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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, 1997
[ ] 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:
Class A 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. [ ]
As of March 6, 1998, the aggregate market value of the Class A Common Stock
held by non-affiliates was $112,351,170. The market value of the Class A Common
Stock is based on the "Bid" price for such stock as reported in the OTC Bulletin
Board on that date. Affiliates include all directors, executive officers and
beneficial holders owning 5% or more of the shares.
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 6, 1998
--------------------------------------- ----------------------------
Class A Common Stock, without par value 6,895,174
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 23, 1998 for First Busey
Corporation's Annual Meeting of Stockholders to be held April 27, 1998, (the
"1998 Proxy Statement") are incorporated by reference into Part III.
FIRST BUSEY CORPORATION
Form 10-K Annual Report
Table of Contents
PART 1
Item 1 Business 3
Item 2 Properties 10
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters 11
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 29
PART III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial Owners and Management 29
Item 13 Certain Relationships and Related Transactions 29
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 30
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
First Busey Corporation ("First Busey"), a Nevada corporation, is a
multi-bank holding company located in Urbana, Illinois. As of December 31,
1997, First Busey owned one community bank subsidiary, and acquired a second one
as of January 12, 1998, a trust company subsidiary, a securities broker-dealer
subsidiary, an insurance subsidiary, a real estate subsidiary, and, effective
January 2, 1998, a travel agency subsidiary. First Busey is engaged primarily
in commercial, retail and correspondent banking and provides trust services,
insurance services, and travel services. Based on assets of $916 million as of
December 31, 1997, First Busey, with deposits of $811 million and stockholders'
equity of $81 million, is one of the largest financial institutions
headquartered in east central Illinois. First Busey's largest subsidiary, Busey
Bank, with continuous operations since 1868, is one of the oldest banks
chartered in Illinois.
First Busey's strategic plan is to provide a full range of financial
services including commercial, retail and correspondent banking services through
its banking subsidiaries, with emphasis on commercial and retail services. The
strategic plan also emphasizes the operation of its banking centers
autonomously, allowing them to tailor their service and products to the
particular market they serve while consolidating back-room operations. First
Busey intends to continue its expansion and growth in the three counties it
currently serves in Illinois, Champaign, McLean and Ford County, its second
banking center in Indianapolis, Indiana, and its Loan Production Office in Ft.
Myers. First Busey engages in exploratory discussions regarding potential
acquisitions from time to time; however, First Busey does not currently have any
commitments to acquire or merge with any financial institution.
First Busey Corporation's operations are conducted primarily through its
lead bank, Busey Bank (eighteen locations), the trust company and the
securities broker-dealer subsidiary. First Busey provides its subsidiaries with
both financial and managerial support. Each subsidiary operates under the
direction of its own Board of Directors.
BUSEY BANK
Busey Bank was established on January 13, 1868 and is a state-chartered
bank. As of December 31, 1997, Busey Bank had total assets of
$900.8 million, representing 98% of First Busey's assets, and had
total revenues of $70.9 million, representing 96% of First Busey's
revenues. Busey Bank provides a full range of banking services
including commercial and retail banking products. The services available
to its commercial and retail customers include a broad selection of
depository and lending activities. In the commercial lending area, Busey Bank
is designated a Small Business Administration Preferred Lender authorized to
fund government guaranteed loans on an expedited basis and is also an approved
lender under the Federal National Mortgage Association Program, permitting
expedited origination of single- and multi-family mortgage loans. Busey Bank's
other commercial lending activities consist primarily of secured loans to
borrowers in many different industries. Busey Bank's retail services include
consumer lending, numerous types of deposit accounts and certain specialized
programs such as the Fortune Five-O Program for the mature market.
Management's philosophy continues to be to develop programs tailored to
specific market segments of its customer base with particular emphasis on retail
services. The Busey organization emphasizes establishing strong relationships
with its customers. Busey Bank has adopted a strategy to increase other income
by emphasizing fee-based services, including transaction accounts, full service
brokerage, mortgage origination and other loan services generating fees.
3
Guidelines for Busey Bank for various collateral advance ratios are set
forth in the Loan Review Grading System under "Collateral Position." Loan
Officers are required to use the grading system in determining an acceptable
collateral position on any given credit request. Collateral coverage
percentages for various types of credit are set forth in the following table:
Collateral Type Coverage Ratio
--------------------- ---------------
Commercial Loans: Real Estate 125%
Accounts Receivable 125%
Inventory & Equipment 200%
Consumer Real Estate Loans: Real Estate 125%
Installment Loans: Cash or Equivalent 110%
Vehicle 140%
Mobile Homes 150%
Other Collateral 160%
All commercial loans must be supported by a completed and signed financial
statement which should include a minimum of a balance sheet and income
statement. Loan Officers are encouraged to require borrowers to provide annual
statements prepared by a CPA firm. Where possible, an audit should be obtained,
however, a review or compilation is acceptable. The Credit Analysis Department
tracks delinquent financial statements and provides weekly reports to the
Commercial Loan Department. In addition, the Senior Loan Committee receives a
monthly report detailing delinquent financial statements for customers with
large loan balances.
A borrower's financial position including cash flow is monitored at least
annually through an annual review process.
OTHER SUBSIDIARIES
First Busey Trust & Investment Co. began operation on January 1, 1987 as a
successor to the combined trust departments of Busey Bank and Champaign County
Bank & Trust Co., which began trust operations in 1967 and 1947, respectively.
Through First Busey Trust & Investment Co., First Busey plans to expand its
trust activities by increasing assets under control, currently approximating
$660 million, and by developing new financial services. During 1997, revenues
from trust activities were $3.2 million. First Busey Resources, Inc.,
previously an inactive subsidiary of First Busey Corporation, became active on
January 7, 1997. This subsidiary currently owns and manages Busey Plaza, a
90,000 square foot building which is the location of the headquarters of First
Busey Trust & Investment Co.
First Busey Corporation acquired Busey Business Bank on January 12, 1998.
This is a de novo bank established in Indianapolis, Indiana. Upon the
establishment of this chartered bank, Busey Bank closed its Loan Production
Office in Indianapolis. It is anticipated that this banking center will serve
the financial needs of the customers who were previously being served by the
Loan Production Office.
Busey Bank established a full service securities broker-dealer subsidiary,
First Busey Securities, Inc., on April 1, 1991. Through the offering of full
service brokerage, along with various insurance and annuity products, new
sources of fee income are available to Busey Bank.
4
In October of 1997, Busey Bank established an insurance subsidiary, Busey
Insurance Services, Inc., to further enhance the services available to its
customers. This subsidiary serves primarily the McLean County market. During
1997, Busey Bank established a subsidiary, BAT. This subsidiary owns and
operates automated teller machines. In January of 1998, Busey Bank acquired
Busey Carter Travel, a travel agency serving primarily Champaign County. This
acquisition was also completed to enhance the services available to the
customers of Busey Bank.
COMPETITION
First Busey faces intense competition in all phases of its banking business
from other banks and financial institutions. First Busey's subsidiary banks
compete for deposits with a large number of depository institutions including
commercial banks, savings and loan associations, credit unions, money market
funds and other financial institutions and financial intermediaries serving
Champaign County, McLean County, Illinois, and Hamilton County, Indiana.
Principal competitive factors with respect to deposits include interest rates
paid on deposits, customer service, convenience and location.
First Busey's subsidiary banks compete for loans with other banks
headquartered in Illinois and Indiana, with loan production offices of large
money center banks headquartered in other states, as well as with savings and
loan associations, credit unions, finance companies, mortgage bankers, leasing
companies and other institutions. Competitive factors with respect to loans
include interest rates charged, customer service and responsiveness in tailoring
financial products to the needs of customers. First Busey's subsidiary banks
compete for loans primarily by designing their products for and directing their
marketing efforts to businesses in the markets they serve which are locally
owned, well-capitalized and well-managed.
Many of the entities that compete with First Busey's subsidiary banks are
substantially larger in size than First Busey and First Busey's subsidiary
banks, and many non-bank financial intermediaries are not subject to the
regulatory restrictions applicable to First Busey's bank subsidiaries. First
Busey and its subsidiary banks have experienced an increase in the level of
competition as well as the number of competitors in recent years. See
"Supervision and Regulation."
EMPLOYEES
First Busey and its subsidiaries employed 393 employees (full-time
equivalent) on December 31, 1997. Management considers its relationship with
its employees to be good.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of First Busey and its subsidiary banks can be
materially affected not only by management decisions and general economic
conditions, but also by applicable statutes and regulations and other regulatory
pronouncements and policies promulgated by regulatory agencies with jurisdiction
over First Busey and its subsidiary banks, such as the Federal Reserve Board
("FRB"), Federal Deposit Insurance Corporation ("FDIC") and the State of
Illinois Office of Banks and Real Estate, and the effect of such statutes,
regulations and other pronouncements and policies can be significant, cannot be
predicted with a high degree of certainty and can change over time.
Furthermore, such statutes, regulations and other pronouncements and policies
are intended to protect the depositors and the FDIC's deposit insurance funds,
not to protect stockholders.
Bank holding companies and banks are subject to enforcement actions by
their regulators for regulatory violations. In addition to compliance with
statutory and regulatory limitations and requirements concerning financial and
operating matters, regulated financial institutions such as First Busey and its
subsidiary banks must file periodic and other reports and information with their
regulators and are subject to examination by each of their regulators.
5
The statutory requirements applicable to and regulatory supervision of bank
holding companies and banks have increased significantly and have undergone
substantial change in recent years. To a great extent, these changes are
embodied in the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), enacted in August 1989, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, and the
regulations promulgated under FIRREA and FDICIA.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof. This discussion is not intended to constitute and does not purport to
be a complete statement of all legal restrictions and requirements applicable to
First Busey and its subsidiary banks and all such descriptions are qualified in
their entirety by reference to applicable statutes, regulations and other
regulatory pronouncements.
INTERSTATE BANKING AND BRANCHING LEGISLATION
On September 29, 1994, the Riegle-Neal Interstate Banking and Efficiency
Act of 1994 (the "Interstate Banking Act") was enacted. Under the Interstate
Banking Act, adequately capitalized and adequately managed bank holding
companies will be allowed to acquire banks across state lines subject to certain
limitations. In addition, under the Interstate Banking Act, since June 1, 1997,
banks have been permitted, under some circumstances, to merge with one another
across state lines and thereby create a main bank with branches in separate
states. After establishing branches in a state through an interstate merger
transaction, a bank may establish and acquire additional branches at any
location in the state where any bank involved in the interstate merger could
have established or acquired branches under applicable federal and state law.
Under the Interstate Banking Act, states could adopt legislation permitting
interstate mergers before June 1, 1997. Alternatively, states could adopt
legislation before June 1, 1997, subject to certain conditions, opting out of
interstate branching. Illinois adopted legislation, effective September 29,
1995, permitting interstate mergers beginning on June 1, 1997. It is
anticipated that this interstate merger and branching ability will increase
competition and further consolidate the financial institutions industry.
REGULATION OF BANK HOLDING COMPANIES AND THEIR NON-BANK SUBSIDIARIES
First Busey is a registered bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended ("BHCA"). As such, First Busey is
subject to regulation, supervision and examination by the FRB. First Busey is
also subject to the limitations and requirements of the Illinois Bank Holding
Company Act ("IBHCA"). These limitations and requirements, however, are no more
restrictive in most instances than those imposed by the BHCA and the FRB. The
business and affairs of First Busey are regulated in a variety of ways,
including limitations on acquiring control of other banks and bank holding
companies, limitations on activities and investments, limitations on interstate
acquisitions, regulatory capital requirements and limitations on payment of
dividends. In addition, it is the FRB's policy that a bank holding company is
expected to act as a source of financial strength to banks that it owns or
controls and, as a result, the FRB could require First Busey to commit resources
to support its subsidiary bank in circumstances in which First Busey might not
do so absent the FRB's policy.
First Busey Trust & Investment Co. is subject to regulation and examination
by the State of Illinois Office of Banks and Real Estate and the FRB. The
federal and state laws generally applicable to a trust company subsidiary of a
bank holding company regulate, among other things, the scope of its business,
investments and other activities. Busey Insurance Services, Inc. is regulated
by the Illinois Department of Insurance. First Busey Securities, Inc. is
regulated by the National Association of Securities Dealers ("NASD").
6
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES
The BHCA generally prohibits a bank holding company from (1) acquiring,
directly or indirectly, more than 5% of the outstanding shares of any class of
voting securities of a bank or bank holding company, (2) acquiring control of a
bank or another bank holding company, (3) acquiring all or substantially all the
assets of a bank, or (4) merging or consolidating with another bank holding
company, without first obtaining FRB approval. In considering an application
with respect to any such transaction, the FRB is required to consider a variety
of factors, including the potential anti-competitive effects of the transaction,
the financial condition and future prospects of the combining and resulting
institutions, the managerial resources of the resulting institution, the
convenience and needs of the communities the combined organization would serve,
the record of performance of each combining organization under the Community
Reinvestment Act and the Equal Credit Opportunity Act, and the prospective
availability to the FRB of information appropriate to determine ongoing
regulatory compliance with applicable banking laws.
In addition, both the federal Change in Bank Control Act and the Illinois
Banking Act ("IBA") impose limitations on the ability of one or more individuals
or other entities to acquire control of First Busey or its subsidiary bank.
The BHCA generally imposes certain limitations on extensions of credit and
other transactions by and between banks that are members of the Federal Reserve
System and other banks and non-bank companies in the same holding company.
Under the BHCA and the FRB's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The BHCA prohibits a bank holding company from acquiring control of a bank
whose principal office is located outside of the state in which its principal
place of business is located unless specifically authorized by applicable state
law. The IBHCA permits Illinois bank holding companies to acquire control of
banks in any state and permits bank holding companies whose principal place of
business is in another state to acquire control of Illinois banks or bank
holding companies if that state affords reciprocal rights to Illinois bank
holding companies and certain other requirements are met.
The restrictions described above represent limitations on expansion by
First Busey and its subsidiary bank, the acquisition of control of First Busey
by another company and the disposition by First Busey of all or a portion of the
stock of its subsidiary banks or by its subsidiary banks of all or a substantial
portion of its assets.
Permitted Non-Banking Activities
The BHCA generally prohibits a bank holding company from engaging in
activities or acquiring or controlling, directly or indirectly, the voting
securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or another activity
that the FRB has determined, by regulation or otherwise, to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Subject to certain exceptions, before making any such acquisition or
engaging in any such activity, a bank holding company must obtain the prior
approval of the FRB as provided in applicable regulations.
In evaluating such applications, the FRB will consider, among other
relevant factors, whether permitting the bank holding company to engage in the
activity in question can reasonably be expected to produce benefits to the
public (such as increased convenience, competition or efficiency) that outweigh
any possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or safety and soundness
concerns). Those activities that the FRB has determined by regulation to be
closely related to banking include making, acquiring and servicing loans or
other extensions of credit by consumer finance companies.
7
Notwithstanding applicable restrictions on acquisition or control of banks,
bank assets, bank holding companies and companies engaged in permitted
non-banking activities, a bank holding company may acquire, without the prior
approval of the FRB, 5% or less of the outstanding shares of any class of voting
securities of a company assuming the investment does not otherwise result in
control of such company. The BHCA prohibits bank holding companies, with
certain exceptions, from acquiring direct or indirect ownership of more than
five percent of the voting securities of any company that is not a bank or does
not engage in any of the activities described in the preceding paragraph.
Capital Requirements
Regulatory capital requirements applicable to all regulated financial
institutions, including bank holding companies and banks, have increased
significantly in recent years and further increases are possible in future
periods. The FRB has adopted risk-based capital standards for bank holding
companies. The articulated objectives of Congress and the FRB in establishing a
risk-based method of measuring capital adequacy are (i) to make regulatory
capital requirements applicable to bank holding companies more sensitive to
differences in risk profiles among bank holding companies, (ii) to factor
off-balance sheet liabilities into the assessment of capital adequacy, (iii) to
reduce disincentives for bank holding companies to hold liquid, low risk assets
and (iv) to achieve greater consistency in the evaluation of capital adequacy of
major banking organizations throughout the world by conforming to the framework
developed jointly by supervisory authorities from countries that are parties to
the so-called "Basle Accord" adopted by such supervisory authorities in July
1988.
The FRB requires bank holding companies to maintain a minimum ratio of
risk-weighted capital to total risk-adjusted assets. Banking organizations,
however, generally are expected to operate well above the minimum risk-based
ratios. Risk-adjusted assets include a "credit equivalent amount" of
off-balance sheet items, determined in accordance with conversion formulae set
forth in the FRB's regulations. Each asset and off-balance sheet item, after
certain adjustments, is assigned to one of four risk-weighting categories, 0%,
20%, 50% or 100%, and the risk-adjusted values are then added together to
determine risk-weighted assets.
A bank holding company must meet two risk-based capital standards, a "core"
or "Tier 1" capital requirement and a total capital requirement. The current
regulations require that a bank holding company maintain Tier 1 capital equal to
4% of risk-adjusted assets and total capital equal to 8% of risk-adjusted
assets. Tier 1 capital must represent at least 50% of total capital and may
consist of those items defined in applicable regulations as core capital
elements. Core capital elements include common stockholders' equity; qualifying
noncumulative, nonredeemable perpetual preferred stock; qualifying (i.e., up to
25% of total Tier 1 capital) cumulative, nonredeemable perpetual preferred
stock; and minority interests in the equity accounts of consolidated
subsidiaries. Core capital excludes goodwill and other intangible assets
required to be deducted in accordance with applicable regulations.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists of
allowances for loan and lease losses; perpetual preferred stock (to the extent
not included in Tier 1 capital); hybrid capital instruments; perpetual debt;
mandatory convertible debt securities; term subordinated debt; and intermediate
term preferred stock, in each case subject to applicable regulatory limitations.
The maximum amount of Tier 2 capital that may be included in an organization's
qualifying total capital cannot exceed 100% of Tier 1 capital. In
determining total capital, a bank holding company must deduct from the sum
of Tier 1 and Tier 2 capital its investments in unconsolidated
subsidiaries; reciprocal holdings of certain securities of banking
organizations; and other deductions required by regulation or determined on a
case-by-case basis by the appropriate supervisory authority.
8
Another capital measure, the Tier 1 leverage ratio, is defined as Tier 1
capital divided by average total assets (net of allowance for losses and
goodwill). The minimum leverage ratio is 3% for banking organizations that do
not anticipate significant growth and that have well-diversified risk (including
no undue interest rate risk), excellent asset quality, high liquidity and good
earnings. Other banking organizations are expected to have ratios of at least
4% to 5%, depending upon their particular condition and growth plans. Higher
capital ratios could be required if warranted by the particular circumstances or
risk profile of a given banking organization. The FRB has not advised First
Busey of any specific minimum Tier 1 leverage ratio applicable to it.
As of December 31, 1997, First Busey's Tier 1 and total risk-based
capital ratios were 11.81% and 13.01%, respectively, and its Tier 1 leverage
ratio was 7.61%.
The failure of a bank holding company to meet its risk-weighted
capital ratios may result in supervisory action, as well as inability to obtain
approval of any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend
upon the level of noncompliance. Under the IBHCA, no bank holding company may
acquire control of a bank if, at the time it applies for approval or at the time
the transaction is consummated, its ratio of total capital to total assets, as
determined in accordance with then applicable FRB regulations, is or will be
less than 7%.
Risk-based capital ratios focus principally on broad categories of credit
risk and do not incorporate factors that can affect the Company's financial
condition, such as overall interest rate risk exposure, liquidity, funding and
market risks, the quality and level of earnings, investment or loan portfolio
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks. For this reason, the overall financial health of
First Busey and its subsidiary bank and the assessment of First Busey and its
subsidiary bank by various regulatory agencies may differ from conclusions that
might be drawn solely from the level of First Busey or its subsidiary bank's
risk-based capital ratios.
During 1994, the federal banking regulators announced a joint decision not
to modify risk-based capital and leverage requirements for regulatory capital to
reflect the impact of unrealized gains and losses for securities classified as
"available for sale." This decision was made in response to the Financial
Accounting Standards Board's issuance of Statement No. 115 "Accounting for
Certain Investments in Debt and Equity Securities."
Regulation of Banks
First Busey's bank subsidiary is a banking corporation organized under
the IBA. As such, it is subject to regulation, supervision and examination by
the State of Illinois Office of Banks and Real Estate. The deposit accounts of
the bank subsidiary are insured up to applicable limits by the FDIC's Bank
Insurance Fund (the "BIF"). Thus, the bank subsidiary is also subject to
regulation, supervision and examination by the FDIC. In certain instances, the
statutes administered by and regulations promulgated by certain of these
agencies are more stringent than those of other agencies with jurisdiction. In
these instances, the bank subsidiary must comply with the more stringent
restrictions, prohibitions or requirements.
The business and affairs of the bank subsidiary are regulated in a
variety of ways. Regulations apply to, among other things, insurance of deposit
accounts, capital ratios, payment of dividends, liquidity requirements, the
nature and amount of the investments that the bank subsidiary may make,
transactions with affiliates, community and consumer lending laws, internal
policies and controls, reporting by and examination of the bank subsidiary and
changes in control of the bank subsidiary.
9
Dividends
The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies. In the policy statement, the FRB expressed its view
that a bank holding company experiencing weak earnings should not pay cash
dividends which exceed its net income or which could only be funded in
ways that would weaken its financial health, such as by borrowing. The FRB
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. First Busey uses funds derived primarily from the payment of
dividends by its largest banking subsidiary for, among other purposes, the
payment of dividends to First Busey's stockholders. Under provisions of the
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. Presently, the surplus of Busey Bank exceeds its capital.
All dividends paid by First Busey's banking subsidiaries are
restricted by capital adequacy requirements imposed by federal regulators
regarding the maintenance of the risk-weighted asset ratios and the leverage
ratio (as defined by regulatory agencies). At December 31, 1997, Busey Bank
had $25,754,000 available for the payment of dividends to First Busey. Sound
banking practices require the maintenance of adequate levels of capital. State
and federal regulatory authorities have adopted standards for the maintenance of
capital by banks and adherence to such standards further limits the ability of
banks to pay dividends.
First Busey Trust & Investment Co., as an Illinois corporation, is
permitted to make distributions to its stockholder as authorized by its Board of
Directors, except that as long as it continues in a fiduciary business, it may
not withdraw for purposes of payment of dividends or otherwise any portion of
its capital account except with the approval of the State of Illinois Office of
Banks and Real Estate.
MONETARY POLICY AND ECONOMIC CONDITION
The earnings of commercial banks and bank holding companies are affected
not only by general economic conditions but also by the policies of various
governmental regulatory authorities. In particular, the FRB influences
conditions in the money and capital markets, which affect interest rates and the
growth in bank credit and deposits. FRB monetary policies have had a
significant effect on the operating results of commercial banks in the past and
this is expected to continue in the future. The general effect, if any, of such
policies upon the future business and earnings of First Busey and its subsidiary
bank cannot be predicted.
ITEM 2. PROPERTIES
As of March 6, 1998, First Busey and its subsidiaries conduct
business in twenty-one locations. Busey Bank has its headquarters at the Busey
Bank Building, a 40,000 square foot building owned by Busey Bank. In addition
to the Busey Bank Building, First Busey and/or its subsidiaries own the land and
building for twelve locations, own the building and lease the land for two
locations and lease six locations. Two supermarket locations, the Bloomington
facility, the Busey Plaza Building and the Indianapolis location are the only
facilities not fully occupied by First Busey or its subsidiaries. The Busey
Plaza Building, a five-story 90,000 square foot office building, is the location
of the headquarters of First Busey Trust & Investment Co., with the remainder
leased to unaffiliated tenants.
10
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to the business, to which First Busey or its subsidiaries
are a part of or which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Office (year first elected as an officer) Age
--------------------- ------------------------------------------------ ---
Douglas C. Mills* Chairman of the Board, President and Chief 57
Executive Officer of First Busey (1971)
Edwin A. Scharlau II* Chairman of the Board of First Busey Trust & 53
Investment Co. and First Busey Securities, Inc.
(1967)
P. David Kuhl* President and Chief Executive 48
Officer of Busey Bank (1979)
*Director
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 1, 1988, First Busey Class A Common Stock has been traded
in the over-the-counter market and quoted in the National Quotation Bureau's
"Pink Sheets." The "Pink Sheets" include approximately 14,000 thinly traded
stocks. In 1997, First Busey Corporation began trading on the OTC Bulletin
Board. The market quotations reflect inter-dealer prices, without
retail-markup, markdown or commission and may not necessarily represent actual
transactions. The investment banking firm of Stephens Inc., Little Rock,
Arkansas, is the principal market maker for First Busey Class A Common Stock.
The last reported "Bid" price for First Busey Class A Common Stock is reported
daily in the News-Gazette, a Champaign-Urbana newspaper. Prior to July 1, 1988,
there was no public market for First Busey Class A Common Stock. Although a
limited trading market for shares of First Busey Class A Common Stock has
developed recently, there can be no assurance that it will continue.
The following table presents for the periods indicated the high and
low "Bid" quotations for First Busey Class A Common Stock as provided by the
Corporation's market maker Stephens, Inc. and reported on the OTC Bulletin
Board.
1997 1996
-------------- --------------
Market Prices of Common Stock High Low High Low
----------------------------- ------ ------ ------ ------
First Quarter $23.75 $22.25 $19.17 $18.00
Second Quarter $24.25 $23.75 $21.00 $18.50
Third Quarter $25.75 $24.25 $22.00 $20.00
Fourth Quarter $27.75 $25.75 $23.75 $21.25
11
During 1997 and 1996, First Busey, declared cash dividends per share as follows:
CLASS A CLASS B
1997 COMMON STOCK COMMON STOCK
------- ------------ ------------
January $ .1700 $ .1546
April $ .1700 $ .1546
July $ .1800 $ .1636
October $ .1800 $ .1636
1996
-------
January $ .1667 $ .1515
April $ .1667 $ .1515
July $ .1600 $ .1455
October $ .1600 $ .1455
Three-for-two stock splits on both Class A and Class B Common Stock
occurred on May 7, 1996, and May 7, 1993.
For a discussion of restrictions on dividends, please see the discussion of
dividend restrictions under Item 1, Business, Dividends on page 10.
As of March 6, 1998 there were approximately 1,012 holders of First Busey
Class A Common Stock.
12
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, 1997, have been derived from First Busey's annual
consolidated financial statements audited by McGladrey & Pullen, LLP,
independent certified public accountants, whose report on the financial position
as of December 31, 1997 and December 31, 1996, and the results of operations for
each of the three years in the period ended December 31, 1997, appears elsewhere
in this report. This financial data should be read in conjunction with the
financial statements and the related notes thereto appearing in this report.
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET ITEMS (dollars in thousands, except per share data)
- ----------------------------------
Securities $215,514 $226,350 $284,517 $210,525 $230,359
Loans, net of unearned interest 602,937 569,500 481,772 451,051 412,905
Allowance for loan losses 6,860 6,131 5,473 5,235 5,205
Total assets 915,540 864,918 844,666 728,459 709,257
Total deposits 811,453 766,927 744,897 635,694 636,418
Long-term debt 10,000 5,000 5,000 5,000 6,645
Stockholders' equity 81,279 73,417 67,778 59,016 56,332
RESULTS OF OPERATIONS
- ----------------------------------
Interest income $ 63,831 $ 61,197 $ 54,494 $ 47,126 $ 46,003
Interest expense 31,119 30,033 26,515 20,212 20,363
-------- -------- -------- -------- --------
Net interest income 32,712 31,164 27,979 26,914 25,640
Provision for loan losses 1,075 1,100 395 240 1,125
Net income $ 10,371 $ 9,306 $ 8,775 $ 8,238 $ 7,364
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(dollars in thousands, except per share data)
PER SHARE DATA(1)
- ----------------------------------
Diluted earnings $ 1.48 $ 1.34 $ 1.27 $ 1.19 $ 1.07
Cash dividends (Class A) .70 .65 0.59 0.53 0.53
Book value 11.84 10.72 9.95 8.64 8.13
Closing "Bid" price 27.50 22.25 18.00 16.17 14.33
OTHER INFORMATION
- ----------------------------------
Return on average assets 1.18% 1.08% 1.15% 1.14% 1.07%
Return on average equity 13.42% 13.40% 13.86% 14.16% 13.87%
Net interest margin (2) 4.20% 4.13% 4.20% 4.30% 4.33%
Stockholders' equity to assets 8.88% 8.49% 8.02% 8.10% 7.94%
(1) Per share amounts have been restated to give retroactive effect to the
three-for-two stock splits which occurred May 7, 1996, and May 7, 1993.
(2) Calculated as a percent of average earning assets.
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
(the "Corporation") for the years ended December 31, 1997, 1996 and 1995. 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. All per
share amounts have been restated to give retroactive effect to the three-for-two
stock splits which occurred May 7, 1996, and May 7, 1993.
GENERAL
The Corporation's consolidated income is generated primarily by the
financial services activities of its subsidiaries. Since January 1, 1982, the
Corporation has acquired eleven banks and sold two; acquired six savings and
loan branches and two bank branches; acquired a bank branch in an FDIC assisted
acquisition of a failed bank; formed a trust company subsidiary; formed an
insurance agency subsidiary; and formed a non-bank ATM subsidiary. All of the
banks acquired during those years were accounted for using the purchase method
of accounting, except for Bank of Urbana which was accounted for using the
pooling of interests method. All subsidiary banks owned by the Corporation as
of November 1991 were merged with Busey Bank. Under the purchase method of
accounting, the earnings of the acquired subsidiaries are included in the
Corporation's earnings only for the periods subsequent to acquisition. The
following table illustrates the amounts of net income contributed by each
subsidiary (on a pre-consolidation basis) since January 1, 1995, less purchase
accounting adjustments.
Subsidiary Acquired 1997 1996 1995
- --------------------------------------------------------------------------------------------------
(dollars in thousands)
Busey Bank (1) 3/20/80 $ 9,645 88.3% $8,980 91.8% $8,664 92.8%
First Busey Trust & Investment Co. (2) -- 987 9.0% 651 6.7% 596 6.4%
First Busey Securities, Inc (3) -- 234 2.1% 148 1.5% 76 0.8%
First Busey Resources, Inc. (4) -- 102 0.9% -- -- -- --
Busey Insurance Services, Inc. (5) -- (26) - 0.2% -- -- -- --
BAT, Inc. (6) -- (12) - 0.1% -- -- -- --
----------------------------------------------------------
Total $10,930 100.0% $9,779 100.0% $9,336 100.0%
==========================================================
(1) City Bank of Champaign and Champaign County Bank & Trust were merged into Busey Bank as
of January 1, 1987. First National Bank of Thomasboro was merged into Busey Bank as of January 1,
1988. State Bank of St. Joseph was merged into Busey Bank as of November 3, 1989. The Bank of
Urbana, Citizens Bank of Tolono, and the assets of Community Bank of Mahomet subject to its
liabilities were merged into Busey Bank as of November 16, 1991. Busey Bank of McLean County was
merged into Busey Bank as of January 1, 1996.
(2) Formed as a subsidiary of the Corporation as of January 1, 1987 as a successor to the
combined trust departments of Busey Bank and Champaign County Bank & Trust.
(3) Formed as a subsidiary of Busey Bank as of April 1, 1991.
(4) 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's balance sheet were transferred
to subsidiary as of that date.
(5) Formed as a subsidiary of Busey Bank as of October 1, 1997.
(6) Reactivated as a subsidiary of Busey Bank as of July 1, 1997.
RESULTS OF OPERATIONS-THREE YEARS ENDED DECEMBER 31, 1997
Summary
The Corporation reported net income of $10,371,000 in 1997, up 11.4% from
$9,306,000 in 1996, which had increased 6.1% from $8,775,000 in 1995. Diluted
earnings per share in 1997 increased 10.4% to $1.48 from $1.34 in 1996, which
was a 5.5% increase from $1.27 in 1995. Contributing to the 1997 increase in
net income were increases in net interest income, trust fees, commissions and
brokers fees, and other service charges and fees. The main factor contributing
to the increase in net income for 1996 was the increase in net interest income
resulting from the large increase in loans outstanding. Operating earnings,
which exclude security gains and the gain on sales of loans and the related tax
14
expense, were $9,748,000 or $1.39 per share for 1997; $8,965,000, or $1.29 per
share for 1996; and $8,217,000, or $1.19 per share for 1995.
There were no material changes in average shares outstanding from 1995 to
1997 to affect earnings per share.
Security gains after the related tax expense were $338,000 or 3.3% of net
income in 1997; $166,000 or 1.8% of net income in 1996; and $134,000 or 1.5% of
net income in 1995.
The Corporation's return on average assets was 1.18%, 1.08% and 1.15% for
1997, 1996, and 1995, respectively, and return on average equity was 13.42%,
13.40%, and 13.86% for 1997, 1996, and 1995, respectively. On an operating
earnings basis, return on average assets was 1.11%, 1.04%, and 1.08% for 1997,
1996, and 1995, respectively, and return on average equity was 12.61%, 12.91%
and 12.98% for 1997, 1996, and 1995, respectively.
Net Interest Income
Net interest income on a tax equivalent basis for 1997 increased 4.6% to
$34,075,000 from $32,574,000 for 1996, which reflected an 11.0% increase from
$29,349,000 in 1995. Net interest income increased in 1997 as investment
security maturities and sales were reinvested in higher yielding loans. Net
interest income increased in 1996 because of a large increase in average loans
outstanding.
Average interest-earning assets increased to $811,010,000 in 1997 from
$788,158,000 and $699,567,000 in 1996 and 1995, respectively. Modest
internally generated growth accounted for the increase in average
interest-earning assets in 1997. The growth in 1996 was primarily due to the
effect of the investment in loans and securities that resulted from the
assumption of $77,988,000 of deposits in December 1995.
The net interest margin was 4.20% in 1997, 4.13% in 1996, and 4.20% in
1995. The increase in the net interest margin for 1997 was due to an increase
in average loan balances of $59,016,000 at an average rate one basis point lower
than the same rate for 1996, partially offset by increases in the average
balance of interest-bearing liabilities and the rates paid on those balances.
The decrease in net interest margin for 1996 was due to a 6 basis point decline
in the net interest spread which resulted from a decline in the yield on
interest-earning assets and an increase in the weighted rate paid on
interest-bearing liabilities when comparing the year ended December 31, 1996, to
the prior year period.
During 1997 and 1996, interest rate trends had a significant impact on the
Corporation's yields and costs. In 1997, the average yield on interest earning
assets increased 10 basis points while the average cost of interest-bearing
liabilities also increased by 10 basis points. This resulted in the net
interest margin increasing to 4.20% for 1997 from 4.13% in 1996. In 1996, the
average yield on interest-earning assets decreased 5 basis points, while the
average cost of interest-bearing liabilities increased 1 basis point. This
resulted in the net interest margin declining to 4.13% for 1996 from 4.20% for
1995. [See "Selected Statistical Information, Consolidated Average Balance
Sheets and Interest Rates."]
Provision for Loan Losses
The provision for loan losses, which is a current charge against income,
represents an amount which management believes is sufficient to maintain an
adequate allowance for future loan losses. In assessing the adequacy of the
allowance for loan losses, management considers the size and quality of the loan
portfolio measured against prevailing economic conditions and historical loan
loss experience. When a determination is made by management to charge off a
loan balance, such write-off is charged against the allowance for loan losses.
15
The provision for loan losses decreased to $1,075,000 in 1997 from
$1,100,000 in 1996 when it increased from $395,000 in 1995. Net charge-offs
decreased to $346,000 in 1997 from $442,000 in 1996 which had increased from
$157,000 in 1995. The provision for 1997 was large relative to net charge-offs
to restore the ratio of the allowance for loan losses to non-performing loans.
The increase in the provision for 1996 was primarily made in order to fund the
reserve for the $87,728,000 increase in loans during the year.
Other Income
Other income increased 18.4% in 1997 to $10,379,000 from $8,769,000 in
1996, which reflected a 2.5% increase from $8,559,000 in 1995. The increase in
1997 is due primarily to increases in trust fee income, commission income, and
other service charges. As a percentage of total income, other income was 14.0%,
12.5%, and 13.6% in 1997, 1996, and 1995, respectively. Gains on the sale of
securities, as a component of other income, totaled $520,000 (5.0%) in 1997,
$256,000 (2.9%) in 1996, and $206,000 (2.4%) in 1995. Other income also
includes gains on sales of loans, as a component of other income, of $439,000
(4.2%), $268,000 (3.1%), and $653,000 (7.6%) in 1997, 1996, and 1995,
respectively.
Additional components of other income were fee income and trust fees.
Service charges and other fee income increased 12.6% to $5,290,000 in 1997 from
$4,698,000 in 1996, which was an 18.2% increase from $3,973,000 in 1995. The
growth in fee income in 1997 and 1996 was due to increases in service charges on
deposit accounts. Trust fees increased 19.0% in 1997 and 3.9% in 1996; revenues
were $3,156,000 in 1997, $2,651,000 in 1996, and $2,551,000 in 1995. Increases
in trust department revenues in each year were primarily due to increases in
assets under care to $660,846,000 at December 31, 1997 from $518,367,000 at
December 31, 1996. Remaining other income decreased 2.4% to $972,000 in 1997
from $996,000 in 1996 which was a 13.4% decrease from $1,150,000 in 1995.
Other Expenses
Other expenses increased 5.7% in 1997 to $27,266,000 from $25,786,000 in
1996, which reflected an increase from $24,069,000 in 1995. As a percentage of
total income, other expenses were 36.7%, 36.9%, and 38.2% in 1997, 1996, and
1995, respectively. Employee related expenses, including salaries and wages and
employee benefits, increased 5.4% in 1997 to $14,615,000, as compared to
$13,868,000 in 1996, which was a 10.5% increase from $12,546,000 in 1995. As a
percent of average assets, employee related expenses were 1.66%, 1.61% and
1.64%, in 1997, 1996, and 1995, respectively. The Corporation had 393, 383,
and 375 full-time equivalent employees at December 31, 1997, 1996, and 1995,
respectively. Net occupancy expense of bank premises and furniture and
equipment expenses increased 13.3% in 1997 to $4,063,000 as compared to
$3,587,000 in 1996 and $3,559,000 in 1995. The increases were primarily due to
expenses associated with remodeling of existing facilities. As a percent of
average assets, occupancy and equipment expenses were .46%, .42%, and .46% in
1997, 1996, and 1995, respectively.
Excluding foreclosed property write-down and expense, remaining other
expenses increased 4.8% to $8,576,000 in 1997 from $8,181,000 in 1996 which was
a 5.7% increase from $7,738,000 in 1995. The increase in 1997 was primarily due
to increased data processing expense. This increase was partially offset by
reduced FDIC insurance expense. The increase in 1996 was primarily due to
increased amortization expenses related to acquisitions in December 1995, and
was partially offset by reduced data processing expenses.
Income Taxes
Income tax expense in 1997 was $4,379,000 as compared to $3,741,000 in 1996
and $3,299,000 in 1995. The provision for income taxes as a percent of income
before income taxes was 29.7%, 28.7%, and 27.3%, for 1997, 1996, and 1995,
respectively. The slightly lower rate in 1995 was due to the reclassification
of expenses of certain acquisition costs.
16
STATEMENTS OF CONDITION-DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets on December 31, 1997 were $915,540,000 an increase of 5.9%
from $864,918,000, on December 31, 1996. Total loans, net of unearned
interest, increased 5.9% to $602,937,000 on December 31, 1997 as compared to
$569,500,000 on December 31, 1996. Deposits increased 5.8% to $811,453,000 on
December 31, 1997 as compared to $766,927,000 on December 31, 1996. Interest
bearing deposits increased $30,513,000 or 4.4% during 1997. Non-interest bearing
deposits increased $14,013,000 or 17.9% during 1997. Total stockholders' equity
increased 10.7% to $81,279,000 on December 31, 1997, as compared to $73,417,000
on December 31, 1996.
Earning Assets
The average interest-earning assets of the Corporation were 92.1%, 91.7%,
and 91.6%, of average total assets for the years ended December 31, 1997, 1996,
and 1995, respectively.
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, 1997, the fair value of these securities was $215,514,000 and the amortized
cost was $206,589,000. There were $9,097,000 of gross unrealized gains and
$172,000 of gross unrealized losses for a net unrealized gain of $8,925,000.
The after-tax effect ($5,801,000) of this unrealized gain has been included in
stockholders' equity as called for in Statement No. 115. The increase in market
value for the debt securities in this classification was a result of falling
interest rates. The fair value increase in the equity securities was primarily
due to a $2,142,000 increase in the value of 54,200 shares of Student Loan
Marketing Association (SLMA) common stock owned by the Corporation throughout
the year.
The composition of securities available for sale is as follows:
Years ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies $161,762 $159,044 $213,862 $137,724 -
Equity securities 11,994 9,065 7,589 5,156 1,037
States and political subdivisions 32,351 1,253 202 - -
Other 9,407 1,881 1,363 1,138 -
----------------------------------------------------
Fair value of securities available for sale $215,514 $171,243 $223,016 $144,018 $ 1,037
====================================================
Fair value of securities under LOCOM(1) - - - - $ 3,052
====================================================
Amortized cost $206,589 $166,189 $218,257 $145,293 $ 1,037
====================================================
Fair value as a percentage of amortized cost 104.32% 103.04% 102.18% 99.12% 294.31%
====================================================
(1) Lower of cost or market
17
The maturities, fair values and weighted average yields of securities available
for sale as of December 31, 1997 are:
Due in 1 year or less Due after 1 year Due after 5 years Due after
through 5 years through 10 years 10 years
-----------------------------------------------------------------------------------------
Fair Weighted Fair Weighted Fair Weighted Fair Weighted
Value Average Value Average Value Average Value Average
Investment Securities(1) Yield Yield Yield Yield
-----------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies $76,011 5.66% $ 83,210 5.93% $ 2,541 5.89% - -
States and political subdivisions (2) 5,010 9.15% 12,228 8.72% 11,823 7.84% 3,290 8.46%
Other 1,210 5.60% 5,097 6.33% 748 7.19% - -
-----------------------------------------------------------------------------------------
Total $82,231 5.87% $100,535 6.29% $15,112 7.48% $3,290 8.46%
=========================================================================================
(1) Excludes equity securities and mortgage backed securities.
(2) On a tax-equivalent basis, assuming a federal income tax rate of 35% (the effective federal income tax rate as
of December 31, 1996)
The securities held to maturity portfolio consisted of debt securities
which provided the Corporation with a relatively stable source of income.
Additionally, the investment portfolio provides a balance to interest rate and
credit risk in other categories of the balance sheet while providing a vehicle
for the investment of available funds and supplying securities to pledge as
required collateral for certain deposits. All remaining securities were
transferred to the available for sale portfolio as of December 31, 1997.
The composition of securities held to maturity was as follows:
Years ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies - $ 8,635 $13,198 $17,031 $174,581
States and political subdivisions - 36,607 37,043 32,957 34,507
Other - 9,865 11,260 16,519 20,234
-------------------------------------------------
Amortized cost of securities held to maturity - $55,107 $61,501 $66,507 $229,322
=================================================
Fair value of securities held to maturity - $55,800 $62,625 $65,386 $236,264
=================================================
Fair value as a percentage of book value - 101.26% 101.83% 98.31% 103.03%
=================================================
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 75.1% at
December 31, 1997 from 74.1% at December 31, 1996 while obligations of state and
political subdivisions (tax-exempt obligations) as a percentage of total
securities decreased to 15.0% at December 31, 1997, from 16.7% at December 31,
1996.
18
Loan Portfolio
Loans, before allowance for loan losses, increased 5.9% to $602,937,000 in
1997 from $569,500,000 in 1996. Non-farm non-residential real estate mortgage
loans increased $8,303,000, or 6.3%, to $139,653,000 in 1997 from $131,350,000
in 1996. 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 $14,160,000, or 6.9%, to $220,659,000 in
1997 from $206,499,000 in 1996. It is intended that residential mortgage loan
origination will generate income and develop retail and other banking
relationships. 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 $131,060,000 as of December 31, 1997.
The composition of loans is as follows:
Years ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(dollars in thousands)
Commercial and financial $ 63,861 $ 62,065 $ 55,687 $ 57,878 $ 44,419
Agricultural 17,403 16,537 12,594 12,750 11,735
Real estate-farmland 11,782 11,468 11,162 11,769 10,777
Real estate-construction 31,306 26,184 25,566 21,759 16,228
Real estate-mortgage 439,660 413,541 334,417 303,046 276,404
Installment loans to individuals 38,925 39,707 42,353 43,854 53,483
----------------------------------------------------
$602,937 $569,502 $481,779 $451,056 $413,046
Unearned interest - (2) (7) (5) (141)
----------------------------------------------------
Loans $602,937 $569,500 $481,772 $451,051 $412,905
====================================================
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, 1997.
1 Year or Less 1 to 5 Years Over 5 Years Total
-----------------------------------------------------------
(dollars in thousands)
Commercial, financial and agricultural $ 63,136 $ 17,463 $ 665 $ 81,264
Real estate-construction 25,843 4,359 1,104 31,306
-----------------------------------------------------------
Total $ 88,979 21,822 $ 1,769 $ 112,570
-----------------------------------------------------------
Interest rate sensitivity of selected loans
Fixed rate $ 13,748 9,324 $ 1,769 $ 24,841
Adjustable rate 75,231 12,498 - 87,729
-----------------------------------------------------------
Total $ 88,979 $ 21,822 $ 1,769 $ 112,570
-----------------------------------------------------------
Allowance for Loan Losses
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'
19
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 loans
judged to present a possibility of loss (if, as a result of such monthly
appraisals, the loan is judged to be not fully collectible, the carrying value
of the loan is reduced to that portion considered collectible); 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.
The following table shows activity affecting the allowance for loan losses:
Years ended December 31
-----------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------
(dollars in thousands)
Average loans outstanding during period $584,327 $525,311 $453,915 $421,337 $366,859
=====================================================
Allowance for loan losses:
Balance at beginning of period $ 6,131 $ 5,473 $ 5,235 $ 5,205 $ 4,456
-----------------------------------------------------
Loans charged-off:
Commercial, financial and agricultural $ 192 $ 227 $ 339 $ 99 $ 397
Real estate-construction - 19 - - -
Real estate-mortgage 50 32 55 153 405
Installment loans to individuals 317 404 286 253 329
-----------------------------------------------------
Total charge-offs $ 559 $ 682 $ 680 $ 505 $ 1,131
-----------------------------------------------------
Recoveries:
Commercial, financial and agricultural $ 13 $ 43 $ 414 $ 62 $ 66
Real estate-construction - 50 - - -
Real estate-mortgage 110 - 3 128 156
Installment loans to individuals 90 147 106 105 111
-----------------------------------------------------
Total recoveries $ 213 $ 240 $ 523 $ 295 $ 333
-----------------------------------------------------
Net loans charged-off $ 346 $ 442 $ 157 $ 210 $ 798
-----------------------------------------------------
Provision for loan losses $ 1,075 $ 1,100 $ 395 $ 240 $ 1,125
-----------------------------------------------------
Net additions (due to acquisitions) - - - - 422
-----------------------------------------------------
Balance at end of period $ 6,860 $ 6,131 $ 5,473 $ 5,235 $ 5,205
=====================================================
Ratios:
Net charge-offs to average loans 0.06% 0.08% 0.03% 0.05% 0.22%
=====================================================
Allowance for loan losses to total
loans at period end 1.14% 1.08% 1.14% 1.16% 1.26%
=====================================================
20
The following table sets forth the allowance for loan losses by loan
categories as of December 31 for each of the years indicated:
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------------
(dollars in thousands)
Commercial, financial, agri-
cultural and real estate-farmland 1,059 15.4% $ 766 15.8% $ 785 16.5% $ 1,122 18.3% $ 3,513 16.2%
Real estate-construction - 5.2% - 4.6% - 5.3% - 4.8% - 3.9%
Real estate-mortgage 4,456 72.9% 3,505 72.6% 3,476 69.4% 3,013 67.2% 779 67.0%
Installment loans to individuals 1,045 6.5% 1,189 7.0% 1,097 8.8% 943 9.7% 785 12.9%
Unallocated 300 N/A 671 N/A 115 N/A 157 N/A 128 N/A
-----------------------------------------------------------------------------------
Total $ 6,860 100% $ 6,131 100% $ 5,473 100% $ 5,235 100% $ 5,205 100%
===================================================================================
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,
-------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------
(dollars in thousands)
Non-accrual loans $ 628 $ - $ 532 $ 636 $ 247
Loans 90 days past due and still accruing 1,033 1,002 897 1,336 1,450
Restructured loans - - - - -
-------------------------------------------
Total non-performing loans $1,661 $1,002 $1,429 $1,972 $1,697
-------------------------------------------
Repossessed assets $ 516 $ 805 $1,380 $1,645 $1,180
Other assets acquired in satisfaction of debts
previously contracted 5 1 1 1 1
-------------------------------------------
Total non-performing other assets $ 521 $ 806 $1,381 $1,646 $1,181
-------------------------------------------
Total non-performing loans and non-
performing other assets $2,182 $1,808 $2,810 $3,618 $2,878
===========================================
Non-performing loans to loans, before
Allowance for loan losses 0.28% 0.18% 0.30% 0.44% 0.41%
===========================================
Non-performing loans and non-performing
other assets to loans, before allowance for
loan losses, and repossessed assets 0.36% 0.32% 0.58% 0.80% 0.70%
===========================================
On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118, which requires loans to be considered
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. For
the year ended December 31, 1997, $8,000 of interest was recognized from
impaired loans, while no interest was recognized for the year ended December 31,
1996.
The gross interest income that would have been recorded in the years ended
December 31, 1994 and 1993 if the non-accrual and restructured loans had been
current in accordance with their original terms was $47,000 and $22,000,
respectively. The amount of interest collected on those loans that was
21
included in interest income for the year ended December 31, 1994 was $38,000.
There was no interest collected on these loans for the year ended December 31,
1993.
Potential Problem Loans
Potential problem loans are those loans which are not categorized as
impaired, non-accrual, past due or restructured, but where current
information indicates that the borrower may not be able to comply with
present loan repayment terms. Management assesses the potential for loss on
such loans as it would with other problem loans and has considered the effect of
any potential loss in determining its provision for possible loan losses.
Potential problem loans totaled $640,000 at December 31, 1997. There are no
other loans identified which management believes represent or result from trends
or uncertainties which management reasonably expects will materially impact
future operating results, liquidity or capital resources. There are no other
credits identified about which management is aware of any information which
causes management to have serious doubts as to the ability of such borrower(s)
to comply with the loan repayment terms.
Deposits
As indicated in the following table, average interest bearing deposits as a
percentage of average total deposits have decreased to 90.6% for the year ended
December 31, 1997 from 90.9% for the year ended December 31, 1996.
December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------
(dollars in thousands)
Average % Total Average Average % Total Average Average % Total Average
Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------------------------------
Non-interest bearing
demand deposits $ 73,345 9.4% -% $ 69,562 9.1% -% $ 63,165 9.5% -%
Interest bearing demand
deposits 110,940 14.2% 1.97% 130,365 17.1% 1.62% 123,369 18.4% 1.79%
Savings/Money Market 234,865 30.1% 3.32% 216,498 28.4% 3.57% 193,658 29.0% 3.49%
Time deposits 360,968 46.3% 5.54% 345,726 45.4% 5.46% 288,125 43.1% 5.44%
----------------------------------------------------------------------------------------
Total $780,118 100.0% 4.24% $762,151 100.0% 4.15% $668,317 100.0% 4.07%
========================================================================================
Certificates of deposit of $100,000 and over and other time deposits of $100,000
and over at December 31, 1997, had the following maturities (dollars in
thousands):
Under 3 months $47,774
3 to 6 months 19,678
6 to 12 months 17,510
Over 12 months 11,575
-------
Total $96,537
=======
22
Short-term Borrowings
The following table sets forth the distribution of short-term borrowings
and weighted average interest rates thereon at the end of each of the last three
years. Federal funds purchased and securities sold under agreements to
repurchase generally represent overnight borrowing transactions. Other
short-term borrowings consist of various demand notes and notes with maturities
of less than one year.
Federal funds purchased and
securities sold under agreements Other short-term
to repurchase borrowings
-----------------------------------------------------
(dollars in thousands)
1997
Balance, December 31, 1997 -- $ 6,550
Weighted average interest rate at end of period -- 7.35%
Maximum outstanding at any month end $13,550 $ 8,000
Average daily balance $ 1,678 $ 6,542
Weighted average interest rate during period (1) 6.14% 7.21%
1996
Balance, December 31, 1996 $ 6,405 $ 8,000
Weighted average interest rate at end of period 7.19% 7.39%
Maximum outstanding at any month end $20,072 $ 9,250
Average daily balance $ 8,804 $ 8,092
Weighted average interest rate during period (1) 5.34% 7.10%
1995
Balance, December 31, 1995 $12,101 $ 9,573
Weighted average interest rate at end of period 5.75% 7.35%
Maximum outstanding at any month end $19,648 $10,573
Average daily balance $14,269 $ 8,428
Weighted average interest rate during period(1) 6.23% 8.50%
(1) The weighted average interest rate is computed by dividing total interest for
the year by the average daily balance outstanding.
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 banking subsidiary, Busey Bank, has an asset-liability
committee which meets monthly to review current market conditions and attempts
to structure the bank's balance sheet to ensure stable net interest income
despite potential changes in interest rates with all other variables constant.
The asset-liability committee uses gap analysis to identify mismatches in
the dollar value of assets and liabilities subject to repricing within specific
time periods. The Funds Management Policy established by the asset liability
committee 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. A
summary of the Corporation's gap analysis is summarized on page 25.
The committee does 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. The asset-liability committee
supplements gap analysis with balance sheet and income simulation analysis to
determine the
23
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
point and +/- 200 basis points. These interest-rate scenarios indicate the
interest rate risk of the Corporation over a one-year time horizon due to
changes in interest rates, as of December 31, 1997, is as follows:
Basis Point Changes
---------------------------------
-200 -100 +100 +200
---------------------------------
Percentage change in net interest income due to an
immediate change in interest over a one-year period 8.23% 3.97% (5.26%) (11.43%)
Liquidity
Liquidity is the availability of funds to meet all present and future cash
flow obligations arising in the daily operations of the business at a minimal
cost. These financial obligations consist of needs for funds to meet extensions
of credit, deposit withdrawals and debt servicing.
The sources of short-term liquidity utilized by the Corporation consist of
asset maturities, sales, deposits and capital funds. Additional liquidity is
provided by bank lines of credit, repurchase agreements and the ability to
borrow from the Federal Reserve Bank and Federal Home Loan Bank. The
Corporation does not deal in or use brokered deposits as a source of liquidity.
The Corporation purchases federal funds as a service to its correspondent banks,
but does not rely upon these purchases for liquidity needs. Long-term liquidity
needs will be satisfied primarily through 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.
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 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.
Average liquid assets are shown in the table below:
Liquid Assets
Years Ended December 31,
--------------------------
Average Balances 1997 1996 1995
--------------------------
(dollars in thousands)
Federal funds sold $8,899 $8,159 $15,000
==========================
Percentage of average total assets 1.01% 0.95% 1.96%
==========================
Rate Sensitive Assets and Liabilities
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.
24
The following table sets forth the static rate-sensitivity analysis of the
Corporation as of December 31, 1997:
Rate Sensitive Within
--------------------------------------------------------------------------------
1-30 Days 31-90 Days 91-180 Days 181 Days-1 Yr Over 1 Yr Total
--------------------------------------------------------------------------------
(dollars in thousands)
Federal funds sold $ 18,800 - - - - $ 18,800
Investment securities
U.S. Treasuries and Agencies 9,635 $ 29,622 $ 8,731 $ 29,022 $ 84,752 161,762
States and political subdivisions 1,103 - 260 4,312 26,676 32,351
Other securities 2,475 200 401 300 18,025 21,401
Loans (net of unearned interest) 196,285 25,435 37,733 82,188 261,296 602,937
--------------------------------------------------------------------------------
Total rate-sensitive assets $ 228,298 $ 55,257 $ 47,125 $ 115,822 $ 390,749 $837,251
--------------------------------------------------------------------------------
Interest bearing transaction deposits $ 13,715 - - - - $ 13,715
Savings deposits 78,393 - - - - 78,393
Money market deposits 254,193 - - - - 254,193
Time deposits 49,990 54,059 71,043 87,209 110,761 373,062
Short-term borrowings 6,550 - - - - 6,550
Long-term debt - - 5,000 - 5,000 10,000
--------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 402,841 $ 54,059 $ 76,043 $ 87,209 $ 115,761 $735,913
--------------------------------------------------------------------------------
Rate-sensitive assets less rate- $ (174,543)
sensitive liabilities $ 1,198 $ (28,918) $ 28,613 $ 274,988 $101,338
--------------------------------------------------------------------------------
Cumulative Gap $ (174,543) $ (173,345) $ (202,263) $ (173,650) $ 101,338
======================================================================
Cumulative amounts as a percentage
of total rate-sensitive assets -20.85% -20.70% -24.16% -20.74% 12.10%
======================================================================
Cumulative Ratio 0.57X 0.62X 0.62X 0.72X 1.14X
======================================================================
The foregoing table shows a negative (liability sensitive) cumulative
unadjusted gap of approximately $175 million in the 1-30 day repricing category.
The gap from 31 to 90 days is nearly matched, and beyond 90 days becomes less
liability sensitive as rate-sensitive assets that reprice beyond 91 days
gradually become greater in volume than rate-sensitive liabilities that are
subject to repricing in the same respective time periods. The composition of
the gap structure at December 31, 1997 will benefit the Corporation more if
interest rates fall during the next 30 days by allowing the net interest margin
to grow as liability rates would reprice more quickly than rates on
rate-sensitive assets.
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, 1997, the Corporation earned $10,371,000 and paid dividends
of $4,762,000 to stockholders, resulting in a retention of current earnings of
$5,609,000.
The Federal Reserve Board uses capital adequacy guidelines in its
examination and regulation of bank holding companies and their subsidiary banks.
Risk-based capital ratios are established by allocating assets and certain
off-balance sheet commitments into four risk-weighted categories. These
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, 1997, the Corporation
had a total capital to total risk-weighted asset ratio of 13.01%, a Tier 1
capital to risk-weighted asset ratio of 11.81% and a Tier 1 leverage ratio of
7.61%; the Corporation's bank subsidiary, Busey Bank, had ratios of 12.59%,
11.37%, and 7.27%, respectively. As these ratios show, the Corporation and its
bank subsidiary significantly exceed the regulatory capital guidelines.
25
Regulatory Considerations
It is management's belief that there are no current recommendations by the
regulatory authorities which if implemented, would have a material effect on the
Corporation's liquidity, capital resources, or operations.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in
June 1997. This statement is effective for financial statement periods
beginning after December 15, 1997. The effect on the Corporation's financial
position and results of operations will not be material.
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement is effective for financial statement periods beginning after
December 15, 1997. The effect on the Corporation's consolidated financial
statements will not be material.
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."
Year 2000 Compliance
The Corporation has developed an all encompassing plan to address Year 2000
related issues. The plan has five phases that included (1) awareness of Year
2000 issues, (2) identification and inventory of Year 2000 issues, (3)
development of solutions including contingency plans, (4) implementation of
solutions, and (5) testing. Approximately 300 different issues and software
systems have been inventoried as having possible Year 2000 impact. These issues
range from forms to alarm systems to core applications software. Plans are
being put in place to test and address each of these items. To ensure
compliance for the bank core data processing systems, there will be a conversion
from the current outsourced solution to an in-house solution in the fall of
1998. This will encompass all loan, deposit and financial reporting aspects of
the banking operation. There will be costs of approximately $3,800,000 for
equipment and software which will be partially offset by the elimination of many
of the outsourcing costs. Some of these costs will be capitalized as they
related to equipment purchased for an in-house data processing solution.
This risk goes beyond the internal items and also involves all of our
vendors and customers. We will be conducting education sessions for our
customers in 1998 to alert them to the potential problems they could encounter.
This will not eliminate this type of Year 2000 risk and the Corporation could be
adversely affected if the vendors and customers do not adequately address their
own Year 2000 issues.
Contingency plans are being developed for critical business applications in
order to mitigate potential problems and/or delays associated with
implementation of new solutions or delivery of products and services from
vendors.
26
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:
Consolidated Average Balance Sheets and Interest Rates
Years Ended December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------
(dollars in thousands)
Assets
Federal funds sold $ 8,899 $ 488 5.49% $ 8,159 $ 441 5.40% $ 15,000 $ 884 5.89%
Investment securities:
U.S. Treasuries and Agencies 160,394 9,309 5.80% 193,295 11,427 5.91% 172,960 10,452 6.04%
States and political
subdivisions(1) 36,064 3,022 8.38% 38,794 3,248 8.37% 36,668 3,126 8.52%
Other securities 21,326 1,008 4.73% 22,599 1,270 5.62% 21,024 1,361 6.47%
Loans (net of unearned discount)(1), (2) 584,327 51,367 8.79% 525,311 46,221 8.80% 453,915 40,041 8.82%
----------------------------------------------------------------------------------------
Total interest-earning assets(1) $811,010 $ 65,194 8.04% $788,158 $ 62,607 7.94% $699,567 $ 55,864 7.99%
========================================================================================
Cash and due from banks 35,695 34,784 30,694
Premises and equipment 22,535 21,555 21,501
Allowance for loan losses (6,480) (5,619) (5,421)
Other assets 18,139 20,392 17,604
--------- --------- ---------
Total assets $880,899 $859,270 $763,945
========= ========= =========
Liabilities and Stockholders' Equity
Interest bearing transaction deposits $110,940 $ 2,182 1.97% $130,365 $ 2,105 1.62% $123,369 $ 2,209 1.79%
Savings deposits 79,888 2,617 3.28% 80,516 2,554 3.17% 57,073 1,659 2.91%
Money market deposits 154,977 5,192 3.35% 135,982 5,167 3.80% 136,585 5,095 3.73%
Time deposits 360,968 20,011 5.54% 345,726 18,884 5.46% 288,125 15,670 5.44%
Short-term borrowings:
Federal funds purchased and
repurchase agreements 1,678 103 6.14% 8,804 470 5.34% 14,269 889 6.23%
Other 6,542 472 7.21% 8,092 575 7.10% 8,428 716 8.50%
Long-term debt 9,301 542 5.83% 5,000 278 5.55% 5,000 277 5.54%
----------------------------------------------------------------------------------------
Total interest-bearing liabilities $724,294 $ 31,119 4.30% $714,485 $ 30,033 4.20% $632,849 $ 26,515 4.19%
========================================================================================
Net interest spread 3.74% 3.74% 3.80%
======= ======= =======
Demand deposits 73,345 69,562 63,165
Other liabilities 5,954 5,798 4,630
Stockholders' equity 77,306 69,425 63,301
--------- --------- ---------
Total liabilities and
stockholders' equity $880,899 $859,270 $763,945
========= ========= =========
Interest income/earning assets(1) $811,010 $ 65,194 8.04% $788,158 $ 62,607 7.94% $699,567 $ 55,864 7.99%
Interest expense/earning assets 811,010 31,119 3.84% 788,158 30,033 3.81% 699,567 26,515 3.79%
----------------------------------------------------------------------------------------
Net interest margin(1) $ 34,075 4.20% $ 32,574 4.13% $ 29,349 4.20%
================= ================= =================
(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
27
Changes In Net Interest Income
Years Ended December 31, 1997, 1996, and 1995
--------------------------------------------------------------------------
Year 1997 vs 1996 Change due to(1) Year 1996 vs 1995 Change due to(1)
--------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Yield/Rate Change Volume Yield/Rate Change
--------------------------------------------------------------------------
(dollars in thousands)
Increase (decrease) in interest income:
Federal funds sold $ 40 $ 7 $ 47 $ (375) $ (68) $ (443)
Investment securities:
U.S. Treasuries and Agencies (1,913) (205) (2,118) 1,196 (221) 975
States and political subdivisions(2) (229) 3 (226) 177 (55) 122
Other securities (69) (193) (262) 119 (210) (91)
Loans(2) 5,188 (42) 5,146 6,282 (102) 6,180
--------------------------------------------------------------------------
Change in interest income(2) $ 3,017 $ (430) $ 2,587 $ 7,399 $ (656) $ 6,743
==========================================================================
Increase (decrease) in interest expense:
Interest bearing transaction deposits $ (166) $ 243 $ 77 $ 42 $ (246) $ (104)
Savings deposits (20) 83 63 732 163 895
Money market deposits 167 (142) 25 (22) 94 72
Time deposits 842 285 1,127 3,146 68 3,214
Federal funds purchased and
repurchase agreements (450) 83 (367) (305) (114) (419)
Other (112) 9 (103) (28) (113) (141)
Long-term debt 250 14 264 - 1 1
--------------------------------------------------------------------------
Change in interest expense $ 511 $ 575 $ 1,086 $ 3,665 $ (147) $ 3,518
--------------------------------------------------------------------------
Increase (decrease) in net interest income(2) $ 2,506 $ (1,005) $ 1,501 $ 3,734 $ (509) $ 3,225
==========================================================================
Percentage increase in net interest income
over prior period 4.6% 11.0%
======== ========
(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%
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are presented beginning on page 35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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 5 and 6 of the 1998 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 9 and 10 of the
1998 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
Incorporated by reference is the information set forth on pages 7 and 8 of the
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information set forth on page 13 of the 1998
Proxy Statement.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit Description of Exhibit Sequentially
Number Numbered Page
- ------------------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of First Busey Corporation (filed as Appendix B to
First Busey's definitive proxy statement filed with the Commission on April 5,
1993 (Commission File No. 0-15950), and incorporated herein by reference)
3.2 By-Laws of First Busey Corporation (filed as Appendix C to First Busey's
definitive proxy statement filed with the Commission on April 5, 1993
(Commission File No. 0-15950), and incorporated herein by reference)
10.1 First Busey Corporation 1993 Restricted Stock Award Plan (filed as Appendix E
to First Busey's definitive proxy statement filed with the Commission on April 5,
1993 (Commission File No. 0-15950), and incorporated herein by reference)
10.2 First Busey Corporation 1986 Stock Option Plan (filed as Exhibit 10.2 to First
Busey's Registration Statement on Form S-1 (Registration No. 33-13973), and
incorporated herein by reference)
10.3 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)
10.4 Mortgage on County Plaza Building (filed as Exhibit 10.4 to First Busey's
Registration Statement on Form S-1 (Registration No. 33-13973), and
incorporated herein by reference)
10.5 Affiliation Agreement dated October l3, 1988 between Community Bank of
Mahomet and CBM Bank, Mahomet and joined in by First Busey Corporation
(filed as Exhibit 2.1 to First Busey's Registration Statement on Form S-4
(Registration No. 33-25159), and incorporated herein by reference)
10.6 Merger Agreement dated October 13, 1988 between Community Bank of
Mahomet and CBM Bank, Mahomet and joined in by Busey Corporation (filed as
Exhibit 2.2 to First Busey's Registration Statement on Form S-4 (Registration No.
33-25159), and incorporated herein by reference)
10.7 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)
10.8 First Busey Corporation 1988 Stock Option Plan (filed as Exhibit 10.8 to First
Busey's Annual Report on Form 10-K for the fiscal year ended December 31, 1988
(Registration No. 2-66201), and incorporated herein by reference)
10.9 Affiliation Agreement dated as of April 10, 1989 between First Busey Corporation
and St. Joseph Bancorp, Inc. (filed as Exhibit 2.1 to First Busey's Corporation
Statement on Form S-4 (Registration No. 33-28926), and incorporated herein by
reference)
30
Exhibit Description of Exhibit Sequentially
Number Numbered Page
- ------------------------------------------------------------------------------------------------------------------
10.10 Agreement and Plan of Merger dated April 10, 1989 between First Busey Corporation
and St. Joseph Bancorp, Inc. (filed as Exhibit 2.2 to First Busey's Registration
Statement on Form S-4 (Registration No 33-28926), and incorporated herein by
reference)
10.11 Affiliation Agreement dated as of October 2, 1992 between First Busey Corporation
and Empire Capital Corporation (filed as Exhibit 2.1 to First Busey's Registration
Statement on Form S-4 (Registration No. 33-54664), and incorporated herein by
reference)
21.1 List of Subsidiaries of First Busey Corporation
23.1 Consent of Independent Public Accountants
FINANCIAL STATEMENT SCHEDULES
Financial statement schedules not included in this Form 10-K have been omitted
because they are not applicable for the required information shown in the
financial statements or notes thereto.
FIRST BUSEY CORPORATION INDEX TO FINANCIAL STATEMENTS
Page
-----
Independent Auditor's Report 37
Consolidated Balance Sheets 38
Consolidated Statements of Income 39
Consolidated Statements of Stockholders' Equity 40-43
Consolidated Statements of Cash Flows 44-46
Notes to Consolidated Financial Statements 47-74
Management Report 75
Independent Accountant's Report 76
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for or on behalf of First Busey
Corporation during the last quarter or the period covered by this Form 10-K.
FORM S-8 UNDERTAKING
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into the registrant's Registration Statement on Form
S-8 File No. 33-30095.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of the expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is
31
asserted by such director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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 23, 1998.
FIRST BUSEY CORPORATION
BY //DOUGLAS C. MILLS//
-----------------------------
Douglas C. Mills
Chairman of the Board, President
and 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 23, 1998.
Signature Title
//DOUGLAS C. MILLS// Chairman of the Board, President
----------------------- and Chief Executive Officer
Douglas C. Mills (Principal Executive Officer)
// SCOTT L. HENDRIE// Senior Vice President and Chief
----------------------- Financial Officer
Scott L. Hendrie (Principal Financial Officer)
//JOSEPH M. AMBROSE// Director
-----------------------
Joseph M. Ambrose
//SAMUEL P. BANKS// Director
-----------------------
Samuel P. Banks
//T.O. DAWSON// Director
-----------------------
T. O. Dawson
//VICTOR F. FELDMAN// Director
-----------------------
Victor F. Feldman
//KENNETH M. HENDREN// Director
-----------------------
Kenneth M. Hendren
//JUDITH L. IKENBERRY// Director
-----------------------
Judith L. Ikenberry
//E. PHILLIPS KNOX// Director
-----------------------
E. Phillips Knox
//P. DAVID KUHL// Director
-----------------------
P. David Kuhl
32
//V. B. LEISTER, JR.// Director
-----------------------
V. B. Leister, Jr.
//LINDA M. MILLS// Director
-----------------------
Linda M. Mills
//ROBERT C. PARKER// Director
-----------------------
Robert C. Parker
//EDWIN A. SCHARLAU// Director
-----------------------
Edwin A. Scharlau II
//BEN SNYDER// Director
-----------------------
Ben Snyder
//DAVID C. THIES// Director
-----------------------
David C. Thies
//ARTHUR R. WYATT// Director
-----------------------
Arthur R. Wyatt
33
(This page intentionally left blank)
34
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
35
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONTENTS
- ----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 37
- ----------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 38
Consolidated statements of income 39
Consolidated statements of stockholders' equity 40-43
Consolidated statements of cash flows 44-46
Notes to consolidated financial statements 47-74
- ----------------------------------------------------------------------------
INTERNAL CONTROL STRUCTURE REPORTS
Management Report - Effectiveness of the Internal Control Structure 75
Independent Accountant's Report 76
- ----------------------------------------------------------------------------
36
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
First Busey Corporation
Urbana, Illinois
We have audited the accompanying consolidated balance sheets of First Busey
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ McGladrey + Pullen, LLP
Champaign, Illinois
January 30, 1998
37
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 43,299 $ 33,738
Federal funds sold 18,800 -
Securities available for sale 215,514 171,243
Securities held to maturity (fair value 1996 $55,800) - 55,107
Loans held for sale (fair value 1997 $5,016; 1996 $1,457) 4,963 1,447
Loans (net of allowance for loan losses 1997 $6,860; 1996 $6,131) 591,114 561,922
Premises and equipment 22,834 21,588
Other assets 19,016 19,873
----------------------
TOTAL ASSETS $915,540 $864,918
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 92,090 $ 78,077
Interest bearing 719,363 688,850
----------------------
TOTAL DEPOSITS 811,453 766,927
Short-term borrowings 6,550 14,405
Long-term debt 10,000 5,000
Other liabilities 6,258 5,169
----------------------
TOTAL LIABILITIES 834,261 791,501
----------------------
Stockholders' Equity
Preferred stock, no par value, 1,000,000 shares authorized, no
shares issued - -
Common stock:
Class A common stock, no par value, authorized 40,000,000 shares;
7,077,353 shares issued 1997 and 5,952,353 issued 1996 6,291 5,291
Class B common stock, no par value, authorized 10,000,000 shares;
no shares issued 1997 and 1,125,000 issued 1996 - 1,000
Surplus 20,729 20,594
Retained earnings 53,011 47,402
Unrealized gain on securities available for sale, net 5,801 3,285
----------------------
TOTAL STOCKHOLDERS' EQUITY BEFORE TREASURY STOCK, UNEARNED
ESOP SHARES AND DEFERRED COMPENSATION FOR
STOCK GRANTS 85,832 77,572
Treasury stock, at cost, 201,960 shares 1997; 230,641 shares 1996 (3,922) (3,489)
Unearned ESOP shares and deferred compensation for restricted
stock awards (631) (666)
----------------------
TOTAL STOCKHOLDERS' EQUITY 81,279 73,417
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $915,540 $864,918
======================
See Accompanying Notes to Consolidated Financial Statements.
38
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- ------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Interest income:
Interest and fees on loans $51,061 $45,948 $39,763
Interest and dividends on securities
Taxable interest income 10,208 12,579 11,681
Nontaxable interest income 1,964 2,111 2,034
Dividends 110 118 132
Interest on federal funds sold 488 441 884
---------------------------
TOTAL INTEREST INCOME 63,831 61,197 54,494
---------------------------
Interest expense:
Interest on deposits 30,002 28,710 24,632
Interest on short-term borrowings 575 1,045 1,606
Interest on long-term debt 542 278 277
---------------------------
TOTAL INTEREST EXPENSE 31,119 30,033 26,515
---------------------------
NET INTEREST INCOME 32,712 31,164 27,979
Provision for loan losses 1,075 1,100 395
---------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 31,637 30,064 27,584
---------------------------
Other income:
Service charges on deposit accounts 2,947 2,937 2,705
Trust fees 3,156 2,651 2,551
Commissions and brokers fees, net 1,051 812 628
Other service charges and fees 1,292 949 640
Security gains, net 520 256 206
Trading security gains (losses), net 2 (100) 26
Gain on sales of loans 439 268 653
Other 972 996 1,150
---------------------------
TOTAL OTHER INCOME 10,379 8,769 8,559
---------------------------
Other expenses:
Salaries and wages 12,134 11,662 10,462
Employee benefits 2,481 2,206 2,084
Net occupancy expense of premises 2,225 1,936 1,977
Furniture and equipment expenses 1,838 1,651 1,582
Data processing 1,760 1,476 1,745
FDIC insurance expense 133 568 874
Amortization of intangible assets 1,328 1,321 860
Stationery, supplies and printing 704 715 690
Foreclosed property write-down and expense 12 150 226
Other 4,651 4,101 3,569
---------------------------
TOTAL OTHER EXPENSES 27,266 25,786 24,069
---------------------------
INCOME BEFORE INCOME TAXES 14,750 13,047 12,074
Income taxes 4,379 3,741 3,299
---------------------------
NET INCOME $10,371 $ 9,306 $ 8,775
===========================
Basic earnings per share $ 1.50 $ 1.37 $ 1.29
===========================
Diluted earnings per share $ 1.48 $ 1.34 $ 1.27
===========================
See Accompanying Notes to Consolidated Financial Statements.
39
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------------
Class A Class B
Common Common
Stock Stock Surplus
-------------------------------
(Dollars in thousands except
per share amounts)
Balance, December 31, 1994 $ 5,291 $ 1,000 $ 20,299
Net income - - -
Purchase of 42,144 shares for the treasury - - -
Issuance of 27,000 shares of treasury stock - - 81
Cash dividends:
Class A common stock $.59 per share - - -
Class B common stock $.53 per share - - -
Principal payments on employee stock ownership
plan debt - - -
Release of restricted stock issued under
restricted stock award plan - - -
Change in unrealized gain (loss) on securities
available for sale, net - - -
-------------------------------
Balance, December 31, 1995 5,291 1,000 20,380
Net income - - -
Purchase of 31,134 shares for the treasury - - -
Issuance of 65,888 shares of treasury stock - - 214
Cash dividends:
Class A common stock $.65 per share - - -
Class B common stock $.59 per share - - -
Principal payments on employee stock ownership
plan debt - - -
Release of restricted stock issued under
Restricted stock award plan - - -
Change in unrealized gain (loss) on securities
Available for sale, net - - -
-------------------------------
Balance, December 31, 1996 $ 5,291 $ 1,000 $ 20,594
40
- --------------------------------------------------------------------------------------------
Unrealized Deferred
Gain (Loss) Compensation
on Securities Unearned for Restricted
Retained Available Treasury ESOP Stock
Earnings for Sale Stock Shares Awards Total
---------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
[align $ 37,639 $ (842) $ (3,226) $ (1,000) $ (145) $ 59,016
with
previous 8,775 - - 8,775
page] - - (705) - - (705)
- - 272 - - 353
(3,340) - - - - (3,340)
(600) - - - - (600)
- - - 250 - 250
- - - - 94 94
- 3,935 - - - 3,935
---------------------------------------------------------------------------------
42,474 3,093 (3659) (750) (51) 67,778
9,306 - - - - 9,306
- - (605) - - (605)
- - 775 (192) 797
(3,710) - - - - (3,710)
(668) - - - - (668)
- - - 250 - 250
- - - - 77 77
- 192 - - - 192
---------------------------------------------------------------------------------
$ 47,402 $ 3,285 $ (3,489) $ (500) $ (166) $ 73,417
41
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------
Class A Class B
Common Common
Stock Stock Surplus
--------------------------------
(Dollars in thousands except
per share amounts)
Balance, December 31, 1996 $ 5,291 $ 1,000 $ 20,594
Net income - - -
Purchase of 121,732 shares for the treasury - - -
Issuance of 150,413 shares of treasury stock - - 135
Cash dividends:
Class A common stock $.70 per share - - -
Class B common stock $.6364 per share - - -
Proceeds from employee stock ownership plan debt - - -
Principal payments on employee stock ownership
plan debt - - -
Forfeiture of restricted stock issued under
restricted stock award plan - - -
Release of restricted stock issued under
restricted stock award plan - - -
Conversion of Class B common stock to
Class A common stock 1,000 (1,000) -
Change in unrealized gain (loss) on securities
available for sale, net - - -
--------------------------------
Balance, December 31, 1997 $ 6,291 $ - $ 20,729
================================
See Accompanying Notes to Consolidated Financial Statements.
42
- ---------------------------------------------------------------------------------------
Unrealized Deferred
Gain (Loss) Compensation
on Securities Unearned for Restricted
Retained Available Treasury ESOP Stock
Earnings for Sale Stock Shares Awards Total
-----------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
[align $ 47,402 $ 3,285 $ (3,489) $ (500) $ (166) $ 73,417
with
previous 10,371 - - - - 10,371
page] - - (3,127) - - (3,127)
- - 2,699 - - 2,834
(4,046) - - - - (4,046)
(716) - - - - (716)
- - - (250) - (250)
- - - 200 - 200
- - (5) - 5 -
- - - - 80 80
- - - - - -
- 2,516 - - - 2516
-----------------------------------------------------------------------------
$ 53,011 $ 5,801 $ (3,922) $ (550) $ (81) $ 81,279
=============================================================================
43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 10,371 $ 9,306 $ 8,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,532 3,355 2,801
Provision for loan losses 1,075 1,100 395
Provision for deferred income taxes (463) (373) (705)
Accretion of security discounts (293) (1,000) (820)
Gain on sales of securities, net (520) (256) (206)
Proceeds from sales of loans 42,004 34,742 34,223
Loans originated for sale (45,081) (34,118) (27,139)
Gain on sales of loans, net (439) (268) (653)
(Gain) loss on sales and dispositions of premises
and equipment (1) (6) 8
Change in assets and liabilities:
(Increase) decrease in other assets (1,114) 1,457 (4,682)
Increase (decrease) in other liabilities 1,247 (148) 2,128
----------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 10,318 13,791 14,125
----------------------------------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (100,964) (357,712) (229,274)
Proceeds from sales 12,292 15,948 55,189
Proceeds from maturities 93,826 395,149 101,722
Securities held to maturity:
Purchases (1,375) (20,556) (8,929)
Proceeds from maturities 11,741 26,889 14,360
(Increase) decrease in federal funds sold (18,800) 650 (650)
Increase in loans (30,674) (88,922) (37,998)
Purchases of premises and equipment (3,370) (1,713) (1,788)
Proceeds from sales of premises and equipment 1 31 -
----------------------------------
NET CASH USED IN INVESTING ACTIVITIES (37,323) (30,236) (107,368)
----------------------------------
(Continued)
44
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Financing Activities
Net increase in certificates of deposit $26,200 $ 1,102 $ 24,233
Net increase in demand deposits, money market and
savings accounts 18,326 20,928 6,982
Certificates of deposit assumed from First
of America - - 67,506
Demand deposits, money market and savings accounts
assumed from First of America - - 10,482
Cash dividends paid (4,762) (4,378) (3,940)
Purchase of treasury stock (3,127) (605) (705)
Proceeds from sales of treasury stock 2,834 797 353
Proceeds from short-term notes payable 2,500 1,000 5,750
Principal payments on short-term notes payable (4,000) (2,000) (1,250)
Proceeds from long-term debt 5,000 - -
Net decrease in federal funds purchased, repurchase
agreements and federal reserve discount obligations (6,405) (6,019) (8,136)
-----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 36,566 10,825 101,275
-----------------------------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 9,561 (5,620) 8,032
Cash and due from banks, beginning 33,738 39,358 31,326
-----------------------------
Cash and due from banks, ending $43,299 $33,738 $ 39,358
=============================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $30,981 $30,573 $ 25,795
=============================
Income taxes $ 4,388 $ 3,661 $ 3,894
=============================
(Continued)
45
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Supplemental Schedule of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans $ 407 $ 396 $ 689
==========================
Principal payments on ESOP debt $ 200 $ 250 $ 250
==========================
Proceeds from ESOP debt $ 250 $ - $ -
==========================
Change in unrealized gain on investment
securities available for sale $ 3,871 $ 295 $ 6,034
==========================
Decrease in deferred income tax assets attributable
to the unrealized gain on investment securities
available for sale $(1,355) $(103) $(2,099)
==========================
Transfer of securities held to maturity to securities
available for sale $44,812 $ - $ -
==========================
See Accompanying Notes to Consolidated Financial Statements.
46
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Description of business:
- -----------------------
First Busey Corporation (the Corporation) is a holding company whose bank
subsidiary, Busey Bank, provides a full range of banking services to individual
and corporate customers through its seventeen locations throughout central
Illinois. The bank is subject to competition from other financial institutions
and nonfinancial institutions providing financial products. First Busey
Securities, Inc. offers security broker/dealer services, and First Busey Trust &
Investment Co. provides investment management and fiduciary services to
institutional, corporate and personal trust clients. First Busey Corporation,
Busey Bank, First Busey Securities, Inc. and First Busey Trust & Investment Co.
are 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 subsidiaries: First Busey
Securities, Inc., Busey Insurance Services, Inc. and BAT, Inc.; First Busey
Trust & Investment Co.; and First Busey Resources, Inc. All material
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements of First Busey Corporation have been
prepared in conformity with generally accepted accounting principles and conform
to predominant practice within the banking industry.
Use of estimates
- ------------------
In preparing the consolidated financial statements, the Corporation's management
is required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant
estimates which are particularly susceptible to change in a short period of time
include the determination of the allowance for loan losses and valuation of real
estate and other properties acquired in connection with foreclosures or in
satisfaction of amounts due from borrowers on loans. Actual results could
differ from those estimates.
Trust assets
- -------------
Other than trust cash on deposit at the Corporation's bank subsidiary, trust
assets are not included in the accompanying consolidated financial statements
because they are not assets of the Corporation.
Cash flows
- -----------
For purposes of reporting cash flows, cash and due from banks include cash on
hand and amounts due from banks. Cash flows from federal funds purchased and
sold are reported net, since their original maturities are less than three
months.
47
- ------
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Securities
- ----------
Securities classified as available for sale are those debt securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity, and marketable equity securities. Any decision to sell
a security classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity mix
of the Corporation's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Securities available for sale are
carried at fair value. The difference between fair value and amortized cost
results in an unrealized gain or loss. Unrealized gains or losses are reported
as increases or decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings. Where applicable,
amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the period to maturity.
Securities classified as held to maturity are those debt securities the
Corporation has both the positive intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount which are recognized in
interest income using the interest method over the period to maturity.
Securities purchased with the intent to earn a profit by trading or reselling
them in a short period of time are classified as trading securities and are
carried at fair value. Realized and unrealized gains and losses are included in
income. At December 31, 1997 and 1996, there were no securities classified in
this category.
Loans
- -----
Loans are stated at the principal amount outstanding, net of unearned interest
and the allowance for loan losses.
Interest is credited to income as earned using the simple interest method
applied to the daily balances of principal outstanding.
The accrual of interest income on loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due. Upon discontinuance of
interest accrual, unpaid accrued interest is reversed. Interest income on these
loans is recognized to the extent interest payments are received and the
principal is considered fully collectible.
For collateralized impaired loans, loan balances in excess of net realizable
value are deemed impaired. In the determination of the valuation, historical
charge-offs for each category of loans, local economic trends, the source of
loans and concentrations of credit in specific industries, if any, are
considered.
48
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Allowance for loan losses
- ----------------------------
The allowance for loan losses is maintained at a level considered adequate by
management to provide for known and inherent risks in the loan portfolio. The
allowance is increased through a provision charged to operating expense and by
recoveries applicable to loans previously charged to the allowance, and is
reduced by loan balances which are considered uncollectible. The allowance is
based upon continuous credit reviews of the loan portfolio and considers changes
in the nature and volume of the loan portfolio, overall portfolio quality, loan
concentrations, specific problem loans, current and anticipated economic
conditions that may affect the borrowers' ability to pay, historical loan loss
experience and other factors, which, in management's opinion, deserve current
recognition in estimating loan losses.
In addition, various regulatory agencies periodically review the allowance for
loan losses, and may require the Bank to make additions to the allowance based
on their judgment of collectibility based on information available to them at
the time of their examination.
Loans held for sale
- ----------------------
Loans held for sale consist of fixed rate mortgage loans conforming to
established guidelines and held for sale to investors and the secondary mortgage
market. Mortgage loans held for sale are carried at the lower of aggregate cost
or estimated fair value.
Premises and equipment
- ------------------------
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.
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. 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.
Amortization
- ------------
The excess of the purchase price of subsidiaries over the fair value of
identifiable assets acquired, which excess aggregated approximately $10,480,000,
is amortized using the straight-line method over 15 years. Amortization of this
excess is $692,000, $691,000 and $479,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Accumulated amortization at December 31, 1997, is
$4,684,000.
49
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Core deposit and other identifiable intangible assets which aggregated
approximately $5,267,000 are amortized on an accelerated basis over the
estimated periods benefited. Amortization of these intangibles is $636,000,
$630,000 and $381,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Accumulated amortization at December 31, 1997 is $3,097,000.
The Corporation reviews its intangible assets periodically to determine
potential impairment by comparing the carrying value of the intangibles with the
anticipated future cash flows of the related businesses.
Income taxes
- -------------
The Corporation and its subsidiaries file consolidated Federal and State income
tax returns with each organization computing its taxes on a separate entity
basis. The provision for income taxes is based on income as reported in the
financial statements.
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future. The deferred tax
assets and liabilities are computed based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Earnings per share
- --------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
Basic earnings per share is computed by dividing net income for the year by the
weighted average number of shares outstanding of 6,901,773, 6,804,160, and
6,815,738 for 1997, 1996, and 1995, respectively.
Diluted earnings per share is 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 weighted average shares outstanding were 6,998,988,
6,936,508, and 6,911,246 for 1997, 1996, and 1995, respectively.
Stock split
- ------------
In April 1996, the Board of Directors approved a three-for-two stock split for
stockholders of record on April 26, 1996 and was effected on May 7, 1996. All
share amounts in the consolidated financial statements have been restated to
reflect the stock split.
50
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Reclassifications
- -----------------
Certain reclassifications have been made to the balances as of and for the year
ended December 31, 1996 and 1995 to be consistent with the classifications
adopted for 1997.
Recent accounting pronouncements
- ----------------------------------
Reporting Comprehensive Income
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in net
assets of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. In addition to an enterprise's
net income, changes in equity components under comprehensive income reporting
would also include such items as the net change in unrealized gain or loss on
available for sale securities and foreign currency translation adjustments. The
purpose of reporting comprehensive income is to measure all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners.
SFAS 130 is effective for financial statement periods beginning after December
15, 1997. The Corporation believes the adoption of SFAS 130 will not have a
material impact on its consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information
- ---------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 establishes standards for
the manner in which public business enterprises report certain information about
operating segments of their business in both their annual and interim financial
reports provided to shareholders. The information required to be disclosed for
an entity's operating segments not only consists of financial information, but
also certain related disclosures of the segment's products and services,
geographic areas, and major customers. The requirements of the new standard may
result in identification of different segments than those now used by the
Corporation.
SFAS 131 is effective for financial statement periods beginning after December
15, 1997. In the initial year of application, comparative information for
earlier years is to be restated, unless impracticable. In addition, the
provisions of SFAS 131 need not be applied to interim financial statements
issued in the initial year of application. The Corporation believes the
adoption of SFAS 131 will not have a material impact on its consolidated
financial statements.
51
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 2. SUBSEQUENT EVENTS
In December 1997, the Corporation was granted a charter by the Department of
Financial Institutions of the State of Indiana to establish a bank. On January
12, 1998, the Corporation capitalized the bank, named Busey Business Bank, at
$10,000,000 and was granted FDIC insurance coverage for the deposits of that
bank. This bank has been established to further expand the Corporation's
presence in Indianapolis where it previously operated a loan production office.
The Corporation provided the capital for the subsidiary by obtaining $10,000,000
in short-term borrowings from a third party lender at rates comparable to its
existing borrowings.
On January 2, 1998, the Corporation, through its Busey Bank subsidiary, entered
into an agreement to acquire The Busey Corporation, parent company of Busey
Carter Travel, an independent travel agency, for common stock totaling
approximately $825,000. As of January 2, 1998, Busey Carter Travel had assets
totaling approximately $877,000 and equity of $647,000. The majority of the
stock of The Busey Corporation was held by individuals who are also stockholders
or insiders of the Corporation. This acquisition is expected to be accounted
for using the purchase method.
NOTE 3. CASH AND DUE FROM BANKS
The Corporation's banking subsidiary is required to maintain certain cash
reserve balances with the Federal Reserve Bank of Chicago, which may be offset
by cash on hand. The required reserve balances as of December 31, 1997 and 1996
were approximately $5,045,000 and $14,474,000, respectively.
In October 1997, the Corporation's bank subsidiary established a clearing
balance requirement of $2,000,000 with the Federal Reserve Bank of Chicago to
use Federal Reserve Bank services. 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.
NOTE 4. SECURITIES
As of December 31, 1997, the Corporation's bank subsidiary transferred its
entire category of held to maturity securities into the available for sale
securities category. In accordance with Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities," this transfer was accounted for at market value. The
aggregate amortized cost and fair values of these securities as of the transfer
date was $44,812,000 and $45,707,000, respectively. The gross unrealized gain
of $895,000, net of the deferred tax liability of $313,000, is included as a
component of stockholders' equity.
52
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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
--------------------------------------------------
AVAILABLE FOR SALE SECURITIES: (Dollars in thousands)
December 31, 1997:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 161,617 $ 277 $ 132 $ 161,762
Obligations of states and political
subdivisions 31,452 919 20 32,351
Corporate securities 6,177 20 1 6,196
Equity securities 4,132 7,881 19 11,994
Other debt securities 859 - - 859
Mortgage backed securities 2,352 - - 2,352
--------------------------------------------------
$ 206,589 $ 9,097 $ 172 $ 215,514
==================================================
December 31, 1996:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 159,354 $ 255 $ 565 $ 159,044
Obligations of states and political
subdivisions 1,250 4 1 1,253
Corporate securities 1,025 6 3 1,028
Equity securities 3,707 5,417 59 9,065
Other debt securities 853 - - 853
--------------------------------------------------
$ 166,189 $ 5,682 $ 628 $ 171,243
==================================================
53
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The amortized cost and fair values of securities held to maturity are summarized
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
HELD TO MATURITY SECURITIES: (Dollars in thousands)
December 31, 1996:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 8,635 $ - $ 119 $ 8,516
Obligations of states and political
subdivisions 36,607 789 153 37,243
Corporate securities 6,640 80 - 6,720
Mortgage-backed securities 3,225 98 2 3,321
--------------------------------------------------
$ 55,107 $ 967 $ 274 $ 55,800
==================================================
The amortized cost and fair value of securities, other than equity securities,
as of December 31, 1997, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the mortgage-backed
securities may be called or prepaid without penalty. Therefore, these
securities are not included in the maturity categories in the following maturity
summary.
Available for Sale
-----------------------
Amortized Fair
Cost Value
-----------------------
(Dollars in thousands)
Due in one year or less $ 82,142 $ 82,231
Due after one year through five years 99,984 100,535
Due after five years through ten years 14,722 15,112
Due after ten years 3,257 3,290
-----------------------
200,105 201,168
Mortgage-backed securities 2,352 2,352
-----------------------
$202,457 $203,520
=======================
54
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Gains and losses related to sales of securities for the years ended December 31,
1997, 1996 and 1995 are summarized as follows (in thousands):
1997 1996 1995
--------------------
Gross security gains $595 $258 $ 351
Gross security losses (75) (2) (145)
--------------------
NET SECURITY GAINS $520 $256 $ 206
====================
Investment securities with carrying values of $154,451,000 and $127,955,000 on
December 31, 1997 and 1996, respectively, were pledged as collateral on public
deposits and for other purposes as required or permitted by law.
NOTE 5. LOANS
The composition of loans is as follows:
December 31,
----------------------
1997 1996
----------------------
(Dollars in thousands)
Commercial $ 63,861 $ 62,065
Real estate construction 31,306 26,184
Real estate - farmland 11,782 11,468
Real estate - 1 to 4 family residential mortgage 220,659 206,499
Real estate - multifamily mortgage 74,385 74,245
Real estate - non-farm nonresidential mortgage 139,653 131,350
Installment 38,925 39,705
Agricultural 17,403 16,537
----------------------
597,974 568,053
Less:
Allowance for loan losses 6,860 6,131
----------------------
NET LOANS $591,114 $561,922
======================
The amount of loans serviced by the Corporation for the benefit of others is not
included in the accompanying consolidated balance sheets. The unpaid principal
balances of these loans were $113,506,000 and $101,344,000 as of December 31,
1997 and 1996, respectively.
The loan portfolio includes a concentration of loans for commercial real estate
amounting to approximately $214,038,000 and $205,595,000 as of December 31, 1997
and 1996, 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
55
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
loss experience on its loan portfolio as a whole.
The Corporation's opinion as to the ultimate collectibility of loans is subject
to estimates regarding future cash flows from operations and the value of
property, real and personal, pledged as collateral. These estimates are
reflected by changing economic conditions and the economic prospects of
borrowers.
The following table presents data on impaired loans:
1997 1996
----------------------
(Dollars in thousands)
Impaired loans for which an allowance has been provided $ - $ -
Impaired loans for which no allowance has been provided 226 -
----------------------
Total loans determined to be impaired $226 $ -
======================
Allowance for loan loss for impaired loans included in the
Allowance for loan losses $ - $ -
======================
Average recorded investment in impaired loans $254 $201
======================
Interest income recognized from impaired loans $ 8 $ -
======================
Cash basis interest income recognized from impaired loans $ 25 $ -
======================
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
-------------------------
1997 1996 1995
-------------------------
(Dollars in thousands)
Balance, beginning of year $6,131 $5,473 $5,235
Provision for loan losses 1,075 1,100 395
Recoveries applicable to loan balances previously
charged off 213 240 523
-------------------------
7,419 6,813 6,153
Loan balances charged off (559) (682) (680)
-------------------------
Balance, ending of year $6,860 $6,131 $5,473
=========================
56
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-----------------------
1997 1996
-----------------------
(Dollars in thousands)
Land $ 4,899 $ 4,899
Buildings and improvements 23,294 21,781
Furniture and equipment 10,720 8,633
-----------------------
38,913 35,313
Less accumulated depreciation 16,079 13,725
-----------------------
$22,834 $21,588
=======================
Depreciation expense was $2,124,000, $1,957,000 and $1,847,000 for the years
ending December 31, 1997, 1996 and 1995, respectively.
NOTE 8. DEPOSITS
The aggregate amount of time deposits with a minimum denomination of $100,000,
was approximately $96,537,000 and $65,462,000 at December 31, 1997 and 1996,
respectively.
As of December 31, 1997, the scheduled maturities of certificates of deposit, in
thousands, are as follows:
1998 $262,299
1999 61,379
2000 27,857
2001 11,399
2002 and thereafter 10,128
--------
$373,062
========
57
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 9. SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
December 31,
-------------------
1997 1996
-------------------
(Dollars in thousands)
Notes payable, American National Bank of Chicago, due January 31,
1998, interest payable quarterly at LIBOR plus 1.50% (effective rate
of 7.37375% at December 31, 1997, except as noted):
$10,000,000 line of credit, collateralized by all of the capital
stock of Busey Bank. $5,000 $ 7,500
Note payable, collateralized by all of the capital stock of Busey
Bank (effective rate of 7.21875% at December 31, 1997) 1,000 -
Collateralized by 22,143 shares of First Busey Corporation
Class A common stock owned by employee stock ownership
plan 150 250
Collateralized by 22,143 shares of First Busey Corporation
Class A common stock owned by employee stock ownership
plan 150 250
Collateralized by 10,000 shares of First Busey Corporation
Class A common stock owned by employee stock ownership
plan (effective rate of 7.3125% at December 31, 1997) 250 -
Federal funds purchased - 6,400
Securities sold under agreements to repurchase - 5
-------------------
$6,550 $14,405
===================
In accordance with the consensus reached on Issue Number 89-10 at the June 1989
meeting of the Financial Accounting Standards Board's Emerging Issues Task
Force, the Company has recorded the pre-1993 debt of the employee stock
ownership plan (ESOP), which totaled $300,000 and $500,000 at December 31, 1997
and 1996, respectively as short-term borrowings and a reduction of stockholders'
equity.
58
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
In August 1997, the employee stock ownership plan borrowed $250,000 to acquire
additional shares. In accordance with AICPA Statement of Position 93-6, this
debt has been recorded as short-term borrowings and a reduction of stockholders'
equity.
NOTE 10. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
1997 1996
---------------------
(Dollars in thousands)
Note payable, Federal Home Loan Bank of Chicago, 5.46%, monthly
installments of interest through June 25, 1998, balance due June 25,
1998, collateralized by all unpledged U.S. Treasury and U.S. Agency
securities, first mortgages on residential real estate and Federal Home
Loan Bank stock $ 5,000 $5,000
Note payable, Federal Home Loan Bank of Chicago, 6.08%, monthly
installments of interest through February 21, 2000, balance due
February 21, 2000, collateralized by all unpledged U.S. Treasury
and U.S. Agency securities, first mortgages on residential real
estate and Federal Home Loan Bank stock 5,000 -
---------------------
$10,000 $5,000
=====================
NOTE 11. INCOME TAXES
The components of income tax expense consist of:
Years Ended December 31,
-------------------------
1997 1996 1995
-------------------------
(Dollars in thousands)
Current $4,842 $4,114 $4,004
Deferred (463) (373) (705)
-------------------------
TOTAL INCOME TAX EXPENSE $4,379 $3,741 $3,299
=========================
59
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
A reconciliation of federal income taxes at statutory rates to the income taxes
included in the statements of income is as follows:
Years ended December 31,
-------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------
(Dollars in thousands)
Income tax at
statutory rate $ 5,163 35.0% $ 4,566 35.0% $ 4,226 35.0%
Effect of:
Benefit of
income taxed
at lower rates (100) (0.7) (100) (0.8) (100) (0.9)
Tax-exempt
interest, net (777) (5.3) (805) (6.2) (788) (6.5)
Amortization
of intangibles 170 1.2 170 1.3 170 1.4
Other (77) (0.5) (90) (0.6) (209) (1.7)
-------------------------------------------------------------------
$ 4,379 29.7% $ 3,741 28.7% $ 3,299 27.3%
===================================================================
Income taxes related to realized gains on sales of securities were $182,000,
$90,000 and $72,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The net deferred tax asset, included in other assets or liabilities, in the
accompanying balance sheets includes the following amounts of deferred tax
assets and liabilities:
1997 1996
----------------------
(Dollars in thousands)
Deferred tax liability $(3,828) $(2,446)
Deferred tax asset 4,344 3,686
Valuation allowance for deferred tax assets (674) (507)
----------------------
NET DEFERRED TAX ASSET (LIABILITY) $ (158) $ 733
======================
60
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The tax effects of principal temporary differences are shown in the following
table:
1997 1996
----------------------
(Dollars in thousands)
Investment securities:
Unrealized gain on securities available for sale $(3,124) $(1,769)
Other 219 219
Basis in premises and equipment (567) (564)
Allowance for loan losses 2,721 2,432
Property acquired in settlement of loans (24) 41
Loans held for sale 22 4
Basis in deposit intangibles 552 419
Deferred compensation 528 388
Performance/restricted stock 24 10
State net operating loss carryforward 278 173
Other (113) (113)
----------------------
516 1,240
Valuation allowance (674) (507)
----------------------
$ (158) $ 733
======================
State net operating loss carryforwards of approximately $5,962,000 are available
to offset future taxable income. The carryforwards expire as follows: 2005 -
$2,047,000; 2006 - $3,007,000; 2007 - $860,000 and 2008 - $48,000.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Corporation established the First Busey Corporation Employees' Stock
Ownership Plan (ESOP) as of January 1, 1984. All full time employees who meet
certain age and length of service requirements are eligible to participate in
the ESOP which purchased common shares of the Corporation using the proceeds of
bank borrowings 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 employee's 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 are included in the computation of average common shares
and common share equivalents. This accounting treatment is grandfathered under
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans" for shares purchased prior to December 31, 1992.
61
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
During the year ended December 31, 1997, $200,000 of compensation expense was
recognized for the ESOP, releasing 29,524 common shares to participant accounts,
and is reflected in the chart below under "Employee Benefits." The Corporation
does not have any repurchase obligation.
As permitted by AICPA Statement of Position (SOP) 93-6, compensation expense for
shares released during 1997 and 1996 is equal to the original acquisition cost
of the shares if they were acquired prior to December 31, 1992. There have been
no shares released that were acquired by the ESOP after December 31, 1992. For
such shares, compensation expense would be equal to the fair market value of the
shares released. Compensation expense related to the ESOP plan was $243,000,
$297,000 and $327,000 in 1997, 1996 and 1995, respectively.
Outstanding ESOP shares as of December 31 by loans acquired prior to December
31, 1992 were as follows:
1997 1996
-----------------------
Allocated shares 385,927 366,960
Unallocated shares 44,286 73,810
-----------------------
TOTAL 430,213 440,770
=======================
Fair value of allocated shares at December 31 $11,831,000 $9,807,000
=======================
Outstanding ESOP shares acquired under the August 1997 loan and their fair
market values were as follows:
1997
------------------------
Fair
Market
Shares Value
------------------------
Unallocated shares 10,000 $275,000
========================
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.
62
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Employer contributions to the employee benefit plans are included in the
statements of income as follows:
------------------------
Years Ended December 31,
1997 1996 1995
------------------------
(Dollars in thousands)
Employee benefits $809 $703 $623
Interest on employee stock ownership plan debt 43 47 77
------------------------
TOTAL EMPLOYER CONTRIBUTIONS $852 $750 $700
========================
NOTE 13. 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 450,000
shares of Class A common stock may be granted by the Compensation Committee of
the Board of Directors to certain executive officers and key personnel of First
Busey Corporation and its subsidiaries. In March 1996, the Board of Directors
approved an increase in the number of shares reserved for issuance as stock
options from 450,000 to 750,000.
A summary of the status of the Corporation's stock option plan as of December
31, 1997, 1996 and 1995 and the changes during the years ending on those dates
is as follows:
1997 1996 1995
-------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------
Outstanding at begin-
ning of year 338,341 $ 14.39 393,917 $ 13.62 264,957 $ 10.73
Granted 97,825 24.98 6,000 18.50 163,500 17.50
Exercised (95,413) 10.07 (56,813) 9.33 (27,000) 9.31
Terminated and
reissuable (10,950) 17.32 (4,763) 16.37 (7,540) 11.67
---------- ---------- ----------
Outstanding at end
of year 329,803 18.69 338,341 14.39 393,917 13.62
===================================================================
Exercisable at end
of year 43,653 $ 10.10 4,500 $ 9.44 60,750 $ 9.33
Weighted-average fair
value per option of
options granted
during the year $ 4.92 $ 5.37 $ 1.88
63
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options
Options Outstanding Exercisable
----------------------------------------------------
Exercise Number Weighted-Average Number
Prices Outstanding Remaining Contractual Life Outstanding
- ------------------------------------------------------------------------
$ 10.00 18,000 2 years 18,000
10.11 25,314 2 years 25,314
14.33 339 2 years 339
16.50 31,950 2 years -
17.50 151,500 4 years -
18.50 6,000 4 years -
24.25 69,700 6 years -
27.50 1,000 2 years -
27.50 26,000 4 years -
----------------------------------------------------
329,803 4 years 43,653
====================================================
Grants under the above plan are accounted for following APB No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized for
grants under this plan. Had compensation cost for stock-based compensation been
determined based on the grant date fair values of awards (the method described
in SFAS 123), reported net income and earnings per common share would have been
reduced to the pro forma amounts shown below:
1997 1996 1995
-----------------------
Net Income (in thousands):
As reported $10,371 $9,306 $8,775
Pro forma $10,262 $9,262 $8,735
Basic earnings per share:
As reported $ 1.50 $ 1.37 $ 1.29
Pro forma $ 1.49 $ 1.36 $ 1.28
Diluted earnings per share:
As reported $ 1.48 $ 1.34 $ 1.27
Pro forma $ 1.47 $ 1.34 $ 1.26
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, included expected stock
price volatility. In management's opinion, such valuation models may not
necessarily provide the best single measure of option value.
64
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The fair value of the stock options granted has been estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions.
1997
---------------------------
Block 1 Block 2 Block 3 1996 1995
-------- -------- ------- ------- ---------
Number of options granted 69,700 26,000 1,000 6,000 163,500
Risk-free interest rate 5.76% 5.74% 5.64% 6.21% 5.40%
Expected life, in years 6 4 2 5 6
Expected volatility 6.3% 6.3% 6.3% 6.1% 6.5%
Expected dividend yield 2.9% 2.9% 2.9% 3.1% 3.7%
Estimated fair value per option $ 5.77 $ 2.78 $ 1.68 $ 5.37 $ 1.88
An additional 1,125 options granted in 1997 vested and were exercised during the
year ended December 31, 1997.
Restricted Stock Award Plan:
- ------------------------------
In January 1993, the Corporation adopted the 1993 Restricted Stock Award Plan
pursuant to which restricted stock awards for up to 225,000 shares of Class A
common stock may be granted by the Compensation Committee of the Board of
Directors to certain executive officers and key personnel of First Busey
Corporation and its subsidiaries. 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, 1997,
there were 6,600 shares under grant with performance restrictions allowed by the
plan which expire as follows: 1998 - 2,200 shares, 1999 - 2,200 shares and 2000
- - 2,200 shares.
Number of Shares
-------------------------
1997 1996 1995
-------------------------
Under restriction, beginning of year 9,000 8,250 14,250
Granted - 9,000 -
Restrictions released 2,200 8,250 6,000
Forfeited and reissuable 200 - -
-------------------------
Under restriction, end of year 6,600 9,000 8,250
=========================
Available to grant, end of year 201,950 201,750 210,750
=========================
Compensation expense is recognized for financial statement purposes over the
period of performance. Compensation expense of $80,000, $77,000, and $94,000
was recognized for financial statement purposes during the years ended December
31, 1997, 1996, and 1995, respectively. Compensation expense of $61,000 and
$184,000 was recognized for income tax purposes for the years ended December 31,
1997 and 1996, respectively.
65
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 14. 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, 1997:
Balance at the beginning of year $ 5,378
New loans 4,970
Repayments (5,486)
Other 13
--------
Balance at end of year $ 4,875
========
NOTE 15. COMMON STOCK
The holders of Class A common stock are entitled to cash dividends per share
which are 10% greater than the cash dividends per share with respect to Class B
common stock. Class A stockholders have one vote per share whereas Class B
stockholders have ten votes per share. Class B common stock may be converted to
Class A common stock at any time on a one-for-one basis. All of the issued
Class B common stock was converted to Class A common stock on December 31, 1997.
There were no other differences between the two classes of common stock.
NOTE 16. CAPITAL RATIOS
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 Bank 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 Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank 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 Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
66
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank 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, 1997, that the Corporation and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the federal and state
regulatory agencies categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank 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
Bank's categories.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
(Dollars in Thousands)
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 74,372 13.01% $ 45,726 8.0% N/A N/A
Busey Bank $ 70,604 12.59% $ 44,850 8.0% $ 56,063 10.0%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 67,512 11.81% $ 22,863 4.0% N/A N/A
Busey Bank $ 63,744 11.37% $ 22,425 4.0% $ 33,638 6.0%
Tier I Capital (to
Average Assets)
Consolidated $ 67,512 7.61% $ 35,495 4.0% N/A N/A
Busey Bank $ 63,744 7.27% $ 35,068 4.0% $ 43,835 5.0%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 67,321 12.48% $ 43,142 8.0% N/A N/A
Busey Bank $ 65,077 12.28% $ 42,399 8.0% $ 52,998 10.0%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 61,190 11.35% $ 21,571 4.0% N/A N/A
Busey Bank $ 58,946 11.12% $ 21,199 4.0% $ 31,799 6.0%
Tier I Capital (to
Average Assets)
Consolidated $ 61,190 7.14% $ 34,279 4.0% N/A N/A
Busey Bank $ 58,946 6.93% $ 34,010 4.0% $ 42,512 5.0%
67
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 17. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The Corporation and its subsidiaries are parties to legal actions which arise in
the normal course of their business activities. In the opinion of management,
the ultimate resolution of these matters is not expected to have a material
effect on the financial position or the results of operations of the Corporation
and its subsidiaries.
The Corporation and its subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk. The contract or notional amounts of those instruments reflect the extent
of involvement the Corporation has in particular classes of financial
instruments.
The Corporation and its subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. The Corporation and
its subsidiaries use the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation and its subsidiaries do not require
collateral or other security to support financial instruments with credit risk.
A summary of the contractual amount of the Corporation's exposure to
off-balance-sheet risk as of December 31, 1997 and 1996, is as follows:
1997 1996
----------------------
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $126,280 $120,525
Standby letters of credit 4,780 5,243
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments are generally at variable interest rates and generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Corporation upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment and income-producing
commercial properties.
68
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
As of December 31, 1997, the Corporation has no significant futures, forwards,
swaps or option contracts, or other financial instruments with similar
characteristics.
NOTE 18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and cash equivalents
- ----------------------------
The carrying amounts reported in the balance sheet for cash and due from banks
and federal funds sold approximate those assets' fair values.
Securities
- ----------
For securities held to maturity and available for sale, fair values are based on
quoted market prices or dealer quotes, where available. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities. The carrying amount of accrued interest receivable
approximates fair value.
Loans
- -----
For certain homogeneous categories of loans, such as some residential mortgages,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. The carrying amount of
accrued interest receivable approximates fair value.
Deposits
- --------
The fair value of demand deposits, savings accounts, NOW 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 the rates currently offered for deposits of similar remaining
maturities. The carrying amount of accrued interest payable approximates fair
value.
69
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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.
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, 1997, these items
are immaterial in nature.
The estimated fair values of the Corporation's financial instruments are as
follows:
1997 1996
--------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 62,099 $ 62,099 $ 33,738 $ 33,738
Securities 215,514 215,514 226,350 227,043
Loans, net 596,077 596,802 563,369 568,480
Accrued interest receivable 7,464 7,464 7,412 7,412
Financial liabilities:
Deposits 811,453 811,198 766,927 768,090
Short-term borrowings 6,550 6,550 14,405 14,405
Long-term debt 10,000 9,982 5,000 4,956
Accrued interest payable 3,586 3,586 3,448 3,448
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.
70
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 19. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial data for First Busey Corporation is presented below.
BALANCE SHEETS
December 31,
----------------------
1997 1996
----------------------
ASSETS (Dollars in thousands)
Cash and due from subsidiary bank $ 131 $ 1,254
Securities available for sale 1,602 1,258
Investments in subsidiaries:
Bank 73,485 66,521
Non-bank 8,334 2,295
Premises and equipment, net 48 4,931
Other assets 5,515 6,177
----------------------
TOTAL ASSETS $89,115 $82,436
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term corporate borrowings $ 6,000 $ 7,500
Short-term ESOP borrowings 550 500
Other liabilities 1,286 1,019
----------------------
TOTAL LIABILITIES 7,836 9,019
----------------------
Stockholders' equity before unearned ESOP shares and deferred
compensation for stock grants 81,910 74,083
Unearned ESOP shares and deferred compensation for restricted
stock awards (631) (666)
----------------------
STOCKHOLDERS' EQUITY 81,279 73,417
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $89,115 $82,436
======================
71
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1997 1996 1995
------------------------
(Dollars in thousands)
Operating income:
Dividends from subsidiaries:
Bank $ 6,000 $6,000 $5,400
Non-bank 500 400 300
Interest and dividend income 10 12 27
Other income 788 579 451
------------------------
TOTAL OPERATING INCOME 7,298 6,991 6,178
------------------------
Expenses:
Salaries and employee benefits 1,124 1,057 1,025
Interest expense 429 527 740
Operating expense 1,425 1,064 1,109
------------------------
TOTAL EXPENSES 2,978 2,648 2,874
------------------------
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 4,320 4,343 3,304
Income tax benefit 767 730 980
------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 5,087 5,073 4,284
Equity in undistributed income of subsidiaries:
Bank 4,696 3,983 4,195
Non-bank 588 250 296
------------------------
NET INCOME $10,371 $9,306 $8,775
========================
72
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------
1997 1996 1995
----------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $10,371 $ 9,306 $ 8,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 972 1,206 1,226
Equity in undistributed net income of subsidiaries (5,284) (4,233) (4,491)
Gain on sales of securities (62) - (54)
(Gain) loss on disposal of premises and equipment (1) 6 -
Changes in assets and liabilities:
Increase in other assets (320) (445) (739)
Increase in other liabilities 267 277 27
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,943 6,117 4,744
----------------------------
Cash Flows from Investing Activities
Proceeds from sales of securities
available for sale 556 136 259
Purchases of securities available for sale (473) (186) (10)
Proceeds from sales of premises and equipment 1 - -
Purchases of premises and equipment (2) (66) (184)
Capital contribution to subsidiary (593) - -
Proceeds from capital distribution of subsidiary - - 91
----------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (511) (116) 156
----------------------------
Cash Flows from Financing Activities
Purchases of treasury stock (3,127) (605) (705)
Proceeds from sales of treasury stock 2,834 797 353
Proceeds from short-term borrowings 2,500 1,000 5,750
Dividends paid (4,762) (4,378) (3,940)
Principal payments on short-term borrowings (4,000) (2,000) (1,250)
Principal payments on long-term debt - - (4,891)
----------------------------
NET CASH USED IN FINANCING ACTIVITIES (6,555) (5,186) (4,683)
----------------------------
NET (DECREASE) INCREASE IN CASH AND
DUE FROM BANKS (1,123) 815 217
Cash and due from banks, beginning 1,254 439 222
----------------------------
Cash and due from banks, ending $ 131 $ 1,254 $ 439
============================
73
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
------------------------
1997 1996 1995
------------------------
(Dollars in thousands)
Supplemental Schedule of Noncash Investing and
Financing Activities
Principal payments on ESOP debt $ 200 $250 $ 250
========================
Proceeds from ESOP debt $ 250 $ - $ -
========================
Transfer of premises and equipment and other
assets to subsidiary $5,441 $ - $ -
========================
Change in unrealized gain on securities
available for sale - holding company $ 365 $174 $ 259
========================
Increase in deferred income taxes attributable
to the unrealized gain on securities
available for sale - holding company $ (127) $(61) $ (91)
========================
Change in unrealized gain on securities
available for sale - subsidiaries $2,278 $ 79 $3,767
========================
74
MANAGEMENT REPORT
BUSEY BANK
AS OF DECEMBER 31, 1997
FINANCIAL STATEMENTS
Management of Busey Bank is responsible for the preparation, integrity and fair
presentation of its published financial statements as of December 31, 1997, and
for the year then ended. The financial statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts, some of which are based on judgments and estimates of management.
INTERNAL CONTROLS
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 1997. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that Busey
Bank maintained an effective internal control structure over financial reporting
as of December 31, 1997.
DESIGNATED LAWS
Management is also responsible for compliance with the federal and state laws
and regulations relating to safety and soundness, including those designated
laws and regulations regarding dividend restrictions and loans to insiders.
Based on our assessment, management believes Busey Bank complied, in all
material respects, with those designated laws and regulations for the year ended
December 31, 1997.
___________________________________
Douglas C. Mills, Chairman of the Board
First Busey Corporation (Holding Company)
___________________________________
P. David Kuhl, President
Busey Bank
75
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Busey Bank
Urbana, Illinois
We have examined management's assertion that Busey Bank maintained a system of
internal control over financial reporting which is designed to provide
reasonable assurance to the Bank's management and Board of Directors regarding
the preparation of reliable published financial statements as of December 31,
1997, included in the accompanying management report.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing and evaluating the design and operating effectiveness of the
internal control structure, and such other procedures as we considered necessary
in the circumstances. We believe that our examination provides a reasonable
basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assertions that Busey Bank maintained a system of
internal control over financial reporting which is designed to provide
reasonable assurance to the Bank's management and Board of Directors regarding
the preparation of reliable published financial statements as of December 31,
1997, is fairly stated, in all material respects, based upon criteria
established in "Internal Control - Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ McGladrey + Pullen, LLP
Champaign, Illinois
January 30, 1998
76
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF FIRST BUSEY CORPORATION
March 6, 1998
Busey Bank
Busey Business Bank
First Busey Trust & Investment Co.
First Busey Resources, Inc.
LIST OF SUBSIDIARIES OF BUSEY BANK
March 6, 1998
First Busey Securities, Inc.
Busey Insurance Services, Inc.
Busey Carter Travel Agency
BAT, Inc.
77
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-30095) of our report, dated January 30, 1998, with respect to
the financial statements of First Busey Corporation and Subsidiaries, appearing
in this Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ McGladrey + Pullen, LLP
Champaign, Illinois
March 18, 1998
78