UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


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

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

For the Quarterly Period Ended 6/30/~~2018~~2019


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

¨ ~~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)~~ (217) 365-4544

N/A

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

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

~~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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes xþ 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 ☐	~~Accelerated filer~~ ¨
Non-accelerated filer	o☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company ¨☐
Emerging growth company	o☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended ~~transaction~~transition 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 ☐ No ☑

~~Yes~~ o No xSecurities registered pursuant to Section 12(b) of the Act:


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

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


Class		Outstanding at August 7, ~~2018~~2019
Common Stock, $.001 par value		~~48,777,809~~55,386,636

Table of Contents

FIRST BUSEY CORPORATION

FORM 10-Q

June 30, ~~2018~~2019

Table of Contents


Part I	FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS	3
	CONSOLIDATED BALANCE SHEETS	4
	CONSOLIDATED STATEMENTS OF INCOME	5
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	76
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	87
	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	4539
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	6257
Item 4.	CONTROLS AND PROCEDURES	6358

Part II	OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	6358
Item 1A.	RISK FACTORS	6358
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6359
Item 3.	DEFAULTS UPON SENIOR ~~SECURITES~~SECURITIES	6359
Item 4.	MINE SAFETY DISCLOSURES	6359
Item 5.	OTHER INFORMATION	6359
Item 6.	EXHIBITS	6460
	SIGNATURES	6561

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

~~June 30, 2018 and December 31, 2017~~(Unaudited)


		June 30, 2019		December 31, 2018
		(dollars in thousands)
Assets
Cash and due from banks		$	113,346	$	128,838
Interest-bearing deposits			306,861		111,135
Total cash and cash equivalents			420,207		239,973

Debt securities available for sale			1,848,073		697,685
Debt securities held to maturity (fair value 2019 $15,934; 2018 $603,360)			15,708		608,660
Equity securities			5,362		6,169
Loans held for sale, at fair value			39,607		25,895
Portfolio loans (net of allowance for loan losses 2019 $51,375; 2018 $50,648)			6,480,751		5,517,780
Premises and equipment, net			149,726		117,672
Right of use asset			10,426		—
Goodwill			314,343		267,685
Other intangible assets, net			60,984		32,873
Cash surrender value of bank owned life insurance			173,150		128,491
Other assets			94,330		59,474
Total assets		$	9,612,667	$	7,702,357
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing		$	1,766,681	$	1,464,700
Interest-bearing			6,066,541		4,784,621
Total deposits	��		7,833,222		6,249,321

Securities sold under agreements to repurchase			190,846		185,796
Short-term borrowings			30,761		—
Long-term debt			86,772		50,000
Senior notes, net of unamortized issuance costs			39,607		39,539
Subordinated notes, net of unamortized issuance costs			59,197		59,147
Junior subordinated debt owed to unconsolidated trusts			71,230		71,155
Lease liability			10,531		—
Other liabilities			86,893		52,435
Total liabilities			8,409,059		6,707,393

Outstanding commitments and contingent liabilities (see Note 10)

Stockholders’ Equity
Common stock, $.001 par value, authorized 66,666,667 shares; 55,910,733 shares issued 2019 and 49,185,581 shares issued 2018			56		49
Additional paid-in capital			1,246,160		1,080,084
Accumulated deficit			(44,878)		(72,167)
Accumulated other comprehensive income (loss)			14,627		(6,812)
Total stockholders’ equity before treasury stock			1,215,965		1,001,154

Treasury stock, at cost (2019 524,097 shares; 2018 310,745 shares)			(12,357)		(6,190)
Total stockholders’ equity			1,203,608		994,964
Total liabilities and stockholders’ equity		$	9,612,667	$	7,702,357

Common shares outstanding at period end			55,386,636		48,874,836

~~(Unaudited)~~

June 30, 2018

December 31, 2017

(dollars in thousands)

Assets

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

33,974

94,848

Portfolio loans (net of allowance for loan losses 2018 $53,305; 2017 $53,582)

5,501,982

5,465,918

Premises and equipment, net

119,835

116,913

Goodwill

267,685

269,346

Other intangible assets, net

35,722

38,727

Cash surrender value of bank owned life insurance

127,965

126,737

Deferred tax asset, net

16,665

17,296

Other assets

56,179

55,973

Total assets

$
7,775,544

$
7,860,640

Liabilities and Stockholders’ Equity

Liabilities

Deposits:

Noninterest-bearing

$
1,496,671

$
1,597,421

Interest-bearing

4,667,241

4,528,544

Total deposits

$
6,163,912

$
6,125,965

Securities sold under agreements to repurchase

240,109

304,566

Short-term borrowings

150,000

220,000

Long-term debt

50,000

50,000

Senior notes, net of unamortized issuance costs

39,472

39,404

Subordinated notes, net of unamortized issuance costs

64,653

64,715

Junior subordinated debt owed to unconsolidated trusts

71,081

71,008

Other liabilities

39,135

49,979

Total liabilities

$
6,818,362

$
6,925,637

Commitments and contingencies (See Note 13)

Stockholders’ Equity

Common stock, $.001 par value, authorized 66,666,667 shares; shares issued 2018 and 2017 49,185,581

$
49

$
49

Additional paid-in capital

1,082,323

1,084,889

Accumulated deficit

(104,504
)
(132,122
)
Accumulated other comprehensive loss

(10,865
)
(2,810
)
Total stockholders’ equity before treasury stock

$
967,003

$
950,006

Common stock shares held in treasury at cost, 2018 409,177; 2017 500,638

(9,821
)
(15,003
)
Total stockholders’ equity

$
957,182

$
935,003

Total liabilities and stockholders’ equity

$
7,775,544

$
7,860,640

Common shares outstanding at period end

48,776,404

48,684,943

See accompanying notes to unaudited ~~Consolidated Financial Statements.~~consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

~~For the Six Months Ended June 30, 2018 and 2017~~(Unaudited)

~~(Unaudited)~~


		Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018
	(dollars in thousands, except per share amounts)
Interest income:
Interest and fees on loans	$	78,031	$	62,290	$	149,820	$	123,250
Interest and dividends on investment securities:
Taxable interest income		11,152		6,323		21,336		12,313
Non-taxable interest income		1,200		1,204		2,276		2,464
Other interest income		1,083		508		2,315		931
Total interest income		91,466		70,325		175,747		138,958
Interest expense:
Deposits		14,154		6,904		26,654		12,891
Federal funds purchased and securities sold under agreements to repurchase		627		372		1,210		713
Short-term borrowings		494		457		685		933
Long-term debt		741		213		1,320		377
Senior notes		399		399		799		799
Subordinated notes		731		794		1,462		1,587
Junior subordinated debt owed to unconsolidated trusts		892		814		1,806		1,529
Total interest expense		18,038		9,953		33,936		18,829
Net interest income		73,428		60,372		141,811		120,129
Provision for loan losses		2,517		2,258		4,628		3,266
Net interest income after provision for loan losses		70,911		58,114		137,183		116,863
Non-interest income:
Fees for customer services		9,696		7,290		17,793		14,236
Trust fees		8,318		6,735		16,433		14,249
Commissions and brokers’ fees, net		1,170		883		2,084		1,979
Remittance processing		3,717		3,566		7,497		6,958
Mortgage revenue		2,851		1,573		4,796		3,216
Net (losses) gains on sales of securities		(10)		160		(184)		160
Unrealized (losses) gains recognized on equity securities		(1,016)		—		(800)		—
Other income		3,170		2,595		6,222		4,490
Total non-interest income		27,896		22,802		53,841		45,288
Non-interest expense:
Salaries, wages and employee benefits		34,268		25,472		66,609		54,291
Net occupancy expense of premises		4,511		3,689		8,713		7,510
Furniture and equipment expenses		2,352		1,790		4,447		3,703
Data processing		5,616		4,030		10,017		8,375
Amortization of intangible assets		2,412		1,490		4,506		3,005
Other expense		18,861		10,834		30,891		21,461
Total non-interest expense		68,020		47,305		125,183		98,345
Income before income taxes		30,787		33,611		65,841		63,806
Income taxes		6,702		8,749		16,287		17,027
Net income	$	24,085	$	24,862	$	49,554	$	46,779

Basic earnings per common share	$	0.43	$	0.51	$	0.91	$	0.96
Diluted earnings per common share	$	0.43	$	0.51	$	0.90	$	0.95
Dividends declared per share of common stock	$	0.21	$	0.20	$	0.42	$	0.40

2018

2017

(dollars in thousands, except per share amounts)

Interest income:

Interest and fees on loans

$
123,250

$
81,833

Interest and dividends on investment securities:

Taxable interest income

13,244

7,650

Non-taxable interest income

2,464

1,453

Total interest income

$
138,958

$
90,936

Interest expense:

Deposits

$
12,891

$
4,207

Federal funds purchased and securities sold under agreements to repurchase

713

327

Short-term borrowings

933

74

Long-term debt

377

280

Senior notes

799

162

Subordinated notes

1,587

299

Junior subordinated debt owed to unconsolidated trusts

1,529

1,208

Total interest expense

$
18,829

$
6,557

Net interest income

$
120,129

$
84,379

Provision for loan losses

3,266

1,000

Net interest income after provision for loan losses

$
116,863

$
83,379

Non-interest income:

Trust fees

$
14,249

$
12,017

Commissions and brokers’ fees, net

1,979

1,473

Remittance processing

6,958

5,704

Fees for customer services

14,236

12,081

Mortgage revenue

3,216

4,904

Security gains, net

160

853

Other

4,490

3,044

Total non-interest income

$
45,288

$
40,076

Non-interest expense:

Salaries, wages and employee benefits

$
54,291

$
41,951

Net occupancy expense of premises

7,510

6,311

Furniture and equipment expenses

3,703

3,338

Data processing

8,375

6,235

Amortization of intangible assets

3,005

2,389

Other

21,461

14,163

Total non-interest expense

$
98,345

$
74,387

Income before income taxes

$
63,806

$
49,068

Income taxes

17,027

17,419

Net income

$
46,779

$
31,649

Basic earnings per common share

$
0.96

$
0.83

Diluted earnings per common share

$
0.95

$
0.82

Dividends declared per share of common stock

$
0.40

$
0.36

See accompanying notes to unaudited ~~Consolidated Financial Statements.~~consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

~~For the Three Months Ended June 30, 2018 and 2017~~(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(dollars in thousands)
Net income	$	24,085	$	24,862	$	49,554	$	46,779
Other comprehensive income (loss), before tax:
Debt securities available for sale:
Unrealized net gains/(losses) on securities:
Unrealized net holding gains (losses) arising during period		18,214		(1,666)		25,014		(10,420)
Unrealized gains on debt securities transferred from held to maturity to available for sale		—		—		4,780		—
Reclassification adjustment for losses (gains) included in net income		10		—		193		—
Other comprehensive income (loss), before tax		18,224		(1,666)		29,987		(10,420)
Income tax expense (benefit) related to items of other comprehensive income		5,192		(475)		8,548		(2,970)
Other comprehensive income (loss), net of tax		13,032		(1,191)		21,439		(7,450)
Comprehensive income	$	37,117	$	23,671	$	70,993	$	39,329

~~(Unaudited)~~

2018

2017

(dollars in thousands, except per share amounts)

Interest income:

Interest and fees on loans

$
62,290

$
41,236

Interest and dividends on investment securities:

Taxable interest income

6,831

4,047

Non-taxable interest income

1,204

726

Total interest income

$
70,325

$
46,009

Interest expense:

Deposits

$
6,904

$
2,163

Federal funds purchased and securities sold under agreements to repurchase

372

204

Short-term borrowings

457

27

Long-term debt

213

167

Senior notes

399

162

Subordinated notes

794

299

Junior subordinated debt owed to unconsolidated trusts

814

621

Total interest expense

$
9,953

$
3,643

Net interest income

$
60,372

$
42,366

Provision for loan losses

2,258

500

Net interest income after provision for loan losses

$
58,114

$
41,866

Non-interest income:

Trust fees

$
6,735

$
5,827

Commissions and brokers’ fees, net

883

751

Remittance processing

3,566

2,859

Fees for customer services

7,290

6,095

Mortgage revenue

1,573

2,770

Security gains (losses), net

160

(4
)
Other

2,595

1,764

Total non-interest income

$
22,802

$
20,062

Non-interest expense:

Salaries, wages and employee benefits

$
25,472

$
20,061

Net occupancy expense of premises

3,689

3,126

Furniture and equipment expenses

1,790

1,719

Data processing

4,030

3,306

Amortization of intangible assets

1,490

1,182

Other

10,834

7,374

Total non-interest expense

$
47,305

$
36,768

Income before income taxes

$
33,611

$
25,160

Income taxes

8,749

8,681

Net income

$
24,862

$
16,479

Basic earnings per common share

$
0.51

$
0.43

Diluted earnings per common share

$
0.51

$
0.43

Dividends declared per share of common stock

$
0.20

$
0.18

See accompanying notes to unaudited ~~Consolidated Financial Statements.~~consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

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

~~(Unaudited)~~

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 Six Months Ended June 30, 2018 and 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, 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


								Accumulated
				Additional				Other
		Common		Paid-in		Accumulated		Comprehensive		Treasury
	Shares	Stock		Capital		(Deficit)		Income (loss)		Stock		Total
Balance, March 31, 2019	55,624,627	$	56	$	1,247,340	$	(57,125)	$	1,595	$	(5,725)	$	1,186,141
Net income	—		—		—		24,085		—		—		24,085
Other comprehensive income	—		—		—		—		13,032		—		13,032
Repurchase of stock	(333,334)		—		—		—		—		(8,433)		(8,433)
Issuance of treasury stock for employee stock purchase plan	4,419		—		29		—		—		84		113
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	81,962		—		(2,364)		—		—		174		(2,190)
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	8,962		—		(19)		—		—		1,543		1,524
Cash dividends common stock at $0.21 per share	—		—		—		(11,681)		—		—		(11,681)
Stock dividend equivalents restricted stock units at $0.21 per share	—		—		157		(157)		—		—		—
Stock-based compensation	—		—		1,017		—		—		—		1,017
Balance, June 30, 2019	55,386,636	$	56	$	1,246,160	$	(44,878)	$	14,627	$	(12,357)	$	1,203,608

Balance, December 31, 2018	48,874,836	$	49	$	1,080,084	$	(72,167)	$	(6,812)	$	(6,190)	$	994,964
Net income	—		—		—		49,554		—		—		49,554
Other comprehensive income	—		—		—		—		21,439		—		21,439
Stock issued in acquisition of Banc Ed, net of stock issuance costs	6,725,152		7		166,274		—		—		—		166,281
Repurchase of stock	(333,334)		—		—		—		—		(8,433)		(8,433)
Issuance of treasury stock for employee stock purchase plan	16,150		—		79		—		—		306		385
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	91,032		—		(2,535)		—		—		345		(2,190)
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	12,800		—		(91)		—		—		1,615		1,524
Cash dividends common stock at $0.42 per share	—		—		—		(21,947)		—		—		(21,947)
Stock dividend equivalents restricted stock units at $0.42 per share	—		—		318		(318)		—		—		—
Stock-based compensation	—		—		2,031		—		—		—		2,031
Balance, June 30, 2019	55,386,636	$	56	$	1,246,160	$	(44,878)	$	14,627	$	(12,357)	$	1,203,608

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited)

(dollars in thousands, except per share amounts)


								Accumulated
				Additional				Other
		Common		Paid-in		Accumulated		Comprehensive		Treasury
	Shares	Stock		Capital		(Deficit)		Income (loss)		Stock		Total
Balance, March 31, 2018	48,717,239	$	49	$	1,084,411	$	(119,467)	$	(9,674)	$	(13,173)	$	942,146
Net income	—		—		—		24,862		—		—		24,862
Other comprehensive loss	—		—		—		—		(1,191)		—		(1,191)
Issuance of treasury stock for employee stock purchase plan	3,030		—		(80)		—		—		172		92
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	31,832		—		(1,875)		—		—		1,803		(72)
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	24,303		—		(1,161)		—		—		1,377		216
Cash dividends common stock at $0.20 per share	—		—		—		(9,743)		—		—		(9,743)
Stock dividend equivalents restricted stock units at $0.20 per share	—		—		154		(156)		—		—		(2)
Stock-based compensation	—		—		874		—		—		—		874
Balance, June 30, 2018	48,776,404	$	49	$	1,082,323	$	(104,504)	$	(10,865)	$	(9,821)	$	957,182

Balance, December 31, 2017	48,684,943	$	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 of 2017 reclassification	—		—		—		605		(605)		—		—
Issuance of treasury stock for employee stock purchase plan	11,748		—		(328)		—		—		666		338
Net issuance of treasury stock for restricted/deferred stock unit vesting and related tax	31,832		—		(1,875)		—		—		1,803		(72)
Net issuance of treasury stock for stock options exercised, net of shares redeemed and related tax	47,881		—		(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	48,776,404	$	49	$	1,082,323	$	(104,504)	$	(10,865)	$	(9,821)	$	957,182

See accompanying notes to unaudited ~~Consolidated Financial Statements.~~consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~For the Six Months Ended June 30, 2018 and 2017~~(Unaudited)

~~(Unaudited)~~

2018

2017

(dollars in thousands)

Cash Flows from Operating Activities

Net income

$
46,779

$
31,649

Adjustments to reconcile net income to net cash provided by operating activities:

Stock-based and non-cash compensation

1,722

1,133

Depreciation

4,748

3,862

Amortization of intangible assets

3,005

2,389

Premises and equipment impairment

817

—

Provision for loan losses

3,266

1,000

Provision for deferred income taxes

3,601

2,031

Amortization of security premiums and discounts, net

4,485

2,543

Accretion of premiums and discounts on time deposits and trust preferred securities, net

(49
)
(198
)
Accretion of premiums and discounts on portfolio loans, net

(6,375
)
(3,270
)
Security gains, net

(160
)
(853
)
Change in equity securities, net

(1,071
)
—

Gain on sales of mortgage loans, net of origination costs

(5,095
)
(26,136
)
Mortgage loans originated for sale

(219,252
)
(758,338
)
Proceeds from sales of mortgage loans

285,221

866,635

Net losses (gains) on disposition of premises and equipment

105

(56
)
Increase in cash surrender value of bank owned life insurance

(1,228
)
(888
)
Change in assets and liabilities:

Decrease in other assets

1,393

7,879

(Decrease) increase in other liabilities

(12,981
)
4,839

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

—

127,287

Proceeds from sales of securities classified equity

920

—

Proceeds from maturities of securities classified available for sale

82,817

103,249

Proceeds from maturities of securities classified held to maturity

18,033

2,819

Purchase of securities classified available for sale

(93,591
)
(116,327
)
Purchase of securities classified held to maturity

(85,050
)
(164,803
)
Net (increase) in portfolio loans

(36,080
)
(32,403
)
Proceeds from disposition of premises and equipment

2

611

Proceeds from sale of other real estate owned (“OREO”) properties

722

3,765

Purchases of premises and equipment

(8,594
)
(6,054
)
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)~~


	Six Months Ended June 30,
	2019		2018
	(dollars in thousands)
Cash Flows from Operating Activities
Net income	$	49,554	$	46,779
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,628		3,266
Amortization of intangible assets (excluding Mortgage Servicing Rights ("MSR"))		4,506		3,005
Amortization of mortgage servicing rights		1,222		759
Depreciation and amortization of premises and equipment		5,674		4,748
Net amortization (accretion) of premium (discount) on portfolio loans		(5,729)		(6,375)
Net amortization (accretion) of premium (discount) on investment securities		2,843		4,485
Net amortization (accretion) of premium (discount) on time deposits		(802)		(121)
Net amortization (accretion) of premium (discount) on Federal Home Loan Bank ("FHLB") advances and other borrowings		125		72
Impairment of other real estate owned ("OREO")		18		—
Impairment of fixed assets held for sale		—		817
Impairment of MSR		1,822		—
Change in fair value of loans held for sale, net		(800)		—
Change in fair value of equity securities, net		800		(1,071)
(Gain) loss on sales of securities, net		184		(160)
(Gain) loss on sale of loans, net		(5,615)		(5,095)
(Gain) loss on sale of OREO		(83)		—
(Gain) loss on sale of premises and equipment		116		105
(Gain) loss life insurance proceeds		(1,016)		—
Provision for deferred income taxes		3,816		3,601
Stock-based and non-cash compensation		2,031		1,722
Decrease in deferred compensation		(3,339)		—
Increase in cash surrender value of bank owned life insurance		(1,970)		(1,228)
Mortgage loans originated for sale		(244,781)		(219,252)
Proceeds from sales of mortgage loans		239,252		285,221
Net change in operating assets and liabilities:
(Increase) decrease in other assets		1,176		1,848
(Decrease) in other liabilities		(16,268)		(11,363)
Net cash provided by operating activities	$	37,364	$	111,763

Cash Flows from Investing Activities
Purchases of debt securities held to maturity		—		(85,050)
Purchases of debt securities available for sale		(227,182)		(93,591)
Purchase of FHLB stock		(3,700)		—
Proceeds from sales of equity securities		958		920
Proceeds from sales of debt securities available for sale		227,371		—
Proceeds from paydowns and maturities of debt securities held to maturity		13,922		18,033
Proceeds from paydowns and maturities of debt securities available for sale		146,566		82,817
Proceeds from the redemption of FHLB stock		3,720		2,114
Net cash (received) paid in acquisitions		(49,387)		—
Net change in loans		(89,642)		(36,080)
Cash paid for premiums on bank-owned life insurance		(3)		—
Purchases of premises and equipment		(5,918)		(8,594)
Proceeds from life insurance		1,672		—
Proceeds from disposition of premises and equipment		3		2
Capitalized expenditures on OREO		(2)		—
Proceeds from sale of OREO		1,119		722
Net cash provided by (used in) investing activities	$	19,497	$	(118,707)

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(continued)~~(Continued)

~~For the Six Months Ended June 30, 2018 and 2017~~(Unaudited)


	Six Months Ended June 30,
	2019		2018
	(dollars in thousands)
Cash Flows from Financing Activities
Net change in deposits	$	145,499	$	38,069
Net change in federal funds purchased and securities sold under agreements to repurchase		(45,549)		(64,457)
Proceeds from other borrowings		60,000		—
Repayment of FHLB advances, net		(2,297)		—
Repayment of other borrowings		(3,000)		(70,000)
Cash dividends paid		(21,947)		(19,482)
Purchase of treasury stock		(8,433)		—
Cash paid for withholding taxes on share based payments		(835)		(74)
Proceeds from stock options exercised		169		346
Common stock issuance costs		(234)		—
Net cash provided by (used in) financing activities	$	123,373	$	(115,598)

Net increase in cash and cash equivalents		180,234		(122,542)
Cash and cash equivalents, beginning of period		239,973		353,272

Cash and cash equivalents, ending of period	$	420,207	$	230,730

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash Payments for:
Interest	$	33,122	$	17,212
Income taxes		10,555		4,322

Non-cash Investing and Financing Activities:
OREO acquired in settlement of loans		1,396		3,125
Transfer of debt securities held to maturity to available for sale		573,639		—

~~(Unaudited)~~

2018

2017

(dollars in thousands)

Cash Flows from Financing Activities

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

—

39,351

Net proceeds from issuance of subordinated debt

—

59,022

Cash dividends paid

(19,482
)
(13,764
)
Value of shares surrendered upon vesting to satisfy tax withholding obligations of stock-based compensation

(74
)
(1,259
)
Proceeds from stock options exercised

346

137

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

$
353,272

$
166,706

Cash and cash equivalents, ending of period

$
230,730

$
294,100

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash payments for:

Interest

$
17,212

$
6,162

Income taxes

$
4,322

$
13,116

Non-cash investing and financing activities:

Real estate acquired in settlement of loans

$
3,125

$
258

See accompanying notes to unaudited ~~Consolidated Financial Statements.~~consolidated financial statements.

Table of Contents

FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Significant Accounting Policies

Basis of Financial Statement Presentation

When preparing these unaudited ~~Consolidated Financial Statements~~consolidated financial statements of First Busey Corporation and its subsidiaries (“First Busey,” “Company,” “we,” or “our”), a Nevada corporation, we have assumed that you have read the audited ~~Consolidated Financial Statements~~consolidated financial statements included in our ~~2017~~Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2018 (“2018 Form 10-K”). These interim unaudited ~~Consolidated Financial Statements~~consolidated financial statements serve to update our ~~2017~~2018 Form 10-K and may not include all information and notes necessary to constitute a complete set of ~~Financial Statements.~~financial statements.

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

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

~~We have also considered the impact of~~The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on ~~these unaudited Consolidated Financial Statements.~~Form 10-Q were issued. There were no significant subsequent events for the quarter ended June 30, ~~2018~~2019 through the issuance date of these unaudited ~~Consolidated Financial Statements~~consolidated financial statements that warranted adjustment to or disclosure in the unaudited ~~Consolidated Financial Statements.~~consolidated financial statements.

Use of Estimates

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

disclosures provided. Actual results could differ from those estimates. Material estimates ~~that~~which 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, goodwill, income taxes and the determination of the allowance for loan losses.

~~Recently Issued Accounting Standards~~Leases

~~Accounting Standards Update (“ASU”) 2014-09~~, ~~“Revenue from Contracts with Customers (Topic 606).”~~ ~~ASU 2014-09 outlines~~A determination is made at inception if an arrangement contains 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 requireslease. For arrangements that ~~companies recognize revenue based~~contain a lease, the Company recognizes the lease on the balance sheet as a right of use asset and corresponding lease liability. Lease-related assets, or right of use assets, are recognized on the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of ~~transferred goods or services~~the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as ~~they occur~~incurred.

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

Table of Contents

The Company’s ~~revenue is comprised~~lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of ~~net interest income, which is explicitly excluded from~~a renewal option to be reasonably certain, the ~~scope~~Company will include the extended term in the calculation of the right-of-use asset and lease liability.

Impact of recently adopted accounting standards

On January 1, 2019, the Company adopted ASU ~~2014-09,~~No. 2016-02“Leases (Topic 842) and ~~non-interest income.~~all subsequent ASUs that modified Topic 842. The Company ~~has evaluated its non-interest income and~~made the ~~nature of its contracts with customers and determined that further disaggregation of revenue beyond what is presented~~following elections for all leases 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 recordedconnection with the adoption of this ~~guidance.~~guidance:

●

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

●

The Company did not elect the hindsight practical expedient;

●

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

●

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

●

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

●

The Company did not elect the land easement practical expedient.

~~ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification~~At the date 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~~adoption, the ~~effects of remeasuring deferred tax liabilities and assets originally~~Company 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 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 Consolidated 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. In July 2018, ~~ASU 2018-11, “Leases (Topic 842): Targeted Improvements”~~ was issued to allow companies to choose to recognize the cumulative effect of applying the new standard to leased assets and liabilities as an adjustment to the opening balance of retained earnings rather than recasting prior year results when they adopt the standard. The Company is evaluating the impact this guidance will haveapproximately $8.1 million on its Consolidated ~~Financial Statements and related disclosures. Where the Company is a lessee, the Company expects an increase in assets and liabilities~~Balance Sheets to ~~record~~reflect the right of use asset and ~~the~~associated 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.liability. The Company ~~has developed and is executing~~utilized its incremental borrowing rate, on a ~~project plan to implement this guidance. As part of that project plan,~~collateralized basis, for the ~~Company will evaluate the impact this guidance will have on its Consolidated Financial Statements and related disclosures.~~remaining contractual lease term.

~~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 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~~"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 iswas effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal ~~years, with early~~years. The adoption ~~permitted. The Company does not expect~~of this guidance todid not have a material impact on ~~its Consolidated Financial Statements.~~the Company’s consolidated financial statements.

ASU 2017-12, ~~“Derivatives~~"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~~expands the types of relationships that qualify for hedge accounting. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, requires all items that affect earnings to be presented in the same income statement line as the hedged item, provides for applying hedge accounting to additional hedging strategies, provides for new approaches to measuring the hedged item in fair value hedges of interest rate risk, and eases the requirements for effective testing and hedge documentation. This guidance iswas effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal ~~years, with early adoption permitted. The~~years. During the first quarter of 2019, the Company ~~does not expect~~adopted this guidance, reassessed classification of certain investments and transferred $573.6 million of securities from held to ~~have a material impact on its Consolidated Financial Statements.~~maturity to available for sale.

ASU 2018-07, ~~“Compensation—Stock~~"Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment ~~Accounting”~~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 iswas effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal ~~years, with early~~years. The adoption ~~permitted. The Company does not expect~~of this guidance todid not have a material impact on the Company’s consolidated financial statements.

Table of Contents

Recently issued accounting standards

ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 implements a change from the current impaired loss model to an expected credit loss model over the life of an instrument, including loans and securities held to maturity. The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods with those years. The Company has developed and is executing a project plan to implement this guidance. The project plan includes an assessment of data, development of CECL methodologies, model validation, and parallel runs to assess the impact of CECL calculations on its ~~Consolidated Financial Statements.~~consolidated financial statements and evaluation of related disclosures.

Note 2: ~~Acquisitions~~Acquisition

~~First Community Financial Partners, Inc.~~The Banc Ed Corp.

On ~~July 2, 2017,~~January 31, 2019, the Company completed its acquisition of ~~First Community Financial Partners, Inc.~~The Banc Ed Corp. (“~~First Community”~~Banc Ed”). TheBANK of Edwardsville (“TheBANK”), ~~which was headquartered in Joliet, Illinois and its wholly owned~~Banc Ed’s wholly-owned bank subsidiary, First Community Financial Bank. Founded in 2004, First Community operated nine banking centers in Will, DuPage and Grundy 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 waswill be merged with and into First Busey’s bank subsidiary, Busey ~~Bank.~~Bank, in the fourth quarter of 2019. At ~~that~~the time ~~First Community Financial Bank’s~~of the bank merger, TheBANK’s banking ~~centers became banking centers~~offices will become branches of Busey Bank.

Under the terms of the ~~merger agreement~~Merger Agreement with ~~First Community,~~Banc Ed, at the effective time of the acquisition, each share of ~~First Community~~Banc Ed common stock issued and outstanding was converted into the right to receive ~~0.396~~8.2067 shares of the Company’s common stock, cash in lieu of fractional shares and ~~$1.35~~$111.53 cash consideration per share. The market value of the ~~7.2~~6.7 million shares of First Busey common stock issued at the effective time of the acquisition was approximately ~~$211.1~~$166.5 million based on First Busey’s closing stock price of ~~$29.32~~$24.76 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.January 31, 2019.

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged ~~were~~was recorded at ~~their~~ estimated fair values on the date of acquisition. ~~The total consideration paid, which was used to determine~~Fair values are considered provisional until final fair values are determined or 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 expectedmeasurement period has passed, but no later than one year from the acquisition date. Reviews of third party valuations are still being performed by management. Therefore amounts are subject to change and ~~the greater revenue opportunities~~could change materially from the ~~Company’s broader service capabilities in the Chicagoland area, is not tax deductible, and was assigned to the Banking operating segment.~~provisional amounts disclosed below.

~~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 ~~$0.1~~$4.0 million and $5.0 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 $0.8 million in pre-tax expenses related to the acquisition of First CommunityBanc Ed for the three and six months ended June 30, ~~2017,~~2019, respectively, primarily for professional and legal fees and deconversion expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated ~~Financial Statements.~~Statements of Income.

Table of Contents

The following table presents the estimated fair value ~~estimates~~ of ~~First Community~~Banc Ed’s assets acquired and liabilities assumed as of ~~July 2, 2017~~ January 31, 2019 (dollars in thousands):


	Estimated
	Fair Value
Assets acquired:
Cash and cash equivalents	$	42,013
Securities		692,684
Loans held for sale		2,157
Portfolio loans		873,336
Premises and equipment		31,929
Other intangible assets		32,617
Mortgage servicing rights		6,946
Other assets		57,296
Total assets acquired		1,738,978

Liabilities assumed:
Deposits		1,439,203
Other borrowings		63,439
Other liabilities		25,079
Total liabilities assumed		1,527,721

Net assets acquired	$	211,257

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

Goodwill	$	46,658

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

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~~credit impaired (“PCI”) loans were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the aggregate principal balance outstanding and aggregate fair value of the acquired performing loans ~~including loans held for sale, totaled $1.1 billion.~~were $889.3 and $871.0 million, respectively. The difference between the ~~aggregate principal balance outstanding~~carrying value and aggregate fair value of ~~$14.4~~$17.0 million ~~is expected to~~will 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 ~~$17.9~~$3.9 million and the aggregate fair value of PCI loans totaled ~~$12.5~~$2.3 million. The accretable discount of $0.2 million on PCI loans represents the amount by which ~~became~~the undiscounted expected cash flows on such ~~loans’ new~~loans exceed their carrying value. ~~At June 30, 2018, PCI loans related to this transaction with a carrying value of $3.8 million were outstanding, with~~The amount by which the ~~decrease relating to collections and a loan sale.~~

~~For PCI loans,~~contractual payments exceeds the undiscounted expected cash flows represents the non-accretable difference. The difference between contractually required payments at the acquisition date and the cash flow expected to be collected is referred to as the non-accretable difference. Further, the excess of cash flows expected at acquisition over the fair value is referred to as the accretable yield. ~~The accretable yield, as~~At June 30, 2019, the carrying value of PCI loans acquired from Banc Ed was $1.7 million.

Table of Contents

Since the acquisition date, Banc Ed earned total revenues of ~~$0.6~~$33.0 million ~~on PCI loans was expected to be recognized over~~and net income of $7.1 million, which are included in the ~~estimated four year remaining life~~Company’s unaudited Consolidated Statements of Income for the ~~respective loans in a manner that approximates the level yield method; however, $0.2 million of the accretable yield was accelerated in 2017 as a result of collections of PCI loan balances.~~

six months ended June 30, 2019. The following table provides the unaudited pro forma information for the results of operations for the three and six months ended June 30, ~~2017,~~2019 and 2018, as if the acquisition had occurred January 1, ~~2017.~~2018. The pro forma results combine the historical results of ~~First Community~~Banc Ed into the Company’s unaudited Consolidated Statements of Income, including the impact of purchase accounting adjustments ~~for~~including loan discount accretion, intangible assets amortization, deposit accretion and ~~deposit~~premises accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, ~~2017.~~2018. 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~~ dispositions (~~(dollars in thousands, except per share amount)~~:

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 were subject to proration under the terms of the merger agreement with Mid Illinois and ultimately received a mixture of cash and stock consideration. First Busey operated South Side Bank as a separate bank subsidiary from October 2, 2017 until March 16, 2018, when it was merged with and into Busey Bank. At that time, South Side Bank’s banking centers became banking centers of Busey Bank.

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition. An adjustment to the fair value was recorded in the first quarter of 2018 as additional information became available. Fair values are subject to refinement for up to one year after the closing date of October 1, 2017; however, the Company does not expect any further adjustments will be necessary. As the total consideration paid for Mid Illinois 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 tax deductible, and was assigned to the Banking operating segment.

First Busey incurred $0.2 million and $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 six months ended 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

The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses. Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ~~ASC 310-20, Receivables-Nonrefundable Fees and Other Costs~~~~, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses. PCI loans were accounted for under~~ ~~ASC 310-30,~~ ~~Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality~~. As of the acquisition date, the aggregate principal outstanding was $362.4 million and aggregate fair value 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 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 this transaction with a carrying value of $0.1 million were outstanding, with the 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 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.


		Pro Forma
		Three Months Ended June 30,			Six Months Ended June 30,
		2019		2018		2019	2018
Total revenues (net interest income plus non- interest income)	$	101,324	$	105,517	$	201,976	$	206,635
Net income		26,947		30,578		54,337		56,931
Diluted earnings per common share		0.48		0.55		0.97		1.02

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 sale, which was recorded at the lower of amortized cost or estimated fair value less estimated cost to sell. The Company recognized an impairment charge of $0.8 million related to these properties, resulting in a net amount of bank properties held for sale of $3.7 million at June 30, 2018 which is included in premises and equipment, net.

Note 3: Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019:	Cost		Gains		Losses		Value
Debt securities available for sale
U.S. Treasury securities	$	58,308	$	260	$	(33)	$	58,535
Obligations of U.S. government corporations and agencies		287,444		3,370		(48)		290,766
Obligations of states and political subdivisions		274,301		4,683		(54)		278,930
Commercial mortgage-backed securities		122,510		1,678		(33)		124,155
Residential mortgage-backed securities		951,998		10,394		(1,255)		961,137
Corporate debt securities		133,053		1,514		(17)		134,550
Total	$	1,827,614	$	21,899	$	(1,440)	$	1,848,073

Debt securities held to maturity
Obligations of states and political subdivisions⁽¹⁾	$	15,708	$	226	$	—	$	15,934

(1)	Gross unrealized losses less than one thousand dollars.

Table of Contents


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

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

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~~In adopting ASU 2017-12, the Company reassessed the classification of certain investments during the first quarter of 2019 and transferred $573.6 million of securities ~~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~~from held to maturity to 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 carriedsale. The transfer occurred at fair value ~~with~~and had a related unrealized ~~gains and losses, net~~loss of ~~taxes, reported~~$4.8 million recorded 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 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, 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 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.

The amortized cost and fair value of debt securities, ~~as of June 30, 2018,~~ by contractual maturity or pre-refunded date, are shown below. Mortgages underlying mortgage-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government agencies and corporations (dollars in thousands).


	Debt securities available for sale				Debt securities held to maturity
	Amortized		Fair		Amortized		Fair
June 30, 2019:	Cost		Value		Cost		Value
Due in one year or less	$	220,023	$	220,304	$	2,724	$	2,729
Due after one year through five years		418,649		424,241		11,861		12,035
Due after five years through ten years		263,388		267,989		1,123		1,170
Due after ten years		925,554		935,539		—		—
Total	$	1,827,614	$	1,848,073	$	15,708	$	15,934

Available for sale

Held to maturity

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

Due in one year or less

$
77,340

$
77,103

$
8,505

$
8,484

Due after one year through five years

324,776

320,789

58,742

57,794

Due after five years through ten years

164,557

162,163

30,266

29,571

Due after ten years

319,862

311,283

410,267

400,866

Total

$
886,535

$
871,338

$
507,780

$
496,715

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017

											Three Months Ended June 30,				Six Months Ended June 30,
											2019		2018		2019		2018
Gross security gains	$	—	$	1		$	—	$	969		$	391	$	—	$	391	$	—
Gross security (losses)	—		(5		)	—		(116		)		(401)		—		(584)		—
Security (losses) gains, net(1)	$	—	$	(4	)	$	—	$	853

Net (losses) gains on sales of securities⁽¹⁾											$	(10)	$	—	$	(193)	$	—

~~(1)Security gains, net~~

(1)

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

Table of ~~Income in 2018 relate to the sale of equity securities as noted above.~~Contents

The tax provision for the net realized gains and losses was insignificant for the three months ended June 30, 2017. The tax provision for the net realized gains and losses was $0.3 million for the six months ended June 30, 2017.
~~Investment~~Debt securities with carrying amounts of ~~$593.5~~$755.1 million and ~~$638.2~~$498.3 million on June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

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

For less than

For greater

12 months, gross

than 12 months, gross

Total, gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
June 30, 2019:
Value

Losses

Value

Losses

Value

Losses
Debt securities available for sale

U.S. Treasury securities

$
59,885

$
(1,077
)
$
—

$
—

$
59,885

$
(1,077
)
$
—

$
—

$
24,768

$
(33)

$
24,768

$
(33)
Obligations of U.S. government corporations and agencies

69,054

(1,284
)
24,593

(677
)
93,647

(1,961
)
Obligations of U.S. government corporations and
agencies⁽¹⁾

51

—

22,468

(48)

22,519

(48)
Obligations of states and political subdivisions

195,490

(2,668
)
14,978

(211
)
210,468

(2,879
)

1,394

(8)

24,192

(46)

25,586

(54)
Commercial mortgage-backed securities

—

—

14,746

(33)

14,746

(33)
Residential mortgage-backed securities

246,040

(5,288
)
84,148

(4,199
)
330,188

(9,487
)

13,629

(8)

183,552

(1,247)

197,181

(1,255)
Corporate debt securities

84,425

(516
)
—

—

84,425

(516
)

1,765

(7)

15,049

(10)

16,814

(17)
Total temporarily impaired securities

$
654,894

$
(10,833
)
$
123,719

$
(5,087
)
$
778,613

$
(15,920
)
$
16,839

$
(23)

$
284,775

$
(1,417)

$
301,614

$
(1,440)

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
)

Debt securities held to maturity

Obligations of states and political subdivisions⁽¹⁾
$
—

$
—

$
500

$
—

$
500

$
—
(1) Unrealized losses less than one thousand dollars.

For less than

For greater

12 months, gross

than 12 months, gross

Total, gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
December 31, 2018:
Value

Losses

Value

Losses

Value

Losses
Debt securities available for sale

U.S. Treasury securities
$
995

$
(4)

$
24,343

$
(410)

$
25,338

$
(414)
Obligations of U.S. government corporations and
agencies

749

(3)

50,744

(758)

51,493

(761)
Obligations of states and political subdivisions

49,893

(460)

77,651

(1,111)

127,544

(1,571)
Commercial mortgage-backed securities

—

—

1,942

(61)

1,942

(61)
Residential mortgage-backed securities

48,387

(496)

247,573

(6,647)

295,960

(7,143)
Corporate debt securities

90,713

(268)

15,083

(108)

105,796

(376)
Total temporarily impaired securities
$
190,737

$
(1,231)

$
417,336

$
(9,095)

$
608,073

$
(10,326)

Debt securities held to maturity

Obligations of states and political subdivisions
$
9,531

$
(33)

$
9,538

$
(54)

$
19,069

$
(87)
Commercial mortgage-backed securities

12,067

(212)

45,041

(791)

57,108

(1,003)
Residential mortgage-backed securities

77,071

(974)

245,128

(5,063)

322,199

(6,037)
Total temporarily impaired securities
$
98,669

$
(1,219)

$
299,707

$
(5,908)

$
398,376

$
(7,127)

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~~Debt securities are periodically evaluated for other-than-temporary impairment (“OTTI”). As of June 30, 2019, the Company’s debt security portfolio consisted of 1,273 securities. The total number of debt securities in the investment portfolio in an unrealized loss position as of June 30, ~~2018~~2019 was ~~834,~~126 and represented aan unrealized loss of ~~2.17%~~0.47% of the aggregate ~~carrying value. As of June 30, 2018,~~amortized cost. The unrealized losses relate to changes in market interest rates and market conditions that do not represent credit-related impairments.  Furthermore, the Company does not intend to sell such securities and it is ~~more-likely-than-not~~more likely than not that the Company will recover the amortized cost prior to being required to sell the debt securities. Full collection of the amounts due according to the contractual terms of the debt securities is expected; therefore, the Company does not consider these investments to be OTTI at June 30, ~~2018.~~
The Company had available for sale obligations of state and political subdivisions with a fair value of $246.6 million and $280.2 million as of June 30, 2018 and December 31, 2017, respectively. In addition, the Company had held to maturity obligations of state and political subdivisions with a fair value of $38.8 million and $41.5 million as of June 30, 2018 and December 31, 2017, respectively.
2019. As of June 30, 2018, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $239.2 million of general obligation bonds and $46.2 million of revenue bonds issued by 405 issuers, primarily consisting of states, counties, cities, towns, villages and school districts. The Company held investments in general obligation bonds in 35 states, including eight states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 21 states, including three states where the aggregate fair value exceeded $5.0 million.
As of December 31, 2017, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $271.7 million of general obligation bonds and $50.0 million of revenue bonds issued by 446 issuers, primarily consisting of states, counties, cities, towns, villages and school districts. The Company held investments in general obligation bonds in 36 states (including the District of Columbia), including nine states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 22 states, including 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)~~:
~~June 30, 2018:~~

Average Exposure

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Illinois

89

$
88,096

$
87,384

$
982

Wisconsin

29

19,713

19,511

673

Texas

45

25,639

25,287

562

Michigan

27

14,243

14,316

530

Ohio

20

15,068

14,969

748

Pennsylvania

18

10,995

10,970

609

New Jersey

14

6,319

6,277

450

Missouri

9

5,582

5,533

615

Other

94

55,629

54,924

584

Total general obligations bonds

345

$
241,284

$
239,171

$
693

~~December 31, 2017:~~

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 $3.9 million and $4.0 million being the largest exposure to a single issuer at June 30, 2018 and December 31, 2017, respectively. Accordingly, as of June 30, 2018 and December 31, 2017,2019, 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, 99.3% had been rated by at least one nationally recognized rating organization and 0.7% were unrated, based on the aggregate fair value as~~

Table of ~~June 30, 2018 and December 31, 2017.~~Contents

~~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)~~:

~~June 30, 2018:~~

Average Exposure

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Indiana

14

$
11,953

$
11,894

$
850

Missouri

5

7,048

6,987

1,397

Illinois

6

5,622

5,561

927

Other

35

22,055

21,807

623

Total revenue bonds

60

$
46,678

$
46,249

$
771

~~December 31, 2017:~~

Average Exposure

Number of

Amortized

Fair

Per Issuer

U.S. State

Issuers

Cost

Value

(Fair Value)

Indiana

14

$
12,001

$
12,054

$
861

Missouri

6

7,376

7,336

1,223

Illinois

7

6,477

6,456

922

Other

38

24,163

24,158

636

Total revenue bonds

65

$
50,017

$
50,004

$
769

The revenue bonds are diversified across many issuers and revenue sources with $3.5 million and $3.6 million being the largest exposure to a single issuer at each of June 30, 2018 and December 31, 2017, respectively. Accordingly, as of June 30, 2018 and December 31, 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, 100.0% had been rated by at least one nationally recognized rating organization as of June 30, 2018. Of the revenue bonds in the Company’s portfolio, 99.4% had been rated by at least one nationally recognized rating organization and 0.6% were unrated, based on the fair value as of December 31, 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 June 30, 2018, all of the Company’s obligations of state and political subdivision securities are owned by its subsidiary bank, which 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 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.
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 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.
Note 4: ~~Loans held for sale~~Portfolio loans

Loans held for sale totaled $34.0 million and $94.8 million at June 30, 2018 and December 31, 2017, respectively. The amount of loans held for sale decreased from December 31, 2017, due to lower origination volumes and 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 June 30,

Six Months Ended June 30,

2018

2017

2018

2017

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

$
2,878

$
10,065

$
6,985

$
22,216

Less direct origination costs

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

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

552

503

1,169

898

Mortgage revenue

$
1,573

$
2,770

$
3,216

$
4,904

~~Note 5: Portfolio loans~~
The distribution of portfolio loans ~~at June 30, 2018 and December 31, 2017~~ is as follows (dollars in thousands):

June 30,
2018

December 31,
2017

June 30,

December 31,

2019

2018
Commercial

$
1,446,061

$
1,414,631

$
1,668,098

$
1,405,106
Commercial real estate

2,355,225

2,354,684

2,661,905

2,366,823
Real estate construction

274,967

261,506

429,326

288,197
Retail real estate

1,449,476

1,460,801

1,721,370

1,480,133
Retail other

29,558

27,878

51,427

28,169
Portfolio loans

$
5,555,287

$
5,519,500

$
6,532,126

$
5,568,428

Less allowance for loan losses

53,305

53,582

Allowance for loan losses

(51,375)

(50,648)
Portfolio loans, net

$
5,501,982

$
5,465,918

$
6,480,751

$
5,517,780

Net deferred loan origination costs included in the table above were ~~$5.3~~$5.4 million as of June 30, ~~2018~~2019 and ~~$4.1~~$5.6 million as of December 31, ~~2017.~~2018. Net accretable purchase accounting adjustments included in the table above reduced loans by ~~$18.0~~$25.0 million as of June 30, ~~2018~~2019 and ~~$23.6~~$13.9 million as of December 31, ~~2017.~~2018.

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 or are loans 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 and South Side Bank loans are similar in nature to Busey Bank’s policies and the Company is migrating 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. 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, 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.

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

·~~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~~$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~~$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~~$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.

Table of Contents

Portfolio loans in the highest grades, represented by the pass and watch categories, totaled $5.3 billion at June 30, 2018 and December 31, 2017. Portfolio loans in the lowest grades, represented by the special mention, substandard and doubtful categories, totaled $237.2 million at June 30, 2018, compared to $193.8 million at December 31, 2017.
The following table is a summary of risk grades segregated by category of portfolio loans (excluding accretable purchase accounting adjustments and clearings) ~~(dollars~~(dollars in ~~thousands~~thousands)):

June 30, 2018

Pass

Watch

Special
Mention

Substandard

Doubtful

June 30, 2019






Special



Substandard


Pass

Watch

Mention

Substandard

Non-accrual
Commercial

$
1,192,414

$
137,423

$
43,455

$
65,337

$
9,135

$
1,378,041

$
188,282

$
48,181

$
45,599

$
10,647
Commercial real estate

2,127,522

147,242

36,408

46,430

8,597

2,367,741

178,859

85,837

29,926

12,780
Real estate construction

252,778

15,644

3,846

3,257

23

394,416

34,348

450

1,273

826
Retail real estate

1,417,838

8,401

7,933

5,316

7,385

1,674,105

16,038

6,317

9,235

8,529
Retail other

29,787

—

7

27

75

51,848

99

—

—

34
Total

$
5,020,339

$
308,710

$
91,649

$
120,367

$
25,215

$
5,866,151

$
417,626

$
140,785

$
86,033

$
32,816

December 31, 2017

Pass

Watch

Special
Mention

Substandard

Doubtful

December 31, 2018






Special



Substandard


Pass

Watch

Mention

Substandard

Non-accrual
Commercial

$
1,175,421

$
141,776

$
51,366

$
43,933

$
5,285

$
1,126,257

$
172,449

$
47,000

$
42,532

$
17,953
Commercial real estate

2,169,420

130,056

21,151

36,482

11,997

2,106,711

137,214

85,148

36,205

10,298
Real estate construction

212,952

41,292

3,880

3,071

608

268,069

14,562

3,899

1,888

18
Retail real estate

1,436,156

6,883

5,162

4,135

6,714

1,448,964

6,425

6,792

5,435

6,698
Retail other

28,300

9

—

7

20

26,707

—

—

—

30
Total

$
5,022,249

$
320,016

$
81,559

$
87,628

$
24,624

$
4,976,708

$
330,650

$
142,839

$
86,060

$
34,997

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

June 30, 2019

Loans past due, still accruing

Non-accrual


30-59 Days

60-89 Days

90+Days

Loans
Commercial

$
2,745

$
593

$
—

$
10,647
Commercial real estate

4,519

608

38

12,780
Real estate construction

103

107

—

826
Retail real estate

8,140

987

220

8,529
Retail other

216

22

—

34
Total

$
15,723

$
2,317

$
258

$
32,816

December 31, 2018

Loans past due, still accruing

Non-accrual


30-59 Days

60-89 Days

90+Days

Loans
Commercial

$
158

$
140

$
775

$
17,953
Commercial real estate

148

558

—

10,298
Real estate construction

121

—

58

18
Retail real estate

4,578

1,368

766

6,698
Retail other

48

2

2

30
Total

$
5,053

$
2,068

$
1,601

$
34,997

June 30, 2018

Loans past due, still accruing

Non-accrual

30-59 Days

60-89 Days

90+Days

Loans

Commercial

$
122

$
—

$
—

$
9,135

Commercial real estate

1,504

349

750

8,597

Real estate construction

599

123

—

23

Retail real estate

6,093

1,177

390

7,385

Retail other

47

3

2

75

Total

$
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 six~~ months ended June 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was ~~$0.3~~$0.4 million and ~~$0.7~~$0.3 million, respectively. The gross interest income that would have been recorded in the ~~three and~~ six months ended June 30, ~~2017~~2019 and 2018 if impaired loans had been current in accordance with their original terms was ~~$0.2~~$1.1 million and ~~$0.5~~$0.7 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 six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

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 termsTable of ~~the loan over the long term, though unable to meet the terms of the loan in the near term due to individual circumstances.~~Contents

The Company considers the customer’s past performance, previous and current credit history, the individual circumstances surrounding the customer’s current difficulties and the customer’s plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. Generally, restructurings consist of short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief or forbearance (debt forgiveness). 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~~troubled debt restructurings (“TDR”) loans is as follows (dollars in thousands):

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


June 30,

December 31,

2019

2018
In compliance with modified terms

$
8,288

$
8,319
30 — 89 days past due

321

127
Included in non-performing loans

3,503

392
Total

$
12,112

$
8,838
~~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~~
Loans classified as a TDR ~~it evaluates any possible impairment similar to other impaired loans based on present value of~~during 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~~three and six months ended June 30, 2019, included one commercial loan ~~is collateral dependent. If the Company determines that the fair value of the TDR is less than the~~for payment modification with a 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~~$0.6 million. Loans classified as a TDR during the three and six months ended June 30, 2018 included one retail real estate modification for short-term interest rate relief, with a recorded investment of $0.1 million. Performing loans classified as TDRs during the three and six months ended June 30, 2017 included one commercial modification for short-term principal payment relief, with a recorded investment of $1.6 million and one retail real estate modification for short-term interest rate relief, with a recorded investment of $0.3 million.

The gross interest income that would have been recorded in the three and six months ended June 30, 2019 and 2018 ~~and 2017~~ if ~~performing~~ TDRs had ~~been performing~~performed in accordance with their original terms compared with their modified terms was insignificant.

~~There were no TDRs~~One commercial real estate TDR, with a recorded investment of $3.2 million, that ~~were~~was entered into during the last twelve months, ~~that were~~was subsequently classified as non-performing and had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual) during the three and six months ended June 30, ~~2018.~~2019. There were no TDRs that were entered into during the prior twelve months that were subsequently classified as non-performing and had payment defaults during the three and six months ended June 30, ~~2017.~~2018.

At June 30, 2019, the Company had $2.6 million of residential real estate in the process of foreclosure.

Table of Contents

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

June 30, 2018

Unpaid
Contractual
Principal
Balance

Recorded
Investment
with No
Allowance

Recorded
Investment
with
Allowance

Total
Recorded
Investment

Related
Allowance

Average
Recorded
Investment

June 30, 2019


Unpaid

Recorded












Contractual

Investment

Recorded

Total

Average

Principal

with No

Investment

Recorded

Related

Recorded


Balance

Allowance

with Allowance

Investment

Allowance

Investment
Commercial

$
11,787

$
6,932

$
2,343

$
9,275

$
1,272

$
9,386

$
16,668

$
7,511

$
3,856

$
11,367

$
2,358

$
15,425
Commercial real estate

16,614

12,029

3,494

15,523

1,246

17,423

19,784

10,498

7,686

18,184

1,367

17,730
Real estate construction

440

415

—

415

—

836

1,329

1,186

—

1,186

—

656
Retail real estate

17,029

14,171

25

14,196

25

14,244

15,322

13,367

474

13,841

474

13,685
Retail other

162

78

—

78

—

46

62

34

—

34

—

39
Total

$
46,032

$
33,625

$
5,862

$
39,487

$
2,543

$
41,935

$
53,165

$
32,596

$
12,016

$
44,612

$
4,199

$
47,535

December 31, 2017

Unpaid
Contractual
Principal
Balance

Recorded
Investment
with No
Allowance

Recorded
Investment
with
Allowance

Total
Recorded
Investment

Related
Allowance

Average
Recorded
Investment

December 31, 2018


Unpaid

Recorded












Contractual

Investment

Recorded

Total

Average

Principal

with No

Investment

Recorded

Related

Recorded


Balance

Allowance

with Allowance

Investment

Allowance

Investment
Commercial

$
10,604

$
7,192

$
191

$
7,383

$
138

$
10,184

$
21,442

$
6,858

$
12,001

$
18,859

$
4,319

$
13,364
Commercial real estate

22,218

16,472

1,964

18,436

704

15,195

19,079

13,082

4,498

17,580

1,181

18,077
Real estate construction

1,040

1,016

—

1,016

—

692

478

453

—

453

—

712
Retail real estate

18,517

14,957

25

14,982

25

13,009

14,418

13,196

61

13,257

61

14,110
Retail other

40

20

—

20

—

44

117

33

—

33

—

40
Total

$
52,419

$
39,657

$
2,180

$
41,837

$
867

$
39,124

$
55,534

$
33,622

$
16,560

$
50,182

$
5,561

$
46,303

~~Management’s~~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 June 30, 2018 and December 31, 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 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 June 30, 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 June 30, 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.   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. The Company 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. 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~~recorded investment of all acquired loans as of June 30, ~~2018~~2019 totaled approximately ~~$1.5~~$1.8 billion.

Table of Contents

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

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

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

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





Commercial

Real Estate

Retail Real







Commercial

Real Estate

Construction

Estate

Retail Other

Total
Beginning balance

$
17,577

$
22,090

$
2,799

$
9,836

$
347

$
52,649

$
17,998

$
20,097

$
2,807

$
9,503

$
510

$
50,915
Provision for loan loss

1,720

909

35

(548
)
142

2,258

Provision for loan losses

1,161

(97)

411

941

101

2,517
Charged-off

(1,916
)
(110
)
—

(412
)
(115
)
(2,553
)

(2,563)

—

—

(200)

(178)

(2,941)
Recoveries

205

158

81

417

90

951

137

188

87

369

103

884
Ending Balance

$
17,586

$
23,047

$
2,915

$
9,293

$
464

$
53,305

Ending balance

$
16,733

$
20,188

$
3,305

$
10,613

$
536

$
51,375

As of and for the Six Months Ended June 30, 2019





Commercial

Real Estate

Retail Real







Commercial

Real Estate

Construction

Estate

Retail Other

Total
Beginning balance

$
17,829

$
21,137

$
2,723

$
8,471

$
488

$
50,648
Provision for loan losses

2,954

(1,186)

413

2,298

149

4,628
Charged-off

(4,370)

(15)

—

(717)

(308)

(5,410)
Recoveries

320

252

169

561

207

1,509
Ending balance

$
16,733

$
20,188

$
3,305

$
10,613

$
536

$
51,375

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

Commercial

Real Estate

Retail Real


Commercial

Real Estate

Construction

Estate

Retail Other

Total
Beginning balance

$
17,577

$
22,090

$
2,799

$
9,836

$
347

$
52,649
Provision for loan losses

1,720

909

35

(548)

142

2,258
Charged-off

(1,916)

(110)

—

(412)

(115)

(2,553)
Recoveries

205

158

81

417

90

951
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

Real Estate

Retail Real


Commercial

Real Estate

Construction

Estate

Retail Other

Total
Beginning balance

$
14,779

$
21,813

$
2,861

$
13,783

$
346

$
53,582
Provision for loan losses

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

Table of Contents

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 Three Months Ended June 30, 2017

Commercial

Commercial
Real Estate

Real Estate
Construction

Retail Real
Estate

Retail Other

Total

Beginning balance

$
13,260

$
19,848

$
2,021

$
12,978

$
335

$
48,442

Provision for loan losses

(1,572
)
1,279

(197
)
1,020

(30
)
500

Charged-off

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

1,318

98

385

324

95

2,220

Ending balance

$
12,928

$
20,124

$
2,161

$
13,681

$
307

$
49,201

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

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

Provision for loan losses

(2,221
)
1,059

(63
)
2,240

(15
)
1,000

Charged-off

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

2,027

131

402

885

154

3,599

Ending balance

$
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~~(dollars in thousands):

As of June 30, 2019




Commercial

Real Estate

Retail Real





Commercial

Real Estate

Construction

Estate

Retail Other

Total
Allowance for loan losses

Ending balance attributed to:

Loans individually evaluated for
impairment

$
2,358

$
1,367

$
—

$
474

$
—

$
4,199
Loans collectively evaluated for
impairment

14,375

18,821

3,305

10,139

536

47,176
Ending balance

$
16,733

$
20,188

$
3,305

$
10,613

$
536

$
51,375

Loans:

Loans individually evaluated for
impairment

$
11,336

$
15,723

$
751

$
12,668

$
34

$
40,512
Loans collectively evaluated for
impairment

1,656,731

2,643,721

428,140

1,707,529

51,393

6,487,514
PCI loans evaluated for
impairment

31

2,461

435

1,173

—

4,100
Ending balance

$
1,668,098

$
2,661,905

$
429,326

$
1,721,370

$
51,427

$
6,532,126

As of December 31, 2018




Commercial

Real Estate

Retail Real





Commercial

Real Estate

Construction

Estate

Retail Other

Total
Allowance for loan losses

Ending balance attributed to:

Loans individually evaluated for
impairment

$
4,319

$
1,181

$
—

$
61

$
—

$
5,561
Loans collectively evaluated for
impairment

13,510

19,956

2,723

8,410

488

45,087
Ending balance

$
17,829

$
21,137

$
2,723

$
8,471

$
488

$
50,648

Loans:

Loans individually evaluated for
impairment

$
18,441

$
15,318

$
453

$
13,159

$
33

$
47,404
Loans collectively evaluated for
impairment

1,386,247

2,349,243

287,744

1,466,876

28,136

5,518,246
PCI loans evaluated for
impairment

418

2,262

—

98

—

2,778
Ending balance

$
1,405,106

$
2,366,823

$
288,197

$
1,480,133

$
28,169

$
5,568,428

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

Table of Contents

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 ~~6: OREO~~5: Deposits

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 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 $1.2 million in commercial OREO, $0.1 million in residential OREO and an insignificant amount of other repossessed assets. At June 30, 2018 the Company had $1.7 million of residential real estate in the process of foreclosure.
~~The following table summarizes activity related to OREO~~ ~~(dollars in thousands)~~:

Six Months Ended
June 30, 2018

Year Ended
December 31, 2017

Beginning balance

$
1,283

$
2,518

Additions, transfers from loans

3,125

1,417

Additions, fair value from First Community acquisition

—

722

Additions, fair value from Mid Illinois acquisition

—

60

Proceeds from sales of OREO

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

26

1,632

Valuation allowance for OREO

(18
)
(42
)
Ending balance

$
3,694

$
1,283

~~Note 7: Deposits~~
The composition of deposits is as follows ~~(dollars~~(dollars in thousands):

June 30, 2019

December 31, 2018
Demand deposits, noninterest-bearing

$
1,766,681

$
1,464,700
Interest-bearing transaction deposits

1,926,502

1,435,574
Saving deposits and money market deposits

2,390,228

1,852,044
Time deposits

1,749,811

1,497,003
Total

$
7,833,222

$
6,249,321

June 30, 2018

December 31, 2017

Demand deposits, noninterest-bearing

$
1,496,671

$
1,597,421

Interest-bearing transaction deposits

1,238,876

1,166,170

Saving deposits and money market deposits

1,953,859

2,026,212

Time deposits

1,474,506

1,336,162

Total

$
6,163,912

$
6,125,965

~~The Company held brokered interest-bearing transaction deposits of $5.0 million at June 30, 2018 and December 31, 2017.~~ The Company held brokered saving deposits and money market deposits of ~~$51.0~~$14.4 million and ~~$75.1~~$17.5 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately ~~$620.1~~$934.5 million and ~~$578.9~~ $673.7 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The aggregate amount of time deposits with a minimum denomination that meets or exceeds the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 was approximately ~~$217.7~~$340.4 million and ~~$197.9~~ $264.1 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The Company held brokered time deposits of ~~$311.8~~$108.8 million and ~~$247.7~~$262.5 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

As of June 30, ~~2018,~~2019, the scheduled maturities of time deposits are as follows ~~(dollars~~(dollars in thousands):

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

July 1, 2019 – June 30, 2020

$
1,064,812
July 1, 2020 – June 30, 2021

389,392
July 1, 2021 – June 30, 2022

158,968
July 1, 2022 – June 30, 2023

63,863
July 1, 2023 – June 30, 2024

71,961
Thereafter

815

$
1,749,811

Note 8:6: Borrowings

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

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

On ~~April 30, 2018,~~January 29, 2019, the Company entered into an Amended and Restated Credit Agreement providing for a ~~third~~$60.0 million term loan (the “Term Loan”) with a maturity date of November 30, 2023. The Term Loan has an annual interest rate of one-month LIBOR plus a spread of 1.50%. The proceeds of the Term Loan were used to fund the cash consideration related to the acquisition of Banc Ed. The Company had $57.0 million outstanding indebtedness on June 30, 2019, comprised of $6.0 million of short-term debt and $51.0 million of long-term debt.

The Amended and Restated Credit Agreement also retained the Company’s $20.0 million revolving facility with a maturity date of April 30, 2019. On April 19, 2019, the Company entered into an amendment to the Amended and Restated Credit Agreement to extend the maturity of ~~this~~its revolving loan facility ~~from April 30, 2018~~ to April 30, ~~2019, to decrease the maximum principal amount from $40.0 million to $20.0 million, and to amend and restate the annual interest rate.~~2020. The ~~loan also bears~~revolving facility incurs a non-usage fee ~~calculated~~ based on the ~~average daily principal balance of the loan outstanding during the prior fiscal quarter.~~undrawn amount. The Company had no outstanding ~~amount~~balance under the revolving facility on June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

~~The following table sets forth the distribution~~

Table of ~~securities sold under agreements to repurchase and short-term borrowings and weighted average interest rates~~ ~~(dollars in thousands)~~:Contents

June 30,
2018

December 31,
2017

Securities sold under agreements to repurchase

Balance at end of period

$
240,109

$
304,566

Weighted average interest rate at end of period

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

$
267,596

$
304,566

Average daily balance for the year-to-date period

$
246,100

$
213,527

Weighted average interest rate during period(1)

0.58
%
0.46
%

Short-term borrowings, FHLB advances

Balance at end of period

$
150,000

$
220,000

Weighted average interest rate at end of period

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

$
225,000

$
234,600

Average daily balance for the year-to-date period

$
110,083

$
84,201

Weighted average interest rate during period(1)

1.63
%
1.20
%

~~(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.~~

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

June 30,

December 31,

2019

2018
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.

$
35,772

$
50,000
Notes payable

51,000

—
Total long-term borrowings

$
86,772

$
50,000

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, 2019, long-term debt from the FHLB, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from 2.15% to 3.04%. The weighted average rate on the long-term advances was 2.29% as of June 30, 2019. As of December 31, 2018, funds borrowed from the FHLB, listed above, consisted of variable-rate notes maturing through September 2024, with interest rates ranging from ~~1.60%~~2.20% to ~~1.87%~~2.41%. 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 1.10% to 1.32%. The weighted average rate on the long-term advances was 1.19%2.28% as of December 31, ~~2017.~~2018.

On May 25, 2017, the Company issued $40.0 million of 3.75% senior notes that mature on May 25, 2022. The senior notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017. 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~~on February 25, May 25, August 25 and November 25 of each year, commencing on August 25, 2022. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. The senior notes and subordinated notes are unsecured obligations of the Company. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled ~~$0.5~~$0.4 million and ~~$0.9~~$0.8 million, respectively, at June 30, ~~2018.~~2019. Unamortized debt issuance costs related to the senior notes and subordinated notes totaled ~~$0.6~~$0.5 million and ~~$1.0~~$0.9 million, respectively, at 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 used for general corporate purposes.2018.
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 9: 7: Junior Subordinated Debt Owed to Unconsolidated Trusts

First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrent with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The trust preferred securities are instruments that qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment. In connection with the acquisition of Pulaski ~~acquisition~~Financial Corp. (“Pulaski”) in 2016, the Company acquired similar statutory trusts maintained by Pulaski and the fair value adjustment is being accreted over the weighted average remaining life. The Company had ~~$71.1 million and $71.0~~$71.2 million of junior subordinated debt owed to unconsolidated trusts at June 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018.

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.

Table of Contents

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 June 30, ~~2018,~~2019, 100% of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.

The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are ~~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 ~~10:~~8: Earnings Per Common Share

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

Three Months Ended
June 30,

Six Months Ended
June 30,

2018

2017

2018

2017

Net income available to common stockholders

$
24,862

$
16,479

$
46,779

$
31,649

Three Months Ended

Six Months Ended

June 30,

June 30,


2019

2018

2019

2018

Net income

$
24,085

$
24,862

$
49,554

$
46,779

Shares:

Weighted average common shares outstanding

48,815

38,311

48,796

38,302

55,638

48,815

54,464

48,796

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

409

441

407

444

303

409

300

407

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

49,224

38,752

49,203

38,746

55,941

49,224

54,764

49,203

Basic earnings per common share

$
0.51

$
0.43

$
0.96

$
0.83

$
0.43

$
0.51

$
0.91

$
0.96

Diluted earnings per common share

$
0.51

$
0.43

$
0.95

$
0.82

$
0.43

$
0.51

$
0.90

$
0.95

Basic earnings per share ~~are~~is 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~~is computed using the treasury stock method and ~~reflect~~reflects 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~~At June 30, 2019, 169,258 outstanding restricted stock units, ~~for which the exercise or the grant price exceeds the average market price over the period have an~~48,107 outstanding stock options, and 191,278 warrants were anti-dilutive ~~effect~~ and ~~are~~ excluded from the ~~calculation.~~calculation of common stock equivalents. At June 30, 2018, 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents. ~~At June 30, 2017, 10,850 outstanding options, 128,622 restricted stock units and 191,278 warrants were anti-dilutive and excluded from the calculation of common stock equivalents.~~

Note ~~11:~~9: 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 and advisory directors. Each DSU is equivalent to one share of the Company’s common stock. The DSUs vest ~~on the first anniversary of~~over a twelve-month period following the grant date or on the date of the

Table of Contents

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 and stock options assumed from acquisitions.

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 June 30, 2018, the Company held 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 originally approved in 2008. During 2015, the Company purchased 333,333 shares under this repurchase plan. At June 30, 2018 the Company had 333,334 shares that may still be purchased under the plan.
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

A summary of the status of and changes in the ~~Company’s~~Company's stock option awards for the six months ended June 30, ~~2018~~2019 follows:

Weighted-

Weighted-

Average

Average

Exercise

Remaining Contractual


Shares

Price

Term
Outstanding at beginning of period

87,600

$
20.58

Exercised

(21,799)

17.71

Forfeited

(2,271)

23.53

Expired

(5,176)

18.13

Outstanding at end of period

58,354

$
21.76

6.23
Exercisable at end of period

42,472

$
21.09

5.80

Shares

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining Contractual
Term

Outstanding at beginning of year

213,428

$
16.97

Exercised

(70,817
)
14.20

Forfeited

(12,627
)
21.66

Expired

(2,565
)
16.41

Outstanding at end of period

127,419

$
18.06

4.49

Exercisable at end of period

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 six months ended June 30, 2019, related to the converted options from First Community. The Company recorded an insignificant amount and $0.1 million in stock option compensation expense for the three and six months ended June 30, 2018, ~~respectively, related to the converted options from First Community. The Company did not record any stock option compensation expense for the three and six months ended June 30, 2017.~~respectively. As of June 30, ~~2018,~~2019, the Company had ~~$0.3~~$0.1 million of unrecognized stock option expense. This cost is expected to be recognized ~~over a period of 1.4 years.~~in 2019.

Restricted Stock Unit Plan

A summary of the changes in the Company’s stock unit awards for the six months ended June 30, ~~2018,~~2019, is as follows:

Weighted-

Director

Weighted-

Restricted

Average

Deferred

Average

Stock

Grant Date

Stock

Grant Date

Units

Fair Value

Units

Fair Value

Non-vested at beginning of year

587,763

$
22.68

42,411

$
25.47

Weighted-

Director

Weighted-

Restricted

Average

Deferred

Average

Stock

Grant Date

Stock

Grant Date


Units

Fair Value

Units

Fair Value
Non-vested at beginning of period

690,495

$
26.14

20,449

$
27.93
Granted

—

—

—

—

—

—

—

—
Dividend equivalents earned

7,657

30.76

1,565

30.76

11,359

25.56

1,269

25.56
Vested

(994
)
19.70

(19,686
)
29.69

(104,760)

18.40

(20,195)

31.29
Forfeited

(1,494
)
26.19

—

—

(4,712)

30.47

(1,523)

31.62
Non-vested at end of period

592,932

$
22.78

24,290

$
22.39

592,382

$
27.46

—

$
—
Outstanding at end of period

592,932

$
22.78

90,337

$
21.10

592,382

$
27.46

68,153

$
22.27

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

Table of Contents

The Company recognized ~~$0.8~~$1.0 million and ~~$0.6~~$0.8 million of compensation expense related to both non-vested RSUs and DSUs for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Company recognized ~~$1.6~~$1.9 million and ~~$1.1~~$1.6 million of compensation expense related to both non-vested RSUs and DSUs for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. As of June 30, ~~2018,~~2019, there was ~~$6.8~~$8.8 million of total unrecognized compensation cost related to these non-vested ~~RSUs and DSUs.~~stock awards. This cost is expected to be recognized over a period of 3.3 years.

As of June 30, ~~2018, 888,097~~2019, 766,824 shares remain available for issuance pursuant to the Company’s 2010 Equity Incentive Plan, ~~75,636~~54,841 shares remain available for issuance pursuant to the Company’s Employee Stock Purchase Plan and ~~318,701~~309,326 shares remain available for issuance pursuant to the First Community 2016 Equity Incentive Plan.

Note ~~12: Income Taxes~~
~~At June 30, 2018, the Company was not under examination by any tax authority.~~
~~Note 13:~~10: Outstanding Commitments and Contingent Liabilities

Legal Matters

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

Credit Commitments and Contingencies

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~~thousands)):

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~~

June 30, 2019

December 31, 2018
Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit

$
1,567,091

$
1,398,483
Standby letters of credit

37,560

32,156

Note 11: Regulatory Capital

The Company and the subsidiary banks are subject to ~~extend credit~~various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The capital amounts and classification also are ~~agreements~~subject 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 necessaryqualitative judgments by the ~~Company upon extension of credit, is based on management’s credit evaluation of the customer.~~regulators about components, risk weightings and other factors.

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 publicBanking regulations identify five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized 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.critically undercapitalized. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, all capital ratios of the Company and the subsidiary banks exceeded the well capitalized levels under the applicable regulatory capital adequacy guidelines. Management believes that no ~~amounts were recorded as liabilities~~events or changes have occurred subsequent to June 30, 2019 that would change this designation.

Table of Contents

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

Minimum

Minimum

To Be Well

Actual

Capital Requirement

Capitalized

Amount

Ratio


Amount

Ratio


Amount

Ratio

As of June 30, 2019:

Total Capital (to Risk Weighted Assets)

Consolidated
$
1,015,740

13.96
%

$
581,993

8.00
%

$
727,491

10.00
%
Busey Bank
$
893,175

14.53
%

$
491,782

8.00
%

$
614,727

10.00
%
TheBANK
$
194,755

17.34
%

$
89,849

8.00
%

$
112,312

10.00
%

Tier 1 Capital (to Risk Weighted Assets)

Consolidated
$
904,365

12.43
%

$
436,495

6.00
%

$
581,993

8.00
%
Busey Bank
$
842,312

13.70
%

$
368,837

6.00
%

$
491,782

8.00
%
TheBANK
$
194,243

17.30
%

$
67,387

6.00
%

$
89,849

8.00
%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated
$
830,365

11.41
%

$
327,371

4.50
%

$
472,869

6.50
%
Busey Bank
$
842,312

13.70
%

$
276,628

4.50
%

$
399,573

6.50
%
TheBANK
$
194,243

17.30
%

$
50,540

4.50
%

$
73,003

6.50
%

Tier 1 Capital (to Average Assets)

Consolidated
$
904,365

9.87
%

$
366,386

4.00
%

N/A

N/A

Busey Bank
$
842,312

11.40
%

$
295,539

4.00
%

$
369,424

5.00
%
TheBANK
$
194,243

10.93
%

$
71,062

4.00
%

$
88,827

5.00
%

��

Minimum

Minimum

To Be Well

Actual

Capital Requirement

Capitalized

Amount

Ratio


Amount

Ratio


Amount

Ratio

As of December 31, 2018:

Total Capital (to Risk Weighted Assets)

Consolidated
$
894,572

14.83
%

$
482,638

8.00
%

$
603,297

10.00
%
Busey Bank
$
854,351

14.19
%

$
481,701

8.00
%

$
602,126

10.00
%

Tier 1 Capital (to Risk Weighted Assets)

Consolidated
$
783,924

12.99
%

$
361,978

6.00
%

$
482,638

8.00
%
Busey Bank
$
803,703

13.35
%

$
361,276

6.00
%

$
481,701

8.00
%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated
$
709,924

11.77
%

$
271,484

4.50
%

$
392,143

6.50
%
Busey Bank
$
803,703

13.35
%

$
270,957

4.50
%

$
391,382

6.50
%

Tier 1 Capital (to Average Assets)

Consolidated
$
783,924

10.36
%

$
302,704

4.00
%

N/A

N/A

Busey Bank
$
803,703

10.64
%

$
302,232

4.00
%

$
377,789

5.00
%

Table of Contents

In July 2013, the U.S. federal banking authorities approved the Basel III Rule for strengthening international capital standards. The Basel III Rule introduced a capital conservation buffer, composed entirely of Common Equity Tier 1 Capital (“CET1”), which is added to the ~~Company’s potential obligations under these guarantees.~~minimum risk-weighted asset ratios. The capital conservation buffer is not a minimum capital requirement; however, banking institutions with a ratio of CET1 to risk-weighted assets below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. In order to refrain from restrictions on dividends, equity repurchases and discretionary bonus payments, banking institutions must maintain minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

N~~ote 14: Capital~~

The ability of the Company to pay cash dividends to its stockholders and to service its debt ~~was historically~~is dependent on the receipt of cash dividends from its subsidiaries. Under applicable regulatory requirements, an Illinois state-chartered bank such as Busey Bank may not pay dividends in excess of its net profits. Because Busey Bank had been in ~~a retained earnings~~an accumulated deficit position ~~since~~ 2009 thru 2018, it was not able to pay ~~dividends.~~dividends in prior years. With prior approval from its regulators, however, an Illinois state-chartered bank in that situation was able to reduce its capital stock by amending its charter to decrease the authorized number of shares, and then make a subsequent distribution to its holding company. Using this approach, and with the approval of its regulators, Busey Bank has distributed funds to the Company, the most recent of which was ~~$40.0~~$40.0 million on October 12, ~~2017. The Company expects to seek regulatory approval for a final capital distributions from~~2018. Busey Bank returned to a positive retained earnings position in the second quarter of 2018 and, ~~return~~in 2019, returned to ~~cash dividends thereafter.~~paying dividends.

The Company and 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 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 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 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 June 30, 2018, the Company and 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 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 1.875% increase as of January 1, 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 June 30, 2018 and December 31, 2017, the Company was in compliance with the current phase of the Basel III Rule and management believes that the Company 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)~~.

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
%

Minimum

Actual

Capital Requirement with
Capital Buffer

Minimum To Be
Well Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2017:

Total Capital (to Risk Weighted Assets)

Consolidated

$
837,183

14.15
%
$
547,265

9.25
%
$
591,638

10.00
%
Busey Bank

$
704,807

12.78
%
$
509,978

9.25
%
$
551,327

10.00
%
South Side Bank

$
84,914

22.61
%
$
34,744

9.25
%
$
37,561

10.00
%

Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$
718,101

12.14
%
$
428,937

7.25
%
$
473,310

8.00
%
Busey Bank

$
651,432

11.82
%
$
399,713

7.25
%
$
441,062

8.00
%
South Side Bank

$
84,707

22.55
%
$
27,232

7.25
%
$
30,049

8.00
%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

Consolidated

$
644,633

10.90
%
$
340,192

5.75
%
$
384,565

6.50
%
Busey Bank

$
651,432

11.82
%
$
317,013

5.75
%
$
358,363

6.50
%
South Side Bank

$
84,707

22.55
%
$
21,598

5.75
%
$
24,415

6.50
%

Tier 1 Capital (to Average Assets)

Consolidated

$
718,101

9.78
%
$
293,588

4.00
%
N/A

N/A

Busey Bank

$
651,432

9.80
%
$
265,847

4.00
%
$
332,309

5.00
%
South Side Bank

$
84,707

12.75
%
$
26,571

4.00
%
$
33,214

5.00
%
Note ~~15:~~12: Operating Segments and Related Information

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

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

The segment financial information provided below has been derived from information used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies in the ~~Company’s Annual Report on~~“Note 1. Significant Accounting Policies” to Form ~~10-K~~10-K. The Company accounts for ~~the year ended December 31, 2017.~~intersegment revenue and transfers at current market value.

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

Goodwill

Total Assets

June 30,
2018

December 31,
2017

June 30,
2018

December 31,
2017

Goodwill

Total Assets


June 30, 2019

December 31, 2018

June 30, 2019

December 31, 2018

Banking

$
246,999

$
248,660

$
7,719,424

$
7,809,738

$
293,657

$
246,999

$
9,568,148

$
7,656,709
Remittance Processing

8,992

8,992

36,572

34,646

8,992

8,992

42,083

39,278
Wealth Management

11,694

11,694

32,103

32,077

11,694

11,694

26,015

20,992
Other

—

—

(12,555
)
(15,821
)

—

—

(23,579)

(14,622)
Totals

$
267,685

$
269,346

$
7,775,544

$
7,860,640

$
314,343

$
267,685

$
9,612,667

$
7,702,357

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

Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,


2019

2018

2019

2018

Net interest income:

Banking

$
75,944

$
62,109

$
146,582

$
123,525

Remittance Processing

18

16

36

32

Wealth Management

—

100

—

194

Other

(2,534)

(1,853)

(4,807)

(3,622)

Total net interest income

$
73,428

$
60,372

$
141,811

$
120,129

Non-interest income:

Banking

$
15,659

$
11,734

$
28,442

$
22,631

Remittance Processing

4,117

3,987

8,298

7,770

Wealth Management

9,594

7,808

18,727

16,449

Other

(1,474)

(727)

(1,626)

(1,562)

Total non-interest income

$
27,896

$
22,802

$
53,841

$
45,288

Non-interest expense:

Banking

$
56,895

$
37,855

$
102,066

$
79,241

Remittance Processing

2,589

2,624

5,353

5,090

Wealth Management

5,749

4,703

11,313

9,614

Other

2,787

2,123

6,451

4,400

Total non-interest expense

$
68,020

$
47,305

$
125,183

$
98,345

Income before income taxes:

Banking

$
32,191

$
33,730

$
68,330

$
63,649

Remittance Processing

1,546

1,379

2,981

2,712

Wealth Management

3,845

3,205

7,414

7,029

Other

(6,795)

(4,703)

(12,884)

(9,584)

Total income before income taxes

$
30,787

$
33,611

$
65,841

$
63,806

Net income:

Banking

$
24,441

$
24,904

$
51,106

$
46,749

Remittance Processing

1,105

986

2,130

1,939

Wealth Management

2,845

2,288

5,486

5,052

Other

(4,306)

(3,316)

(9,168)

(6,961)

Total net income

$
24,085

$
24,862

$
49,554

$
46,779

Note ~~16:~~13: Derivative Financial Instruments

The Company ~~originates and purchases~~enters into derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale, forward sales commitments to sell residential mortgage loans to loan investors and derivatives to customers for interest rate swaps. See “~~Note 17:~~“Note 14: Fair Value ~~Measurements~~”Measurements” for further discussion of the fair value measurement of such derivatives.

Interest Rate Lock ~~Commitments.~~Commitments. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had issued ~~$89.9~~$73.5 million and ~~$51.7~~$27.2 million, respectively, of unexpired interest rate lock commitments to loan customers. Such interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and

Table of Contents

Hedging, are carried at their fair values in other assets or other liabilities in the unaudited ~~Consolidated Financial Statements,~~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.~~Commitments. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had issued ~~$121.7~~$107.5 million and ~~$139.7~~$48.6 million, respectively, of unexpired forward sales commitments to mortgage loan investors. Typically, the Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited ~~Consolidated Financial Statements.~~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~~Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

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

June 30, 2018

December 31, 2017


June 30, 2019

December 31, 2018
Fair value recorded in other assets

$
760

$
675

$
1,135

$
624
Fair value recorded in other liabilities

1,054

2,148

1,949

1,205

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

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

Three Months Ended June 30,

Six Months Ended June 30,


2019

2018

2019

2018

Gross gains

$
1,023

$
4,942

$
1,755

$
8,807

$
1,929

$
1,023

$
3,007

$
1,755

Gross (losses)

(1,054
)
(4,228
)
(2,108
)
(8,019
)

(1,949)

(1,054)

(3,067)

(2,108)

Net gains (losses)

$
(31
)
$
714

$
(353
)
$
788

$
(20)

$
(31)

$
(60)

$
(353)

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~~Derivatives to Customers.. The Company ~~entered into~~may offer derivative contracts to its customers in connection with their risk management needs. These derivatives are primarily interest rate ~~swap contracts to manage~~swaps. The Company manages the ~~interest rate~~ risk ~~exposure~~ associated with ~~specific commercial loan relationships, at the time such loans were originated. The Company offsets each customer~~these contracts by entering into an equal and offsetting derivative with a ~~bank counterparty.~~third-party dealer. With a notional values of ~~$190.6~~$407.4 million and ~~$161.3~~$243.7 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, these contracts support variable rate, commercial loan relationships totaling ~~$95.3~~$203.7 million and ~~$80.7~~$121.8 million, respectively. ~~While these swap~~These derivatives generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Table of Contents

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

	June 30, 2018		December 31, 2017

						June 30, 2019		December 31, 2018
Fair value recorded in other assets	$	1,705	$	262	$	11,948	$	1,438
Fair value recorded in other liabilities	1,705		262			11,948		1,438

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017

													Three Months Ended June 30,				Six Months Ended June 30,
													2019		2018		2019		2018
Gross gains	$	489		$	301		$	1,443		$	301		$	73	$	489	$	164	$	1443
Gross (losses)	(489		)	(301		)	(1,443		)	(301		)
Gross losses														(73)		(489)		(164)		(1,443)
Net gains (losses)	$	—		$	—		$	—		$	—		$	—	$	—	$	—	$	—

~~First Busey had $0.3~~The Company pledged $12.3 million in ~~securities pledged~~cash to secure its obligation under these contracts at June 30, ~~2018. First Busey had $2.0~~2019. The Company pledged $1.0 million in cash ~~and $0.4 million in securities pledged~~ to secure its obligation under contracts at December 31, ~~2017.~~2018.

Note ~~17:~~14: Fair Value Measurements

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

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

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

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

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

~~There were no transfers between levels during the quarter ended June 30, 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~~company's creditworthiness as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the ~~Company’s~~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.

Table of Contents

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

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

The market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The independent pricing service also monitors market indicators, industry and economic events. For certain security types, additional inputs may be used or some of the market inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day. Because the data utilized was observable, the securities have been classified as level ~~2 in ASC Topic 820.~~2.

~~Securities~~ Equity ~~Investments~~Securities.~~. Securities classified as equity investments~~ Equity securities are reported at fair value utilizing level 1 or 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 11. For stock, quoted prices for identical or similar assets in ~~ASC Topic 820.~~markets that are not active are utilized and classified as level 2.

Loans Held for Sale. Loans held for sale are reported at fair value utilizing level 2 measurements. The fair value of the mortgage loans held for sale are measured using observable quoted market or contract prices or market price equivalents and are classified as level ~~2 in ASC Topic 820.~~2.

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

Table of Contents

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, ~~as of June 30, 2018 and December 31, 2017,~~ segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value ~~(dollars~~(dollars in thousands):

Level 1

Level 2

Level 3

Total

Inputs

Inputs

Inputs

Fair Value

June 30, 2018

Fair value adjusted through comprehensive income:

Securities available for sale

U.S. Treasury securities

$
—

$
59,958

$
—

$
59,958

Obligations of U.S. government corporations and agencies

—

94,497

—

94,497

Obligations of states and political subdivisions

—

246,654

—

246,654

Residential mortgage-backed securities

—

354,055

—

354,055

Corporate debt securities

—

116,174

—

116,174

Fair value adjusted through current period earnings:

Securities equity investments

5,689

—

—

5,689

Loans held for sale

—

33,974

—

33,974

Derivative assets

—

2,465

—

2,465

Derivative liabilities

—

2,759

—

2,759

	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
December 31, 2017
*Securities available for sale*

									Level 1		Level 2		Level 3		Total
June 30, 2019									Inputs		Inputs		Inputs		Fair Value
Fair value adjusted through comprehensive income:
Debt securities available for sale
U.S. Treasury securities	$	—	$	60,348	$	—	$	60,348	$	—	$	58,535	$	—	$	58,535
Obligations of U.S. government corporations and agencies	—		103,665		—		103,665			—		290,766		—		290,766
Obligations of states and political subdivisions	—		280,199		—		280,199			—		278,930		—		278,930
Commercial mortgage-backed securities										—		124,155		—		124,155
Residential mortgage-backed securities	—		397,436		—		397,436			—		961,137		—		961,137
Corporate debt securities	—		31,034		—		31,034			—		134,550		—		134,550
*Securities equity investments*	5,378		—		—		5,378
Fair value adjusted through current period earnings:
Equity securities										—		5,362		—		5,362
*Loans held for sale*	—		94,848		—		94,848			—		39,607		—		39,607
*Derivative assets*	—		937		—		937			—		13,083		—		13,083
*Derivative liabilities*	—		2,410		—		2,410			—		13,897		—		13,897


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

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

Impaired Loans. The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is ~~considered~~identified as impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on non-accrual status and restructured loans in compliance with modified terms. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all impaired loan fair values have been classified as level ~~3 in ASC Topic 820.~~3.

OREO.Non-financial assets and non-financial liabilities measured at fair value include OREO (upon initial recognition or subsequent impairment). OREO properties are measured using a combination of observable inputs, including recent appraisals, and unobservable ~~inputs based on customized discounting criteria.~~inputs. Due to the significance of the unobservable inputs, all OREO fair values have been classified as level ~~3 in ASC Topic 820.~~3.

Table of Contents

Bank Property Held for Sale.Bank property held for sale represents certain banking center office buildings which the Company has closed and consolidated with other existing banking centers. Bank property held for sale is measured at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon discounted appraisals or real estate listing price. Due to the significance of the unobservable inputs, all bank property held for sale fair values have been classified as level ~~3 in ASC Topic 820.~~3.

The following table summarizes assets and liabilities measured at fair value on a non-recurring basis, ~~as of June 30, 2018 and December 31, 2017,~~ segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value ~~(dollars~~(dollars in thousands):

	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
June 30, 2018

									Level 1		Level 2		Level 3		Total
									Inputs		Inputs		Inputs		Fair Value
June 30, 2019
Impaired loans	$	—	$	—	$	3,319	$	3,319	$	—	$	—	$	7,817	$	7,817
OREO	—		—		55		55			—		—		84		84
Bank property held for sale	—		—		3,711		3,711			—		—		1,832		1,832

December 31, 2017
Impaired loans	$	—	$	—	$	1,313	$	1,313
OREO(1)	—		—		—		—


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

~~(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
	Fair Value		Valuation	Unobservable	Range
	Estimate		Techniques	Input	(Weighted Average)
June 30, 2018

						Quantitative Information about Level 3 Fair Value Measurements
						Fair Value		Valuation	Unobservable	Range
						Estimate		Techniques	Input	(Weighted Average)
June 30, 2019
Impaired loans	$	3,319	Appraisal of collateral	Appraisal adjustments	-0.1% to -100.0% (-36.5)%	$	7,817	Appraisal of collateral	Appraisal adjustments	- 3.4	%	to	- 100.0	%
										(-29.4)%
OREO	55		Appraisal of collateral	Appraisal adjustments	-25.0% to -100.0% (-65.0)%		84	Appraisal of collateral	Appraisal adjustments	- 25.0	%	to	- 100.0	%
										(-61.8)%
Bank property held for sale	3,711		Appraisal of collateral or real estate listing price	Appraisal adjustments	-0.0% to -35.1% (-18.0)%		1,832	Appraisal of collateral or real estate listing price	Appraisal adjustments	- 0.0	%	to	- 35.1	%

December 31, 2017
										(-28.3)%

December 31, 2018
Impaired loans	$	1,313	Appraisal of collateral	Appraisal adjustments	-20.3% to -100.0% (-30.8)%	$	10,999	Appraisal of collateral	Appraisal adjustments	- 3.3	%	to	- 100.0	%
OREO(1)	—		Appraisal of collateral	Appraisal adjustments	-100.0% (-100.0)%
										(-24.1)%
OREO							55	Appraisal of collateral	Appraisal adjustments	- 25.0	%	to	- 100.0	%
										(-65.0)%
Bank property held for sale							1,832	Appraisal of collateral or real estate listing price	Appraisal adjustments	- 0.0	%	to	- 35.1	%
										(-28.3)%

~~(1)OREO fair value was less than one thousand dollars.~~Table of Contents

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~~(dollars in thousands):


	June 30, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	420,207	$	420,207	$	239,973	$	239,973
Level 2 inputs:
Debt securities held to maturity		15,708		15,934		608,660		603,360
Accrued interest receivable		28,614		28,614		22,314		22,314
Level 3 inputs:
Portfolio loans, net		6,480,751		6,447,502		5,517,780		5,473,063
Mortgage servicing rights		8,692		12,772		3,315		11,051
Other servicing rights		845		1,434		781		1,443

Financial liabilities:
Level 2 inputs:
Time deposits	$	1,749,811	$	1,747,766	$	1,497,003	$	1,482,301
Securities sold under agreements to repurchase		190,846		190,846		185,796		185,796
Short-term borrowings		30,761		30,748		—		—
Long-term debt		86,772		86,873		50,000		49,873
Junior subordinated debt owed to unconsolidated trusts		71,230		65,073		71,155		65,182
Accrued interest payable		7,380		7,380		6,568		6,568
Level 3 inputs:
Senior notes, net of unamortized issuance costs		39,607		40,419		39,539		39,452
Subordinated notes, net of unamortized issuance costs		59,197		59,719		59,147		58,186

June 30, 2018

December 31, 2017

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Financial assets:

Level 1 inputs:

Cash and cash equivalents

$
230,730

$
230,730

$
353,272

$
353,272

Level 2 inputs:

Securities held to maturity

507,780

496,715

443,550

441,052

Accrued interest receivable

22,476

22,476

22,591

22,591

Level 3 inputs:

Portfolio loans, net

5,501,982

5,423,322

5,465,918

5,361,406

Mortgage servicing rights

3,502

10,813

3,680

8,635

Other servicing rights

390

1,041

280

901

Financial liabilities:

Level 2 inputs:

Time deposits(2)

$
1,474,506

$
1,461,928

$
—

$
—

Deposits(2)

—

—

6,125,965

6,119,135

Securities sold under agreements to repurchase

240,109

240,109

304,566

304,566

Short-term borrowings

150,000

150,000

220,000

220,000

Long-term debt

50,000

50,000

50,000

50,000

Junior subordinated debt owed to unconsolidated trusts

71,081

71,081

71,008

71,008

Accrued interest payable

4,198

4,198

2,581

2,581

Level 3 inputs:

Senior notes, net of unamortized issuance costs

39,472

38,328

39,404

39,104

Subordinated notes, net of unamortized issuance costs

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~~2018 Form ~~10-K~~10-K.

Note 15: Leases

The Company has operating leases consisting primarily of equipment leases and real estate leases. The Company leases real estate property for bank branches, ATM locations, and office space with terms extending through 2032. As of June 30, 2019, the Company reported $10.4 million of right-of-use asset and $10.5 million lease liability in its unaudited Consolidated Balance Sheets.

Table of Contents

The following tables represents lease costs and other lease information for the ~~year ended December 31, 2017.~~periods presented (dollars in thousands):


	Three Months Ended		Six Months Ended
Lease Costs	June 30, 2019		June 30, 2019
Operating lease costs	$	584	$	1,117
Variable lease costs		119		230
Short-term lease costs		8		23
Sublease income		-		-
Net lease cost	$	711	$	1,370

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease cash flows – Fixed payments	$	570	$	1,083
Operating lease cash flows – Liability reduction		490		953
Right of use assets obtained during the period in exchange for operating lease liabilities		764		764
Weighted average lease term (in years)		6.81		6.81
Weighted average discount rate		3.04%		3.04%

~~Note 18: Liability for Loans Sold~~

~~Under standard representations and warranties and early payment default clauses in the Company’s mortgage sale agreements,~~At June 30, 2019, the Company ~~could be required to repurchase mortgage loans sold to investors or reimburse~~was obligated under noncancelable operating leases for office space and other commitments. Rent expense under operating leases, included in net occupancy and equipment expense, was $0.7 million for 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. The Company records an estimated liability for probable amounts due to the Company’s loan investors under these obligations. This repurchase liability is determined based on a combination of factors including the volume of loans sold in current and previous periods; borrower default expectations; historical investor repurchase demand and appeals success 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~~three months ended June 30, ~~2018~~2019 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 is2018. Rent expense under operating leases, included in ~~other liabilities~~net occupancy and equipment expense, was $1.4 million for the six months ended June 30, 2019 and 2018.

Rent commitments were as follows (dollars in ~~the accompanying Consolidated Balance Sheets. Because the level~~thousands):


	June 30, 2019
2019	$	1,150
2020		2,342
2021		1,730
2022		1,375
2023		1,217
Thereafter		3,896
Amounts representing interest		(1,179)
Present value of net future minimum lease payments	$	10,531

Table 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 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.Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of the financial condition as of ~~First Busey at~~ June 30, ~~2018~~2019 (unaudited), as compared with December 31, ~~2017~~2018 and June 30, ~~2017~~2018 (unaudited), and the results of operations for the three and six months ended June 30, ~~2018~~2019 (unaudited) and ~~2017~~2018 (unaudited), and the three months ended March 31, ~~2018~~2019 (unaudited) when applicable. Management’s discussion and analysis should be read in conjunction with the Company’s unaudited ~~Consolidated Financial Statements~~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~~2018 Form ~~10-K for the year ended December 31, 2017.~~10-K.

EXECUTIVE SUMMARY

Operating Results

The ~~Company’s~~Company reported net income for the second quarter of ~~2018 was $24.9~~2019 of $24.1 million, or ~~$0.51~~$0.43 per diluted common share, as compared to ~~net income of $21.9~~$25.5 million, or ~~$0.45~~$0.48 per diluted common share, for the first quarter of ~~2018~~2019 and net income of $16.5 million, or $0.43 per diluted common share, for the second quarter of 2017. Adjusted net income(1) for the second quarter of 2018 was $25.6 million, or $0.52 per diluted common share, compared to $24.9 million, or $0.51 per diluted common share, for the second quarter of 2018. Adjusted net income⁽¹⁾ for the second quarter of 2019 was $29.5 million, or $0.53 per diluted common share, as compared to $26.6 million, or $0.50 per diluted common share, for the first quarter of ~~2018~~2019 and ~~$16.7~~$25.6 million, or ~~$0.43~~$0.52 per diluted common share, for the second quarter of ~~2017.~~2018.

Year-to-date net income through June 30, ~~2018~~2019 was ~~$46.8~~$49.6 million, or ~~$0.95~~$0.90 per diluted common share, compared to net income of ~~$31.6~~$46.8 million, or ~~$0.82~~$0.95 per diluted common share, for the comparable period of ~~2017.~~2018. Year-to-date adjusted net ~~income(1)~~income⁽¹⁾ for the first six months of ~~2018~~2019 was $56.1 million, or $1.02 per diluted common share, compared to $50.5 million or $1.03 per diluted common share compared to $32.5 million or $0.84 per diluted common share for 2017. The results were favorably impacted by the 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 2017.2018.

The Company views certain non-operating items, including ~~but not limited to,~~ acquisition-related and restructuring charges, as adjustments to net ~~income.~~income reported under GAAP. Non-operating pretax adjustments for the second quarter of ~~2018~~2019 were $4.1 million of expenses related to acquisitions, ~~including $0.8 million in fixed asset impairments and $0.1~~$1.4 million of ~~data processing conversion~~expenses related to other restructuring costs and ~~other acquisition-related expenses.~~$1.8 million related to mortgage servicing rights impairment from TheBANK. The reconciliation of non-GAAP measures (including adjusted net income, adjusted ~~efficiency ratio, adjusted~~ return on average assets, adjusted net interest margin, adjusted efficiency ratio, tangible book value, tangible book value per share and return on average tangible common ~~equity, tangible book value and tangible book value per share)~~equity), which the Company believes facilitates the assessment of its ~~banking operations~~financial results and peer comparability, is included in tabular form in this Quarterly Report on Form 10-Q in the “Non-GAAP Financial Information” section.

~~Revenues from trust fees, commissions~~On January 31, 2019, the Company completed its acquisition of Banc Ed, the holding company for TheBANK. TheBANK, founded in 1868, is a commercial bank headquartered in Edwardsville, Illinois. It is anticipated that TheBANK will be merged with and brokers’ fees, and remittance processing activities represented 49.0% of the Company’s non-interest income for the quarter ended June 30, 2018, providing a balance to revenue from traditional banking activities. Two of the Company’s acquisitions, Pulaski Financial Corp. andinto First ~~Community, had no legacy fee income in these businesses; therefore, the addition of these fee-based service offerings~~Busey’s bank subsidiary, Busey Bank, in the ~~corresponding acquired bank markets~~fourth quarter of 2019. The Company’s operating results and financial condition were materially impacted by this acquisition.

On May 13, 2019, the Company announced the execution of an Agreement and Plan of Merger in connection with the proposed acquisition by Busey Bank of Investors’ Security Trust Company (“IST”), a Fort Myers, Florida wealth management firm. While the proposed acquisition is expected to ~~continue providing attractive growth opportunities~~add to the Company’s wealth management offerings, it is not expected to have any immediate, material impact to the Company’s earnings or overall business. Through this transaction, Busey Bank and IST broaden the expertise and level of service available to clients, from individuals and families to institutions and foundations. It is anticipated that IST will be merged with and into the wealth management division of Busey Bank in ~~future periods.~~2019, subject to customary closing conditions and required approvals.

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

Table of ~~adjusted net income, a non-GAAP financial measure, see “Non-GAAP Financial Information.”~~Contents

Asset Quality

~~We remain committed to our focus on quality balance sheet growth and our credit metrics remain solid.~~ As of June 30, ~~2018,~~2019, the Company reported non-performing loans ~~decreased to $26.4~~of $33.1 million compared to ~~$33.6~~$36.6 million ~~as of~~at March 31, ~~2018, and increased from $20.1 million as of June 30, 2017.~~2019. Non-performing loans were ~~0.47%~~0.51% of total portfolio loans as of June 30, ~~2018,~~2019 compared to ~~0.61%~~0.56% as of March 31, ~~2018~~2019. With a continued commitment to asset quality and ~~0.51% as~~the strength of ~~June 30, 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 second quarter of 2017. The allowance for loan loss as a percentage of portfolio loans was 0.96% at June 30, 2018 as compared to 0.95% at March 31, 2018 and 1.25% at June 30, 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 forour balance sheet, near-term loan losses ~~of $2.3 million in the second quarter of 2018, compared~~are expected to ~~$1.0 million in the first quarter of 2018~~remain generally low. While these results are encouraging, asset quality metrics can be generally influenced by market-specific economic conditions, and ~~$0.5 million in the second quarter of 2017. The Company recorded provision for loan losses of $3.3 million in the first six months of 2018 and $1.0 million in the first six months of 2017.~~

specific measures may fluctuate from period to period. The key metrics are as follows (dollars in thousands):

	As of and for the Three Months Ended
	June 30,			March 31,			December 31,			September 30,
	2018			2018			2017			2017

													As of
													June 30,			March 31			December 31,			September 30,
													2019			2019			2018			2018
Portfolio loans	$	5,555,287		$	5,531,453		$	5,519,500		$	5,085,864		$	6,532,126		$	6,515,081		$	5,568,428		$	5,623,741
Commercial loans(1)	4,076,253			4,061,181			4,030,821			3,782,463
Allowance for loan losses	53,305			52,649			53,582			51,035				51,375			50,915			50,648			52,743
Non-performing loans
Non-accrual loans	25,215			32,588			24,624			27,430				32,816			36,230			34,997			40,395
Loans 90+ days past due	1,142			995			2,741			439				258			356			1,601			364
Loans 30-89 days past due	10,017			9,506			12,897			11,556				18,040			10,780			7,121			8,189
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		%
Other non-performing assets														936			921			376			1,093
Allowance as a percentage of non-performing loans	202.2		%	156.8		%	195.8		%	183.1		%		155.3	%		139.2	%		138.4	%		129.4	%
Allowance for loan losses to portfolio loans	0.96		%	0.95		%	0.97		%	1.0		%		0.79	%		0.78	%		0.91	%		0.94	%

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

Economic Conditions of Markets

~~The Company~~Busey Bank has 44 banking centers serving Illinois. Our ~~primary downstate~~ Illinois markets of Champaign, Macon, McLean, and Peoria counties ~~are anchored by~~and Southwest Chicago feature several ~~strong, well-recognized and stable organizations.~~Fortune 1000 companies. Those organizations, coupled with a large ~~agricultural sector,~~healthcare and higher education sectors, anchor the communities in which they are located and have provided a comparatively stable foundation for housing, employment and small business. The First Community acquisition 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 densityTheBANK has 19 banking centers in ~~the Midwest.~~Southern Illinois.

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.

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. Louis, Missouri 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~~Illinois; therefore, the Company’s geographic concentration in only three of ~~the~~these 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.~~decades.

Busey Bank has five banking centers in southwest ~~Florida. Southwest~~ Florida, which has ~~shown continuing signs of improvement in areas such as~~experienced job growth and ~~the~~an expanded housing market over the last several years.

Busey Bank has one banking center in the Indianapolis, Indiana ~~area, which~~area. Indianapolis is the most populous city of Indiana with a diverse ~~economy. Many large corporations are headquartered in Indianapolis~~economy and it is ~~host~~headquarters to ~~numerous conventions and sporting events annually.~~many large corporations.

~~OPERATING PERFORMANCE~~Table of Contents

Net interest income

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

Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes an income tax rate of ~~26% in 2018 and 35% in 2017.~~21%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.

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

Table of Contents

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

~~THREE MONTHS ENDED JUNE 30, 2018 AND 2017~~ (UNAUDITED)

Change in income/

2018

2017

expense due to

Average

Income/

Yield/

Average

Income/

Yield/

Average

Average

Total

Balance

Expense

Rate(6)

Balance

Expense

Rate(6)

Volume

Yield/Rate

Change

(dollars in thousands)

Assets

Interest-bearing bank deposits and federal funds sold

$
115,599

$
508

1.76
%
$
182,562

$
454

1.00
%
$
(208
)
$
262

$
54

Investment securities

U.S. Government obligations

155,009

636

1.65
%
144,653

487

1.35
%
37

112

149

Obligations of states and political subdivisions(1)

290,802

1,986

2.74
%
186,547

1,411

3.03
%
723

(148
)
575

Other securities

862,392

5,328

2.48
%
480,064

2,811

2.35
%
2,354

163

2,517

Loans held for sale

27,516

299

4.36
%
104,420

1,000

3.84
%
(820
)
119

(701
)
Portfolio loans(1) (2)

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)

$
6,984,486

$
71,067

4.08
%
$
4,990,573

$
46,771

3.76
%
$
20,348

$
3,948

$
24,296

Cash and due from banks

102,640

75,959

Premises and equipment

120,595

78,728

Allowance for loan losses

(53,521
)

(49,260
)

Other assets

499,341

265,074

Total Assets

$
7,653,541

$
5,361,074

Liabilities and Stockholders’ Equity

Interest-bearing transaction deposits

$
1,214,863

$
782

0.26
%
$
1,021,986

$
333

0.13
%
$
73

$
376

$
449

Savings and money market deposits

2,004,299

1,641

0.33
%
1,493,040

678

0.18
%
230

733

963

Time deposits

1,400,548

4,481

1.28
%
743,308

1,152

0.62
%
1,511

1,818

3,329

Short-term borrowings:

Repurchase agreements

235,678

372

0.63
%
176,735

204

0.46
%
78

90

168

Other (4)

96,429

457

1.90
%
2,198

27

4.93
%
457

(27
)
430

Long-term debt(5)

154,123

1,406

3.66
%
120,141

628

2.10
%
214

564

778

Junior subordinated debt owed to unconsolidated trusts

71,046

814

4.60
%
70,904

621

3.51
%
1

192

193

Total interest-bearing liabilities

$
5,176,986

$
9,953

0.77
%
$
3,628,312

$
3,643

0.40
%
$
2,564

$
3,746

$
6,310

Net interest spread(1)

3.31
%

3.36
%

Noninterest-bearing deposits

1,492,251

1,091,696

Other liabilities

40,173

36,178

Stockholders’ equity

944,131

604,888

Total Liabilities and Stockholders’ Equity

$
7,653,541

$
5,361,074

Interest income / earning assets(1) (3)

$
6,984,486

$
71,067

4.08
%
$
4,990,573

$
46,771

3.76
%

Interest expense / earning assets

$
6,984,486

$
9,953

0.57
%
$
4,990,573

$
3,643

0.29
%

Net interest margin(1)

$
61,114

3.51
%

$
43,128

3.47
%
$
17,784

$
202

$
17,986


	Three Months Ended June 30,
	2019						2018
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate⁽⁵⁾		Balance		Expense		Rate⁽⁵⁾
Assets
Interest-bearing bank deposits and federal funds sold	$	215,181		1,083	2.02	%	$	115,599	$	508	1.76	%
Investment securities:
U.S. Government obligations		354,327		2,151	2.43	%		155,009		636	1.65	%
Obligations of states and political subdivisions⁽¹⁾		294,371		2,181	2.97	%		290,802		1,882	2.60	%
Other securities		1,248,788		8,337	2.68	%		862,392		5,328	2.48	%
Loans held for sale		25,143		212	3.38	%		27,516		299	4.36	%
Portfolio loans^{(1), (2)}		6,528,326		78,279	4.81	%		5,533,168		62,233	4.51	%
Total interest-earning assets^{(1), (3)}	$	8,666,136	$	92,243	4.27	%	$	6,984,486	$	70,886	4.07	%

Cash and due from banks		113,233						102,640
Premises and equipment		149,334						120,595
Allowance for loan losses		(51,047)						(53,521)
Other assets		645,022						499,341
Total assets	$	9,522,678					$	7,653,541

Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits	$	1,821,827	$	2,489	0.55	%	$	1,214,863	$	782	0.26	%
Savings and money market deposits		2,400,751		3,581	0.60	%		2,004,299		1,641	0.33	%
Time deposits		1,747,830		8,084	1.86	%		1,400,548		4,481	1.28	%
Federal funds purchased and repurchase agreements		193,621		627	1.30	%		235,678		372	0.63	%
Borrowings ⁽⁴⁾		258,662		2,365	3.67	%		250,552		1,863	2.98	%
Junior subordinated debt issued to unconsolidated trusts		71,194		892	5.03	%		71,046		814	4.60	%
Total interest-bearing liabilities	$	6,493,885	$	18,038	1.11	%	$	5,176,986	$	9,953	0.77	%

Net interest spread⁽¹⁾					3.16	%					3.30	%

Noninterest-bearing deposits		1,747,746						1,492,251
Other liabilities		85,245						40,173
Stockholders’ equity		1,195,802						944,131
Total liabilities and stockholders’ equity	$	9,522,678					$	7,653,541


Interest income / earning assets^{(1), (3)}	$	8,666,136	$	92,243	4.27	%	$	6,984,486	$	70,886	4.07	%
Interest expense / earning assets	$	8,666,136	$	18,038	0.84	%	$	6,984,486	$	9,953	0.57	%
Net interest margin⁽¹⁾			$	74,205	3.43	%			$	60,933	3.50	%

~~(1)On a tax-equivalent basis assuming an income tax rate of 26% in 2018 and 35% in 2017.~~

~~(2)Non-accrual loans have been included in average portfolio loans.~~

(1)	On a tax-equivalent basis and assuming an income tax rate of 21%.

(2)	Non-accrual loans have been included in average portfolio loans.

(3)	Interest income includes a tax-equivalent adjustment of $0.8 million and $0.6 million for the three months ended June 30, 2019 and 2018, respectively.

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

(5)	Annualized.

Table of Contents

CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES

(UNAUDITED)


	Six Months Ended June 30,
	2019							2018
	Average			Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance			Expense		Rate⁽⁵⁾		Balance		Expense		Rate⁽⁵⁾
Assets
Interest-bearing bank deposits and federal funds sold	$	217,811			2,315	2.14	%	$	116,956	$	931	1.61	%
Investment securities:
U.S. Government obligations		343,773			4,217	2.47	%		158,272		1,285	1.64	%
Obligations of states and political subdivisions⁽¹⁾		280,405			4,118	2.96	%		299,976		3,861	2.60	%
Other securities		1,186,059	��		15,881	2.70	%		851,297		10,286	2.44	%
Loans held for sale		21,218			379	3.60	%		33,372		649	3.92	%
Portfolio loans^{(1), (2)}		6,329,596			150,291	4.79	%		5,520,584		123,085	4.50	%
Total interest-earning assets^{(1), (3)}	$	8,378,862		$	177,201	4.26	%	$	6,980,457	$	140,097	4.05	%

Cash and due from banks		109,714							105,667
Premises and equipment		146,776							119,481
Allowance for loan losses		(51,236)							(54,076)
Other assets		614,859							507,162
Total assets	$	9,198,975						$	7,658,691

Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits	$	1,760,550		$	4,967	0.57	%	$	1,188,922	$	1,452	0.25	%
Savings and money market deposits		2,303,358			6,285	0.55	%		2,015,561		3,160	0.32	%
Time deposits		1,718,587			15,402	1.81	%		1,389,595		8,279	1.20	%
Federal funds purchased and repurchase agreements		199,045			1,210	1.23	%		246,802		713	0.58	%
Borrowings ⁽⁴⁾		227,460			4,266	3.78	%		264,205		3,696	2.82	%
Junior subordinated debt issued to unconsolidated trusts		71,175			1,806	5.12	%		71,028		1,529	4.34	%
Total interest-bearing liabilities	$	6,280,175		$	33,936	1.09	%	$	5,176,113	$	18,829	0.73	%

Net interest spread⁽¹⁾						3.17	%					3.32	%

Noninterest-bearing deposits		1,682,691							1,494,680
Other liabilities		80,034							48,923
Stockholders’ equity		1,153,075							938,975
Total liabilities and stockholders’ equity	$	9,195,975						$	7,658,691


Interest income / earning assets^{(1), (3)}	$	8,378,862		$	177,201	4.26	%	$	6,980,457	$	140,097	4.05	%
Interest expense / earning assets	$	8,378,862		$	33,936	0.81	%	$	6,980,457	$	18,829	0.55	%
Net interest margin⁽¹⁾				$	143,265	3.45	%			$	121,268	3.50	%

(1)On a tax-equivalent basis and assuming an income tax rate of 21%.

(2)	Non-accrual loans have been included in average portfolio loans.

(3)	Interest income includes a tax-equivalent adjustment of $1.5 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively.

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

(5)	Annualized.

Table of Contents

Earning Assets, Sources of Funds and Net Interest Margin

Total average interest-earning assets increased $1.7 billion, or 24.1%, to $8.7 billion for the three months ended June 30, 2019, as compared to $7.0 billion for the same period in 2018. Total average interest-earning assets increased $1.4 billion, or 20.0%, to $8.4 billion for the six months ended June 30, 2019, as compared to $7.0 billion for the same period of 2018. Average loans have increased due to the Banc Ed acquisition and organic growth. Loans generally have notably higher yields compared to interest-bearing bank deposits and investment securities and our loan growth contributed to a positive effect on net interest margin.

Total average interest-bearing liabilities increased $1.3 billion, or 25.4%, to $6.5 billion for the three months ended June 30, 2019 as compared to $5.2 billion for the same period in 2018. Total average interest-bearing liabilities increased $1.1 billion, or 21.3%, to $6.3 billion for the six months ended June 30, 2019 as compared to $5.2 billion for the same period of 2018. Average noninterest-bearing deposits increased $255.5 million, or 17.1%, to $1.7 billion for the three months ended June 30, 2019, as compared to $1.5 billion for the same period of 2018. Average noninterest-bearing deposits increased $188.0 million, or 12.6%, to $1.7 billion for the six months ended June 30, 2019, as compared to $1.5 billion for the same period of 2018.

Interest income, on a tax-equivalent basis, increased $21.3 million, or 30.1%, to $92.2 million for the three months ended June 30, ~~2018 and 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.~~

~~CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST RATES~~

~~SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (UNAUDITED)~~

Change in income/

2018

2017

expense due to

Average

Income/

Yield/

Average

Income/

Yield/

Average

Average

Total

Balance

Expense

Rate(6)

Balance

Expense

Rate(6)

Volume

Yield/Rate

Change

(dollars in thousands)

Assets

Interest-bearing bank deposits and federal funds sold

$
116,956

$
931

1.61
%
$
137,826

$
632

0.92
%
$
(122
)
$
421

$
299

Investment securities

U.S. Government obligations

158,272

1,285

1.64
%
145,922

940

1.30
%
85

260

345

Obligations of states and political subdivisions(1)

299,976

4,073

2.74
%
190,803

2,843

3.00
%
1,502

(272
)
1,230

Other securities

851,297

10,286

2.44
%
474,034

5,469

2.33
%
4,547

270

4,817

Loans held for sale

33,372

649

3.92
%
121,546

2,238

3.71
%
(1,708
)
119

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

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)

$
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

105,667

77,516

Premises and equipment

119,481

78,505

Allowance for loan losses

(54,076
)

(48,986
)

Other assets

507,162

271,342

Total Assets

$
7,658,691

$
5,325,723

Liabilities and Stockholders’ Equity

Interest-bearing transaction deposits

$
1,188,922

$
1,452

0.25
%
$
1,019,185

$
613

0.12
%
$
117

$
722

$
839

Savings and money market deposits

2,015,561

3,160

0.32
%
1,474,562

1,256

0.17
%
476

1,428

1,904

Time deposits

1,389,595

8,279

1.20
%
760,829

2,338

0.62
%
2,781

3,160

5,941

Short-term borrowings:

Repurchase agreements

246,802

713

0.58
%
171,290

327

0.38
%
176

210

386

Other (4)

110,083

933

1.71
%
11,188

74

1.33
%
833

26

859

Long-term debt(5)

154,122

2,763

3.62
%
100,181

741

1.49
%
555

1,467

2,022

Junior subordinated debt owed to unconsolidated trusts

71,028

1,529

4.34
%
70,887

1,208

3.44
%
2

319

321

Total interest-bearing liabilities

$
5,176,113

$
18,829

0.73
%
$
3,608,122

$
6,557

0.37
%
$
4,940

$
7,332

$
12,272

Net interest spread(1)

3.33
%

3.40
%

Noninterest-bearing deposits

1,494,680

1,079,405

Other liabilities

48,923

38,020

Stockholders’ equity

938,975

600,176

Total Liabilities and Stockholders’ Equity

$
7,658,691

$
5,325,723

Interest income / earning assets(1) (3)

$
6,980,457

$
140,464

4.06
%
$
4,947,346

$
92,411

3.77
%

Interest expense / earning assets

$
6,980,457

$
18,829

0.55
%
$
4,947,346

$
6,557

0.27
%

Net interest margin(1)

$
121,635

3.51
%

$
85,854

3.50
%
$
35,637

$
144

$
35,781

~~(1)On a tax-equivalent basis assuming 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 $1.5 million at June 30, 2018 and 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.~~

The Consolidated Average Balance Sheets and interest rates were impacted by the 2017 acquisitions of First Community and Mid Illinois, along with organic growth. Total average interest-earning assets increased $2.0 billion, or 40.0%, to $7.0 billion for the three month period ended June 30, 2018, as2019, compared to ~~$5.0 billion for~~$70.9 million in the same period in 2017. Total average interest-earning assets increased $2.1 billion, or 41.1%, to $7.0 billion for the six month period ended June 30, 2018, as compared to $4.9 billion for the same period in 2017. Total average interest-bearing liability balances increased $1.6 billion, or 42.7%, to $5.2 billion for the three month period ended June 30, 2018, as compared to $3.6 billion for the same period in 2017. Total average interest-bearing liability balances increased $1.6 billion, or 43.5%, to $5.2 billion for the six month period ended June 30, 2018, as compared to $3.6 billion for the same period in 2017.

of 2018. Interest income, on a tax-equivalent basis, increased ~~$24.3~~$37.1 million, or ~~51.9%~~26.5%, to ~~$71.1~~$177.2 million for the ~~three month period~~six months ended June 30, ~~2018, as~~2019, compared to ~~$46.8~~$140.1 million in same period of 2018. The interest income increase related primarily to the increase in average loan balances. Interest expense increased during the three months ended June 30, 2019 by $8.0 million to $18.0 million, compared to $10.0 million in the same period of ~~2017.~~2018. Interest ~~income, on a tax-equivalent basis,~~expense increased ~~$48.1 million, or 52.0%, to $140.5 million for~~during the six ~~month period~~months ended June 30, ~~2018, as~~2019 by $15.1 million to $33.9 million, compared to ~~$92.4~~$18.8 million in the same period of ~~2017. The interest income~~2018. Funding costs have increased primarily due to resetting of time deposit rates to reflect market rate increases ~~related primarily to~~and additional borrowings in conjunction with 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.Banc Ed acquisition.

Net interest income, on a tax-equivalent basis, increased ~~$18.0~~$13.3 million, or 21.8%, for the three ~~month period~~months ended June 30, ~~2018,~~2019 as compared to the same period of ~~2017.~~2018. Net interest income, on a tax-equivalent basis, increased ~~$35.8~~$22.0 million, or 18.1%, for the six ~~month period~~months ended June 30, ~~2018,~~2019 as compared to the same period of 2017. The Federal Open Market Committee announced that the federal funds rate increased from 1.50% to 1.75% on March 21, 2018 and then on June 13, 2018 that the federal funds rate increased from 1.75% to 2.00%. In 2017, for comparison, the federal funds rate increased from 0.75% to 1.00% on March 15, 2017, and then from 1.00% to 1.25% on June 15, 2017. The Company expects the increases in interest rates to be modestly favorable to net interest income for the 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.2018.

~~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~~decreased to ~~3.51%~~3.43% for the three ~~month period~~months ended June 30, ~~2018, compared to 3.47% for the same period in 2017, and increased to 3.51% for the six month period ended June 30, 2018,~~2019, compared to 3.50% for the same period ~~in 2017.~~of 2018, and decreased to 3.45% for the six months ended June 30, 2019, compared to 3.50% for the same period of 2018. Net of purchase accounting accretion and ~~amortization(1),~~ amortization,⁽¹⁾the net interest margin for the three ~~month period~~months ended June 30, ~~2018~~2019 was ~~3.34%~~3.27%, ~~steady with the same period in 2017, and was 3.33% for the six month period ended June 30, 2018,~~ a decrease from ~~3.36%~~3.33% for the same period in ~~2017.~~2018, and was 3.29% for the six months ended June 30, 2019, a decrease from 3.32% for the same period of 2018.

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


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

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

2018

2017

First Quarter

3.52
%
3.53
%
Second Quarter

3.51
%
3.47
%
Third Quarter

—

3.60
%
Fourth Quarter

—

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 ~~3.31%~~3.16% for the three ~~month period~~months ended June 30, ~~2018,~~2019 compared to ~~3.36%~~3.30% in the same period of 2018, and was 3.17% for the six months ended June 30, 2019, compared to 3.32% for the same period ~~in 2017 and was 3.33% for the six month period ended June 30,~~of 2018, ~~compared to 3.40% for the same period in 2017.~~each on a tax-equivalent basis.

Table of Contents

Management attempts to mitigate the effects of the interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies. Please refer to the Notes to Consolidated Financial Statements in the Company’s ~~Annual Report on~~2018 Form 10-K ~~for the year ended December 31, 2017~~ for accounting policies underlying the recognition of interest income and expense.

~~(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 June 30,										Six Months Ended June 30,
	2018		2017			$ Change			% Change		2018		2017		$ Change			% Change

																				Three Months Ended June 30,								Six Months Ended June 30,
																								$		%						$		%
																				2019		2018		Change		Change		2019		2018		Change		Change
Fees for customer services																				$	9,696	$	7,290	$	2,406	33.0	%	$	17,793	$	14,236	$	3,557	25.0	%
Trust fees	$	6,735	$	5,827		$	908		15.6	%	$	14,249	$	12,017	$	2,232		18.6	%		8,318		6,735		1,583	23.5	%		16,433		14,249		2,184	15.3	%
Commissions and brokers’ fees, net	883		751			132			17.6	%	1,979		1,473		506			34.4	%		1,170		883		287	32.5	%		2,084		1,979		105	5.3	%
Remittance processing	3,566		2,859			707			24.7	%	6,958		5,704		1,254			22.0	%		3,717		3,566		151	4.2	%		7,497		6,958		539	7.7	%
Fees for customer services	7,290		6,095			1,195			19.6	%	14,236		12,081		2,155			17.8	%
Mortgage revenue	1,573		2,770			(1,197		)	(43.2	)%	3,216		4,904		(1,688		)	(34.4	)%		2,851		1,573		1,278	81.2	%		4,796		3,216		1,580	49.1	%
Security (losses) gains, net	160		(4		)	164			NM		160		853		(693		)	(81.2	)%
Net (losses) gains on sales of securities																					(10)		160		(170)	(106.3)	%		(184)		160		(344)	(215.0)	%
Unrealized (losses) gains recognized on equity securities																					(1,016)		—		(1,016)	(100.0)	%		(800)		—		(800)	(100.0)	%
Other income	2,595		1,764			831			47.1	%	4,490		3,044		1,446			47.5	%		3,170		2,595		575	22.2	%		6,222		4,490		1,732	38.6	%
Total non-interest income	$	22,802	$	20,062		$	2,740		13.7	%	$	45,288	$	40,076	$	5,212		13.0	%	$	27,896	$	22,802	$	5,094	22.3	%	$	53,841	$	45,288	$	8,553	18.9	%

~~NM=Not Meaningful~~

Total non-interest income of $22.8 million for the three month period ended June 30, 2018 increased by 13.7% as compared to $20.1 million for the same period in 2017. Total non-interest income of $45.3 million for the six month period ended June 30, 2018 increased by 13.0% as compared to $40.1 million for the same period in 2017. The increases reflect organic growth as well as the 2017 acquisitions of First Community and Mid Illinois.

~~Combined Wealth Management revenue, consisting of trust fees and commissions and brokers’ fees, net, increased to $7.6~~$27.9 million for the three months ended June 30, ~~2018~~2019 increased by 22.3% as compared to ~~$6.6~~$22.8 million for the ~~three months ended June 30, 2017 and increased to $16.2~~same period in 2018. Total non-interest income of $53.8 million for the six months ended June 30, ~~2018~~2019 increased by 18.9% as compared to ~~$13.5~~$45.3 million for the same period in 2018. Revenues from trust fees, commissions and brokers’ fees and remittance processing activities represented 47.3% of the Company’s non-interest income for the quarter ended June 30, 2019, providing a balance to revenue from traditional banking activities.

Trust fees and commissions and brokers’ fees were $9.5 million for the second quarter of 2019 compared to $7.6 million for the second quarter of 2018. Trust fees and commissions and brokers’ fees were $18.5 million for the six months ended June 30, ~~2017. Market expansion and increasing~~2019 compared to $16.2 million for the same period of 2018. The Company’s wealth management division ended the second quarter of 2019 with $9.0 billion in assets under care drove fee income. Further, two of the Company’s acquisitions, Pulaski and First Community, had no legacy fee income in these businesses; therefore, the addition of these fee-based service offeringscompared to $7.0 billion in the ~~corresponding acquired bank markets is expected to provide attractive growth opportunities in future periods.~~second quarter of 2018.

Remittance processing revenue from the Company’s subsidiary, FirsTech, ~~Inc.,~~ of $3.7 million for the second quarter of 2019 increased from $3.6 million for the ~~three~~second quarter of 2018. For the first six months ~~ended June 30, 2018~~of 2019, remittance processing revenue increased to $7.5 million compared to ~~$2.9~~$7.0 million for the same period of ~~2017. For the first six months~~2018. FirsTech experienced growth from both new clients and expansion of 2018, remittance processing revenue 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.~~clients.

Fees for customer services increased ~~to $7.3 million~~33.0% and 25.0% for the three ~~month period~~and six months ended June 30, ~~2018 as~~2019, respectively, compared to ~~$6.1 million for~~ the same period of ~~2017 and increased to $14.2 million for the six month period ended June 30,~~ 2018 as ~~compared to $12.1 million for~~a result of the ~~same period of 2017.~~Banc Ed acquisition. Evolving regulation, product changes and changing behaviors by our ~~client~~customer base ~~may~~ impact ~~the~~ fees for customer ~~services~~services.

The mortgage line of business generated $2.9 million of revenue in ~~future periods.~~

~~Mortgage revenue decreased~~the second quarter of 2019, an increase compared to $1.6 million of revenue in the second quarter of 2018, and increased to $4.8 million for the ~~three month period~~six months ended June 30, ~~2018~~2019 compared to ~~$2.8~~$3.2 million for the same period of ~~2017 and decreased to $3.2 million for the six month period ended June 30,~~ 2018, ~~compared to $4.9 million for the same~~following a period of ~~2017. 2018 results reflect lower origination volumes, the timing~~restructuring and additional revenue from TheBANK.

Table of ~~sales, and the realignment~~Contents

Non-interest expense (dollars in thousands):


	Three Months Ended June 30,										Six Months Ended June 30,
							$		%								$		%
	2019			2018			Change		Change		2019			2018			Change		Change
Salaries, wages and employee benefits	$	34,268		$	25,472		$	8,796	34.5	%	$	66,609		$	54,291		$	12,318	22.7	%
Net occupancy expense of premises		4,511			3,689			822	22.3	%		8,713			7,510			1,203	16.0	%
Furniture and equipment expenses		2,352			1,790			562	31.4	%		4,447			3,703			744	20.1	%
Data processing		5,616			4,030			1,586	39.4	%		10,017			8,375			1,642	19.6	%
Amortization of intangible assets		2,412			1,490			922	61.9	%		4,506			3,005			1,501	50.0	%
Other expense		18,861			10,834			8,027	74.1	%		30,891			21,461			9,430	43.9	%
Total non-interest expense	$	68,020		$	47,305		$	20,715	43.8	%	$	125,183		$	98,345		$	26,838	27.3	%

Income taxes	$	6,702		$	8,749		$	(2,047)	(23.4)	%	$	16,287		$	17,027		$	(740)	(4.3)	%
Effective rate on income taxes		21.8	%		26.0	%						24.7	%		26.7	%

Efficiency ratio		63.6	%		54.8	%						60.9	%		57.3	%
Full-time equivalent employees as of period-end		1,579			1,288

Total non-interest expense of ~~mortgage origination resources to the Company’s branch market areas through the sale of certain mortgage locations in the fourth quarter of 2017.~~

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 47.1%~~$68.0 million for the three months ended June 30, ~~2018~~2019 increased as compared to $47.3 million for the same period in 2018. Total non-interest expense of ~~2017 and increased 47.5%~~$125.2 million for the six months ended June 30, ~~2018 compared to the same period of 2017 across multiple revenue sources.~~

~~Non-interest expense~~ (~~dollars in thousands~~):

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

$
Change

%
Change

2018

2017

$
Change

%
Change

Salaries, wages and employee benefits

$
25,472

$
20,061

$
5,411

27.0
%
$
54,291

$
41,951

$
12,340

29.4
%
Net occupancy expense of premises

3,689

3,126

563

18.0
%
7,510

6,311

1,199

19.0
%
Furniture and equipment expenses

1,790

1,719

71

4.1
%
3,703

3,338

365

10.9
%
Data processing

4,030

3,306

724

21.9
%
8,375

6,235

2,140

34.3
%
Amortization of intangible assets

1,490

1,182

308

26.1
%
3,005

2,389

616

25.8
%
Other expense

10,834

7,374

3,460

46.9
%
21,461

14,163

7,298

51.5
%
Total non-interest expense

$
47,305

$
36,768

$
10,537

28.7
%
$
98,345

$
74,387

$
23,958

32.2
%

Income taxes

$
8,749

$
8,681

$
68

0.8
%
$
17,027

$
17,419

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

26.0
%
34.5
%

26.7
%
35.5
%

Efficiency ratio

54.7
%
56.3
%

57.2
%
57.6
%

Full-time equivalent employees as of period-end

1,288

1,238

~~Total non-interest expense of $47.3 million for the three month period ended June 30, 2018~~2019 increased as compared to ~~$36.8~~$98.3 million for the same period in ~~2017. Total non-interest expense of $98.3~~2018. The three and six months ended June 30, 2019 reflect increases from the Banc Ed acquisition.

Salaries, wages and employee benefits increased to $34.3 million for the ~~six month period~~three months ended June 30, ~~2018 increased~~2019 as compared to ~~$74.4~~$25.5 million for the same period in ~~2017. Pre-tax non-operating expenses of $1.0~~2018, and increased to $66.6 million ~~impacted~~for the ~~three month period~~six months ended June 30, 2018 while pre-tax non-operating expenses of $0.3 million impacted the same period of 2017. Pre-tax non-operating expenses of $4.5 million impacted the six month period ended June 30, 2018 while pre-tax non-operating expenses of $1.3 million impacted the same period 2017. We continue to examine expenses across all areas of the Company and remain focused on expense discipline, with an emphasis on the ones outlined below.

~~Salaries, wages and employee benefits expense of $25.5 million increased $5.4 million for the three month period ended June 30, 2018~~2019 as compared ~~to the same period in 2017 and increased $12.3 million,~~ to $54.3 million for the ~~six month period ended June 30, 2018 as compared to the~~ same period ~~of 2017.~~in 2018. The ~~increase was~~increases in salaries, wages and employee benefits primarily ~~as a result of an increased~~relates to fluctuations in the number of employees resulting from the First Community 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 totaled 1,288 at June 30, 2018, down from 1,347 at December 31, 2017, and up from 1,238 at June 30, 2017.Banc Ed acquisition.

Combined net occupancy expense of premises and furniture and equipment expenses ofwere $6.9 million for the three months ended June 30, 2019 and $5.5 million for the three months ended June 30, 2018. Combined net occupancy expense of premises and furniture and equipment expenses were $13.2 million for the six months ended June 30, 2019 and $11.2 million for the ~~three and~~ six ~~month periods~~months ended June 30, ~~2018, respectively,~~2018. The increase is primarily due to TheBANK adding 19 banking centers to our banking center network.

Data processing expense in the second quarter of 2019 of $5.6 million increased compared to ~~the same periods in 2017. The 2017 acquisitions added 21 banking centers. We continue to evaluate our banking center network and five banking centers were closed~~$4.0 million in the ~~first~~second quarter of 2018.

~~Data~~ In the first six months of 2019, data processing expense ~~for the three month period ended June 30, 2018 of $4.0~~increased to $10.0 million ~~increased from $3.3~~compared to $8.4 million for the same period of ~~2017. Data~~2018. Variances are related to payment of conversion expenses and data processing ~~expense~~related to TheBANK.

Amortization of intangible assets increased to $2.4 million for the ~~six month period~~three months ended June 30, 2019 compared to $1.5 million for the three months ended June 30, 2018, and increased to $4.5 million for the six months ended June 30, 2019 compared to $3.0 million for the six months ended June 30, 2018, as a result of ~~$8.4~~the Banc Ed acquisition.

Other expense of $18.9 million ~~decreased from $6.2~~for the three months ended June 30, 2019 was an increase compared to $10.8 million for the same period in 2018. Other expense of ~~2017. Variances are largely related to deconversion expenses related to acquisitions.~~

~~Amortization of intangible assets increased~~$30.9 million for the ~~three and~~ six ~~month periods~~months ended June 30, ~~2018~~2019 was an increase compared to $21.5 million for the same period in ~~2017 as a result of the First Community and Mid Illinois acquisitions.~~

Other expense of $10.8 million for the three month period ended June 30, 2018 increased $3.5 million compared to the same period in 2017. Other expense of $21.5 million for the six month period ended June 30, 2018 increased $7.3 million compared to the same period in 20172018. Variances are across multiple expense categories ~~including fluctuations~~and include expenses related to acquisitions and other restructuring activities. In addition, included in ~~gains and losses on OREO sales, business development and acquisition related check card service expense.~~

~~The effective rate on income taxes, or income taxes divided by income before taxes, of 26.0% and 26.7%~~other expense for the three and six months ended June 30, ~~2018, respectively,~~2019 is MSR valuation impairment of $1.8 million and lease impairment of $0.4 million.

The effective income tax rate of 21.8% and 24.7% for the three and six months ended June 30, 2019, was lower than the combined federal and state statutory rate of approximately 28% due to tax ~~preferred~~exempt interest income, such as municipal bond interest and bank owned life insurance income, ~~accounting for a~~and investments in various federal and state tax credits.

~~portion~~Table of ~~our taxable income. Effective July 1, 2017,~~Contents

The Company continues to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. At June 30, 2019, the ~~combined Illinois corporate income~~Company was not under examination by any tax ~~rate and replacement tax rate increased from 7.75% to 9.50%. Effective January 1, 2018 in connection with the TCJA, the corporate federal tax rate was reduced from 35.0% to 21.0%.~~authority.

The efficiency ~~ratio(1) represents~~ratio⁽¹⁾ is calculated as total non-interest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus non-interest income, less security gains and losses. The efficiency ratio, which is a measure commonly used by management and the ~~investment community in the~~ banking industry, measures the amount of expense ~~that is~~ incurred to generate a dollar of revenue. The efficiency ratio was 63.6% in the second quarter of ~~54.7%~~2019 as compared to 54.8% in the same period of 2018 and the efficiency ratio was 60.9% for the ~~three month period~~six months ended June 30, ~~2018 improved from 56.3%~~2019 as compared to 57.3% in the comparable period ~~in 2017 and the efficiency ratio~~ of ~~57.2% for the six month period ended June 30, 2018 improved from 57.6% in the comparable period in 2017.~~2018. Operating costs have been influenced by ~~acquisitions~~acquisition, restructuring and other non-recurring items and the adjusted efficiency ~~ratio(1)~~ratio⁽¹⁾, excluding the impact of such ~~acquisition~~ costs, ~~among other items,~~ was ~~53.6% and 55.8%~~56.6% for the ~~three month periods~~quarter ended June 30, ~~2018 and 2017, respectively.~~2019 compared to 53.7% for the same period of 2018. The adjusted efficiency ~~ratio(1)~~ratio⁽¹⁾ was ~~54.5%~~56.5% and ~~56.5%~~54.6% for the six month periods ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. While acquisition expenses may have a negative impact on the efficiency ratios, the Company expects to realize operating efficiencies creating a positive impact in future years. 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 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”.

~~(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):

	June 30, 2018		December 31, 2017		$ Change			% Change

										June 30,		December 31,
										2019		2018		$ Change		% Change
Assets
Securities available for sale	$	871,338	$	872,682	$	(1,344	)	(0.2	)%
Securities held to maturity	507,780		443,550		64,230			14.5	%
Loans held for sale	33,974		94,848		(60,874		)	(64.2	)%
Debt securities available for sale										$	1,848,073	$	697,685	$	1,150,388	164.9	%
Debt securities held to maturity											15,708		608,660		(592,952)	(97.4)	%
Portfolio loans, net	5,501,982		5,465,918		36,064			0.7	%		6,480,751		5,517,780		962,971	17.5	%


Total assets	$	7,775,544	$	7,860,640	$	(85,096	)	(1.1	)%	$	9,612,667	$	7,702,357	$	1,910,310	24.8	%


Liabilities
Deposits:
Noninterest-bearing	$	1,496,671	$	1,597,421	$	(100,750	)	(6.3	)%	$	1,766,681	$	1,464,700	$	301,981	20.6	%
Interest-bearing	4,667,241		4,528,544		138,697			3.1	%		6,066,541		4,784,621		1,281,920	26.8	%
Total deposits	$	6,163,912	$	6,125,965	$	37,947		0.6	%	$	7,833,222	$	6,249,321	$	1,583,901	25.3	%


Securities sold under agreements to repurchase	$	240,109	$	304,566	$	(64,457	)	(21.2	)%	$	190,846	$	185,796	$	5,050	2.7	%
Short-term borrowings	150,000		220,000		(70,000		)	(31.8	)%		30,761		—		30,761	100.0	%
Long-term debt	50,000		50,000		—			—	%		86,772		50,000		36,772	73.5	%
Senior notes, net of unamortized issuance costs	39,472		39,404		68			0.2	%		39,607		39,539		68	0.2	%
Subordinated notes, net of unamortized issuance costs	64,653		64,715		(62		)	(0.1	)%		59,197		59,147		50	0.1	%
Junior subordinated debt owed to unconsolidated trusts	71,081		71,008		73			0.1	%		71,230		71,155		75	0.1	%


Total liabilities	$	6,818,362	$	6,925,637	$	(107,275	)	(1.5	)%	$	8,409,059	$	6,707,393	$	1,701,666	25.4	%


Stockholders’ equity	$	957,182	$	935,003	$	22,179		2.4	%	$	1,203,608	$	994,964	$	208,644	21.0	%

~~In the first half~~Portfolio Loans

The Company believes that making sound loans is a necessary and desirable means of ~~2018, we continued~~employing funds available for investment. Authorized personnel are expected to ~~emphasize our key priorities - balance sheet strength, profitability~~make sound, profitable loans that resources permit and ~~growth - achieved within a framework of safety~~that opportunity affords. The Company maintains lending policies and ~~soundness. Our capital position remains strong and we continue~~procedures designed to focus lending efforts on ~~a sound credit foundation. We believe our emphasis~~the

Table of Contents

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 ~~commercial banking and wealth management, supplemented by our remittance processing activities, will drive growth~~short to intermediate-term (0-7 years) loans in geographic areas within 125 miles of its lending offices. Loans originated outside of these areas are generally residential mortgage loans originated for sale in the ~~remainder of 2018 and beyond.~~

~~Loans Held for Sale~~

~~Loans held for sale totaled $34.0 million and $94.8 million at June 30, 2018 and December 31, 2017, respectively. The amount of~~secondary market or are loans ~~held for sale decreased from December 31, 2017, due~~ to ~~lower origination volumes in 2018. Lower origination volumes are a reflection~~existing customers of the ~~realignment~~banks. The Company attempts to utilize government-assisted lending programs, such as the Small Business Administration and United States Department of ~~mortgage origination resources~~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 ~~Company’s branch market areas through~~borrowers or from proceeds from the sale of ~~certain mortgage locations~~selected assets of the borrowers.

Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews the Company’s allowance for loan losses in conjunction with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company’s underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship. 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. 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 ~~fourth quarter~~Company’s 2018 Form 10-K. The significant majority of ~~2017. Loans held for sale generate net interest income until loans are delivered to investors, at which point mortgage revenue will be recognized.~~the Company’s portfolio lending activity occurs in its Illinois and Missouri markets, with the remainder in the Indiana and Florida markets.

~~Portfolio Loans~~

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

	June 30, 2018
	Illinois		Missouri		Florida		Indiana		Total


											June 30, 2019
											Illinois		Missouri		Florida		Indiana		Total
Commercial	$	988,777	$	414,808	$	18,750	$	23,726	$	1,446,061	$	1,185,675	$	438,141	$	15,991	$	28,291	$	1,668,098
Commercial real estate	1,465,222		585,258		158,250		146,495		2,355,225			1,766,237		557,318		154,533		183,817		2,661,905
Real estate construction	92,607		107,137		13,038		62,185		274,967			175,619		141,991		28,997		82,719		429,326
Retail real estate	831,694		494,651		100,978		22,153		1,449,476			1,136,955		449,793		101,623		32,999		1,721,370
Retail other	25,242		2,628		1,123		565		29,558			47,597		1,601		1,481		748		51,427
Portfolio loans	$	3,403,542	$	1,604,482	$	292,139	$	255,124	$	5,555,287	$	4,312,083	$	1,588,844	$	302,625	$	328,574	$	6,532,126

Less allowance for loan losses									53,305

Allowance for loan losses																				(51,375)
Portfolio loans, net									$	5,501,982									$	6,480,751

December 31, 2017

Illinois

Missouri

Florida

Indiana

Total

Commercial

$
974,392

$
378,424

$
19,005

$
42,810

$
1,414,631

Commercial real estate

1,505,819

547,200

147,360

154,305

2,354,684

Real estate construction

87,084

74,662

26,209

73,551

261,506

Retail real estate

835,287

509,500

98,112

17,902

1,460,801

Retail other

26,230

685

961

2

27,878

Portfolio loans

$
3,428,812

$
1,510,471

$
291,647

$
288,570

$
5,519,500

Less allowance for loan losses

53,582

Portfolio loans, net

$
5,465,918

Table of Contents


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

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

Portfolio loans increased ~~$35.8~~$963.7 million, or ~~0.6%~~17.3%, as of June 30, ~~2018~~2019 compared to December 31, ~~2017.~~2018, primarily due to the Banc Ed acquisition. Commercial balances (consisting of commercial, commercial real estate and real estate construction loans) increased ~~$45.4~~$699.2 million from December 31, ~~2017.~~2018. Retail real estate and retail other loans ~~decreased $9.6~~increased $264.5 million from December 31, 2017. 2018 loan growth was driven by organic originations, particularly in the Missouri 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.2018.

Allowance for Loan Losses

~~Our~~The Company recorded net charge-offs of $2.1 million for the second quarter of 2019 and $3.9 million for the six months ended June 30, 2019. The allowance for loan ~~losses was $53.3 million, or 0.96%~~loss as a percentage of portfolio loans ~~and $53.6 million, or 0.97% of portfolio loans,~~was 0.79% at June 30, ~~2018~~2019 as compared to 0.78% at March 31, 2019 and 0.91% at December 31, ~~2017, respectively. As of June 30, 2018, management believed the level of~~2018. The decline in the allowance ~~and~~ coverage ~~of non-performing~~ratio in 2019 is primarily attributed to the Banc Ed acquisition. Acquired loans are initially recorded at their acquisition date fair value so a separate allowance is not initially recognized. An allowance is recorded subsequent to ~~be appropriate based upon~~acquisition to 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~~extent the ~~future as management continues to identify potential problem loans and gains further information concerning existing problem loans.~~reserve requirement exceeds the recorded fair value adjustment.

Provision for Loan Losses

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

The provision for loan losses was $2.5 million and $2.3 million for the three months ended June 30, 2019 and 2018, respectively, and was $4.6 million and $3.3 million ~~and $1.0 million at~~for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. As a result of acquisitions, the Company is holding acquired loans that are carried net of a fair value adjustment for credit and interest rate marks and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. However, as the acquired loans renew and as the Company originates new loan production, it is necessary to establish an allowance for loan losses, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses.

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

Table of Contents

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.~~guidelines. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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


	June 30,			March 31,			December 31,			September 30,
	2019			2019			2018			2018
Non-accrual loans	$	32,816		$	36,230		$	34,997		$	40,395
Loans 90+ days past due and still accruing		258			356			1,601			364
Total non-performing loans		33,074			36,586			36,598			40,759

OREO		936			921			376			1,093

Total non-performing assets	$	34,010		$	37,507		$	36,974		$	41,852

Allowance for loan losses	$	51,375		$	50,915		$	50,648		$	52,743
Allowance for loan losses to portfolio loans		0.79	%		0.78	%		0.91	%		0.94	%
Allowance for loan losses to non-performing loans		155.3	%		139.2	%		138.4	%		129.4	%
Non-performing loans to portfolio loans, before allowance for loan losses		0.5	%		0.6	%		0.7	%		0.7	%
Non-performing assets to portfolio loans and OREO, before allowance for loan losses		0.5	%		0.6	%		0.7	%		0.7	%

June 30,
2018

March 31,
2018

December 31,
2017

September 30,
2017

Non-accrual loans

$
25,215

$
32,588

$
24,624

$
27,430

Loans 90+ days past due and still accruing

1,142

995

2,741

439

Total non-performing loans

$
26,357

$
33,583

$
27,365

$
27,869

OREO

$
3,694

$
1,001

$
1,283

$
1,172

Total non-performing assets

$
30,051

$
34,584

$
28,648

$
29,041

Allowance for loan losses

$
53,305

$
52,649

$
53,582

$
51,035

Allowance for loan losses to portfolio loans

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

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

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

0.5
%
0.6
%
0.5
%
0.6
%

Total non-performing assets were ~~$30.1~~$34.0 million at June 30, ~~2018,~~2019, compared to ~~$28.6~~$37.0 million at December 31, ~~2017.~~2018. Non-performing assets as a percentage of ~~total~~portfolio loans and ~~non-performing assets~~OREO continued to be favorably low at 0.5% on June 30, ~~2018.~~2019. Asset quality metrics can be generally influenced by market-specific economic conditions beyond the control of the Company, and specific measures may fluctuate from quarter to quarter.

Potential Problem Loans

Potential problem loans are those loans which are not categorized as impaired, restructured, non-accrual or 90+ days past due, but where current information indicates that the borrower may not be able to comply with ~~present~~ loan repayment terms. Management assesses the potential for loss on such loans ~~as it would with other problem loans~~ and ~~has considered~~considers the effect of any potential loss in determining its provision for probable loan losses. Potential problem loans totaled ~~$106.1~~$79.2 million at June 30, ~~2018,~~2019, compared to ~~$70.4~~$70.9 million at December 31, ~~2017.~~2018. Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral or other planned actions will result in full repayment of the debts. As of June 30, ~~2018,~~2019, management identified no other loans that represent or result from trends or uncertainties which ~~management reasonably~~would be expected to materially impact future operating results, liquidity or capital resources.

Table of Contents

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 June 30, ~~2018,~~2019, the Company had additional capacity to borrow from the FHLB and Federal Reserve of $1.1 billion and $470.1 million, respectively. Additionally, the Company has an unused revolving facility of $20.0 million.

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

OFF-BALANCE-SHEET ARRANGEMENTS

~~At June 30, 2018~~The banks routinely enter into commitments to extend credit and ~~December 31, 2017 the Company had outstanding~~ standby letters of credit of $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~~normal course of business to meet the financing needs of ~~the Company’s~~its customers. As of June 30, 2019 and December 31, 2018, ~~no amounts were recorded as liabilities for~~we had outstanding loan commitments and standby letters of credit of $1.6 billion and $1.4 billion, respectively. The balance of commitments to extend credit represents future cash requirements and some of these commitments may expire without being drawn upon. We anticipate we will have sufficient funds available to meet current loan commitments, including loan applications received and in process prior to the ~~Company’s potential obligations under these~~issuance of firm commitments.

CAPITAL RESOURCES

Our capital ratios are in excess of those required to be considered “well-capitalized” pursuant to applicable regulatory guidelines. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary ~~bank.~~banks. Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. ~~For 2018, the guidelines, including the capital conservation buffer, required~~In order to refrain from restrictions on dividends, equity repurchases and discretionary bonus payments, bank holding companies and their subsidiary ~~bank~~banks are required to maintain, including the capital conservation buffer, a total capital to total risk-weighted asset ratio of not less than ~~9.875%~~10.50%, Tier 1 capital to total risk-weighted asset ratio of not less than ~~7.875%~~8.50%, Common Equity Tier 1 capital to total risk-weighted asset ratio of not less than ~~6.375%~~7.0% and a Tier 1 leverage ratio of not less than 4.00%. ~~These minimum capital requirements will increase annually until the~~The Basel III Rule iswas fully phased-in on January 1, 2019. As of June 30, 2018, First Busey had a total capital to total risk-weighted asset ratio of 14.42%, a Tier 1 capital to risk-weighted asset ratio of 12.44%, Common Equity Tier 1 capital to risk-weighted asset ratio of 11.21%See “Note 11: Regulatory Capital” for ratios and ~~a Tier 1 leverage ratio of 10.13%; Busey Bank had ratios of 14.03%, 13.14%, 13.14% and 10.68%, respectively.~~further discussion.

NON-GAAP FINANCIAL INFORMATION

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

A reconciliation to what management believes to be the most direct compared GAAP financial measures, ~~specifically~~for example, net income in the case of adjusted net income and adjusted return on average assets, total net interest income, total non-interest income and total non-interest expense in the case of adjusted efficiency ratio and total stockholders’ equity in the

Table of Contents

case of the tangible book value per share, appears ~~below~~ ~~(dollars in thousands, except per share data)~~.below. The Company believes each of the adjusted measures is useful for investors and management to understand the effects of certain non-recurring non-interest items and provides additional perspective on the Company’s performance over time as well as comparison to the Company’s peers.

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

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

(dollars in thousands)

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
%


	Three Months Ended										Six Months Ended
	June 30,			March 31,			June 30,				June 30,			June 30,
	2019			2019			2018				2019			2018
Net income	$	24,085		$	25,469		$	24,862		$	49,554		$	46,779
Acquisition expenses
Salaries, wages, and employee benefits		43			—			—			43			1,233
Data processing		327			7			34			334			406
Other (includes professional and legal)		3,293			1,205			107			4,498			2,057
Lease impairment		415			—			—			415			—
Other restructuring costs
Salaries, wages, and employee benefits		275			—			—			275			417
Data processing		292			100			—			392			—
Fixed asset impairment		—			—			817			—			817
Other (includes professional and legal)		826			167			—			993			—
MSR valuation impairment		1,822			—			—			1,822			—
Related tax benefit		(1,880)			(334)			(230)			(2,214)			(1,197)
Adjusted net income	$	29,498		$	26,614		$	25,590		$	56,112		$	50,512

Average total assets	$	9,522,678		$	8,865,642		$	7,653,541		$	9,198,975		$	7,658,691

Reported: Return on average assets⁽¹⁾		1.01	%		1.17	%		1.30	%		1.09	%		1.23	%
Adjusted: Return on average assets⁽¹⁾		1.24	%		1.22	%		1.34	%		1.23	%		1.33	%

⁽¹⁾ Annualized measure

~~(1)Annualized measure~~Table of Contents

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~~(dollars in thousands)


	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2019			2019			2018			2019			2018

Reported: Net interest income	$	73,428		$	68,383		$	60,372	��	$	141,811		$	120,129
Tax-equivalent adjustment		777			677			561			1,454			1,139
Purchase accounting accretion		(3,471)			(2,994)			(3,015)			(6,465)			(6,425)
Adjusted: Net interest income	$	70,734		$	66,066		$	57,918		$	136,800		$	114,843

Average interest-earning assets	$	8,666,136		$	8,088,396		$	6,984,486		$	8,378,862		$	6,980,457

Reported: Net interest margin⁽¹⁾		3.43	%		3.46	%		3.50	%		3.45	%		3.50	%
Adjusted: Net Interest margin⁽¹⁾		3.27	%		3.31	%		3.33	%		3.29	%		3.32	%

⁽¹⁾ Annualized measure

Reconciliation of Non-GAAP Financial Measures — Adjusted Efficiency Ratio

(dollars in thousands)

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
%


	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,				June 30,			June 30,
	2019			2019			2018			2019			2018
Reported: Net Interest income	$	73,428		$	68,383		$	60,372		$	141,811		$	120,129
Tax-equivalent adjustment		777			677			561			1,454			1,139
Tax equivalent interest income	$	74,205		$	69,060		$	60,933		$	143,265		$	121,268

Reported: Non-interest income		27,896			25,945			22,802			53,841			45,288
Net (losses) gains on sales of securities and unrealized (losses) gains recognized on equity securities		(1,026)			42			160			(984)			160
Adjusted: Non-interest income	$	28,922		$	25,903		$	22,642		$	54,825		$	45,128

Reported: Non-interest expense		68,020			57,163			47,305			125,183			98,345
Amortization of intangible assets		(2,412)			(2,094)			(1,490)			(4,506)			(3,005)
Non-operating adjustments:
Salaries, wages, and employee benefits		(318)			—			—			(318)			(1,650)
Data processing		(619)			(107)			(34)			(726)			(406)
Other		(6,356)			(1,372)			(924)			(7,728)			(2,429)
Adjusted: Non-interest expense	$	58,315		$	53,590		$	44,857		$	111,905		$	90,855

Reported: Efficiency ratio		63.62	%		57.99	%		54.82	%		60.92	%		57.30	%
Adjusted: Efficiency ratio		56.55	%		56.43	%		53.67	%		56.49	%		54.60	%

Table of Contents

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~~(dollars in thousands)

~~(2)Annualized measure~~


	Three Months Ended
	June 30,			March 31,			June 30,
	2019			2019			2018

Total Assets	$	9,612,667		$	9,537,334		$	7,775,544
Goodwill and other intangible assets, net		(375,327)			(377,739)			(303,407)
Tax effect of other intangible assets, net		17,075			17,751			9,288
Tangible assets	$	9,254,415		$	9,177,346		$	7,481,425

Total stockholders’ equity		1,203,608			1,186,141			957,182
Goodwill and other intangible assets, net		(375,327)			(377,739)			(303,407)
Tax effect of other intangible assets, net		17,075			17,751			9,288
Tangible common equity	$	845,356		$	826,153		$	663,063

Tangible common equity to tangible assets⁽¹⁾		9.13	%		9.00	%		8.86	%
Tangible book value per share	$	14.95		$	14.53		$	13.40

Average stockholders’ common equity	$	1,195,802		$	1,109,872		$	944,131
Average goodwill and other intangible assets, net		(376,851)			(352,587)			(304,379)
Average tangible stockholders’ common equity	$	818,951		$	757,285		$	639,752

Reported: Return on average tangible common equity⁽²⁾		11.80	%		13.64	%		15.59	%
Adjusted: Return on average tangible common equity^{(2), (3)}		14.45	%		14.25	%		16.04	%


		Six Months Ended
		June 30,			June 30,
		2019			2018
Average stockholders’ common equity	$	1,153,075		$	938,975
Average goodwill and other intangible assets, net		(364,786)			(305,666)
Average tangible stockholders’ common equity	$	788,289		$	633,309

Reported: Return on average tangible common equity⁽²⁾		12.68	%		14.90	%
Adjusted: Return on average tangible common equity^{(2), (3)}		14.35	%		16.08	%

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

~~(3)Calculated using adjusted net income~~

FORWARD-LOOKING STATEMENTS

Statements made in this ~~report,~~document, other than those concerning historical financial information, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events. A number of factors, many of which are beyond our ability to control or predict, could cause actual results to differ materially from those in our forward-looking statements. These factors include, among others, the following:

Table of Contents

(i) the strength of the local, state, national and international economy (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations); (ii) changes in state and federal laws, regulations and governmental policies concerning the Company’s general business; (iii) changes in interest rates and prepayment rates of the Company’s assets; (iv) increased competition in the financial services sector and the inability to attract new customers; (v) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (vi) the loss of key executives or employees; (vii) changes in consumer spending; (viii) unexpected results of current and/or future acquisitions, which may include failure to realize the anticipated benefits of any acquisition and the possibility that transaction costs may be greater than anticipated; (ix) unexpected outcomes of existing or new litigation involving the Company; (x) the economic impact of any future terrorist threats or attacks; (xi) the economic impact of exceptional weather occurrences such as tornadoes, hurricanes, floods, and blizzards; and (xii) changes in accounting policies and practices. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including additional factors that could materially affect its financial results, is included in the Company’s filings with the Securities and Exchange Commission.

CRITICAL ACCOUNTING ESTIMATES

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

Our significant accounting policies are described in Note 1 of the Company’s ~~Annual Report on~~2018 Form ~~10-K for the year ended December 31, 2017.~~10-K. The majority of these accounting policies do not require management to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material. However, the following policies could be deemed critical:

Fair Value of ~~Available for Sale~~ Investment ~~Securities.~~Securities ~~are classified as available for sale when First Busey determines it is possible the~~. The fair values of investment 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. Securities classified as available for sale~~ are ~~carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income (loss). For securities classified as available for sale, fair value~~ measurements from an independent pricing service and are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.

Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of debt securities below their amortized cost are evaluated to determine whether ~~they~~such declines 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 decline in fair value as an OTTI loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The decline in fair value is separated into the amount of impairment related to the credit loss and the amount of impairment related to all other factors. The amount of the impairment related to credit loss is recognized in earnings, and the amount of impairment related to all other factors is recognized in other comprehensive income (loss).

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

The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed. At the date of acquisition, when loans have evidence of credit deterioration since origination and it is probable that the Company will not collect all contractually

Table of Contents

required principal and interest payments, the difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. At each future reporting date, the Company re-estimates the expected cash flows of the loans. Subsequent decreases in the expected cash flows will generally result in a provision for loan losses. Subsequent increases in the expected cash flows will generally be offset against the allowance for loan losses to the extent an allowance has been established or will be recognized as interest income prospectively.

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

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

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

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

The allowance consists of specific and general components. The specific component considers loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when either the discounted cash flows ~~(or~~or collateral value or observable market ~~price)~~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~~fair value of ~~expected future~~the collateral, if the loan is collateral-dependent or based on the discounted cash flows ~~discounted~~of the loan 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~~is based upon the estimated fair value, net of selling costs, of the applicable

Table of Contents

collateral. The required allowance or actual ~~losses~~loss on ~~these~~an impaired ~~loans~~loan 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.~~estimate.

ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

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

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

As interest rate changes do not impact all categories of assets and liabilities equally or simultaneously, the asset-liability committee primarily relies on balance sheet and income simulation analysis to determine the potential impact of changes in market interest rates on net interest income. In these standard simulation models, the balance sheet is projected over a ~~year-one time horizon~~one-year and a ~~year-two~~two-year time horizon and net interest income is calculated under current market rates and ~~then~~ assuming permanent instantaneous shifts of +/-100, ~~+200,~~+/-200, and +300 ~~and +400~~ basis points. ~~Management measures such changes assuming~~The model assumes 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 are assumed to remain constant as of the measurement date; variable-rate assets and liabilities ~~remain constant at the measurement date balances. The model uses~~are repriced based on repricing ~~frequency on all variable-rate assets~~frequency; and ~~liabilities. Prepayment~~prepayment speeds on loans ~~have been adjusted to incorporate expected prepayment speeds in~~are projected for both a declining and rising rate ~~environment.~~environments.

~~Utilizing this measurement concept, the~~The interest rate risk of First Busey ~~due to an~~as a result of immediate and sustained ~~change~~changes in interest rates, expressed as a change in net interest income as a percentage of the net interest income calculated in the constant base model, was as follows:


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

June 30, 2019	(8.51)	%	(4.58)	%	1.10	%	2.77	%	4.26	%

December 31, 2018	(9.86)	%	(3.58)	%	1.08	%	2.01	%	2.88	%


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

June 30, 2019	(11.53)	%	(6.79)	%	2.87	%	5.68	%	8.25	%

December 31, 2018	(13.71)	%	(5.13)	%	1.97	%	3.70	%	5.32	%

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
%

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

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act was carried out as of June 30, ~~2018,~~2019, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, ~~2018,~~2019, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Exchange Act iswas (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 June 30, ~~2018,~~2019, First Busey did not make any changes in its internal control over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

ITEM 1A. RISK FACTORS

~~The Company has made the following addition~~There have been no material changes to the risk factors disclosed in Item 1A of Part I of the Company’s ~~Annual Report on~~2018 Form ~~10-K for the year ended December 31, 2017:~~10-K.

Table of Contents

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~~On May 22, 2019, First Busey’s board of directors approved an amendment to increase the authorized shares under the repurchase program by ~~or on behalf of First Busey of~~1,000,000 shares. On June 14, 2019, the Company repurchased 333,334 shares ~~of its common stock during the quarter ended June 30, 2018.~~in a private transaction for $25.30 per share. At June 30, ~~2018,~~2019, the Company had ~~333,334~~1,000,000 shares that may still be purchased under the plan.


Period	Total number of shared purchased	Average price paid per share	Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum number of Shares that May Yet Be Repurchased Under the Program
April 1-30, 2019	—	—	—	333,334
May 1-31, 2019	—	—	—	1,333,334
June 1-30, 2019	333,334	$ 25.30	333,334	1,000,000

ITEM 3. DEFAULTS UPON SENIOR ~~SECURITES~~SECURITIES

None.

~~None.~~

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

~~None.~~

ITEM 6. EXHIBITS

*10.1		~~Form of Director Deferred Stock Unit Award Agreement under the First Busey Corporation 2010 Equity Incentive Plan, as amended.~~
10.1
*10.2		~~Form of Director Deferred Stock Unit Award~~Employment Agreement ~~under the First Community Financial Partners, Inc. 2016 Equity Incentive Plan.~~

~~10.3~~		~~Amendment No. 3 to Credit Agreement~~Addendum by and between First Busey Corporation and ~~U.S. Bank National Association~~Christopher M. Shroyer, dated ~~as of~~ April ~~30, 2018~~23, 2019 (filed as Exhibit ~~10.1~~99.2 to the Company’s Form 8-K ~~dated April 30, 2018,~~ filed with the Commission on ~~May 2, 2018~~April 23, 2019 (Commission No. 0-15950), and incorporated herein by reference)..

*31.110.2		Letter Agreement by and between First Busey Corporation and Robin N. Elliott, dated April 23, 2019 (filed as Exhibit 99.3 to the Company’s Form 8-K filed with the Commission on April 23, 2019 (Commission No. 0-15950), and incorporated herein by reference).

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

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

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

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

*101101.INS		~~Interactive Data File~~iXBRL Instance Document
	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at June 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017; (iv) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017; and (vi) Notes to Unaudited Consolidated Financial Statements.
101.SCH		iXBRL Taxonomy Extension Schema

101.CAL		iXBRL Taxonomy Extension Calculation Linkbase

101.LAB		iXBRL Taxonomy Extension Label Linkbase

101.PRE		iXBRL Taxonomy Extension Presentation Linkbase

101.DEF		iXBRL Taxonomy Extension Definition Linkbase

*	Filed herewith.

*Filed herewithTable of Contents

SIGNATURES

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

FIRST BUSEY CORPORATION

(Registrant)


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

	By:	/s/ ROBIN N. ELLIOTT
		Robin N. Elliott
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

	~~By:~~	~~/s/ JENNIFER L. SIMONS~~
		~~Jennifer L. Simons~~
		~~Chief Accounting Officer~~ ~~(Principal Accounting Officer)~~

Date: August 7, ~~2018~~2019