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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, 2004
[ ] 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 $238,119,323 based on the closing price for the stock as
reported on The Nasdaq Stock Market as of June 30, 2004, 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 March 1, 2005
----- ----------------------------
Common Stock, without par value 20,577,651
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 16, 2005, for First
Busey Corporation's Annual Meeting of Stockholders to be held April 26, 2005,
(the "2005 Proxy Statement") are incorporated by reference into Part III.
(This page intentionally left blank)
2
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................................................................ 9
Item 4 Submission of Matters to a Vote of Security Holders.............................. 9
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities................................................... 10
Item 6 Selected Financial Data.......................................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk....................... 32
Item 8 Financial Statements and Supplementary Data...................................... 34
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... 34
Item 9A Controls and Procedures.......................................................... 34
Item 9B Other Information................................................................ 34
PART III
Item 10 Directors and Executive Officers of the Registrant............................... 35
Item 11 Executive Compensation........................................................... 35
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.............................................................. 35
Item 13 Certain Relationships and Related Transactions................................... 35
Item 14 Principal Accountant Fees and Services........................................... 35
PART IV
Item 15 Exhibits, Financial Statement Schedules and reports on Form 8-K.................. 36
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
First Busey Corporation ("First Busey" or the "Corporation"), a Nevada
Corporation, is a $1.964 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 26
locations. First Busey is headquartered in Urbana, Illinois and its common stock
is traded on The Nasdaq Stock Market under the symbol "BUSE."
BANKING AND NON-BANKING SUBSIDIARIES
First Busey currently has three wholly owned banking subsidiaries located
in three states, Busey Bank, Busey Bank Florida and First Capital Bank (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.
First Busey acquired First Capital Bankshares, Inc., parent of First
Capital Bank on June 1, 2004. First Capital Bank has three locations in Peoria,
Illinois, and one location in Pekin, Illinois.
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, is
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.
Busey Capital Management is a wholly-owned subsidiary of First Busey Trust &
Investment Co.
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.
First Busey Statutory Trust II, a statutory business trust, was organized
in the state of Connecticut in April, 2004. First Busey owns all of the common
securities of First Busey Statutory Trust II.
4
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 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, 2004, First Busey ranked first in total deposits in Champaign County,
second in Ford County, fourth in McLean County, and seventh in Peoria 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 banks are 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.
5
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
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
6
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 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, 2004, First Busey and its subsidiaries had a total of
548 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 64, 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.
BARBARA J. KUHL. Mrs. Kuhl, age 54, 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.
P. DAVID KUHL. Mr. Kuhl, age 55, has served as Chairman of the Board and
Chief Executive Officer of Busey Bank since January, 2003. Previously, 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.
DAVID D. MILLS. Mr. Mills, age 34, has served as President and Chief
Operating Officer of Busey Bank since January, 2003. Previously, he served as
Vice President of First Busey Corporation from December, 2001 to January, 2003.
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 of
First Busey Corporation.
7
EDWIN A. SCHARLAU II. Mr. Scharlau, age 60, 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. HARRINGTON. Mrs. Harrington, age 45, has served as Chief
Financial Officer of First Busey Corporation since March, 1999. Previously, she
served as Controller and Senior Vice President of Busey Bank from December, 1994
to March, 1999. Mrs. Harrington has served in various financial and accounting
positions since joining the organization in December, 1991.
BUSINESS COMBINATION
On June 1, 2004, First Busey Corporation acquired all the outstanding
common stock of First Capital Bankshares, Inc. and its subsidiary First Capital
Bank, a $239,000,000 bank headquartered in Peoria, Illinois. This acquisition
expanded the Corporation's banking presence in central Illinois into Peoria and
surrounding communities. The transaction has been accounted for as a purchase
and the results of operations of both entities since the acquisition date have
been included in the consolidated financial statements. The purchase price of
$42,072,000 was allocated based upon the fair value of the assets required. The
excess of the total acquisition cost over the fair value of the net assets
acquired has been allocated to core deposit intangible and goodwill. The core
deposit intangibles of $2,383,000 are being amortized over periods ranging from
three to ten years.
Pro forma unaudited operating results for 2004 and 2003, giving effect to
the First Capital Bankshares acquisition as if it had occurred as of January 1,
2003, are included in Note 2 to the Corporation's consolidated financial
statements.
RECENT DEVELOPMENTS
On February 24, 2005, the Corporation entered into an agreement with
Tarpon Coast Bancorp, Inc., of Port Charlotte, Florida, to acquire the
outstanding stock of Tarpon Coast for aggregate consideration of approximately
$35.6 million or $27.00 per share for its outstanding shares, warrants and
120,500 options. Consideration will be in the form of common stock and cash. The
agreement is subject to approval by the shareholders of Tarpon Coast and the
receipt of required regulatory approvals. The transaction is currently expected
to close on or before August 30, 2005.
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 amendments 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.
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 and First Capital Bank, located at
6699 Sheridan Road, Peoria, Illinois, offer similar services as
8
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 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, 2004.
9
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 Stock
Market.
2004 2003
----------------------------
Market Prices of Common Stock High Low High Low
- ----------------------------- ----- ----- ------ ------
First Quarter 18.67 17.83 $16.25 $14.93
Second Quarter 19.60 17.97 $17.68 $15.39
Third Quarter 20.00 18.50 $18.57 $16.31
Fourth Quarter 21.53 18.28 $19.23 $17.33
During 2004 and 2003, First Busey declared cash dividends per share of common
stock as follows:
2004 COMMON STOCK
- ---- ------------
January $ .1267
April $ .1267
July $ .1267
October $ .1300
2003
- ----
January $ .1133
April $ .1133
July $ .1133
October $ .1133
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 4 - 6.
As of March 1, 2005, there were approximately 943 holders of common stock.
10
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, 2004 - $ - - 134,616
February 1 - 28, 2004 - - - 884,616
March 1 - 31, 2004 33,750 18.07 33,750 850,866
April 1 - 30, 2004 9,900 18.47 9,900 840,966
May 1 - 31, 2004 30,000 18.15 30,000 810,966
June 1 - 30, 2004 30,000 18.28 30,000 780,966
July 1 - 31, 2004 15,000 18.73 15,000 765,966
August 1 - 31, 2004 77 19.04 77 765,889
September 1 - 30, 2004 - - - 765,889
October 1 - 31, 2004 - - - 765,889
November 1 - 30, 2004 5,000 19.25 5,000 760,889
December 1 - 31, 2004 - - - 760,889
------- -------------- -------
Total 123,727 $ 18.30 123,727
(1) First Busey Corporation's Board of Directors approved a stock purchase plan
on March 20, 2001, for the repurchase of up to 750,000 shares of common stock.
The Corporation's 2001 repurchase plan has no expiration date. First Busey
Corporation's board of directors approved a stock purchase plan on February 17,
2004, for the repurchase of up to an additional 750,000 shares of common stock.
The Corporation's 2004 repurchase plan has no expiration date.
11
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, 2004, 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, 2004, 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.
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
BALANCE SHEET ITEMS
Securities available for sale $ 352,256 $ 224,733 $ 233,830 $ 210,869 $ 228,597
Loans 1,475,900 1,192,396 1,101,043 978,106 984,369
Allowance for loan losses 19,217 16,228 15,460 13,688 12,268
Total assets 1,964,441 1,522,084 1,435,578 1,300,689 1,355,044
Total deposits 1,558,822 1,256,595 1,213,605 1,105,999 1,148,787
Long-term debt 165,374 92,853 71,759 47,021 55,259
Junior subordinated debt owed to
unconsolidated trusts 40,000 25,000 25,000 25,000 -
Stockholders' equity 138,872 125,177 115,163 105,790 92,325
RESULTS OF OPERATIONS
Interest and dividend income $ 85,919 $ 73,849 $ 76,085 $ 89,985 $ 93,242
Interest expense 30,041 25,618 30,494 46,435 50,476
Net interest income 55,878 48,231 45,591 43,550 42,766
Provision for loan losses 2,905 3,058 3,125 2,020 2,515
Net income(1) 22,454 19,864 17,904 15,653 14,053
PER SHARE DATA(2)
Diluted earnings $ 1.09 $ 0.97 $ 0.87 $ 0.77 $ 0.69
Cash dividends 0.51 0.45 0.40 0.35 0.32
Book value(3) 6.74 6.10 5.66 5.16 4.58
Closing price 20.87 18.00 15.37 14.32 13.29
OTHER INFORMATION
Return on average assets 1.28% 1.35% 1.33% 1.19% 1.12%
Return on average equity 17.23% 16.34% 16.31% 15.80% 16.56%
Net interest margin (4) 3.49% 3.60% 3.74% 3.64% 3.74%
Stockholders' equity to assets 7.07% 8.22% 8.02% 8.13% 6.81%
(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) Per share data have been retroactively adjusted to effect a three-for-two
common stock split effective August 3, 2004, as if it had occurred on
January 1, 2000.
(3) Total capital divided by shares outstanding as of period end.
(4) Calculated as a percent of average earning assets.
12
A reconcilation of First Busey's Consolidated Statements of Income for
each of the five years ending December 31, 2004, from amounts reported to
amounts exclusive of goodwill amortization is shown below:
FINANCIAL ACCOUNTING STANDARDS NO. 142 DISCLOSURE
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(dollars in thousands except per share data)
Net income as reported $ 22,454 $ 19,864 $ 17,904 $ 15,653 $ 14,053
Goodwill amortization, after tax - - - 651 677
---------- ---------- ---------- ---------- ----------
Net income as adjusted $ 22,454 $ 19,864 $ 17,904 $ 16,304 $ 14,730
---------- ---------- ---------- ---------- ----------
Diluted earnings per share of common stock:
As reported $ 1.09 $ 0.97 $ 0.87 $ 0.77 $ 0.69
Goodwill amortization - - - 0.03 0.03
---------- ---------- ---------- ---------- ----------
Earnings per share as adjusted $ 1.09 $ 0.97 $ 0.87 $ 0.80 $ 0.72
---------- ---------- ---------- ---------- ----------
13
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, 2004, 2003, and 2002. 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 variability 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 (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.
14
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 twelve 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 direct subsidiary since January 1, 2002.
Subsidiary Acquired 2004 2003 2002
- ----------------------------- -------- -------------------- ------------------- -------------------
(dollars in thousands)
Busey Bank(1) 3/20/80 $ 20,683 83.3% $ 19,758 90.9% $ 18,292 90.7%
Busey Bank Florida(2) 10/29/99 1,573 6.3% 287 1.3% 24 0.1%
First Capital Bank(3) 6/1/2004 1,170 4.7% - - - -
Busey Investment Group, Inc.(4) - 1,989 8.0% 1,620 7.5% 1,705 8.5%
First Busey Resources, Inc.(5) - (565) -2.3% 72 0.3% 149 0.7%
-------- ----------- ----- ----------- ----- ----------- -----
Total $ 24,850 100.0% $ 21,737 100.0% $ 20,170 100.0%
======== =========== ===== =========== ===== =========== =====
(1) City Bank of Champaign and Champaign County Bank & Trust w ere 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) Acquired as a subsidiary of First Capital Bankshares Inc., as of June 1,
2004.
(4) Formed as a subsidiary of First Busey Corporation on March 18, 1999.
(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.
Busey Bank is the only subsidiary that has contributed at least 10% of the
Corporation's consolidated net income in at least one of the last three years.
15
EXECUTIVE SUMMARY
First Busey Corporation posted record earnings during 2004 due primarily
to strong growth in net interest income combined with moderate growth in fee
income and operating expenses.
The increase in net interest income is due generally to balance sheet
growth, and specifically to growth in the average balance of outstanding loans.
Most of the loan growth occurred in the southwest Florida markets served by
Busey Bank Florida's banking operations and Busey Bank's loan production
offices. The Corporation also experienced strong loan growth in Illinois,
primarily in Champaign County. The acquisition of First Capital Bank in Peoria,
Illinois also contributed to the strong loan growth during 2004.
First Busey experienced a large decline in the production of single-family
loan production as well as in gains on the sale of these loans during 2004
compared to 2003. Refinance activity began declining during the second half of
2003 as interest rates increased. The Corporation's mortgage operation has
shifted its focus to financing new home purchases as well as developing other
products, such as new home construction financing, to replace some of this
income source.
Growth in fee income from trust and brokerage services helped to offset
the reduced gains on the sale of mortgage loans. Trust and asset management fees
are based primarily on the market value of assets under care. Assets under care
grew 19.5% to $1.446 billion as of December 31, 2004, compared to $1.210 billion
as of December 31, 2003. Improved equity market conditions should lead to growth
in trust revenue during 2005.
The Corporation's net chargeoffs decreased to $1,985,000 in 2004 from
$2,290,000 in 2003, yet net chargeoffs continued to be slightly higher than in
prior years. In 2003, net chargeoffs included $2,000,000 related to one large
credit in the commercial construction industry. The Corporation charged off the
remaining loan balance of $1,400,000 to this same customer during 2004. Expenses
related to other real estate owned have remained higher than historical levels.
The relatively high ORE expense during these three 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 contracted with an independent
hotel management firm to operate the hotel beginning January, 2004. The
Corporation continues to market this property for sale.
Operating expenses increased moderately during 2004 compared to 2003 and
2002. Most of the growth in operating expenses in 2004 was due to the addition
of First Capital Bank. As a percentage of net interest income plus other income,
however, other expenses were 54.1%, 54.8%, and 57.1% in 2004, 2003, and 2002
respectively, indicating that revenues have grown more rapidly than expenses
over this three-year time period.
On July 23, 2004, First Busey Corporation's Board of Directors approved a
three-for-two stock split. The stock split was effected in the form of a 50%
dividend issued on August 3, 2004, to shareholders of record at the close of
business on August 2, 2004. Fractional share amount resulting from the split
were paid to shareholders in cash. Share and per share data have been
retroactively adjusted as if the stock split had occurred on January 1, 2000.
On February 24, 2005 the Corporation entered into an agreement with Tarpon
Coast Bankshares, Inc. of Port Charlotte, Florida, to acquire the outstanding
stock of Tarpon Coast for aggregate consideration of approximately $35.6
million, or $27.00 per share for its outstanding shares, warrants, and options.
Consideration will be in the form of common stock and cash. The agreement is
subject to approval by the shareholders of Tarpon Coast and the receipt of the
required regulatory approvals. This acquisition is currently expected to close
on or before August 30, 2005.
16
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 2004
SUMMARY
First Busey Corporation reported net income of $22,454,000 in 2004, up
13.0% from $19,864,000 in 2003, which itself represented an increase of 10.9%
from $17,904,000 in 2002. Diluted earnings per share in 2004 increased 12.4% to
$1.09 from $0.97 in 2003, which was a 11.5% increase from $0.87 in 2002. The
main factors contributing to the increase in net income during 2004 were
increases in net interest income as well as fee income, which were only
partially offset by lower gains on the sale of mortgage loans and higher
operating expenses.
Security gains after the related tax expense were $827,000 or 3.7% of net
income in 2004, $588,000 or 3.0% of net income in 2003, and $459,000 or 2.6% of
net income in 2002. Busey Bank owns a position in a bank-qualified equity
security with substantial appreciated value. The Bank's Board has authorized the
orderly liquidation of this security over an extended time period.
The Corporation's return on average assets was 1.28%, 1.35% and 1.33% for
2004, 2003, and 2002, respectively, and return on average equity was 17.23%,
16.34%, and 16.31% for 2004, 2003, and 2002, respectively.
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $264,009,000 or 19.2% to $1,640,204,000
in 2004 as compared to $1,376,195,000 in 2003. This growth is due primarily to
growth in the average balance of loans, U.S. Treasury and agency securities, and
other securities. Interest-bearing liabilities averaged $1,441,450,000 for the
year ended December 31, 2004, an increase of $253,287,000 or 21.3% from the
average balance of $1,188,163,000 for 2003. The Corporation experienced growth
in all categories of interest-bearing liabilities. While the addition of First
Capital Bank was a significant factor in First Busey's consolidated balance
sheet growth, the Corporation also experienced growth from its other two bank
subsidiaries, Busey Bank and Busey Bank Florida.
Interest income, on a fully taxable equivalent basis increased $12,117,000
or 16.1% to $87,226,000 in 2004 from $75,109,000, which was a decrease of
$2,284,000 or 3.0% from the $77,393,000 in interest income earned in 2002.
Interest income grew in 2004 primarily due to growth in the average balance of
outstanding loans, other securities and U.S. Treasuries and agencies. Growth in
the average balances of these assets was partially offset by the lower average
yield on outstanding loans and U.S. Treasuries and agencies. The Corporation's
yield on average earning assets was 5.32% in 2004 compared to 5.46% in 2003 and
6.18% in 2002.
Interest expense increased during 2004 by $4,423,000 or 17.3% to
$30,041,000 from $25,618,000 in 2003. The increase in interest expense was due
primarily to growth in the average balance of all categories of interest-bearing
liabilities, which was only partially offset by the lower average rates paid on
money market deposits and long-term debt. The average rate paid on
interest-bearing liabilities was 2.08% in 2004 compared to 2.16% in 2003 and
2.79% in 2002.
Net interest income, on a fully taxable equivalent basis, increased 15.5%
in 2004 to $57,185,000 from $49,491,000, which reflected a 5.5% increase from
$46,899,000 in 2002. Net interest margin, the Corporation's net interest income
expressed as a percentage of average earning assets stated on a fully taxable
equivalent basis, was 3.49% during 2004, which was a decline from 3.60% in 2003
and 3.74% in 2002. The net interest margin expressed as a percentage of average
total assets, also on a fully taxable equivalent basis, was 3.25% in 2004,
compared to 3.37% in 2003, and 3.50% in 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses is a current charge against income and
represents an amount which management believes is sufficient to maintain an
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
17
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 Corporation's provision for loan losses was $2,905,000 during 2004.
The provision and net charge-offs of $1,985,000 resulted in the allowance for
loan losses representing 1.30% of total outstanding loans and 524% of
non-performing loans as of December 31, 2004, as compared to the allowance
representing 1.36% of outstanding loans and 504% of non-performing loans as of
December 31, 2003.
Sensitive assets include nonaccrual loans, loans on First Busey
Corporation's watch loan reports 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 decreased $895,000 or 3.6% to $23,790,000 from $24,685,000 in
2003, which reflected an increase of 9.5% or $2,148,000 from $22,537,000 in
2002. The variability in other income is due primarily to changes in the level
of gains on the sale of mortgage loans. In 2004 the Corporation recognized gains
of $2,689,000 on the sale of $182,368,000 in mortgage loans compared to
$6,183,000 on the sale of $431,199,000 in loans in 2003 and $3,995,000 on the
sale of $253,225,000 in loans in 2002. The interest-rate environment and debt
markets have strong influence on the level of mortgage loan origination and
sales volumes. As interest rates have risen since mid-2003, origination and
sales activity related to home purchases has remained strong while refinancing
activity has slowed considerably.
Gains on the sale of securities, as a component of other income totaled
$1,373,000 (5.8%) in 2004, $975,000 (4.0%) in 2003, and $762,000 (3.4%) in 2002.
Additional components of other income were service charge and other fee income,
trust fees, and brokerage commissions. Service charges and other fees totaled
$9,876,000 (41.5%), $9,155,000 (37.1%), and $8,870,000 (39.4%) in 2004, 2003,
and 2002, respectively. Trust revenues were $5,339,000, $4,615,000 and
$4,781,000 in 2004, 2003, and 2002 respectively. Trust revenues in each year
were directly related to the total value of trust assets under care and thus
were influenced by changes in the equity and bond markets. Remaining other
income increased $31.7% or $524,000 to $2,178,000 in 2004 from $1,654,000 in
2003, which had decreased from $2,023,000 in 2002. Other income includes
$798,000 on the increase in the cash surrender value of bank owned life
insurance during 2004, compared to $727,000 in 2003 and $655,000 in 2002.
During 2003 the Corporation recorded a valuation allowance of $215,000 to
the carrying amount of its mortgage servicing assets as loans in the
Corporation's sold loan portfolio were prepaying more rapidly than anticipated
when the loans were sold. Mortgage servicing asset amortization of $1,659,000
and the valuation allowance of $215,000 were recorded as charges against the
servicing income on sold mortgage loans and were included in other operating
income. The balance in the valuation allowance remained at $215,000 on December
31, 2004.
OTHER EXPENSES
Operating expenses increased $3,116,000 or 7.8% to $43,085,000 from
$39,969,000 which had increased by 2.7% from $38,926,000 in 2002. As a
percentage of total income, other expenses were 39.3%, 40.6%, and 39.5% in 2004,
2003, and 2002, respectively.
Employee-related expenses, including salaries and wages and employee
benefits, increased by 6.8% or $1,512,000 to $23,826,000 in 2004 from
$22,314,000 in 2003, which had increased by $1,311,000 from $21,003,000 in 2002.
As a percentage of average assets, employee-related expenses were 1.36%, 1.52%,
and 1.57% in 2004, 2003, and 2002, respectively. The Corporation had 548, 503,
and 491 full-time equivalent employees at December 31, 2004, 2003, and 2002,
respectively. The increase in employee-related expenses in 2004 compared to 2003
was due to the addition of associates of
18
First Capital Bank which was partially offset by reduced commissions and
incentive payments to associates involved in the origination, processing, and
sale of mortgage loans held for sale. The increase in employee-related expenses
in 2003 compared to 2002 was due primarily to increases in commission and
incentive payments to associates involved in mortgage production.
Occupancy expense increased 24.2% or $763,000 to $3,921,000 in 2004 from
$3,158,000 in 2003 due to the addition of First Capital Bank, higher real estate
taxes, and increased maintenance costs. Another factor contributing to this
increase is due to the August, 2003, sale of a real estate property that had
been leased out to other tenants. Occupancy expenses were reported net of rental
income on this property.
Other expenses increased 6.4% or $567,000 to $9,388,000 in 2004 from
$8,821,000 in 2003, which had increased from $8,249,000 in 2002. In June, 2002,
Busey Bank became mortgagee in possession of a hotel property located in
Bloomington, Illinois 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 ORE and
is included in the repossessed assets total on the nonperforming loan table of
this report. First Busey Resources entered into a contract with an independent
hotel management firm to manage the day-to-day operations of the property in
January, 2004.
Other expenses for the year ending December 31, 2004, include valuation
adjustments of $700,000 and net ORE expenses of $139,000 associated with
operating this repossessed asset. For the year ending December 31, 2003, other
expenses included valuations adjustments of $931,000 and net ORE expenses of
$269,000 associated with this asset. Valuation adjustments of $700,000 and net
ORE expense of $282,00 were included in other expense in 2002.
INCOME TAXES
Income tax expense in 2004 was $11,224,000 as compared to $10,025,000 in
2003 and $8,173,000 in 2002. The provision for income taxes as a percent of
income before income taxes was 33.3%, 33.5% and 31.3% for 2004, 2003, and 2002,
respectively.
BALANCE SHEET - DECEMBER 31, 2004 AND DECEMBER 31, 2003
Total assets on December 31, 2004, were $1,964,441,000, an increase of
29.1% from $1,522,084,000 on December 31, 2003. Of the increase in total assets,
$241,234,000 is attributable to the acquisition of First Capital Bank.
Securities available for sale increased $127,523,000 or 56.7% to $352,256,000 at
December 31, 2004 from $224,733,000 at December 31, 2003. The First Capital Bank
acquisition contributed $49,285,000 of the increase in securities available for
sale. Total loans, net of unearned interest, increased 23.8% or $283,504,000 to
$1,475,900,000 on December 31, 2004, as compared to $1,192,396,000 on December
31, 2003. First Capital Bank contributed $151,680,000 toward this loan growth.
Total deposits increased 24.1% or $302,227,000 to $1,558,822,000 on
December 31, 2004, as compared to $1,256,595,000 on December 31, 2003.
Non-interest bearing deposits increased $53,343,000 or 33.2% during 2004.
Interest-bearing deposits increased $248,884,000 or 22.7% during 2004. First
Capital Bank added a total of $147,084,000 in total deposits. First Capital had
$12,876,000 in non-interest bearing deposits and $134,208,000 in
interest-bearing deposits
Total stockholders' equity increased 10.9% or $13,695,000 to $138,872,000
on December 31, 2004, as compared to $125,177,000 on December 31, 2003. The
growth in total equity was due primarily to $12,071,000 in earnings retained in
the Corporation combined with an increase of $494,000 due to the reissuance of
treasury stock. Treasury shares will be used in future years as participants
exercise outstanding options under the Corporation's stock option plan which is
discussed in Note 16 of the Corporation's consolidated financial statements.
19
A. EARNING ASSETS
The average interest-earning assets of the Corporation were 93.4%, 93.7%,
and 93.4% of average total assets for the years ended December 31, 2004, 2003,
and 2002 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, 2004, the fair value of these securities was $352,256,000 and the amortized
cost was $337,037,000. There were $16,326,000 of gross unrealized gains and
$1,107,000 of gross unrealized losses for a net unrealized gain of $15,219,000.
The after-tax effect ($9,170,000) 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,
------------------------------------------------------
2004 2003 2002 2001 2000
---------- -------- -------- -------- --------
(dollars in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies $ 249,150 $150,898 $158,324 $143,490 $162,886
Obligations of states and political
subdivisions 51,768 48,235 51,434 43,767 43,197
Mortgage-backed securities 23,170 - - - -
Corporate debt securities 2,220 4,265 3,746 5,554 7,035
Mutual funds and other equity securities 25,948 21,335 20,326 18,058 15,479
---------- -------- -------- -------- --------
Fair value of securities available for sale $ 352,256 $224,733 $233,830 $210,869 $228,597
========== ======== ======== ======== ========
Amortized cost $ 337,037 $209,482 $216,801 $197,398 $218,790
========== ======== ======== ======== ========
Fair value as a percentage of amortized cost 104.52% 107.28% 107.85% 106.82% 104.48%
========== ======== ======== ======== ========
20
The maturities, fair values and weighted average yields of debt securities
available for sale as of December 31, 2004, are:
Due in 1 year or Due after 1 year Due after 5 years
less through 5 years through 10 years Due after 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. Treasury securities and
obligations of U.S. government
corporations and agencies $ 94,111 2.28% $ 154,633 3.02% $ 406 2.41% $ - 0.00%
Obligations of states and political
subdivisions(2) 9,064 4.87% 23,544 6.21% 17,221 6.65% 1,939 6.37%
Mortgage-backed securities - 0.00% - 0.00% 1,882 4.05% 21,288 3.62%
Corporate debt securities 432 6.16% 1,412 5.59% 252 4.82% 124 10.50%
--------- ---- --------- ---- -------- ---- -------- ----
Total $ 103,607 2.52% $ 179,589 3.46% $ 19,761 6.30% $ 23,351 3.88%
========= ==== ========= ==== ======== ==== ======== ====
(1) Excludes mutual funds and other equity 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, 2004)
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 increased to 70.7% at December
31, 2004, from 67.1% at December 31, 2003, while obligations of state and
political subdivisions (tax-exempt obligations) as a percentage of total
securities decreased to 14.7% at December 31, 2004, from 21.5% at December 31,
2003.
LOAN PORTFOLIO
Loans, including loans held for sale, before allowance for loan losses,
increased 23.8% to $1,475,900,000 as of December 31, 2004 from $1,192,396,000 at
December 31, 2003. Non-farm non-residential real estate mortgage loans increased
$71,824,000, or 24.6%, to $363,993,000 in 2004 from $292,169,000 at December 31,
2003. The addition of First Capital is responsible for $40,980,000 of this
increase. 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 $67,747,000, or 18.0%, to $443,320,000 as of
December 31, 2004, from $375,573,000 at December 31, 2003. 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 $413,679,000 as of December 31, 2004.
The loan portfolio includes a concentration of loans for commercial real
estate amounting to approximately $470,156,000 and $383,494,000 as of December
31, 2004 and 2003, 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.
21
The composition of loans is as follows:
As of December 31,
------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- -------- --------
(dollars in thousands)
Commercial and financial $ 216,290 $ 138,272 $ 118,004 $121,694 $124,052
Agricultural 25,224 22,300 22,034 21,022 20,844
Real estate-farmland 11,750 11,890 13,421 14,414 15,411
Real estate-construction 235,547 168,141 129,872 83,701 75,672
Real estate-mortgage 923,291 790,089 761,901 679,351 697,410
Installment loans to individuals 63,798 61,704 55,811 57,924 50,980
---------- ---------- ---------- -------- --------
Loans $1,475,900 $1,192,396 $1,101,043 $978,106 $984,369
========== ========== ========== ======== ========
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, 2004:
1 Year or
Less 1 to 5 Years Over 5 Years Total
--------- ------------ ------------ --------
(dollars in thousands)
Commercial, financial and agricultural $ 129,948 $ 60,445 $ 51,121 $241,514
Real estate-construction 144,134 81,915 9,498 235,547
--------- ------------ ------------ --------
Total $ 274,082 $ 142,360 $ 60,619 $477,061
========= ============ ============ ========
Interest rate sensitivity of selected loans
Fixed rate $ 105,242 $ 38,254 $ 23,235 $166,731
Adjustable rate 168,840 104,106 37,384 310,330
--------- ------------ ------------ --------
Total $ 274,082 $ 142,360 $ 60,619 $477,061
========= ============ ============ ========
22
ALLOWANCE FOR LOAN LOSSES
The following table shows activity affecting the allowance for loan losses:
Years ended December 31
----------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- -------- --------
(dollars in thousands)
Average loans outstanding during
period $1,355,487 $1,118,667 $1,015,073 $961,779 $937,239
========== ========== ========== ======== ========
Allowance for loan losses:
Balance at beginning of period $ 16,228 $ 15,460 $ 13,688 $ 12,268 $ 10,403
---------- ---------- ---------- -------- --------
Loans charged-off:
Commercial, financial and agricultural $ 1,782 $ 2,123 $ 775 $ 103 $ 70
Real estate-construction 48 - 76 - -
Real estate-mortgage 141 172 659 408 290
Installment loans to individuals 216 220 319 265 414
---------- ---------- ---------- -------- --------
Total charge-offs $ 2,187 $ 2,515 $ 1,829 $ 776 $ 774
---------- ---------- ---------- -------- --------
Recoveries:
Commercial, financial and agricultural $ 57 $ 69 $ 349 $ 15 $ 22
Real estate-construction - - - - -
Real estate-mortgage 28 6 26 42 4
Installment loans to individuals 117 150 101 119 98
---------- ---------- ---------- -------- --------
Total recoveries $ 202 $ 225 $ 476 $ 176 $ 124
---------- ---------- ---------- -------- --------
Net loans charged-off $ 1,985 $ 2,290 $ 1,353 $ 600 $ 650
---------- ---------- ---------- -------- --------
Provision for loan losses $ 2,905 $ 3,058 $ 3,125 $ 2,020 $ 2,515
---------- ---------- ---------- -------- --------
Net additions due to acquisition $ 2,069 $ - $ - $ - $ -
---------- ---------- ---------- -------- --------
Balance at end of period $ 19,217 $ 16,228 $ 15,460 $ 13,688 $ 12,268
========== ========== ========== ======== ========
Ratios:
Net charge-offs to average loans 0.15% 0.20% 0.13% 0.06% 0.07%
========== ========== ========== ======== ========
Allowance for loan losses to total
loans at period end 1.30% 1.36% 1.40% 1.40% 1.25%
========== ========== ========== ======== ========
The following table sets forth the allowance for loan losses by loan
categories as of December 31 for each of the years indicated:
2004 2003 2002 2001 2000
--------------- --------------- -------------- --------------- ---------------
% 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, agricultural
and real estate-farmland $ 4,337 17.2% $ 2,295 14.5% $ 2,143 13.9% $ 1,880 16.1% $ 1,854 16.3%
Real estate-construction 27 16.0% - 14.1% - 11.8% - 8.6% - 7.7%
Real estate-mortgage 13,053 62.5% 12,752 66.2% 12,451 69.2% 10,880 69.4% 9,051 70.8%
Installment loans to individuals 481 4.3% 821 5.2% 779 5.1% 811 5.9% 708 5.2%
Unallocated 1,319 N/A 360 N/A 87 N/A 117 N/A 655 N/A
-------- ----- -------- ----- ------- ----- -------- ----- -------- -----
Total $ 19,217 100.0% $ 16,228 100.0% $15,460 100.0% $ 13,688 100.0% $ 12,268 100.0%
======== ===== ======== ===== ======= ===== ======== ===== ======== =====
This table indicates growth in the allowance for loan losses for real
estate mortgages as of December 31, 2004 as compared to December 31, 2003. The
increase in the amounts allocated to commercial, financial, agricultural and
real estate-farmland and real estate mortgages is due primarily to growth in the
outstanding balances of these loan categories.
23
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,
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(dollars in thousands)
Non-accrual loans $1,523 $2,638 $1,265 $1,265 $ 767
Loans 90 days past due and still accruing 2,141 581 963 959 4,667
Restructured loans - - - - -
------ ------ ------ ------ ------
Total non-performing loans $3,664 $3,219 $2,228 $2,224 $5,434
------ ------ ------ ------ ------
Repossessed assets $4,212 $4,781 $5,724 $ 30 $ 230
Other assets acquired in satisfaction of debts
previously contracted 23 10 1 1 11
------ ------ ------ ------ ------
Total non-performing other assets $4,235 $4,791 $5,725 $ 31 $ 241
------ ------ ------ ------ ------
Total non-performing loans and non-
performing other assets $7,899 $8,010 $7,953 $2,255 $5,675
====== ====== ====== ====== ======
Non-performing loans to loans, before
allowance for loan losses 0.25% 0.27% 0.20% 0.23% 0.55%
====== ====== ====== ====== ======
Non-performing loans and non-performing
other assets to loans, before allowance for
loan losses 0.54% 0.67% 0.72% 0.23% 0.58%
====== ====== ====== ====== ======
The ratio of non-performing loans and non-performing other assets to
loans, before allowance for loan losses, decreased from 0.67% as of December 31,
2003, to 0.54% as of December 31, 2004, due primarily to reduced balances in
non-accrual loans combined with the reduction in repossessed assets which were
the result of valuation adjustments on the hotel property held in repossessed
assets. An increase in loans 90 days past due and still accruing partially
offset these reductions in non-performing loans and other assets. Busey Bank
became mortgagee in possession of the ORE hotel property in June, 2002, and
remained so until September, 2003, when it took title to the property upon
completion of foreclosure proceedings.
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. During 2004, the Corporation recognized $28,000 in interest income
on these loans. No interest income was recognized on these loans during 2003 and
2002.
The gross interest income that would have been recorded in the years ended
December 31, 2004, 2003 and 2002 if the non-accrual and restructured loans had
been current in accordance with their original terms was $307,000, $268,000, and
$211,000, respectively. The amount of interest collected on those loans that was
included in interest income was $28,000 for the year ended December 31, 2004, $0
for the year ended December 31, 2003, and $0 for the year ended December 31,
2002.
24
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 probable loan losses. Potential problem
loans totaled $3,245,000 at December 31, 2004. Management has identified no
other loans that represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity or capital resources. Management is not aware of any information about
any other credits which cause management to have serious doubts as to the
ability of such borrower(s) to comply with the loan repayment terms.
OTHER INTEREST-BEARING ASSETS
No other interest-bearing assets are categorized as impaired.
DEPOSITS
As indicated in the following table, average non-interest-bearing deposits
as a percentage of average total deposits increased to 12.5% for the year ended
December 31, 2004, from 12.2% for the year ended December 31, 2003, which was an
increase from 11.6% for the year ended December 31, 2002.
December 31,
-------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
(dollars in thousands)
Average Average Average Average Average Average
Balance % Total Rate Balance % Total Rate Balance % Total Rate
----------- ------- ------- ----------- ------- ------- ----------- ------- -------
Non-interest bearing
demand deposits $ 175,463 12.5% 0.00% $ 149,030 12.2% 0.00% $ 129,766 11.6% 0.00%
Interest bearing demand
deposits 26,917 1.9% 0.70% 18,194 1.5% 0.48% 11,477 1.0% 1.15%
Savings/Money Market 622,660 44.4% 0.78% 555,193 45.5% 0.74% 507,931 45.3% 1.19%
Time deposits 578,808 41.2% 2.83% 497,875 40.8% 3.10% 472,000 42.1% 3.90%
----------- ----- ---- ----------- ----- ---- ----------- ----- ----
Total $ 1,403,848 100.0% 1.53% $ 1,220,292 100.0% 1.61% $ 1,121,174 100.0% 2.19%
=========== ===== ==== =========== ===== ==== =========== ===== ====
Certificates of deposit of $100,000 and over and other time deposits of
$100,000 and over at December 31, 2004, had the following maturities (dollars in
thousands):
Under 3 months $ 64,536
3 to 6 months 36,073
6 to 12 months 31,296
Over 12 months 64,355
-------------
Total $ 196,260
=============
25
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.
Securities sold
Federal funds under agreements Other short-term
purchased to repurchase borrowings
------------- ---------------------- ----------------
(dollars in thousands)
2004
Balance, December 31, 2004 $ - $ 41,558 $ 11,250
Weighted average interest rate at end of period 0.00% 1.31% %
Maximum outstanding at any month end $ 29,400 $ 51,469 $ 17,250
Average daily balance $ 5,010 $ 26,864 $ 9,293
Weighted average interest rate during period(1) 1.28% 1.25% 1.70%
2003
Balance, December 31, 2003 $ 8,500 $ 7,500 $ -
Weighted average interest rate at end of period 1.19% 0.75% 0.00%
Maximum outstanding at any month end $ 27,000 $ 9,341 $ -
Average daily balance $ 2,999 $ 7,497 $ -
Weighted average interest rate during period(1) 1.40% 1.39% 0.00%
2002
Balance, December 31, 2002 $ - $ 2,467 $ -
Weighted average interest rate at end of period 0.00% 5.68% 0.00%
Maximum outstanding at any month end $ 19,300 $ 7,439 $ 2,000
Average daily balance $ 2,089 $ 5,866 $ 462
Weighted average interest rate during period(1) 1.91% 5.68% 4.55%
(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,
2004 2003 2002
------- ------- -------
(dollars in thousands)
Cash and due from banks $45,905 $38,247 $33,633
Interest-bearing bank deposits 3,359 928 1,039
Federal funds sold 15,844 14,362 16,633
------- ------- -------
Total $65,108 $53,537 $51,305
======= ======= =======
Percent of average total assets 3.7% 3.6% 3.8%
======= ======= =======
26
The Corporation's primary sources of funds consist of deposits, investment
maturities and sales, loan principal repayments, deposits, and capital funds.
Additional liquidity is provided by brokered deposits, bank lines of credit,
repurchase agreements and the ability to borrow from the Federal Reserve Bank
and the Federal Home Loan Bank. The Corporation has an operating line in the
amount of $10,000,000, all of which was available as of December 31, 2004.
Long-term liquidity needs will be satisfied primarily through the retention of
capital funds.
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 2004 the Corporation originated
$159,560,000 and sold $182,368,000 in mortgage loans held for sale compared to
originations of $400,967,000 and sales of $431,199,000 in 2003, and originations
of $292,102,000 and sales of $253,225,000 in 2002. As of December 31, 2004, the
Corporation held $9,574,000 in loans held for sale.
On June 1, 2004, First Busey Corporation completed the acquisition of
First Capital Bankshares, Inc. of Peoria, Illinois, the holding company of First
Capital Bank. In order to partially fund this transaction First Busey issued
$15,000,000 in trust preferred securities through First Busey Statutory Trust
II. These securities were issued in April, 2004. The balance is financed through
a commercial loan agreement with JPMorgan Chase N.A., formerly Bank One. The
arrangement is a note, in the amount of $42,000,000, which matures in June,
2011, and carries interest at LIBOR plus 1.25%.
On February 24, 2005 the Corporation entered into an agreement with Tarpon
Coast Bankshares, Inc. of Port Charlotte, Florida, to acquire the outstanding
stock of Tarpon Coast for aggregate consideration of approximately $35.6
million, or $27.00 per share for its outstanding shares, warrants, and options.
Consideration will be in the form of common stock and cash. First Busey will
finance the cash portion of this transaction under the note it has with JPMorgan
Chase N.A., which is described above.
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. 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, 2004
and 2003, the Corporation had outstanding loan commitments including lines of
credit of $413,679,000 and $286,037,000, respectively. The balance of
commitments to extend credit represents future cash requirements 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.
The Corporation has entered into certain contractual obligations and other
commitments. Such obligations generally relate to funding of operations through
deposits, debt issuance, and property and equipment leases. The following table
summarizes significant contractual obligations and other commitments as of
December 31, 2004.
27
The following table summarizes significant contractual obligations and
other commitments as of December 31, 2004:
Junior
Subordinated
Short- and Debt Owed to
Certificates of Long-term Unconsolidated
Deposit Borrowing Leases Trusts Total
--------------- ---------- ------ -------------- --------
(dollars in thousands)
2005 $ 387,476 $ 46,240 $ 947 $ - $434,663
2006 124,153 28,898 935 - 153,986
2007 95,373 22,198 869 - 118,440
2008 22,542 44,373 655 - 67,570
2009 31,583 14,373 191 - 46,147
Thereafter 263 20,542 266 40,000 61,071
--------------- ---------- ------ -------------- --------
Total $ 661,390 $ 176,624 $3,863 $ 40,000 $881,877
=============== ========== ====== ============== ========
Commitments to extend credit $413,679
========
Net cash flows provided by operating activities totaled $49,467,000 and
$54,569,000 in 2004 and 2003, respectively, and cash used in operating
activities totaled $14,122,000 in 2002. Significant items affecting the cash
flows provided by or used in operating activities include net income,
depreciation and amortization expense, the provision for loan losses, and
activities related to the origination and sale of mortgage loans held for sale.
Operating cash flows decreased during 2004 relative to 2003 due primarily to
lower mortgage loan sale activity. Net cash provided by mortgage loans
originated totaled $25,497,000 in 2004 compared to $36,415,000 in 2003. Mortgage
loan origination and sales activities resulted in a net cash use of $34,882,000
during 2002.
Net cash used by investing activities totaled $274,450,000, $118,555,000,
and 92,077,000 in 2004, 2003, and 2002, respectively. Significant activities
affecting cash flows from investing activities are those activities associated
with managing the Corporation's investment portfolio, loans held in the
Corporation's portfolio, and subsidiary or business unit acquisition activities.
In 2004, First Busey's proceeds from the sales and maturities of securities
classified as available-for-sale totaled $195,885,000, and the Corporation
purchased $271,763,000 in securities resulting in net cash used by securities
activity of $75,878,000. In 2003, sales and maturities totaled and purchases
totaled $221,526,000 and purchases totaled $212,444,000, resulting in net cash
generated of $9,082,000. In 2002 sales and maturities totaled $99,906,000 and
purchases totaled $118,028,000, resulting in net cash used of $18,122,000. Net
loan portfolio growth totaled $156,755,000, $124,402,000, and $91,148,000 in
2004, 2003, and 2002, respectively. During June, 2004, the Corporation purchased
the outstanding shares of First Capital Bankshares resulting in the net use of
$35,990,000.
Net cash provided by financing activities was $220,577,000, $68,738,000
and $112,264,000 in 2004, 2003, 2002, respectively. Significant items affecting
cash flows from financing activities are deposits, short-term borrowings, and
long-term debt. Deposits, which are the Corporation's primary funding source,
grew $155,143,000 in 2004, $42,990,000 in 2003, and $107,606,000 in 2002. The
Corporation has increased its use of short-term and long-term advances from the
Federal Home Loan Banks of Chicago and Atlanta to fund growth in loan and
investment balances. The Corporation issued junior subordinated debt and
increased long-term debt to fund the June, 2004, acquisition of First Capital
Bankshares, Inc.
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, 2004, the Corporation earned $22,454,000 and paid dividends
of $10,383,000 to stockholders, resulting in a retention of current earnings of
$12,071,000.
28
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 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, 2004, the Corporation had a
total capital to total risk-weighted asset ratio of 10.92%, a Tier 1 capital to
risk-weighted asset ratio of 9.24% and a Tier 1 leverage ratio of 6.88%; Busey
Bank had ratios of 11.24%, 9.52%, and 7.15%, respectively; First Capital Bank
had ratios of 11.96%, 10.71%, and 6.91%, respectively. The Corporation's thrift
subsidiary, Busey Bank Florida, had ratios of 11.56%, 10.31%, and 8.06%,
respectively. As these ratios indicate, the Corporation and its bank
subsidiaries exceed the regulatory capital guidelines.
REGULATORY CONSIDERATIONS
In accordance with Federal Reserve Board regulations in effect on December
31, 2004, First Busey is allowed, for regulatory purposes, to include all
$40,000,000 of the outstanding cumulative trust preferred securities in Tier 1
capital (as defined by regulation). On March 1, 2005, the Federal Reserve Board
issued final regulations allowing for the continued limited inclusion of trust
preferred securities in the Tier 1 capital of bank holding companies, but with
further restrictions on the amount of trust preferred securities and other
restricted core capital elements that may be included in Tier 1 capital. The
final rule allows for a five-year transition period to March 31, 2009, for
application of the new limits. If those limitations had been in effect at
December 31, 2004, First Busey would have been allowed to include approximately
$31,555,000 of the cumulative trust preferred securities in Tier 1 capital; the
remainder would be included in Tier 2 capital. The Corporation would have
exceeded all regulatory minimum capital ratios if the newly adopted regulations
had been in effect on December 31, 2004.
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.
29
A.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,
--------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- --------------------------- ----------------------------
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 $ 3,359 46 1.37% $ 928 $ 8 0.86% $ 1,039 $ 12 1.15%
Federal funds sold 15,844 272 1.72% 14,362 149 1.04% 16,633 260 1.56%
Investment securities:
U.S. Treasuries and Agencies 172,812 4,533 2.62% 164,633 5,098 3.10% 149,670 6,387 4.27%
Obligations of states and
political subdivisions(1) 49,863 2,985 5.99% 51,452 3,125 6.07% 46,577 3,140 6.74%
Other securities 42,839 1,631 3.81% 26,153 960 3.67% 24,201 800 3.31%
Loans (net of unearned
discount)(1, 2) 1,355,487 77,759 5.74% 1,118,667 65,769 5.88% 1,015,073 66,794 6.58%
----------- ------ ---- ----------- ------- ---- ---------- ------- ----
Total interest-earning assets(1) $ 1,640,204 87,226 5.32% $ 1,376,195 $75,109 5.46% $1,253,193 $77,393 6.18%
=========== ====== ==== =========== ======= ==== ========== ======= ====
Cash and due from banks 45,905 38,247 33,633
Premises and equipment 24,553 24,887 28,375
Allowance for loan losses (17,716) (16,228) (14,001)
Other assets 63,900 44,858 40,209
----------- ----------- -----------
Total assets $ 1,756,846 $ 1,467,959 $ 1,341,409
=========== =========== ===========
Liabilities and Stockholders' Equity
Interest bearing transaction deposits $ 26,917 188 0.70% $ 18,194 $ 87 0.48% $ 11,477 $ 132 1.15%
Savings deposits 111,796 704 0.63% 105,649 733 0.69% 96,495 1,059 1.10%
Money market deposits 510,864 4,149 0.81% 449,544 3,390 0.75% 411,436 4,997 1.21%
Time deposits 578,808 16,395 2.83% 497,875 15,434 3.10% 472,000 18,410 3.90%
Short-term borrowings:
Federal funds purchased 5,010 64 1.28% 2,999 42 1.40% 2,089 40 1.91%
Securities sold under
agreements to repurchase 26,864 335 1.25% 7,497 104 1.39% 5,866 333 5.68%
Other 9,293 158 1.70% - - - 462 21 4.55%
Long-term debt 136,513 5,372 3.94% 81,405 3,578 4.40% 66,762 3,252 4.87%
Junior subordinated debt issued to
unconsolidated trusts 35,385 2,676 7.56% 25,000 2,250 9.00% 25,000 2,250 9.00%
----------- ------ ---- ----------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities $ 1,441,450 30,041 2.08% $ 1,188,163 $25,618 2.16% 1,091,587 30,494 2.79%
=========== ====== ==== =========== ======= ==== ========== ======= ====
Net interest spread 3.24% 3.30% 3.39%
==== ==== ====
Demand deposits 175,463 149,030 129,766
Other liabilities 9,577 9,166 10,286
Stockholders' equity 130,356 121,600 109,770
----------- ----------- -----------
Total liabilities and
stockholders' equity $ 1,756,846 $ 1,467,959 $ 1,341,409
=========== =========== ===========
Interest income/earning assets(1) $ 1,640,204 $87,226 5.32% $ 1,376,195 $75,109 5.46% $ 1,253,193 $77,393 6.18%
Interest expense/earning assets $ 1,640,204 $30,041 1.83% $ 1,376,195 $25,618 1.86% $ 1,253,193 $30,494 2.44%
----------- ------ ---- ----------- ------- ---- ---------- ------- ----
Net interest margin(1) $57,185 3.49% $49,491 3.60% $46,899 3.74%
======= ==== ======= ==== ======= ====
(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
30
Changes in Net Interest Income:
Years Ended December 31, 2004, 2003, and 2002
-------------------------------------------------------------------------
Year 2004 vs. 2003 Change due to(1) Year 2003 vs. 2002 Change due to(1)
----------------------------------- ------------------------------------
Average Average Total Average Average
Volume Yield/Rate Change Volume Yield/Rate Total Change
--------- ---------- ---------- -------- ---------- ------------
(dollars in thousands)
Increase (decrease) in interest income:
Interest-bearing bank deposits $ 31 $ 7 $ 38 $ (1) $ (3) $ (4)
Federal funds sold 17 106 123 (32) (79) (111)
Investment securities:
U.S. Treasuries and Agencies 272 (837) (565) 739 (2,028) (1,289)
Obligations of state and political
subdivisions(2) (96) (44) (140) 313 (328) (15)
Other securities 634 37 671 68 92 160
Loans(2) 13,542 (1,552) 11,990 6,816 (7,841) (1,025)
-------- ------- --------- ------- -------- -------
Change in interest income(2) $ 14,400 $(2,283) $ 12,117 $ 7,903 $(10,187) $(2,284)
======== ======= ========= ======= ======== =======
Increase (decrease) in interest expense:
Interest bearing transaction deposits $ 52 $ 49 $ 101 $ 54 $ (99) $ (45)
Savings deposits 49 (78) (29) 113 (439) (326)
Money market deposits 485 274 759 519 (2,126) (1,607)
Time deposits 2,048 (1,087) 961 1,085 (4,061) (2,976)
Federal funds purchased 25 (3) 22 4 (2) 2
Securities sold under agreements to
repurchase 240 (9) 231 133 (362) (229)
Other short-term borrowings 158 - 158 (21) - (21)
Long-term debt 2,122 (328) 1,794 588 (262) 326
Junior subordinated debt owed
to unconsolidated trusts 692 (266) 426 - - -
-------- ------- --------- ------- -------- -------
Change in interest expense $ 5,871 $(1,448) $ 4,423 $ 2,475 $ (7,351) $(4,876)
-------- ------- --------- ------- -------- -------
Increase (decrease) in net interest income(2) $ 8,529 $ (835) $ 7,694 $ 5,428 $ (2,836) $ 2,592
======== ======= ========= ======= ======== =======
Percentage increase in net interest income
over prior period 15.5% 5.5%
========= =======
(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 First Busey 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 of the geographic
regions served by the Corporation, and the retention of key individuals in the
Corporation's management structure.
31
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, Busey Bank Florida and
First Capital Bank, 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, 2004:
Rate Sensitive Within
------------------------------------------------------------------------
181 Days -
1-30 Days 31-90 Days 91-180 Days 1 Year Over 1 Year Total
--------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
Interest-bearing deposits $ 2,719 $ - $ - $ - $ - $ 2,719
Federal funds sold 3,100 - - - - 3,100
Investment securities
U.S. Treasuries and Agencies 17,628 20,961 13,045 43,113 154,403 249,150
States and political subdivisions 2,720 1,519 1,235 7,946 38,348 51,768
Other securities 12,782 246 325 3,803 34,182 51,338
Loans (net of unearned interest) 633,522 91,223 113,456 152,131 485,568 1,475,900
--------- --------- ---------- --------- ---------- ----------
Total rate-sensitive assets $ 672,471 $ 113,949 $ 128,061 $ 206,993 $ 712,501 $1,833,975
--------- --------- ---------- --------- ---------- ----------
Interest bearing transaction deposits $ 31,129 $ - $ - $ - $ - $ 31,129
Savings deposits 113,822 - - - - 113,822
Money market deposits 538,560 - - - - 538,560
Time deposits 103,567 72,470 104,664 134,952 245,737 661,390
Fed funds purchased and repurchase
Agreements 41,558 - - - - 41,558
Short term borrowings 2,250 - 9,000 - - 11,250
Long-term debt 35,479 11,500 8,050 12,020 98,325 165,374
Junior subordinated debt issued to
unconsolidated trusts - 15,000 - - 25,000 40,000
--------- --------- ---------- --------- ---------- ----------
Total rate-sensitive liabilities $ 866,365 $ 98,970 $ 121,714 $ 146,972 $ 369,062 $1,603,083
--------- --------- ---------- --------- ---------- ----------
Rate-sensitive assets less
rate-sensitive liabilities $(193,894) $ 14,979 $ 6,347 $ 60,021 $ 343,439 $ 230,892
--------- --------- ---------- --------- ---------- ----------
Cumulative Gap $(193,894) $(178,915) $ (172,568) $(112,547) $ 230,892
========= ========= ========== ========= ==========
Cumulative amounts as a percentage
of total rate-sensitive assets -10.57% -9.76% -9.41% -6.14% 12.59%
========= ========= ========== ========= ==========
Cumulative Ratio 0.78 0.81 0.84 0.91 1.14
========= ========= ========== ========= ==========
32
First Busey Corporation's funds management policy requires the subsidiary
banks to maintain a cumulative rate-sensitivity ration of .75 - 1.25 in the
90-day, 180-day, and 1-year time periods. As of December 31, 2004, the Banks and
the Corporation, on a consolidated basis, are within those guidelines.
The foregoing table shows a negative (liability-sensitive)
rate-sensitivity gap of $193.9 million in the 1-30 day repricing category as
more liabilities were subject to repricing during that time period than assets
were 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, 2004, 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. Other factors influence the
effect of interest rate fluctuations on the Corporation's net interest margin.
For example, a decline in interest rates may lead borrowers to repay 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
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 to incorporate
expected prepayment speeds 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 was as
follows:
Basis Point Changes
-------------------------
-100 +100 +200
------- ----- -----
December 31, 2004 (3.88%) 0.70% 0.97%
December 31, 2003 (5.57%) 3.05% 6.06%
First Busey's funds management policy defines a targeted range of +/- 10%
change in net interest margin in a 1-year time frame for interest rate shocks of
+/- 100 basis points and +/- 200 basis points. As indicated in the table above,
the Corporation is within this targeted range on a consolidated basis. The table
above does not include an analysis of decreases of more than 100 basis points
due to the low level of current market interest rates.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are presented beginning on page 40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation conducted an evaluation, with the participation of its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Corporation's disclosure controls and procedures as of December 31, 2004. The
Corporation's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Corporation in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and
reported on a timely basis.
Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures as of December 31, 2004, are effective in timely alerting them to
material information relating to First Busey Corporation, including its
consolidated subsidiaries, required to be included in the Corporation's periodic
filings under the Exchange Act.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
First Busey's management is responsible for establishing and maintaining
adequate internal control over financial reporting. The corporation's internal
control over financial reporting is a process designed under the supervision of
the Corporation's Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Corporation's consolidated financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.
Management has performed a comprehensive review, evaluation, and
assessment of the Corporation's internal control over financial reporting as of
December 31, 2004. In making its assessment of internal control over financial
reporting, management used the criteria issued by the committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in "Internal Control -
Integrated Framework."
First Capital Bank (FCB) has been excluded from management's assessment of
internal controls as of December 31, 2004, because it was acquired by the
Corporation in a purchase combination on June 1, 2004, and it was not possible
for management to conduct an assessment of FCB's internal control over financial
reporting in the period between the consummation date and the date of
management's assessment. FCB represented total assets and net income of
approximately $250 million and $1.2 million, respectively, of the Corporation's
related consolidated financial statement amounts as of and for the year ended
December 31, 2004.
Based on the assessment, management has determined that, as of December
31, 2004, the Corporation's internal control over financial reporting is
effective, based on the COSO criteria. Management's assessment of the
effectiveness of the Corporation's internal control over financial reporting as
of December 31, 2004, has been audited by McGladrey & Pullen, LLP, an
independent registered public accounting firm, as stated in their report
appearing on page 42.
ITEM 9B. OTHER INFORMATION
Not applicable.
34
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 3-4 of the 2005 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 10-13 of
the 2005 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 under the heading
"Common Stock Ownership of Certain Beneficial Owners and Management" on pages
8-10 of the 2005 Proxy Statement.
The following table discloses the number of outstanding options, warrants
and rights granted by the Corporation to participants in equity compensation
plan, as well as the number of securities remaining available for future
issuance under these plans. The table provides this information separately for
equity compensation plans that have and have not been approved by security
holders.
(a) (b) (c)
-------------------- ---------------------------- ------------------------
Number of securities
Number of securities remaining available for
to be issued upon future issuance under
exercise of Weighted-average exercise equity compensation plan
outstanding options, price of outstanding (excluding securities
Plan Category warrants and rights options, warrants and rights reflected in column (a)
- ------------------------- -------------------- ---------------------------- ------------------------
Equity compensation plans
approved by stockholders 773,250 $ 16.40 1,877,775
Equity compensation plans
not approved by
stockholders - - -
-------------------- ---------------------------- ------------------------
Total 773,250 $ 16.40 1,877,775
==================== ============================ ========================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information set forth under the heading
"Certain Relationships and Related Transactions" on page 15 of the 2005 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference is the information set forth under the heading
"Audit Committee" on pages 5-7 of the 2005 Proxy statement.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit
Number Description of Exhibit
- -------- -----------------------
3.1 Restated Articles of Incorporation of First Busey Corporation (filed
as Exhibit 3.1 to First Busey's Form 10-Q for the quarterly period
ended March 31, 2004, filed with the Commission on May 10, 2004,
(Commission File No. 0-15950), and incorporated herein by reference)
3.2 First Busey Corporation Revised By-Laws (filed as Exhibit 3.2 to
First Busey's Form 10-Q for the quarterly period ended March 31,
2004, filed with the Commission on May 10, 2004 (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 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)
10.5 First Busey Corporation 2004 Stock Option Plan (filed as Annex D to
First Busey's definitive proxy statement filed with the Commission
on March 12, 2004 (Commission File No. 0-15950), and incorporated
herein by reference)
10.6 First Busey Corporation loan agreement with JPMorgan Chase N.A.,
formerly known as Bank One, to be filed with First Busey's Annual
Report on Form 10-K for the fiscal year ended December 31, 2004
14.1 First Busey Corporation Code of Ethics (filed as Exhibit 14.1 to
First Busey's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 filed with the Commission on March 12, 2004
(Registration 0-015950), and incorporated herein by reference)
21.1 List of Subsidiaries of First Busey Corporation
23.1 Consent of Independent Public Accountants
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
36
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the
Corporation's Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the
Corporation's Chief Financial Officer
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
----
Reports of Independent Registered Public Accounting Firm 41
Consolidated Balance Sheets 44
Consolidated Statements of Income 45
Consolidated Statements of Stockholders' Equity 46
Consolidated Statements of Cash Flows 49
Notes to Consolidated Financial Statements 52
REPORTS ON FORM 8-K
On January 18, 2005, the Corporation filed a report on Form 8-K (Item
2.02) dated January 18, 2005, releasing its financial results for the three
months ending December 31, 2004.
On January 24, 2005, the Corporation filed a report on Form 8-K (Item
1.01) dated January 18, 2005, reporting board approval of bonus payments and
restricted shares released to executive officers.
On February 2, 2005, the Corporation filed a report on Form 8-K (Item
1.01) dated January 28, 2005, announcing board approval of fiscal year 2005
compensation to executive officers.
One February 25, 2005, the Corporation filed a report on Form 8-K (Item
1.01) dated February 24, 2005, announcing that on February 24, 2005 it entered
into an agreement to acquire Tarpon Coast Bancorp, Inc., Port Charlotte,
Florida.
37
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 16, 2005.
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 16, 2005.
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/ E. PHILLIPS KNOX Director
- ---------------------
E. Phillips Knox
/s/ DAVID L. IKENBERRY Director
- ---------------------
David L. Ikenberry
/s/ V. B. LEISTER, JR. Director
- ---------------------
V. B. Leister, Jr.
/s/ JOSEPH E. O'BRIEN Director
- ---------------------
Joseph E. O'Brien
/s/ ARTHUR R. WYATT Director
- -------------------
Arthur R. Wyatt
38
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
39
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 41
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 44
Consolidated statements of income 45
Consolidated statements of stockholders' equity 46 - 48
Consolidated statements of cash flows 49 - 51
Notes to consolidated financial statements 52 - 89
40
[McGLADREY & PULLEN LOGO]
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America), the effectiveness of
First Busey Corporation and Subsidiaries' internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organization
of the Treadway Commission (COSO), and our report dated February 4, 2005,
expressed an unqualified opinion.
McGLADREY & PULLEN, LLP
Champaign, Illinois
February 4, 2005, except for Note 24 as
to which the date is February 24, 2005.
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
41
[McGLADREY & PULLEN LOGO]
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
First Busey Corporation
Urbana, Illinois
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that First
Busey Corporation maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). First Busey Corporation's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Corporation's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A Corporation's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
Corporation's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Corporation; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the Corporation
are being made only in accordance with authorizations of Management and
Directors of the Corporation; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Corporation's assets that could have a material effect on the
consolidated financial statements.
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
42
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded First Capital Bank (FCB) from its assessment
of internal control over financial reporting as of December 31, 2004 because it
was acquired by the Corporation in a purchase business combination during 2004.
We have also excluded FCB from our audit of internal control over financial
reporting. FCB's total assets and net income represent approximately $250
million and $1.2 million, respectively, of the Corporation's related
consolidated financial statement amounts as of and for the year ended December
31, 2004.
In our opinion, management's assessment that First Busey Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, First
Busey Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of First Busey Corporation and our report dated February 4, 2005,
except for Note 24 as to which the date is February 24, 2005, expressed an
unqualified opinion.
McGLADREY & PULLEN, LLP
Champaign, Illinois
February 4, 2005
43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
-------------- -------------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 47,991 $ 52,397
Federal funds sold 3,100 -
Securities available for sale 352,256 224,733
Loans held for sale (fair value 2004 $9,717; 2003 $30,609) 9,574 30,529
Loans (net of allowance for loan losses 2004 $19,217; 2003 $16,228) 1,447,109 1,145,639
Premises and equipment 26,295 22,223
Goodwill 31,785 7,380
Other intangible assets 3,852 2,100
Cash surrender value of bank owned life insurance 17,634 16,836
Other assets 24,845 20,247
------------- -------------
TOTAL ASSETS $ 1,964,441 $ 1,522,084
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 213,921 $ 160,578
Interest bearing 1,344,901 1,096,017
------------- -------------
TOTAL DEPOSITS 1,558,822 1,256,595
Federal funds purchased and securities sold under agreements
to repurchase 41,558 16,000
Short-term borrowings 11,250 -
Long-term debt 165,374 92,853
Junior subordinated debt owed to unconsolidated trusts 40,000 25,000
Other liabilities 8,565 6,459
------------- -------------
TOTAL LIABILITIES 1,825,569 1,396,907
------------- -------------
Commitments and contingencies (Note 19)
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;
21,232,059 shares issued 6,291 6,291
Surplus 21,696 20,968
Retained earnings 114,359 102,288
Accumulated other comprehensive income 9,170 9,191
------------- -------------
TOTAL STOCKHOLDERS' EQUITY BEFORE TREASURY STOCK,
UNEARNED ESOP SHARES AND DEFERRED COMPENSATION
FOR RESTRICTED STOCK AWARDS 151,516 138,738
Common stock in treasury, at cost, 623,908 shares 2004; 715,844
shares 2003 (10,173) (10,667)
Unearned ESOP shares and deferred compensation for restricted
Stock awards (2,471) (2,894)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 138,872 125,177
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,964,441 $ 1,522,084
============= =============
See Accompanying Notes to Consolidated Financial Statements.
44
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ----------- ------------
(Dollars in thousands, except per share amounts)
Interest and dividend income:
Loans, including fees $ 77,499 $ 65,603 $ 66,586
Debt securities
Taxable interest income 5,487 5,321 6,793
Nontaxable interest income 1,939 2,031 2,041
Dividends 722 745 405
Federal funds sold 272 149 260
------------ ----------- ------------
TOTAL INTEREST AND DIVIDEND INCOME 85,919 73,849 76,085
------------ ----------- ------------
Interest expense:
Deposits 21,436 19,644 24,598
Federal funds purchased and securities sold under
agreements to repurchase 399 146 373
Short-term borrowings 158 - 21
Long-term debt 5,372 3,578 3,252
Junior subordinated debt owed to unconsolidated
trusts 2,676 2,250 2,250
------------ ----------- ------------
TOTAL INTEREST EXPENSE 30,041 25,618 30,494
------------ ----------- ------------
NET INTEREST INCOME 55,878 48,231 45,591
Provision for loan losses 2,905 3,058 3,125
------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 52,973 45,173 42,466
------------ ----------- ------------
Other income:
Service charges on deposit accounts 7,841 7,319 7,054
Trust fees 5,339 4,615 4,781
Commissions and brokers' fees, net 2,335 2,103 2,106
Other service charges and fees 2,035 1,836 1,816
Security gains, net 1,373 975 762
Gain on sales of loans 2,689 6,183 3,995
Other 2,178 1,654 2,023
------------ ----------- ------------
TOTAL OTHER INCOME 23,790 24,685 22,537
------------ ----------- ------------
Other expenses:
Salaries and wages 19,529 18,491 17,431
Employee benefits 4,297 3,823 3,572
Net occupancy expense of premises 3,921 3,158 3,076
Furniture and equipment expenses 2,384 2,446 3,469
Data processing 1,915 1,755 1,459
Amortization of intangible assets 631 414 660
Stationery, supplies and printing 1,020 1,061 1,010
Other 9,388 8,821 8,249
------------ ----------- ------------
TOTAL OTHER EXPENSES 43,085 39,969 38,926
------------ ----------- ------------
INCOME BEFORE INCOME TAXES 33,678 29,889 26,077
Income taxes 11,224 10,025 8,173
------------ ----------- ------------
NET INCOME $ 22,454 $ 19,864 $ 17,904
============ =========== ============
Basic earnings per share $ 1.10 $ 0.98 $ 0.88
============ =========== ============
Diluted earnings per share $ 1.09 $ 0.97 $ 0.87
See Accompanying Notes to Consolidated Financial Statements.
45
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Dollars in thousands)
Deferred
Accumulated Compensation
Other Unearned for Restricted
Common Retained Comprehensive Treasury ESOP Stock
Stock Surplus Earnings Income (loss) 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 262,152 shares for
the treasury - - - - (3,792) - - (3,792)
Issuance of 81,900 shares of
treasury stock for option
exercise and related tax
benefit - (296) - - 1,155 - - 859
Issuance of 1,125 shares of
treasury stock to benefit
plans - 1 - - 16 - - 17
Issuance of 14,925 shares of
treasury stock for restricted
stock grants - 2 - - 210 - (212) -
Cash dividends:
Common stock at $.40 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)
46
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Dollars in thousands)
Deferred
Accumulated Compensation
Other Unearned for Restricted
Common Retained Comprehensive Treasury ESOP Stock
Stock Surplus Earnings Income (loss) 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 235,200 shares for the
treasury - - - - (4,079) - - (4,079)
Issuance of 265,263 shares of
treasury stock for option exercise
and related tax benefit - (126) - - 3,575 - - 3,449
Issuance of 133,823 shares of
treasury stock to benefit plans - 173 - - 1,887 - - 2,060
Cash dividends:
Common stock at $.45 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
======== ========= ========== =========== ========= ======== ========= ========
(Continued)
47
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Dollars in thousands)
Deferred
Accumulated Compensation
Other Unearned for Restricted
Common Retained Comprehensive Treasury ESOP Stock
Stock Surplus Earnings Income (loss) Stock Shares Awards Total
-------- --------- --------- ------------- --------- --------- -------------- ---------
Balance, December 31, 2003 $ 6,291 $ 20,968 $ 102,288 $ 9,191 $ (10,667) $ (2,853) $ (41) $125,177
Comprehensive Income:
Net Income - - 22,454 - - - - 22,454
Other comprehensive income, net
of tax:
Unrealized gains on securities
available for sale arising
during the period, net of tax
benefit of $535 - - - - - - - 806
Reclassification adjustment,
net of taxes of ($546) - - - - - - - (827)
--------
Other comprehensive income, net
of tax of ($11) - - - (21) - - - (21)
--------
Comprehensive Income - - - - - - - 22,433
--------
Purchase of 123,727 shares for the
treasury - - - - (2,264) - (2,264)
Issuance of 173,550 shares of
treasury stock for option exercise
and related tax benefit - 356 - - 2,220 - - 2,576
Issuance of 42,113 shares of
treasury stock to benefit plans - 270 - - 538 - 808
Cash dividends:
Common stock at $.51 per share - - (10,383) - - - - (10,383)
Employee stock ownership plan shares
allocated - 102 - - - 397 - 499
Amortization of restricted stock
issued under restricted stock
award plan - - - - - - 26 26
-------- --------- --------- ---------- --------- --------- -------- --------
Balance, December 31, 2004 $ 6,291 $ 21,696 $ 114,359 $ 9,170 $ (10,173) $ (2,456) $ (15) $138,872
======== ========= ========= ========== ========= ========= ======== ========
See Accompanying Notes to Consolidated Financial Statements
48
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
--------- ---------- ---------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 22,454 $ 19,864 $ 17,904
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock-based compensation 26 55 116
Depreciation and amortization 3,525 3,534 4,202
Provision for loan losses 2,905 3,058 3,125
Fair value adjustment on employee stock
ownership plan shares allocated 102 59 (15)
Provision for deferred income taxes (1,071) 344 (1,367)
Stock dividends received (457) (495) (301)
Accretion of security discounts, net (563) (293) (460)
Security gains, net (1,373) (975) (762)
Gain on sales of loans, net (2,689) (6,183) (3,995)
Loss (gain) on sales and dispositions of premises
and equipment 42 (423) (11)
Market valuation adjustment on ORE properties 760 989 700
Increase in deferred compensation 577 415 454
Change in assets and liabilities:
Increase in other assets (828) (551) (105)
Increase (decrease) in other liabilities 560 (1,244) 1,275
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES BEFORE LOAN ORIGINATIONS AND SALES 23,970 18,154 20,760
--------- --------- ---------
Loans originated for sale (159,560) (400,967) (292,102)
Proceeds from sales of loans 185,057 437,382 257,220
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 49,467 54,569 (14,122)
--------- --------- ---------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (271,763) (212,444) (118,028)
Proceeds from sales 55,641 19,033 23,358
Proceeds from maturities 140,244 202,493 76,548
(Increase) decrease in federal funds sold (1,507) - 20,000
Increase in loans (156,755) (124,402) (91,148)
Purchases of premises and equipment (3,529) (3,724) (1,898)
Proceeds from sales of premises and equipment 7 6,216 89
Increase in investment in life insurance - (5,000) (343)
Increase in cash surrender value of bank owned life
insurance (798) (727) (655)
Purchase of subsidiary net of cash and due from
banks acquired (35,990) - -
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (274,450) (118,555) (92,077)
--------- --------- ---------
(continued)
49
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
--------- -------- ---------
(Dollars in thousands)
Cash Flows from Financing Activities
Net increase (decrease) in certificates of deposit $ 83,058 $(27,254) $ 64,691
Net increase in demand deposits, money market
and savings accounts 72,085 70,244 42,915
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 101 13,533 (7,300)
Proceeds from short-term borrowings 15,250 - 500
Principal payments on short-term borrowings (5,250) - (2,500)
Proceeds from long-term debt 74,655 20,000 43,000
Principal payments on long-term debt (25,059) - (18,000)
Proceeds from issuance of junior subordinated debt
owed to unconsolidated trust 15,000 - -
Cash dividends paid (10,383) (9,215) (8,126)
Purchase of treasury stock (2,264) (4,079) (3,792)
Proceeds from sales of treasury stock 3,384 5,509 876
--------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 220,577 68,738 112,264
--------- -------- ---------
Net (decrease) increase in cash and due from banks (4,406) 4,752 6,065
Cash and due from banks, beginning 52,397 47,645 41,580
--------- -------- ---------
Cash and due from banks, ending $ 47,991 $ 52,397 $ 47,645
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
PURCHASE OF SUBSIDIARY:
Purchase price $ 42,072 $ - $ -
--------- -------- ---------
Assets acquired:
Cash and due from other banks 6,082 - -
Federal funds sold 1,593 - -
Securities available for sale 49,285 - -
Loans held for sale 1,853 - -
Loans (net of allowance for loan losses of $2,069) 147,758 - -
Premises and equipment 3,483 - -
Goodwill 24,405 - -
Other intangible assets 2,383 - -
Other assets 4,392 - -
Liabilities assumed:
Deposits (147,084) - -
Securities sold under agreements to repurchase (25,457) - -
Short-term borrowings (1,250) - -
Long-term debt (23,322) - -
Other liabilities (2,049) - -
--------- -------- ---------
42,072 - -
========= ======== =========
50
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
--------- ---------- ----------
(Dollars in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONT.)
Cash payments for:
Interest $ 28,707 $ 26,395 $ 30,817
Income taxes $ 10,555 $ 9,864 $ 7,810
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 138 $ 527 $ 5,977
Employee stock ownership plan shares allocated $ 397 $ 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.
51
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 Capital Bank; First Busey Resources, Inc.; Busey
Investment Group, Inc. and its subsidiaries: First Busey Trust & Investment
Company, Inc., First Busey Securities, Inc., Busey Insurance Services, Inc., and
Busey Capital Management. All significant 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, valuation of other 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 the consolidated statement of 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 and deposits are also treated as
net increases or decreases.
52
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, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. 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. Gains and losses
on the sale of securities are recorded on the trade date and are determined
using the specific identification method.
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, as determined by aggregate outstanding commitments from
investors or current investor yield requirements. 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 amount 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 that are intended to be sold are considered
to be derivatives. Accordingly, such commitments along with any related fees
received from potential borrowers 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
Servicing assets are recognized as separate assets when rights are acquired
through the sale of mortgage loans. The Corporation generally retains the right
to service mortgage loans sold to others. For sales of mortgage loans, a portion
of the cost of originating the loan is allocated to the servicing right based on
relative fair value. Fair value is based on market prices for comparable
mortgage servicing contracts, when available, or alternatively, is based on a
valuation model that calculates the present value of estimated future net
servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the
cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses.
Capitalized servicing rights are reported in other assets and are amortized into
other income in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets.
Mortgage servicing rights are periodically evaluated for impairment based on the
fair value of those rights as compared to amortized cost. Fair values are
estimated using discounted cash flows based on 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
53
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
servicing rights based on the origination date, interest rate, and type 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.
If the Corporation later determines that all or a portion of the impairment no
longer exists for a particular group of loans, a reduction of the allowance may
be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal and are
recorded as income when earned. The amortization of mortgage servicing rights is
netted against loan servicing fee income.
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
outstanding unpaid principal, adjusted for changeoffs, the allowance for loan
losses, and any deferred fees or costs on originated loans.
Loan origination and commitment fees, net of 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. The accrual of interest
on mortgage and commercial loans is discontinued at the time the loan is 90 days
past due unless the credit is well-secured and in process of collection.
Personal loans are typically charged off no later than 180 days past due. Past
due status is based on contractual terms of the loan. In all cases, loans are
placed on non-accrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
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 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 as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance for loan losses when management believes the
uncollectibility of the loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
In addition, regulatory agencies as an integral part of their examination
process, periodically review the allowance for loan losses, and may require the
Corporation to make additions to the allowance based on their judgment about
information available to them at the time of their examinations.
54
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as 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 amount 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, based on current information and events, it is probable
the Corporation will be unable to collect scheduled payments of principal and
interest payments when due according to the terms of the loan agreement. Factors
considered by management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loans and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present value of the expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
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 unless such loans are
the subject of a restructuring agreement.
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 amount 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.
55
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. The Corporation recognized loss provisions of $760,000, $989,000, and
$700,000 during the years ended December 31, 2004, 2003, and 2002 respectively
in valuation allowances associated with the carrying amount of properties held
in OREO. 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 $4,212,000 and $4,781,000 as of
December 31, 2004, and 2003 respectively.
Goodwill and other intangible assets
Costs in excess of the estimated fair value of identifiable net assets acquired
consist of goodwill and core deposit intangible assets. Goodwill was originally
amortized into expense on a straight-line basis over periods not to exceed 25
years. Under the provisions of Statement of Financial Accounting Standard (SFAS)
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 31, 2001, goodwill is no longer subject to amortization
over its useful life, but instead is now subject to at least annual assessments
by applying a fair value based test. The Corporation performed an initial
impairment assessment as of January 1, 2002, and annual impairment assessments
as of December 31, 2004 and 2003 by performing a fair value test and comparing
the fair value of outstanding assets less fair value of liabilities to the
carrying value of goodwill.
Core deposit intangible assets are amortized on a straight-line basis over the
estimated period benefited up to 10 years. Total amortization expense was
approximately $631,000, $414,000, and $660,000 for the years ended December 31,
2004, 2003, and 2002, respectively.
56
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and intangible asset disclosures are as follows:
As of December 31, 2004
---------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
(Dollars in thousands)
AMORTIZED INTANGIBLE ASSETS:
Core deposit intangibles $ 10,389 $ 6,537
======== ==========
AGGREGATE AMORTIZATION EXPENSE:
For the year ended December 31, 2004 $ 631
==========
ESTIMATED AMORTIZATION EXPENSE:
2004 $ 782
2005 749
2006 499
2007 439
2008 439
Thereafter 944
----------
3,852
==========
GOODWILL: $ 31,785
========
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 subsidiary 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
Reclassifications have been made to certain account balances, with no effect on
net income or stockholders' equity, as of and for the years ended December 31,
2003 and 2002, to be consistent with the classifications adopted as of and for
the year ended December 31, 2004.
On July 23, 2004, First Busey Corporation's Board of Directors approved a
three-for-two stock split. The stock split was effected in the form of a 50%
dividend issued on August 3, 2004, for shareholders of record at the close of
business on August 2, 2004. Fractional share amounts resulting from the split
were paid to shareholders in cash. Share and per share data have been
retroactively adjusted as if the stock split had occurred on January 1, 2002.
57
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 16. 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.
2004 2003 2002
---------- ----------- ---------
(in thousands, except per share data)
Net income:
As reported $ 22,454 $ 19,864 $ 17,904
Deduct total stock-based compensation expense determined
under the fair value method for all awards, net of related
tax effects 336 257 242
---------- ----------- ---------
Pro forma $ 22,118 $ 19,607 $ 17,662
========== =========== =========
Basic earnings per share:
As reported $ 1.10 $ 0.98 $ 0.88
Pro forma $ 1.09 $ 0.96 $ 0.87
Diluted earnings per share:
As reported $ 1.09 $ 0.97 $ 0.87
Pro forma $ 1.08 $ 0.95 $ 0.86
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.
2004
---------------------------
Block 1 Block 2 2002
--------- ---------- ----------
Number of options granted 54,000 300,000 343,500
Risk-free interest rate 1.40% 2.12% 3.51%
Expected life, in years 5 5 3
Expected volatility 18.20% 18.02% 19.27%
Expected dividend yield 2.80% 2.60% 2.60%
Estimated fair value per option $ 2.04 $ 2.55 $ 3.28
The Corporation awarded no stock options during 2003.
58
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,
-----------------------------------------------
2004 2003 2002
------------- ------------- --------------
Net income available to common shareholders $ 22,454,000 $ 19,864,000 $ 17,904,000
Basic average common shares outstanding 20,370,473 20,343,180 20,303,877
Dilutive potential due to stock options 140,950 191,160 121,994
------------- ------------- --------------
Average number of common shares and dilutive
potential common shares outstanding 20,511,423 20,534,340 20,425,871
============= ============= ==============
Basic net income per share $ 1.10 $ 0.98 $ 0.88
============= ============= ==============
Diluted net income per share $ 1.09 $ 0.97 $ 0.87
============= ============= ==============
Impact of new financial accounting standards
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This Statement is effective for contracts entered
into or modified after June 30, 2003, except in certain circumstances, and for
hedging relationships designated after June 30, 2003. This Statement did not
have a material effect on the Corporation's consolidated financial statements.
In December 2003, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 03-3 ("SOP 03-3"), "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses the
accounting for differences between contractual cash flows and the cash flows
expected to be collected from purchased loans or debt securities if those
differences are attributable, in part, to credit quality. SOP 03-3 requires
purchased loans and debt securities to be recorded initially at fair value based
on the present value of the cash flows expected to be collected with no
carryover of any valuation allowance previously recognized by the seller.
Interest income should be recognized based on the effective yield from the cash
flows expected to be collected. To the extent the purchased loans or debt
securities experience subsequent deterioration in credit quality, a valuation
allowance would be established for any additional cash flows that are not
expected to be received. However, if more cash flows subsequently are expected
to be
59
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
received than originally estimated, the effective yield would be adjusted on a
prospective basis. SOP 03-3 will be effective for loans and debt securities
acquired after December 31, 2004. Management does not expect the adoption of
this statement to have a material impact on the Corporation's consolidated
financial statements.
In December 2003, the FASB issued a revision to Interpretation of No. 46,
"Consolidation of Variable Interest Entities," ("FIN 46") which establishes
guidance for determining when an entity should consolidate another entity that
meets the definition of a variable interest entity. FIN 46 requires a variable
interest entity to be consolidated by a company if that company will absorb a
majority of the expected losses, will receive a majority of the expected
residual returns, or both. FASB deferred the effective date of FIN 46 to no
later than the end of the first reporting period that ended after March 15,
2004. First Busey Corporation adopted FIN 46 as of January 1, 2004, which
resulted in the Corporation no longer consolidating its wholly-owned subsidiary,
First Busey Capital Trust I, and recorded it on the equity method. The
Interpretation and the revision had no material effect on the Corporation's
consolidated financial statements.
In March 2004, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB) No. 105, "Application of Accounting Principles to
Loan Commitments," which provides guidance regarding loan commitments that are
accounted for as derivative instruments. In this SAB, the SEC determined that an
interest rate lock commitment should generally be valued at zero at inception.
The rate locks will continue to be adjusted for changes in value resulting from
changes in market interest rates. This SAB did not have a material impact on the
Corporation's financial position or results of operations.
In September 2004, the FASB issued FASB Staff Position ("FSP") Emerging Issues
Task Force ("EITF") Issue No. 03-1-1 delaying the effective date of paragraphs
10-20 of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investment," which provides guidance for the determining
the meaning of "other-than-temporarily impaired" and its application to certain
debt and equity securities within the scope of SFAS No.115, "Accounting for
Certain Investments in Debt and Equity Securities", and investments accounting
for under the cost method. The guidance requires that investments which have
declined in value due to credit concerns or solely due to changes in interest
rates must be recorded as other-than-temporarily impaired unless the Corporation
can assert and demonstrate its intention to hold the security for a period of
time sufficient to allow for a recovery of fair value up to or beyond the cost
of the investment which might mean maturity. The delay of the effective date of
EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP
Issue 03-1-a. Proposed FSB Issue 03-1-a is intended to provide implementation
guidance with respect to all securities analyzed for impairment under paragraphs
10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the
provisions of EITF 03-1 and proposed FSP issue 03-1-a will affect the
Corporation.
In December 2004, the FASB published FASB Statement No. 123 (revised 2004),
"Share-Based Payment" ("FAS 123(R)"). FAS 123(R) requires that the compensation
cost relating to share-based payment transactions, including grants of employee
stock options, be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. FAS
123(R) permits entities to use any option-pricing model that meets the fair
value objective in the Statement. Modifications of share-based payments will be
treated as replacement awards with the cost of the incremental value recorded in
the financial statements.
FAS 123(R) is effective at the beginning of the third quarter of 2005. As of the
date of this filing, no decisions have been made as to whether the Corporation
will apply the modified prospective or retrospective transition method of
application.
The Corporation will present a cumulative effect of a change in accounting
principle as a result of the adoption of FAS 123(R) for the estimation of future
forfeitures. The Corporation is precluded from its past practice of recognizing
forfeitures only as they occur.
60
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The impact of this statement on the Corporation in 2005 and beyond will depend
upon various factors, among them being our future compensation strategy. The pro
forma compensation costs presented in this and prior filings for the Corporation
have been calculated using a Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future periods.
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. BUSINESS COMBINATION
On June 1, 2004, First Busey Corporation acquired all the outstanding common
stock of First Capital Bankshares, Inc. and its subsidiary First Capital Bank, a
$239,000,000 bank headquartered in Peoria, Illinois. This acquisition expands
the Corporation's banking presence in central Illinois into Peoria and
surrounding communities. The transaction has been accounted for as a purchase,
and the results of operations of both entities since the acquisition date have
been included in the consolidated financial statements. The purchase price of
$42,072,000 was allocated based upon the fair value of assets acquired and
liabilities assumed. The excess of total acquisition cost over the fair value of
the net assets acquired has been allocated to core deposit intangible assets and
goodwill. The core deposit intangibles of $2,383,000 are being amortized over
periods ranging from three to ten years. The Corporation does not expect to make
further adjustments to these allocations.
Pro forma unaudited operating results for the twelve months ended December 30,
2004 and 2003, giving effect to the First Capital acquisition as if it had
occurred as of January 1, 2003 are as follows:
2004 2003
---------------------------------
(Dollars in thousdands except
` per share data
Interest income $ 90,344 $ 84,556
Interest expense 31,741 30,556
Provision for loan losses 3,390 3,898
Noninterest income 24,645 26,513
Noninterest expense 45,272 44,541
----------- ----------
Income before income taxes $ 34,586 $ 32,074
Income taxes 11,585 10,682
----------- ----------
Net income $ 23,001 $ 21,392
=========== ==========
Earnings per share - basic $ 1.13 $ 1.05
=========== ==========
Earnings per share - diluted $ 1.12 $ 1.04
=========== ==========
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 Banks of Chicago and
Atlanta, which may be offset by cash on hand. The required reserve balances as
of December 31, 2004 and 2003 were approximately $16,004,000 and $10,921,000,
respectively.
61
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Busey Bank and First Capital Bank have established clearing balance requirements
with the Federal Reserve Bank of Chicago to use Federal Reserve Bank services.
As of December 31, 2004, the clearing balance requirements totaled $3,000,000.
As of December 31, 2003, 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
---------- ---------- ---------- ---------
(Dollars in thousands)
December 31, 2004:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 249,946 $ 242 $ 1,038 $ 249,150
Obligations of states and political
subdivisions 49,949 1,839 20 51,768
Mortgage-backed securities 22,736 466 32 23,170
Corporate debt securities 2,184 43 7 2,220
---------- ---------- ---------- ---------
324,815 2,590 1,097 326,308
Mutual funds and other equity securities 12,222 13,736 10 25,948
---------- ---------- ---------- ---------
$ 337,037 $ 16,326 $ 1,107 $ 352,256
========== ========== ========== =========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
(Dollars in thousands)
December 31, 2003:
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
========== ========== ========== =========
62
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, 2004, 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 $ 103,758 $ 103,607
Due after one year through five years 179,296 179,589
Due after five years through ten years 18,875 19,761
Due after ten years 22,886 23,351
----------- -----------
$ 324,815 $ 326,308
=========== ===========
Gains and losses related to sales of securities are summarized as follows (in
thousands):
For the Years Ended December 31,
--------------------------------
2004 2003 2002
-------- ------- ------
Gross security gains $ 1,544 $ 1,133 $ 762
Gross security losses (171) (158) -
-------- ------- ------
NET SECURITY GAINS $ 1,373 $ 975 $ 762
======== ======= ======
The tax provisions for these net realized gains and losses amounted to $546,000,
387,000, and $303,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
Investment securities with carrying amounts of $226,356,000 and $151,730,000 on
December 31, 2004 and 2003, 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.
63
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information pertaining to securities with gross unrealized losses at December
31, 2004 and 2003 aggregated by investment category and length of time that
individual securities have been in continuous loss position follows:
Continuous unrealized losses Continuous unrealized losses `
existing for less than 12 existing greater than 12
months months Total
---------------------------- ---------------------------- -----------------------
Unrealized Fair Unrealized Fair Unrealized
Fair Losses Value Losses Value Losses
------------- ------------- ------------- ------------- ---------- ----------
(Dollars in thousands)
December 31, 2004:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 190,541 $ 917 $ 7,380 $ 121 $ 197,921 $ 1,038
Obligations of states and
political subdivisions 4,294 19 419 1 4,713 20
Mortgage-backed securities 3,201 32 - - 3,201 32
Corporate securities 806 7 - - 806 7
---------- ---------- ----------- -------- ---------- ---------
Subtotal, debt securities $ 198,842 $ 975 $ 7,799 $ 122 $ 206,641 $ 1,097
Mutual funds and other
equity securities 54 10 - - 54 10
---------- ---------- ----------- -------- ---------- ---------
Total temporarily
impaired securities $ 198,896 $ 985 $ 7,799 $ 122 $ 206,695 $ 1,107
========== ========== =========== ======== ========== =========
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)
December 31, 2003:
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
========== ========== =========== ========== ========== ==========
64
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to 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.
NOTE 5. LOANS
The composition of loans is as follows:
December 31,
---------------------------
2004 2003
------------ ------------
(Dollars in thousands)
Commercial $ 216,290 $ 138,272
Real estate construction 235,547 168,141
Real estate - farmland 11,750 11,890
Real estate - 1 to 4 family residential mortgage 443,320 375,573
Real estate - multifamily mortgage 106,163 91,325
Real estate - non-farm nonresidential mortgage 363,993 292,169
Installment 63,315 61,323
Agricultural 25,224 22,300
------------ ------------
1,465,602 1,160,993
Plus net deferred loan costs 724 874
------------ ------------
1,466,326 1,161,867
Less allowance for loan losses 19,217 16,228
------------ ------------
NET LOANS $ 1,447,109 $ 1,145,639
============ ============
The loan portfolio includes a concentration of loans for commercial real estate
amounting to approximately $470,156,000 and $383,494,000 as of December 31, 2004
and 2003, 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.
Geographic distribution of the commercial real estate loans as of December 31,
2004 and 2003 follows:
December 31,
--------------------------
2004 2003
----------- -----------
(dollars in thousands)
Illinois $ 306,324 $ 245,245
Florida 93,970 86,964
Indiana 69,862 51,285
----------- -----------
$ 470,156 $ 383,494
=========== ===========
65
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
-------------------------
2004 2003
--------- --------
(Dollars in thousands)
Loans 90 days past due and still accruing $ 2,141 $ 2,638
Non-accrual loans 1,523 581
--------- --------
3,664 3,219
========= ========
The following table presents data on impaired loans:
2004 2003 2002
-------- -------- -------
(Dollars in thousands)
Impaired loans for which an allowance has
been provided $ 408 $ - $ -
Impaired loans for which no allowance has
been provided $ 503 $ 2,214 $ 309
-------- -------- -------
Total loans determined to be impaired $ 911 $ 2,214 $ 309
======== ======== ========
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 168 $ - $ -
======== ======== ========
Average recorded investment in impaired loans $ 1,670 $ 1,193 $ 1,435
======== ======== ========
Interest income recognized from impaired loans $ 28 $ - $ -
======== ======== ========
Cash basis interest income recognized from
impaired loans $ 28 $ - $ -
======== ======== ========
66
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
----------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Balance, beginning of year $ 16,228 $ 15,460 $ 13,688
Addition due to acquisition 2,069 - -
Provision for loan losses 2,905 3,058 3,125
Recoveries applicable to loan balances previously
charged off 202 225 476
Loan balances charged off (2,187) (2,515) (1,829)
-------- -------- --------
Balance, end of year $ 19,217 $ 16,228 $ 15,460
======== ======== ========
NOTE 7. LOAN SERVICING
The unpaid principal balances of loans serviced by the Corporation for the
benefit of other are not included in the accompanying consolidated balance
sheets. These unpaid principal balances were $568,081,000 and $531,271,000 as of
December 31, 2004 and 2003, 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, 2004 and 2003, was $1,964,000 and $2,279,000, respectively. The fair values
of these servicing rights were $2,025,000 and $2,279,000, respectively, at
December 31, 2004 and 2003. The following summarizes mortgage servicing rights
capitalized and amortized:
For the Years Ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Mortgage servicing rights capitalized $ 838 $ 2,679 $ 1,467
======== ======== ========
Mortgage servicing rights amortized $ 1,153 $ 1,874 $ 906
======== ======== ========
67
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
--------------------
2004 2003
-------- --------
(Dollars in thousands)
Land $ 7,381 $ 6,639
Buildings and improvements 25,045 21,819
Furniture and equipment 21,386 18,925
-------- --------
53,812 47,383
Less accumulated depreciation 27,517 25,160
-------- --------
$ 26,295 $ 22,223
======== ========
Depreciation expense was $2,894,000, $3,120,000 and $3,542,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
NOTE 9. DEPOSITS
The composition of deposits is as follows:
December 31,
----------------------------
2004 2003
----------- -----------
(dollars in thousands)
Demand deposits, noninterest-bearing $ 213,921 $ 160,578
Interest-bearing transaction deposits 31,129 49,903
Savings deposits 113,822 106,990
Money market deposits 538,560 451,669
Time deposits 661,390 487,455
----------- -----------
Total $ 1,558,822 $ 1,256,595
=========== ===========
The aggregate amount of time deposits with a minimum denomination of $100,000
was approximately $196,260,000 and $105,614,000 at December 31, 2004 and 2003,
respectively. Brokered deposits of $16,423,000 are included in the balance of
time deposits with a minimum denomination of $100,000 as of December 31, 2004.
The Corporation had no brokered deposits as of December 31, 2003.
As of December 31, 2004, the scheduled maturities of certificates of deposit, in
thousands, are as follows:
2005 $ 387,476
2006 124,153
2007 95,373
2008 22,542
2009 31,583
Thereafter 263
--------------
$ 661,390
==============
68
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Balances of securities sold under agreements to
repurchase were $41,558,000 and $8,500,000 as of December 31, 2004 and 2003,
respectively.
NOTE 11. SHORT-TERM BORROWINGS
Short-term borrowings consist of fixed-rate advances which mature in less than
one year from date of origination. The advances are borrowed from the 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. Interest rates on the short-term
advances outstanding as of December 31, 2004, range from 1.31% to 2.05% with an
average weighted rate of 1.86%. The Corporation had no short-term borrowings
outstanding as of December 31, 2003.
At December 31, 2004, First Busey Corporation had an operating line in the
amount of $10,000,000 from its primary correspondent bank. The Corporation did
not draw on the line in 2004, and the entire balance was available as of
December 31, 2004. The line, which is collateralized by the outstanding shares
of Busey Bank, matures on January 20, 2006.
69
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
2004 2003
--------- ---------
(Dollars in thousands)
Notes payable, JPMorgan Chase N.A., formerly known as Bank One, interest payable
quarterly
$250,000 term loan, at one-year LIBOR plus 1.25% (effective rate of 2.75% at
December 31, 2004), 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, 2004; 9,000 shares as
of December 31, 2003) $ 50 $ 75
$2,370,000 term loan, at one-year LIBOR plus 1.25% (effective rate of 2.75%
at December 31, 2004), 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 (75,000 shares as of December 31, 2004; 90,000 shares
as of December 31, 2003) $ 1,185 $ 1,422
$1,356,500 term loan at one-year LIBOR plus 1.25% (effective rate of 2.75% at
December 31, 2004), 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 (67,500 shares as of December 31, 2004; 75,000 shares
as of December 31, 2003) $ 1,221 $ 1,356
$42,000,000 term loan at six-month LIBOR plus 1.25% (effective rate of 2.86%
at December 31, 2004), principal payment of $4,000,000 due annually beginning
January 25, 2006, final payment due on June 1, 2011, collateralized by the
outstanding shares of Busey Bank. $ 30,000 $ -
Notes payable, Federal Home Loan Banks of Chicago and Atlanta, 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. $ 132,918 $ 90,000
--------- ---------
$ 165,374 $ 92,853
========= =========
As of December 31, 2004, funds borrowed from the Federal Home Loan Banks of
Chicago and Atlanta, listed above, consisted of fixed-rate advances maturing
through January, 2013, with interest rates ranging from 1.47% to 6.18%. The
weighted average rate on these long-term advances was 3.95% and 4.22% as of
December 31, 2004 and 2003, respectively.
70
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004, the scheduled maturities of long-term debt, in
thousands, are as follows:
2005 $ 34,990
2006 28,898
2007 22,198
2008 44,373
2009 14,373
Thereafter $ 20,542
------------
$ 165,374
============
The Corporation had no letters of credit outstanding with the Federal Home Loan
Bank of Chicago at December 31, 2004 and $1,300,000 outstanding at December 31,
2003.
NOTE 13. JUNIOR SUBORDINATED DEBT OWED TO UNCONSOLIDATED TRUSTS
In June 2001, First Busey Corporation issued $25 million in cumulative trust
preferred securities through a newly formed Delaware business trust, First Busey
Capital Trust I. 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 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. Interest expense on the trust preferred securities was $2,250,000 for
each of the years ended December 31, 2004, 2003, and 2002. Prior redemption is
permitted under certain circumstances such as changes in tax and investment
company regulations. The obligations of the trust are fully and unconditionally
guaranteed, on a subordinated basis, by the Corporation. The trust preferred
securities qualify as Tier 1 capital for regulatory purposes.
The trust preferred securities are mandatorily redeemable upon the maturity of
the debentures on June 18, 2031, 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.
Prior to the implementation of a new accounting standard in the first quarter of
2004, the financial statements of the Trust were included in the consolidated
financial statements of the Corporation because First Busey owns all of the
outstanding common equity securities of the Trust. However, because First Busey
is not the primary beneficiary of the Trust, in accordance with the new
accounting standard, the financial statements of the Trust are no longer
included in the consolidated financial statements of the Corporation. The
Corporation's prior financial statements have been reclassified to
de-consolidate the Corporation's investment in the Trust. There was no
cumulative effect on stockholders' equity as a result of this adoption.
In April 2004, First Busey Corporation, through First Busey Statutory Trust II,
issued $15 million of cumulative trust preferred securities ("Securities") in a
private placement. The Securities were issued at an initial coupon rate of
3.82875%, pay cumulative cash distributions quarterly, and are subject to
repricing on a quarterly basis (3-month LIBOR plus 2.65%). Effective December
17, 2004, the rate on these securities increased to 5.15125%. Interest expense
on these trust preferred securities was $426,000 for the year ended December 31,
2004.
The proceeds of the offering were invested by First Busey Statutory Trust II in
junior subordinated deferrable interest debentures of First Busey Corporation
which represents all of the assets of the Trust. The Securities are subject to
mandatory redemption, in whole or in part, upon repayment of the junior
subordinated debentures at the stated maturity or their earlier redemption, in
each case at a redemption
71
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price equal to the aggregate liquidation preference of the Securities plus any
accumulated and unpaid distributions thereon to the date of redemption. Prior
redemption is permitted under certain circumstances, such as changes in tax and
investment company regulations, and is subject to payment of premium above par
value if made within five years of issuance. The obligations of the trust are
fully and unconditionally guaranteed, on a subordinated basis, by the
Corporation. The trust preferred securities qualify as Tier 1 capital for
regulatory purposes.
Issuance costs of $75,000 related to these trust preferred debentures were
deferred and are being amortized over the period until mandatory redemption of
the debentures in June, 2034.
NOTE 14. INCOME TAXES
The components of income taxes consist of:
Years Ended December 31,
--------------------------------
2004 2003 2002
--------- --------- --------
(Dollars in thousands)
Current $ 12,295 $ 9,681 $ 9,540
Deferred (1,071) 344 (1,367)
--------- --------- --------
TOTAL INCOME TAX EXPENSE $ 11,224 $ 10,025 $ 8,173
========= ========= ========
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,
2004 2003 2002
---------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ------ -------- ------ -------- ------
(Dollars in thousands)
Income tax at statutory rate $ 11,787 35.0% $ 10,461 35.0% $ 9,127 35.0%
Effect of:
Tax-exempt interest, net (797) (2.4%) (819) (2.7%) (774) (3.0%)
Income on bank owned life
insurance (317) (0.9%) (287) (1.0%) (260) (1.0%)
Amortization of intangibles 51 0.1% (35) (0.1%) 55 0.2%
Other 500 1.5% 705 2.3% 25 0.1%
---------- ------ -------- ------ -------- ------
$ 11,224 33.3% $ 10,025 33.5% $ 8,173 31.3%
========== ====== ======== ====== ======== ======
72
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred taxes, included in other liabilities in the accompanying balances
sheets, includes the following amounts of deferred tax assets and liabilities:
2004 2003
---------------------------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 7,473 $ 6,441
Property acquired in settlement of loans 825 569
Loans held for sale 50 32
Basis in deposit intangibles - 296
Deferred compensation 641 433
Accrued vacation 178 -
Other 129 295
---------- ------------
9,296 8,066
---------- ------------
Deferred tax liabilities:
Investment securities
Unrealized gains on securities held for sale (6,049) (6,060)
Other (592) (419)
Basis in premises and equipment (1,553) (1,425)
Mortgage servicing assets (779) (905)
Basis in deposit intangibles (601) -
Deferred loan fees (288) (337)
---------- ------------
(9,862) (9,146)
---------- ------------
NET DEFERRED TAX LIABILITY $ (566) $ (1,080)
========== ============
NOTE 15. 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 AICPA 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 75,000 shares of the Corporation's common stock using
proceeds of $1,356,000 from bank borrowings which are secured by the stock.
73
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As permitted by 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. Compensation expense for shares
released is equal to the fair market value of the shares when released if they
were acquired on or after January 1, 1993. All shares released in 2004, 2003,
and 2002 were acquired after January 1, 1993. During 2004, $467,000 of
compensation expense was recognized for the ESOP, releasing 25,500 shares to
participant accounts. During 2003, $327,000 of compensation expense was
recognized for the ESOP releasing 18,000 shares to participant accounts. During
2002, $304,000 of compensation expense was recognized for the ESOP, releasing
18,000 shares to participant accounts. Compensation expense related to the ESOP
is included in the chart below under "Employee Benefits". Compensation expense
related to the ESOP plan, including related interest expense, was $635,000,
$431,000, and $382,000, in the years ended December 31, 2004, 2003 and 2002.
Shares held in the ESOP which were acquired prior to December 31, 1992 were as
follows:
2004 2003
------------- ------------
Allocated shares 1,074,256 1,080,007
Unallocated shares - -
------------- ------------
TOTAL 1,074,256 1,080,007
============= ============
Fair value of allocated shares at December 31 $ 22,420,000 $ 19,440,000
============= ============
Shares held in the ESOP which were acquired after December 31, 1992 and their
fair values were as follows:
2004 2003
--------------------- ----------------------
Fair Fair
Shares Value Shares Value
------- ------------ ------- ------------
Allocated shares 99,600 $ 2,079,000 77,726 $ 1,399,000
Unallocated shares 148,500 3,099,000 174,000 3,132,000
------- ------------ ------- ------------
TOTAL 248,100 $ 5,178,000 251,726 $ 4,531,000
======= ============ ======= ============
74
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $855,000, $880,000, and $857,000 for the years
ended December 31, 2004, 2003, and 2002, respectively.
Expense related to the employee benefit plans are included in the statements of
income as follows:
Years Ended December 31,
----------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Employee benefits $ 1,401 $ 1,259 $ 1,161
Interest on employee stock ownership plan debt 89 52 78
-------- -------- --------
TOTAL EMPLOYER CONTRIBUTIONS $ 1,490 $ 1,311 $ 1,239
======== ======== ========
NOTE 16. 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 1,350,000
shares of common stock may be granted by the Executive Compensation and
Succession 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 1,350,000 to 2,250,000.
In January of 1999, the Corporation adopted the 1999 Stock Option Plan pursuant
to which nonqualified stock options for up to 750,000 shares of common stock may
be granted by the Executive Compensation and Succession Committee of the Board
of Directors to certain executive officers and key personnel of First Busey
Corporation and its subsidiaries.
In April, 2004, the Corporation adopted the 2004 Stock Option Plan pursuant to
which nonqualified stock options for up to 1,500,000 shares of common stock may
be granted by the Executive Compensation and Succession Committee of the Board
of Directors to certain executive officers and key personnel of First Busey
Corporation and its subsidiaries.
75
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, 2004, 2003, and 2002 and the changes during the years ending
on those dates is as follows:
2004 2003 2002
--------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 596,400 $ 12.19 871,488 $ 12.51 613,488 $ 10.76
Granted 354,000 19.36 - - 343,500 14.56
Exercised (173,550) 12.31 (265,263) 10.19 (81,900) 8.09
Forfeited (6,825) 16.18 (9,825) 12.23 (3,600) 11.17
-------- -------- -------
Outstanding at end of year 770,025 $ 16.47 596,400 $ 13.54 871,488 $ 12.51
======== ========= ======== ========= ======= =========
Exercisable at end of year 82,125 $ 11.95 252,600 $ 12.19 345,300 $ 11.13
Weighted-average fair value per
option of options granted during
the year $ 2.47 N/A $ 3.28
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options
Options Outstanding Exercisable
--------------------------------
Weighted-
Average
Remaining
Exercise Contractual
Prices Number Life Number
- -------- ------- ---------- ------
$ 11.92 78,750 0.96 years 78,750
12.71 3,375 1.67 years 3,375
14.56 336,300 5.96 years -
18.07 54,000 3.96 years -
19.59 297,800 4.70 years -
------- ---------- ------
770,225 4.80 years 82,125
======= ========== ======
76
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Award Plan:
The 1993 Restricted Stock Award Plan provides for restricted stock awards of up
to 675,000 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 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, 2004, there were 3,225 shares under grant.
Number of Shares
------------------------------
2004 2003 2002
------- ------- -------
Under restriction, beginning of year 6,450 10,425 -
Granted - - 14,925
Restrictions released 3,225 3,975 4,500
Forfeited and reissuable - - -
------- ------- -------
Under restriction, end of year 3,225 6,450 10,425
======= ======= =======
Available to grant, end of year 597,300 597,300 597,300
======= ======= =======
Compensation expense is recognized for financial statement purposes over the
period of performance. Compensation expense of $26,000, $55,000, and $116,000
was recognized for financial statement purposes during the years ended December
31, 2004, 2003, and 2002, respectively.
NOTE 17. 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, 2004:
Balance at beginning of year $ 4,969
Addition due to acquisition 11,136
New loans 9,130
Repayments (10,565)
-----------
Balance at end of year $ 14,670
===========
77
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. 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 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,
2004, that the Corporation and the Banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 2004, 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. The Corporation's and the Banks' actual capital
amounts and ratios as of December 31, 2004 and 2003, are also presented in the
table.
78
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, 2004:
Total Capital (to Risk Weighted Assets)
Consolidated $ 157,328 10.92% $ 115,292 8.00% N/A N/A
Busey Bank $ 128,706 11.24% $ 91,580 8.00% $ 114,475 10.00%
Busey Bank Florida $ 15,133 11.56% $ 10,473 8.00% $ 13,091 10.00%
First Capital Bank $ 17,827 11.96% $ 11,926 8.00% $ 14,908 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 133,122 9.24% $ 57,646 4.00% N/A N/A
Busey Bank $ 108,992 9.52% $ 45,790 4.00% $ 68,685 6.00%
Busey Bank Florida $ 13,495 10.31% $ 5,237 4.00% $ 7,855 6.00%
First Capital Bank $ 15,960 10.71% $ 5,963 4.00% $ 8,945 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 133,122 6.88% $ 77,382 4.00% N/A N/A
Busey Bank $ 108,992 7.15% $ 60,945 4.00% $ 76,181 5.00%
Busey Bank Florida $ 13,495 8.06% $ 6,694 4.00% $ 8,368 5.00%
First Capital Bank $ 15,960 6.91% $ 9,233 4.00% $ 11,541 5.00%
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%
79
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. 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.
As of December 31, 2004, Busey Bank had entered into a contractual commitment
for the remodel of one of its branch locations in Champaign, Illinois. It had
also entered into a separate contractual commitment for the construction of a
new branch location in Normal, Illinois. Total commitment for these two projects
is approximately $2,112,000. These projects are expected to be completed during
2005. In addition to these two contruction projects, Busey Bank had entered into
a contractual commitment with its data processing provider for the replacement
of certain hardware and software components. Commitments under this contract
total $725,000. Installation of these components is expected to be complete by
March 31, 2005.
The Corporation and its subsidiaries are parties to credit related financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets.
The Corporation and its subsidiaries' exposure to credit loss is represented by
the contractual amount of those commitments. The Corporation and its
subsidiaries use the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
A summary of the contractual amount of the Corporation's exposure to
off-balance-sheet risk follows:
December 31,
----------------------
2004 2003
---------- ----------
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 413,679 $ 286,037
Standby letters of credit 12,507 11,682
Commitments to extend credit are agreements to lend to a customer as long as no
condition established in the contract has been violated. These commitments are
generally at variable interest rates and generally have fixed expiration dates
or other termination clauses and may require payment of a fee. The commitments
for equity lines of credit may expire without being drawn upon. Therefore, the
total commitment amounts do not necessarily represent future cash requirements.
The amount of collateral obtained, if it is deemed necessary by the Corporation
upon extension of credit, is based on management's credit evaluation of the
customer.
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.
80
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 and 2003, no amounts have been
recorded as liabilities for the corporation's potential obligations under these
guarantees.
As of December 31, 2004, 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, 2004, 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 $992,000, $790,000, and $699,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
The projected minimum rental payments under the terms of the leases at December
31, 2004, in thousands, are as follows:
2005 $ 947
2006 935
2007 869
2008 655
2009 191
Thereafter 266
---------
$ 3,863
=========
NOTE 20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Corporation.
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.
81
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans held for sale
Fair value of mortgage loans held for sale are based on commitments on hand from
investors or prevailing market prices.
Fair values for on-balance-sheet commitments to originate loans held for sale
are based on fees currently charged to enter into similar agreements, and for
fixed-rate commitments also consider the difference between current levels of
interest rates and the committed rates.
Loans
For variable rate loans that reprice frequently with no significant change in
credit risk, fair values are based on carrying amount. 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. Fair values for
nonperforming loans are estimated using discounted cash flow analysis or
underlying collateral values, when applicable. 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 is estimated using a discounted cash flow calculation
that applies interest rates currently offered for deposits of similar remaining
maturities. The carrying amounts reported in the balance sheet for securities
sold under agreements to repurchase approximate those assets' fair values. 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.
Junior subordinated debt owed to unconsolidated trusts
Fair values are based upon quoted market prices or dealer quotes. For variable
rate instruments, fair values are based on carrying values. 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, 2004 and 2003,
these items are immaterial.
82
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Corporation's financial instruments are as
follows:
2004 2003
-----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ----------------- ---------------- ---------------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 51,091 $ 51,091 $ 52,397 $ 52,397
Securities 352,256 352,256 224,733 224,733
Loans, net 1,456,683 1,463,112 1,176,168 1,184,532
Accrued interest receivable 8,566 8,566 6,606 6,606
Financial liabilities:
Deposits 1,558,822 1,559,370 1,256,595 1,263,205
Federal funds purchased and
securities sold under agreements to
repurchase 41,558 41,558 16,000 16,000
Short-term borrowings 11,250 11,250 - -
Long-term debt 165,374 165,928 92,853 95,740
Junior subordinated debt owed to
unconsolidated trusts 40,000 42,550 25,000 28,275
Accrued interest payable 3,799 3,799 2,465 2,465
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 21. REPORTABLE SEGMENTS AND RELATED INFORMATION
First Busey Corporation has four reportable segments, Busey Bank, Busey Bank
Florida, First Capital Bank, and Busey Investment Group. Busey Bank provides a
full range of banking services to individual and corporate customers through its
branch network in Champaign, McLean and Ford Counties in Illinois, through its
branch in Indianapolis, Indiana, and through its loan production office in Fort
Myers, Florida. Busey Bank Florida provides a full range of banking services to
individual and corporate customers in Fort Myers and Cape Coral, Florida. First
Capital Bank, acquired June 1, 2004, provides a full range of banking services
to individual and corporate customers in Peoria and Pekin, Illinois. Busey
Investment Group is a wholly-owned subsidiary of First Busey Corporation and
owns three subsidiaries: First Busey Trust & Investment Co. which provides trust
and asset management services to individual and corporate customers throughout
Central Illinois; First Busey Securities, Inc., a full-service broker/dealer
subsidiary; and Busey Insurance Services, Inc., an insurance agency which
provides personal insurance products and specializes in long-term healthcare
insurance.
In prior periods, First Busey has reported First Busey Trust & Investment Co. as
a separate segment. Over time, the three subsidiaries of Busey Investment Group
have converged and are now directed by a common management team in a similar
operating style, share similar marketing strategies, and share common office
locations. Likewise, the financial results of these three subsidiaries are
83
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reviewed and monitored on a consolidated basis. Therefore, management of First
Busey Corporation has identified Busey Investment Group as the more appropriate
reportable segment.
The Corporation's four 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
four segments are the same as those described in the summary of significant
accounting policies in the annual report. The Corporation accounts for
intersegment revenue and transfers at current market value.
The following summarized information relates to the Corporation's reportable
segments:
December 31,
2004 2003 2002
------ ------ ------
(Dollars in thousands)
Interest Income:
Busey Bank 70,644 68,869 72,841
Busey Bank Florida 8,475 4,716 2,981
First Capital Bank 6,521 - -
Busey Investment Group 147 150 176
All Other 132 114 87
------ ------ ------
Total Interest Income 85,919 73,849 76,085
------ ------ ------
Interest Expense:
Busey Bank 21,720 21,229 26,599
Busey Bank Florida 2,744 2,126 1,588
First Capital Bank 2,348 - -
Busey Investment Group - - -
All Other 3,229 2,263 2,307
------ ------ ------
Total Interest Expense 30,041 25,618 30,494
------ ------ ------
Other Income:
Busey Bank 15,578 17,996 15,841
Busey Bank Florida 504 552 434
First Capital Bank 650 - -
Busey Investment Group 7,310 6,531 6,885
All Other (252) (394) (623)
------ ------ ------
Total Other Income 23,790 24,685 22,537
------ ------ ------
84
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2004 2003 2002
--------- --------- ---------
(Dollars in thousands)
Net Income:
Busey Bank 20,683 19,758 18,292
Busey Bank Florida 1,573 287 24
First Capital Bank 1,170 - -
Busey Investment Group 1,989 1,620 1,705
All Other (2,961) (1,801) (2,117)
--------- --------- ---------
Total Net Income 22,454 19,864 17,904
--------- --------- ---------
Goodwill:
Busey Bank 5,832 5,832 5,832
Busey Bank Florida - - -
First Capital Bank 24,405 - -
Busey Investment Group - - -
All Other 1,548 1,548 1,548
--------- --------- ---------
Total Goodwill 31,785 7,380 7,380
--------- --------- ---------
Assets:
Busey Bank 1,523,648 1,394,354 1,346,062
Busey Bank Florida 175,778 113,441 73,193
First Capital Bank 249,575 - -
Busey Investment Group 6,053 5,265 5,113
All Other 9,387 9,024 11,210
--------- --------- ---------
Total Assets 1,964,441 1,522,084 1,435,578
--------- --------- ---------
85
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial data for First Busey Corporation is presented below.
BALANCE SHEETS
December 31,
-----------------------
2004 2003
--------- ---------
(Dollars in thousands)
ASSETS
Cash and due from subsidiary bank $ 7,376 $ 5,498
Securities available for sale 2,766 3,241
Loans 2,585 2,473
Investments in subsidiaries:
Bank 180,916 127,498
Non-bank 11,011 10,678
Premises and equipment, net 118 101
Goodwill 1,548 1,548
Other assets 6,512 2,983
--------- ---------
TOTAL ASSETS $ 212,832 $ 154,020
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Long-term debt $ 30,000 $ -
Long-term ESOP debt 2,456 2,853
Junior subordinated debentures due to unconsolidated
trusts 40,000 25,000
Other liabilities 1,504 990
--------- ---------
TOTAL LIABILITIES 73,960 28,843
--------- ---------
Stockholders' equity before unearned ESOP shares and deferred
compensation for restricted stock awards 141,343 128,071
Unearned ESOP shares and deferred compensation for restricted
stock awards (2,471) (2,894)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 138,872 125,177
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 212,832 $ 154,020
========= =========
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Operating income:
Dividends from subsidiaries:
Bank $ 12,600 $ 12,000 $ 12,000
Non-bank 1,000 1,500 2,050
Interest and dividend income 199 154 141
Other income 1,275 1,101 928
-------- -------- --------
TOTAL OPERATING INCOME 15,074 14,755 15,119
-------- -------- --------
Expenses:
Salaries and employee benefits 1,838 1,633 1,503
Interest expense 3,305 2,303 2,325
Operating expense 952 882 1,475
-------- -------- --------
TOTAL EXPENSES 6,095 4,818 5,303
-------- -------- --------
INCOME BEFORE INCOME TAX BENEFIT
AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 8,979 9,937 9,816
Income tax benefit 2,225 1,723 2,007
-------- -------- --------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARIES 11,204 11,660 11,823
Equity in undistributed income of subsidiaries:
Bank 10,826 8,044 6,316
Non-bank 424 160 (235)
-------- -------- --------
NET INCOME $ 22,454 $ 19,864 $ 17,904
======== ======== ========
87
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- -------- --------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 22,454 $ 19,864 $ 17,904
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 72 63 35
Equity in undistributed net income of subsidiaries (11,250) (8,204) (6,081)
Stock-based compensation 26 55 116
Fair value adjustment on employee stock ownership
plan shares allocated 102 59 (15)
Security gains, net (164) (93) (1)
Gain on disposal of premises and equipment - - (22)
Changes in assets and liabilities:
(Increase) decrease in other assets (4,222) 46 2,232
Increase (decrease) in other liabilities 1,309 (57) (73)
---------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,327 11,733 14,095
---------- -------- --------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale 575 3,770 67
Purchases of securities available for sale (194) (3,718) (532)
Increase in loans (112) (335) (313)
Proceeds from sales of premises and equipment - - 32
Purchases of premises and equipment (89) (36) (128)
Capital contribution to subsidiary (42,366) - -
---------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (42,186) (319) (874)
---------- -------- --------
Cash Flows from Financing Activities
Proceeds from short-term borrowings - - 500
Principal payments on short-term borrowings - - (2,500)
Proceeds from issuance of long-term debt 42,000 - -
Principal payments on long-term debt (12,000) - -
Proceeds from issuance of junior subordinated
debentures due to First Busey Statutory Trust II 15,000 - -
Purchases of treasury stock (2,264) (4,079) (3,792)
Proceeds from sales of treasury stock 3,384 5,509 876
Cash dividends paid (10,383) (9,215) (8,126)
---------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 35,737 (7,785) (13,042)
---------- -------- --------
NET INCREASE IN CASH AND
DUE FROM SUBSIDIARY BANKS 1,878 3,629 179
Cash and due from subsidiary banks, beginning 5,498 1,869 1,690
---------- -------- --------
Cash and due from subsidiary banks, ending $ 7,376 $ 5,498 $ 1,869
========== ======== ========
88
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. UNAUDITED INTERIM FINANCIAL DATA
The following table reflects summarized quarterly data for the periods described
(unaudited), in thousands, except per share data:
2004
---------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Interest income $24,470 $23,281 $19,912 $18,256
Interest expense 9,092 8,437 6,618 5,894
------- ------- ------- -------
Net interest income 15,378 14,844 13,294 12,362
Provision for loan losses 585 1,240 655 425
Noninterest income 6,041 6,021 6,034 5,694
Noninterest expense 12,272 11,150 10,196 9,467
------- ------- ------- -------
Income before income taxes 8,562 8,475 8,477 8,164
Income taxes 2,793 2,691 2,936 2,804
------- ------- ------- -------
Net income $ 5,769 $ 5,784 $ 5,541 $ 5,360
======= ======= ======= =======
Basic earnings per share $ 0.28 $ 0.28 $ 0.27 $ 0.26
Diluted earnings per share $ 0.28 $ 0.28 $ 0.27 $ 0.26
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 $ 0.21 $ 0.26 $ 0.26 $ 0.24
Diluted earnings per share $ 0.21 $ 0.26 $ 0.26 $ 0.24
NOTE 24. SUBSEQUENT EVENT
On February 24, 2005, the Board of Directors of First Busey Corporation entered
into an agreement with the Board of Directors of Tarpon Coast Bancorp, Inc. to
acquire all of the issued and outstanding stock of Tarpon Coast for
approximately $35.6 million or $27.00 per share. Tarpon shareholders will
receive $27.00 per share in a combination of First Busey common shares and cash.
The agreement is subject to approval by the shareholders of Tarpon Coast and the
receipt of the required regulatory approvals. The acquisition is expected to
close on or before August 30, 2005.
89