FIRST BUSEY CORP /NV/ (BUSE) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following is management’s discussion and analysis of the financial condition as of December 31, 2021, and 2020, and the results of operations for the years ended December 31, 2021, 2020, and 2019, of First Busey and its subsidiaries.  It should be read in conjunction with “Item 1.  Business,” the Consolidated Financial Statements, and the related Notes to the Consolidated Financial Statements included in this Annual Report.

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Detailed discussion and analysis of the financial condition and results of operation for 2021 as compared to 2020 can be found below.  Comparison of 2020 to 2019 can be found in “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report.

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Impact of COVID-19

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Although the progression of the COVID-19 pandemic in the U.S. has impacted First Busey’s results of operations, we continue to navigate the economic environment caused by COVID-19 effectively and prudently and remain resolute in our focus on serving our customers, communities, and associates while protecting our balance sheet.  We remain vigilant, given that negative impacts of COVID-19, such as further margin compression and a deterioration in asset quality, could impact future quarters.

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Effects on Our Market Areas

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Our commercial and consumer banking products and services are delivered in Illinois, Missouri, Florida, and Indiana.  Each state has taken different steps to reopen after COVID-19 thrust the country into lockdown starting in March 2020, and these efforts are subject to changes and delays based on case monitoring in each state.

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Policy and Regulatory Developments

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Federal, state, and local governments, and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic.  Regulatory actions taken during 2021 include the following:

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Our Response

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We have taken, and continue to take, numerous steps in response to the COVID-19 pandemic, including the following:

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Critical Accounting Estimates

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First Busey has established various accounting policies that govern the application of GAAP in the preparation of its Consolidated Financial Statements.  Significant accounting policies are described in “Note 1.  Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.

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

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Fair Value of Debt Securities Available for Sale

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

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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.

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A debt security available for sale is impaired if the fair value of the security declines below its amortized cost basis.  To determine the appropriate accounting, we must first determine if we intend to sell the security or if it is more likely than not that we will be required to sell the security before the fair value increases to at least the amortized cost basis.  If either of those selling events is expected, we will write down the amortized cost basis of the security to its fair value.  This is achieved by writing off any previously recorded allowance, if applicable, and recognizing any incremental impairment through earnings.  If we do not intend to sell the security, nor believe it more likely than not that we will be required to sell the security before the fair value recovers to the amortized cost basis, we must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors.

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We consider the following factors in assessing whether the decline is due to a credit loss:

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Impairment related to a credit loss must be measured using the discounted cash flow method.  Credit loss recognition is limited to the fair value of the security.  The impairment is recognized by establishing an allowance through provision for credit losses.  Impairment related to noncredit factors is recognized in AOCI, net of applicable taxes.

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Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations

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

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The fair value of a loan portfolio acquired in a business combination generally requires greater levels of management estimates and judgment than other assets acquired or liabilities assumed.  Acquired loans are in the scope of ASC 326.  However, the offset to record the allowance at the date of acquisition on acquired loans depends on whether or not the loan is classified as PCD.  The allowance for PCD loans is recorded through a gross-up effect, while the allowance for acquired non-PCD loans is recorded through provision expense, consistent with originated loans.  Thus, the determination of which loans are PCD and non-PCD can have a significant effect on the accounting for these loans.

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Goodwill

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

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Income Taxes

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

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Allowance for Credit Losses

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First Busey calculates the ACL at each reporting date.  We recognize an allowance for the lifetime expected credit losses for the amount we do not expect to collect.  Measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported book value.  The calculation also contemplates that First Busey may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical credit loss information.

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In determining the allowance, management relies predominantly on a disciplined credit review and approval process that extends to the full range of First Busey’s credit exposure.  The ACL must be determined on a collective (pool) basis when similar risk characteristics exists.  On a case-by-case basis, we may conclude a loan should be evaluated on an individual basis based on the disparate risk characteristics.

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Loans deemed uncollectible are charged against and reduce the allowance.  A provision for credit losses is charged to current expense and acts to replenish the ACL in order to maintain the allowance at a level that management deems adequate.  Determining the allowance involves significant judgments and assumptions by management.  Because of the nature of the judgments and assumptions made by management, actual results may differ from these judgments and assumptions.

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Executive Summary

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Operating Results

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Results of our operations are presented below, segregated by operating segment (dollars in thousands):

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Operating Performance

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Operating performance metrics presented in the table below have been derived from information used by management to monitor and manage our financial performance (dollars in thousands, except per share amounts):

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On May 31, 2021, First Busey completed its acquisition of CAC, the holding company for GSB.  GSB was operated as a separate banking subsidiary from June 1, 2021, until August 14, 2021, when it was merged with and into Busey Bank.  At that time GSB’s seven banking centers became banking centers of Busey Bank.  When we completed the GSB acquisition, we reset the baseline for the future financial performance of First Busey in a multitude of positive ways.  With GSB now merged and integrated, we expect to see the full contribution of synergies of GSB reflected in our financial performance in the years ahead.

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On November 19, 2021, 17 banking centers, two of which were previously GSB banking centers, were closed and consolidated, as part of the Company’s efforts to ensure a balance between its physical banking center network and robust digital banking services while also optimizing operating efficiency.  Following the completion of these banking center closures and consolidations, the Company continues to operate a total of 58 banking centers across its markets.

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First Busey views certain non-operating items, including acquisition-related and restructuring charges, as adjustments to net income reported under GAAP.  Non-operating pretax adjustments for 2021 included $13.6 million of expenses related to acquisitions and $3.7 million of expenses related to other restructuring costs.  The reconciliation of non-GAAP measures (including pre-provision net revenue, adjusted pre-provision net revenue, pre-provision net revenue to average assets, adjusted pre-provision net revenue to average assets, adjusted net income, adjusted earnings per share, adjusted return on average assets, adjusted net interest margin, adjusted noninterest expense, efficiency ratio, adjusted efficiency ratio, tangible common equity, tangible common equity to tangible assets, tangible book value per share, and return on average tangible common equity), which First Busey believes facilitates the assessment of its financial results and peer comparability, is included in tabular form in this Annual Report.  See “Item 1.  Business—Non-GAAP Financial Information.”

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Combined, revenues from wealth management fees and payment technology solutions activities represented 53.8% of First Busey’s noninterest income in 2021, providing a balance to spread-based revenue from traditional banking activities.  Further, noninterest income, excluding net securities gains (losses) represented 32.4% of total revenue for the year ended December 31, 2021.

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Results of Operation — Three Years Ended December 31, 2021

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Net Interest Income

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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.

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Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis.  Tax-equivalent basis assumes a federal income tax rate of 21.0%.  Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets.  A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets.  After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets.  In addition to yield, various other risks are factored into the evaluation process.

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

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Average Balance Sheets and Interest Rates

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Average balances, income and expense, and yield rates are presented below for the periods indicated (dollars in thousands):

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Average Balance Sheets and Interest Rates (continued)

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Changes in Net Interest Income are presented in the table below:

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Earning Assets, Sources of Funds, and Net Interest Margin

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Changes in average earning assets, sources of funds, and net interest margin are presented in the tables below (dollars in thousands):

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The Consolidated Average Balance Sheets and interest rates were impacted in 2021 and 2020 by numerous factors surrounding COVID-19.  Further, the 2021 Consolidated Average Balance Sheet was impacted by the CAC acquisition.  The FOMC rate cuts during the first quarter of 2020 have contributed to the decline in net interest margin, as assets, in particular commercial loans, repriced more quickly and to a greater extent than liabilities.  Net interest margin has also been negatively impacted by existing loan amortization and paydowns at higher rates than new loan production, the sizeable balance of lower-yielding PPP loans, significant growth in the Company’s liquidity position, and the issuance of debt.  Those impacts were partially offset by the Company’s efforts to lower deposit funding costs as well as the fees recognized on PPP loans.

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First Busey remains substantially core deposit funded, with robust liquidity and significant market share in the communities we serve.  As of December 31, 2021, our loan to deposit ratio was 66.8% and core deposits represented 98.7% of total deposits outstanding (excluding time deposits with balances greater than $250,000).

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Net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 2.36% in 2021 compared to 2.83% in 2020 and 3.10% in 2019, each on a tax equivalent basis.

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Annualized net interest margins for the quarterly periods indicated were as follows:

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Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies.

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Noninterest Income

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Changes in noninterest income are summarized in the tables below for the periods presented (dollars in thousands):

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Total noninterest income increased 12.3% to $132.8 million for the year ended December 31, 2021, compared to $118.3 million for the year ended December 31, 2020.  Revenues from wealth management fees and payment technology solutions represented 53.8% for the year ended December 31, 2021, compared to 49.5% for the year ended December 31, 2020.  Payment technology solutions revenue relates to our payment processing company, FirsTech.

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Wealth management fees increased 23.7% to $53.1 million in 2021, compared to $42.9 million in 2020.  Assets under care increased 24.5% to $12.7 billion as of December 31, 2021, compared to $10.2 billion at December 31, 2020.  The increase in assets under care includes $1.2 billion related to assets obtained in the acquisition of CAC, with the remaining $1.3 million related to organic and market related growth.

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Fees for customer services increased 12.7% to $35.6 million in 2021, compared to $31.6 million in 2020.  Fees for customer services have been impacted since early 2020 by changing customer behaviors resulting from COVID-19, and government stimulus programs, and continue to rebound with improving economic conditions and customer activity levels.

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Payment technology solutions revenue increased 17.4% to $18.3 million in 2021, compared to $15.6 million in 2020.  Fluctuations in payment technology solutions revenue were primarily the result of increased payment and volume activity as well as growth in customers served by FirsTech.  FirsTech operations add important diversity to our revenue stream while widening our array of service offerings to larger commercial clients both within our footprint and nationally.  We are currently making strategic investments in FirsTech to further enhance future growth including further upgrades to the product and engineering teams to build an API first cloud-based platform to provide for fully integrated payment capabilities as well as the continued development of our BaaS platform.

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Mortgage revenue decreased 44.5% to $7.2 million in 2021, compared to $13.0 million in 2020.  Sold-loan mortgage volume declined in 2021 compared to 2020 due to a higher share of portfolio loan production in 2021.

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Income on bank owned life insurance decreased 4.0% to $5.2 million in 2021, compared to $5.4 million in 2020, as a result of a decrease in earnings on the cash surrender value of the policies.

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Other income increased 23.2% to $10.3 million in 2021 compared to $8.4 million in 2020.  Other income variances are primarily driven by fluctuations in income generated from swap origination fees, commercial loan sales gains, and gains and losses on fixed asset disposal.

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Noninterest Expense

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Changes in noninterest expense are summarized in the tables below for the periods presented (dollars in thousands):

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Total noninterest expense increased to $261.8 million in 2021, compared to $234.2 million in 2020.  Non-operating acquisition and other restructuring increased to $17.4 million in 2021, compared to $10.7 million in 2020, contributing $6.7 million of the total $27.6 million increase in noninterest expense.  In addition, GSB’s results of operations were included in First Busey’s consolidated results of operations beginning June 1, 2021.  We remain focused on expense discipline and have begun to realize synergies from the GSB merger and Personal Banking Transformation Plan, which resulted in the consolidation of 17 branches across our various markets.

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Salaries, wages, and employee benefits increased to $145.3 million in 2021, compared to $126.7 million in 2020.  Non-operating expenses contributed $5.3 million of the total $18.6 million increase.  Salaries, wages, and employee benefit expenses were also impacted by increases in full-time equivalent employees since June 1, 2021, related to the CAC acquisition, and we began to see synergies in late August after GSB was merged into Busey Bank.  We had a total of 1,463 full-time equivalents at December 31, 2021, compared to 1,346 at December 31, 2020.  Current labor market trends reflect a shrinking labor supply, while job growth reflects increasing demand for a skilled workforce, putting further upward pressure on salaries, wages, and employee benefits.

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Data processing expense increased to $21.9 million in 2021, compared to $16.4 million in 2020.  Non-operating expenses comprised $3.6 million of the total $5.4 million increase.  Data processing for 2021 also includes data processing related to CAC from June 1, 2021, until GSB merged with Busey Bank on August 14, 2021.

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Combined, net occupancy expense of premises and furniture and equipment expenses decreased to $26.6 million in 2021, compared to $27.2 million in 2020.  GSB added 7 branches on June 1, 2021.  We closed 12 banking centers in October 2020, and completed the previously announced closure and consolidation of 17 banking centers, two of which were formerly GSB banking centers, in November 2021.  The full benefit of reduction in expenses related to these locations will be realized in future periods as those properties are divested.

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Professional fees decreased to $7.5 million in 2021, compared to $8.4 million in 2020, as a result of decreases in legal fees, audit and accounting fees, payroll service costs, and consulting fees.  Excluding non-operating expenses, professional fees decreased from $7.8 million in 2020 to $5.9 million in 2021.

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Amortization of intangible assets increased to $11.3 million in 2021, compared to $10.0 million in 2020, as a result of increases in intangible asset balances from the acquisition of CAC.

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Interchange expense increased to $5.8 million in 2021, compared to $4.8 million in 2020, as a result of increased payment and volume activity at FirsTech.

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Other expense increased to $43.3 million in 2021, compared to $40.7 million in 2020.  Variances occurred across multiple expense categories, including NMTC amortization, regulatory expenses, marketing, business development, recruiting and onboarding, director compensation, and card service fees, partially offset by lower MSR valuation impairment, lower fixed asset impairment, and releases in the provision for unfunded commitments.

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Efficiency Ratio (1)

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The efficiency ratio is calculated as total noninterest expense, less amortization charges, as a percentage of tax-equivalent net interest income plus noninterest income, less security gains and losses.  The efficiency ratio, which is a measure commonly used by management and the banking industry, measures the amount of expense incurred to generate a dollar of revenue.  The efficiency ratio was 62.2% in 2021, compared to 55.7% in 2020.  Operating costs have been influenced by acquisition expenses and other restructuring costs, and the adjusted efficiency ratio1 was 57.9% for the year ended December 31, 2021, compared to 53.0% for the year ended December 31, 2020.

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Income Taxes

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The effective income tax rate, or income taxes divided by income before taxes, was 21.3%, 21.7%, and 23.4% for the years ended December 31, 2021, 2020, and 2019, respectively.  The decrease in the effective tax rate was driven by an increase in tax exempt income, such as municipal bond interest and bank owned life insurance income, combined with the benefits received from various investments in federal and state tax credits, including an Illinois NMTC.  We continue to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis.  As of December 31, 2021, we were not under examination by any tax authority.

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Balance Sheet

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Changes in significant items included in our Consolidated Balance Sheets are summarized in the table below (dollars in thousands):

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(1) For a reconciliation of the efficiency ratio and the adjusted efficiency ratio, both of which are non-GAAP financial measures, see “Item 1.  Business—Non-GAAP Financial Information.”

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Investment Securities

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Debt securities available for sale are carried at fair value.  As of December 31, 2021, the fair value of debt securities available for sale was $4.0 billion, and the amortized cost was also $4.0 billion.  There were $22.4 million of gross unrealized gains and $54.7 million of gross unrealized losses for a net unrealized loss of $32.3 million.  The net unrealized loss, net of tax, is recorded in stockholders’ equity.  Equity securities are carried at fair value.  As of December 31, 2021, the fair value of equity securities was $13.6 million.

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The composition of debt securities available for sale was as follows (dollars in thousands):

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The primary purposes of our investment securities portfolio are to provide a source of liquidity; to provide collateral for pledging purposes against public monies and repurchase agreements; to serve as a tool for interest rate risk positioning; and to provide a source of earnings by deploying funds which are not needed to fulfill loan demand, deposit redemptions, or other liquidity purposes.  Pledged securities totaled $708.9 million, or 17.8% of total securities, at December 31, 2021, and $628.0 million, or 27.8% of total securities, at December 31, 2020.

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By maturity date, fair values, and weighted average yields of debt securities available for sale as of December 31, 2021, were (dollars in thousands):

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We consider many factors in determining the composition of our investment portfolio including, but not limited to, credit quality, duration, interest rate risk, liquidity, tax-equivalent yield, regulatory, and overall portfolio allocation.  As of December 31, 2021, we did not have any non-U.S. Treasury securities or obligations of U.S. government corporations and agencies issued securities that exceeded 10% of our total stockholders’ equity.

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Portfolio Loans

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We believe that making sound and profitable loans is a necessary and desirable means of employing funds available for investment.  First Busey maintains lending policies and procedures designed to focus lending efforts on the types, locations, and duration of loans most appropriate for its business model and markets.  GSB’s policies were similar in nature to Busey Bank’s policies, and we are migrating the legacy GSB portfolio toward Busey Bank’s policies.  While not specifically limited, we attempt to focus our lending on short to intermediate-term (0-10 years) loans in geographic areas within 125 miles of our lending offices.  Loans originated outside of these areas are generally residential mortgage loans originated for sale in the secondary market or loans to existing customers of Busey Bank.  We attempt to utilize government-assisted lending programs, such as the SBA and U.S. Department of Agriculture lending programs, when prudent.  Generally, loans are collateralized by assets, primarily real estate, and guaranteed by individuals.  Loans are expected to be repaid primarily from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

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

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As a matter of policy and practice, we limit the level of concentration exposure in any particular loan segment with the goal of maintaining a well-diversified loan portfolio.  In anticipation of the potential risks associated with COVID-19, we took actions starting in early March 2020 to escalate the monitoring of susceptible industry sectors within our portfolio.

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At no time is a borrower’s total borrowing relationship permitted to exceed Busey Bank’s regulatory lending limit.  We generally limit such relationships to amounts substantially less than the regulatory limit.  Loans to related parties, including executive officers and directors of First Busey and its subsidiaries, are reviewed for compliance with regulatory guidelines.

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

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Busey Bank’s lending can be summarized into five primary areas: commercial loans, commercial real estate loans, real estate construction loans, retail real estate loans, and retail other loans.

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Commercial Loans

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Commercial loans typically comprise working capital loans or business expansion loans, including loans for asset purchases and other business loans.  Commercial loans will generally be guaranteed, in full or a material percentage, by the primary owners of the business.  Commercial loans are made based primarily on the historical and projected cash flow of the underlying borrower and secondarily on the underlying assets pledged as collateral by the borrower.  Cash flows of the underlying borrower, however, may not perform consistently with historical or projected information.  Further, collateral securing loans may fluctuate in value due to individual economic or other factors.  Busey Bank has established minimum standards and underwriting guidelines for all commercial loan types.

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Commercial Real Estate Loans

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The commercial environment, along with the academic presence in some of our markets, provides for the majority of our commercial lending opportunities to be commercial real estate related, including multi-unit housing.  As the majority of our loan portfolio is within the commercial real estate class, our goal is to maintain a high quality, geographically diverse portfolio of commercial real estate loans.  Commercial real estate loans are subject to underwriting standards and guidelines similar to commercial loans.  Commercial real estate loans are generally guaranteed, in full or a material percentage, by the primary owners of the business.  Repayment of these loans is primarily dependent on the cash flows of the underlying property.  However, commercial real estate loans generally must be supported by an adequate underlying collateral value.  The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors.  These loans are subject to other industry guidelines which we closely monitor.

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Real Estate Construction Loans

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Real estate construction loans are primarily commercial in nature.  Loan proceeds are monitored by the Company and advanced for the improvement of real estate in which we hold a mortgage.  Real estate construction loans will generally be guaranteed, in full or a material percentage, by the developer or primary owners of the business.  These loans are subject to underwriting standards and guidelines similar to commercial loans.  The loan generally must be supported by an adequate “as completed” value of the underlying project.  In addition to the underlying project, the financial history of the developer and business owners weighs significantly in determining approval.  Repayment of these loans is typically through permanent financing following completion of the construction.  Real estate construction loans are inherently more risky than loans on completed properties as the unimproved nature and the financial risks of construction significantly enhance the risks of commercial real estate loans.  These loans are closely monitored and subject to other industry guidelines.

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Retail Real Estate Loans

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Retail real estate loans are comprised of direct consumer loans that include residential real estate, home equity lines of credit, and home equity loans.  In 2021, we sold the majority of our newly originated 30-year fixed rate retail real estate loans to secondary market purchasers, while retaining a larger percentage of the 15-year fixed rate loans in our portfolio.  As retail real estate loan underwriting is subject to specific regulations, we typically underwrite our retail real estate loans to conform to widely accepted standards.  Several factors are considered in underwriting including the debt-to-income ratio and credit history of the borrower, as well as the value of the underlying real estate.

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Retail Other Loans

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Retail other loans consist of installment loans to individuals, including automotive loans and indirect lending.  These loans are centrally underwritten utilizing the borrower’s financial history, including the FICO credit scoring, and information as to the underlying collateral.  In 2021, associated with the CAC acquisition and purchased participations, retail other loans now also include whole-life loans which are secured by the cash value of life insurance policies.  Repayment of retail other loans is expected from the cash flow of the borrower.

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The composition of our portfolio loans as of the dates indicated was as follows (dollars in thousands):

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

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As of December 31, 2021, portfolio loan balances included balances acquired in the CAC acquisition.  The Company generated $460.7 million in core loan growth, excluding PPP loans, over the last three quarters of 2021.  Commercial balances – consisting of commercial, commercial real estate and real estate construction loans – excluding PPP loans, increased by $452.2 million, or 9.2%, during the year ended December 31, 2021.  Retail real estate and retail other loans increased by $294.0 million, or 20.3%, during the year ended December 31, 2021.  PPP loans decreased $371.4 million during the year ended December 31, 2021, to $75.0 million.

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Commitments to extend credit and standby letters of credit increased $222.9 million, or 12.4%, to a total of $2.0 billion as of December 31, 2021, compared to $1.8 billion as of December 31, 2020.

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The following table sets forth remaining maturities of selected loans (excluding deferred loan fees and costs, purchase premiums and discounts, and certain real estate-mortgage loans and installment loans to individuals) at December 31, 2021 (dollars in thousands).  The determination of loan maturities is based on contractual loan terms.  For the purposes of categorization within the table below, demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are considered to mature within one year.  Maturities for non-contractual rollovers or extensions are determined based on the rate review date.

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Selected loans maturing after one year are summarized below by interest rate sensitivity and loan category (dollars in thousands):

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Allowance for Credit Losses

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The following table summarizes, by loan category, activity affecting the ACL and average portfolio loans outstanding for the year ended December 31, 2021, as well as the related ratios of net charge-offs (recoveries) to average portfolio loans (dollars in thousands):

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The following table summarizes the relationship between the ACL and total portfolio loans, as of the periods indicated (dollars in thousands):

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The following table sets forth the ACL by loan categories and percentage of loans to total loans as of December 31 for each of the years indicated (dollars in thousands):

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The ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration, and other factors.  As of December 31, 2021, management believed the level of the allowance to be appropriate based upon the information available.  However, additional losses may be identified in our loan portfolio as new information is obtained.

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Provision for Credit Losses

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The ACL is a significant estimate in our Consolidated Balance Sheet, affecting both earnings and capital.  The methodology adopted influences, and is influenced by, Busey Bank’s overall credit risk management processes.  The ACL is recorded in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected.  All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date.  The ACL is established through the provision for credit loss expense charged to income.  We recorded a provision release of $15.1 million for the year ended December 31, 2021, reflecting improvements in macroeconomic conditions and asset quality, compared to a provision expense of $38.8 million and $10.4 million for the years ended December 31, 2020, and 2019, respectively.

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Non-performing Loans and Non-performing Assets

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

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

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The following table sets forth information concerning non-performing loans and performing restructured loans (dollars in thousands):

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Credit quality continues to be exceptionally strong.  Total non-performing assets were $21.3 million at December 31, 2021, compared to $28.9 million at December 31, 2020.  Asset quality metrics remain dependent upon market-specific economic conditions, and specific measures may fluctuate from period to period.  Continued disciplined credit management resulted in non-performing loans as a percentage of portfolio loans of 0.23% at December 31, 2021, compared with 0.36% at December 31, 2020.  If economic conditions were to deteriorate, we would expect the credit quality of our loan portfolio to decline and loan defaults to increase.  Allowance coverage of non-performing loans increased to 521.5% at December 31, 2021, compared to 415.8% at December 31, 2020.

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Classified assets, which includes non-performing assets and substandard loans, declined to $91.8 million at December 31, 2021, compared to $97.8 million at December 31, 2020.  The ratio of classified assets to Busey Bank Tier 1 capital and ACL declined to 6.9% at December 31, 2021, from 8.5% at December 31, 2020.

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Potential Problem Loans

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Potential problem loans are loans classified as substandard which are not individually evaluated, restructured, non-accrual, or 90+ days past due, but where current information indicates that the borrower may not be able to comply with loan repayment terms.  Management assesses the potential for loss on such loans and considers the effect of any potential loss in determining its provision for expected credit losses.  Potential problem loans increased to $70.5 million at December 31, 2021, compared to $68.8 million at December 31, 2020.  Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral, or other planned actions will result in full repayment of the debts.  As of December 31, 2021, management identified no other loans that represent or result from trends or uncertainties which would be expected to materially impact future operating results, liquidity, or capital resources.

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Deposits

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The following table shows the deposit mix for each of the periods presented (dollars in thousands):

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We focus on deepening our relationship with customers to foster core deposit growth, allowing us to reduce our reliance on wholesale funding.  Our 2021 deposit balances were impacted by the retention of PPP loan funding in customer deposit accounts, the impacts of economic stimulus, and other core deposit growth.  Core deposits include non-brokered transaction accounts, money market deposit accounts, and time deposits of $250,000 or less.  Time deposits as a percentage of total deposits decreased to 8.7% as of December 31, 2021, compared to 12.9% as of December 31, 2020.  As time deposits mature, we are actively engaging our customers to renew at current market rates.

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Deposits are federally insured up to the FDIC insurance limit of $250,000.  When a portion of a deposit account exceeds the FDIC insurance limit, that portion is uninsured.  The following table summarizes the uninsured portion of time deposits by maturity date (dollars in thousands):

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Borrowings

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Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily.  Short-term borrowings include FHLB advances which mature in less than one year from the date of origination, and the current portion of long-term debt due within 12 months.

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On May 28, 2021, First Busey entered into a Second Amended and Restated Credit Agreement, pursuant to which we have access to (i) a $40.0 million revolving line of credit with a termination date of April 30, 2022, and (ii) a $60.0 million term loan with a maturity date of May 31, 2026.  The loans have an annual interest rate of 1.75% plus the 1-month LIBOR rate.  Proceeds of the term loan were used to fund a part of the cash portion of the merger consideration related to the acquisition of CAC and for general corporate purposes.  The revolving credit facility incurs a non-usage fee based on any undrawn amounts.  As of December 31, 2021, there was no balance outstanding on the revolving credit facility and a total of $54.0 million outstanding on the term loan, of which $12.0 million is short-term and $42.0 million is long-term.

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The following table sets forth the distribution of short-term borrowings and weighted average interest rates thereon (dollars in thousands):

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In addition to the term loan, long-term debt includes funds borrowed from the FHLB which totaled $4.1 million and $4.8 million at December 31, 2021, and 2020, respectively.

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On May 25, 2017, we issued $40.0 million of 3.75% senior notes that mature on May 25, 2022.  The senior notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017.  The senior notes are not subject to optional redemption by the Company.  Additionally, on May 25, 2017, we issued $60.0 million of fixed-to-floating rate subordinated notes that mature on May 25, 2027.  The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 4.75% for the first five years after issuance and thereafter bear interest at a floating rate equal to 3-month LIBOR plus a spread of 2.919%, as calculated on each applicable determination date.  The subordinated notes are payable semi-annually on each May 25 and November 25, commencing on November 25, 2017, during the five year fixed-term and thereafter on February 25, May 25, August 25, and November 25 of each year, commencing on August 25, 2022.  The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after May 25, 2022.  The senior notes and subordinated notes are unsecured obligations of First Busey.

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On June 1, 2020, we issued $125.0 million of fixed-to-floating rate subordinated notes that mature on June 1, 2030.  The subordinated notes, which qualify as Tier 2 capital for First Busey, bear interest at an annual rate of 5.25% for the first five years after issuance and thereafter bear interest at a floating rate equal to a three-month benchmark rate plus a spread of 5.11%, as calculated on each applicable determination date.  The subordinated notes are payable semi-annually on each June 1 and December 1, during the five-year fixed-term, and thereafter on March 1, June 1, September 1, and December 1 of each year, commencing on September 1, 2025.  The subordinated notes have an optional redemption, in whole or in part, on any interest payment date on or after June 1, 2025.  The subordinated notes are unsecured obligations of First Busey.

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Unamortized debt issuance costs related to senior notes and subordinated notes are presented in the following table (dollars in thousands):

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Junior Subordinated Debt Owed to Unconsolidated Trusts

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First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities.  Proceeds from such issuances were used by the trusts to purchase junior subordinated notes of First Busey, which are the sole assets of each trust.  Concurrent with the issuance of the trust preferred securities, we issued guarantees for the benefit of the holders of the trust preferred securities.  The trust preferred securities are instruments that qualify, and are treated by First Busey, as Tier 1 regulatory capital.  First Busey owns all of the common securities of each trust.  The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.  In connection with the Pulaski acquisition in 2016, we acquired similar statutory trusts previously maintained by Pulaski and the fair value adjustment is being accreted over their weighted average remaining life, with a balance of $3.0 million remaining to be accreted.  We had $71.6 million and $71.5 million of junior subordinated debt owed to unconsolidated trusts at December 31, 2021, and 2020, respectively.

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Liquidity

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

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Average liquid assets are summarized in the table below (dollars in thousands):

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