SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended 6/30/2003 Commission File No. 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 Identification
Incorporation or organization) No.)
201 W. Main St.,
Urbana, Illinois 61801
- ------------------------------- -------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (217) 365-4556
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 whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act)
Yes X No
----------- -----------
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 August 1, 2003
------------------------------------------------------------------------
Common Stock, without par value 13,614,920
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 45,871 $ 47,645
Federal funds sold 33,300 -
Securities available for sale (amortized cost 2003, $230,364;
2002, $216,801) 248,829 233,830
Loans 1,114,804 1,101,043
Allowance for loan losses (16,327) (15,460)
----------- -----------
Net loans $ 1,098,477 $ 1,085,583
Premises and equipment 25,389 27,359
Cash surrender value of bank owned life insurance 16,436 11,109
Goodwill 7,380 7,380
Other intangible assets 2,258 2,464
Other assets 22,272 20,208
----------- -----------
Total assets $ 1,500,212 $ 1,435,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 161,122 $ 151,105
Interest bearing 1,096,160 1,062,500
----------- -----------
Total deposits $ 1,257,282 $ 1,213,605
Securities sold under agreements to repurchase 8,162 2,467
Long-term debt 77,759 71,759
Company obligated mandatorily redeemable preferred securities 25,000 25,000
Other liabilities 8,486 7,584
----------- -----------
Total liabilities $ 1,376,689 $ 1,320,415
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 6,291 6,291
Surplus 21,004 20,862
Retained earnings 97,225 91,639
Accumulated other comprehensive income 11,142 10,276
----------- -----------
Total stockholders' equity before treasury stock, unearned ESOP
shares and deferred compensation for stock grants $ 135,662 $ 129,068
Treasury stock, at cost (10,312) (12,050)
Unearned ESOP shares and deferred compensation for stock grants (1,827) (1,855)
----------- -----------
Total stockholders' equity $ 123,523 $ 115,163
----------- -----------
Total liabilities and stockholders' equity $ 1,500,212 $ 1,435,578
=========== ===========
Common shares outstanding at period end 13,652,220 13,568,220
=========== ===========
See notes to unaudited consolidated financial statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------- -------
(Dollars in thousands, except
per share amounts)
INTEREST INCOME:
Interest and fees on loans $32,839 $32,637
Interest and dividends on investment securities:
Taxable interest income 3,149 3,659
Non-taxable interest income 1,031 977
Dividends 76 61
Interest on federal funds sold 77 86
------- -------
Total interest income $37,172 $37,420
------- -------
INTEREST EXPENSE:
Deposits $10,600 $12,366
Short-term borrowings 97 265
Long-term debt 1,671 1,405
Company obligated mandatorily redeemable preferred securities 1,125 1,125
------- -------
Total interest expense $13,493 $15,161
------- -------
Net interest income $23,679 $22,259
Provision for loan losses 930 1,480
------- -------
Net interest income after provision for loan losses $22,749 $20,779
------- -------
OTHER INCOME:
Trust $ 2,291 $ 2,611
Commissions and brokers fees, net 976 1,095
Service charges on deposit accounts 3,529 3,411
Other service charges and fees 955 862
Security gains, net 299 473
Gain on sales of loans 4,474 1,356
Increase in cash surrender value of life insurance 327 336
Other operating income 495 906
------- -------
Total other income $13,346 $11,050
------- -------
OTHER EXPENSES:
Salaries and wages $ 9,636 $ 8,640
Employee benefits 1,884 1,823
Net occupancy expense of premises 1,529 1,557
Furniture and equipment expenses 1,310 1,481
Data processing 879 710
Stationery, supplies and printing 519 490
Amortization of intangible assets 206 224
Other operating expenses 4,403 3,470
------- -------
Total other expenses $20,366 $18,395
------- -------
Income before income taxes $15,729 $13,434
Income taxes 5,531 4,457
------- -------
NET INCOME $10,198 $ 8,977
======= =======
BASIC EARNINGS PER SHARE $ 0.75 $ 0.66
======= =======
DILUTED EARNINGS PER SHARE $ 0.75 $ 0.66
======= =======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.34 $ 0.30
======= =======
See notes to unaudited consolidated financial statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------- -------
(Dollars in thousands, except
per share amounts)
INTEREST INCOME
Interest and fees on loans $16,354 $16,233
Interest and dividends on investment securities:
Taxable interest income 1,554 1,873
Non-taxable interest income 514 493
Dividends 38 30
Interest on federal funds sold 44 28
------- -------
Total interest income $18,504 $18,657
------- -------
INTEREST EXPENSE:
Deposits $ 5,176 $ 6,101
Short-term borrowings 52 126
Long-term debt 860 750
Company obligated mandatorily redeemable preferred securities 562 562
------- -------
Total interest expense $ 6,650 $ 7,539
------- -------
Net interest income $11,854 $11,118
Provision for loan losses 330 915
------- -------
Net interest income after provision for loan losses $11,524 $10,203
------- -------
OTHER INCOME:
Trust $ 1,184 $ 1,361
Commissions and brokers fees, net 511 554
Service charges on deposit accounts 1,836 1,855
Other service charges and fees 505 440
Security gains, net 116 199
Gains on sales of pooled loans 2,239 559
Increase in cash surrender value of life insurance 167 159
Other operating income 313 459
------- -------
Total other income $ 6,871 $ 5,586
------- -------
OTHER EXPENSES:
Salaries and wages $ 4,947 $ 4,342
Employee benefits 922 892
Net occupancy expense of premises 714 782
Furniture and equipment expenses 628 752
Data processing 370 342
Stationary, supplies and printing 226 257
Amortization of intangible assets 103 112
Other operating expenses 2,074 1,921
------- -------
Total other expenses $ 9,984 $ 9,400
------- -------
Income before income taxes $ 8,411 $ 6,389
Income taxes 3,055 2,102
------- -------
NET INCOME $ 5,356 $ 4,287
======= =======
BASIC EARNINGS PER SHARE $ 0.39 $ 0.32
======= =======
DILUTED EARNINGS PER SHARE $ 0.39 $ 0.32
======= =======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.17 $ 0.15
======= =======
See notes to unaudited consolidated financial statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
--------- --------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,198 $ 8,977
Adjustments to reconcile net income to net cash provided by operating
activities:
Stock-based compensation 28 57
Depreciation and amortization 1,940 1,961
Provision for loan losses 930 1,480
Provision for deferred income taxes (646) 766
Stock dividends (275) (145)
Amortization of investment security discounts (158) (212)
Gain on sales of investment securities, net (299) (473)
Gain on sale of pooled loans (4,474) (1,356)
Gain on sale and disposition of premises and equipment (420) (28)
Market valuation adjustment on OREO property 694 -
Change in assets and liabilities:
Increase in other assets (2,493) (1,904)
Increase in accrued expenses 1,554 3,104
(Decrease) increase in interest payable (460) 264
Decrease in income taxes receivable - 22
Decrease in income taxes payable (116) -
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
LOAN ORIGINATIONS AND SALES $ 6,003 $ 12,513
--------- --------
Loans originated for sale (224,162) (89,363)
Proceeds from sales of loans 241,803 100,922
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 23,644 $ 24,072
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities classified available for sale 12,832 17,544
Proceeds from maturities of securities classified available for sale 119,908 36,020
Purchase of securities classified available for sale (145,571) (58,599)
Increase in federal funds sold (33,300) (7,700)
Increase in loans (27,256) (48,418)
Proceeds from sale of premises and equipment 1,644 106
Purchases of premises and equipment (988) (992)
Increase in investment in bank owned life insurance (5,000) (344)
Increase in cash surrender value of bank owned life insurance (327) (336)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES $ (78,058) $(62,719)
--------- --------
(Continued)
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in certificates of deposit $ (4,438) $36,320
Net increase (decrease) in demand, money market and saving deposits 48,115 (6,507)
Cash dividends paid (4,612) (4,074)
Purchase of treasury stock (416) (1,796)
Proceeds from sale of treasury stock 2,296 763
Net increase (decrease) in securities sold under agreement to repurchase 5,695 (4,746)
Proceeds from short-term borrowings - 500
Principal payments on short-term borrowings - (2,500)
Proceeds from issuance of long-term debt 6,000 31,000
Principal payments on long-term borrowings - (8,000)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 52,640 $40,960
--------- --------
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS $ (1,774) $ 2,313
Cash and due from banks, beginning 47,645 $41,580
--------- --------
Cash and due from banks, ending $ 45,871 $43,893
========= ========
See notes to unaudited consolidated financial statements.
FIRST BUSEY CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ------
(Dollars in thousands)
Other real estate acquired in settlement of loans $265 $5,812
==== ======
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------- -------
(Dollars in thousands)
Net income $10,198 $ 8,977
------- -------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period $ 1,735 $ 2,221
Less reclassification adjustment for gains included in net income (299) (473)
------- -------
Other comprehensive income, before tax $ 1,436 $ 1,748
Income tax expense related to items of other comprehensive income 570 694
------- -------
Other comprehensive income, net of tax $ 866 $ 1,054
------- -------
Comprehensive income $11,064 $10,031
======= =======
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTERIM FINANCIAL STATEMENTS
The consolidated interim financial statements of First Busey Corporation and
Subsidiaries are unaudited, but in the opinion of management reflect all
necessary adjustments, consisting only of normal recurring accruals, for a fair
presentation of results as of the dates and for the periods covered by the
financial statements. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted within the United
States of America for interim financial data and with the instructions to Form
10-Q and Article 10 of Regulation S-X. The results for the interim periods are
not necessarily indicative of the results of operations that may be expected for
the fiscal year.
In preparing the consolidated financial statements, the Corporation's management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
NOTE 2: LOANS
The major classifications of loans as of June 30, 2003 and December 31, 2002
were as follows:
June 30, 2003 December 31, 2002
----------------------------------
(Dollars in thousands)
Commercial $ 119,857 $ 118,004
Real estate construction 147,911 129,872
Real estate - farmland 13,430 13,421
Real estate - 1-4 family residential mortgage 406,941 430,189
Real estate - multifamily mortgage 70,297 57,559
Real estate - non-farm nonresidential mortgage 280,895 274,153
Installment 55,710 55,811
Agricultural 19,763 22,034
----------------------------------
$1,114,804 $1,101,043
Less:
Allowance for loan losses 16,327 15,460
----------------------------------
Net loans $1,098,477 $1,085,583
==================================
The real estate-mortgage category includes loans held for sale with carrying
values of $47,594,000 at June 30, 2003 and $60,761,000 at December 31, 2002;
these loans had fair market values of $48,541,000 and $61,685,000 respectively.
8 of 33
NOTE 3: EARNINGS PER SHARE
Net income per common share has been computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-----------------------------------------------------------
Net income $ 5,356,000 $ 4,287,000 $10,198,000 $ 8,977,000
Shares:
Weighted average common shares outstanding 13,572,024 13,564,129 13,561,358 13,572,538
Diluted effect of outstanding options, as determined
by the application of the treasury stock method 120,933 78,589 117,426 77,066
----------- ----------- ----------- -----------
Weighted average common shares outstanding,
as adjusted for diluted earnings per share calculation 13,692,957 13,642,718 13,678,784 13,649,604
=========== =========== =========== ===========
Basic earnings per share $ 0.39 $ 0.32 $ 0.75 $ 0.66
=========== =========== =========== ===========
Diluted earnings per share $ 0.39 $ 0.32 $ 0.75 $ 0.66
=========== =========== =========== ===========
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: STOCK-BASED COMPENSATION
First Busey Corporation applies Accounting Principles Board Opinion No. 25 in
accounting for stock options and discloses the fair value of options granted as
permitted by SFAS No. 123. The Corporation has recorded no compensation expense
associated with stock options as all options granted under its plan had an
exercise price equal to the market value of the common stock when granted.
The following summarizes the pro-forma effects assuming compensation expense had
been recorded based upon the estimated fair value:
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) (dollars in thousands)
2003 2002 2003 2002
-------------------------------------------------
Net income as reported $5,356 $4,287 $10,198 $8,977
Less compensation expense determined under fair value
method for all options granted, net of related tax effects 64 51 128 86
------ ------ ------- ------
Pro-forma net income $5,292 $4,236 $10,070 $8,891
====== ====== ======= ======
BASIC EARNINGS PER SHARE
Reported net income $ 0.39 $ 0.32 $ 0.75 $ 0.66
Less compensation expense - 0.01 0.01 -
------ ------ ------- ------
Pro-forma net income $ 0.39 $ 0.31 $ 0.74 $ 0.66
====== ====== ======= ======
DILUTED EARNINGS PER SHARE
Reported net income $ 0.39 $ 0.32 $ 0.75 $ 0.66
Less compensation expense - 0.01 0.01 0.01
------ ------ ------- ------
Pro-forma net income $ 0.39 $ 0.31 $ 0.74 $ 0.65
====== ====== ======= ======
The Corporation has not granted any stock options during 2003.
9 of 33
NOTE 5: OUTSTANDING COMMITMENTS
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers in
the way of commitments to extend credit. They involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheets.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The corporation uses
the same credit policies in making commitments and conditional obligations as
they do for on-balance-sheet instruments.
A summary of the contractual amount of the Corporation's exposure to off-balance
sheet risk follows:
June 30, 2003 December 31, 2002
--------------------------------------
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $233,745 $222,407
Standby letters of credit 11,515 13,138
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments are generally at variable interest rates and generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The customer's credit worthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Corporation upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including bond financing and similar transactions and primarily have terms of
one year or less. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds collateral, which may include accounts receivable,
inventory, property and equipment, income producing properties, supporting those
commitments if deemed necessary. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the Corporation
would be required to fund the commitment. The maximum potential amount of future
payments the Corporation could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Corporation would be entitled to seek recovery from the customer. As of June 30
2003, and December 31, 2002, no amounts have been recorded as liabilities for
the Corporation's potential obligations under these guarantees.
FORWARD LOOKING STATEMENTS
This presentation includes forward looking statements that are intended to be
covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements include but are not limited
to comments with respect to the objectives and strategies, financial condition,
results of operations and business of First Busey Corporation.
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These forward looking statements involve numerous assumptions, inherent risks
and uncertainties, both general and specific, and the risk that predictions and
other forward looking statements will not be achieved. The Corporation cautions
you not to place undue reliance on these forward looking statements as a number
of important factors could cause actual future results to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in such
forward looking statements.
These risks, uncertainties and other factors include the general state of the
economy, both on a local and national level, the ability of the Corporation to
successfully complete acquisitions, the continued growth of geographic regions
served by the Corporation, and the retention of key individuals in the
Corporation's management structure.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial condition
of First Busey Corporation and Subsidiaries ("Corporation") at June 30, 2003
(unaudited), as compared with December 31, 2002 and the results of operations
for the six months ended June 30, 2003 and 2002 (unaudited), and the results of
operations for the three months ended June 30, 2003 and 2002 (unaudited). This
discussion and analysis should be read in conjunction with the Corporation's
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report.
Certain reclassifications have been made to the balances, with no effect on net
income, as of and for the three and six months ending June 30, 2002, to be
consistent with the classifications adopted as of and for the six months ending
June 30, 2003.
FINANCIAL CONDITION AT JUNE 30, 2003 AS COMPARED TO DECEMBER 31, 2002
Total assets increased $64,634,000 or 4.5%, to $1,500,212,000 at June 30, 2003
from $1,435,578,000 at December 31, 2002. Securities available for sale
increased $14,999,000, or 6.4%, to $248,829,000 at June 30, 2003 from
$233,830,000 at December 31, 2002. Loans increased $13,761,000, or 1.3%, to
$1,114,804,000 at June 30, 2003 from $1,101,043,000 at December 31, 2002,
primarily due to increases in real estate construction, multifamily, and
non-farm nonresidential mortgages. These increases were partially offset by
decreases in 1-4 family residential mortgages and agricultural loans.
Total deposits increased $43,677,000, or 3.6%, to $1,257,282,000 at June 30,
2003 from $1,213,605,000 at December 31, 2002. Noninterest-bearing deposits
increased 6.6% to $161,122,000 at June 30, 2003 from $151,105,000 at December
31, 2002. Interest-bearing deposits increased 3.2% to $1,096,160,000 at June 30,
2003 from $1,062,500,000 at December 31, 2002.
Securities sold under agreements to repurchase increased $5,695,000 to
$8,162,000 as of June 30, 2003, as compared to $2,467,000 as of December 31,
2002. Long-term debt increased $6,000,000 or 8.4% to $77,759,000 at June 30,
2003, compared to $71,759,000 at December 31, 2002. The increase in long-term
debt is due to increases in Federal Home Loan Bank (FHLB) advances outstanding
which were used primarily to fund loan growth.
In the first six months of 2003, the Corporation repurchased 17,800 shares of
its common stock at an aggregate cost of $416,000. The Corporation's board of
directors approved a stock purchase plan on March 20, 2001, for the repurchase
of 500,000 shares of common stock. Through June 30, 2003, the Corporation has
repurchased 271,256 shares of common stock under this plan.
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ASSET QUALITY
The following table sets forth the components of non-performing assets and past
due loans.
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in thousands)
Non-accrual loans $1,145 $1,265
Loans 90 days past due, still accruing 1,180 963
Restructured loans - -
Other real estate owned 5,293 5,724
Non-performing other assets 1 1
------ ------
Total non-performing assets $7,619 $7,953
====== ======
Total non-performing assets as a percentage of total assets 0.51% 0.55%
====== ======
Total non-performing assets as a percentage of loans plus non-performing assets 0.68% 0.72%
====== ======
Loans 90 days past due and still accruing were $1,180,000 or 0.11% of total
loans as of June 30, 2003, compared to $963,000 or 0.09% of total loans as of
December 31, 2002. The balance of other real estate owned decreased to
$5,293,000 as of June 30, 2003, compared to $5,724,000 as of December 31, 2002.
This decrease is attributable primarily to the recording of valuation
adjustments totaling $637,000 by Busey Bank in connection with the carrying
value of a hotel property in the McLean County market. Busey Bank became
mortgage in possession of this property on June 28, 2003, and remains so pending
completion of foreclosure proceedings which are expected to be completed during
the third quarter of 2003.
ALLOWANCE FOR LOAN LOSSES
First Busey Corporation has established an allowance for loan losses which
represents the corporation's estimate of the probable losses that have occurred
as of the date of the financial statements.
Management has established an allowance for loan losses which reduces the total
loans outstanding by an estimate of uncollectible loans. Loans deemed
uncollectible are charged against and reduce the allowance. Periodically, a
provision for loan losses is charged to current expense. This provision acts to
replenish the allowance for loan losses and to maintain the allowance at a level
that management deems adequate.
There is no precise method of predicting specific loan losses or amounts which
ultimately may be charged off on segments of the loan portfolio. The
determination that a loan may become uncollectible, in whole or in part, is a
matter of judgment. Similarly, the adequacy of the allowance for loan losses can
be determined only on a judgmental basis, after full review, including (a)
consideration of economic conditions and their effect on particular industries
and specific borrowers; (b) a review of borrowers' financial data, together with
industry data, the competitive situation, the borrowers' management capabilities
and other factors; (c) a continuing evaluation of the loan portfolio, including
monitoring by lending officers and staff credit personnel of all loans which are
identified as being of less than acceptable quality; (d) an in-depth appraisal,
on a monthly basis, of all impaired (loans are considered to be impaired when
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due); and (e) an evaluation of the underlying
collateral for secured lending, including the use of independent appraisals of
real estate properties securing loans.
Periodic provisions for loan losses are determined by management based upon the
size and the quality of the loan portfolio measured against prevailing economic
conditions and historical loan loss experience and also based on specific
exposures in the portfolio. Management has instituted a formal loan review
system supported by an effective credit analysis and control process. The
Corporation will maintain the allowance for loan losses at a level sufficient to
absorb estimated uncollectible loans and, therefore, expects to make periodic
additions to the allowance for loan losses.
The Corporation maintains its allowance for loan losses at a level management
believes will be adequate to absorb estimated losses on existing loans based on
an evaluation of the collectibility of loans and prior loss
12 of 33
experience. The allowance is calculated using a risk rating system which
involves judgments, estimates, and uncertainties that are susceptible to change.
This risk rating system is based on 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. Changes in these
factors or conditions could have significant impact on the Corporation's
financial condition or results of operation.
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 loan losses. Potential problem loans totaled $4,216,000 at
June 30, 2003 as compared to $1,053,000 as of December 31, 2002. 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AS COMPARED TO JUNE 30, 2002
SUMMARY
Net income for the six months ended June 30, 2003 increased 13.6% to $10,198,000
as compared to $8,977,000 for the comparable period in 2002. Year-to-date
diluted earnings per share increased 13.6% to $0.75 for the six months ending
June 30, 2003 as compared to $.66 for the same period in 2002.
The Corporation's return on average assets was 1.43% for the six months ended
June 30, 2003, as compared to 1.40% for the comparable period in 2002. The
Corporation's return on average shareholders' equity was 17.23% for the six
months ended June 30, 2003, as compared to 16.82% for the same period in 2002.
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $137,079,000 or 11.3% to $1,345,941,000 for the
six months ending June 30, 2003, as compared to $1,208,862,000 for same period
last year. This is due primarily to growth in the average balances of loans
outstanding, U.S. Government obligations, and obligations of states and
political subdivisions.
Interest-bearing liabilities averaged $1,166,345,000 during the first six months
of 2003, an increase of $115,673,000 or 11.0% from the average balance of
$1,050,672,000 for the same period in 2002. This growth is due to increases in
the average balances of long-term debt and all categories of interest-bearing
deposit accounts.
Income on interest-earning assets is accrued based on the effective yield of the
underlying financial instruments. A loan is considered to be impaired when,
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due. The accrual of interest income on impaired
loans is discontinued when there is reasonable doubt as to the borrower's
ability to meet contractual payments of interest or principal.
Net interest income, on a fully taxable equivalent basis, increased $1,427,000
or 6.2% to $24,322,000 for the six months ended June 30, 2003, compared to
$22,895,000 for the same period in 2002. Net interest margin, the Corporation's
net interest income, expressed as a percentage of average earning assets stated
on a fully taxable equivalent basis, was 3.64% for the six months ended June 30,
2003, as compared to 3.82% for the same period
13 of 33
in 2002. The net interest margin expressed as a percentage of average total
assets, also on a fully taxable equivalent basis, was 3.41% for the six months
ended June 30, 2003, compared to 3.56% for same period in 2002.
Interest income, on a tax equivalent basis, for the six months ended June 30,
2003, was $37,815,000, which is $241,000 or 0.6% lower than the $38,056,000
earned during the same period in 2002. The average yield on interest-earning
assets declined 69 basis points to 5.66% for the six-month period ended June 30,
2003, compared to 6.35% for the same period in 2002. Declines in the yields on
all categories of interest-earning assets offset the growth in the average
balances of all categories of interest-earning assets.
Interest expense for the six months ended June 30, 2003, was $13,493,000, which
is $1,668,000 or 11.0% lower than for the same period in 2002. The average rate
paid on interest-bearing liabilities declined 58 basis points to 2.33% for the
six months ended June 30, 2003, as compared to 2.91% for the same period in
2002. Growth in the average balances of all categories of interest-bearing
liabilities was offset by declines in the average rate paid on all categories of
interest-bearing liabilities.
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses of $930,000 during the six months
ended June 30, 2003, is $550,000 less than the $1,480,000 recorded during the
comparable period in 2002. The provision and net charge-offs of $63,000 for the
six-month period ending June 30, 2003, resulted in the allowance representing
1.46% of total loans and 702% of non-performing loans as of June 30, 2003, as
compared to the allowance representing 1.40% of outstanding loans and 694% of
non-performing loans as of December 31, 2002. Net charge-offs for the first six
months of 2003 were $63,000 compared to $1,358,000 for the comparable period in
2002. The net chargeoff ratio (net charge-offs as a percentage of average loans)
was 0.01% for the six-month period ending June 30, 2003, reflecting a decrease
from 0.14% for the same period in 2002. The adequacy of the allowance for loan
losses is consistent with management's consideration of the composition of the
portfolio, non-performing asset levels, recent credit quality experience,
historic charge-off trends, and prevailing economic conditions among other
factors.
OTHER INCOME, OTHER EXPENSE, AND INCOME TAXES
Total other income, excluding security gains, increased $2,470,000 or 23.4% to
$13,047,000 for the six months ended June 30, 2003, compared to $10,577,000 for
the same period in 2002. Growth in service charges and gains on the sale of
loans were partially offset by declines in trust fees, commissions and brokers
fees, and other operating income.
Income recognized on service charges, trust fees, commissions, and loan gains is
recognized based on contractual terms and are accrued based on estimates, or are
recognized as transactions occur or services are provided. Income from the
servicing of sold loans is recognized based on estimated asset valuations and
transactions volumes. While these estimates and assumptions may be considered
complex, First Busey has implemented controls and processes to ensure the
accuracy of these accruals.
During the first six months of 2003 the Corporation recognized $4,474,000 on the
sale of $237,329,000 compared to $1,356,000 on the sale of $99,566,000 of loans
during the prior year period. The increase in gains on the sale of loans and the
principal balances sold can be attributed to the interest-rate environment
experienced during the six months ending June 30, 2003, as customers refinanced
existing home mortgages at lower interest rates. Management anticipates
continued sales from the current mortgage loan production of the Corporation if
mortgage loan originations allow and the sales of loans necessary to maintain
the Corporation's desired asset/liability structure. The Corporation may realize
gains and/or losses on these sales dependent upon interest rate movements and
upon how receptive the debt markets are to mortgage-backed securities.
In this low interest rate environment customers have prepaid loans in the
corporation's sold loan portfolio more rapidly than anticipated when the loans
were sold. This has resulted in more rapid amortization of the
14 of 33
Corporation's mortgage servicing asset. During the second quarter of 2003, the
Corporation recorded a valuation allowance of $215,000 to the carrying value of
its mortgage servicing assets. Mortgage servicing asset amortization of $851,000
and the valuation allowance of $215,000 have been recorded as charges against
the servicing income on sold mortgage loans and are included in other operating
income.
During the six months ending June 30, 2003, the Corporation recognized security
gains of approximately $180,000 after income taxes, representing 1.8% of net
income. During the same period in 2002, security gains of approximately $285,000
after income taxes were recognized, representing 3.2% of net income. The
Corporation owns a position in a qualified equity security with substantial
appreciated value. First Busey's Board of Directors has authorized an orderly
liquidation of this asset over a six-year period.
Total other expenses increased $1,971,000 or 10.7% to $20,366,000 for the six
months ending June 30, 2003, compared to $18,395,000 for the comparable period
in 2002.
Salaries and wage expense increased $996,000 or 11.5% to $9,636,000 for the six
months ended June 30, 2003, as compared to $8,640,000 during the same period
last year. Growth in the salary expense is due primarily to increases in
commissions and other incentive compensation programs for associates involved in
originating, processing, and selling mortgage loans held for sale. Growth in the
Florida market also contributed to the increase in salary and wage expense as
Busey Bank Florida opened a branch in Cape Coral, Florida, during the fourth
quarter of 2002. The Corporation had 505 and 473 full-time equivalent employees
as of June 30, 2003, and June 30, 2002, respectively.
Occupancy and furniture and equipment expenses decreased $199,000 or 6.6% to
$2,839,000 for the six-month period ending June 30, 2003, compared to $3,038,000
during the comparable period in 2002. Data processing expenses increased
$169,000 due to costs associated with the upgrade of Busey Bank's image capture
system. These expenses were incurred during the first quarter of 2003. Other
operating expenses increased $933,000 or 26.9% to $4,403,000 for the six month
period ending June 30, 2003, compared to $3,470,000 for the comparable period in
2002. Of this increase, $637,000 is associated with the recording of valuation
adjustments by Busey Bank on the carrying value of properties held in its other
real estate owned inventory.
Income taxes for the six months ended June 30, 2003, increased to $5,531,000 as
compared to $4,457,000 for the comparable period in 2002. As a percentage of
income before taxes, the provision for income taxes increased to 35.2% for the
six months ended June 30, 2003 from 33.2% for the comparable period in 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003, AS COMPARED TO JUNE 30, 2002
SUMMARY
Net income for three months ended June 30, 2003, increased $1,069,000 or 24.9%
to $5,356,000 as compared to $4,287,000 for the three months ending June 30,
2002. Diluted earnings per share increased $.07 or 21.9% to $0.39 for the three
months ending June 30, 2003 as compared to $0.32 for the comparable period in
2002.
The Corporation's return on average assets was 1.48% for three month period
ending June 30, 2003, compared to 1.32% for the comparable period in 2002. The
return on average shareholders' equity increased to 17.71% for the three month
period ending June 30, 2003, compared to 15.82% for the comparable period in
2002.
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $143,360,000 or 11.8% to $1,359,539,000 for the
three months ending June 30, 2003, as compared to $1,216,179,000 for same period
last year. This is due primarily to growth in the average balances of
outstanding loan balances.
15 of 33
Interest-bearing liabilities averaged $1,174,715,000 during the three months
ending June 30, 2003, an increase of $117,031,000 or 11.1% from the average
balance of $1,057,684,000 for the same period in 2002. This growth is due
increases in the average balances of long-term debt and all categories of
interest-bearing deposit accounts.
Net interest income, on a fully taxable equivalent basis, increased $741,000 or
6.5% to $12,173,000 for the three months ended June 30, 2003, compared to
$11,432,000 for the same period in 2002. Net interest margin, the Corporation's
net interest income, expressed as a percentage of average earning assets stated
on a fully taxable equivalent basis, was 3.59% for the three months ending June
30, 2003, as compared to 3.77% for the comparable period in 2002. The net
interest margin expressed as a percentage of average total assets, also on a
fully taxable equivalent basis, was 3.37% for the three months ended June 30,
2003, compared to 3.52% for comparable period in 2002.
Interest income, on a tax equivalent basis, for the three month period ending
June 30, 2003, was $18,823,000, which is $148,000 or 0.8% lower than the
$18,971,000 earned during the same period in 2002. The average yield on
interest-earning assets declined 71 basis points to 5.55% for the three-month
period ended June 30, 2003, compared to 6.26% for the same period in 2002.
Declines in the yields on all categories of interest-earning assets offset the
growth in the average balances of all categories of interest-earning assets.
Interest expense for the three months ending June 30, 2003, was $6,650,000,
which is $889,000 or 11.8% lower than for the same period in 2002. The average
rate paid on interest-bearing liabilities declined 59 basis points to 2.27% for
the three months ended June 30, 2003, as compared to 2.86% for the same period
in 2002. Declines in the average rate paid on all categories of interest-bearing
liabilities offset growth in the average balances of all categories of
interest-bearing liabilities.
OTHER INCOME, OTHER EXPENSE, AND INCOME TAXES
Total other income, excluding security transactions, increased $1,368,000 or
25.4% to $6,755,000 for the three months ended June 30, 2003, compared to
$5,387,000 for the same period in 2002. Growth in gains on the sale of loans
were partially offset by declines in trust fees and other operating income.
Gains of $2,239,000 were recognized on the sale of $118,783,000 of mortgage
loans during the three months ending June 30, 2003, compared to gains of
$559,000 on the sale of $57,174,000 in mortgage loans during the prior year
period.
During the three-month period ending June 30, 2003, the Corporation recognized
security gains of approximately $70,000, after income taxes, representing 1.3%
of net income. During the comparable period in 2002, security gains of
approximately $120,000, after income taxes, were recognized, representing 2.8%
of net income.
Total other expenses increased $584,000 or 6.2% to $9,984,000 for the three
months ending June 30, 2003, compared to $9,400,000 for the comparable period in
2002.
Salaries and wage expense increased $605,000 or 13.9% to $4,947,00 for the three
months ended June 30, 2003, as compared to $4,342,000 during the same period
last year. Again, the growth in salary and wage expense is due to increases in
compensation programs for associates involved in originating, processing, and
selling mortgage loans held for sale combined with the addition of the branch
office in Cape Coral, Florida. Occupancy and furniture and equipment expenses
decreased $192,000 or 12.5% to $1,342,000 for the three-month period ending June
30, 2003, compared to $1,534,000 during the comparable period in 2002.
Income taxes for the three-month period ending June 30, 2003, increased to
$3,055,000 as compared to $2,102,000 for the comparable period in 2002. As a
percentage of income before taxes, the provision for income taxes increased to
36.3% for the three months ended June 30, 2003 from 32.9% for the comparable
period in 2002.
16 of 33
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, First Busey Corporation applied FASB Statement No.
142, Goodwill and Other Intangible Assets. Among its provisions is a requirement
to disclose what reported net income would have been in all periods presented
exclusive of amortization expense, net of related income tax effects, recognized
in those periods related to goodwill, intangible assets no longer being
amortized, and changes in amortization periods for intangible assets that will
continue to be amortized together with related per share amounts.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------ ------ ------- ------
(Dollars in thousands, except per share amounts)
Reported net income $5,356 $4,287 $10,198 $8,977
Add goodwill amortization 82 100 164 201
------ ------ ------- ------
Adjusted net income $5,438 $4,387 $10,362 $9,178
====== ====== ======= ======
BASIC EARNINGS PER SHARE
Reported net income $ 0.39 $ 0.32 $ 0.75 $ 0.66
Goodwill amortization 0.01 0.00 0.01 0.02
------ ------ ------- ------
Adjusted net income $ 0.40 $ 0.32 $ 0.76 $ 0.68
====== ====== ======= ======
DILUTED EARNINGS PER SHARE
Reported net income $ 0.39 $ 0.32 $ 0.75 $ 0.66
Goodwill amortization 0.01 0.00 0.01 0.01
------ ------ ------- ------
Adjusted net income $ 0.40 $ 0.32 $ 0.76 $ 0.67
====== ====== ======= ======
In April, 2003, Statement on Financial Accounting Standards No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities, was issued.
This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective for contracts entered into
or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which related to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to both existing contracts and new contracts entered
into after June 30, 2003. The Corporation does not anticipate this statement
will have a significant impact upon the operations of First Busey or its
subsidiaries.
In May, 2003, Statement on Financial Accounting Standards No. 150 Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity was issued. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement requires an issuer to classify the following instruments as
liabilities (or assets in some circumstances):
- A financial instrument issued in the form of shares that is
mandatorily redeemable - that embodies an unconditional obligation
requiring the issuer to redeem it by transferring its assets at a
specified or determinable date (or dates) or upon an event that is
certain to occur
- A financial instrument, other than an outstanding share, that, at
inception, embodies an obligation to repurchase the issuer's equity
shares, or is indexed to such an obligation, and that requires or may
17 of 33
require the issuer to settle the obligation by transferring assets
(for example, a forward purchase contract or written put option on the
issuer's equity shares that is to be physically settled or net cash
settled)
- A financial instrument that embodies an unconditional obligation, or a
financial instrument other than an outstanding share that embodies a
conditional obligation, that the issuer must or may settle by issuing
a variable number of its equity shares, if, at inception, the monetary
value of the obligation is based solely or predominantly on any of the
following:
- A fixed monetary amount known at inception, for example, a
payable settleable with a variable number of the issuer's
equity shares.
- Variations in something other than the fair value of the
issuer's equity shares, for example, a financial instrument
indexed to the S&P and settleable with a variable number of
the issuer's equity shares.
- Variations inversely related to changes in the fair value of
the issuer's equity shares, for example, a written put
option that could be net share settled.
The requirements of this Statement apply to issuer's classification and
measurement of freestanding financial instruments, including that that comprise
more than one option or forward contract.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted.
First Busey Corporation does not anticipate this Statement will have a
significant impact upon the operations of the Corporation or its subsidiaries.
REPORTABLE SEGMENTS AND RELATED INFORMATION
First Busey Corporation has three reportable segments, Busey Bank, Busey Bank
Florida and First Busey Trust & Investment Co. Busey Bank provides a full range
of banking services to individual and corporate customers through its branch
network in Champaign, McLean and Ford Counties in Illinois, through its branch
in Indianapolis, Indiana, and through its loan production office in Fort Myers,
Florida. Busey Bank Florida provides a full range of banking services to
individual and corporate customers in Fort Myers, Florida. First Busey Trust &
Investment Company provides trust and asset management services to individual
and corporate customers throughout central Illinois.
The Corporation's three reportable segments are strategic business units that
are separately managed as they offer different products and services and have
different marketing strategies.
The segment financial information provided below has been derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the Corporation. The accounting policies of the
three segments are the same as those described in the summary of significant
accounting policies in the annual report. The Corporation accounts for
intersegment revenue and transfers at current market value.
18 of 33
June 30, 2003
-------------------------------------------------------------------------------------------------------
First Busey
Busey Bank Trust & Consolidated
Busey Bank Florida Investment Co. All Other Totals Eliminations Totals
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest income $ 35,069 $ 1,988 $ 71 $ 1,195 $ 38,323 $ (1,151) $ 37,172
Interest expense 11,357 1,010 - 2,279 14,646 (1,153) 13,493
Other income 10,081 355 2,144 13,698 26,258 (12,912) 13,346
Net income 10,503 55 665 11,120 22,343 (12,145) 10,198
Total assets 1,395,252 87,758 3,187 190,049 1,676,246 (176,034) 1,500,212
June 30, 2002
-------------------------------------------------------------------------------------------------------
First Busey
Busey Bank Trust & Consolidated
Busey Bank Florida Investment Co. All Other Totals Eliminations Totals
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest income $ 35,917 $ 1,366 $ 79 $ 1,209 $ 38,571 $ (1,151) $ 37,420
Interest expense 13,327 674 - 2,297 16,298 (1,137) 15,161
Other income 7,356 172 2,520 12,766 22,814 (11,764) 11,050
Net income 9,134 48 763 10,095 20,040 (11,063) 8,977
Total assets 1,287,848 56,103 3,642 179,975 1,527,568 (171,003) 1,356,565
LIQUIDITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available to meet the present and future cash flow
obligations arising in the daily operations of the business. These financial
obligations consist of needs for funds to meet commitments to borrowers for
extensions of credit, funding capital expenditures, withdrawals by customers,
maintaining deposit reserve requirements, servicing debt, paying dividends to
shareholders, and paying operating expenses.
The Corporation's most liquid assets are cash and due from banks,
interest-bearing bank deposits, and Federal funds sold. The balances of these
assets are dependent on the Corporation's operating, investing, lending and
financing activities during any given period.
The Corporation's primary sources of funds, consists of deposits, investment
maturities and sales, loan principal repayment, deposits, and capital funds.
Additional liquidity is provided by bank lines of credit, repurchase agreements
and the ability to borrow from the Federal Reserve Bank and the Federal Home
Loan Bank. The Corporation has not dealt in or used brokered deposits as a
source of liquidity. The Corporation has an operating line with Bank One in the
amount of $10,000,000, all of which was available as of June 30, 2003. 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. During the first six months of 2003 the
Corporation originated $224,162,000 and sold $237,329,000 in mortgage loans for
sale compared to originations of $89,363,000 and sales of $99,566,000 during the
first six months of 2002. As of June 30, 2003, the Corporation held $47,594,000
in loans held for sale. Management intends to sell these loans during the third
quarter of 2003.
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
19 of 33
days and 90 days, management currently believes that adequate liquidity exists
to meet all projected cash flow obligations. The Corporation achieves a
satisfactory degree of liquidity through actively managing both assets and
liabilities. Asset management guides the proportion of liquid assets to total
assets, while liability management monitors future funding requirements and
prices liabilities accordingly.
The Corporation's banking subsidiaries routinely enter into commitments to
extend credit in the normal course of their business. As of June 30, 2003, and
2002, the Corporation had outstanding loan commitments including lines of credit
of $233,745,000 and $222,407,000, respectively. The balance of commitments to
extend credit represents future cash requirement and some of these commitments
may expire without being drawn upon. The Corporation anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process prior to the issuance of firm commitments.
The Corporation has entered into certain contractual obligations and other
commitments. Such obligations generally relate to funding of operations through
deposits, debt issuance, and property and equipment leases. The following table
summarizes significant contractual obligations and other commitments as of June
30, 2003:
Company
Obligated
Mandatorily
Short- and Redeemable
Certificates Long-term Preferred
Due Within of Deposit Borrowing Leases Securities Total
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1 year $311,339 $ 262 $ 765 $ - $312,366
2 years 81,539 15,262 738 - 97,539
3 years 44,994 8,262 705 - 53,961
4 years 39,181 18,262 682 - 58,125
5 years 33,157 31,237 560 - 64,954
Thereafter 62 4,474 619 25,000 30,155
------------------------------------------------------------------------------------------
Total $510,272 $77,759 $4,069 $25,000 $617,100
==========================================================================================
Commitments to extend credit $233,745
========
CAPITAL RESOURCES
Other than from the issuance of common stock, the Corporation's primary source
of capital is retained net income. During the six months ended June 30, 2003 the
Corporation earned $10,198,000 and paid dividends of $4,612,000 to stockholders,
resulting in a retention of current earnings of $5,586,000. The Corporation's
dividend payout for the six months ended June 30, 2003 was 45.2%.
The Corporation and the Banks are subject to regulatory capital requirements
administered by federal and state banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Banks must meet specific capital guidelines that involve the
quantitative measure of their assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Quantitative measures
established by regulation to ensure capital adequacy require the Corporation and
the Banks to maintain minimum amounts and ratios (set forth in the table below)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of June 30, 2003, that the Corporation and the
Banks meet all capital adequacy requirements to which they are subject.
20 of 33
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 JUNE 30, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated $146,444 13.83% $84,278 8.00% N/A N/A
Busey Bank $113,566 11.56% $78,614 8.00% $98,268 10.00%
Busey Bank Florida $ 11,985 19.81% $ 4,840 8.00% $ 6,049 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $127,555 12.04% $42,364 4.0% N/A N/A
Busey Bank $ 96,498 9.82% $39,307 4.0% $58,961 6.00%
Busey Bank Florida $ 11.333 18.74% $ 2,420 4.0% $ 3,630 6.00%
Tier I Capital (to Average Assets)
Consolidated $127,555 8.97% $56,883 4.0% N/A N/A
Busey Bank $ 96,498 7.28% $53,054 4.0% $66,318 5.00%
Busey Bank Florida $ 11,333 13.42% $ 3,378 4.0% $ 4,222 5.00%
AS OF DECEMBER 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $137,796 13.31% $82,830 8.0% N/A N/A
Busey Bank $108,321 11.13% $77,846 8.0% $97,307 10.0%
Busey Bank Florida $ 11,802 25.47% $ 3,708 8.0% $ 4,634 10.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated $119,897 11.58% $41,415 4.0% N/A N/A
Busey Bank $ 91,826 9.44% $38,923 4.0% $58,385 6.00%
Busey Bank Florida $ 11,280 24.34% $ 1,854 4.0% $ 2,781 6.00%
Tier I Capital (to Average Assets)
Consolidated $119,897 8.66% $55,389 4.0% N/A N/A
Busey Bank $ 91,826 7.03% $52,244 4.0% $65,305 5.00%
Busey Bank Florida $ 11,280 16.50% $ 2,736 4.0% $ 3,420 5.00%
21 of 33
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.
The following table sets forth the static rate-sensitivity analysis of the
Corporation as of June 30, 2003.
Rate Sensitive Within
-----------------------------------------------------------------------------------
1-30 31-90 91-180 181 Days - Over
Days Days Days 1 Year 1 Year Total
-----------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing deposits $ 60 $ - $ - $ - $ - $ 60
Federal funds sold 33,300 - - - - 33,300
Investment securities
U.S. Governments 15,997 18,092 16,144 27,697 92,337 170,267
Obligations of states and
political subdivisions 3,275 - 3,847 2,398 42,235 51,755
Other securities 12,200 - 102 231 14,274 26,807
Loans (net of unearned int.) 493,157 65,322 78,725 116,111 361,489 1,114,804
-------------------------------------------------------------------------------------
Total rate-sensitive assets $ 557,989 $83,414 $ 98,818 $146,437 $510,335 $1,396,993
-------------------------------------------------------------------------------------
Interest bearing transaction
Deposits $ 44,359 $ - $ - $ - $ - $ 44,359
Savings deposits 106,138 - - - - 106,138
Money market deposits 435,392 - - - - 435,392
Time deposits 73,224 61,182 68,783 112,989 194,093 510,271
Securities sold under agreements to
repurchase 8,162 - - - - 8,162
Long-term debt - - - 1,759 76,000 77,759
Company obligated mandatorily
redeemable preferred securities - - - - 25,000 25,000
-------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 667,275 $ 61,182 $ 68,783 $114,748 $295,093 $1,207,081
-------------------------------------------------------------------------------------
Rate-sensitive assets less
rate-sensitive liabilities $(109,286) $ 22,232 $ 30,035 $ 31,689 $215,242 $ 189,912
-------------------------------------------------------------------------------------
Cumulative Gap $(109,286) $(87,054) $(57,019) $(25,330) $189,912
=====================================================================================
Cumulative amounts as a percentage
of total rate-sensitive assets -7.82% -6.23% -4.08% -1.81% 13.59%
=====================================================================================
Cumulative ratio 0.84 0.88 0.93 0.97 1.16
=====================================================================================
The foregoing table shows a negative (liability sensitive) rate-sensitivity gap
of $109.3 million in the 1-30 day as there were more liabilities subject to
repricing in that time period than there were assets subject to repricing within
that same time period. The volume of assets subject to repricing exceeds the
volume of liabilities subject to repricing for all time periods beyond 30 days.
On a cumulative basis, however, the gap remains liability-sensitive through one
year. The composition of the gap structure at June 30, 2003, will benefit the
Corporation more if interest rates decrease during the next year by allowing the
net interest margin to grow as liability rates would reprice more quickly than
rates on rate-sensitive assets. After 1 year, a rate increase would benefit the
Corporation because the volume of rate-sensitive assets subject to repricing
would exceed the volume of rate-sensitive liabilities subject to repricing.
22 of 33
FIRST BUSEY CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND INTEREST RATES
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
2003 2002
--------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------- ---------------------------------------
ASSETS (Dollars in thousands)
Federal funds sold $ 13,485 $ 77 1.15% $ 10,878 $ 86 1.59%
Investment securities
U.S. Government obligations 163,840 2,821 3.47% 143,451 3,294 4.63%
Obligations of states and political
subdivisions(1) 51,789 1,586 6.18% 42,925 1,503 7.06%
Other securities 25,539 404 3.19% 24,350 426 3.53%
Loans (net of unearned interest)(1)(2) 1,091,288 32,927 6.08% 987,258 32,747 6.69%
----------------------- -----------------------
Total interest earning assets $1,345,941 $37,815 5.66% $1,208,862 $38,056 6.35%
======= =======
Cash and due from banks 37,563 33,596
Premises and equipment 26,668 28,679
Allowance for loan losses (15,881) (13,814)
Other assets 42,495 38,134
---------- ----------
Total Assets $1,436,786 $1,295,457
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction deposits $ 18,008 $ 51 0.57% $ 13,456 $ 65 0.97%
Savings deposits 104,325 429 0.83% 97,168 550 1.14%
Money market deposits 428,157 1,828 0.86% 401,638 2,622 1.32%
Time deposits 504,663 8,292 3.31% 446,130 9,129 4.13%
Short-term borrowings:
Federal Funds Purchased 3,513 26 1.49% 3,213 31 1.95%
Repurchase agreements 7,308 71 1.96% 7,730 219 5.71%
Other - - - 857 15 3.53%
Long-term debt 75,371 1,671 4.47% 55,480 1,405 5.11%
Company obligated mandatorily
redeemable preferred securities 25,000 1,125 9.07% 25,000 1,125 9.07%
----------------------- -----------------------
Total interest-bearing liabilities $1,166,345 $13,493 2.33% $1,050,672 $15,161 2.91%
======= =======
Net interest spread 3.33% 3.44%
==== ====
Demand deposits 141,413 127,455
Other liabilities 9,681 9,715
Stockholders' equity 119,347 107,615
---------- ----------
Total Liabilities and Stockholders' Equity $1,436,786 $1,295,457
========== ==========
Interest income/earning assets(1) $1,345,941 $37,815 5.66% $1,208,862 $38,056 6.35%
Interest expense/earning assets $1,345,941 $13,493 2.02% $1,208,862 $15,161 2.53%
------------------- -------------------
Net interest margin(1) $24,322 3.64% $22,895 3.82%
=================== ===================
(1) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2003 and 2002.
(2) Non-accrual loans have been included in average loans, net of unearned
interest.
23 of 33
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Change due to(1)
Average Average Total
Volume Yield/Rate Change
---------------------------------------
(Dollars in thousands)
Increase (decrease) in interest income:
Federal funds sold $ 57 $ (66) $ (9)
Investment securities:
U.S. Government obligations 622 (1,095) (473)
Obligations of states and political subdivisions(2) 211 (128) 83
Other securities 24 (46) (22)
Loans(2) 1,262 (1,082) 180
--------------------------------------
Change in interest income(2) $2,176 $(2,417) $ (241)
--------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction deposits $ 66 $ (80) $ (14)
Savings deposits 45 (166) (121)
Money market deposits 187 (981) (794)
Time deposits 1,668 (2,505) (837)
Short-term borrowings:
Federal funds purchased 3 (8) (5)
Repurchase agreements (12) (136) (148)
Other (15) - (15)
Long-term debt 408 (142) 266
Company obligated mandatorily redeemable preferred securities - - -
---------------------------------------
Change in interest expense $2,350 $(4,018) $(1,668)
--------------------------------------
Increase in net interest income(2) $ (174) $ 1,601 $ 1,427
======================================
(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% for
2003 and 2002.
24 of 33
FIRST BUSEY CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND INTEREST RATES
QUARTERS ENDED JUNE 30, 2003 AND 2002
2003 2002
--------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------- ---------------------------------------
ASSETS (Dollars in thousands)
Federal funds sold $ 15,257 $ 44 1.16% $ 6,702 $ 28 1.68%
Investment securities
U.S. Government obligations 166,544 1,377 3.32% 151,329 1,676 4.44%
Obligations of states and political
subdivisions(1) 52,693 791 6.02% 43,697 758 6.96%
Other securities 25,944 215 3.32% 24,556 227 3.71%
Loans (net of unearned interest)(1)(2) 1,099,101 16,396 5.98% 989,895 16,282 6.60%
----------------------- -----------------------
Total interest earning assets $1,359,539 $18,823 5.55% $1,216,179 $18,971 6.26%
======= =======
Cash and due from banks 38,070 34,255
Premises and equipment 25,868 28,514
Allowance for loan losses (16,167) (13,940)
Other assets 43,046 39,075
---------- ----------
Total Assets $1,450,356 $1,304,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction deposits $ 18,219 $ 26 0.57% $ 12,143 $ 27 0.89%
Savings deposits 106,876 217 0.81% 97,569 283 1.16%
Money market deposits 430,678 912 0.85% 397,706 1,289 1.30%
Time deposits 502,258 4,021 3.21% 451,244 4,502 4.00%
Short-term borrowings:
Federal funds purchased 5,300 20 1.51% 6,131 30 1.96%
Repurchase agreements 8,625 32 1.49% 6,554 94 5.75%
Other - - - 250 2 3.21%
Long-term debt 77,759 860 4.44% 61,087 750 4.92%
Company obligated mandatorily
redeemable preferred securities 25,000 562 9.02% 25,000 562 9.02%
----------------------- -----------------------
Total interest-bearing liabilities $1,174,715 $ 6,650 2.27% $1,057,684 $ 7,539 2.86%
======= =======
Net interest spread 3.28% 3.40%
==== ====
Demand deposits 144,432 127,052
Other liabilities 9,921 10,640
Stockholders' equity 121,288 108,707
---------- ----------
Total Liabilities and Stockholders' Equity $1,450,356 $1,304,083
========== ==========
Interest income/earning assets(1) $1,359,539 $18,823 5.55% $1,216,179 $18,971 6.26%
Interest expense/earning assets $1,359,539 $ 6,650 1.96% $1,216,179 $ 7,539 2.49%
------------------- --------------------
Net interest margin (1) $12,173 3.59% $11,432 3.77%
=================== ====================
(1) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2003 and 2002.
(2) Non-accrual loans have been included in average loans, net of unearned
interest.
25 of 33
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
QUARTERS ENDED JUNE 30, 2003 AND 2002
Change due to(1)
Average Average Total
Volume Yield/Rate Change
------------------------------------
(Dollars in thousands)
Increase (decrease) in interest income:
Federal funds sold $ 21 $ (5) $ 16
Investment securities:
U.S. Government obligations 197 (496) (299)
Obligations of states and political subdivisions(2) 95 (62) 33
Other securities 15 (27) (12)
Loans(2) 729 (615) 114
------------------------------------
Change in interest income(2) $1,057 $(1,205) $(148)
------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction deposits $ 1 $ (2) $ (1)
Savings deposits 31 (97) (66)
Money market deposits 119 (496) (377)
Time deposits 644 (1,125) (481)
Short-term borrowings:
Federal funds purchased (4) (6) (10)
Repurchase agreements 46 (108) (62)
Other (2) - (2)
Long-term debt 173 (63) 110
Company obligated mandatorily redeemable preferred securities - - -
------------------------------------
Change in interest expense $1,008 $(1,897) $(889)
------------------------------------
Increase in net interest income(2) $ 49 $ 692 $ 741
====================================
(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% for
2003 and 2002.
26 of 33
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of change in asset values due to movements in underlying
market rates and prices. Interest rate risk is the risk to earnings and capital
arising from movements in interest rates. Interest rate risk is the most
significant market risk affecting the Corporation as other types of market risk,
such as foreign currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Corporation's business activities.
The Corporation's subsidiary banks, Busey Bank and Busey Bank Florida have
asset-liability committees which meet at least quarterly to review current
market conditions and attempt to structure the banks' balance sheets to ensure
stable net interest income despite potential changes in interest rates with all
other variables constant.
The asset-liability 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 22.
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
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, + 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 June 30, 2003, is as follows:
Basis Point Changes
---------------------------------------------------
-100 +100 +200
---------------------------------------------------
Percentage change in net interest income due to an immediate change
in interest over a one-year period (3.45%) 3.88% 7.42%
These results do not differ materially from those reported as of December 31,
2002.
ITEM 4: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the
Corporation's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Corporation's disclosure controls
and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on their evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Corporation in reports that it files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
In addition, since their evaluation, there have been no significant changes to
the Corporation's internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
27 of 33
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
Not Applicable
ITEM 2: Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3: Defaults Upon Senior Securities
Not Applicable
ITEM 4: Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of First Busey Corporation was held on April 22, 2003 Please refer to the
Corporation's quarterly report filed on Form 10-Q for the period ending March 31, 2003, for the results of the matters
approved by the stockholders.
ITEM 5: Other Information
Not Applicable
ITEM 6: Exhibits and Reports on Form 8-K
(a.) Exhibits
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, from the Corporation's Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, from the Corporation's Chief Financial Officer.
(b.) Reports on Form 8-K
On July 16, 2003, First Busey Corporation filed a report on Form 8-K (Item 12) dated July 15, 2003, releasing its
financial results for the three months ending June 30, 2003.
28 of 33
SIGNATURES
Pursuant to the requirements 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.
FIRST BUSEY CORPORATION
(REGISTRANT)
By: /s/ Douglas C. Mills
-------------------------------------------------
Douglas C. Mills
Chairman of the Board and Chief Executive Officer
By: /s/ Barbara J. Harrington
-------------------------------------------------
Barbara J. Harrington
Chief Financial Officer
(Principal financial and accounting officer)
Date: August 14, 2003
29 of 33