Unit Award Agreement under the First Busey Corporation 2010 Equity Incentive Plan, as amended.
*10.2
Form of Director Deferred Stock Unit Award Agreement under the First Community Financial Partners, Inc. 2016 Equity Incentive Plan.
10.3
Amendment No. 3 to Credit Agreement between First Busey Corporation and U.S. Bank National Association dated as of April 30, 2018 (filed as Exhibit 10.1 to Form 8-K dated April 30, 2018, filed with the Commission on May 2, 2018 (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

Interactive Data File

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016;~~2017; (ii) Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016;~~2017; (iii) Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016;~~2017; (iv) Consolidated Statements of Stockholders’ Equity for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016;~~2017; (v) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016;~~2017; and (vi) Notes to Unaudited Consolidated Financial Statements.

*Filed herewith

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

~~Van A. Dukeman~~
President and Chief Executive Officer
(Principal ~~executive officer)~~Executive Officer)

By:
/s/ ROBIN N. ELLIOTT

Robin N. Elliott

~~Robin N. Elliott~~
Chief Financial Officer
(Principal ~~financial officer)~~Financial Officer)

By:
/s/ ~~SUSAN K. MILLER~~JENNIFER L. SIMONS

Jennifer L. Simons

~~Susan K. Miller~~
~~Deputy Chief Financial Officer and~~ Chief Accounting Officer
(Principal ~~accounting officer)~~Accounting Officer)

Date: ~~November 8, 2017~~August 7, 2018

6765

Part I	FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS	3
	CONSOLIDATED BALANCE SHEETS	4
	CONSOLIDATED STATEMENTS OF INCOME	5
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	7
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	8
	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	45
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	62
Item 4.	CONTROLS AND PROCEDURES	63

Part II	OTHER INFORMATION

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(dollars in thousands)

Net income	$	18,784		$	15,422		$	50,433		$	38,239
Other comprehensive income (loss), before tax:
Securities available for sale:
Unrealized net gains (losses) on securities:
Unrealized net holding gains (losses) arising during period	$	563		$	(2,017	)	$	1,864		$	8,582
Reclassification adjustment for (gains) included in net income	(290		)	(11		)	(1,143		)	(1,230		)
Other comprehensive income (loss), before tax	$	273		$	(2,028	)	$	721		$	7,352
Income tax expense (benefit) related to items of other comprehensive income	119			(815		)	298			2,934
Other comprehensive income (loss), net of tax	$	154		$	(1,213	)	$	423		$	4,418
Comprehensive income	$	18,938		$	14,209		$	50,856		$	42,657

	As Recorded by Pulaski		Fair Value Adjustments			As Recorded by First Busey
Assets acquired:
Cash and cash equivalents	$	25,580	$	—		$	25,580
Securities	47,895		105		(a)	48,000
Loans held for sale	184,856		—			184,856
Portfolio loans	1,243,913		(14,452		)(b)	1,229,461
Premises and equipment	17,236		(667		)(c)	16,569
OREO	5,022		(2,534		)(d)	2,488
Goodwill	3,939		(3,939		)(e)	—
Other intangible assets	—		15,468		(f)	15,468
Other assets	70,365		(122		)(g)	70,243
Total assets acquired	1,598,806		(6,141		)	1,592,665

Liabilities assumed:
Deposits	1,226,906		1,102		(h)	1,228,008
Other borrowings	205,840		906		(i)	206,746
Trust preferred securities	19,589		(3,805		)(j)	15,784
Other liabilities	24,594		(612		)(k)	23,982
Total liabilities assumed	1,476,929		(2,409		)	1,474,520

Net assets acquired	$	121,877	$	(3,732	)	$	118,145

Consideration paid:
Cash						$	5
Common stock						192,990
Fair value of stock options assumed						2,454
Total consideration paid						195,449

Goodwill						$	77,304

	Pro Forma
	Nine Months Ended
	September 30, 2016
Total revenues (net interest income plus non-interest income)	$	184,677
Net income	36,408
Diluted earnings per common share	0.94

	As Recorded by First Community		Fair Value Adjustments			As Recorded by First Busey
Assets acquired:
Cash and cash equivalents	$	60,686	$	—		$	60,686
Securities	166,046		(203		)(a)	165,843
Loans held for sale	905		—			905
Portfolio loans, net	1,103,987		(7,404		)(b)	1,096,583
Premises and equipment	21,682		(3,588		)(c)	18,094
OREO	915		(193		)(d)	722
Other intangible assets	701		13,278		(e)	13,979
Other assets	41,644		111		(f)	41,755
Total assets acquired	1,396,566		2,001			1,398,567

Liabilities assumed:
Deposits	1,134,584		(229		)(g)	1,134,355
Other borrowings	125,471		280		(h)	125,751
Other liabilities	11,503		359		(i)	11,862
Total liabilities assumed	1,271,558		410			1,271,968

Net assets acquired	$	125,008	$	1,591		$	126,599

Consideration paid:
Cash						$	24,557
Cash payout of options and restricted stock units						6,182
Common stock						211,120
Fair value of stock options assumed						722
Total consideration paid						242,581

Goodwill						$	115,982

	Pro Forma				Pro Forma
	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Total revenues (net interest income plus non-interest income)	$	75,952	$	77,624	$	227,858	$	220,558
Net income	14,854		19,360		54,478		46,836
Diluted earnings per common share	0.32		0.42		1.19		1.02

	Pro Forma
	Three Months Ended		Six Months Ended
	June 30, 2017		June 30, 2017
Total revenues (net interest income plus non-interest income)	$	78,122	$	152,227
Net income	21,462		40,149
Diluted earnings per common share	0.47		0.87

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2018:
Available for sale
U.S. Treasury securities(1)	$	61,035	$	—	$	(1,077	)	$	59,958
Obligations of U.S. government corporations and agencies	96,454		4		(1,961		)	94,497
Obligations of states and political subdivisions	249,092		441		(2,879		)	246,654
Residential mortgage-backed securities	363,309		233		(9,487		)	354,055
Corporate debt securities	116,645		45		(516		)	116,174
Total	$	886,535	$	723	$	(15,920	)	$	871,338

Held to maturity
Obligations of states and political subdivisions	$	38,870	$	60	$	(164	)	$	38,766
Commercial mortgage-backed securities	60,282		—		(1,562		)	58,720
Residential mortgage-backed securities	408,628		74		(9,473		)	399,229
Total	$	507,780	$	134	$	(11,199	)	$	496,715

	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016			2018		2017			2018		2017
Gross security gains	$	290	$	136		$	1,259		$	1,381		$	—	$	1		$	—	$	969
Gross security (losses)	—		(125		)	(116		)	(151		)	—		(5		)	—		(116		)
Net security gains	$	290	$	11		$	1,143		$	1,230
Security (losses) gains, net(1)												$	—	$	(4	)	$	—	$	853

	Continuous unrealized losses existing for less than 12 months, gross					Continuous unrealized losses existing for greater than 12 months, gross					Total, gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2018:
Available for sale
U.S. Treasury securities	$	59,885	$	(1,077	)	$	—	$	—		$	59,885	$	(1,077	)
Obligations of U.S. government corporations and agencies	69,054		(1,284		)	24,593		(677		)	93,647		(1,961		)
Obligations of states and political subdivisions	195,490		(2,668		)	14,978		(211		)	210,468		(2,879		)
Residential mortgage-backed securities	246,040		(5,288		)	84,148		(4,199		)	330,188		(9,487		)
Corporate debt securities	84,425		(516		)	—		—			84,425		(516		)
Total temporarily impaired securities	$	654,894	$	(10,833	)	$	123,719	$	(5,087	)	$	778,613	$	(15,920	)

Held to maturity
Obligations of states and political subdivisions	$	27,304	$	(164	)	$	—	$	—		$	27,304	$	(164	)
Commercial mortgage-backed securities	56,453		(1,398		)	2,267		(164		)	58,720		(1,562		)
Residential mortgage-backed securities	359,073		(9,473		)	—		—			359,073		(9,473		)
Total temporarily impaired securities	$	442,830	$	(11,035	)	$	2,267	$	(164	)	$	445,097	$	(11,199	)

						Average Exposure							Average Exposure
	Number of	Amortized		Fair		Per Issuer		Number of	Amortized		Fair		Per Issuer
U.S. State	Issuers	Cost		Value		(Fair Value)		Issuers	Cost		Value		(Fair Value)
Illinois	108	$	94,616	$	95,355	$	883	89	$	88,096	$	87,384	$	982
Wisconsin								29	19,713		19,511		673
Texas								45	25,639		25,287		562
Michigan	35	20,543		20,841		595		27	14,243		14,316		530
Wisconsin	35	24,000		24,071		688
Ohio								20	15,068		14,969		748
Pennsylvania	20	13,170		13,196		660		18	10,995		10,970		609
Texas	31	18,946		19,040		614
Ohio	10	10,692		10,712		1,071
New Jersey	13	6,435		6,472		498		14	6,319		6,277		450
Missouri								9	5,582		5,533		615
Other	56	34,572		34,684		619		94	55,629		54,924		584
Total general obligations bonds	308	$	222,974	$	224,371	$	728	345	$	241,284	$	239,171	$	693

	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Commercial	$	1,319,908	$	959,888	$	1,446,061	$	1,414,631
Commercial real estate	2,215,299		1,654,164		2,355,225		2,354,684
Real estate construction	247,256		182,078		274,967		261,506
Retail real estate	1,288,852		1,069,060		1,449,476		1,460,801
Retail other	14,549		13,710		29,558		27,878
Portfolio loans	$	5,085,864	$	3,878,900	$	5,555,287	$	5,519,500

Less allowance for loan losses	51,035		47,795		53,305		53,582
Portfolio loans, net	$	5,034,829	$	3,831,105	$	5,501,982	$	5,465,918

											June 30, 2018
	September 30, 2017										Pass		Watch		Special Mention		Substandard		Doubtful
	Pass		Watch		Special Mention		Substandard		Doubtful
Commercial	$	1,107,709	$	134,287	$	38,283	$	35,885	$	7,215	$	1,192,414	$	137,423	$	43,455	$	65,337	$	9,135
Commercial real estate	2,050,678		108,687		23,040		31,374		13,313		2,127,522		147,242		36,408		46,430		8,597
Real estate construction	198,095		41,056		5,750		3,119		610		252,778		15,644		3,846		3,257		23
Retail real estate	1,264,840		6,414		6,184		3,001		6,247		1,417,838		8,401		7,933		5,316		7,385
Retail other	15,036		—		—		—		45		29,787		—		7		27		75
Total	$	4,636,358	$	290,444	$	73,257	$	73,379	$	27,430	$	5,020,339	$	308,710	$	91,649	$	120,367	$	25,215

	September 30, 2017
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+ Days		Loans
Commercial	$	1,699	$	369	$	—	$	7,215
Commercial real estate	3,139		802		—		13,313
Real estate construction	—		—		—		610
Retail real estate	3,674		1,838		439		6,247
Retail other	31		4		—		45
Total	$	8,543	$	3,013	$	439	$	27,430

	September 30, 2017		December 31, 2016
Restructured loans:
In compliance with modified terms	$	11,813	$	10,593
30 – 89 days past due	125		59
Included in non-performing loans	2,890		1,285
Total	$	14,828	$	11,937

													June 30, 2018
	September 30, 2017												Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial	$	10,995	$	5,461	$	3,558	$	9,019	$	1,477	$	10,153	$	11,787	$	6,932	$	2,343	$	9,275	$	1,272	$	9,386
Commercial real estate	25,055		17,797		2,038		19,835		818		14,132		16,614		12,029		3,494		15,523		1,246		17,423
Real estate construction	1,048		1,024		—		1,024		—		664		440		415		—		415		—		836
Retail real estate	17,206		14,484		25		14,509		25		12,277		17,029		14,171		25		14,196		25		14,244
Retail other	66		45		—		45		—		75		162		78		—		78		—		46
Total	$	54,370	$	38,811	$	5,621	$	44,432	$	2,320	$	37,301	$	46,032	$	33,625	$	5,862	$	39,487	$	2,543	$	41,935

	As of and for the Three Months Ended September 30, 2017																	As of and for the Three Months Ended June 30, 2018
	Commercial			Commercial Real Estate			Real Estate Construction		Retail Real Estate			Retail Other			Total			Commercial			Commercial Real Estate			Real Estate Construction		Retail Real Estate			Retail Other			Total
Beginning balance	$	12,928		$	20,124		$	2,161	$	13,681		$	307		$	49,201		$	17,577		$	22,090		$	2,799	$	9,836		$	347		$	52,649
Provision for loan losses	336			418			64		654			22			1,494
Provision for loan loss																		1,720			909			35		(548		)	142			2,258
Charged-off	(60		)	(69		)	—		(482		)	(74		)	(685		)	(1,916		)	(110		)	—		(412		)	(115		)	(2,553		)
Recoveries	318			403			36		223			45			1,025			205			158			81		417			90			951
Ending balance	$	13,522		$	20,876		$	2,261	$	14,076		$	300		$	51,035
Ending Balance																		$	17,586		$	23,047		$	2,915	$	9,293		$	464		$	53,305

	As of and for the Six Months Ended June 30, 2018
	Commercial			Commercial Real Estate			Real Estate Construction			Retail Real Estate			Retail Other			Total
Beginning balance	$	14,779		$	21,813		$	2,861		$	13,783		$	346		$	53,582
Provision for loan loss	4,723			2,445			37			(4,210		)	271			3,266
Charged-off	(2,697		)	(1,425		)	(97		)	(942		)	(322		)	(5,483		)
Recoveries	781			214			114			662			169			1,940
Ending Balance	$	17,586		$	23,047		$	2,915		$	9,293		$	464		$	53,305

	As of and for the Nine Months Ended September 30, 2017																		As of and for the Three Months Ended June 30, 2017
	Commercial			Commercial Real Estate			Real Estate Construction			Retail Real Estate			Retail Other			Total			Commercial			Commercial Real Estate			Real Estate Construction			Retail Real Estate			Retail Other			Total
Beginning balance	$	13,303		$	20,623		$	1,870		$	11,648		$	351		$	47,795		$	13,260		$	19,848		$	2,021		$	12,978		$	335		$	48,442
Provision for loan losses	(1,885		)	1,477			1			2,894			7			2,494			(1,572		)	1,279			(197		)	1,020			(30		)	500
Charged-off	(241		)	(1,758		)	(48		)	(1,574		)	(257		)	(3,878		)	(78		)	(1,101		)	(48		)	(641		)	(93		)	(1,961		)
Recoveries	2,345			534			438			1,108			199			4,624			1,318			98			385			324			95			2,220
Ending balance	$	13,522		$	20,876		$	2,261		$	14,076		$	300		$	51,035		$	12,928		$	20,124		$	2,161		$	13,681		$	307		$	49,201

	As of September 30, 2017
	Commercial		Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Total
Amount allocated to:
Loans individually evaluated for impairment	$	1,477	$	818	$	—	$	25	$	—	$	2,320
Loans collectively evaluated for impairment	12,045		20,058		2,261		14,051		300		48,715
Ending balance	$	13,522	$	20,876	$	2,261	$	14,076	$	300	$	51,035

Loans:
Loans individually evaluated for impairment	$	8,557	$	10,991	$	443	$	12,139	$	45	$	32,175
Loans collectively evaluated for impairment	1,310,889		2,195,464		246,232		1,274,343		14,504		5,041,432
PCI loans evaluated for impairment	462		8,844		581		2,370		—		12,257
Ending balance	$	1,319,908	$	2,215,299	$	247,256	$	1,288,852	$	14,549	$	5,085,864

	As of December 31, 2016
	Commercial		Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Total
Amount allocated to:
Loans individually evaluated for impairment	$	1,535	$	1,778	$	11	$	140	$	3	$	3,467
Loans collectively evaluated for impairment	11,768		18,845		1,859		11,508		348		44,328
Ending balance	$	13,303	$	20,623	$	1,870	$	11,648	$	351	$	47,795

Loans:
Loans individually evaluated for impairment	$	11,834	$	11,147	$	494	$	11,644	$	56	$	35,175
Loans collectively evaluated for impairment	947,993		1,642,010		181,584		1,056,942		13,654		3,842,183
PCI loans evaluated for Impairment	61		1,007		—		474		—		1,542
Ending balance	$	959,888	$	1,654,164	$	182,078	$	1,069,060	$	13,710	$	3,878,900

	As of June 30, 2018
	Commercial		Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Total
Amount allocated to:
Loans individually evaluated for impairment	$	1,272	$	1,246	$	—	$	25	$	—	$	2,543
Loans collectively evaluated for impairment	16,314		21,801		2,915		9,268		464		50,762
Ending balance	$	17,586	$	23,047	$	2,915	$	9,293	$	464	$	53,305

Loans:
Loans individually evaluated for impairment	$	8,846	$	13,173	$	415	$	12,926	$	78	$	35,438
Loans collectively evaluated for impairment	1,436,786		2,339,702		274,552		1,435,280		29,480		5,515,800
PCI loans evaluated for impairment	429		2,350		—		1,270		—		4,049
Ending balance	$	1,446,061	$	2,355,225	$	274,967	$	1,449,476	$	29,558	$	5,555,287

	As of December 31, 2017
	Commercial		Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Total
Amount allocated to:
Loans individually evaluated for impairment	$	138	$	704	$	—	$	25	$	—	$	867
Loans collectively evaluated for impairment	14,641		21,109		2,861		13,758		346		52,715
Ending balance	$	14,779	$	21,813	$	2,861	$	13,783	$	346	$	53,582

Loans:
Loans individually evaluated for impairment	$	6,572	$	11,491	$	435	$	12,673	$	20	$	31,191
Loans collectively evaluated for impairment	1,407,248		2,336,248		260,490		1,445,819		27,858		5,477,663
PCI loans evaluated for impairment	811		6,945		581		2,309		—		10,646
Ending balance	$	1,414,631	$	2,354,684	$	261,506	$	1,460,801	$	27,878	$	5,519,500

	Nine Months Ended September 30, 2017			Year Ended December 31, 2016			Six Months Ended June 30, 2018			Year Ended December 31, 2017
Beginning balance	$	2,518		$	783		$	1,283		$	2,518
Additions, transfers from loans	477			2,775			3,125			1,417
Additions, fair value from Pulaski acquisition	—			2,488
Additions, fair value from First Community acquisition	722			—			—			722
Additions, fair value from Mid Illinois acquisition							—			60
Proceeds from sales of OREO	(4,069		)	(4,498		)	(722		)	(5,024		)
Gain on sales of OREO	1,566			999			26			1,632
Valuation allowance for OREO	(42		)	(29		)	(18		)	(42		)
Ending balance	$	1,172		$	2,518		$	3,694		$	1,283

October 1, 2017 — September 30, 2018	$	641,038
October 1, 2018 — September 30, 2019	246,685
October 1, 2019 — September 30, 2020	48,839
October 1, 2020 — September 30, 2021	28,023
October 1, 2021 — September 30, 2022	37,391
Thereafter	217
	$	1,002,193

July 1, 2018 — June 30, 2019	$	1,062,338
July 1, 2019 — June 30, 2020	238,719
July 1, 2020 — June 30, 2021	63,516
July 1, 2021 — June 30, 2022	65,582
July 1, 2022 — June 30, 2023	44,289
Thereafter	62
	$	1,474,506

	September 30, 2017		December 31, 2016

Notes payable, FHLB, ranging in original maturity from nineteen months to ten years, collateralized by FHLB deposits, residential and commercial real estate loans and FHLB stock.	$	50,000	$	80,000

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at beginning of year	209,382		$	15.13		213,428		$	16.97
Converted options from First Community	121,360		21.41
Granted	—		—
Exercised	(20,924	)	12.36			(70,817	)	14.20
Forfeited	(3,080	)	23.53			(12,627	)	21.66
Expired	(10,850	)	58.05			(2,565	)	16.41
Outstanding at end of period	295,888		$	16.24	3.53	127,419		$	18.06	4.49
Exercisable at end of period	217,348		$	13.61	1.51	88,750		$	15.68	2.80

			Weighted-		Director		Weighted-				Weighted-		Director		Weighted-
	Restricted		Average		Deferred		Average		Restricted		Average		Deferred		Average
	Stock		Grant Date		Stock		Grant Date		Stock		Grant Date		Stock		Grant Date
	Units		Fair Value		Units		Fair Value		Units		Fair Value		Units		Fair Value
Non-vested at beginning of year	552,610		$	18.45	35,038		$	21.04	587,763		$	22.68	42,411		$	25.47
Granted	143,235		30.34		18,330		29.61		—		—		—		—
Dividend equivalents earned	10,053		29.58		1,715		29.61		7,657		30.76		1,565		30.76
Vested	(116,498	)	14.73		(18,716	)	22.97		(994	)	19.70		(19,686	)	29.69
Forfeited	(9,932	)	17.87		—		—		(1,494	)	26.19		—		—
Non-vested at end of period	579,468		$	22.34	36,367		$	24.77	592,932		$	22.78	24,290		$	22.39
Outstanding at end of period	579,468		$	22.34	113,504		$	20.49	592,932		$	22.78	90,337		$	21.10

	September 30, 2017		December 31, 2016
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,265,398	$	875,077
Standby letters of credit	33,273		20,145