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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15950
FIRST BUSEY CORPORATION
(Exact name of registrant as specified in its Charter)
Nevada 37-1078406
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
201 West Main Street
Urbana, Illinois 61801
(Address of principal executive offices) (Zip Code)
(217) 365-4513
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.). Yes |X| No | |
The aggregate market value of the voting and nonvoting Common Stock held
by non-affiliates was $211,677,035 based on the closing price for the stock as
reported on the Nasdaq National Market as of June 30, 2003, or as of the last
business day of the registrants most recently completed second fiscal quarter.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 27, 2004
----- --------------------------------
Common Stock, without par value 13,696,902
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 12, 2004, for First
Busey Corporation's Annual Meeting of Stockholders to be held April 13, 2004,
(the "2004 Proxy Statement") are incorporated by reference into Part III.
(This page intentionally left blank)
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FIRST BUSEY CORPORATION
Form 10-K Annual Report
Table of Contents
PART 1
Item 1 Business ..................................................................................... 4
Item 2 Properties ................................................................................... 8
Item 3 Legal Proceedings ............................................................................ 8
Item 4 Submission of Matters to a Vote of Security Holders .......................................... 8
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ............................................................... 9
Item 6 Selected Financial Data ...................................................................... 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 13
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................... 30
Item 8 Financial Statements and Supplementary Data .................................................. 32
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................................... 32
Item 9A Controls and Procedures ...................................................................... 32
PART III
Item 10 Directors and Executive Officers of the Registrant ........................................... 32
Item 11 Executive Compensation ....................................................................... 32
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .......................................................................... 32
Item 13 Certain Relationships and Related Transactions ............................................... 32
Item 14 Principal Accountant Fees and Services ....................................................... 32
PART IV
Item 15 Exhibits, Financial Statement Schedules and reports on Form 8-K .............................. 33
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
First Busey Corporation ("First Busey" or the "Corporation"), a Nevada
Corporation, is a $1.5 billion financial holding company which was initially
organized as a bank holding company in 1980. First Busey conducts a broad range
of financial services through its banking and non-banking subsidiaries at 23
locations. First Busey is headquartered in Urbana, Illinois and its common stock
is traded on the Nasdaq National Market under the symbol "BUSE."
BANKING AND NON-BANKING SUBSIDIARIES
First Busey currently has two wholly owned banking subsidiaries located in
three states, Busey Bank and Busey Bank Florida (the "Banks").
Busey Bank, a state-chartered bank organized in 1868, is a full-service
commercial bank offering a wide variety of services to individual, business,
institutional and governmental customers, including retail products and
services. Busey Bank has 18 locations in Illinois and one in Indianapolis,
Indiana.
First Busey acquired Eagle BancGroup, Inc., parent of First Federal
Savings & Loan Association ("First Federal"), in October, 1999. First Federal,
located in Bloomington, Illinois, was established in 1919 as a federally
chartered capital stock savings association. In June, 2000, First Federal
changed its name to Busey Bank fsb. At the same time, four of Busey Bank's
branches, located in LeRoy and Bloomington, Illinois, were transferred to Busey
Bank fsb. In October, 2000, Busey Bank fsb opened an additional branch in Fort
Myers, Florida. In November, 2001, Busey Bank fsb transferred its charter to
Florida, and changed its name to Busey Bank Florida. Simultaneously, the
Illinois assets of Busey Bank fsb were merged into Busey Bank. Busey Bank
Florida, a federally chartered savings association, is a full-service bank
offering commercial and retail banking services. Busey Bank Florida has one
location in Fort Myers, Florida, and two locations in Cape Coral, Florida.
The Banks offer a full range of banking services, including commercial,
financial, agricultural and real estate loans, and retail banking services,
including accepting customary types of demand and savings deposits, making
individual, consumer, installment, first mortgage and second mortgage loans,
offering money transfers, safe deposit services, IRA, Keogh and other fiduciary
services, automated banking and automated fund transfers.
Busey Investment Group, Inc., a wholly owned non-banking subsidiary,
located in Champaign, Illinois. Busey Investment Group is the parent company of:
(1) First Busey Trust & Investment Co., which is exclusively dedicated to
providing a full range of trust and investment management services, including
estate and financial planning, tax preparation, custody services and
philanthropic advisory services; (2) First Busey Securities, Inc., which is a
full-service broker/dealer and provides individual investment advice; and (3)
Busey Insurance Services, Inc., which offers a variety of insurance products.
First Busey Resources, Inc., a wholly owned non-banking subsidiary,
located in Urbana, Illinois, owns and manages a hotel property included in
repossessed assets and two other real estate properties which are not currently
used in banking activities.
First Busey Capital Trust I ("Capital Trust I"), a statutory business
trust organized under the Delaware Business Trust Act, was formed in June, 2001.
First Busey owns all of the Common Securities of Capital Trust I.
COMPETITION
The Banks compete actively with national and state banks, savings and loan
associations and credit unions for deposits and loans primarily in central and
east-central Illinois, southwest Florida, and central Indiana. In addition,
First Busey and its non-bank subsidiaries compete with other financial
institutions, including asset management and trust companies, security
broker/dealers, personal loan companies, insurance companies, finance companies,
leasing companies, mortgage companies, and
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certain governmental agencies, all of which actively engage in marketing various
types of loans, deposit accounts, and other products and services.
Based on information obtained from FDIC/OTS Summary of Deposits dated
June, 2003, First Busey ranked first in total deposits in Champaign County,
second in Ford County, and fourth in McLean County. Customers for banking
services are generally influenced by convenience, quality of service, personal
contacts, price of services and availability of products. Although the market
share of First Busey varies in different markets, First Busey believes that its
affiliates effectively compete with other banks, thrifts and financial
institutions in their relevant market areas.
SUPERVISION, REGULATION AND OTHER FACTORS
GENERAL
First Busey is a financial holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve") under the Bank Holding Company Act ("BHCA"), and by the Illinois Bank
Holding Company Act ("IBHCA"). First Busey's state-chartered bank is subject to
regulation and examination primarily by the State of Illinois Office of Banks
and Real Estate ("SIOBRE") and, secondarily, by the Federal Deposit Insurance
Corporation ("FDIC"). First Busey's federally chartered capital stock savings
association is subject to regulation and examination primarily by the Office of
Thrift Supervision ("OTS") and, secondarily, by the FDIC. Numerous other federal
and state laws, as well as regulations promulgated by the Federal Reserve,
SIOBRE, FDIC and OTS govern almost all aspects of the operations of the Banks.
Various federal and state bodies regulate and supervise First Busey's
non-banking subsidiaries including its brokerage, investment advisory and
insurance agency operations. These include, but are not limited to, SIOBRE,
Federal Reserve, Securities and Exchange Commission, National Association of
Securities Dealers, Inc., Illinois Department of Insurance, federal and state
banking regulators and various state regulators of insurance and brokerage
activities.
Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company that
elects to become a financial holding company may engage in any activity that the
Federal Reserve, in consultation with the Secretary of the Treasury, determines
by regulation or order is: (1) financial in nature; (2) incidental to any such
financial activity; or (3) complementary to any such financial activity and does
not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. This Act makes significant
changes in U.S. banking law, principally by repealing certain restrictive
provisions of the 1933 Glass-Steagall Act. The Act specifies certain activities
that are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting and selling insurance; providing financial, investment, or economic
advisory services; underwriting, dealing in, or making a market in, securities;
and any activity currently permitted for bank holding companies by the Federal
Reserve under Section 4(c)(8) of the BHCA. The Act does not authorize banks or
their affiliates to engage in commercial activities that are not financial in
nature. A bank holding company may elect to be treated as a financial holding
company only if all depository institution subsidiaries of the holding company
are well-capitalized, well-managed and have at least a satisfactory rating under
the Community Reinvestment Act.
In addition to the Act, there have been a number of legislative and
regulatory proposals that would have an impact on bank/financial holding
companies and their bank and non-bank subsidiaries. It is impossible to predict
whether or in what form these proposals may be adopted in the future and if
adopted, what their effect will be on First Busey.
DIVIDENDS
The Federal Reserve has issued a policy statement on the payment of cash
dividends by financial holding companies. In the policy statement, the Federal
Reserve expressed its view that a bank holding company experiencing weak
earnings should not pay cash dividends in excess of its net income or which
could only be funded in ways that would weaken its financial health, such as by
borrowing. First Busey is also subject to certain contractual and regulatory
capital restrictions that limit the amount of cash dividends that First Busey
may pay. The Federal Reserve also may impose limitations on the payment of
5
dividends as a condition to its approval of certain applications, including
applications for approval of mergers and acquisitions.
The primary sources of funds for First Busey's payment of dividends to its
shareholders are dividends and fees to First Busey from its banking and
nonbanking affiliates. Various federal and state statutory provisions and
regulations limit the amount of dividends that the subsidiary banks of First
Busey may pay. Under provisions of the Illinois Banking Act ("IBA"), dividends
may not be declared by banking subsidiaries except out of the bank's net profit
(as defined), and unless the bank has transferred to surplus at least one-tenth
of its net profits since the date of the declaration of the last preceding
dividend, until the amount of its surplus is at least equal to its capital.
Federal and state banking regulations applicable to First Busey and its
banking subsidiaries require minimum levels of capital, which limit the amounts
available for payment of dividends.
CAPITAL REQUIREMENTS
First Busey is required to comply with the capital adequacy standards
established by the Federal Reserve, and its banking subsidiaries must comply
with similar capital adequacy standards established by the OTS, FDIC, and
SIOBRE, as applicable. There are two basic measures of capital adequacy for
financial holding companies and their banking subsidiaries that have been
promulgated by the Federal Reserve and the FDIC: a risk-based measure and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company or a bank to be considered in compliance.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC insured depository
institutions that fail to meet applicable capital requirements. See "Prompt
Corrective Action."
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system the federal banking
regulators are required to rate supervised institutions on the basis of five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and to take
certain mandatory supervisory actions, and are authorized to take other
discretionary actions, with respect to institutions in the three
undercapitalized categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, subject to a narrow
exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
Pursuant to FDICIA, the Federal Reserve, the FDIC, and the OTS have
adopted regulations setting forth a five-tier scheme for measuring the capital
adequacy of the financial institutions they supervise. Under the regulations, an
institution would be placed in one of the following capital categories: (i) well
capitalized (an institution that has a Total Capital ratio of at least 10%, a
Tier 1 Capital ratio of at least 6% and a Tier 1 Leverage Ratio of at least 5%);
(ii) adequately capitalized (an institution that has a Total Capital ratio of at
least 8%, a Tier 1 Capital ratio of at least 4% and a Tier 1 Leverage Ratio of a
least 4%); (iii) undercapitalized (an institution that has a Total Capital ratio
of under 8%, a Tier 1 Capital ratio of under 4% or a Tier 1 Leverage Ratio of
under 4%); (iv) significantly undercapitalized (an institution that has a Total
Capital ratio of under 6%, a Tier 1 Capital ratio of under 3% or a Tier 1
Leverage Ratio of under 3%); and (v) critically undercapitalized (an institution
whose tangible equity is not greater than 2% of total tangible assets). The
regulations permit the appropriate federal banking regulator to downgrade an
institution to the next lower category if the regulator determines (i) after
notice and opportunity for hearing or response, that the institution is in an
unsafe or unsound condition or (ii) that the institution has received (and not
corrected) a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent examination.
Supervisory actions by the appropriate federal banking regulator depend upon an
institution's classification within the five
6
categories. First Busey's management believes that First Busey and its
significant bank subsidiaries have the requisite capital levels to qualify as
well capitalized institutions under the FDICIA regulations.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. Federal banking agencies may not accept a capital
plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
EMPLOYEES
As of December 31, 2003, First Busey and its subsidiaries had a total of
503 employees (full-time and equivalents).
EXECUTIVE OFFICERS
Following is a description of the business experience for at least the
past five years of the executive officers of the Corporation.
DOUGLAS C. MILLS. Mr. Mills, age 63, has served as Chairman of the Board
and Chief Executive Officer of First Busey Corporation since its incorporation.
He has been associated with Busey Bank since 1971 when he assumed the position
of Chairman of the Board. Mr. Mills' son is David D. Mills, President of Busey
Bank
P. DAVID KUHL. Mr. Kuhl, age 54 has served as Chairman of the Board and
Chief Executive Officer of Busey Bank since January, 2003. Prior to being named
Chairman of the Board, Mr. Kuhl served as President and Chief Executive Officer
of Busey Bank from June, 1991. Prior to that, Mr. Kuhl served in various
management capacities since joining Busey Bank in 1979. Mr. Kuhl has served on
the Board of Directors of Busey Bank since 1991. Mr. Kuhl is married to Barbara
J. Kuhl, President and Chief Operating Officer of First Busey Corporation
EDWIN A. SCHARLAU II. Mr. Scharlau, age 59, has served as chairman of the
Board of Busey Investment Group, Inc. since January, 2001, and First Busey
Securities, Inc. since June, 1994. Mr. Scharlau has also served as Vice-Chairman
of the Board of First Busey Corporation since January, 2003. Mr. Scharlau served
as Chairman of the Board of Busey Bank from June, 1991, to January, 2003. Mr.
Scharlau has been associated with Busey Bank since 1964.
BARBARA J. KUHL. Mrs. Kuhl, age 53, has served as President and Chief
Operating Officer of First Busey Corporation since November, 2000. Previously,
Mrs. Kuhl served in various management capacities since joining Busey Bank in
1974. Mrs. Kuhl is married to P. David Kuhl, Chairman of the Board and Chief
Executive Officer of Busey Bank.
DAVID D. MILLS. Mr. Mills, age 33, has served as President and Chief
Operating Officer of Busey Bank since January, 2003. Prior to that he was Vice
President of First Busey Corporation. Mr. Mills began his career with Busey Bank
in December, 1998, as a Commercial Lending Officer. Mr. Mills' father is Douglas
C. Mills, Chairman of the Board and Chief Executive Officer of First Busey
Corporation.
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BARBARA J. HARRINGTON. Mrs. Harrington, age 44, has served as Chief
Financial Officer of First Busey Corporation since March, 1999. Prior to that
she served as Controller and Senior Vice President of Busey Bank. Mrs.
Harrington has served in various financial and accounting positions since
joining the organization in December, 1991.
SECURITIES AND EXCHANGE COMMISSION REPORTING AND OTHER INFORMATION
First Busey's web site address is www.busey.com. The Corporation makes
available on this web site its annual report on Form 10-K, its quarterly reports
on Form 10-Q, current reports on form 8-K, and amendements thereto, as
reasonably practicable after such reports are filed with the Securities and
Exchange Commission, and in any event, on the same day as such filing with the
Securities and Exchange Commission. Reference to this web site does not
constitute incorporation by reference of the information contained on the web
site and should not be considered part of this document.
First Busey Corporation has adopted a code of ethics applicable to our
employees, officers, and directors. The text of this code of ethics may be found
under "Investor Relations" on the Corporation's website. It is also filed as an
exhibit to this annual report on Form 10-K.
ITEM 2. PROPERTIES
The location and general character of the materially important physical
properties of First Busey and its subsidiaries are as follows: First Busey,
where corporate management and administration operate, is headquartered at 201
West Main Street, Urbana, Illinois. Busey Bank has properties located at 201
West Main Street, Urbana, Illinois, 909 West Kirby Avenue, Champaign, Illinois,
and 301 Fairway Drive, Bloomington, Illinois. These facilities offer commercial
banking services, including commercial, financial, agricultural and real estate
loans, and retail banking services, including accepting customary types of
demand and savings deposits, making individual, consumer, installment, first
mortgage and second mortgage loans. Busey Bank Florida, located at 7980
Summerlin Lakes Drive, Fort Myers, Florida, offers similar services as Busey
Bank. Busey Investment Group, Inc., located at 502 West Windsor Road, Champaign,
Illinois, through its subsidiaries, provides a full range of trust and
investment management services, execution of securities transactions as a
full-service broker/dealer and provide individual investment advice on equity
and other securities as well as insurance agency services. First Busey
Resources, Inc., located at 201 W. Main Street, Urbana, Illinois, which owns a
hotel property included in repossessed assets and manages two real estate
properties not currently used in banking operations.
First Busey and its subsidiaries own or lease all of the real property
and/or buildings on which each respective entity is located.
ITEM 3. LEGAL PROCEEDINGS
As part of the ordinary course of business, First Busey and its
subsidiaries are parties to litigation that is incidental to their regular
business activities.
There is no material pending litigation in which First Busey or any of its
subsidiaries is involved or of which any of their property is the subject.
Furthermore, there is no pending legal proceeding that is adverse to First Busey
in which any director, officer or affiliate of First Busey, or any associate of
any such director or officer, is a party, or has a material interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2003.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents for the periods indicated the high and low
closing price for First Busey common stock as reported on the Nasdaq National
Market.
2003 2002
-------------------- ---------------------
Market Prices of Common Stock High Low High Low
- ----------------------------- ---- --- ---- ---
First Quarter $24.37 $22.40 $21.75 $19.55
Second Quarter $26.52 $23.08 $22.61 $20.30
Third Quarter $27.86 $24.46 $23.00 $21.00
Fourth Quarter $28.84 $26.00 $23.57 $22.14
During 2003 and 2002, First Busey declared cash dividends per share of common
stock as follows:
2003 COMMON STOCK
---- ------------
January $ .17
April $ .17
July $ .17
October $ .17
2002
----
January $ .15
April $ .15
July $ .15
October $ .15
For a discussion of restrictions on dividends, please see the discussion
of dividend restrictions under Item 1, Business, Supervision, Regulation and
Other Factors, Dividends on pages 5 - 6.
As of February 27, 2004, there were approximately 981 holders of common
stock.
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The following table presents for the periods indicated a summary of the
purchases made by or on behalf of First Busey Corporation of shares of its
common stock.
Total Maximum
Number of Number of
Shares Shares
Purchased that May
as Part of Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid per Plans or Plans or
Purchased Share Programs Programs (1)
- ------------------------------------------------------------------------------------------------------------
January 1 - 31, 2003 7,500 $ 23.12 7,500 239,044
February 1 - 28, 2003 -- -- -- 239,044
March 1 - 31, 2003 -- -- -- 239,044
April 1 - 30, 2003 -- -- -- 239,044
May 1 - 31, 2003 10,300 23.55 10,300 228,744
June 1 - 30, 2003 -- -- -- 228,744
July 1 - 31, 2003 59,000 25.77 59,000 169,744
August 1 - 31, 2003 10,000 25.68 10,000 159,744
September 1 - 30, 2003 -- -- -- 159,744
October 1 - 31, 2003 11,000 25.99 11,000 148,744
November 1 - 30, 2003 -- -- -- 148,744
December 1 - 31, 2003 59,000 27.12 59,000 89,744
------- ------- -------
Total 156,800 $ 26.02 156,800
(1) First Busey Corporation's board of directors approved a stock purchase
plan on March 20, 2001, for the repurchase of up to 500,000 shares of
common stock. The Corporation's 2001 repurchase plan has no expiration
date.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data for each of the five years in the
period ended December 31, 2003, have been derived from First Busey's audited
consolidated financial statements and the results of operations for each of the
three years in the period ended December 31, 2003, which appear elsewhere in
this report. This financial data should be read in conjunction with the
financial statements and the related notes thereto appearing in this annual
report.
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
BALANCE SHEET ITEMS
Securities $ 224,733 $ 233,830 $ 210,869 $ 228,597 $ 225,046
Loans 1,192,396 1,101,043 978,106 984,369 886,684
Allowance for loan losses 16,228 15,460 13,688 12,268 10,403
Total assets 1,522,084 1,435,578 1,300,689 1,355,044 1,247,123
Total deposits 1,256,595 1,213,605 1,105,999 1,148,787 1,027,981
Long-term debt 92,853 71,759 47,021 55,259 55,849
Company obligated mandatorily
redeemable trust preferred debentures 25,000 25,000 25,000 -- --
Stockholders' equity 125,177 115,163 105,790 92,325 82,284
RESULTS OF OPERATIONS
Interest income $ 73,849 $ 76,085 $ 89,985 $ 93,242 $ 72,311
Interest expense 25,618 30,494 46,435 50,476 34,920
Net interest income 48,231 45,591 43,550 42,766 37,391
Provision for loan losses 3,058 3,125 2,020 2,515 2,570
Net income(1) 19,864 17,904 15,653 14,053 12,548
PER SHARE DATA
Diluted earnings $ 1.45 $ 1.31 $ 1.15 $ 1.03 $ .90
Cash dividends .68 .60 .52 .48 .44
Book value 9.15 8.49 7.73 6.86 6.08
Closing price 27.00 23.06 21.48 19.9375 22.625
OTHER INFORMATION
Return on average assets 1.35% 1.33% 1.19% 1.12% 1.22%
Return on average equity 16.34% 16.31% 15.80% 16.56% 14.68%
Net interest margin (2) 3.60% 3.74% 3.64% 3.74% 4.02%
Stockholders' equity to assets 8.22% 8.02% 8.13% 6.81% 6.60%
(1) Effective January 1, 2002, First Busey adopted Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 142 changed the accounting for goodwill from a model
that required amortization of goodwill, supplemented by impairment tests,
to an accounting model that is based solely upon impairment tests.
(2) Calculated as a percent of average earning assets.
11
A reconcilation of First Busey's Consolidated Statements of Income for
each of the five years ending December 31, 2003, from amounts reported to
amounts exclusive of goodwill amortization is shown below:
FINANCIAL ACCOUNTING STANDARDS NO. 142 DISCLOSURE
Net income as reported $ 19,864 $ 17,904 $ 15,653 $ 14,053 $ 12,548
Goodwill amortization, after tax -- -- 651 677 322
---------- ---------- ---------- ---------- ----------
Net income as adjusted $ 19,864 $ 17,904 $ 16,304 $ 14,730 $ 12,870
---------- ---------- ---------- ---------- ----------
Diluted earnings per share of common stock:
As reported $ 1.45 $ 1.31 $ 1.15 $ 1.03 $ .90
Goodwill amortization -- -- .05 .05 .02
---------- ---------- ---------- ---------- ----------
Earnings per share as adjusted $ 1.45 $ 1.31 $ 1.20 $ 1.08 $ .92
---------- ---------- ---------- ---------- ----------
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the financial
condition and results of operations of First Busey Corporation and subsidiaries
for the years ended December 31, 2003, 2002, and 2001. It should be read in
conjunction with "Business," "Selected Financial Data," the consolidated
financial statements and the related notes to the consolidated financial
statements and other data included in this Annual Report.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are critical to the portrayal
and understanding of the Corporation's financial condition and results of
operations and require management to make assumptions that are difficult,
subjective or complex. These estimates involve judgments, estimates 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 materially different financial condition or results
of operations is a reasonable likelihood. First Busey's significant accounting
policies are described in Note 1 in the Notes to the Consolidated Financial
Statements. The majority of these accounting policies do not require management
to make difficult, subjective or complex judgments or estimates or the
vairability of the estimates is not material. However, the following policies
could be deemed critical.
ALLOWANCE FOR LOAN LOSSES
First Busey Corporation has established an allowance for loan losses which
represents the corporation's estimate of the probable losses that have occurred
as of the date of the financial statements.
Management has established an allowance for loan losses which reduces the
total loans outstanding by an estimate of uncollectible loans. Loans deemed
uncollectible are charged against and reduce the allowance. Periodically, a
provision for loan losses is charged to current expense. This provision acts to
replenish the allowance for loan losses and to maintain the allowance at a level
that management deems adequate.
There is no precise method of predicting specific loan losses or amounts
which ultimately may be charged off on segments of the loan portfolio. The
determination that a loan may become uncollectible, in whole or in part, is a
matter of judgment. Similarly, the adequacy of the allowance for loan losses can
be determined only on a judgmental basis, after full review, including (a)
consideration of economic conditions and their effect on particular industries
and specific borrowers; (b) a review of borrowers' financial data, together with
industry data, the competitive situation, the borrowers' management capabilities
and other factors; (c) a continuing evaluation of the loan portfolio, including
monitoring by lending officers and staff credit personnel of all loans which are
identified as being of less than acceptable quality; (d) an in-depth appraisal,
on a monthly basis, of all impaired (loans are considered to be impaired when
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due); and (e) an evaluation of the underlying
collateral for secured lending, including the use of independent appraisals of
real estate properties securing loans.
Periodic provisions for loan losses are determined by management based
upon the size and the quality of the loan portfolio measured against prevailing
economic conditions and historical loan loss experience and also based on
specific exposures in the portfolio. Management has instituted a formal loan
review system supported by an effective credit analysis and control process. The
Corporation will maintain the allowance for loan losses at a level sufficient to
absorb estimated uncollectible loans and, therefore, expects to make periodic
additions to the allowance for loan losses.
REVENUE RECOGNITION
Income on interest-earning assets is accrued based on the effective yield
of the underlying financial instruments. A loan is considered to be impaired
when, based on current information and events, it is probable the Corporation
will not be able to collect all amounts due. The accrual of interest income on
impaired loans is discontinued when there is reasonable doubt as to the
borrower's ability to meet contractual payments of interest or principal.
13
Income recognized on service charges, trust fees, commissions, and loan
gains is recognized based on contractual terms and are accrued based on
estimates, or are recognized as transactions occur or services are provided.
Income from the servicing of sold loans is recognized based on estimated asset
valuations and transactions volumes. While these estimates and assumptions may
be considered complex, First Busey has implemented controls and processes to
ensure the accuracy of these accruals.
GENERAL
The Corporation's consolidated income is generated primarily by the
financial services activities of its subsidiaries. Since January 1, 1982, the
Corporation has acquired eleven banks and sold two; acquired six savings and
loan branches and two bank branches; acquired a bank branch in an FDIC assisted
acquisition of a failed bank; acquired a thrift holding company and federal
savings and loan; formed a trust company subsidiary; formed an insurance agency
subsidiary; formed a non-bank ATM subsidiary and acquired and liquidated a
travel agency. The following table illustrates the amounts of net income
contributed by each subsidiary (on a pre-consolidation basis) since January 1,
2001, less purchase accounting adjustments (net income for Busey Bank in
following table excludes income from Bank subsidiaries and includes deduction
for amortization expense recorded on parent company statements).
Subsidiary Acquired 2003 2002 2001
- ---------- --------- -------------------- -------------------- -------------------
(dollars in thousands)
Busey Bank (1) 3/20/80 $ 19,927 91.7% $ 18,541 91.9% $ 13,574 79.2%
Busey Bank Florida (2) 10/29/99 287 1.3% 24 0.1% 1,984 11.6%
First Busey Trust & Investment Co. (3) -- 1,296 6.0% 1,419 7.0% 1,391 8.1%
First Busey Securities, Inc. (4) -- 313 1.4% 258 1.3% (40) -0.2%
First Busey Resources, Inc. (5) -- 72 0.3% 149 0.7% 130 0.8%
Busey Insurance Services, Inc. (6) -- 24 0.1% 39 0.2% 10 0.0%
BAT, Inc. (7) -- (169) -0.8% (282) -1.4% 81 0.5%
Busey Travel, Inc. (8) 1/1/98 -- 0.0% 33 0.2% (6) 0.0%
---------- ------ ---------- ------ ---------- ------
Total $ 21,750 100.0% $ 20,214 100.0% $ 17,124 100.0%
========== ====== ========== ====== ========== ======
(1) City Bank of Champaign and Champaign County Bank & Trust were merged into
Busey Bank as of January 1, 1987. First National Bank of Thomasboro was
merged into Busey Bank as of January 1,1988. State Bank of St. Joseph was
merged into Busey Bank as of November 3, 1989. The Bank of Urbana,
Citizens Bank of Tolono, and the assets of Community Bank of Mahomet
subject to its liabilities were merged into Busey Bank as of November 16,
1991. Busey Bank of McLean County was merged into Busey Bank as of January
1, 1996. Busey Business Bank was formed on January 12, 1998, and merged
into Busey Bank as of October 30, 1998.
(2) Acquired as a subsidiary of Eagle BancGroup, Inc. as of October 29, 1999.
(3) Formed as a subsidiary of the Corporation as of January 1, 1987 as a
successor to the combined trust departments of Busey Bank and Champaign
County Bank & Trust; transferred to Busey Investment Group on January 1,
2001.
(4) Formed as a subsidiary of Busey Bank as of April 1, 1991; transferred to
Busey Investment Group on January 1, 2001.
(5) Reactivated as a subsidiary of First Busey Corporation as of January 1,
1997. Real estate and certain other assets previously carried on the
parent company and subsidiary balance sheets were transferred to
subsidiary as of that date.
(6) Formed as a subsidiary of Busey Bank as of October 1, 1997; transferred to
Busey Investment Group on January 1, 2001.
(7) Reactivated as a subsidiary of Busey Bank as of July 1, 1997.
(8) Acquired as a subsidiary of Busey Bank as of January 1, 1998; liquidated
November 30, 2002.
14
Busey Bank and Busey Bank Florida have each contributed at least 10% of
the Corporation's consolidated net income in at least one of the last three
years.
EXECUTIVE SUMMARY
First Busey Corporation posted record earnings during 2003 due primarily
to growth in net interest income and mortgage banking income combined with
moderate expense growth.
The increase in net interest income is due primarily to growth in the
average balance of outstanding loans. Most of the loan growth occurred in the
Fort Myers, FL market through Busey Bank Florida's banking operations and Busey
Bank's loan production office. The Corporation expects to continue to grow loans
in its existing markets of Champaign and McLean Counties in Illinois,
Indianapolis, Indiana, and Fort Myers, Florida.
First Busey saw tremendous growth in the production of single-family loan
production as well as in gains on the sale of these loans. This growth in
production is primarily the result of increased refinance activity due to 2003's
low interest-rate environment. Refinance activity declined considerably during
the second half of 2003 due to rising interest rates, and the mortgage operation
has refocused its attention to attract more new home purchasers as well as
developing other products, such as new home construction financing, to replace
this income source.
The Corporation's net chargeoffs increased during 2003 to $2,290,000. Of
this net chargeoff figure, $2,000,000 is related to one large credit in the
commercial construction industry. Expenses related to other real estate owned
were higher during 2003 and 2002 than in prior years. The increase in ORE
expense during these two years was due to operating losses associated with a
hotel property in the McLean County market and valuation adjustments necessary
to reduce the carrying value of this property to estimated net realizable value.
The Corporation has contracted with an independent hotel management firm to
operate the hotel during 2004 until a buyer is identified.
Income from trust and brokerage activities during 2003 were relatively
flat compared to 2002. Trust and investment management fees are based primarily
on the market value of assets under care. Trust fees declined in 2003 due
partially to the weak equity market experienced during the first half of the
year. Assets under care grew 25.6% to $1.210 billion as of December 31, 2003,
compared to $963 million as of December 31, 2002. Improved equity market
conditions should lead to growth in trust revenue during 2004.
Operating expenses increased 2.7% to $39,969,000 during 2003 compared to
$38,926,000 during 2002, which had decreased slightly from $38,974,000 during
2001. Most of the growth in operating expenses is due to commission and other
incentive payments related to mortgage origination activities and ORE expenses
previously described. As a percentage of net interest income plus other income,
other expenses were 54.8%, 57.1%, and 60.0% in 2003, 2002, and 2001
respectively, indicating that revenues have grown more rapidly than expenses
over this three-year time period.
On January 5, 2004, the Corporation entered into an agreement with First
Capital Bankshares, Inc. of Peoria, Illinois, to acquire the outstanding stock
of First Capital for cash consideration of approximately $42 million or $5,750
per share for its 6,736 shares and 740 options outstanding. The agreement is
subject to approval by the shareholders of First Capital and the receipt of the
required regulatory approvals. The acquisition is expected to close on or before
June 30, 2004. First Busey has secured a commitment to finance the acquisition
on a short-term basis with maturity expected in January, 2006. First Busey will
review the various alternatives for refinancing this acquisition on a long-term
basis and will determine its course of action during 2005. In addition to
growing First Capital's banking operations in the Peoria market, First Busey
will also examine opportunities for expanding its trust and brokerage operations
into that market.
15
RESULTS OF OPERATIONS-THREE YEARS ENDED DECEMBER 31, 2003
SUMMARY
The Corporation reported net income of $19,864,000 in 2003, up 10.9% from
$17,904,000 in 2002, which itself represented an increase of 14.4% from
$15,653,000 in 2001. Diluted earnings per share in 2003 increased 10.7% to $1.45
from $1.31 in 2002, which was a 13.9% increase from $1.15 in 2001. The main
factors contributing to the increase in net income in 2003 were increases in net
interest income, service charges on deposit accounts, and gains on the sale of
mortgage loans. Operating earnings, which exclude security gains and the related
tax expense, were $19,276,000 or $1.41 per share for 2003; $17,445,000, or $1.28
per share for 2002; and $14,878,000, or $1.09 per share for 2001.
Security gains after the related tax expense were $588,000 or 3.0% of net
income in 2003; $459,000 or 2.6% of net income in 2002; and $775,000 or 5.0% of
net income in 2001. The Corporation owns a position in a bank-qualified equity
security with substantial appreciated value. First Busey's Board has authorized
an orderly liquidation of this asset over a ten-year period.
The Corporation's return on average assets was 1.35%, 1.33% and 1.19% for
2003, 2002, and 2001, respectively, and return on average equity was 16.34%,
16.31%, and 15.80% for 2003, 2002, and 2001, respectively. On an operating
earnings basis, return on average assets was 1.31%, 1.30%, and 1.13% for 2003,
2002, and 2001, respectively, and return on average equity was 15.85%, 15.89%
and 15.02% for 2003, 2002, and 2001, respectively.
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased 9.8% or $123,002,000 to $1,376,195,000
during 2003 from the 2002 average balance of $1,253,193,000. The average balance
of loans increased 10.2% or $103,594,000 to $1,118,667,000 for 2003 from the
2002 average balance of $1,015,073,000. The average balance of all categories of
investment securities increased during 2003 as compared to 2002. Growth in the
average balances of investment securities and loans was partially offset by
declines in the average balances of interest-bearing deposits and Federal funds
sold.
The balance of interest-bearing liabilities averaged $1,118,163,000 for
2003, an increase of $96,576,000 or 8.8% from the 2002 average balance of
$1,091,587,000. A small decline in the average balance of other short-term
borrowings partially offset the growth in all other categories of
interest-bearing liabilities.
The Corporation's net interest margin expressed as a percentage of average
earning assets, stated on a fully taxable equivalent basis, was 3.60% for 2003,
a decrease of 14 basis points from the 3.74% for 2002. The net interest margin
expressed as a percentage of average total assets, also on a fully taxable
equivalent basis, was 3.37% for 2003 a decline of 13 basis points from the 3.50%
net interest margin for 2002.
Interest income on a tax equivalent basis decreased $2,284,000 or 3.0% to
$75,109,000 for 2003 as compared to the interest income of $77,393,000 for 2002.
The decrease in interest income is primarily attributable to the decline in the
average rate paid on all categories of interest-earning assets with the
exception of other securities. The average yield on interest-earning assets fell
72 basis points to 5.46% for 2003 as compared to 6.18% for 2002. Growth in the
average balance of investment securities and loans offset the impact of the
decline in interest rates.
Interest expense decreased $4,876,000 or 16.0% to $25,618,000 during 2003
as compared to interest expense of $30,494,000 for 2002. This decline resulted
partially from changes in the mix of funding sources but primarily as the result
of the decline in rates paid on all categories of interest-bearing liabilities.
Net interest income on a tax equivalent basis increased 5.5% in 2003 to
$49,491,000 from $46,899,000 in 2002, which reflected a 4.5% increase from
$44,883,000 in 2001. The decrease in interest rates throughout 2003 led to
declines in the amount of income earned on interest-earning assets and also had
significant impact on the amount of interest expense recognized by the
Corporation. The average
16
yield on interest-earning assets decreased 72 basis points from 6.18% in 2002 to
5.46% in 2003. The average rate paid on interest-bearing liabilities declined 63
basis points from 2.79% in 2002 to 2.16% in 2003.
PROVISION FOR LOAN LOSSES
The provision for loan losses, which is a current charge against income,
represents an amount which management believes is sufficient to maintain an
adequate allowance for known and probable losses. In assessing the adequacy of
the allowance for loan losses, management considers the size and quality of the
loan portfolio measured against prevailing economic conditions, regulatory
guidelines, and historical loan loss experience and credit quality of the
portfolio. When a determination is made by management to charge off a loan
balance, such write-off is charged against the allowance for loan losses.
The provision for loan losses decreased $67,000 to $3,058,000 in 2003 from
$3,125,000 in 2002 which had increased from $2,020,000 in 2001. Net charge-offs
increased to $2,290,000 in 2003 from $1,353,000 in 2002, and total
non-performing loans increased to $3,219,000 as of December 31, 2003, compared
to $2,228,000 as of December 31, 2002. Net charge-offs were $600,000 in 2001,
and non-performing loans totaled $2,224,000 as of December 31, 2001.
Sensitive assets include nonaccrual loans, loans on First Busey
Corporation's watch loan report, and other loans identified as having more than
reasonable potential for loss. The watch loan list is comprised of loans which
have been restructured or involve customers in industries which have been
adversely affected by market conditions. The majority of these loans are being
repaid in conformance with their contracts.
OTHER INCOME
Other income increased 9.5% in 2003 to $24,685,000 from $22,537,000 in
2002, which reflected a 5.0% increase from $21,460,000 in 2001. The increases in
2003 and 2002 are due primarily to increases in the gains on the sale of loans
and growth in service charges on deposit accounts. As a percentage of total
income, other income was 25.1%, 22.9%, and 19.3% in 2003, 2002, and 2001,
respectively. Gains on the sale of securities, as a component of other income,
totaled $975,000 (4.0%) in 2003, $762,000 (3.4%) in 2002, and $1,285,000 (6.0%)
in 2001. Gains on sales of loans, as a component of other income totaled
$6,183,000 (25.0%), $3,995,000 (17.7%), and $2,296,000 (10.7%) in 2003, 2002,
and 2001, respectively. Service charges on deposit accounts, as a component of
other income totaled $7,319,000 (29.7%), $7,054,000 (31.3%), and $6,121,000
(28.5%) in 2003, 2002, and 2001, respectively
Additional components of other income were fee income and trust fees.
Service charges and other fee income increased 2.6% to $11,258,000 in 2003 from
$10,976,000 in 2002, which was a 10.3% increase from $9,950,000 in 2001. The
growth in fee income in 2003 and 2002 is due primarily to increases in service
charges on deposit accounts. Despite the poor equity market in 2003 and 2002,
trust fees declined just 3.5% in 2003 from 2002 and increased 3.8% in 2002 from
2001. Trust revenues were $4,615,000 in 2003, $4,781,000 in 2002, and $4,607,000
in 2001. Trust revenues in each year were directly related to the total trust
assets under care. Remaining other income decreased 18.2% to $1,654,000 in 2003
from $2,023,000 in 2002 which was a 39.1% decrease from $3,322,000 in 2001. In
December, 2001, the Corporation sold the customer list of its travel agency
subsidiary. As a result of this sale, no commissions from travel services were
recognized in 2003 and 2002. The Corporation recognized $727,000 on the increase
in the cash surrender value of bank owned life insurance during 2003 compared to
$655,000 during 2002 and $111,000 during 2001.
OTHER EXPENSES
Operating expenses increased $1,043,000 or 2.7% in 2003 to $39,969,000
from $38,926,000 in 2002, which reflected a decrease of $48,000 from $38,974,000
in 2001. As a percentage of total income, other expenses were 40.6%, 39.5%, and
35.0% in 2003, 2002, and 2001, respectively. Employee-related expenses,
including salaries and wages and employee benefits, increased in 2003 to
$22,314,000, as compared to $21,003,000 in 2002, which was a slight decrease
from $21,066,000 in 2001. As a percent of average assets, employee-related
expenses were 1.52%, 1.57%, and 1.61% in 2003, 2002, and 2001, respectively. The
Corporation had 503, 491, and 498 full-time equivalent employees at December 31,
2003, 2002, and 2001, respectively. The increase in employee related expenses in
2003 compared to
17
2002 is due primarily to increases in commissions and other incentive
compensation for associates involved in the origination, processing, and sale of
mortgage loans held for sale. The decline in 2002 from 2001 in employee-related
expense and number of employees is related to the sale of the travel business.
Net occupancy expense of bank premises and furniture and equipment expenses
decreased $941,000 or 14.4% in 2003 to $5,604,000 as compared from $6,545,000 in
2002 and $6,957,000 in 2001.
Data processing expenses increased 20.3% to $1,755,000 for the year ended
December 31, 2003, compared to $1,459,000 for the year ended December 31, 2002,
and $920,000 for the year ended December 31, 2001. Data processing expenses were
higher in 2003 compared to 2002 due to the addition of network monitoring and
protection systems, an increase in the volume of transaction activity, and the
acquisition of equipment and software to enhance the banks' item capture system
in preparation of Check 21 compliance.
Amortization and impairment expenses declined in 2003 compared to 2002 as
the core deposit intangible associated with an acquisition completed in 1995
became fully amortized during 2002. Amortization and impairment expenses
declined in 2002 as compared to 2001 due to the adoption of Statement of
Financial Accounting standards No. 142. During the year ended December 31, 2001,
the Corporation recognized an impairment write-down of $325,000 on a customer
list purchased by First Busey Securities, Inc. Revenues generated from this
customer list were lower than originally projected.
Other expenses increased $572,000 or 6.9% to $8,821,000 during the year
ended December 31, 2003, as compared to the year ended December 31, 2002. In
June, 2002, Busey Bank became mortgagee in possession of a hotel property in
Bloomington, IL. In September, 2003, Busey Bank took title to the property upon
completion of foreclosure proceedings. The Bank operated this property through
its wholly owned subsidiary, BAT, Inc., from June, 2002 through December 31,
2003. The hotel property was transferred from Busey Bank to First Busey
Resources, Inc. in December, 2003, where it remains classified as Other Real
Estate (ORE) and is included in the repossessed asset total on the
non-performing loan table of this report. First Busey Resources has entered into
a contract with an independent hotel management firm to manage the day-to-day
operations of the property until it can be sold. Other expenses for the year
ending December 31, 2003 include valuation adjustments of $931,000 and net ORE
expenses of $269,000 associated with operating this repossessed asset. For the
year ending December 31, 2002, valuation adjustments of $700,000 and net ORE
expense of $282,000 associated with operating the property are included in the
other expense line.
INCOME TAXES
Income tax expense in 2003 was $10,025,000 as compared to $8,173,000 in
2002 and $8,363,000 in 2001. The provision for income taxes as a percent of
income before income taxes was 33.5%, 31.3%, and 34.8%, for 2003, 2002, and
2001, respectively. The provision for income taxes as a percentage of income
before income taxes decreased in 2002 due to the increase in income from bank
owned life insurance, which is not taxable to the Corporation, and to the
reduction in nondeductible amortization expense.
BALANCE SHEET-DECEMBER 31, 2003 AND DECEMBER 31, 2002
Total assets on December 31, 2003, were $1,522,084,000, an increase of
6.0% from $1,435,578,000 on December 31, 2002. Total loans, net of unearned
interest, increased 8.3% to $1,192,396,000 on December 31, 2003, as compared to
$1,101,043,000 on December 31, 2002. Total deposits increased 3.5% to
$1,256,595,000 on December 31, 2003 as compared to $1,213,605,000 on December
31, 2002. Non-interest bearing deposits increased $9,473,000 or 6.3% during
2003. Interest-bearing deposits increased $33,517,000 or 3.2% during 2003.
Total stockholders' equity increased 8.7% to $125,177,000 on December 31,
2003, as compared to $115,163,000 on December 31, 2002. Growth in equity is due
primarily to $10,649,000 earnings retained in the Corporation combined with a
net decrease of $1,085,000 in unrealized gains on available for sale securities
and a $1,383,000 decrease in Treasury stock. Treasury shares will be issued in
future years as participants exercise outstanding options under the
Corporation's stock option plan which is discussed in Note 15 to the
Corporation's consolidated financial statements.
18
A. EARNING ASSETS
The average interest-earning assets of the Corporation were 93.7%, 93.4%,
and 94.0%, of average total assets for the years ended December 31, 2003, 2002,
and 2001 respectively.
B. INVESTMENT SECURITIES
The Corporation has classified all investment securities as securities
available for sale. These securities are held with the option of their disposal
in the foreseeable future to meet investment objectives or for other operational
needs. Securities available for sale are carried at fair value. As of December
31, 2003, the fair value of these securities was $224,733,000 and the amortized
cost was $209,482,000. There were $15,389,000 of gross unrealized gains and
$138,000 of gross unrealized losses for a net unrealized gain of $15,251,000.
The after-tax effect ($9,191,000) of this unrealized gain has been included in
stockholders' equity. The decrease in market value for the debt securities in
this classification was a result of increasing interest rates. The fair value
increase in the equity securities was primarily due to an increase in the value
of shares of SLM Corporation common stock owned by the Corporation as of year
end.
The composition of securities available for sale is as follows:
As of December 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands)
U.S. Treasuries and Agencies $150,898 $158,324 $143,490 $162,886 $164,565
Equity securities 21,335 20,326 18,058 15,479 13,079
States and political subdivisions 48,235 51,434 43,767 43,197 41,554
Other 4,265 3,746 5,554 7,035 5,848
-------- -------- -------- -------- --------
Fair value of securities available for sale $ 224,733 $233,830 $210,869 $228,597 $225,046
======== ======== ======== ======== ========
Amortized cost $209,482 $216,801 $197,398 $218,790 $221,601
======== ======== ======== ======== ========
Fair value as a percentage of amortized cost 107.28% 107.85% 106.82% 104.48% 101.55%
======== ======== ======== ======== ========
The maturities, fair values and weighted average yields of debt securities
available for sale as of December 31, 2003, are:
Due in 1 year or Due after 1 year Due after 5 years Due after
less through 5 years through 10 years 10 years
------------------- ------------------- ------------------- --------------------
Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average
Investment Securities(1) Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
U.S. Treasuries and Agencies $ 68,308 2.99% $ 82,494 2.34% $ 96 4.00% $ -- 0.00%
States and political subdivisions (2) 5,537 5.19% 20,970 6.04% 20,936 6.80% 792 7.08%
Other 435 6.89% 1,862 6.11% 304 5.18% 1,664 9.40%
-------- ---- -------- ---- -------- ---- -------- ----
Total $ 74,280 3.18% $105,326 3.14% $ 21,336 6.76% $ 2,456 8.65%
======== ==== ======== ==== ======== ==== ======== ====
(1) Excludes equity securities and mortgage backed securities.
(2) On a tax-equivalent basis, assuming a federal income tax rate of 35% (the
effective federal income tax rate as of December 31, 2003)
The Corporation also uses its investment portfolio to manage its tax
position. Depending upon projected levels of taxable income for the Corporation,
periodic changes are made in the mix of tax-exempt and taxable securities to
achieve maximum yields on a tax-equivalent basis. U.S. government and agency
securities as a percentage of total securities decreased to 67.1% at December
31, 2003, from 67.7% at December 31, 2002, while obligations of state and
political subdivisions (tax-exempt obligations) as a percentage of total
securities decreased to 21.5% at December 31, 2003, from 22.0% at December 31,
2002.
19
LOAN PORTFOLIO
Loans, including loans held for sale, before allowance for loan losses,
increased 8.3% to $1,192,396,000 as of December 31, 2003 from $1,101,043,000 at
December 31, 2002. Non-farm non-residential real estate mortgage loans increased
$18,016,000, or 6.6%, to $292,169,000 in 2003 from $274,153,000 in 2002. This
increase reflects management's emphasis on commercial loans secured by
mortgages. Also, 1 to 4 family residential real estate mortgage loans (not held
for sale) increased $6,691,000, or 1.8%, to $376,559,000 in 2003 from
$369,868,000 in 2002. In 2003's low interest rate environment, the Corporation
experienced significant refinance activity. The Corporation has no loans to
customers engaged in oil and gas exploration or to foreign companies or
governments. Commitments under standby letters of credit, unused lines of credit
and other conditionally approved credit lines, totaled approximately
$286,037,000 as of December 31, 2003.
The loan portfolio includes a concentration of loans for commercial real
estate amounting to approximately $383,494,000 and $331,712,000 as of December
31, 2003 and 2002, respectively. Generally, these loans are collateralized by
assets of the borrowers. The loans are expected to be repaid from cash flows or
from proceeds from the sale of selected assets of the borrowers. Credit losses
arising from lending transactions for commercial real estate entities are
comparable with the Corporation's credit loss experience on its loan portfolio
as a whole.
The composition of loans is as follows:
As of December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- -------- -------- --------
(dollars in thousands)
Commercial and financial $ 138,272 $ 118,004 $121,694 $124,052 $119,800
Agricultural 22,300 22,034 21,022 20,844 20,126
Real estate-farmland 11,890 13,421 14,414 15,411 15,841
Real estate-construction 168,141 129,872 83,701 75,672 52,479
Real estate-mortgage 790,089 761,901 679,351 697,410 622,075
Installment loans to individuals 61,704 55,811 57,924 50,980 56,363
---------- ---------- -------- -------- --------
Loans $1,192,396 $1,101,043 $978,106 $984,369 $886,684
========== ========== ======== ======== ========
The following table sets forth remaining maturities of selected loans
(excluding certain real estate-farmland, real estate-mortgage loans and
installment loans to individuals) at December 31, 2003:
1 Year or
Less 1 to 5 Years Over 5 Years Total
--------- ------------ ------------ --------
(dollars in thousands)
Commercial, financial and agricultural $ 97,036 $40,322 $23,214 $160,572
Real estate-construction 104,869 58,819 4,453 168,141
-------- ------- ------- --------
Total $201,905 $99,141 $27,667 $328,713
======== ======= ======= ========
Interest rate sensitivity of selected loans
Fixed rate $ 53,669 $21,725 $ 4,845 $ 80,239
Adjustable rate 148,236 77,416 22,822 248,474
-------- ------- ------- --------
Total $201,905 $99,141 $27,667 $328,713
======== ======= ======= ========
20
ALLOWANCE FOR LOAN LOSSES
The following table shows activity affecting the allowance for loan losses:
Years ended December 31
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- -------- -------- --------
(dollars in thousands)
Average loans outstanding during period $1,118,667 $1,015,073 $961,779 $937,239 $731,491
========== ========== ======== ======== ========
Allowance for loan losses:
Balance at beginning of period $ 15,460 $ 13,688 $ 12,268 $ 10,403 $ 7,101
---------- ---------- -------- -------- --------
Loans charged-off:
Commercial, financial and agricultural $ 2,123 $ 775 $ 103 $ 70 $ 40
Real estate-construction -- 76 -- -- --
Real estate-mortgage 172 659 408 290 145
Installment loans to individuals 220 319 265 414 366
---------- ---------- -------- -------- --------
Total charge-offs $ 2,515 $ 1,829 $ 776 $ 774 $ 551
---------- ---------- -------- -------- --------
Recoveries:
Commercial, financial and agricultural $ 69 $ 349 $ 15 $ 22 $ 16
Real estate-construction -- -- -- -- --
Real estate-mortgage 6 26 42 4 67
Installment loans to individuals 150 101 119 98 99
---------- ---------- -------- -------- --------
Total recoveries $ 225 $ 476 $ 176 $ 124 $ 182
---------- ---------- -------- -------- --------
Net loans charged-off $ 2,290 $ 1,353 $ 600 $ 650 $ 369
---------- ---------- -------- -------- --------
Provision for loan losses $ 3,058 $ 3,125 $ 2,020 $ 2,515 $ 2,570
---------- ---------- -------- -------- --------
Net additions due to acquisition -- -- -- -- 1,101
---------- ---------- -------- -------- --------
Balance at end of period $ 16,228 $ 15,460 $ 13,688 $ 12,268 $ 10,403
========== ========== ======== ======== ========
Ratios:
Net charge-offs to average loans 0.20% 0.13% 0.06% 0.07% 0.05%
========== ========== ======== ======== ========
Allowance for loan losses to total loans
at period end 1.36% 1.40% 1.40% 1.25% 1.17%
========== ========== ======== ======== ========
The following table sets forth the allowance for loan losses by loan
categories as of December 31 for each of the years indicated:
------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ------------------ ------------------ ----------------- ----------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(dollars in thousands)
Commercial, financial, agri- $ 2,295 14.5% $ 2,143 13.9% $ 1,880 16.1% $ 1,854 16.3% $ 3,391 17.6%
cultural and real
estate-farmland
Real estate-construction -- 14.1% -- 11.8% -- 8.6% -- 7.7% -- 5.9%
Real estate-mortgage 12,752 66.2% 12,451 69.2% 10,880 69.4% 9,051 70.8% 5,708 70.1%
Installment loans to 821 5.2% 779 5.1% 811 5.9% 708 5.2% 1,293 6.4%
individuals
Unallocated 360 N/A 87 N/A 117 N/A 655 N/A 11 N/A
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $16,228 100.0% $15,460 100.0% $13,688 100.0% $12,268 100.0% $10,403 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
This table indicates growth in the allowance for loan losses for real
estate mortgages as of December 31, 2003 as compared to December 31, 2002. The
increase in the allowance allocated to real estate mortgages is due primarily to
growth in the outstanding balances of this loan category.
21
NON-PERFORMING LOANS
It is management's policy to place commercial and mortgage loans on
non-accrual status when interest or principal is 90 days or more past due. Such
loans may continue on accrual status only if they are both well-secured and in
the process of collection.
The following table sets forth information concerning non-performing loans at
December 31 for each of the years indicated:
Years ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(dollars in thousands)
Non-accrual loans $ 581 $1,265 $1,265 $ 767 $1,220
Loans 90 days past due and still accruing 2,638 963 959 4,667 897
Restructured loans -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans $3,219 $2,228 $2,224 $5,434 $2,117
------ ------ ------ ------ ------
Repossessed assets $4,781 $5,724 $ 30 $ 230 $ 459
Other assets acquired in satisfaction of debts
previously contracted 10 1 1 11 5
------ ------ ------ ------ ------
Total non-performing other assets $4,791 $5,725 $ 31 $ 241 $ 464
------ ------ ------ ------ ------
Total non-performing loans and non-
performing other assets $8,010 $7,953 $2,255 $5,675 $2,581
====== ====== ====== ====== ======
Non-performing loans to loans, before
allowance for loan losses 0.27% 0.20% 0.23% 0.55% 0.24%
====== ====== ====== ====== ======
Non-performing loans and non-performing
other assets to loans, before allowance for
loan losses 0.67% 0.72% 0.23% 0.58% 0.29%
====== ====== ====== ====== ======
The ratio of non-performing loans and non-performing other assets to
loans, before allowance to loan losses, decreased from 0.72% as of December 31,
2002, to 0.67% as of December 31, 2003 due primarily to valuation adjustments on
the hotel property held in repossessed assets. Busey Bank became mortgagee in
possession of this property in June, 2002, and remained so until September,
2003, when it took title of the property upon completion of foreclosure
proceedings. Costs associated with renovation of the property were added to the
value of the hotel during 2003 and 2002. Busey Bank recognized valuation
adjustments of $931,000 during 2003, and $700,000 during 2002 to reduce the
carrying value to estimated market value of approximately $4,000,000 as of
December 31, 2003. In December, 2003, this property was transferred from Busey
Bank to First Busey Resources, Inc., which will operate the property until it
can be liquidated.
A loan is considered to be impaired when, based on current information and
events, it is probable the Corporation will not be able to collect all amounts
due. The accrual of interest income on impaired loans is discontinued when there
is reasonable doubt as to the borrower's ability to meet contractual payments of
interest or principal. Interest income on these loans is recognized to the
extent interest payments are received and the principal is considered fully
collectible. No interest income was recognized on these loans during 2003 and
2002, and $9,000 was recognized during 2001.
The gross interest income that would have been recorded in the years ended
December 31, 2003, 2002 and 2001 if the non-accrual and restructured loans had
been current in accordance with their original terms was $268,000, $211,000, and
$84,000, respectively. The amount of interest collected on those loans that was
included in interest income was $0 for the year ended December 31, 2003, $0 for
the year ended December 31, 2002, and $17,000 for the year ended December 31,
2001.
22
POTENTIAL PROBLEM LOANS
Potential problem loans are those loans which are not categorized as
impaired, non-accrual, past due or restructured, but where current information
indicates that the borrower may not be able to comply with present loan
repayment terms. Management assesses the potential for loss on such loans as it
would with other problem loans and has considered the effect of any potential
loss in determining its provision for possible loan losses. Potential problem
loans totaled $10,566,000 at December 31, 2003. There are no other loans
identified which management believes represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources. There are no other credits
identified about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrower(s) to
comply with the loan repayment terms.
OTHER INTEREST-BEARING ASSETS
There are no other interest-bearing assets which are categorized as
impaired.
DEPOSITS
As indicated in the following table, average interest-bearing deposits as
a percentage of average total deposits decreased to 87.8% for the year ended
December 31, 2003, from 88.4% for the year ended December 31, 2002, which was a
decrease from 89.3% for the year ended December 31, 2001.
December 31,
------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------- -------------------------------- -------------------------------
(dollars in thousands)
Average % Total Average Average % Total Average Average % Total Average
Balance Rate Balance Rate Balance Rate
------------ ------- ------- ------------ ------- ------- ------------ ------- -------
Non-interest bearing
demand deposits $ 149,030 12.2% 0.00% $ 129,766 11.6% 0.00% $ 119,274 10.7% 0.00%
Interest bearing demand
deposits 18,194 1.5% 0.48% 11,477 1.0% 1.15% 34,199 3.1% 2.15%
Savings/Money Market 555,193 45.5% 0.74% 507,931 45.3% 1.19% 449,874 40.5% 2.59%
Time deposits 497,875 40.8% 3.10% 472,000 42.1% 3.90% 508,400 45.7% 5.55%
------------ ----- ---- ------------ ----- ---- ------------ ----- ----
Total $ 1,220,292 100.0% 1.61% $ 1,121,174 100.0% 2.19% $ 1,111,747 100.0% 3.65%
============ ===== ==== ============ ===== ==== ============ ===== ====
Certificates of deposit of $100,000 and over and other time deposits of
$100,000 and over at December 31, 2003, had the following maturities (dollars in
thousands):
Under 3 months $ 36,914
3 to 6 months 18,730
6 to 12 months 14,157
Over 12 months 35,813
-------------
Total $ 105,614
=============
23
SHORT-TERM BORROWINGS
The following table sets forth the distribution of short-term borrowings
and weighted average interest rates thereon at the end of each of the last three
years. Federal funds purchased and securities sold under agreements to
repurchase generally represent overnight borrowing transactions. Other
short-term borrowings consist of various demand notes and notes with maturities
of less than one year.
Federal funds purchased and
securities sold under agreements Other short-term
to repurchase borrowings
--------------------------------------------------------
(dollars in thousands)
2003
Balance, December 31, 2003 $ 16,000 $ --
Weighted average interest rate at end of period 0.98% 0.00%
Maximum outstanding at any month end $ 34,500 $ --
Average daily balance $ 10,496 $ --
Weighted average interest rate during period (1) 1.39% 0.00%
2002
Balance, December 31, 2002 $ 2,467 $ --
Weighted average interest rate at end of period 5.68% 0.00%
Maximum outstanding at any month end $ 26,739 $ 2,000
Average daily balance $ 7,955 $ 462
Weighted average interest rate during period (1) 4.69% 4.55%
2001
Balance, December 31, 2001 $ 9,767 $ 2,000
Weighted average interest rate at end of period 5.68% 6.73%
Maximum outstanding at any month end $ 18,126 $ 30,000
Average daily balance $ 15,692 $ 14,985
Weighted average interest rate during period (1) 6.25% 7.39%
(1) The weighted average interest rate is computed by dividing total interest
for the year by the average daily balance outstanding.
LIQUIDITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available to meet the present and future cash flow
obligations arising in the daily operations of the business. These financial
obligations consist of needs for funds to meet commitments to borrowers for
extensions of credit, funding capital expenditures, withdrawals by customers,
maintaining deposit reserve requirements, servicing debt, paying dividends to
shareholders, and paying operating expenses.
The Corporation's most liquid assets are Cash and due from banks,
Interest-bearing bank deposits, and Federal funds sold. The balances of these
assets are dependent on the Corporation's operating, investing, lending, and
financing activities during any given period.
Average liquid assets are summarized in the table below:
Years Ended December 31,
2003 2002 2001
------- ------- -------
(dollars in thousands)
Cash and due from banks $38,247 $33,633 $31,690
Interest-bearing bank deposits 928 1,039 13,721
Federal funds sold 14,362 16,633 30,142
------- ------- -------
Total $53,537 $51,305 $75,553
======= ======= =======
Percent of average total assets 3.6% 3.8% 5.8%
======= ======= =======
24
The Corporation's primary sources of funds consist of deposits, investment
maturities and sales, loan principal repayment, deposits and capital funds.
Additional liquidity is provided by bank lines of credit, repurchase agreements
and the ability to borrow from the Federal Reserve Bank and Federal Home Loan
Bank. The Corporation has not dealt in or used brokered deposits as a source of
liquidity. Additional liquidity is provided by bank lines of credit, repurchase
agreements and the ability to borrow from the Federal Reserve Bank and the
Federal Home Loan Banks of Chicago and Atlanta. The Corporation has an operating
line with Bank One in the amount of $10,000,000, all of which was available as
of December 31, 2003. Long-term liquidity will be satisfied primarily through
retention of capital funds.
On December 31, 2003, the Corporation held $52,397,000 in liquid assets as
compared to $47,645,000 as of December 31, 2002. Growth in liquid assets was
offset by a decline in the balance of U.S. Treasuries and Agency securities
available for sale. These investments are highly liquid and provide additional
interest income.
An additional source of liquidity that can be managed for short-term and
long-term needs is the Corporation's ability to securitize or package loans
(primarily mortgage loans) for sale. During 2003 and 2002 the Corporation
realized increased activity in the origination and sale of loans held for sale
due to the low interest-rate environment. The Corporation sold $437,382,000 in
mortgage loans during 2003 and $257,220,000 during 2002. As of December 31,
2003, the Corporation held $30,529,000 in loans held for sale. Management
intends to sell these loans during the first quarter of 2004.
The Corporation also realized significant growth in loans held for
investment during 2003. This loan growth was funded primarily through net
deposit growth and growth in the outstanding balances of advances from the
Federal Home Loan Banks of Chicago and Atlanta. In December, 2002, the
Corporation prepaid Federal Home Loan Bank advances totaling $10,000,000 and
incurred prepayment penalties totaling $388,000 in order to more closely match
the term and cost of funds to the loan growth.
The objective of liquidity management by the Corporation is to ensure that
funds will be available to meet demand in a timely and efficient manner. Based
upon the level of investment securities that reprice within 30 days and 90 days,
management currently believes that adequate liquidity exists to meet all
projected cash flow obligations.
First Busey Corporation has secured a commitment to borrow $42 million to
finance the acquisition of the outstanding shares and options of First Capital
Bankshares, Inc. of Peoria, Illinois. The Corporation will review various
alternatives for refinancing this acquisition on a long-term basis and will
determine its course of action during 2005.
The Corporation achieves a satisfactory degree of liquidity through
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.
The Corporation's banking subsidiaries routinely enter into commitments to
extend credit in the normal course of their business. As of December 31, 2003
and 2002, the Corporation had outstanding loan commitments including lines of
credit of $286,037,000 and $222,407,000, respectively. The balance of
commitments to extend credit represents future cash requirement and some of
these commitments may expire without being drawn upon. The Corporation
anticipates it will have sufficient funds available to meet its current loan
commitments, including loan applications received and in process prior to the
issuance of firm commitments.
As of December 31, 2003 and 2002, certificates of deposit which are
scheduled to mature within one year were $287,584,000 and $323,580,000,
respectively.
Net cash flows provided by operating activities totaled $54,569,000 in
2003 and $2,266,000 in 2001, while net cash used by operating activities was
$14,122,000 in 2002. Significant items affecting the cash flows provided by
operating activities are net income, depreciation and amortization expense, the
provision for loan losses, and activities related to the production and sale of
loans held for sale. Operating cash flow increased significantly during 2003
relative to 2002 due primarily to mortgage loan origination
25
and sale activity. During 2003 the Corporation originated $400,967,000 in loans
held for sale and generated $437,382,000 from the sale of held-for-sale loans
resulting in net cash provided by loan originations and sales of $36,415,000.
During 2002 the Corporation originated $292,102,000 in held-for-sale loans and
generated $257,220,000 from the sale of held-for-sale loans leading to a net
cash use of $34,882,000.
Net cash used in investing activities was $118,555,000 in 2003 and
$92,077,000 in 2002. During 2001 investing activities resulting in net cash
provided of $48,330,000. Significant items affecting cash flows from investing
activities are investment securities and loans held in the Corporation's
portfolio. The Corporation's loan portfolio grew significantly during 2003 and
2002 and was the single largest factor affecting net cash used in investing
activities during those two years.
Net cash provided by financing activities was $68,738,000 during 2003 and
$12,264,000 during 2002 while net cash used in financial activities was
$67,601,000 during 2001. Significant items affecting cash flows from financing
activities are deposits, short-term borrowings, and long-term borrowings.
Deposits, which are the Corporation's primary funding source, have grown during
the last two years, but have not grown as rapidly as loan balances. This led to
an increase in the Corporation's use of short-term and long-term borrowing
sources during 2003 to fund the asset growth. Federal funds purchased and
securities sold under agreements to repurchase increased $13,533,000 during
2003. The Corporation increased its use of long-term advances from the Federal
Home Loan Banks of Chicago and Atlanta by $20,000,000 during 2003 as rates on
these advances were lower than rates on deposit products for similar terms.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain contractual obligations and other
commitments. Such obligations generally relate to funding of operations through
deposits, debt issuances, and property and equipment leases.
The following table summarizes significant contractual obligations and
other commitments as of December 31, 2003:
Company
Obligated
Mandatorily
Short- and Redeemable
Certificates of Long-term Trust Preferred
Deposit Borrowing Leases Debentures Total
----------------- ---------------- ----------------- ----------------- ----------------
(dollars in thousands)
2003 $ 287,584 $ 6,398 $ 814 $ - $ 294,796
2004 85,421 16,397 708 - 102,526
2005 43,192 15,398 679 - 59,269
2006 50,632 12,373 620 - 63,625
2007 20,582 40,372 475 - 61,429
Thereafter 44 1,915 370 25,000 27,329
----------------- ---------------- ----------------- ----------------- ----------------
Total $ 487,455 $ 92,853 $ 3,666 $ 25,000 $ 608,974
================= ================ ================= ================ ================
Commitments to extend credit $ 286,037
================
CAPITAL RESOURCES
Other than from the issuance of common stock, the Corporation's primary
source of capital is net income retained by the Corporation. During the year
ended December 31, 2003, the Corporation earned $19,864,000 and paid dividends
of $9,215,000 to stockholders, resulting in a retention of current earnings of
$10,649,000.
The Federal Reserve Board 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 four risk-weighted categories. These
26
balances are then multiplied by the factor appropriate for that risk-weighted
category. The guidelines require bank holding companies and their subsidiary
banks to maintain a total capital to total risk-weighted asset ratio of not less
than 8.00%, of which at least one half must be Tier 1 capital, and a Tier 1
leverage ratio of not less than 4.00%. As of December 31, 2003, the Corporation
had a total capital to total risk-weighted asset ratio of 13.33%, a Tier 1
capital to risk-weighted asset ratio of 11.62% and a Tier 1 leverage ratio of
8.85%; the Corporation's bank subsidiary, Busey Bank, had ratios of 11.30%,
9.64%, and 7.33%, respectively; the Corporation's thrift subsidiary, Busey Bank
Florida, had ratios of 15.50%, 14.39%, and 10.16%, respectively. As these ratios
indicate, the Corporation and its bank subsidiaries exceed the regulatory
capital guidelines.
REGULATORY CONSIDERATIONS
It is management's belief that there are no current recommendations by the
regulatory authorities which if implemented, would have a material effect on the
Corporation's liquidity, capital resources, or operations.
NEW ACCOUNTING PRONOUNCEMENTS
Information relating to new accounting pronouncements appears in Note 1 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 salary 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 "Selected Statistical
Information" and Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
27
C. SELECTED STATISTICAL INFORMATION
The following tables contain information concerning the consolidated
financial condition and operations of the Corporation for the periods, or as of
the dates, shown. All average information is provided on a daily average basis.
The following table shows the 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
interest-bearing liabilities, and the related interest rates:
Years Ended December 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------- ------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- ------- ------ ---------- ------- ------ ---------- -------- ------
(dollars in thousands)
Assets
Interest-bearing bank deposits $ 928 $ 8 0.86% $ 1,039 $ 12 1.15% $ 13,721 $ 513 3.74%
Federal funds sold 14,362 149 1.04% 16,633 260 1.56% 30,142 1,179 3.91%
Investment securities:
U.S. Treasuries and
Agencies 164,633 5,098 3.10% 149,670 6,387 4.27% 159,969 8,726 5.45%
Obligations of states
and political 51,452 3,125 6.07% 46,577 3,140 6.74% 43,896 3,169 7.22%
subdivisions(1)
Other securities 26,153 960 3.67% 24,201 800 3.31% 23,382 889 3.80%
Loans (net of unearned
discount)(1),(2) 1,118,667 65,769 5.88% 1,015,073 66,794 6.58% 961,779 76,842 7.99%
---------- ------- ------ ---------- ------- ------ ---------- -------- ------
Total interest-earning
assets(1) $1,376,195 $75,109 5.46% $1,253,193 $77,393 6.18% $1,232,889 $ 91,318 7.41%
========== ======= ====== ========== ======= ====== ========== ======== ======
Cash and due from banks 38,247 33,633 31,690
Premises and equipment 24,887 28,375 30,283
Allowance for loan losses (16,228) (14,001) (12,774)
Other assets 44,858 40,209 30,173
---------- ---------- ----------
Total assets $1,467,959 $1,341,409 $1,312,261
========== ========== ==========
Liabilities and Stockholders'
Equity
Interest bearing transaction
deposits $ 18,194 $ 87 0.48% $ 11,477 $ 132 1.15% $ 34,199 $ 734 2.15%
Savings deposits 105,649 733 0.69% 96,495 1,059 1.10% 90,544 2,059 2.27%
Money market deposits 449,544 3,390 0.75% 411,436 4,997 1.21% 359,330 9,614 2.68%
Time deposits 497,875 15,434 3.10% 472,000 18,410 3.90% 508,400 28,207 5.55%
Short-term borrowings:
Federal funds purchased 2,999 42 1.40% 2,089 40 1.91% 45 1 2.22%
Repurchase agreements 7,497 104 1.39% 5,866 333 5.68% 15,647 98.0 6.26%
Other -- -- -- 462 21 4.55% 14,985 1,108 7.39%
Long-term debt 81,405 3,578 4.40% 66,762 3,252 4.87% 47,703 2,532 5.31%
Company obligated mandatorily
redeemable trust preferred 25,000 2,250 9.00% 25,000 2,250 9.00% 13,333 1,200 9.00%
debentures
---------- ------- ------ ---------- ------- ------ ---------- -------- ------
Total interest-bearing
liabilities $1,188,163 $25,618 2.16% 1,091,587 30,494 2.79% $1,084,186 $ 46,435 4.28%
========== ======= ====== ========== ======= ====== ========== ======== ======
Net interest spread 3.30 3.39% 3.13%
====== ====== ======
Demand deposits 149,030 129,766 119,274
Other liabilities 9,166 10,286 9,746
Stockholders' equity 121,600 109,770 99,055
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,467,959 $1,341,409 $1,312,261
========== ========== ==========
Interest income/earning
assets(1) $1,376,195 $75,109 5.46% $1,253,193 $77,393 6.18% $1,232,889 $ 91,318 7.41%
Interest expense/earning
assets $1,376,195 $25,618 1.86% $1,253,193 $30,494 2.44% $1,232,889 $ 46,435 3.77%
---------- ------- ------ ---------- ------- ------ ---------- -------- ------
Net interest margin1 49,491 3.60% $46,899 3.74% $ 44,883 3.64%
======= ====== ======= ====== ======== ======
(1) On a tax equivalent basis, assuming a federal income tax rate of 35%
(2) Non-accrual loans have been included in average loans, net of unearned
discount
28
Changes In Net Interest Income:
Years Ended December 31, 2003, 2002, and 2001
--------------------------------------------------------------------------------
Year 2003 vs. 2002 Change due to(1) Year 2002 vs. 2001 Change due to(1)
------------------------------------ --------------------------------------
Average Average Total Average Average Total
Volume Yield/Rate Change Volume Yield/Rate Change
------- ---------- ------- -------- ---------- --------
(dollars in thousands)
Increase (decrease) in interest income:
Interest-bearing bank deposits $ (1) $ (3) $ (4) $ (285) $ (216) $ (501)
Federal funds sold (32) (79) (111) (393) (526) (919)
Investment securities:
U.S. Treasuries and Agencies 739 (2,028) (1,289) (534) (1,805) (2,339)
States and political subdivisions(2) 313 (328) (15) 345 (374) (29)
Other securities 68 92 160 33 (122) (89)
Loans(2) 6,816 (7,841) (1,025) 4,601 (14,649) (10,048)
------- -------- ------- ------- -------- --------
Change in interest income(2) $ 7,903 $(10,187) $(2,284) $ 3,767 $(17,692) $(13,925)
======= ======== ======= ======= ======== ========
Increase (decrease) in interest expense:
Interest bearing transaction deposits $ 54 $ (99) $ (45) $ (354) $ (248) $ (602)
Savings deposits 113 (439) (326) 145 (1,145) (1,000)
Money market deposits 519 (2,126) (1,607) 1,669 (6,286) (4,617)
Time deposits 1,085 (4,061) (2,976) (1,903) (7,894) (9,797)
Federal funds purchased 4 (2) 2 40 (1) 39
Repurchase agreements 133 (362) (229) (443) (204) (647)
Other short-term borrowings (21) -- (21) (779) (308) (1,087)
Long-term debt 588 (262) 326 907 (187) 720
Company obligated mandatorily
redeemable trust preferred debentures -- -- -- 1,050 -- 1,050
------- -------- ------- ------- -------- --------
Change in interest expense $ 2,475 $ (7,351) $(4,876) $ 332 $(16,273) $(15,941)
------- -------- ------- ------- -------- --------
Increase (decrease) in net interest income(2) $ 5,428 $ (2,836) $ 2,592 $ 3,435 $ (1,419) $ 2,016
======= ======== ======= ======= ======== ========
Percentage increase in net interest income
over prior period 5.5% 4.5%
====== ========
(1) Changes due to both rate and volume have been allocated proportionally
(2) On a tax equivalent basis, assuming a federal income tax rate of 35%
FORWARD LOOKING STATEMENTS
This presentation includes forward looking statements that are intended to
be covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements include but are not limited
to comments with respect to the objectives and strategies, financial condition,
results of operations and business of the Corporation.
These forward looking statements involve numerous assumptions, inherent
risks and uncertainties, both general and specific, and the risk that
predictions and other forward looking statements will not be achieved. The
Corporation cautions you not to place undue reliance on these forward looking
statements as a number of important factors could cause actual future results to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward looking statements.
These risks, uncertainties and other factors include the general state of
the economy, both on a local and national level, the ability of the Corporation
to successfully complete acquisitions, the continued growth in the geographic
area in which the banking subsidiaries operate, and the retention of individuals
who currently are very important in the management structure of the Corporation.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of change in asset values due to movements in
underlying market rates and prices. Interest rate risk is the risk to earnings
and capital arising from movements in interest rates. Interest rate risk is the
most significant market risk affecting the Corporation as other types of market
risk, such as foreign currency exchange rate risk and commodity price risk, do
not arise in the normal course of the Corporation's business activities.
The Corporation's subsidiary banks, Busey Bank and Busey Bank Florida,
have asset-liability committees which meet at least quarterly to review current
market conditions and attempt to structure the banks' balance sheets to ensure
stable net interest income despite potential changes in interest rates with all
other variables constant.
The asset-liability committees use gap analysis to identify mismatches in
the dollar value of assets and liabilities subject to repricing within specific
time periods. The Funds Management Policies established by the asset liability
committees and approved by the Corporation's Board of Directors establishes
guidelines for maintaining the ratio of cumulative rate-sensitive assets to
rate-sensitive liabilities within prescribed ranges at certain intervals.
Interest rate sensitivity is a measure of the volatility of the net
interest margin as a consequence of changes in market rates. The
rate-sensitivity chart shows the interval of time in which given volumes of
rate-sensitive earning assets and rate-sensitive interest-bearing liabilities
would be responsive to changes in market interest rates based on their
contractual maturities or terms for repricing. It is however, only a static,
single-day depiction of the Corporation's rate sensitivity structure, which can
be adjusted in response to changes in forecasted interest rates.
The following table sets forth the static rate-sensitivity analysis of the
Corporation as of December 31, 2003:
Rate Sensitive Within
----------------------------------------------------------------------------------------
1-30 Days 31-90 Days 91-180 Days 181 Days - Over 1 Year Total
1 Year
--------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
Interest-bearing deposits $ 5,088 $ -- $ -- $ -- $ -- $ 5,088
Investment securities
U.S. Treasuries and Agencies 10,997 9,047 17,204 31,060 82,590 150,898
States and political 3,258 -- 219 5,335 39,423 48,235
subdivisions
Other securities 12,015 -- 128 208 13,249 25,600
Loans (net of unearned interest) 502,847 74,399 86,371 129,295 399,484 1,192,396
--------- --------- --------- --------- -------- ----------
Total rate-sensitive assets $ 534,205 $ 83,446 $ 103,922 $ 165,898 $534,746 $1,422,217
--------- --------- --------- --------- -------- ----------
Interest bearing transaction deposits $ 49,903 $ -- $ -- $ -- $ -- $ 49,903
Savings deposits 106,990 -- -- -- -- 106,990
Money market deposits 451,669 -- -- -- -- 451,669
Time deposits 62,590 53,155 83,291 91,470 196,949 487,455
Fed funds purchased and repurchase
agreements 16,000 -- -- -- -- 16,000
Long-term debt 2,853 -- -- 6,000 84,000 92,853
Company obligated mandatorily
redeemable trust preferred debentures -- -- -- -- 25,000 25,000
--------- --------- --------- --------- -------- ----------
Total rate-sensitive liabilities $ 690,005 $ 53,155 $ 83,291 $ 97,470 $305,949 $1,229,870
--------- --------- --------- --------- -------- ----------
Rate-sensitive assets less
rate-sensitive liabilities $(155,800) $ 30,291 $ 20,631 $ 68,428 $228,797 $ 192,347
--------- --------- --------- --------- -------- ----------
Cumulative Gap $(155,800) $(125,509) $(104,878) $ (36,450) $192,347
========= ========= ========= ========= ========
Cumulative amounts as a percentage
of total rate-sensitive assets -10.95% -8.82% -7.37% -2.56% 13.52%
========= ========= ========= ========= ========
Cumulative Ratio 0.77 0.83 0.87 0.96 1.16
========= ========= ========= ========= ========
30
The forgoing table shows a negative (liability-sensitive) rate-sensitivity
gap of $155.8 million in the 1-30 day repricing category as there were more
liabilities subject to repricing during that time period than there were assets
subject to repricing within that same time period. The volume of assets subject
to repricing exceeds the volume of liabilities subject to repricing for all time
period beyond 30 days. On a cumulative basis, however, the gap remains liability
sensitive through one year. The composition of the gap structure as of December
31, 2003 indicates the Corporation would benefit more if interest rates decrease
during the next year by allowing the net interest margin to grow as the volume
of interest-bearing liabilities subject to repricing would be greater than the
volume of interest-earning assets subject to repricing during the same period.
The asset-liability committees do not rely solely on gap analysis to
manage interest-rate risk as interest rate changes do not impact all categories
of assets and liabilities equally or simultaneously. There are other factors
which would influence the effect of interest rate fluctuations on the
Corporation's net interest margin. For example, a decline in interest rates may
lead to borrowers repaying their loans more rapidly which could mitigate some of
the expected benefit of the decline in interest rates when negatively gapped.
Conversely, a rapid rise in interest rates could lead to an increase in the net
interest margin if the increased rates on loans and other interest-earning
assets are higher than those on interest-bearing deposits and other liabilities.
The asset-liability committees supplement gap analysis with balance sheet
and income simulation analysis to determine the potential impact on net interest
income of changes in market interest rates. In these simulation models the
balance sheet is projected out over a one-year period and net interest income is
calculated under current market rates, and then assuming permanent instantaneous
shifts in the yield curve of +/- 100 basis points, and + 200 basis points.
Management measures such changes assuming immediate and sustained shifts in the
Federal funds rate and the corresponding shifts in other rate indices based on
their historical changes relative to changes in the Federal funds rate. The
model assumes asset and liability balances remain constant at December 31, 2003
balances. The model uses repricing frequency on all variable-rate assets and
liabilities. The model also uses a historical decay rate on all fixed-rate core
deposit balances. Prepayment speeds on loans have been adjusted up and down to
incorporate expected prepayment in both a rising and declining rate environment.
Utilizing this measurement concept the interest rate risk of the Corporation,
expressed as a change in net interest income as a percentage of the net income
calculated in the constant base model, due to changes in interest rates at
December 31, 2003, was as follows:
Basis Point Changes
--------------------------------------
-100 +100 +200
------------ ---------- ------------
Percentage change in net interest income due to an immediate change
in interest rates over a one-year period (5.57%) 3.05% 6.06%
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are presented beginning on page 37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Corporation's management, including its Chief Executive Officer and Chief
Financial Officer, of the Corporation's disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934). Based on their evaluation, the Corporation's Chief Executive Officer and
Chief Financial Officer have concluded that information required to be disclosed
by the Corporation in reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Commission rules and forms.
In addition, since their evaluation, there have been no significant changes to
the Corporation's internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant. Incorporated by reference is the information
set forth on pages 2-4 of the 2004 Proxy Statement.
(b) Executive Officers of the Registrant. Please refer to Part I of this Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference is the information set forth on pages 11-13 of
the 2004 Proxy Statement (except the information set forth in the sections
"Report of the Compensation Committee on Executive Compensation").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference is the information set forth on pages 8-10 and
page 17 of the 2004 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information set forth on page 15 of the
2004 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference is the information set forth on pages 5-7 of the
2004 Proxy statement.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit Description of Exhibit Sequentially
Number Numbered Page
- ------- -------------------------------------------------------------------- -------------
3.1 Certificate of Incorporation of First Busey Corporation (filed as
Appendix B to First Busey's definitive proxy statement filed with
the Commission on April 5, 1993 (Commission File No. 0-15950), and
incorporated herein by reference)
3.2 By-Laws of First Busey Corporation (filed as Appendix C to First
Busey's definitive proxy statement filed with the Commission on
April 5, 1993 (Commission File No. 0-15950), and incorporated herein
by reference)
10.1 First Busey Corporation 1993 Restricted Stock Award Plan (filed as
Appendix E to First Busey's definitive proxy statement filed with
the Commission on April 5, 1993 (Commission File No. 0-15950), and
incorporated herein by reference)
10.2 First Busey Corporation Profit Sharing Plan and Trust (filed as
Exhibit 10.3 to First Busey's Registration Statement on Form S-1
(Registration No. 33-13973), and incorporated herein by reference)
10.3 First Busey Corporation Employee Stock Ownership Plan (filed as
Exhibit 10.7 to First Busey's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (Registration No. 2-66201), and
incorporated herein by reference)
10.4 First Busey Corporation 1988 Stock Option Plan (filed as Exhibit
10.8 to First Busey's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 (Registration No. 2-66201), and incorporated
herein by reference)
10.5 First Busey Corporation 1999 Stock Option Plan (filed as Appendix B
to First Busey's definitive proxy statement filed with the
Commission on March 25, 1999 (Commission File No. 0-15950), and
incorporated herein by reference)
10.6 First Busey Corporation 2004 Stock Option Plan to be filed as Annex
D to First Busey's definitive proxy statement on March 12, 2004
14.1 First Busey Corporation Code of Ethics 83
21.1 List of Subsidiaries of First Busey Corporation 86
23.1 Consent of Independent Public Accountants 87
31.1 Certification of First Busey Corporation's Chief Executive Officer 88
31.2 Certification of First Busey Corporation's Chief Financial Officer 89
32.1 Certification of First Busey Corporation's Chief Executive Officer 90
32.2 Certification of First Busey Corporation's Chief Financial Officer 91
33
FINANCIAL STATEMENT SCHEDULES
Financial statement schedules not included in this Form 10-K have been omitted
because they are not applicable for the required information shown in the
financial statements or notes thereto.
FIRST BUSEY CORPORATION INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report 39
Consolidated Balance Sheets 40
Consolidated Statements of Income 41
Consolidated Statements of Stockholders' Equity 42
Consolidated Statements of Cash Flows 45
Notes to Consolidated Financial Statements 47
Management Report 81
Independent Accountant's Report 82
REPORTS ON FORM 8-K
On January 8, 2004, the Corporation filed a report on Form 8-K (Item 2)
dated January 6, 2004, announcing that on January 5, 2004, it entered into an
agreement to acquire First Capital Bankshares, Inc., Peoria, IL.
On January 20, 2004, the Corporation filed a report on Form 8-K (Item 12)
dated January 20, 2004, releasing its financial results for the three months
ending December 31, 2003.
On February 24, 2004, the Corporation filed a report on Form 8-K dated
February 24, 2004, announcing its intention to repurchase up to 500,000 shares,
or approximately 4%, of its common stock outstanding.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Urbana,
Illinois on March 12, 2004.
FIRST BUSEY CORPORATION
BY /s/ DOUGLAS C. MILLS
--------------------
Douglas C. Mills
Chairman of the Board, President,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 12, 2004.
Signature Title
/s/ DOUGLAS C. MILLS Chairman of the Board, Chief
-------------------- Executive Officer
Douglas C. Mills (Principal Executive Officer)
/s/ BARBARA J. HARRINGTON Chief Financial Officer
------------------------- (Principal Financial Officer)
Barbara J. Harrington
/s/ JOSEPH M. AMBROSE Director
---------------------
Joseph M. Ambrose
/s/ SAMUEL P. BANKS Director
-------------------
Samuel P. Banks
/s/ T. O. DAWSON Director
----------------
T. O. Dawson
/s/ VICTOR F. FELDMAN Director
---------------------
Victor F. Feldman
/s/ KENNETH M. HENDREN Director
----------------------
Kenneth M. Hendren
/s/ E. PHILLIPS KNOX Director
--------------------
E. Phillips Knox
/s/ BARBARA J. KUHL Director
-------------------
Barbara J. Kuhl
/s/ P. DAVID KUHL Director
-----------------
P. David Kuhl
/s/ V. B. LEISTER, JR. Director
----------------------
V. B. Leister, Jr.
/s/ LINDA M. MILLS Director
------------------
Linda M. Mills
35
/s/ EDWIN A. SCHARLAU Director
---------------------
Edwin A. Scharlau II
/s/ DAVID C. THIES Director
------------------
David C. Thies
/s/ ARTHUR R. WYATT Director
-------------------
Arthur R. Wyatt
36
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
37
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONTENTS
INDEPDENDENT AUDITOR'S REPORT 39
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 40
Consolidated statements of income 41
Consolidated statements of stockholders' equity 42 - 44
Consolidated statements of cash flows 45 - 46
Notes to consolidated financial statements 47 - 80
INTERNAL CONTROL REPORTS
Management Report - Effectiveness of the Internal Control 81
Independent Accountant's Report 82
38
MCGLADREY & PULLEN
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
FIRST BUSEY CORPORATION
URBANA, ILLINOIS
We have audited the accompanying consolidated balance sheets of FIRST BUSEY
CORPORATION AND SUBSIDIARIES as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FIRST BUSEY
CORPORATION AND SUBSIDIARIES as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MCGLADREY & PULLEN, LLP
Champaign, Illinois
February 6, 2004
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
39
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 52,397 $ 47,645
Securities available for sale 224,733 233,830
Loans held for sale (fair value 2003 $30,609; 2002 $61,685) 30,529 60,761
Loans (net of allowance for loan losses 2003 $16,228; 2002 $15,460) 1,145,639 1,024,822
Premises and equipment 22,223 27,359
Goodwill 7,380 7,380
Other intangible assets 2,100 2,464
Cash surrender value of bank owned life insurance 16,836 11,109
Other assets 20,247 20,208
----------- -----------
TOTAL ASSETS $ 1,522,084 $ 1,435,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 160,578 $ 151,105
Interest bearing 1,096,017 1,062,500
----------- -----------
TOTAL DEPOSITS 1,256,595 1,213,605
Federal funds purchased and securities
sold under agreements to repurchase 16,000 2,467
Long-term debt 92,853 71,759
Company obligated mandatorily redeemable trust preferred debentures 25,000 25,000
Other liabilities 6,459 7,584
----------- -----------
TOTAL LIABILITIES 1,396,907 1,320,415
----------- -----------
Stockholders' Equity
Preferred stock, no par value, 1,000,000 shares authorized, no
shares issued -- --
Common stock, no par value, authorized 40,000,000 shares;
14,154,706 shares issued 6,291 6,291
Surplus 20,968 20,862
Retained earnings 102,288 91,639
Accumulated other comprehensive income 9,191 10,276
----------- -----------
TOTAL STOCKHOLDERS' EQUITY BEFORE TREASURY STOCK,
UNEARNED ESOP SHARES AND DEFERRED COMPENSATION
FOR RESTRICTED STOCK AWARDS 138,738 129,068
Treasury stock, at cost, 477,229 shares 2003; 586,486 shares 2002 (10,667) (12,050)
Unearned ESOP shares and deferred compensation for restricted
stock awards (2,894) (1,855)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 125,177 115,163
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,522,084 $ 1,435,578
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
40
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------- ------- -------
(Dollars in thousands, except per share amounts)
Interest income:
Loans $65,603 $66,586 $76,618
Securities
Taxable interest income 5,816 7,094 10,011
Nontaxable interest income 2,031 2,041 2,060
Dividends 250 104 117
Federal funds sold 149 260 1,179
------- ------- -------
TOTAL INTEREST INCOME 73,849 76,085 89,985
------- ------- -------
Interest expense:
Deposits 19,644 24,598 40,614
Short-term borrowings 146 394 2,089
Long-term debt 3,578 3,252 2,532
Company obligated mandatorily redeemable
trust preferred debentures 2,250 2,250 1,200
------- ------- -------
TOTAL INTEREST EXPENSE 25,618 30,494 46,435
------- ------- -------
NET INTEREST INCOME 48,231 45,591 43,550
Provision for loan losses 3,058 3,125 2,020
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 45,173 42,466 41,530
------- ------- -------
Other income:
Service charges on deposit accounts 7,319 7,054 6,121
Trust fees 4,615 4,781 4,607
Commissions and brokers' fees, net 2,103 2,106 2,162
Other service charges and fees 1,836 1,816 1,667
Security gains, net 975 762 1,285
Gain on sales of loans 6,183 3,995 2,296
Net commissions from travel services -- -- 864
Other 1,654 2,023 2,458
------- ------- -------
TOTAL OTHER INCOME 24,685 22,537 21,460
------- ------- -------
Other expenses:
Salaries and wages 18,491 17,431 17,624
Employee benefits 3,823 3,572 3,442
Net occupancy expense of premises 3,158 3,076 3,110
Furniture and equipment expenses 2,446 3,469 3,847
Data processing 1,755 1,459 920
Amortization and impairment of intangible assets 414 660 1,751
Stationery, supplies and printing 1,061 1,010 1,016
Other 8,821 8,249 7,264
------- ------- -------
TOTAL OTHER EXPENSES 39,969 38,926 38,974
------- ------- -------
INCOME BEFORE INCOME TAXES 29,889 26,077 24,016
Income taxes 10,025 8,173 8,363
------- ------- -------
NET INCOME $19,864 $17,904 $15,653
======= ======= =======
Basic earnings per share $ 1.46 $ 1.32 $ 1.16
======= ======= =======
Diluted earnings per share $ 1.45 $ 1.31 $ 1.15
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
41
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Deferred
Accumulated Compensation
Other for
Compre- Unearned Restricted
Common Retained hensive Treasury ESOP Stock
Stock Surplus Earnings Income Stock Shares Awards Total
------ -------- -------- ----------- -------- -------- ----------- ---------
Balance, December 31, 2000 $6,291 $ 22,044 $ 73,215 $5,917 $(12,858) $(2,283) $(1) $ 92,325
Comprehensive Income:
Net Income -- -- 15,653 -- -- -- -- 15,653
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale arising during
the period, net of taxes of $1,963 -- -- -- -- -- -- -- 2,986
Reclassification adjustment, net of
taxes of ($510) -- -- -- -- -- -- -- (775)
--------
Other comprehensive income, net of
taxes of $1,453 -- -- -- 2,211 -- -- -- 2,211
--------
Comprehensive Income -- -- -- -- -- -- -- 17,864
--------
Purchase of 168,734 shares for the treasury -- -- -- -- (3,237) -- -- (3,237)
Issuance of 369,000 shares of treasury
stock for option exercise and related tax
benefit -- (872) -- -- 5,940 -- -- 5,068
Issuance of 22,756 shares of treasury stock
to benefit plans -- 18 -- -- 444 -- -- 462
Issuance of 3,236 shares of treasury stock
for bonus compensation program -- (3) -- -- 68 -- -- 65
Issuance of 250 shares of treasury stock
for restricted stock grants -- 1 -- -- 4 -- 5 --
Cash dividends:
Common stock at $.52 per share -- -- (7,007) -- -- -- -- (7,007)
Employee stock ownership plan shares
allocated -- (18) -- -- -- 262 -- 244
Release of restricted stock issued under
restricted stock award plan -- -- -- -- -- -- 6 6
------ -------- -------- ------ -------- ------- --- ---------
Balance, December 31, 2001 $6,291 $ 21,170 $ 81,861 $8,128 $ (9,639) $(2,021) $-- $ 105,790
====== ======== ======== ====== ======== ======= === =========
(continued)
42
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Deferred
Accumulated Compensation
Other for
Compre- Unearned Restricted
Common Retained hensive Treasury ESOP Stock
Stock Surplus Earnings Income Stock Shares Awards Total
------ ------- -------- ----------- -------- -------- ------------ --------
Balance, December 31, 2001 $6,291 $21,170 $ 81,861 $ 8,128 $ (9,639) $(2,021) $ -- $105,790
Comprehensive income:
Net income -- -- 17,904 -- -- -- -- 17,904
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale arising during
period, net of tax benefit of
$1,713 -- -- -- -- -- -- -- 2,607
Reclassification adjustment, net of
taxes of ($303) -- -- -- -- -- -- -- (459)
--------
Other comprehensive income, net of
tax of $1,410 -- -- -- 2,148 -- -- -- 2,148
--------
Comprehensive income -- -- -- -- -- -- -- 20,052
--------
Purchase of 174,768 shares for the
treasury -- -- -- -- (3,792) -- -- (3,792)
Issuance of 54,600 shares of treasury
stock for option exercise and
related tax benefit -- (296) -- -- 1,155 -- -- 859
Issuance of 750 shares of treasury stock
to benefit plans -- 1 -- -- 16 -- -- 17
Issuance of 9,950 shares of treasury stock
for Restricted stock grants -- 2 -- -- 210 -- (212) --
Cash dividends:
Common stock at $.60 per share -- -- (8,126) -- -- -- -- (8,126)
Employee stock ownership plan shares
allocated -- (15) -- -- -- 262 -- 247
Amortization of restricted stock issued
under restricted Stock award plan -- -- -- -- -- -- 116 116
------ ------- -------- ------- -------- ------- ----- --------
Balance, December 31, 2002 $6,291 $20,862 $ 91,639 $10,276 $(12,050) $(1,759) $ (96) $115,163
====== ======= ======== ======= ======== ======= ===== ========
(continued)
43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Deferred
Accumulated Compensation
Other for
Compre- Unearned Restricted
Common Retained hensive Treasury ESOP Stock
Stock Surplus Earnings Income Stock Shares Awards Total
------ -------- --------- ----------- -------- -------- ---------- ---------
Balance, December 31, 2002 $6,291 $ 20,862 $ 91,639 $ 10,276 $(12,050) $(1,759) $(96) $ 115,163
Comprehensive Income:
Net Income -- -- 19,864 -- -- -- -- 19,864
Other comprehensive income, net of tax:
Unrealized losses on securities
available for sale arising
during the period, net of
tax benefit of ($306) -- -- -- -- -- -- -- (497)
Reclassification adjustment, net of
taxes of ($387) -- -- -- -- -- -- -- (588)
---------
Other comprehensive income, net of
tax of ($693) -- -- -- (1,085) -- -- -- (1,085)
---------
Comprehensive Income -- -- -- -- -- -- -- 18,779
---------
Purchase of 156,800 shares for the
treasury -- -- -- -- (4,079) -- -- (4,079)
Issuance of 176,842 shares of
treasury stock for option exercise
and related tax benefit -- (126) -- -- 3,575 -- -- 3,449
Issuance of 89,215 shares of treasury
stock to benefit plans -- 173 -- -- 1,887 -- -- 2,060
Cash dividends:
Common stock at $.68 per share -- -- (9,215) -- -- -- -- (9,215)
Employee stock ownership plan shares
allocated -- 59 -- -- -- 262 -- 321
Proceeds from employee stock ownership
plan debt -- -- -- -- -- (1,356) -- (1,356)
Amortization of restricted stock issued
under restricted stock award plan -- -- -- -- -- -- 55 55
------ -------- --------- -------- -------- ------- ---- ---------
Balance, December 31, 2003 $6,291 $ 20,968 $ 102,288 $ 9,191 $(10,667) $(2,853) $(41) $ 125,177
====== ======== ========= ======== ======== ======= ==== =========
See Accompanying Notes to Consolidated Financial Statements
44
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
--------- --------- ---------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 19,864 $ 17,904 $ 15,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock-based compensation 55 116 71
Depreciation and amortization 3,534 4,202 5,718
Provision for loan losses 3,058 3,125 2,020
Non-cash ESOP adjustment 59 (15) (18)
Provision for deferred income taxes 344 (1,367) (407)
Stock dividends received (495) (301) (403)
Accretion of security discounts, net (293) (460) (819)
Security gains, net (975) (762) (1,285)
Gain on sales of loans, net (6,183) (3,995) (2,296)
(Gain) loss on sales and dispositions of
premises and equipment (423) (11) 388
Market valuation adjustment on
OREO properties 989 700 --
Change in assets and liabilities:
(Increase) decrease in other assets (551) (105) 3,617
Increase (decrease) in other liabilities (829) 1,729 (5,877)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES BEFORE LOAN ORIGINATIONS AND SALES 18,154 20,760 16,362
--------- --------- ---------
Loans originated for sale (400,967) (292,102) (274,893)
Proceeds from sales of loans 437,382 257,220 260,797
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 54,569 (14,122) 2,266
--------- --------- ---------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (212,444) (118,028) (125,173)
Proceeds from sales 19,033 23,358 9,105
Proceeds from maturities 202,493 76,548 139,967
Decrease in federal funds sold -- 20,000 14,700
(Increase) decrease in loans (124,402) (91,148) 22,025
Purchases of premises and equipment (3,724) (1,898) (2,380)
Proceeds from sales of premises and equipment 6,216 89 197
Increase in investment in life insurance (5,000) (343) (10,000)
Increase in cash surrender value
of bank owned life insurance (727) (655) (111)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (118,555) (92,077) 48,330
--------- --------- ---------
(continued)
45
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
-------- --------- --------
(Dollars in thousands)
Cash Flows from Financing Activities
Net (decrease) increase in certificates of deposit $(27,254) $ 64,691 $(95,849)
Net increase in demand deposits, money market
and savings accounts 70,244 42,915 53,061
Net increase (decrease) in Federal funds
purchased and securities sold under agreements
to repurchase 13,533 (7,300) (9,123)
Proceeds from short-term borrowings -- 500 4,500
Principal payments on short-term borrowings -- (2,500) (32,500)
Proceeds from long-term debt 20,000 43,000 18,000
Principal payments on long-term debt -- (18,000) (25,976)
Proceeds from issuance of company obligated
mandatorily redeemable preferred debentures -- -- 25,000
Cash dividends paid (9,215) (8,126) (7,007)
Purchase of treasury stock (4,079) (3,792) (3,237)
Proceeds from sales of treasury stock 5,509 876 5,530
-------- --------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 68,738 112,264 (67,601)
-------- --------- --------
Net increase (decrease) in cash
and due from banks 4,752 6,065 (17,005)
Cash and due from banks, beginning 47,645 41,580 58,585
-------- --------- --------
Cash and due from banks, ending $ 52,397 $ 47,645 $ 41,580
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 26,395 $ 30,817 $ 49,332
Income taxes $ 9,864 $ 7,810 $ 8,297
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 527 $ 5,977 $ 30
Employee stock ownership plan shares allocated $ 262 $ 262 $ 262
Proceeds from employee stock ownership plan debt $ 1,356 $ -- $ --
Transfer of installment purchase debt certificate from
investment portfolio to loan portfolio $ -- $ 242 $ --
See Accompanying Notes to Consolidated Financial Statements.
46
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Description of business:
First Busey Corporation (the Corporation) is a financial holding company whose
subsidiaries provide a full range of banking services, including security
broker/dealer services and investment management and fiduciary services, to
individual and corporate customers through its locations in Central Illinois,
Indianapolis, Indiana, and Fort Myers, Florida. The Corporation and subsidiaries
are subject to competition from other financial institutions and non-financial
institutions providing financial products and services. First Busey Corporation
and its subsidiaries are also subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory agencies.
The significant accounting and reporting policies for First Busey Corporation
and its subsidiaries follow:
Basis of consolidation
The consolidated financial statements include the accounts of First Busey
Corporation and its subsidiaries: Busey Bank and its subsidiary: BAT, Inc.;
Busey Bank Florida; First Busey Resources, Inc.; Busey Investment Group, Inc.
and its subsidiaries: First Busey Trust & Investment Company, Inc., First Busey
Securities, Inc., and Busey Insurance Services, Inc.; and First Busey Capital
Trust I, LP. All material intercompany balances and transactions have been
eliminated in consolidation.
The consolidated financial statements of First Busey Corporation have been
prepared in conformity with accounting principles generally accepted in the
United States of America and conform to predominant practice within the banking
industry.
Use of estimates
In preparing the accompanying consolidated financial statements, the
Corporation's management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ from those estimates. Material
estimates which are particularly susceptible to significant change in the near
term relate to the market value of investment securities, the determination of
the allowance for loan losses and valuation of real estate, or other properties
acquired in connection with foreclosures or in satisfaction of amounts due from
borrowers on loans, and consideration of impairment of goodwill and other
intangible assets.
Trust assets
Assets held for customers in a fiduciary or agency capacity, other than trust
cash on deposit at the Corporation's bank subsidiaries, are not assets of the
Corporation and, accordingly, are not included in the accompanying consolidated
financial statements.
Cash flows
For purposes of reporting cash flows, cash and due from banks include cash on
hand and amounts due from banks. Cash flows from federal funds purchased and
sold are reported net, since their original maturities are less than three
months. Cash flows from loans, deposits, and short-term borrowings are also
treated as net increases or decreases.
47
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities
Securities classified as available for sale are those debt securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity, and marketable equity securities. Any decision to sell
a security classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity mix
of the Corporation's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Securities available for sale are
carried at fair value. The difference between fair value and amortized cost
results in an unrealized gain or loss. Unrealized gains or losses are reported
as increases or decreases in accumulated other comprehensive income, net of the
related deferred tax effect, as a part of stockholders' equity. Realized gains
or losses, determined on the basis of the cost of specific securities sold, are
included in earnings. Where applicable, amortization of premiums and accretion
of discounts are recognized in interest income using the interest method over
the period to maturity.
Declines in the fair value of available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers the length of time and extent to which the fair value has been less
than cost, the financial condition and near-term prospects of the issuer, and
the intent and ability of the Corporation to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are stated at the amount of
unpaid principal, reduced by fees and an allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield. The Corporation is generally amortizing these amounts over the
contractual life. However, for long-term fixed-rate mortgages the Corporation
has anticipated prepayments and assumes an estimated economic life of 5 years or
less. Commitment fees and costs are generally based upon a percentage of a
customer's unused line of credit and fees related to standby letters of credit
and are recognized over the commitment period when the likelihood of exercise is
remote. If the commitment is subsequently exercised during the commitment
period, the remaining unamortized commitment fee at the time of exercise is
recognized over the life of the loan as an adjustment of the yield.
Interest is accrued daily on the outstanding balances. For impaired loans,
accrual of interest is discontinued on a loan when management believes, after
considering collection efforts and other factors that the borrower's financial
condition is such that collection of interest is doubtful. Cash collections on
impaired loans are credited to the loan receivable balance, and no interest
income is recognized on those loans until the principal balance has been
collected.
A loan is considered to be delinquent when payments have not been made according
to contractual terms, typically evidenced by nonpayment of a monthly installment
by the due date. The accrual of interest on loans is discontinued at the time
the loan is 90 days delinquent unless the credit is well-secured and in the
process of collection. Credit card loans and other personal loans are typically
charged off no later than 180 days delinquent.
Interest accrued in the current year but not collected for loans that are placed
on nonaccrual status or charged off is reversed against interest income.
Interest accrued during the prior year but not collected for loans that are
placed on nonaccrual status or charged off is charged against the allowance for
loan
48
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
losses. The interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Allowance for loan losses
The allowance for loan losses is established through a provision for loan losses
charged to operating expense. Loan losses are charged against the allowance for
loan losses when management believes the collectibility of the principal is
unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance is an amount management believes will be adequate to absorb
estimated losses related to specifically identified loans, as well as probable
credit losses inherent in the balance of the loan portfolio, based on an
evaluation of the collectibility of existing loans and prior loss experience.
The evaluations also take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, loan
concentrations, review of specific problem loans and current economic conditions
that may affect the borrowers' ability to repay. This evaluation does not
include the effect of unexpected losses on specific loans or groups of loans
that are related to future events or unexpected changes in economic conditions.
While management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are significant
changes in economic conditions.
In addition, regulatory agencies as an integral part of their examination
process, periodically review the allowance for loan losses, and may require the
Bank to make additions to the allowance based on their judgment about
information available to them at the time of their examinations.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
A loan is impaired when it is probable based on current information and events,
the Corporation will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. Impaired loans
are measured, on an individual basis for commercial and construction loans,
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The amount of impairment, if any, and any subsequent
changes are included in the allowance for loan losses.
Large groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
49
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans held for sale
Loans held for sale are those loans the Corporation has the intent to sell in
the foreseeable future. They consist of fixed-rate mortgage loans conforming to
established guidelines and held for sale to investors and the secondary mortgage
market. Loans held for sale are carried at the lower of aggregate cost or
estimated fair value. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference between the
sales proceeds and the carrying value of the loans after allocating cost to
servicing rights retained.
The Corporation enters into commitments to originate loans whereby the interest
rate on the loan is determined prior to funding (rate lock commitments). Rate
lock commitments on mortgage loans to be held for sale are considered to be
derivatives. Accordingly, such commitments, on the balance sheet are recorded at
fair value, with changes in fair value recorded in the net gain or loss on sale
of mortgage loans. Fair value is based on the change in estimated fair value of
the underlying mortgage loan. The fair value is subject to change primarily due
to changes in interest rates.
Loan servicing
The Corporation generally retains the right to service mortgage loans sold to
others. The cost allocated to the mortgage servicing rights retained has been
recognized as a separate asset and is being amortized in proportion to and over
the period of estimated net servicing income.
Mortgage servicing rights are periodically evaluated for impairment based on the
fair value of those rights. Fair values are estimated using discounted cash
flows based on current market rates of interest and current expected future
prepayment rates. For purposes of measuring impairment, the rights must be
stratified by one or more predominant risk characteristics of the underlying
loans. The Corporation stratifies its capitalized mortgage servicing rights
based on the origination date of the underlying loans. The amount of impairment
recognized is the amount, if any, by which the amortized cost of the rights for
each stratum exceeds its fair value.
Premises and equipment
Land is stated at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives for premises and equipment are:
Asset Description Estimated Useful Life
---------------------------------- -------------------------
Buildings 20 - 40 years
Furniture and equipment 3 - 10 years
Data processing equipment 3 - 5 years
Software 2 - 3 years
Leasehold improvements 3 - 10 years
Management periodically reviews the carrying value of its long-lived assets to
determine if an impairment has occurred or whether changes in circumstances have
occurred that would require a revision to the remaining useful lives of those
assets. In making such determination, management evaluates the performance, on
an undiscounted basis, of the underlying operations or assets which give rise to
such amount.
50
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other real estate owned
Other real estate owned (OREO) represents properties acquired through
foreclosure or other proceedings in settlement of loans. OREO is held for sale
and is recorded at the date of foreclosure at the fair value of the properties
less estimated costs of disposal, which establishes a new cost. Any write-down
to fair value at the time of transfer to OREO is charged to the allowance for
loan losses. Property is evaluated regularly to ensure the recorded amount is
supported by its current fair value, and valuation allowances to reduce the
carrying amount to fair value less estimated costs to dispose are recorded as
necessary. Revenue and expense from the operations of foreclosed assets and
changes in the valuation allowance are included in operations. Other real estate
owned included in other assets was approximately $4,781,000 and $5,724,000 as of
December 31, 2003, and 2002 respectively.
Goodwill and other intangible assets
Costs in excess of the estimated fair value of identifiable net assets acquired
consist primarily of goodwill, core deposit intangible and other identifiable
intangible assets. Goodwill was originally amortized into expense on a
straight-line basis over periods not to exceed 25 years. Effective January 1,
2002, the Corporation ceased amortization in accordance with newly adopted
accounting standards generally accepted in the United States of America. The
Corporation performed an initial impairment assessment as of January 1, 2002,
and annual impairment assessments as of December 31, 2003 and 2002.
Core deposit and other identifiable intangible assets are amortized on an
accelerated basis over the estimated period benefited up to 10 years.
Total amortization expense was approximately $414,000, $660,000, and $1,751,000
for the years ended December 31, 2003, 2002, and 2001, respectively.
Intangible assets are reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the net assets. Such reviews
include an analysis of current results and take into consideration the
discounted value of projected operating cash flows.
Income taxes
The Corporation and its subsidiaries file consolidated Federal and State income
tax returns with each organization computing its taxes on a separate entity
basis. The provision for income taxes is based on income as reported in the
financial statements.
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future. The deferred tax
assets and liabilities are computed based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Reclassifications
Certain reclassifications have been made to the balances, with no effect on net
income or stockholders' equity, as of and for the years ended December 31, 2002
and 2001, to be consistent with the classifications adopted as of and for the
year ended December 31, 2003.
51
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based employee compensation
The Corporation has two stock-based employee compensation plans which have been
in existence for all periods presented, and which are more fully described in
Note 15. As permitted under accounting principles generally accepted in the
United States of America, grants of options under the plans are accounted for
under the recognition and measurement principles of APB No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Because options granted
under the plans had an exercise price equal to market value of the underlying
common stock on the date of grant, no stock-based employee compensation cost is
included in determining net income. The following table illustrates the effect
on net income and earnings per share if the Corporation had applied the fair
value recognition provisions of Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
2003 2002 2001
--------- --------- ---------
(in thousands, except per share data)
Net income:
As reported $ 19,864 $ 17,904 $ 15,653
Deduct total stock-based compensation expense determined
under the fair value method for all awards, net of related
tax effects 257 242 303
--------- --------- ---------
Pro forma $ 19,607 $ 17,662 $ 15,350
========= ========= =========
Basic earnings per share:
As reported $ 1.46 $ 1.32 $ 1.16
Pro forma $ 1.45 $ 1.30 $ 1.14
Diluted earnings per share:
As reported $ 1.45 $ 1.31 $ 1.15
Pro forma $ 1.43 $ 1.30 $ 1.13
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions. In addition,
such models require the use of subjective assumptions, including expected stock
price volatility. In management's opinion, such valuation models may not
necessarily provide the best single measure of option value.
The fair value of the stock options granted has been estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions.
2002 2001
------------- ---------------------------------------
Block 1 Block 2 Block 3
------------- ------------- ----------- -----------
Number of options granted 229,000 61,500 2,250 1,000
Risk-free interest rate 3.51% 4.04% 4.39% 3.54%
Expected life, in years 3 4 5 3
Expected volatility 19.27% 19.89% 19.89% 19.89%
Expected dividend yield 2.60% 2.42% 2.42% 2.44%
Estimated fair value per option
$4.92 $5.35 $5.10 $3.50
The Corporation awarded no stock options during 2003.
52
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share
Basic earnings per share are computed by dividing net income for the year by the
weighted average number of shares outstanding.
Diluted earnings per share are determined by dividing net income for the year by
the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents assume exercise of stock
options and use of proceeds to purchase treasury stock at the average market
price for the period.
The following reflects net income per share calculations for basic and diluted
methods:
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net income available to common shareholders $ 19,864,000 $ 17,904,000 $ 15,653,000
Basic average common shares outstanding 13,562,120 13,535,918 13,486,688
Dilutive potential due to stock options 127,440 81,329 135,300
------------- ------------- -------------
Average number of common shares and dilutive
potential common shares outstanding 13,689,560 13,617,247 13,621,988
============= ============= =============
Basic net income per share $ 1.46 $ 1.32 $ 1.16
============= ============= =============
Diluted net income per share $ 1.45 $ 1.31 $ 1.15
============= ============= =============
Impact of new financial accounting standards
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement was effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Implementation of the Statement on
July 1, 2003 did not have a significant impact on the consolidated financial
statements.
FIN No. 46 "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51." FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIE's were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 were effective immediately for all arrangements
entered into after January 31, 2003. If a VIE existed prior to February 1, 2003,
FIN 46 was effective at the beginning of the first interim period beginning
53
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
after June 15, 2003. However, on October 8, 2003, the Financial Accounting
Standards Board (FASB) deferred the implementation date of FIN 46 until the
first period ending after December 15, 2003.
The Corporation adopted FIN 46 in connection with its consolidated financial
statements for the year ended December 31, 2003. In its current form, FIN 46
will require the Corporation to de-consolidate its investment in First Busey
Capital Trust I in future financial statements. The de-consolidation of
subsidiary trusts of bank holding companies formed in connection with the
issuance of trust preferred securities, like First Busey Capital Trust I,
appears to be an unintended consequence of FIN 46. Based upon its interpretation
of FIN 46, the Corporation continues to consolidate its wholly-owned subsidiary
trust entity involved with the issuance of its trust preferred securities, but
will deconsolidate for the quarter ending March 31, 2004. It is currently
unknown if, or when, the FASB will address this issue. In July 2003, the Board
of Governors of the Federal Reserve System issued a supervisory letter
instructing bank holding companies to continue to include the trust preferred
securities in their Tier I capital for regulatory capital purposes until notice
is given to the contrary. The Federal Reserve intends to review the regulatory
implications of any accounting treatment changes and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that the Federal
Reserve will continue to permit institutions to include trust preferred
securities in Tier I capital for regulatory capital purposes As of December 31,
2003, assuming the Corporation was not permitted to include the $25 million in
trust preferred securities issued by First Busey Capital Trust I in its Tier 1
capital, the Corporation would also be permitted to redeem the capital
securities, which bear interest at 9.00%, without penalty. In addition, the
Corporation would still exceed the regulatory required minimums for capital
adequacy purposes at December 31, 2003, assuming the Corporation was not
permitted to include these securities in Tier 1 capital.
The interpretations of FIN 46 and its application to various transaction types
and structures are evolving. Management continuously monitors emerging issues
related to FIN 46, some of which could potentially impact the Corporation's
financial statements.
Comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
NOTE 2. ADOPTION OF STATEMENT NO. 142.
On January 1, 2002, the Corporation implemented Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Under the
provisions of Statement No. 142, goodwill is no longer subject to amortization
over its estimated useful life, but instead will be subject to at least annual
assessments for impairment by applying a fair value based test. Statement No.
142 also requires that an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer's intent to do so. The
Corporation determined that no transitional impairment loss was required at
January 1, 2002.
Among the provisions of Statement No. 142 is a requirement to disclose what
reported net income would have been for all periods presented exclusive of
amortization expense (net of related income tax effects) recognized in those
periods related to goodwill with related per share amounts. No changes in the
amortization periods for other intangible assets were made during the years
ended December 31, 2003 or 2002, as a result of the adoption of this Standard.
54
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and intangible asset disclosures are as follows:
As of December 31, 2003
------------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
(Dollars in thousands)
AMORTIZED INTANGIBLE ASSETS:
Core deposit intangibles $ 8,006 $ 5,906
============ ============
AGGREGATE AMORTIZATION EXPENSE:
For the year ended December 31, 2003 $ 414
============
ESTIMATED AMORTIZATION EXPENSE:
2004 $ 419
2005 419
2006 386
2007 220
2008 220
Thereafter 436
------------
2,100
============
GOODWILL: $ 7,380
============
December 31,
2003 2002 2001
---------------------------------------------
(Dollars in thousands, except per share data)
Reported net income $ 19,864 $ 17,904 $ 15,653
Add goodwill amortization, net of tax -- -- 651
---------- ---------- ----------
Adjusted net income $ 19,864 $ 17,904 $ 16,304
========== ========== ==========
Basic earnings per share:
Reported net income $ 1.46 $ 1.32 $ 1.16
Goodwill amortization, net of tax -- -- .05
---------- ---------- ----------
Adjusted net income $ 1.46 $ 1.32 $ 1.21
========== ========== ==========
Diluted earnings per share:
Reported net income $ 1.45 $ 1.31 $ 1.15
Goodwill amortization, net of tax -- -- .05
---------- ---------- ----------
Adjusted net income $ 1.45 $ 1.31 $ 1.20
========== ========== ==========
NOTE 3. CASH AND DUE FROM BANKS
The Corporation's banking and thrift subsidiaries are required to maintain
certain cash reserve balances with the Federal Reserve Bank of Chicago, which
may be offset by cash on hand. The required reserve balances as of December 31,
2003 and 2002 were approximately $10,921,000 and $8,566,000, respectively.
55
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1997, the Corporation's bank subsidiary established a clearing
balance requirement of $2,000,000 with the Federal Reserve Bank of Chicago to
use Federal Reserve Bank services. As of December 31, 2003 and 2002, the
clearing balance requirement was $2,750,000. These deposited funds generate
earnings credits at market rates which offset service charges resulting from the
use of Federal Reserve Bank services. The clearing balance requirement is
included in the required reserve balance referred to above and may be increased,
or otherwise adjusted, on approval of the Federal Reserve Bank based on
estimated service charges; however, such adjustments will be made no more
frequently than once per month.
The Corporation maintains its cash in deposit accounts which, at times, may
exceed federally insured limits. The Corporation has not experienced any losses
in such accounts. The Corporation believes it is not exposed to any significant
credit risk on cash and cash equivalents.
NOTE 4. SECURITIES
The amortized cost and fair values of securities available for sale are
summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
December 31, 2003: (Dollars in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 149,727 $ 1,284 $ 113 $ 150,898
Obligations of states and political
subdivisions 45,813 2,433 11 48,235
Corporate securities 3,995 276 6 4,265
------------- ------------- ------------- -------------
199,535 3,993 130 203,398
Mutual funds and other equity securities 9,947 11,396 8 21,335
------------- ------------- ------------- -------------
$ 209,482 $ 15,389 $ 138 $ 224,733
============= ============= ============= =============
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
December 31, 2002: (Dollars in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 155,051 $ 3,273 $ -- $ 158,324
Obligations of states and political
Subdivisions 48,878 2,557 1 51,434
Corporate securities 3,493 255 2 3,746
------------- ------------- ------------- -------------
207,422 6,085 3 213,504
Mutual funds and other equity securities 9,379 10,955 8 20,326
------------- ------------- ------------- -------------
$ 216,801 $ 17,040 $ 11 $ 233,830
============= ============= ============= =============
56
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities available for sale as of
December 31, 2003, by contractual maturity, are shown below. Mutual funds and
other equity securities do not have stated maturity dates and therefore are not
included in the following maturity summary.
Amortized Fair
Cost Value
-------------- ---------------
(Dollars in thousands)
Due in one year or less $ 73,637 $ 74,280
Due after one year through five years 103,676 105,326
Due after five years through ten years 19,963 21,336
Due after ten years 2,259 2,456
-------------- ---------------
$ 199,535 $ 203,398
============== ===============
Gains and losses related to sales of securities are summarized as follows (in
thousands):
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- -------------- -------------
Gross security gains $ 1,133 $ 762 $ 1,285
Gross security losses (158) -- --
------------- -------------- -------------
NET SECURITY GAINS $ 975 $ 762 $ 1,285
============= ============== =============
The tax provisions for these net realized gains and losses amounted to $387,000,
303,000, and $510,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Investment securities with carrying values of $151,730,000 and $142,781,000 on
December 31, 2003 and 2002, respectively, were pledged as collateral on public
deposits, to secure securities sold under agreements to repurchase and for other
purposes as required or permitted by law.
Management evaluates the investment portfolio on an annual basis to determine if
investments have suffered a less than temporary decline in value. In addition,
management monitors market trends and current events in order to identify trends
and circumstances that might impact the carrying value of securities. As of
December 31, 2003, no investments had continuous unrealized losses existing
greater than twelve months.
57
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continuous unrealized losses Continuous unrealized losses
existing for less than 12 existing greater than 12
months months Total
---------------------------- ---------------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ---------- ----------- ------------- ---------- ----------
(Dollars in thousands)
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 21,497 $ (113) $ -- $ -- $ 21,497 $ (113)
Obligations of states and
political subdivisions 2,260 (11) -- -- 2,260 (11)
Corporate securities 401 (6) -- -- 401 (6)
---------- -------- -------- --------- ---------- --------
Subtotal, debt securities $ 24,158 $ (130) $ -- $ -- $ 24,158 $ (130)
Mutual funds and other
equity securities 92 (8) -- -- 92 (8)
---------- -------- -------- --------- ---------- --------
Total temporarily
impaired securities $ 24,250 $ (138) $ -- $ -- $ 24,250 $ (138)
========== ======== ======== ========= =========== ========
For the above investment securities, the unrealized losses are generally due to
changes in interest rates and, as such, are considered to be temporary by the
Corporation.
NOTE 5. LOANS
The composition of loans is as follows:
December 31,
--------------------------
2003 2002
---------- ----------
(Dollars in thousands)
Commercial $ 138,272 $ 118,004
Real estate construction 168,141 129,872
Real estate - farmland 11,890 13,421
Real estate - 1 to 4 family residential mortgage 376,559 369,868
Real estate - multifamily mortgage 91,325 57,559
Real estate - non-farm nonresidential mortgage 292,169 274,153
Installment 62,085 56,137
Agricultural 22,300 22,034
---------- ----------
1,162,741 1,041,048
Less deferred loan fees 874 766
---------- ----------
1,161,867 1,040,282
Less allowance for loan losses 16,228 15,460
---------- ----------
NET LOANS $1,145,639 $1,024,822
========== ==========
58
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loan portfolio includes a concentration of loans for commercial real estate
amounting to approximately $383,494,000 and $331,712,000 as of December 31, 2003
and 2002, respectively. Generally these loans are collateralized by assets of
the borrowers. The loans are expected to be repaid from cash flows or from
proceeds from the sale of selected assets of the borrowers. Credit losses
arising from lending transactions for commercial real estate entities are
comparable with the Corporation's credit loss experience on its loan portfolio
as a whole.
The Corporation's opinion as to the ultimate collectibility of loans is subject
to estimates regarding future cash flows from operations and the value of
property, real and personal, pledged as collateral. These estimates are affected
by changing economic conditions and the economic prospects of borrowers.
Loans contractually past due in excess of 90 days and loans classified as
non-accrual are summarized as follows:
December 31,
-----------------------------------
2003 2002
---------------- ----------------
(Dollars in thousands)
Loans 90 days past due and still accruing $ 2,638 $ 963
Non-accrual loans 581 1,265
---------------- ----------------
3,219 2,228
================ ================
The following table presents data on impaired loans:
2003 2002 2001
---------- --------- ---------
(Dollars in thousands)
Impaired loans for which an allowance has
been provided $ -- $ -- $ --
---------- --------- ---------
Impaired loans for which no allowance has
been provided $ 2,214 $ 309 $ 656
---------- --------- ---------
Total loans determined to be impaired $ 2,214 $ 309 $ 656
========== ========= =========
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ -- $ -- $ --
========== ========= =========
Average recorded investment in impaired loans $ 1,193 $ 1,435 $ 390
========== ========= =========
Interest income recognized from impaired loans $ -- $ -- $ 9
========== ========= =========
Cash basis interest income recognized from
impaired loans $ -- $ -- $ 9
========== ========= =========
59
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
-------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(Dollars in thousands)
Balance, beginning of year $ 15,460 $ 13,688 $ 12,268
Provision for loan losses 3,058 3,125 2,020
Recoveries applicable to loan balances
previously charged off 225 476 176
Loan balances charged off (2,515) (1,829) (776)
-------------- -------------- --------------
Balance, end of year $ 16,228 $ 15,460 $ 13,688
============== ============== ==============
NOTE 7. LOAN SERVICING
The amount of loans serviced by the Corporation for the benefit of others is not
included in the accompanying consolidated balance sheets. The unpaid principal
balances of these loans were $531,271,000 and $368,907,000 as of December 31,
2003 and 2002, respectively. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts, disbursing payments
to investors and collection and foreclosure processing. Loan servicing income is
recorded on the accrual basis and includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees and is net
of amortization of capitalized mortgage servicing rights.
The balance of capitalized servicing rights included in other assets at December
31, 2003 and 2002, was $2,279,000 and $1,474,000, respectively. The following
summarizes mortgage servicing rights capitalized and amortized:
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- -------------- -------------
(Dollars in thousands)
Mortgage servicing rights capitalized $ 2,679 $ 1,467 $ 961
============= ============== =============
Mortgage servicing rights amortized $ 1,874 $ 906 $ 468
============= ============== =============
60
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-----------------------------------
2003 2002
---------------- ---------------
(Dollars in thousands)
Land $ 6,639 $ 7,101
Buildings and improvements 21,819 31,401
Furniture and equipment 18,925 18,253
---------------- ---------------
47,383 56,755
Less accumulated depreciation 25,160 29,396
---------------- ---------------
$ 22,223 $ 27,359
================ ===============
Depreciation expense was $3,120,000, $3,542,000 and $3,967,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
NOTE 9. DEPOSITS
The aggregate amount of time deposits with a minimum denomination of $100,000
was approximately $105,614,000 and $110,158,000 at December 31, 2003 and 2002,
respectively.
As of December 31, 2003, the scheduled maturities of certificates of deposit, in
thousands, are as follows:
2004 $ 287,584
2005 85,421
2006 43,192
2007 50,632
2008 20,582
Thereafter 44
---------------
$ 487,455
===============
NOTE 10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four years from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Corporation may be
required to provide additional collateral based on the fair value of the
underlying securities.
61
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
2003 2002
----------- -----------
(Dollars in thousands)
Notes payable, Bank One, interest payable quarterly
$250,000 term loan, at one-year LIBOR plus 1.40% (effective rate of
2.85% at December 31, 2003), principal payment of $25,000 due
annually on December 15, final payment due December 15, 2006,
collateralized by unallocated shares of First Busey Corporation common
stock purchased by employee stock ownership plan in August, 1997
(6,000 shares as of December 31, 2003; 8,000 shares as of
December 31, 2002) $ 75 $ 100
$2,370,000 term loan, at one-year LIBOR plus 1.40% (effective rate of
2.85% at December 31, 2003), principal payment of $237,000 due
annually on December 15, final payment due December 15, 2009,
collateralized by unallocated shares of First Busey Corporation common
stock purchased by employee stock ownership plan in November, 1999
(60,000 shares as of December 31, 2003; 70,000 shares as of
December 31, 2002) $ 1,422 $ 1,659
$1,356,500 term loan at one-year LIBOR plus 1.40% (effective rate of
2.56% at December 31, 2003), principal payment of $135,650 due annually
on December 15, final payment due December 15, 2013, collateralized by
unallocated shares of First Busey Corporation common stock purchased by
employee stock ownership plan in December, 2003 (50,000 shares as of
December 31, 2003) $ 1,356 -
Notes payable, Federal Home Loan Bank of Chicago, collateralized
by all unpledged U.S. Treasury and U.S. Agency securities, first
mortgages on 1-4 family residential real estate and Federal Home
Loan Bank of Chicago stock $ 90,000 $ 70,000
----------- -----------
$ 92,853 $ 71,759
=========== ===========
62
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Funds borrowed from the Federal Home Loan Banks of Chicago and Atlanta consisted
of the following advances:
Rate December 31,
--------------------------------------------------------
2003 2002 2003 2002
----- ----- ----------- -----------
(Dollars in thousands)
October 8, 2004, fixed 3.95% 3.95% $ 1,000 $ 1,000
October 18, 2004, fixed 3.95% 3.95% 2,000 2,000
October 18, 2004, fixed 3.89% 3.89% 2,000 2,000
November 15, 2004 1.54% -- 1,000 --
February 14, 2005 1.69% -- 1,000 --
March 21, 2005, fixed 4.63% 4.63% 4,000 4,000
April 22, 2005, fixed 4.22% 4.22% 1,000 1,000
May 16, 2005 1.84% -- 1,000 --
June 13, 2005, fixed 3.88% 3.88% 1,000 1,000
June 20, 2005, fixed 4.00% 4.00% 4,000 4,000
July 25, 2005, fixed 3.17% 3.17% 1,000 1,000
October 28, 2005, fixed 2.68% 2.68% 2,000 2,000
November 14, 2005, fixed 2.16% -- 1,000 --
February 27, 2006, fixed 4.44% 4.44% 3,000 3,000
March 20, 2006, fixed 4.94% 4.94% 500 500
March 20, 2006, fixed 4.94% 4.94% 675 675
March 20, 2006, fixed 4.94% 4.94% 825 825
July 24, 2006, fixed 3.87% 3.87% 5,000 5,000
September 11, 2006, fixed 4.95% 4.95% 2,000 2,000
November 24, 2006, fixed 4.75% 4.75% 3,000 3,000
February 28, 2007, fixed 4.90% 4.90% 5,000 5,000
May 16, 2007, fixed 5.00% 5.00% 500 500
May 16, 2007, variable 5.00% 4.39% 1,500 1,500
June 20, 2007, fixed 4.46% 4.46% 1,000 1,000
July 24, 2007, fixed 3.78% 3.78% 1,000 1,000
September 6, 2007, fixed 3.45% 3.45% 3,000 3,000
January 16, 2008, fixed 4.95% 4.95% 5,000 5,000
January 16, 2008, fixed 5.30% 5.30% 5,000 5,000
February 17, 2008, fixed 5.01% 5.01% 10,000 10,000
February 27, 2008, fixed 5.07% 5.07% 2,000 2,000
March 28, 2008, fixed 3.08% -- 2,500 --
March 28, 2008, fixed 3.18% -- 2,500 --
July 31, 2008, fixed 3.65% -- 5,000 --
July 31, 2008, fixed 3.74% -- 5,000 --
October 6, 2008, fixed 4.30% 4.30% 3,000 3,000
January 3, 2013, fixed 4.68% -- 1,000 --
----------- -----------
$ 90,000 $ 70,000
=========== ===========
63
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2003, the scheduled maturities of long-term debt, in
thousands, are as follows:
2004 $ 6,398
2005 16,397
2006 15,398
2007 12,373
2008 40,372
Thereafter $ 1,915
-----------
$ 92,853
===========
The Corporation had letters of credit outstanding with the Federal Home Loan
Bank of Chicago for $1,300,000 and $2,800,000 at December 31, 2003 and 2002,
respectively.
NOTE 12. COMPANY OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED DEBENTURES
In June, 2001, First Busey Corporation issued $25,000,000 in cumulative trust
preferred debentures through a newly formed special-purpose trust, First Busey
Capital Trust I, L.P. The proceeds of the offering were invested by First Busey
Capital Trust I in junior subordinated deferrable interest debentures of the
Corporation. The Trust is a wholly owned consolidated subsidiary of the
Corporation, and its sole assets are the junior subordinated deferrable interest
debentures. Distributions are cumulative and are payable quarterly at a rate of
9.00% per annum of the stated liquidation amount of $10 per preferred security.
Interest expense on the trust preferred securities was $2,250,000 for the years
ended December 31, 2003 and December 31, 2002 and $1,200,000 for the year ended
December 31, 2001. The obligations of the trust are fully and unconditionally
guaranteed, on a subordinated basis, by the Corporation. The trust preferred
debentures qualify as Tier 1 capital for regulatory purposes.
The trust preferred debentures are mandatorily redeemable upon the maturity of
the debentures on June 18, 2031, or to the extent of any earlier redemption of
any debentures by the Corporation, and are callable beginning June 18, 2006.
Issuance costs of $1,340,000 related to the trust preferred debentures were
deferred and are being amortized over the period until mandatory redemption of
the debentures in June, 2031.
NOTE 13. INCOME TAXES
The components of income taxes consist of:
Years Ended December 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
(Dollars in thousands)
Current $ 9,681 $ 9,540 $ 8,770
Deferred 344 (1,367) (407)
----------- ----------- -----------
TOTAL INCOME TAX EXPENSE $ 10,025 $ 8,173 $ 8,363
=========== =========== ===========
64
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of federal and state income taxes at statutory rates to the
income taxes included in the statements of income is as follows:
Years Ended December 31,
2003 2002 2001
-------------------------- -------------------------- ----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
Income tax at statutory rate $ 10,461 35.0% $ 9,127 35.0% $ 8,406 35.0%
Effect of:
Tax-exempt interest, net (819) (2.7%) (774) (3.0%) (758) (3.2%)
Income on bank owned life
Insurance (287) (1.0%) (260) (1.0%) (44) (0.2%)
Amortization of intangibles (35) (0.1%) 55 0.2% 437 1.8%
Other 705 2.3% 25 0.1% 322 1.4%
-------- ---- -------- ---- -------- ----
$ 10,025 33.5% $ 8,173 31.3% $ 8,363 34.8%
======== ==== ======== ==== ======== ====
Net deferred taxes, included in other liabilities in the accompanying balances
sheets, includes the following amounts of deferred tax assets and liabilities:
2003 2002
------- -------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 6,441 $ 6,133
Property acquired in settlement of loans 569 240
Loans held for sale 32 366
Basis in deposit intangibles 296 350
Deferred compensation 433 254
State net operating loss carryforwards -- 31
Other 295 235
------- -------
8,066 7,609
------- -------
Deferred tax liabilities:
Investment securities
Unrealized gains on securities held for sale (6,060) (6,753)
Other (419) (247)
Basis in premises and equipment (1,425) (909)
Mortgage servicing assets (905) (585)
Deferred loan fees (337) (304)
Other -- (240)
------- -------
(9,146) (9,038)
------- -------
NET DEFERRED TAX LIABILITY $(1,080) $(1,429)
======= =======
65
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE BENEFIT PLANS
Employees' Stock Ownership Plan
The First Busey Corporation Employees' Stock Ownership Plan (ESOP) is available
to all full-time employees who meet certain age and length of service
requirements. The ESOP purchased common shares of the Corporation using the
proceeds of bank borrowings which is secured by the stock. The borrowings are to
be repaid using fully deductible contributions to the trust fund. As the ESOP
makes each payment of principal, an appropriate percentage of stock will be
allocated to eligible employees' accounts in accordance with applicable
regulations under the Internal Revenue Code. Allocations of common stock
released and forfeitures are based on the eligible compensation of each
participant. Dividends on allocated shares of common stock are distributed
directly to the participants, and dividends on unallocated shares are used to
service the bank borrowings. All shares held by the ESOP, which were acquired
prior to the issuance of Statement of Position 93-6, are included in the
computation of average common shares and common share equivalents. This
accounting treatment is grandfathered under Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" for shares purchased
prior to December 31, 1992.
In December, 2003, First Busey Corporation's Employees' Stock Ownership Plan
purchased an additional 50,000 shares of the Corporation's common stock using
proceeds of $1,356,000 from bank borrowings which is secured by the stock.
As permitted by AICPA Statement of Position (SOP) 93-6, compensation expense for
shares released is equal to the original acquisition cost of the shares if they
were acquired prior to December 31, 1992. During 2001, $303,000 of compensation
expense was recognized for the ESOP, releasing 12,000 shares to participant
accounts and is reflected in the chart below under "Employee Benefits". During
2002, $304,000 of compensation expense was recognized for the ESOP, releasing
12,000 shares to participant accounts and is reflected in the chart below under
"Employee Benefits". During 2003, $327,000 of compensation expense was
recognized for the ESOP releasing 12,000 shares to participant accounts, and is
reflected in the chart below under "Employee Benefits." For such shares,
compensation expense is equal to the fair market value of the shares released.
Compensation expense related to the ESOP plan, including related interest
expense, was $431,000, $382,000, and $459,000, in the years ended December 31,
2003, 2002 and 2001.
Shares held in the ESOP which were acquired prior to December 31, 1992 were as
follows:
2003 2002
----------- -----------
Allocated shares 720,005 740,264
Unallocated shares -- --
----------- -----------
TOTAL 720,005 740,264
=========== ===========
Fair value of allocated shares at December 31 $19,440,000 $17,070,000
=========== ===========
66
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares held in the ESOP which were acquired after December 31, 1992 and their
fair values were as follows:
2003 2002
-------------------------- ---------------------------
Fair Fair
Shares Value Shares Value
---------- ------------ ---------- -------------
Allocated shares 51,817 $ 1,399,000 37,740 $ 870,000
Unallocated shares 116,000 3,132,000 78,000 1,799,000
---------- ------------ ---------- -------------
TOTAL 167,817 $ 4,531,000 115,740 $ 2,669,000
========== ============ ========== =============
Profit Sharing Plan
All full-time employees who meet certain age and length of service requirements
are eligible to participate in the Corporation's profit-sharing plan. The
contributions, if any, are determined solely by the Boards of Directors of the
Corporation and its subsidiaries and in no case may the annual contributions be
greater than the amounts deductible for federal income tax purposes for that
year. The rights of the participants vest ratably over a seven-year period.
Contributions to the plan were $880,000, $857,000, and $676,000 for the years
ended December 31, 2003, 2002, and 2001, respectively.
Expense related to the employee benefit plans are included in the statements of
income as follows:
Years Ended December 31,
-------------------------------------------
2003 2002 2001
------------ ------------ ----------
(Dollars in thousands)
Employee benefits $ 1,259 $ 1,161 $ 979
Interest on employee stock ownership plan debt 52 78 156
------------ ------------ ----------
TOTAL EMPLOYER CONTRIBUTIONS $ 1,311 $ 1,239 $ 1,135
============ ============ ==========
NOTE 15. STOCK INCENTIVE PLANS
Stock Option Plan:
In March 1989, the Corporation adopted the 1988 Stock Option Plan pursuant to
which incentive stock options and nonqualified stock options for up to 900,000
shares of common stock may be granted by the Compensation Committee of the Board
of Directors to certain executive officers and key personnel of First Busey
Corporation and its subsidiaries. In March 1996, the Board of Directors approved
an increase in the number of shares reserved for issuance as stock options from
900,000 to 1,500,000.
In January of 1999, the Corporation adopted the 1999 Stock Option Plan pursuant
to which nonqualified stock options for up to 500,000 shares of common stock may
be granted by the Compensation Committee of the Board of Directors to certain
executive officers and key personnel of First Busey Corporation and its
subsidiaries.
67
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Corporation's stock option plan for the years
ended December 31, 2003, 2002, and 2001 and the changes during the years ending
on those dates is as follows:
2003 2002 2001
------------------------- ------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 580,992 $ 18.76 408,992 $ 16.14 719,042 $ 12.68
Granted -- -- 229,000 21.84 64,750 17.95
Exercised (176,842) 15.28 (54,600) 12.13 (369,000) 9.99
Terminated and reissuable (6,550) 18.34 (2,400) 16.75 (5,800) 15.56
--------- --------- ---------
Outstanding at end of year 397,600 $ 20.31 580,992 $ 18.76 408,992 $ 16.14
========= ======== ========= ======== ========= ========
Exercisable at end of year 168,400 $ 18.28 230,200 $ 16.70 98,000 $ 19.25
Weighted-average fair value per
option of options granted during
the year N/A $ 4.92 $ 5.31
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options
Options Outstanding Exercisable
--------------------------------- -----------
Weighted-
Average
Remaining
Exercise Contractual
Prices Number Life Number
------------ -------------- ------------- ----------
$ 16.75 46,900 0.75 years 46,900
17.88 61,500 1.96 years 61,500
17.88 5,000 1.00 years 5,000
19.06 2,250 2.67 years --
20.06 54,000 0.96 years 54,000
20.18 1,000 0.75 years 1,000
21.84 226,950 6.96 years --
-------------- ------------- ----------
397,600 4.52 years 168,400
============== ============= ==========
Restricted Stock Award Plan:
The 1993 Restricted Stock Award Plan provides for restricted stock awards of up
to 450,000 shares of common stock which may be granted by the Compensation
Committee of the Board of Directors to certain executive officers and key
personnel of First Busey Corporation and its subsidiaries. Shares
68
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
vest over a period established by the Compensation Committee at grant date and
are based on the attainment of specified earnings per share and earnings growth.
As of December 31, 2003, there were 4,300 shares under grant.
Number of Shares
-------------------------------------------
2003 2002 2001
--------- --------- ---------
Under restriction, beginning of year 6,950 -- 100
Granted -- 9,950 250
Restrictions released 2,650 3,000 350
Forfeited and reissuable -- -- --
--------- --------- ---------
Under restriction, end of year 4,300 6,950 --
========= ========= =========
Available to grant, end of year 398,200 398,200 408,150
========= ========= =========
Compensation expense is recognized for financial statement purposes over the
period of performance. Compensation expense of $55,000, $116,000, and $6,000 was
recognized for financial statement purposes during the years ended December 31,
2003, 2002, and 2001, respectively.
NOTE 16. TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
The Corporation and its subsidiaries have had, and may be expected to have in
the future, banking transactions in the ordinary course of business with
directors, executive officers, their immediate families and affiliated companies
in which they have 10% or more beneficial ownership (commonly referred to as
related parties), on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others.
The following is an analysis of the changes in loans to related parties during
the year ended December 31, 2003:
Balance at the beginning of year $ 5,274
New loans 4,734
Repayments 5,039
------------
Balance at end of year $ 4,969
============
NOTE 17. CAPITAL
The ability of the Corporation to pay cash dividends to its stockholders and to
service its debt is dependent on the receipt of cash dividends from its
subsidiaries. State chartered banks have certain statutory and regulatory
restrictions on the amount of cash dividends they may pay. As a practical
matter, dividend payments are restricted because of the desire to maintain a
strong capital position in the subsidiaries.
The Corporation and the Banks are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's or the Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and
69
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Banks must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's and the
Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003, that the Corporation and the Banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 2003, the most recent notification from the federal and state
regulatory agencies categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Banks' categories.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
(Dollars in Thousands)
As of December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated $ 150,545 13.33% $ 90,350 8.00% N/A N/A
Busey Bank $ 117,133 11.30% $ 82,934 8.00% $ 103,667 10.00%
Busey Bank Florida $ 12,402 15.50% $ 6,402 8.00% $ 8,003 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 131,277 11.62% $ 45,175 4.00% N/A N/A
Busey Bank $ 99,920 9.64% $ 41,467 4.00% $ 62,201 6.00%
Busey Bank Florida $ 11,514 14.39% $ 3,201 4.00% $ 4,802 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 131,277 8.85% $ 59,363 4.00% N/A N/A
Busey Bank $ 99,920 7.33% $ 54,543 4.00% $ 68,179 5.00%
Busey Bank Florida $ 11,514 10.16% $ 4,533 4.00% $ 5,666 5.00%
70
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- ------
(Dollars in thousands)
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $ 137,796 13.31% $ 82,830 8.00% N/A N/A
Busey Bank $ 108,321 11.13% $ 77,846 8.00% $ 97,307 10.00%
Busey Bank Florida $ 11,802 25.47% $ 3,708 8.00% $ 4,634 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 119,897 11.58% $ 41,415 4.00% N/A N/A
Busey Bank $ 91,826 9.44% $ 38,923 4.00% $ 58,385 6.00%
Busey Bank Florida $ 11,280 24.34% $ 1,854 4.00% $ 2,781 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 119,897 8.66% $ 55,389 4.00% N/A N/A
Busey Bank $ 91,826 7.03% $ 52,244 4.00% $ 65,305 5.00%
Busey Bank Florida $ 11,280 16.50% $ 2,736 4.00% $ 3,420 5.00%
NOTE 18. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The Corporation and its subsidiaries are parties to legal actions which arise in
the normal course of their business activities. In the opinion of management,
the ultimate resolution of these matters is not expected to have a material
effect on the financial position or the results of operations of the Corporation
and its subsidiaries.
The Corporation and its subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk. The contract or notional amounts of those instruments reflect the extent
of involvement the Corporation has in particular classes of financial
instruments.
The Corporation and its subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. The Corporation and
its subsidiaries use the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
71
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the contractual amount of the Corporation's exposure to
off-balance-sheet risk follows:
December 31,
----------------------------
2003 2002
------------- ------------
(Dollars in thousands)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $ 286,037 $ 222,407
Standby letters of credit 11,682 13,138
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments are generally at variable interest rates and generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The customer's credit worthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Corporation upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including bond financing and similar transactions and primarily have terms of
one year or less. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds collateral, which may include accounts receivable,
inventory, property and equipment, income producing properties, supporting those
commitments if deemed necessary. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the corporation
would be required to fund the commitment.
The maximum potential amount of future payments the Corporation could be
required to make is represented by the contractual amount shown in the summary
above. If the commitment is funded, the Corporation would be entitled to seek
recovery from the customer. At December 31, 2003 and 2002, no amounts have been
recorded as liabilities for the corporation's potential obligations under these
guarantees.
As of December 31, 2003, the Corporation has no futures, forwards, swaps or
option contracts, or other financial instruments with similar characteristics
with the exception of rate lock commitments on mortgage loans to be held for
sale.
Lease Commitments
At December 31, 2003, the Corporation was obligated under noncancelable
operating leases for office space and other commitments. Rent expense under
operating leases, included in net occupancy expense of premises, was
approximately $790,000, $699,000, and $699,000 for the years ended December 31,
2003, 2002 and 2001, respectively.
72
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The projected minimum rental payments under the terms of the leases at December
31, 2003, in thousands, are as follows:
2004 $ 814
2005 708
2006 679
2007 620
2008 475
Thereafter 370
-------------
$ 3,666
=============
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and cash equivalents
The carrying amounts reported in the balance sheet for cash and due from banks
and federal funds sold approximate those assets' fair values.
Securities
For securities available for sale, fair values are based on quoted market prices
or dealer quotes, where available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. The
carrying amount of accrued interest receivable approximates fair value.
Loans
For certain homogeneous categories of loans, such as some residential mortgages,
fair value is estimated using the quoted market prices for similar loans or
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The carrying amount of accrued interest receivable
approximates fair value.
Deposits and securities sold under agreements to repurchase
The fair value of demand deposits, savings accounts, interest-bearing
transaction accounts, and certain money market deposits is defined as the amount
payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit and securities sold under agreements to repurchase is
estimated using the rates currently offered for deposits of similar remaining
maturities. The carrying amount of accrued interest payable approximates fair
value.
Short-term borrowings and long-term debt
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. The
carrying amount of accrued interest payable approximates fair value.
73
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company obligated mandatorily redeemable trust preferred debentures
Fair values are based upon quoted market prices or dealer quotes. The carrying
amount of accrued interest payable approximates fair value.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. As of December 31, 2003 and 2002,
these items are immaterial in nature.
The estimated fair values of the Corporation's financial instruments are as
follows:
2003 2002
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ----------- ------------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 52,397 $ 52,397 $ 47,645 $ 47,645
Securities 224,733 224,733 233,830 233,830
Loans, net 1,176,168 1,184,532 1,085,583 1,100,710
Accrued interest receivable 6,606 6,606 7,114 7,114
Financial liabilities:
Deposits 1,256,595 1,263,205 1,213,605 1,221,229
Federal funds purchased and
securities sold under agreements to
repurchase 16,000 16,000 2,467 2,498
Long-term debt 92,853 95,740 71,759 76,591
Company obligated mandatorily
redeemable preferred securities 25,000 28,275 25,000 27,875
Accrued interest payable 2,465 2,465 3,241 3,241
In addition, other assets and liabilities of the Corporation that are not
defined as financial instruments are not included in the above disclosures, such
as property and equipment. Also, nonfinancial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the earnings potential of the trust operations, the
trained work force, customer goodwill and similar items.
NOTE 20. REPORTABLE SEGMENTS AND RELATED INFORMATION
First Busey Corporation has three reportable segments, Busey Bank, First Busey
Trust & Investment Co., and Busey Bank Florida. Busey Bank provides a full range
of banking services to individual and corporate customers through its branch
network in central Illinois, through its branch in Indianapolis, Indiana, and
through its loan production office in Fort Myers, Florida. First Busey Trust &
Investment Co. provides trust and asset management services to individual and
corporate customers
74
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
throughout central Illinois. Busey Bank Florida provides a full range of banking
services to individuals and corporate customers in Fort Myers, Florida and the
surrounding communities.
In November of 2001, Busey Bank Florida transferred banking assets in McLean
County, Illinois to Busey Bank. At year-end, Busey Bank Florida had one banking
location in Fort Myers, Florida and two banking locations in Cape Coral,
Florida.
The Corporation's three reportable segments are strategic business units that
are separately managed as they offer different products and services and have
different marketing strategies.
The segment financial information provided below has been derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the Corporation. The accounting policies of the
three segments are the same as those described in the summary of significant
accounting policies. The Corporation accounts for intersegment revenue and
transfers at current market value.
75
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarized information relates to the Corporation's reportable
segments:
December 31, 2003
--------------------------------------------------------------------------------------------------
First
Busey
Busey Trust &
Busey Bank Investment All Consolidated
Bank Florida Co. Other Totals Eliminations Totals
----------- --------- ---------- ----------- ------------ ------------ ------------
Interest income $ 68,869 $ 4,716 $ 141 $ 2,413 $ 76,139 $ (2,290) $ 73,849
Interest expense 21,229 2,126 -- 4,555 27,910 (2,292) 25,618
Other income 17,996 552 4,285 26,710 49,543 (24,858) 24,685
Total income 86,865 5,268 4,426 29,123 125,682 (27,148) 98,534
Net income 19,758 287 1,296 23,481 44,822 (24,958) 19,864
Total assets 1,394,354 113,441 3,298 193,047 1,704,140 (182,056) 1,522,084
December 31, 2002
--------------------------------------------------------------------------------------------------
First
Busey
Busey Trust &
Busey Bank Investment All Consolidated
Bank Florida Co. Other Totals Eliminations Totals
----------- --------- ---------- ----------- ------------ ------------ ------------
Interest income $ 72,841 $ 2,981 $ 156 $ 2,412 $ 78,390 $ (2,305) $ 76,085
Interest expense 26,599 1,588 -- 4,587 32,774 (2,280) 30,494
Other income 15,841 434 4,610 25,084 45,969 (23,432) 22,537
Total income 88,682 3,415 4,766 27,496 124,359 (25,737) 98,622
Net income 18,292 24 1,419 20,016 39,751 (21,847) 17,904
Total assets 1,346,062 73,193 3,232 181,750 1,604,237 (168,659) 1,435,578
December 31, 2001
--------------------------------------------------------------------------------------------------
First
Busey
Busey Trust &
Busey Bank Investment Consolidated
Bank Florida Co. All Other Totals Eliminations Totals
----------- --------- ---------- ----------- ------------ ------------ ------------
Interest income $ 70,740 $ 18,948 $ 178 $ 1,402 $ 91,268 $ (1,283) $ 89,985
Interest expense 33,284 10,823 -- 3,508 47,615 (1,180) 46,435
Other income 12,519 2,281 4,664 23,298 42,762 (21,302) 21,460
Total income 83,259 21,229 4,842 24,700 134,030 (22,585) 111,445
Net income 14,029 1,997 1,391 17,175 34,592 (18,939) 15,653
Total assets 1,238,377 50,935 3,339 174,322 1,466,973 (166,284) 1,300,689
76
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial data for First Busey Corporation is presented below.
BALANCE SHEETS
December 31,
-------------------------
2003 2002
--------- ---------
ASSETS (Dollars in thousands)
Cash and due from subsidiary bank $ 5,498 $ 1,869
Securities available for sale 3,241 2,598
Loans 2,473 2,138
Investments in subsidiaries:
Bank 127,498 120,880
Non-bank 11,837 11,697
Premises and equipment, net 101 128
Goodwill 1,548 1,548
Other assets 1,824 1,870
--------- ---------
TOTAL ASSETS $ 154,020 $ 142,728
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term corporate borrowings $ -- $ --
Long-term ESOP borrowings 2,853 1,759
Junior subordinated debentures due to First Busey
Capital Trust I 25,000 25,000
Other liabilities 990 806
--------- ---------
TOTAL LIABILITIES 28,843 27,565
--------- ---------
Stockholders' equity before unearned ESOP shares and deferred
Compensation for restricted stock awards 128,071 117,018
Unearned ESOP shares and deferred compensation for restricted
stock awards (2,894) (1,855)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 125,177 115,163
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,020 $ 142,728
========= =========
77
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
2003 2002 2001
------- -------- --------
(Dollars in thousands)
Operating income:
Dividends from subsidiaries:
Bank $12,000 $ 12,000 $ 28,983
Non-bank 1,500 2,050 3,190
Interest and dividend income 154 141 137
Other income 1,101 928 950
------- -------- --------
TOTAL OPERATING INCOME 14,755 15,119 33,260
------- -------- --------
Expenses:
Salaries and employee benefits 1,633 1,503 1,096
Interest expense 2,303 2,325 2,308
Operating expense 882 1,475 1,340
------- -------- --------
TOTAL EXPENSES 4,818 5,303 4,744
------- -------- --------
INCOME BEFORE INCOME TAX BENEFIT
AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 9,937 9,816 28,516
Income tax benefit 1,723 2,007 1,806
------- -------- --------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARIES 11,660 11,823 30,322
Equity in undistributed income of subsidiaries:
Bank 8,044 6,316 (12,958)
Non-bank 160 (235) (1,711)
------- -------- --------
NET INCOME $19,864 $ 17,904 $ 15,653
======= ======== ========
78
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 19,864 $ 17,904 $ 15,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 63 35 399
Equity in undistributed net income of subsidiaries (8,204) (6,081) 14,669
Non-cash dividends from subsidiaries -- -- (1,130)
Stock-based compensation 55 116 6
Non-cash ESOP adjustment 59 (15) (18)
Security (gains) losses, net (93) (1) 357
Gain on disposal of premises and equipment -- (22) --
Changes in assets and liabilities:
Increase in other assets 46 2,232 (1,511)
Increase in other liabilities (57) (73) 51
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,733 14,095 28,476
-------- -------- --------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale 3,770 67 224
Purchases of securities available for sale (3,718) (532) (364)
Increase in loans (335) (313) (1,825)
Proceeds from sales of premises and equipment -- 32 --
Purchases of premises and equipment (36) (128) (36)
Capital contribution to subsidiary -- -- (18,260)
Non-cash capital contributions to subsidiary -- -- 883
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (319) (874) (19,378)
-------- -------- --------
Cash Flows from Financing Activities
Proceeds from short-term borrowings -- 500 4,500
Principal payments on short-term borrowings -- (2,500) (32,500)
Proceeds from issuance of junior subordinated
debentures due to First Busey Capital Trust I -- -- 25,000
Purchases of treasury stock (4,079) (3,792) (3,237)
Proceeds from sales of treasury stock 5,509 876 5,595
Cash dividends paid (9,215) (8,126) (7,007)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (7,785) (13,042) (7,649)
-------- -------- --------
NET INCREASE IN CASH AND
DUE FROM SUBSIDIARY BANKS 3,629 179 1,449
Cash and due from subsidiary banks, beginning 1,869 1,690 241
-------- -------- --------
Cash and due from subsidiary banks, ending $ 5,498 $ 1,869 $ 1,690
======== ======== ========
79
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. UNAUDITED INTERIM FINANCIAL DATA
The following table reflects summarized quarterly data for the periods described
(unaudited), in thousands, except per share data:
2003
------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Interest income $18,260 $18,417 $18,504 $18,668
Interest expense 6,007 6,118 6,650 6,843
------- ------- ------- -------
Net interest income 12,253 12,299 11,854 11,825
Provision for loan losses 1,680 448 330 600
Noninterest income 5,621 5,718 6,871 6,475
Noninterest expense 9,580 10,023 9,984 10,382
------- ------- ------- -------
Income before income taxes 6,614 7,546 8,411 7,318
Income taxes 2,258 2,236 3,055 2,476
------- ------- ------- -------
Net income $ 4,356 $ 5,310 $ 5,356 $ 4,842
======= ======= ======= =======
Basic earnings per share $ 0.32 $ 0.39 $ 0.39 $ 0.36
Diluted earnings per share $ 0.32 $ 0.38 $ 0.39 $ 0.35
2002
------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Interest income $19,313 $19,352 $18,657 $18,763
Interest expense 7,596 7,737 7,539 7,622
------- ------- ------- -------
Net interest income 11,717 11,615 11,118 11,141
Provision for loan losses 1,070 575 915 565
Noninterest income 6,051 5,436 5,586 5,464
Noninterest expense 10,958 9,573 9,400 8,995
------- ------- ------- -------
Income before income taxes 5,740 6,903 6,389 7,045
Income taxes 1,385 2,331 2,102 2,355
------- ------- ------- -------
Net income $ 4,355 $ 4,572 $ 4,287 $ 4,690
======= ======= ======= =======
Basic earnings per share $ 0.32 $ 0.34 $ 0.32 $ 0.34
Diluted earnings per share $ 0.32 $ 0.33 $ 0.32 $ 0.34
NOTE 23. SUBSEQUENT EVENT
On January 6, 2004, the Board of Directors of First Busey Corporation entered
into an agreement with the Board of Directors of First Capital Bankshares, Inc.
to acquire all of the issued and outstanding stock of First Capital for
approximately $42 million or $5,750 per share. The agreement is subject to
approval by the shareholders of First Capital and the receipt of the required
regulatory approvals. The acquisition is expected to close on or before June 30,
2004.
80
MANAGEMENT REPORT
BUSEY BANK
AS OF DECEMBER 31, 2003
FINANCIAL STATEMENTS
Busey Bank, a wholly owned subsidiary of First Busey Corporation, is responsible
for the preparation, integrity and fair presentation of its published financial
statements as of December 31, 2003, and for the year then ended. The
consolidated financial statements of First Busey Corporation have been prepared
in accordance with accounting principles generally accepted in the United States
of America and, as such, include some amounts that are based on judgments and
estimates of management.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining effective internal
control over financial reporting presented in conformity with accounting
principles generally accepted in the United States of America and the Federal
Financial Institutions Examination Council Instructions for Consolidated Reports
of Condition and Income (call report instructions). The system contains
monitoring mechanisms and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary
over time.
Management assessed Busey Bank's internal control over financial reporting
presented in conformity with accounting principles generally accepted in the
United States of America and call report instructions as of December 31, 2003.
This assessment was based on criteria for effective internal control over
financial reporting described in "Internal Control - Integrated Framework"
published by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that Busey Bank
maintained effective internal control over financial reporting presented in
conformity with accounting principles generally accepted in the United States of
America and call report instructions as of December 31, 2003.
COMPLIANCE WITH LAWS AND REGULATION
Management is responsible for compliance with the federal and state laws and
regulations concerning dividend restrictions and federal laws and regulations
concerning loans to insiders designated by the FDIC as safety and soundness laws
and regulations.
Management assessed compliance by Busey Bank with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes Busey Bank complied, in all significant respects, with the
designated laws and regulations related to safety and soundness for the year
ended December 31, 2003.
/s/ Douglas C. Mills
--------------------
Douglas C. Mills, Chairman of the Board
First Busey Corporation (Holding Company)
/s/ P. David Kuhl
-----------------
P. David Kuhl, Chairman of the Board
Busey Bank
/s/ Barbara J. Harrington
-------------------------
Barbara J. Harrington, Chief Financial Officer
First Busey Corporation (Holding Company)
81
MCGLADREY & PULLEN
Certified Public Accountants
TO THE BOARD OF DIRECTORS
BUSEY BANK
URBANA, ILLINOIS
We have examined management's assertion that BUSEY BANK, a wholly owned
subsidiary of FIRST BUSEY CORPORATION, maintained effective internal control
over financial reporting as of December 31, 2003, included in the accompanying
Management Report insofar as management's assertion relates to internal control
over the annual financial reporting in the 2003 consolidated financial
statements of First Busey Corporation and Busey Bank's December 31, 2003 Call
Report. Busey Bank's management is responsible for maintaining effective
internal control over financial reporting. Our responsibility is to express an
opinion on the effectiveness of internal control based on our examination.
Our examination was made in accordance with attestation standards established by
the American Institute of Certified Public Accountants and, accordingly,
included obtaining an understanding of internal control over financial
reporting, testing and evaluating the design and operating effectiveness of the
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any
evaluation of the internal control over financial reporting to future periods
are subject to the risk that the internal control may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assertions that BUSEY BANK maintained effective
internal control over financial reporting as of December 31, 2003, insofar as
management's assertion relates to internal control over the annual financial
reporting in the 2003 consolidated financial statements of First Busey
Corporation and Busey Bank's December 31, 2003 Call Report, is fairly stated, in
all material respects, based upon the criteria established in "Internal Control
- - Integrated Framework" published by the Committee of Sponsoring Organizations
of the Treadway Commission.
We were not engaged to, and we have not performed any procedures with respect to
management's assertion regarding compliance with laws and regulations included
in the accompanying Report of Management. Accordingly, we do not express any
opinion, or any other form of assurance, on management's assertion regarding
compliance with laws and regulations.
/s/ MCGLADREY & PULLEN, LLP
Champaign, Illinois
February 6, 2004
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
82