# FIRST BUSEY CORP /NV/ (BUSE) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from FIRST BUSEY CORP /NV/'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/314489/000031448923000010/buse-20221231.htm Accession: 0000314489-23-000010 Filing date: 2023-02-23 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/BUSE/ All MD&A years: /company/BUSE/mda/ Previous year: /company/BUSE/mda/fy2021/ (FY 2021) Next year: /company/BUSE/mda/fy2023/ (FY 2023) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Table of Contents [[GREPCENT_TABLE]] [["SCOPE OF DISCUSSION","46"],["CURRENT EVENTS","46"],["CRITICAL ACCOUNTING ESTIMATES","46"],["Fair Value of Debt Securities Available for Sale","47"],["Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations","47"],["Goodwill","48"],["Income Taxes","48"],["Allowance for Credit Losses","48"],["EXECUTIVE SUMMARY","48"],["Operating Results","48"],["Operating Performance","49"],["RESULTS OF OPERATIONS \u2014 THREE YEARS ENDED DECEMBER 31, 2022","50"],["Net Interest Income","50"],["Noninterest Income","54"],["Noninterest Expense","56"],["Efficiency Ratio","58"],["Income Taxes","58"],["FINANCIAL CONDITION","59"],["Balance Sheet","59"],["Investment Securities","59"],["Portfolio Loans","62"],["Deposits","71"],["Borrowings","72"],["Liquidity","74"],["Off-Balance-Sheet Arrangements","75"],["Contractual Obligations","76"],["Cash Flows","76"],["Capital Resources","77"],["NEW ACCOUNTING PRONOUNCEMENTS","77"],["EFFECTS OF INFLATION","77"]] [[/GREPCENT_TABLE]] 45 Table of Contents SCOPE OF DISCUSSION The following is management’s discussion and analysis of the financial condition as of December 31, 2022, and 2021, and the results of operations for the years ended December 31, 2022, 2021, and 2020, 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. Detailed discussion and analysis of the financial condition and results of operation for 2022 as compared to 2021 can be found below. Comparison of 2021 to 2020 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2021 Annual Report. CURRENT EVENTS Hurricane Ian On September 28, 2022, Hurricane Ian made landfall in southwest Florida, impacting our operations in the region. We remain focused on assisting our clients and employees as they navigate the challenges from this historic storm. As of February 23, 2023, two of our three branches are fully operational, and services have been restored at a temporary facility for our third location. Efforts undertaken to date include: (i) financial assistance for associates impacted by the storm; (ii) creation of a relief center for associates to access much needed supplies; (iii) staffing resource reallocation to support our southwest Florida operations; (iv) fee waivers for impacted customers; and (v) loan modification program for impacted commercial and retail real estate customers. In 2022, we recognized $0.2 million in noninterest income resulting from a gain on hurricane related disposal of fixed assets, partially offset by waived service charges, and $0.4 million in noninterest expense in connection with these initiatives. Efficiency Optimization Plan & FirsTech Leadership Change Early in the fourth quarter of 2022, we implemented a targeted restructuring and efficiency optimization plan that is expected to generate annual salary and benefits savings of approximately $4.0 million. Approximately 33% of the quarterly run-rate for savings was reflected in our results for the fourth quarter of 2022, and we anticipate our savings to be at a 100% run-rate by the first quarter of 2023. We expect to largely reinvest the anticipated savings to support ongoing growth initiatives across our franchise over the next several quarters. Late in the fourth quarter of 2022, we instituted a leadership change at our wholly-owned payments subsidiary, FirsTech, that reflects our continued commitment to scaling and growing this business. Robin Elliott replaces Farhan Yasin as President & CEO of FirsTech and all other leadership remains unchanged. In less than two years, FirsTech has been re-energized, revenue has increased, talent has been upgraded across the enterprise, and the technology stack has been redesigned and modernized, positioning the company for scalable growth. Going forward we are squarely focused on executing on our growth strategy to provide comprehensive and innovative payment technology solutions that enable businesses to connect with their customers in a multitude of ways on a single, highly-configurable, secure platform. The Company incurred one-time severance-related costs of $2.4 million during the fourth quarter of 2022, primarily related to the efficiency optimization plan and FirsTech leadership change. COVID-19 Throughout the COVID-19 pandemic, First Busey operated as an essential community resource, providing approximately $1.1 billion in payroll assistance for small businesses and select nonprofits through low-interest, 100% government-guaranteed loans as part of the PPP. First Busey had $0.9 million in PPP loans outstanding, with an amortized cost of $0.8 million, as of December 31, 2022. In comparison, First Busey had $76.9 million in PPP loans outstanding, with an amortized cost of $75.0 million, as of December 31, 2021. CRITICAL ACCOUNTING ESTIMATES First Busey has established various accounting policies that govern the application of GAAP in the preparation of its Consolidated Financial Statements. Significant accounting policies are described in “Note 1. Significant Accounting Policies” in the Notes to the Consolidated Financial Statements. 46 Table of Contents 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: Fair Value of Debt Securities Available for Sale The fair values of debt securities available for sale are measurements from an independent pricing service and are based on observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate. Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. 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. We consider the following factors in assessing whether the decline is due to a credit loss: •Extent to which the fair value is less than the amortized cost basis; •Adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors); •Payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future; •Failure of the issuer of the security to make scheduled interest or principal payments; and •Any changes to the rating of the security by a rating agency. Impairment related to a credit loss must be measured using the discounted cash flow method. Credit loss recognition is limited to the fair value of the security. The impairment is recognized by establishing an allowance through provision for credit losses. Impairment related to noncredit factors is recognized in AOCI, net of applicable taxes. Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the date of acquisition. Fair values are determined based on the definition of “fair value” defined in ASC 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. Acquired loans are in the scope of ASC Topic 326 “Financial Instruments-Credit Losses.” 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. 47 Table of Contents 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, we assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired. Income Taxes 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. Allowance for Credit Losses 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. 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 exist. On a case-by-case basis, we may conclude a loan should be evaluated on an individual basis based on the disparate risk characteristics. Loans deemed uncollectible are charged against and reduce the allowance. A provision for credit losses is charged to current expense and acts to replenish the 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. EXECUTIVE SUMMARY Operating Results Results of our operations are presented below, segregated by operating segment (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","2020"],["Net income by operating segment"],["Banking","$","131,596","","","$","117,844","","","$","101,226"],["FirsTech","847","","","1,527","","","2,372"],["Wealth Management","18,543","","","18,570","","","13,181"],["Other","(22,675)","","","(14,492)","","","(16,435)"],["Net income","$","128,311","","","$","123,449","","","$","100,344"]] [[/GREPCENT_TABLE]] 48 Table of Contents Operating Performance Operating performance metrics presented in the table below have been derived from information used by management to monitor and manage our financial performance (dollars in thousands, except per share amounts): [[GREPCENT_TABLE]] [["","","","","Years Ended December 31,"],["","","","","","","2022","","2021","","2020"],["Reported:","Net income","","","","","$","128,311","","","$","123,449","","","$","100,344"],["Adjusted:","Net income1","","","","","131,910","","","137,108","","","108,728"],["Reported:","Diluted earnings per common share","","","","","$","2.29","","","$","2.20","","","$","1.83"],["Adjusted:","Diluted earnings per common share1","","","","","2.35","","","2.45","","","1.98"],["Reported:","Return on average assets","","","","","1.03","%","","1.04","%","","0.97","%"],["Adjusted:","Return on average assets1","","","","","1.06","%","","1.15","%","","1.06","%"],["Reported:","Return on average tangible common equity1","","","","","15.56","%","","12.96","%","","11.51","%"],["Adjusted:","Return on average tangible common equity1","","","","","15.99","%","","14.40","%","","12.47","%"],["Reported:","Pre-provision net revenue1","","","","","$","168,493","","","$","138,652","","","$","165,672"],["Adjusted:","Pre-provision net revenue1","","","","","179,424","","","160,792","","","180,516"],["Reported:","Pre-provision net revenue to average assets1","","","","","1.35","%","","1.16","%","","1.61","%"],["Adjusted:","Pre-provision net revenue to average assets1","","","","","1.44","%","","1.35","%","","1.75","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.See “Item 1. Business—Non-GAAP Financial Information.” Non-operating Items 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 were as follows for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","2020"],["Non-operating costs"],["Acquisition related expenses1","$","1,059","","","$","13,646","","","$","1,399"],["Restructuring charges2","3,478","","","3,705","","","9,312"],["Total non-operating costs","$","4,537","","","$","17,351","","","$","10,711"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.Acquisition expenses related to completed acquisitions and exploratory due diligence. 2.Restructuring charges related to previously disclosed restructuring plans. A 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.” 49 Table of Contents Wealth Management Fees and Payment Technology Solutions Combined, revenues from wealth management fees and payment technology solutions activities represented 59.5% of First Busey’s noninterest income in 2022, providing a balance to spread-based revenue from traditional banking activities. Further, noninterest income, excluding net securities gains (losses), represented 28.5% of total revenue for the year ended December 31, 2022. RESULTS OF OPERATION — THREE YEARS ENDED DECEMBER 31, 2022 Net Interest Income Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percent of average earning assets. Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal 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. 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. 50 Table of Contents Consolidated Average Balance Sheets and Interest Rates Average balances, income and expense, and yield rates are presented below for the periods indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","2020"],["","Average Balance","","Income/ Expense","","Yield/ Rate","","Average Balance","","Income/ Expense","","Yield/ Rate","","Average Balance","","Income/ Expense","","Yield/ Rate"],["Assets"],["Interest-bearing bank deposits and federal funds sold","$","290,875","","","$","3,097","","","1.06","%","","$","630,687","","","$","1,151","","","0.18","%","","$","488,786","","","$","1,723","","","0.35","%"],["Investment securities:"],["U.S. Government obligations","179,557","","","1,079","","","0.60","%","","180,041","","","1,692","","","0.94","%","","135,204","","","2,915","","","2.16","%"],["Obligations of states and political subdivisions1","286,220","","","7,611","","","2.66","%","","299,064","","","7,694","","","2.57","%","","293,070","","","8,353","","","2.85","%"],["Other securities","3,265,271","","","61,591","","","1.89","%","","2,876,714","","","37,166","","","1.29","%","","1,411,826","","","29,857","","","2.11","%"],["Loans held for sale","5,178","","","192","","","3.71","%","","21,803","","","506","","","2.32","%","","82,106","","","2,184","","","2.66","%"],["Portfolio loans1, 2","7,445,962","","","288,615","","","3.88","%","","6,969,807","","","252,946","","","3.63","%","","7,006,946","","","284,306","","","4.06","%"],["Total interest-earning assets1, 3","$","11,473,063","","","$","362,185","","","3.16","%","","$","10,978,116","","","$","301,155","","","2.74","%","","$","9,417,938","","","$","329,338","","","3.50","%"],["Cash and due from banks","120,910","","","","","","","133,711","","","","","","","118,739"],["Premises and equipment","131,657","","","","","","","138,731","","","","","","","146,144"],["ACL","(89,387)","","","","","","","(97,397)","","","","","","","(88,248)"],["Other assets","856,705","","","","","","","751,774","","","","","","","697,683"],["Total assets","$","12,492,948","","","","","","","$","11,904,935","","","","","","","$","10,292,256"],["Liabilities and Stockholders\u2019 Equity"],["Interest-bearing transaction deposits","$","2,785,439","","","$","7,150","","","0.26","%","","$","2,619,942","","","$","1,922","","","0.07","%","","$","2,153,230","","","$","4,718","","","0.22","%"],["Savings and money market deposits","3,326,259","","","4,237","","","0.13","%","","3,092,992","","","2,817","","","0.09","%","","2,567,962","","","5,960","","","0.23","%"],["Time deposits","846,738","","","4,725","","","0.56","%","","1,040,709","","","7,844","","","0.75","%","","1,356,347","","","20,013","","","1.48","%"],["Federal funds purchased and repurchase agreements","244,004","","","1,475","","","0.60","%","","218,454","","","227","","","0.10","%","","187,811","","","660","","","0.35","%"],["Borrowings4","309,175","","","15,932","","","5.15","%","","268,767","","","12,452","","","4.63","%","","217,702","","","9,352","","","4.30","%"],["Junior subordinated debt issued to unconsolidated trusts","71,716","","","3,029","","","4.22","%","","71,545","","","2,840","","","3.97","%","","71,376","","","2,960","","","4.15","%"],["Total interest-bearing liabilities","$","7,583,331","","","$","36,548","","","0.48","%","","$","7,312,409","","","$","28,102","","","0.38","%","","$","6,554,428","","","$","43,663","","","0.67","%"],["Net interest spread1","","","","","2.68","%","","","","","","2.36","%","","","","","","2.83","%"],["Noninterest-bearing deposits","3,550,517","","","","","","","3,142,155","","","","","","","2,364,442"],["Other liabilities","163,929","","","","","","","125,509","","","","","","","133,012"],["Stockholders\u2019 equity","1,195,171","","","","","","","1,324,862","","","","","","","1,240,374"],["Total liabilities and stockholders\u2019 equity","$","12,492,948","","","","","","","$","11,904,935","","","","","","","$","10,292,256"],["Interest income / earning assets1, 3","$","11,473,063","","","$","362,185","","","3.16","%","","$","10,978,116","","","$","301,155","","","2.74","%","","$","9,417,938","","","$","329,338","","","3.50","%"],["Interest expense / earning assets","11,473,063","","","36,548","","","0.32","%","","$","10,978,116","","","28,102","","","0.25","%","","$","9,417,938","","","43,663","","","0.47","%"],["Net interest margin1","","","$","325,637","","","2.84","%","","","","$","273,053","","","2.49","%","","","","$","285,675","","","3.03","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.On a tax-equivalent basis, assuming a federal income tax rate of 21.0%. 2.Non-accrual loans have been included in average portfolio loans. 3.Interest income includes a tax-equivalent adjustment of $2.2 million, $2.4 million, and $2.7 million for 2022, 2021 and 2020, respectively. Interest income includes $1.9 million, $14.0 million, and $15.2 million of fees, net of deferred costs related to PPP loans for 2022, 2021, and 2020, respectively. 4.Includes short-term borrowings, long-term debt, senior notes, and subordinated notes. Interest expense includes a non-usage fee on our revolving credit facility. 51 Table of Contents The following table presents a breakout of changes in net interest income attributable to changes in average volume and changes in average yield (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022 vs. 2021 Change Due To","","2021 vs. 2020 Change Due To"],["","Average Volume","","Average Yield/Rate","","Total Change","","Average Volume","","Average Yield/Rate","","Total Change"],["Increase (decrease) in interest income"],["Interest-bearing bank deposits and federal funds sold","$","(921)","","","$","2,867","","","$","1,946","","","$","410","","","$","(982)","","","$","(572)"],["Investment securities:"],["U.S. Government obligations","(5)","","","(608)","","","(613)","","","765","","","(1,988)","","","(1,223)"],["Obligations of state and political subdivisions","(337)","","","254","","","(83)","","","168","","","(827)","","","(659)"],["Other securities","5,544","","","18,881","","","24,425","","","22,213","","","(14,904)","","","7,309"],["Loans held for sale","(515)","","","201","","","(314)","","","(1,430)","","","(248)","","","(1,678)"],["Portfolio loans","17,870","","","17,799","","","35,669","","","(1,499)","","","(29,861)","","","(31,360)"],["Change in interest income","$","21,636","","","$","39,394","","","$","61,030","","","$","20,627","","","$","(48,810)","","","$","(28,183)"],["Increase (decrease) in interest expense"],["Interest-bearing transaction deposits","$","129","","","$","5,099","","","$","5,228","","","$","855","","","$","(3,651)","","","$","(2,796)"],["Savings and money market deposits","151","","","1,269","","","1,420","","","931","","","(4,074)","","","(3,143)"],["Time deposits","(1,303)","","","(1,816)","","","(3,119)","","","(3,923)","","","(8,246)","","","(12,169)"],["Federal funds purchased and repurchase agreements","30","","","1,218","","","1,248","","","95","","","(528)","","","(433)"],["Borrowings","1,611","","","1,869","","","3,480","","","2,289","","","811","","","3,100"],["Junior subordinated debt owed to unconsolidated trusts","7","","","182","","","189","","","7","","","(127)","","","(120)"],["Change in interest expense","$","625","","","$","7,821","","","$","8,446","","","$","254","","","$","(15,815)","","","$","(15,561)"],["Increase (decrease) in net interest income","$","21,011","","","$","31,573","","","$","52,584","","","$","20,373","","","$","(32,995)","","","$","(12,622)"],["Percentage increase (decrease) in net interest income over prior period","","","","","19.3","%","","","","","","(4.4)","%"]] [[/GREPCENT_TABLE]] Notable changes in average assets and average liabilities are summarized as follows for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","Change","","% Change"],["Average interest-earning assets","$","11,473,063","","","$","10,978,116","","","$","494,947","","","4.5","%"],["Average interest-bearing liabilities","7,583,331","","","7,312,409","","","270,922","","","3.7","%"],["Average noninterest-bearing deposits","3,550,517","","","3,142,155","","","408,362","","","13.0","%"],["Total average deposits","10,508,953","","","9,895,798","","","613,155","","","6.2","%"],["Total average liabilities","11,297,777","","","10,580,073","","","717,704","","","6.8","%"],["Average noninterest-bearing deposits as a percent of total average deposits","33.8","%","","31.8","%","","200 bps"],["Total average deposits as a percent of total average liabilities","93.0","%","","93.5","%","","(50) bps"]] [[/GREPCENT_TABLE]] 52 Table of Contents Changes in net interest income and net interest margin are summarized as follows for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","Change","","% Change"],["Net interest income"],["Interest income, on a tax-equivalent basis1","$","362,185","","","$","301,155","","","$","61,030","","","20.3","%"],["Interest expense","(36,548)","","","(28,102)","","","(8,446)","","","30.1","%"],["Net interest income, on a tax-equivalent basis1","$","325,637","","","$","273,053","","","$","52,584","","","19.3","%"],["Net interest margin1, 2","2.84","%","","2.49","%","","35 bps"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.Assuming a federal income tax rate of 21.0%. 2.Net interest income expressed as a percentage of average earning assets, stated on a tax-equivalent basis. The FOMC raised rates by a total of 425 basis points during 2022. Rising rates have a positive impact on net interest margin, as assets, in particular commercial loans, reprice more quickly and to a greater extent than liabilities. In general, net interest margins have been impacted over the last three years by PPP loans, significant growth in the Company’s liquidity position, organic portfolio loan growth over the past seven quarters, and the issuance of debt, with more recent impacts resulting from rate increases. First Busey remains substantially funded by core deposits1, with robust liquidity and significant market share in the communities we serve. As of December 31, 2022, our loan to deposit ratio was 76.7% and core deposits represented 98.8% of total deposits. 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 2.68% in 2022 compared to 2.36% in 2021 and 2.83% in 2020, each on a tax equivalent basis. Annualized net interest margins for the quarterly periods indicated were as follows: [[GREPCENT_TABLE]] [["","2022","","2021","","2020"],["First Quarter","2.45","%","","2.72","%","","3.20","%"],["Second Quarter","2.68","%","","2.50","%","","3.03","%"],["Third Quarter","3.00","%","","2.41","%","","2.86","%"],["Fourth Quarter","3.24","%","","2.36","%","","3.06","%"]] [[/GREPCENT_TABLE]] Management attempts to mitigate the effects of an unpredictable interest-rate environment through effective portfolio management, prudent loan underwriting and operational efficiencies. 1 Core deposits is a non-GAAP financial measure. For a reconciliation of non-GAAP measures to the most directly comparable financial GAAP measures, see “Item 1. Business—Non-GAAP Financial Information.” 53 Table of Contents Noninterest Income Changes in noninterest income are summarized in the tables below for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","Change","% Change"],["Noninterest income"],["Wealth management and payment technology solutions income:"],["Wealth management fees","$","55,378","","","$","53,086","","","$","2,292","","","4.3","%"],["Payment technology solutions","20,067","","","18,347","","","1,720","","","9.4","%"],["Combined, wealth management fees and payment technology solutions","75,445","","","71,433","","","4,012","","","5.6","%"],["Fees for customer services","33,111","","","35,604","","","(2,493)","","","(7.0)","%"],["Mortgage revenue","1,895","","","7,239","","","(5,344)","","","(73.8)","%"],["Income on bank owned life insurance","3,663","","","5,166","","","(1,503)","","","(29.1)","%"],["Securities income:"],["Realized net gains (losses) on securities","50","","","29","","","21","","","72.4","%"],["Unrealized net gains (losses) recognized on equity securities","(2,183)","","","3,041","","","(5,224)","","","(171.8)","%"],["Net securities gains (losses)","(2,133)","","","3,070","","","(5,203)","","","(169.5)","%"],["Other income","14,822","","","10,292","","","4,530","","","44.0","%"],["Total noninterest income","$","126,803","","","$","132,804","","","$","(6,001)","","","(4.5)","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2021","","2020","","Change","% Change"],["Noninterest income"],["Wealth management and payment technology solutions income:"],["Wealth management fees","$","53,086","","","$","42,928","","","$","10,158","","","23.7","%"],["Payment technology solutions","18,347","","","15,628","","","2,719","","","17.4","%"],["Combined, wealth management fees and payment technology solutions","71,433","","","58,556","","","12,877","","","22.0","%"],["Fees for customer services","35,604","","","31,604","","","4,000","","","12.7","%"],["Mortgage revenue","7,239","","","13,038","","","(5,799)","","","(44.5)","%"],["Income on bank owned life insurance","5,166","","","5,380","","","(214)","","","(4.0)","%"],["Securities income:"],["Realized net gains (losses) on securities","29","","","1,724","","","(1,695)","","","(98.3)","%"],["Unrealized net gains (losses) recognized on equity securities","3,041","","","(393)","","","3,434","","","873.8","%"],["Net securities gains (losses)","3,070","","","1,331","","","1,739","","","130.7","%"],["Other income","10,292","","","8,356","","","1,936","","","23.2","%"],["Total noninterest income","$","132,804","","","$","118,265","","","$","14,539","","","12.3","%"]] [[/GREPCENT_TABLE]] 54 Table of Contents Total noninterest income was $126.8 million for the year ended December 31, 2022, a decrease of 4.5% when compared with $132.8 million for the year ended December 31, 2021. Revenues from wealth management fees and payment technology solutions represented 59.5% and 53.8% of noninterest income for the years ended December 31, 2022, and December 31, 2021, respectively, providing a complement to spread-based revenue from traditional banking activities. On a combined basis, revenue from these two critical operating areas was $75.5 million for the year ended December 31, 2022, a 5.6% increase from $71.4 million for the year ended December 31, 2021. Wealth management fees increased by 4.3% to $55.4 million in 2022, compared to $53.1 million in 2021. First Busey’s Wealth Management division had $11.1 billion in assets under care as of December 31, 2022, compared to $12.7 billion as of December 31, 2021. The decrease in the value of assets under care was principally due to a reduction in market valuations and nonrecurring outflows. Our portfolio management team continues to produce solid results in the face of very volatile markets. Payment technology solutions revenue relates to our payment processing company, FirsTech. Payment technology solutions revenue increased by 9.4% to $20.1 million in 2022, compared to $18.3 million in 2021. Increases in payment technology solutions revenue were primarily the result of 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 enhance future growth, including further upgrades to the product and engineering teams to build an API cloud-based platform to provide for fully integrated payment capabilities, as well as the continued development of our BaaS platform. Fees for customer services decreased by 7.0% to $33.1 million in 2022, compared to $35.6 million in 2021. Beginning on July 1, 2022, we became subject to the Durbin Amendment of the Dodd-Frank Act. The Durbin Amendment requires the Federal Reserve to establish a maximum permissible interchange fee for many types of debit transactions, which resulted in a $4.8 million reduction in fee income during the last half of 2022. Mortgage revenue was $1.9 million in 2022, compared to $7.2 million in 2021. Decreases primarily resulted from declines in sold-loan mortgage volume due to retaining a higher share of loan production in 2022, as well as lower gain on sale premiums. General economic conditions and interest rate volatility may impact future fee income. Income on bank owned life insurance decreased by 29.1% to $3.7 million in 2022, compared to $5.2 million in 2021, primarily as a result of a decrease in life insurance proceeds. Other income increased by 44.0% to $14.8 million in 2022, compared to $10.3 million in 2021. Other income benefited primarily from increases in other asset investment values and check sales, partially offset by smaller gains on commercial loan sales. 55 Table of Contents Noninterest Expense Changes in noninterest expense are summarized in the tables below for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","Change","","% Change"],["Noninterest expense"],["Salaries, wages, and employee benefits","$","159,016","","","$","145,312","","","$","13,704","","","9.4","%"],["Data processing","21,648","","","21,862","","","(214)","","","(1.0)","%"],["Premises expenses:"],["Net occupancy expense of premises","19,130","","","18,346","","","784","","","4.3","%"],["Furniture and equipment expenses","7,645","","","8,301","","","(656)","","","(7.9)","%"],["Combined, net occupancy expense of premises and furniture and equipment expenses","26,775","","","26,647","","","128","","","0.5","%"],["Professional fees","6,125","","","7,549","","","(1,424)","","","(18.9)","%"],["Amortization of intangible assets","11,628","","","11,274","","","354","","","3.1","%"],["Interchange expense","6,298","","","5,792","","","506","","","8.7","%"],["Other expense","52,391","","","43,344","","","9,047","","","20.9","%"],["Total noninterest expense","$","283,881","","","$","261,780","","","$","22,101","","","8.4","%"],["Income taxes","$","33,426","","","$","33,374","","","$","52","","","0.2","%"],["Effective income tax rate","20.7","%","","21.3","%","","(60) bps"],["Efficiency ratio1","59.9","%","","62.2","%","","(230) bps"],["Adjusted efficiency ratio1","58.9","%","","57.9","%","","100 bps"],["Full-time equivalent employees as of period-end","1,497","","","1,463","","","34","","","2.3","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.The efficiency ratio and adjusted efficiency ratio are both non-GAAP financial measures. For a reconciliation of non-GAAP financial measure to the most directly comparable GAAP financial measures, see “Item 1. Business—Non-GAAP Financial Information.” 56 Table of Contents [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2021","","2020","","Change","","% Change"],["Noninterest expense"],["Salaries, wages, and employee benefits","$","145,312","","","$","126,719","","","$","18,593","","","14.7","%"],["Data processing","21,862","","","16,426","","","5,436","","","33.1","%"],["Premises expenses:"],["Net occupancy expense of premises","18,346","","","17,607","","","739","","","4.2","%"],["Furniture and equipment expenses","8,301","","","9,550","","","(1,249)","","","(13.1)","%"],["Combined, net occupancy expense of premises and furniture and equipment expenses","26,647","","","27,157","","","(510)","","","(1.9)","%"],["Professional fees","7,549","","","8,396","","","(847)","","","(10.1)","%"],["Amortization of intangible assets","11,274","","","10,008","","","1,266","","","12.6","%"],["Interchange expense","5,792","","","4,810","","","982","","","20.4","%"],["Other expense","43,344","","","40,681","","","2,663","","","6.5","%"],["Total noninterest expense","$","261,780","","","$","234,197","","","$","27,583","","","11.8","%"],["Income taxes","$","33,374","","","$","27,862","","","$","5,512","","","19.8","%"],["Effective income tax rate","21.3","%","","21.7","%","","(40) bps"],["Efficiency ratio1","62.2","%","","55.7","%","","650 bps"],["Adjusted efficiency ratio1","57.9","%","","53.0","%","","490 bps"],["Full-time equivalent employees as of period-end","1,463","","","1,346","","","117","","","8.7","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.The efficiency ratio and adjusted efficiency ratio are both non-GAAP financial measures. For a reconciliation of non-GAAP financial measure to the most directly comparable GAAP financial measures, see “Item 1. Business—Non-GAAP Financial Information.” Total noninterest expense increased to $283.9 million for the year ended December 31, 2022, compared to $261.8 million for the year ended December 31, 2021. Non-operating acquisition and other restructuring expenses decreased to $4.5 million in 2022, compared to $17.4 million in 2021. We remain focused on expense discipline, and have made necessary investments during the past two years to support the continued organic growth of our key business lines and related support and risk management functions. Salaries, wages, and employee benefits increased to $159.0 million in 2022, compared to $145.3 million in 2021. We had a total of 1,497 full-time equivalents at December 31, 2022, compared to 1,463 at December 31, 2021. Throughout 2022 we continued to invest in talent across our business lines and our risk management infrastructure. Labor market trends over the past year reflected a tight labor supply, while job gains resulted in increased demands for a skilled workforce, maintaining upward pressure on salaries, wages, and employee benefits. Data processing expense decreased to $21.6 million in 2022, compared to $21.9 million in 2021. Decreases were primarily attributable to higher expenses in 2021 related to the CAC acquisition, offset by increased expenses for FirsTech related to transaction volume and continued Company-wide investments in technology enhancements, as well as inflation-driven price increases. Combined, net occupancy expense of premises and furniture and equipment expenses increased to $26.8 million in 2022, compared to $26.6 million in 2021. Year-over-year increases are primarily attributable to higher building and maintenance costs. As we continue to divest our recently closed branches we expect to realize incremental cost savings. Professional fees decreased to $6.1 million in 2022, compared to $7.5 million in 2021, as a result of decreases in legal fees, audit and accounting fees, payroll service costs, and consulting fees. 57 Table of Contents Amortization of intangible assets increased to $11.6 million in 2022, compared to $11.3 million in 2021, as a result of increases in intangible asset balances from the acquisition of CAC. Amortization of intangible assets included 12 months of amortization in 2022 in connection with intangible assets obtained in the acquisition of CAC, compared to seven months in 2021. Interchange expense increased to $6.3 million in 2022, compared to $5.8 million in 2021. Fluctuations in interchange expense were primarily the result of increased payment and volume activity at FirsTech. Other expense increased to $52.4 million in 2022, compared to $43.3 million in 2021. Increases were across multiple expense categories including marketing and business development, NMTC amortization, and regulatory expenses, partially offset by lower fixed asset impairment. Efficiency Ratio2 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. Our efficiency ratio was 59.9% for the year ended December 31, 2022, compared to 62.2% for the year ended December 31, 2021. Operating costs have been influenced by acquisition expenses and other restructuring costs, and the adjusted efficiency ratio1 was 58.9% for the year ended December 31, 2022, compared to 57.9% for the year ended December 31, 2021. Income Taxes The effective income tax rate, or income taxes divided by income before taxes, was 20.7%, 21.3%, and 21.7% for the years ended December 31, 2022, 2021, and 2020, respectively. The Company's effective tax rate was lower than the combined federal and state statutory rate of approximately 28.0% due to tax exempt interest income, such as municipal bond interest and bank owned life insurance income, and investments in various federal and state tax credits. We continue to monitor evolving federal and state tax legislation and its potential impact on operations on an ongoing basis. As of December 31, 2022, we were not under examination by any tax authority; however, we have received an inquiry from the State of Illinois regarding our prior franchise tax filings. In the event the Company is required to amend our prior franchise tax filings, we could incur additional expenses. 2 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.” 58 Table of Contents FINANCIAL CONDITION Balance Sheet Changes in significant items included in our Consolidated Balance Sheets are summarized in the table below (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021","","Change","","% Change"],["Assets"],["Debt securities available for sale","$","2,461,393","","","$","3,981,251","","","$","(1,519,858)","","","(38.2)","%"],["Debt securities held to maturity","918,312","","","\u2014","","","918,312","","","NM"],["Portfolio loans, net of ACL","7,634,094","","","7,101,111","","","532,983","","","7.5","%"],["Total assets","12,336,677","","","12,859,689","","","(523,012)","","","(4.1)","%"],["Liabilities"],["Deposits:"],["Noninterest-bearing","3,393,666","","","3,670,267","","","(276,601)","","","(7.5)","%"],["Interest-bearing","6,677,614","","","7,098,310","","","(420,696)","","","(5.9)","%"],["Total deposits","10,071,280","","","10,768,577","","","(697,297)","","","(6.5)","%"],["Securities sold under agreements to repurchase","229,806","","","270,139","","","(40,333)","","","(14.9)","%"],["Short-term borrowings","351,054","","","17,678","","","333,376","","","1,885.8","%"],["Subordinated notes, net of unamortized issuance costs","222,038","","","182,773","","","39,265","","","21.5","%"],["Total liabilities","11,190,700","","","11,540,577","","","(349,877)","","","(3.0)","%"],["Stockholders\u2019 Equity","1,145,977","","","1,319,112","","","(173,135)","","","(13.1)","%"]] [[/GREPCENT_TABLE]] Investment Securities Primary purposes of our investment securities portfolio are to provide a source of earnings by deploying funds which are not needed to fulfill loan demand, deposit redemptions, or other liquidity purposes; to serve as a tool for interest rate risk positioning; and to provide collateral for pledging purposes against public deposits and repurchase agreements, all while providing a source of liquidity. 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 considerations, and overall portfolio allocation. As of December 31, 2022, we did not hold general obligation bonds of any single issuer, the aggregate of which exceeded 10% of the Company’s stockholders’ equity. Pledged securities totaled $746.7 million, or 22.1% of total debt securities, as of December 31, 2022, and $708.9 million, or 17.8% of total debt securities, as of December 31, 2021. Debt Securities Available for Sale Debt securities available for sale are carried at fair value. As of December 31, 2022, the fair value of debt securities available for sale was $2.5 billion, and the amortized cost was $2.8 billion. There were $0.1 million of gross unrealized gains and $311.2 million of gross unrealized losses, for a net unrealized loss of $311.1 million. The net unrealized loss, net of tax, is recorded in stockholders’ equity through AOCI. 59 Table of Contents The composition of debt securities available for sale was as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Debt securities available for sale"],["U.S. Treasury securities","$","114,061","","","$","165,762"],["Obligations of U.S. government corporations and agencies","19,779","","","38,470"],["Obligations of states and political subdivisions","257,512","","","306,869"],["Asset-backed securities","469,875","","","492,186"],["Commercial mortgage-backed securities","108,394","","","614,998"],["Residential mortgage-backed securities","1,243,256","","","2,069,313"],["Corporate debt securities","248,516","","","293,653"],["Debt securities available for sale, fair value","$","2,461,393","","","$","3,981,251"],["Debt securities available for sale, amortized cost","$","2,772,453","","","$","4,013,523"],["Fair value as a percentage of amortized cost","88.78","%","","99.20","%"]] [[/GREPCENT_TABLE]] By maturity date, fair values, and weighted average yields of debt securities available for sale as of December 31, 2022, were (dollars in thousands): [[GREPCENT_TABLE]] [["","Due in 1 year or less","","Due after 1 year through 5 years","","Due after 5 years through 10 years","","Due after 10 years"],["","Fair Value","","Weighted Average Yield","","Fair Value","","Weighted Average Yield","","Fair Value","","Weighted Average Yield","","Fair Value","","Weighted Average Yield"],["Debt securities available for sale1"],["U.S. Treasury securities","$","69,480","","","0.15","%","","$","44,581","","","0.34","%","","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%"],["Obligations of U.S. government corporations and agencies","8,947","","","2.31","%","","7,733","","","2.75","%","","3,099","","","3.48","%","","\u2014","","","\u2014","%"],["Obligations of states and political subdivisions2","27,473","","","2.02","%","","92,449","","","2.23","%","","93,704","","","2.16","%","","43,886","","","2.50","%"],["Asset-backed securities","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","72,729","","","5.53","%","","397,146","","","5.19","%"],["Commercial mortgage-backed securities","\u2014","","","\u2014","%","","23,643","","","2.24","%","","18,584","","","2.19","%","","66,167","","","2.15","%"],["Residential mortgage-backed securities","223","","","2.48","%","","15,532","","","2.67","%","","106,308","","","1.85","%","","1,121,193","","","1.68","%"],["Corporate debt securities","27,844","","","0.62","%","","184,816","","","1.21","%","","35,856","","","3.55","%","","\u2014","","","\u2014","%"],["Debt securities available for sale","$","133,967","","","0.78","%","","$","368,754","","","1.51","%","","$","330,280","","","2.92","%","","$","1,628,392","","","2.50","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.Securities are presented based upon final contractual maturity or pre-refunded date. 2.Weighted average yield calculated on a tax-equivalent basis, assuming a federal income tax rate of 21.0%. 60 Table of Contents Debt Securities Held to Maturity In 2022, a portion of the debt securities available for sale were transferred to debt securities held to maturity. Debt securities held to maturity are carried at amortized cost. As of December 31, 2022, the amortized cost of debt securities held to maturity was $918.3 million, and the fair value was $785.3 million. There were no gross unrecognized gains and $133.0 million of gross unrecognized losses. Unrecognized losses are included in OCI, and amortized into income over the contractual lives of the securities. An ACL balance will be established for debt securities held to maturity when applicable. As of December 31, 2022, no ACL was recorded for our portfolio of debt securities held to maturity. The composition of debt securities held to maturity was as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Debt securities held to maturity"],["Commercial mortgage-backed securities","$","474,820","","","$","\u2014"],["Residential mortgage-backed securities","443,492","","","\u2014"],["Debt securities held to maturity, amortized cost","$","918,312","","","$","\u2014"],["Debt securities held to maturity, fair value","$","785,295","","","$","\u2014"],["Fair value as a percentage of amortized cost","85.52","%","","N/A"]] [[/GREPCENT_TABLE]] By maturity date, fair values, and weighted average yields of debt securities held to maturity as of December 31, 2022, were (dollars in thousands): [[GREPCENT_TABLE]] [["","Due in 1 year or less","","Due after 1 year through 5 years","","Due after 5 years through 10 years","","Due after 10 years"],["","Fair Value","","Weighted Average Yield","","Fair Value","","Weighted Average Yield","","Fair Value","","Weighted Average Yield","","Fair Value","","Weighted Average Yield"],["Debt securities held to maturity1"],["Commercial mortgage-backed securities","$","\u2014","","","\u2014","%","","$","41,483","","","2.25","%","","$","57,955","","","2.20","%","","$","311,644","","","2.31","%"],["Residential mortgage-backed securities","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","374,213","","","2.25","%"],["Debt securities held to maturity","$","\u2014","","","\u2014","%","","$","41,483","","","2.25","%","","$","57,955","","","2.20","%","","$","685,857","","","2.28","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.Securities are presented based upon final contractual maturity or pre-refunded date. Equity Securities Equity securities are carried at fair value. The fair value of equity securities was $11.5 million as of December 31, 2022, compared to $13.6 million as of December 31, 2021. 61 Table of Contents Portfolio Loans 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. 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. 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. 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. 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. 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. Commercial Loans Commercial loans typically comprise working capital loans or business expansion loans, including loans for asset purchases and other business loans. Commercial loans will generally be guaranteed, in full or a 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. Commercial Real Estate Loans 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. 62 Table of Contents Real Estate Construction Loans Real estate construction loans are primarily commercial in nature. Loan proceeds are monitored by the Company and advanced for the improvement of real estate in which 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. Retail Real Estate Loans Retail real estate loans are comprised of direct consumer loans that include residential real estate, home equity lines of credit, and home equity loans. In 2022, the Company retained a larger percentage of originated retail real estate loans in our portfolio over selling to secondary market purchasers. 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. Retail Other Loans 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 credit scores, as well as information about the underlying collateral. Retail other loans 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. Portfolio Loans by Loan Category The composition of our portfolio loans as of the dates indicated was as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021","","","","","","","","Change","","% Change"],["Portfolio loans"],["Commercial","$","1,974,154","","","$","1,943,886","","","","","","","","","$","30,268","","","1.6","%"],["Commercial real estate","3,261,873","","","3,119,807","","","","","","","","","142,066","","","4.6","%"],["Real estate construction","530,469","","","385,996","","","","","","","","","144,473","","","37.4","%"],["Retail real estate","1,657,082","","","1,512,976","","","","","","","","","144,106","","","9.5","%"],["Retail other","302,124","","","226,333","","","","","","","","","75,791","","","33.5","%"],["Total portfolio loans","$","7,725,702","","","$","7,188,998","","","","","","","","","$","536,704","","","7.5","%"],["ACL","(91,608)","","","(87,887)","","","","","","","","","(3,721)","","","4.2","%"],["Portfolio loans, net","$","7,634,094","","","$","7,101,111","","","","","","","","","$","532,983","","","7.5","%"]] [[/GREPCENT_TABLE]] 63 Table of Contents Geographic distributions of portfolio loans, based on origination, by category were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","December 31, 2022"],["","Illinois","","Missouri","","Florida","","Indiana","","Total"],["Portfolio loans"],["Commercial","$","1,401,165","","","$","466,904","","","$","52,925","","","$","53,160","","","$","1,974,154"],["Commercial real estate","2,180,767","","","680,532","","","220,939","","","179,635","","","3,261,873"],["Real estate construction","326,154","","","131,782","","","31,212","","","41,321","","","530,469"],["Retail real estate","1,253,069","","","210,048","","","122,397","","","71,568","","","1,657,082"],["Retail other","296,719","","","2,565","","","1,788","","","1,052","","","302,124"],["Total portfolio loans","$","5,457,874","","","$","1,491,831","","","$","429,261","","","$","346,736","","","$","7,725,702"],["ACL","","","","","","","","","(91,608)"],["Portfolio loans, net of ACL","","","","","","","","","$","7,634,094"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","December 31, 2021"],["","Illinois","","Missouri","","Florida","","Indiana","","Total"],["Portfolio loans"],["Commercial","$","1,372,584","","","$","463,085","","","$","55,180","","","$","53,037","","","$","1,943,886"],["Commercial real estate","2,063,681","","","691,969","","","191,303","","","172,854","","","3,119,807"],["Real estate construction","199,471","","","120,785","","","31,265","","","34,475","","","385,996"],["Retail real estate","1,124,486","","","235,083","","","96,563","","","56,844","","","1,512,976"],["Retail other","219,000","","","3,684","","","2,181","","","1,468","","","226,333"],["Total portfolio loans","$","4,979,222","","","$","1,514,606","","","$","376,492","","","$","318,678","","","$","7,188,998"],["ACL","","","","","","","","","(87,887)"],["Portfolio loans, net of ACL","","","","","","","","","$","7,101,111"]] [[/GREPCENT_TABLE]] 64 Table of Contents Loan Growth The Company generated $610.8 million, or 8.6%, in core loan3 growth during 2022. Changes in portfolio loan balances, by loan category, were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021","","Change","","% Change"],["Portfolio loans"],["Commercial loans:"],["Commercial","$","1,974,154","","$","1,943,886","","$","30,268","","","1.6","%"],["Commercial real estate","3,261,873","","3,119,807","","142,066","","4.6","%"],["Real estate construction","530,469","","385,996","","144,473","","37.4","%"],["Commercial loan balances","5,766,496","","5,449,689","","316,807","","5.8","%"],["Retail loans:"],["Retail real estate","1,657,082","","1,512,976","","144,106","","9.5","%"],["Retail other","302,124","","226,333","","75,791","","33.5","%"],["Retail loan balances","1,959,206","","1,739,309","","219,897","","12.6","%"],["Total portfolio loans","7,725,702","","7,188,998","","536,704","","7.5","%"],["ACL","(91,608)","","","(87,887)","","","(3,721)","","4.2","%"],["Portfolio loans, net of ACL","$","7,634,094","","$","7,101,111","","$","532,983","","7.5","%"]] [[/GREPCENT_TABLE]] Excluding the amortized cost of PPP loans, changes in commercial loan balances were as follows: [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021","","Change","","% Change"],["Commercial loan balances","$","5,766,496","","","$","5,449,689","","","$","316,807","","5.8","%"],["Less: PPP loans amortized cost","(845)","","","(74,958)","","","74,113","","(98.9)","%"],["Commercial loan balances, excluding PPP loans","$","5,765,651","","$","5,374,731","","$","390,920","","7.3","%"]] [[/GREPCENT_TABLE]] Commercial balances—consisting of commercial, commercial real estate, and real estate construction loans—excluding PPP loans, increased by $390.9 million, or 7.3%, during the year ended December 31, 2022. Retail real estate and retail other loans increased by $219.9 million, or 12.6%, during the year ended December 31, 2022. PPP loans decreased by $74.1 million during the year ended December 31, 2022, to $0.8 million. Loan Commitments Commitments to extend credit and standby letters of credit increased by $8.6 million, or 0.4%, to a total of $2.0 billion as of December 31, 2022. 3 Core loans is a non-GAAP financial measure. For a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measures, see “Item 1. Business—Non-GAAP Financial Information” included in this Annual Report. 65 Table of Contents Loan Maturities The following table sets forth remaining maturities of selected loans (excluding deferred loan fees and costs, purchase premiums and discounts, and certain real estate-mortgage loans and installment loans to individuals) at December 31, 2022, (dollars in thousands). The determination of loan maturities is based on contractual loan terms. For the purposes of categorization within the table below, demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are considered to mature within one year. Maturities for non-contractual rollovers or extensions are determined based on the rate review date. [[GREPCENT_TABLE]] [["","Within 1 Year","","After 1 Year Through 5 Years","","After 5 Years Through 15 Years","","After 15 Years","","Total"],["Selected Loans"],["Commercial","$","1,037,306","","","$","628,431","","","$","288,086","","","$","20,412","","","$","1,974,235"],["Commercial real estate","956,694","","","1,492,092","","","814,381","","","35","","","3,263,202"],["Real estate construction","342,924","","","138,112","","","48,730","","","2,820","","","532,586"],["Total selected loans","$","2,336,924","","","$","2,258,635","","","$","1,151,197","","","$","23,267","","","$","5,770,023"]] [[/GREPCENT_TABLE]] Interest Rate Structure Selected loans maturing after one year are summarized below by interest rate structure and loan category, as of December 31, 2022, (dollars in thousands): [[GREPCENT_TABLE]] [["","Fixed Rate","","Adjustable Rate","","Total"],["Selected loans maturing after 1 year"],["Commercial","$","896,637","","","$","40,292","","","$","936,929"],["Commercial real estate","2,198,122","","","108,386","","","2,306,508"],["Real estate construction","170,692","","","18,970","","","189,662"],["Total selected loans maturing after 1 year","$","3,265,451","","","$","167,648","","","$","3,433,099"]] [[/GREPCENT_TABLE]] 66 Table of Contents Allowance for Credit Losses The following table summarizes, by loan category, activity affecting the ACL and average portfolio loans outstanding for the year ended December 31, 2022, as well as the related ratios of net charge-offs (recoveries) to average portfolio loans (dollars in thousands): [[GREPCENT_TABLE]] [["","ACL","","Average Portfolio Loans Outstanding","","Ratio of Net Charge-offs (Recoveries) To Average Portfolio Loans"],["ACL balance, December 31, 2019","$","53,748"],["Adoption of ASC 326-30","16,833"],["Net (charge-offs) recoveries and average portfolio loans by loan category:"],["Commercial","(5,972)","","","$","2,123,550","","","0.28","%"],["Commercial real estate","(1,777)","","","2,840,592","","","0.06","%"],["Real estate construction","583","","","447,503","","","(0.13)","%"],["Retail real estate","(845)","","","1,552,297","","","0.05","%"],["Retail other","(319)","","","43,004","","","0.74","%"],["Net (charge-offs) recoveries and average portfolio loans","(8,330)","","","$","7,006,946","","","0.12","%"],["Provision for credit losses","38,797"],["ACL balance, December 31, 2020","101,048"],["Day 1 PCD1","4,178"],["Net (charge-offs) recoveries and average portfolio loans by loan category:"],["Commercial","(1,397)","","","$","1,985,511","","","0.07","%"],["Commercial real estate","(666)","","","2,953,944","","","0.02","%"],["Real estate construction","89","","","450,713","","","(0.02)","%"],["Retail real estate","(76)","","","1,446,673","","","0.01","%"],["Retail other","(188)","","","132,966","","","0.14","%"],["Net (charge-offs) recoveries and average portfolio loans","(2,238)","","","$","6,969,807","","","0.03","%"],["Provision for credit losses","(15,101)"],["ACL balance, December 31, 2021","87,887"],["Net (charge-offs) recoveries and average portfolio loans by loan category:"],["Commercial","(492)","","","$","1,919,227","","","0.03","%"],["Commercial real estate","(842)","","","3,200,166","","","0.03","%"],["Real estate construction","213","","","466,045","","","(0.05)","%"],["Retail real estate","385","","","1,584,859","","","(0.02)","%"],["Retail other","(166)","","","275,665","","","0.06","%"],["Net (charge-offs) recoveries and average portfolio loans","(902)","","","$","7,445,962","","","0.01","%"],["Provision for credit losses","4,623"],["ACL balance, December 31, 2022","$","91,608"]] [[/GREPCENT_TABLE]] 67 Table of Contents The following table presents ACL to portfolio loan ratios, as of the periods indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Portfolio loans","$","7,725,702","","","$","7,188,998"],["PPP loans amortized cost","(845)","","","(74,958)"],["Core loans1","$","7,724,857","","","$","7,114,040"],["ACL","$","91,608","","","$","87,887"],["Ratios"],["ACL to portfolio loans","1.19","%","","1.22","%"],["ACL to core loans1","1.19","%","","1.24","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.Core loans is a non-GAAP financial measure. For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, see "Item 1. Business—Non-GAAP Financial Information." The following table sets forth the ACL by loan categories and percentage of loans to total loans as of December 31 for each of the years indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["","ACL","","% of Loans to Total Loans","","ACL","","% of Loans to Total Loans"],["Loan Category"],["Commercial","$","23,860","","","25.6","%","","$","23,855","","","27.0","%"],["Commercial real estate","38,299","","","42.2","%","","38,249","","","43.4","%"],["Real estate construction","6,457","","","6.9","%","","5,102","","","5.4","%"],["Retail real estate","18,193","","","21.4","%","","17,589","","","21.0","%"],["Retail other","4,799","","","3.9","%","","3,092","","","3.2","%"],["Total","$","91,608","","","100.0","%","","$","87,887","","","100.0","%"]] [[/GREPCENT_TABLE]] The ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration, and other factors. As of December 31, 2022, management believed the level of the allowance to be appropriate based upon the information available. However, additional losses may be identified in our loan portfolio as new information is obtained. Provision for Credit Losses The ACL is a significant estimate in our Consolidated Balance Sheet, affecting both earnings and capital. The methodology adopted influences, and is influenced by, Busey Bank’s overall credit risk management processes. The ACL is recorded in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date. The ACL is established through the provision for credit loss expense charged to income. Provision expenses (releases) were recorded as follows for each of the years indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","2020"],["Provision for credit losses","$","4,623","","","$","(15,101)","","","$","38,797"]] [[/GREPCENT_TABLE]] The relatively high expense in 2020 was attributed to the adoption of CECL in combination with the impacts of the COVID-19 pandemic on the economy, followed by a provision release in 2021 reflecting improvements in macroeconomic conditions and asset quality. In 2022 we began to see a stabilization of the provision expense. 68 Table of Contents Non-performing Loans and Non-performing Assets Loans are considered past due if the required principal or interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory guidelines. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Typically, loans are secured by collateral. When a loan is classified as non-accrual and determined to be collateral dependent, it is appropriately reserved or charged down through the 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. 69 Table of Contents The following table sets forth information concerning non-performing loans and performing restructured loans (dollars in thousands): [[GREPCENT_TABLE]] [["","","As of December 31,"],["","","2022","","2021"],["Portfolio loans","","$","7,725,702","","","$","7,188,998"],["Non-GAAP adjustments:"],["PPP loans amortized cost","","(845)","","","(74,958)"],["Core loans1","","$","7,724,857","","","$","7,114,040"],["Loans 30 \u2013 89 days past due","","$","6,548","","","$","6,261"],["Total assets","","12,336,677","","","12,859,689"],["Non-performing assets"],["Non-performing loans:"],["Non-accrual loans","","$","15,067","","","$","15,946"],["Loans 90+ days past due and still accruing","","673","","","906"],["Total non-performing loans","","15,740","","","16,852"],["OREO and other repossessed assets","","850","","","4,416"],["Total non-performing assets","","16,590","","","21,268"],["Substandard (excludes 90+ days past due)","","90,489","","","70,565"],["Classified assets","","$","107,079","","","$","91,833"],["Performing TDRs (includes 30 \u2013 89 days past due)","","$","3,032","","","$","1,801"],["ACL","","91,608","","","87,887"],["Bank Tier 1 Capital","","1,306,716","","","1,241,303"],["Ratios"],["ACL to non-accrual loans","","608.00","%","","551.15","%"],["ACL to non-performing loans","","582.01","%","","521.52","%"],["ACL to non-performing assets","","552.19","%","","413.24","%"],["Non-accrual loans to portfolio loans","","0.20","%","","0.22","%"],["Non-performing loans to portfolio loans","","0.20","%","","0.23","%"],["Non-performing loans to core loans1","","0.20","%","","0.24","%"],["Non-performing assets to total assets","","0.13","%","","0.17","%"],["Non-performing assets to portfolio loans and OREO","","0.21","%","","0.30","%"],["Classified assets to Bank Tier 1 Capital and ACL","","7.66","%","","6.91","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.Core loans is a non-GAAP financial measure. For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, see "Item 1. Business—Non-GAAP Financial Information." Credit quality continues to be exceptionally strong. Total non-performing assets were $16.6 million at December 31, 2022, compared to $21.3 million at December 31, 2021. 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 0.20% at December 31, 2022, compared with 0.23% at December 31, 2021. Furthermore, net charge-offs in 2022 totaled $0.9 million, representing 0.01% of average loans, compared with net charge-offs in 2021 of $2.2 million, representing 0.03% of average loans. 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 582.0% at December 31, 2022, compared to 521.5% at December 31, 2021. 70 Table of Contents Classified assets, which includes non-performing assets and substandard loans, increased to $107.1 million at December 31, 2022, compared to $91.8 million at December 31, 2021. The ratio of classified assets to Busey Bank Tier 1 capital and ACL increased to 7.7% at December 31, 2022, from 6.9% at December 31, 2021. Potential Problem Loans 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 $89.2 million at December 31, 2022, compared to $70.5 million at December 31, 2021. Management continues to monitor these credits and anticipates that restructurings, guarantees, additional collateral, or other planned actions will result in full repayment of the debts. As of December 31, 2022, management identified no other loans that represent or result from trends or uncertainties which would be expected to materially impact future operating results, liquidity, or capital resources. Deposits The following table shows the deposit mix for each of the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["","Balance","","% Total","","Balance","","% Total","","","","","","Change","","% Change"],["Deposits"],["Non-maturity deposits:"],["Noninterest-bearing demand deposits","$","3,393,666","","","33.7","%","","$","3,670,267","","","34.1","%","","","","","","$","(276,601)","","","(7.5)","%"],["Interest-bearing transaction deposits","2,857,818","","","28.4","%","","2,720,417","","","25.2","%","","","","","","137,401","","","5.1","%"],["Saving deposits and money market deposits","2,964,421","","","29.4","%","","3,442,244","","","32.0","%","","","","","","(477,823)","","","(13.9)","%"],["Total non-maturity deposits","9,215,905","","","91.5","%","","9,832,928","","","91.3","%","","","","","","(617,023)","","","(6.3)","%"],["Time deposits","855,375","","","8.5","%","","935,649","","","8.7","%","","","","","","(80,274)","","","(8.6)","%"],["Total deposits","$","10,071,280","","","100.0","%","","$","10,768,577","","","100.0","%","","","","","","$","(697,297)","","","(6.5)","%"]] [[/GREPCENT_TABLE]] We focus on deepening our relationship with customers to foster core deposit4 growth, allowing us to reduce our reliance on wholesale funding. Our 2022 deposit balances were impacted by the declining retention of PPP loan funding in customer deposit accounts and the residual impacts of economic stimulus measures, along with the movement of deposits by certain non-relationship customers to competitors based on rate offerings. Core deposits include non-brokered transaction accounts, money market deposit accounts, and time deposits of $250,000 or less. Core deposits represented 98.8% of total deposits as of December 31, 2022, compared to 98.7% as of December 31, 2021. Time deposits as a percentage of total deposits declined to 8.5% as of December 31, 2022, compared to 8.7% as of December 31, 2021. As time deposits mature, we are actively engaging our customers to renew at current market rates. 4 Core deposits is a non-GAAP financial measure. For a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measures, see “Item 1. Business—Non-GAAP Financial Information” included in this Annual Report. 71 Table of Contents Deposits are federally insured up to the FDIC insurance limit of $250,000. When a portion of a deposit account exceeds the FDIC insurance limit, that portion is uninsured. The following table presents estimates of the uninsured portion of time deposits by maturity date (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31, 2022"],["Uninsured time deposits by schedule of maturities"],["3 months or less","$","21,908"],["Over 3 months through 6 months","16,926"],["Over 6 months through 12 months","31,888"],["Thereafter","49,929"],["Uninsured time deposits","$","120,651"]] [[/GREPCENT_TABLE]] Borrowings Term Loan On May 28, 2021, the Company 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 an initial termination date of April 30, 2022, and (ii) a $60.0 million term loan with a maturity date of May 31, 2026. The loans had an annual interest rate of 1.75% plus the one-month LIBOR rate. On April 30, 2022, the agreement was amended, effecting an extension of the termination date for the revolving line of credit to April 30, 2023, and providing for the transition from a LIBOR-indexed interest rate to a SOFR-indexed interest rate. Under the terms of the amendment, the loans now have an annual interest rate of 1.80% plus the one-month forward-looking term rate based on SOFR. 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 in the second quarter of 2021, and for general corporate purposes. As of December 31, 2022, there was no balance outstanding on the revolving credit facility and a total of $42.0 million outstanding on the term loan, of which $12.0 million was short-term and $30.0 million was long-term. The revolving credit facility incurs a non-usage fee based on any undrawn amounts. Securities Sold Under Agreements to Repurchase and Short-term Borrowings Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Short-term borrowings include FHLB advances which mature in less than one year from the date of origination, and the current portion of long-term debt due within 12 months. 72 Table of Contents The following table sets forth the distribution of securities sold under agreements to repurchase and short-term borrowings, as well as the weighted average interest rates thereon (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","2020"],["Securities sold under agreements to repurchase"],["Balance at end of period","$","229,806","","","$","270,139","","","$","175,614"],["Weighted average interest rate at end of period","1.91","%","","0.08","%","","0.13","%"],["Maximum outstanding at any month end in year-to-date period","$","283,664","","","$","270,139","","","$","210,529"],["Average daily balance for the year-to-date period","$","243,690","","","$","218,454","","","$","187,032"],["Weighted average interest rate during period (1)","0.60","%","","0.10","%","","0.35","%"],["FHLB advances, current portion due within 12 months"],["Balance at end of period","$","339,054","","","$","5,678","","","$","4,658"],["Weighted average interest rate at end of period","4.28","%","","0.36","%","","0.43","%"],["Maximum outstanding at any month end in year-to-date period","$","339,054","","","$","5,678","","","$","4,658"],["Average daily balance for the year-to-date period","$","25,845","","","$","4,934","","","$","3,556"],["Weighted average interest rate during period (1)","4.28","%","","0.41","%","","0.53","%"],["Term loan, current portion due within 12 months"],["Balance at end of period","$","12,000","","","$","12,000","","","$","\u2014"],["Weighted average interest rate at end of period","5.92","%","","1.88","%","","\u2014","%"],["Maximum outstanding at any month end in year-to-date period","$","12,000","","","$","12,000","","","$","\u2014"],["Average daily balance for the year-to-date period","$","12,000","","","$","7,167","","","$","\u2014"],["Weighted average interest rate during period (1)","3.55","%","","1.79","%","","\u2014","%"]] [[/GREPCENT_TABLE]] ___________________________________________ 1.The weighted average interest rate is computed by dividing total interest for the period by the average daily balance outstanding. Long-term Debt In addition to the term loan, long-term debt includes funds borrowed from the FHLB which totaled $4.1 million at December 31, 2021. We did not have any funds borrowed from the FHLB included in long-term debt as of December 31, 2022. Senior and Subordinated Notes On May 25, 2017, we issued $40.0 million of 3.75% senior notes that matured and were redeemed on May 25, 2022. Additionally, on May 25, 2017, we issued $60.0 million of fixed-to-floating rate subordinated notes that were scheduled to mature on May 25, 2027, with an optional redemption in whole or in part on any interest payment date on or after May 25, 2022. We redeemed all $60.0 million of the outstanding fixed-to-floating rate subordinated notes during the third quarter of 2022. At the time of redemption, the redeemed subordinated notes carried interest at a floating rate of 3-month LIBOR plus 2.919%. 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. 73 Table of Contents On June 2, 2022, the Company issued $100.0 million aggregate principal amount of 5.000% fixed-to-floating rate subordinated notes maturing June 15, 2032, which qualify as Tier 2 Capital for regulatory purposes. The price to the public for the subordinated notes was 100% of the principal amount of the subordinated notes. Interest on the subordinated notes will accrue at a rate equal to (i) 5.000% per annum from the original issue date to, but excluding, June 15, 2027, payable semiannually in arrears, and (ii) a floating rate per annum equal to a benchmark rate, which is expected to be the Three-Month Term SOFR (as defined in the subordinated notes), plus a spread of 252 basis points from and including, June 15, 2027, payable quarterly in arrears. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after June 15, 2027. Unamortized debt issuance costs related to senior notes and subordinated notes are presented in the following table (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Unamortized debt issuance costs"],["Senior notes issued in 2017","$","\u2014","","","$","56"],["Subordinated notes issued in 2017","\u2014","","","549"],["Subordinated notes issued in 2020","1,220","","","1,678"],["Subordinated notes issued in 2022","1,742","","","\u2014"],["Total unamortized debt issuance costs","$","2,962","","","$","2,283"]] [[/GREPCENT_TABLE]] Junior Subordinated Debt Owed to Unconsolidated Trusts First Busey maintains statutory trusts for the sole purpose of issuing and servicing trust preferred securities and related trust common securities. Proceeds from such issuances were used by the trusts to purchase junior subordinated notes of 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 remaining to be accreted of $2.8 million at December 31, 2022. We had $71.8 million and $71.6 million of junior subordinated debt owed to unconsolidated trusts at December 31, 2022, and 2021, respectively. Liquidity Liquidity management is the process by which we ensure that adequate liquid funds are available to meet the present and future cash flow obligations arising in the daily operations of our business. These financial obligations consist of needs for funds to meet commitments to borrowers for extensions of credit, fund capital expenditures, honor withdrawals by customers, pay dividends to stockholders, and pay operating expenses. Our most liquid assets are cash and due from banks, interest-bearing bank deposits, and federal funds sold. Balances of these assets are dependent on our operating, investing, lending, and financing activities during any given period. 74 Table of Contents Average liquid assets are summarized in the table below (dollars in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2022","","2021","","2020"],["Average liquid assets"],["Cash and due from banks","$","120,910","","","$","133,711","","","$","118,739"],["Interest-bearing bank deposits","290,875","","","630,687","","","488,786"],["Federal funds sold","\u2014","","","\u2014","","","\u2014"],["Total average liquid assets","$","411,785","","","$","764,398","","","$","607,525"],["Average liquid assets as a percent of average total assets","3.3","%","","6.4","%","","5.9","%"]] [[/GREPCENT_TABLE]] First Busey’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayments, and capital funds. Cash and unencumbered securities on our Consolidated Balance Sheets are summarized as follows for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Cash and unencumbered securities"],["Total cash and cash equivalents","$","227,164","","","$","836,095"],["Debt securities available for sale","2,461,393","","","3,981,251"],["Debt securities pledged as collateral","(746,675)","","","(708,939)"],["Cash and unencumbered securities","$","1,941,882","","","$","4,108,407"]] [[/GREPCENT_TABLE]] Additional liquidity is provided by the ability to borrow from the FHLB, the Federal Reserve Bank, First Busey’s revolving credit facility, or to utilize brokered deposits, as summarized in the table below (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Additional borrowing capacity available from:"],["FHLB","$","1,765,388","","","$","1,536,019"],["Federal Reserve Bank","659,680","","","624,627"],["Revolving credit facility","40,000","","","40,000"],["Additional borrowing capacity","$","2,465,068","","","$","2,200,646"]] [[/GREPCENT_TABLE]] As of December 31, 2022, 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. Our ability to pay cash dividends to our stockholders and to service our debt is dependent on the receipt of cash dividends from our subsidiaries. Busey Bank paid dividends to First Busey totaling $95.0 million and $60.0 million for the years ended December 31, 2022, and 2021, respectively. Off-Balance-Sheet Arrangements Busey Bank routinely enters into commitments to extend credit and standby letters of credit in the normal course of business to meet the financing needs of its customers. The balance of commitments to extend credit represents future cash requirements and some of these commitments may expire without being drawn upon. 75 Table of Contents The following table summarizes our outstanding commitments and reserves for unfunded commitments (dollars in thousands): [[GREPCENT_TABLE]] [["","As of December 31,"],["","2022","","2021"],["Outstanding loan commitments and standby letters of credit","2,024,777","","","2,016,207"],["Reserve for unfunded commitments","6,601","","","6,540"]] [[/GREPCENT_TABLE]] The following table summarizes our provision for unfunded commitments expenses (releases) for the periods presented (dollars in thousands): [[GREPCENT_TABLE]] [["","","","Years Ended December 31,"],["","","","","","2022","","2021","","2020"],["Provision for unfunded commitments expense (release)","","","","","$","61","","","$","(774)","","","$","1,822"]] [[/GREPCENT_TABLE]] We anticipate we will have sufficient funds available to meet current loan commitments, including loan applications received and in process prior to the issuance of firm commitments. Contractual Obligations We have entered into certain contractual obligations and other commitments which generally relate to funding of operations through deposits, debt issuance, and property and equipment leases. The following table summarizes significant contractual obligations and other commitments, excluding short-term borrowings and the current portion of long-term debt, as of December 31, 2022, (dollars in thousands): [[GREPCENT_TABLE]] [["","Certificates of Deposit","","Operating Leases","","Junior Subordinated Debt Owed to Unconsolidated Trusts","","Long-term Debt","","Subordinated Notes, Net of Unamortized Issuance Costs","","Total"],["Contractual obligations by schedule of maturities"],["2023","$","560,147","","","$","2,254","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","562,401"],["2024","229,263","","","1,942","","","\u2014","","","12,000","","","\u2014","","","243,205"],["2025","34,307","","","1,719","","","\u2014","","","12,000","","","\u2014","","","48,026"],["2026","16,637","","","1,442","","","\u2014","","","6,000","","","\u2014","","","24,079"],["2027","14,301","","","1,277","","","\u2014","","","\u2014","","","\u2014","","","15,578"],["Thereafter","720","","","6,699","","","71,810","","","\u2014","","","222,038","","","301,267"],["Contractual obligations","$","855,375","","","$","15,333","","","$","71,810","","","$","30,000","","","$","222,038","","","$","1,194,556"],["Commitments to extend credit and standby letters of credit","","","","","","","","$","2,024,777"]] [[/GREPCENT_TABLE]] Cash Flows Net cash flows provided by operating activities totaled $165.8 million in 2022, compared to $162.0 million in 2021. Significant items affecting the cash flows provided by operating activities include net income; the provision for credit losses; depreciation and amortization; gain on sales of mortgage loans, net of origination costs and activities related to the origination and sales of loans held for sale; and stock-based compensation. Net cash used to originate mortgage loans held for sale totaled $24.3 million in 2022, compared to $31.7 million of in 2021. Fluctuations in sales are a function of changes in market rates for mortgage loans, which influence refinance activity. Our provision for credit losses reflects a provision expense of $4.6 million in 2022, compared to a reserve release of $15.1 million in 2021. Stock-based compensation increased to $9.0 million in 2022, compared to $7.9 million in 2021. 76 Table of Contents Net cash used in investing activities totaled $290.9 million in 2022, compared to $829.2 million in 2021. Significant investment activities are those associated with managing First Busey’s investment and loan portfolios, as well as acquisition activities. We purchased $280.1 million of debt securities available for sale in 2022, compared to $2.3 billion in 2021. In 2021, investing outflows were partially offset with $228.3 million net cash received in connection with the CAC acquisition. Net cash used in financing activities totaled $483.9 million in 2022, compared to $814.7 million provided by financing activities in 2021. Significant items affecting cash flows from financing activities are debt issuance, deposits, short-term borrowings, long-term debt, payment of dividends, and proceeds and redemption from stock issuances. Deposits, which represent First Busey’s primary funding source, decreased by $696.9 million in 2022, compared to an increase of $767.5 million in 2021, excluding acquired deposits. Proceeds from FHLB advances totaled $335.0 million in 2022, compared to $5.0 million in 2021. Capital Resources Our capital ratios are in excess of those required to be considered “well-capitalized” pursuant to applicable regulatory guidelines. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. In order to refrain from restrictions on dividends, equity repurchases, and discretionary bonus payments, banking institutions must maintain capital in excess of regulatory minimum capital requirements. The table below presents minimum capital ratios with capital buffer and capital ratios for First Busey and Busey Bank as of December 31, 2022. [[GREPCENT_TABLE]] [["","Minimum Capital Requirements with Capital Buffer","","As of December 31, 2022"],["","","First Busey Corporation","","Busey Bank"],["Common Equity Tier 1 Capital to Risk Weighted Assets","7.00","%","","11.96","%","","14.49","%"],["Tier 1 Capital to Risk Weighted Assets","8.50","%","","12.78","%","","14.49","%"],["Total Capital to Risk Weighted Assets","10.50","%","","16.12","%","","15.35","%"],["Leverage Ratio of Tier 1 Capital to Average Assets","6.50","%","","9.45","%","","10.72","%"]] [[/GREPCENT_TABLE]] Management believes that no conditions or events have occurred since December 31, 2022, that would materially adversely change First Busey’s or Busey Bank’s capital classifications. NEW ACCOUNTING PRONOUNCEMENTS We review new accounting standards as issued. Information relating to accounting pronouncements applicable to First Busey appears in “Note 1. Significant Accounting Policies” in the Notes to the Consolidated Financial Statements. EFFECTS OF INFLATION The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salaries, wages, and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, loans, and deposits, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. For additional information regarding interest rates and changes in net interest income see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operation — Three Years Ended December 31, 2022—Consolidated Average Balance Sheets and Interest Rates” and “Item  7A. Quantitative and Qualitative Disclosures About Market Risk.” 77 Table of Contents