Note 14: Capital

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

The Company and Busey Bank are subject to regulatory capital requirements administered by federal and/or state agencies that involve the quantitative measure of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Quantitative measures established by regulations to ensure capital adequacy require the Company and Busey Bank to maintain minimum dollar amounts and ratios of such to risk weighted assets (as defined in the regulations and set forth in the table below) of total capital, Tier 1 capital and Common Equity Tier 1 capital, and for the bank, Tier 1 capital to average assets. Failure to meet minimum capital requirements may cause regulatory bodies to initiate certain discretionary and/or mandatory actions that, if undertaken, could have a direct material effect on our unaudited Consolidated Financial Statements. The Company, as a financial holding company, is required to be “well capitalized” in the capital categories shown in the table below. As of June 30, 2018, the Company and Busey Bank met all capital adequacy requirements to which they were subject, including the guidelines to be considered “well capitalized.”

The Dodd-Frank Act established minimum capital levels for bank holding companies on a consolidated basis. The components of Tier 1 capital are restricted to capital instruments that, at the time of signing, were considered to be Tier 1 capital for insured depository institutions. Under this legislation, the Company is able to maintain its trust preferred securities as Tier 1 capital, but it will have to comply with new capital mandates in other respects, and it will not be able to raise Tier 1 capital through the issuance of trust preferred securities in the future.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rule required by the Dodd-Frank Act. The Basel III Rule is applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally non-public bank holding companies with consolidated assets of less than $1.0 billion). The Basel III Rule not only increased most of the required minimum regulatory capital ratios, but they also introduced a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.

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

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

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

					Minimum
	Actual				Capital Requirement with Capital Buffer				Minimum To Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2018:
Total Capital (to Risk Weighted Assets)
Consolidated	$	865,366	14.42	%	$	592,648	9.875	%	$	600,150	10.00	%
Busey Bank	$	837,823	14.03	%	$	589,537	9.875	%	$	596,999	10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	746,561	12.44	%	$	472,618	7.875	%	$	480,120	8.00	%
Busey Bank	$	784,518	13.14	%	$	470,137	7.875	%	$	477,599	8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	672,561	11.21	%	$	382,596	6.375	%	$	390,098	6.50	%
Busey Bank	$	784,518	13.14	%	$	380,587	6.375	%	$	388,050	6.50	%

Tier 1 Capital (to Average Assets)
Consolidated	$	746,561	10.13	%	$	294,897	4.00	%	N/A		N/A
Busey Bank	$	784,518	10.68	%	$	293,941	4.00	%	$	367,427	5.00	%

					Minimum
	Actual				Capital Requirement with Capital Buffer				Minimum To Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2017:
Total Capital (to Risk Weighted Assets)
Consolidated	$	837,183	14.15	%	$	547,265	9.25	%	$	591,638	10.00	%
Busey Bank	$	704,807	12.78	%	$	509,978	9.25	%	$	551,327	10.00	%
South Side Bank	$	84,914	22.61	%	$	34,744	9.25	%	$	37,561	10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	718,101	12.14	%	$	428,937	7.25	%	$	473,310	8.00	%
Busey Bank	$	651,432	11.82	%	$	399,713	7.25	%	$	441,062	8.00	%
South Side Bank	$	84,707	22.55	%	$	27,232	7.25	%	$	30,049	8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	644,633	10.90	%	$	340,192	5.75	%	$	384,565	6.50	%
Busey Bank	$	651,432	11.82	%	$	317,013	5.75	%	$	358,363	6.50	%
South Side Bank	$	84,707	22.55	%	$	21,598	5.75	%	$	24,415	6.50	%

Tier 1 Capital (to Average Assets)
Consolidated	$	718,101	9.78	%	$	293,588	4.00	%	N/A		N/A
Busey Bank	$	651,432	9.80	%	$	265,847	4.00	%	$	332,309	5.00	%
South Side Bank	$	84,707	12.75	%	$	26,571	4.00	%	$	33,214	5.00	%