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 6/30/2005 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 July 28, 2005
- ----------------------------- ----------------------------
Common Stock, $.001 par value 20,590,411
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(UNAUDITED)
June 30, 2005 December 31, 2004
------------- -----------------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 55,611 $ 47,991
Federal funds sold 1,600 3,100
Securities available for sale (amortized cost 2005, $293,138;
2004, $337,037) 305,991 352,256
Loans 1,575,742 1,475,900
Allowance for loan losses (21,119) (19,217)
------------- -----------------
Net loans $ 1,554,623 $ 1,456,683
Premises and equipment 27,635 26,295
Cash surrender value of bank owned life insurance 18,025 17,634
Goodwill 31,785 31,785
Other intangible assets 3,462 3,852
Other assets 29,130 24,845
------------- -----------------
Total assets $ 2,027,862 $ 1,964,441
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 205,212 $ 213,921
Interest bearing 1,427,502 1,344,901
------------- -----------------
Total deposits $ 1,632,714 $ 1,558,822
Securities sold under agreements to repurchase 37,532 41,558
Short-term borrowings 1,000 11,250
Long-term debt 151,801 165,374
Junior subordinated debt owed to unconsolidated trusts 50,000 40,000
Other liabilities 10,941 8,565
------------- -----------------
Total liabilities $ 1,883,988 $ 1,825,569
------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 21 6,291
Surplus 28,147 21,696
Retained earnings 121,453 114,359
Accumulated other comprehensive income 7,744 9,170
------------- -----------------
Total stockholders' equity before treasury stock, unearned ESOP
shares and deferred compensation for stock grants $ 157,365 $ 151,516
Treasury stock, at cost (11,026) (10,173)
Unearned ESOP shares and deferred compensation for stock grants (2,465) (2,471)
------------- -----------------
Total stockholders' equity $ 143,874 $ 138,872
------------- -----------------
Total liabilities and stockholders' equity $ 2,027,862 $ 1,964,441
============= =================
Common shares outstanding at period end 20,592,251 20,608,151
============= =================
See accompanying 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, 2005 AND 2004
(UNAUDITED)
2005 2004
------------------ -----------------
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 47,783 $ 34,716
Interest and dividends on investment securities:
Taxable interest income 3,627 2,149
Non-taxable interest income 1,040 925
Dividends 375 350
Interest on Federal funds sold 223 28
------------------ -----------------
Total interest income $ 53,048 $ 38,168
------------------ -----------------
INTEREST EXPENSE:
Deposits $ 14,446 $ 8,897
Federal funds purchased and securities sold under agreements to
repurchase 491 117
Short-term borrowings 90 46
Long-term debt 3,052 2,231
Junior subordinated debt owed to unconsolidated trusts 1,559 1,221
------------------ -----------------
Total interest expense $ 19,638 $ 12,512
------------------ -----------------
Net interest income $ 33,410 $ 25,656
Provision for loan losses 2,115 1,080
------------------ -----------------
Net interest income after provision for loan losses $ 31,295 $ 24,576
------------------ -----------------
OTHER INCOME:
Trust $ 2,911 $ 2,791
Commissions and brokers fees, net 1,051 1,196
Service charges on deposit accounts 3,768 3,740
Other service charges and fees 1,084 981
Security gains, net 412 688
Gain on sales of loans 1,012 1,281
Increase in cash surrender value of life insurance 391 415
Other operating income 890 636
------------------ -----------------
Total other income $ 11,519 $ 11,728
------------------ -----------------
OTHER EXPENSES:
Salaries and wages $ 10,635 $ 9,124
Employee benefits 2,379 2,236
Net occupancy expense of premises 2,068 1,817
Furniture and equipment expenses 1,426 1,123
Data processing 1,067 888
Stationery, supplies and printing 514 454
Amortization of intangible assets 390 234
Other operating expenses 4,922 3,787
------------------ -----------------
Total other expenses $ 23,401 $ 19,663
------------------ -----------------
Income before income taxes $ 19,413 $ 16,641
Income taxes 6,601 5,740
------------------ -----------------
NET INCOME $ 12,812 $ 10,901
================== =================
BASIC EARNINGS PER SHARE* $ 0.63 $ 0.54
================== =================
DILUTED EARNINGS PER SHARE* $ 0.62 $ 0.53
================== =================
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK* $ 0.28 $ 0.25
================== =================
*Per share have been retroactively adjusted to effect a three-for-two common
stock split declared on July 23, 2004, as if it had occurred on January 1, 2004.
See accompanying 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, 2005 AND 2004
(UNAUDITED)
2005 2004
------------------ -----------------
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 24,921 $ 18,077
Interest and dividends on investment securities:
Taxable interest income 1,762 1,118
Non-taxable interest income 547 472
Dividends 192 218
Interest on federal funds sold 63 27
------------------ -----------------
Total interest income $ 27,485 $ 19,912
------------------ -----------------
INTEREST EXPENSE:
Deposits $ 7,671 $ 4,650
Federal funds purchased and securities sold under agreements to
repurchase 315 61
Short-term borrowings 37 34
Long-term debt 1,511 1,215
Junior subordinated debt owed to unconsolidated trusts 802 658
------------------ -----------------
Total interest expense $ 10,336 $ 6,618
------------------ -----------------
Net interest income $ 17,149 $ 13,294
Provision for loan losses 1,425 655
------------------ -----------------
Net interest income after provision for loan losses $ 15,724 $ 12,639
------------------ -----------------
OTHER INCOME:
Trust $ 1,471 $ 1,396
Commissions and brokers' fees, net 525 604
Service charges on deposit accounts 1,944 2,012
Other service charges and fees 575 513
Security gains, net 250 497
Gains on sales of loans 589 459
Increase in cash surrender value of life insurance 196 206
Other operating income 414 347
------------------ -----------------
Total other income $ 5,964 $ 6,034
------------------ -----------------
OTHER EXPENSES:
Salaries and wages $ 5,438 $ 4,583
Employee benefits 1,175 1,213
Net occupancy expense of premises 1,121 933
Furniture and equipment expenses 743 588
Data processing 578 450
Stationary, supplies and printing 249 234
Amortization of intangible assets 195 129
Other operating expenses 2,653 2,066
------------------ -----------------
Total other expenses $ 12,152 $ 10,196
------------------ -----------------
Income before income taxes $ 9,536 $ 8,477
Income taxes 3,260 2,936
------------------ -----------------
NET INCOME $ 6,276 $ 5,541
================== =================
BASIC EARNINGS PER SHARE* $ 0.31 $ 0.27
================== =================
DILUTED EARNINGS PER SHARE* $ 0.31 $ 0.27
================== =================
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK* $ 0.14 $ 0.13
================== =================
*Per share have been retroactively adjusted to effect a three-for-two common
stock split declared on July 23, 2004, as if it had occurred on January 1, 2004.
See accompanying 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, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- ------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,812 $ 10,901
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation 6 13
Depreciation and amortization 2,020 1,599
Provision for loan losses 2,115 1,080
Provision for deferred income taxes (1,012) (163)
Stock dividends (231) (201)
Amortization of investment security discounts (353) (41)
Gain on sales of investment securities, net (412) (688)
Gain on sales of loans (1,012) (1,281)
(Gain) loss on sale and disposition of premises and equipment (25) 20
Increase in deferred compensation 69 3
Change in assets and liabilities:
(Increase) decrease in other assets (2,894) 427
Increase in accrued expenses 1,515 506
Increase in interest payable 485 372
Decrease (increase) in income taxes receivable 550 (476)
Increase in income taxes payable 873 -
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
LOAN ORIGINATIONS AND SALES $ 14,506 $ 12,071
----------- ------------
Loans originated for sale (72,573) (86,104)
Proceeds from sales of loans 68,178 91,992
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,111 $ 17,959
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities classified available for sale 4,295 8,638
Proceeds from maturities of securities classified available for sale 60,991 36,397
Purchase of securities classified available for sale (20,392) (57,024)
Decrease (increase) in federal funds sold 1,500 (4,257)
Increase in loans (95,203) (113,055)
Proceeds from sale of premises and equipment 70 2
Purchases of premises and equipment (3,014) (1,909)
Increase in cash surrender value of bank owned life insurance (391) (415)
Purchase of subsidiary, net of cash and due from banks acquired - (35,990)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES $ (52,144) $ (167,613)
----------- ------------
(continued on next page)
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in certificates of deposit $ 27,874 $ 48,172
Net increase in demand, money market and saving deposits 46,018 31,346
Cash dividends paid (5,718) (5,153)
Purchase of treasury stock (2,065) (1,886)
Proceeds from sale of treasury stock 1,393 1,005
Net decrease in Federal funds purchased and securities sold under
agreement to repurchase (4,026) (5,977)
Proceeds from short-term borrowings 1,000 15,250
Principal payments on short-term borrowings (11,250) (2,250)
Proceeds from issuance of long-term debt 18,000 61,000
Principal payments on long-term borrowings (31,573) (12,008)
Proceeds from issuance of junior subordinated debt owed to unconsolidated
Trusts 10,000 15,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 49,653 $ 144,499
----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $ 7,620 $ (5,155)
Cash and due from banks, beginning 47,991 $ 52,397
----------- -----------
Cash and due from banks, ending $ 55,611 $ 47,242
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
OTHER REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS $ 555 $ -
=========== ===========
PURCHASE OF SUBSIDIARY:
Purchase price $ - $ 42,072
=========== ===========
Assets acquired:
Cash and due from other banks $ - 6,082
Federal funds sold - 1,593
Securities available for sale - 49,285
Loans held for sale - 1,853
Loans (net of allowance for loan losses) - 147,758
Premises and equipment - 3,483
Goodwill - 24,405
Other intangible assets - 2,383
Other assets - 4,392
Liabilities assumed:
Deposits - (147,084)
Securities sold under agreements to repurchase - (25,457)
Short-term borrowings - (1,250)
Long-term debt - (23,322)
Other liabilities - (2,049)
----------- -----------
$ - $ 42,072
=========== ===========
See accompanying notes to unaudited consolidated financial statements
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
(Dollars in thousands)
Net income $ 12,812 $ 10,901
----------- -----------
Other comprehensive income, before tax:
Unrealized losses on securities:
Unrealized holding losses arising during period $ (1,955) $ (1,716)
Less reclassification adjustment for gains included in net
income (412) (688)
----------- -----------
Other comprehensive loss, before tax $ (2,367) $ (2,404)
Income tax benefit related to items of other comprehensive loss (941) (970)
----------- -----------
Other comprehensive loss, net of tax $ (1,426) $ (1,434)
----------- -----------
Comprehensive income $ 11,386 $ 9,467
=========== ===========
See accompanying notes to unaudited consolidated financial statements
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. These unaudited consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004.
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.
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NOTE 2: UNREALIZED LOSSES ON INVESTMENT SECURITIES
Information pertaining to securities with gross unrealized losses as of June 30,
2005, aggregated by investment category and length of time that individual
securities have been in continuous loss position follows:
Continuous unrealized Continuous unrealized
losses existing for less losses existing for greater
than 12 months than 12 months Total
------------------------- --------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ---------- ----------- ------------ ----------- ----------
(Dollars in thousands)
June 30, 2005:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 140,125 $ 1,234 $ 51,266 $ 515 $ 191,391 $ 1,749
Obligations of states and
political subdivisions 11,939 55 1,916 27 13,855 82
Mortgage-backed securities 8,966 139 - - 8,966 139
Corporate securities 697 7 201 5 898 12
----------- ---------- ----------- ------------ ----------- ----------
Subtotal, debt securities $ 161,727 $ 1,435 $ 53,383 547 $ 215,110 $ 1,982
Mutual funds and other equity
securities 155 10 - - 155 10
----------- ---------- ----------- ------------ ----------- ----------
Total temporarily impaired
securities $ 161,882 $ 1,445 $ 53,383 $ 547 $ 215,265 $ 1,992
=========== ========== =========== ============ =========== ==========
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Corporation
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
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NOTE 3: LOANS
The major classifications of loans as of June 30, 2005 and December 31, 2004
were as follows:
June 30, 2005 December 31, 2004
------------- -----------------
(Dollars in thousands)
Commercial $ 198,917 $ 216,290
Real estate construction 298,815 235,547
Real estate - farmland 10,904 11,750
Real estate - 1-4 family residential mortgage 489,764 452,894
Real estate - multifamily mortgage 104,663 106,163
Real estate - non-farm nonresidential mortgage 402,772 363,993
Installment 47,943 63,315
Agricultural 21,267 25,224
------------- -----------------
$ 1,575,045 $ 1,475,176
Plus net deferred loan costs 697 724
------------- -----------------
1,575,742 1,475,900
Less:
Allowance for loan losses (21,119) (19,217)
------------- -----------------
Net loans $ 1,554,623 $ 1,456,683
============= =================
The real estate- 1-4 family residential mortgage category includes loans held
for sale with carrying values of $14,981,000 at June 30, 2005 and $9,574,000 at
December 31, 2004; these loans had fair market values of $15,190,000 and
$9,717,000 respectively.
Changes in the allowance for loan losses were as follows:
2005 2004
--------- ---------
(Dollars in thousands)
Balance, beginning of year $ 19,217 $ 16,228
Addition due to acquisition - 2,069
Provision of loan losses 2,115 1,080
Recoveries applicable to loan balances previously
charged off 153 72
Loan balances charged off (366) (1,136)
--------- ---------
Balance, June 30 $ 21,119 $ 18,313
========= =========
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NOTE 4: EARNINGS PER SHARE*
Net income per common share has been computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------- ------------ ------------- ------------
Net income $ 6,276,000 $ 5,541,000 $ 12,812,000 $ 10,901,000
Shares:
Weighted average common shares outstanding 20,419,361 20,334,312 20,427,663 20,345,961
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method 94,910 143,809 121,695 144,420
-------------- ------------ ------------- ------------
Weighted average common shares outstanding,
as adjusted for diluted earnings per share calculation 20,514,271 20,478,121 20,549,358 20,490,381
============== ============ ============= ============
Basic earnings per share $ 0.31 $ 0.27 $ 0.63 $ 0.54
============== ============ ============= ============
Diluted earnings per share $ 0.31 $ 0.27 $ 0.62 $ 0.53
============== ============ ============= ============
* Share and per share data have been retroactively adjusted to effect a
three-for-two stock split declared on July 23, 2004, as if it had occurred on
January 1, 2004.
NOTE 5: 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 except per share data )
2005 2004 2005 2004
-------------- ------------- ------------- -------------
NET INCOME AS REPORTED $ 6,276 $ 5,541 $ 12,812 $ 10,901
Less compensation expense determined under fair value
method for all options granted, net of related tax effects 69 88 120 145
-------------- ------------- ------------- -------------
Pro-forma net income $ 6,207 $ 5,453 $ 12,692 $ 10,756
============== ============= ============= =============
BASIC EARNINGS PER SHARE
Reported net income $ 0.31 $ 0.27 $ 0.63 $ 0.54
Less compensation expense 0.01 - 0.01 0.01
-------------- ------------- ------------- -------------
Pro-forma net income $ 0.30 $ 0.27 $ 0.62 $ 0.53
============== ============= ============= =============
DILUTED EARNINGS PER SHARE
Reported net income $ 0.31 $ 0.27 $ .62 $ 0.53
Less compensation expense 0.01 - - 0.01
-------------- ------------- ------------- -------------
Pro-forma net income $ 0.30 $ 0.27 $ 0.62 $ 0.52
============== ============= ============= =============
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In April, 2005, the Corporation granted 54,000 stock options to individuals
serving as directors on the boards of First Busey Corporation, Busey Bank, Busey
Bank Florida, and Busey Investment Group, Inc.. The fair value of the stock
options granted has been estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Number of options granted 54,000
Risk-free interest rate 3.28%
Expected life, in years 4.64
Expected volatility 18.02%
Expected dividend yield 2.82%
Estimated fair value per option $ 2.82
NOTE 6: JUNIOR SUBORDINATED DEBT OWED TO UNCONSOLIDATED TRUSTS
In June 2001, First Busey Corporation issued $25 million in cumulative trust
preferred securities through a newly formed Delaware business trust, First Busey
Capital Trust I. The proceeds of the offering were invested by First Busey
Capital Trust I in junior subordinated deferrable interest debentures of the
Corporation. The trust is a wholly-owned subsidiary of the Corporation, and its
sole assets are the junior subordinated deferrable interest debentures.
Distributions are cumulative and are payable quarterly at a rate of 9.00% per
annum. Interest expense on the trust preferred securities was $1,125,000 for the
six-month periods ended June 30, 2005 and June 30, 2004. Prior redemption is
permitted under certain circumstances such as changes in tax and investment
company regulations. The obligations of the trust are fully and unconditionally
guaranteed, on a subordinated basis, by the Corporation. The trust preferred
securities qualify as Tier 1 capital for regulatory purposes.
The trust preferred securities are mandatorily redeemable upon the maturity of
the debentures on June 18, 2031, and are callable beginning June 18, 2006.
Issuance costs of $1,340,000 related to the trust preferred debentures were
deferred and are being amortized over the period until mandatory redemption of
the debentures in June 2031.
Prior to the implementation of a new accounting standard in the first quarter of
2004, the financial statements of the Trust were included in the consolidated
financial statements of the Corporation because First Busey owns all of the
outstanding common equity securities of the Trust. However, because First Busey
is not the primary beneficiary of the Trust, in accordance with the new
accounting standard the financial statements of the Trust are no longer included
in the consolidated financial statements of the Corporation. The Corporation's
prior financial statements have been reclassified to de-consolidate the
Corporation's investment in the Trust. There was no cumulative effect on
stockholders'equity as a result of this adoption.
In April 2004, First Busey Corporation, through First Busey Statutory Trust II,
issued $15 million of trust preferred securities in a private placement. The
Securities were issued at an initial coupon rate of 3.82875%, pay cumulative
cash distributions quarterly, and are subject to repricing on a quarterly basis
(3-month LIBOR plus 2.65%). The proceeds of the offering were invested by First
Busey Statutory Trust II in junior subordinated deferrable interest debentures
of First Busey Corporation which represent all of the assets of the Trust. The
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at the stated maturity or their
earlier redemption, in each case at a redemption price equal to the aggregate
liquidation preference of the Securities plus any accumulated and unpaid
distributions thereon to the date of redemption. Prior redemption is permitted
under certain circumstances, such as changes in tax and investment company
regulations, and is subject to payment of a premium above par value if made
within five years of issuance. The obligations of the trust are fully and
unconditionally guaranteed, on a subordinated basis, by the Corporation. The
trust preferred securities qualify as Tier 1 capital for regulatory purposes.
First Busey Corporation used the proceeds of these debentures for general
corporate purposes and to partially
12 of 41
fund the acquisition of First Capital Bankshares, Inc. On January 6, 2004, the
Board of Directors of First Busey Corporation entered into an agreement with the
Board of Directors of First Capital Bankshares, Inc. to acquire all of the
issued and outstanding stock of First Capital for approximately $42 million or
$5,750 per share. The acquisition closed on June 1, 2004.
In June, 2005, First Busey Corporation, through First Busey Statutory Trust III,
issued $10 million of trust preferred securities in a private placement. The
Securities were issued at an initial coupon rate of 5.12%, pay cumulative cash
distributions quarterly, and are subject to repricing on a quarterly basis
(3-month LIBOR plus 1.75%). The proceeds of the offering were invested by First
Busey Statutory Trust III in junior subordinated deferrable interest debentures
of First Busey Corporation which represent all of the assets of the Trust. These
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at the stated maturity or their
earlier redemption, in each case at a redemption price equal to the aggregate
liquidation preference of the Securities plus any accumulated and unpaid
distributions thereon to the date of redemption. Prior redemption is permitted
under certain circumstances, such as a change in tax and investment company
regulations, and is subject to payment of a premium above par value if made
within five years of issuance. The obligations of the trust are fully and
unconditionally guaranteed, on a subordinated basis, by the Corporation. The
trust preferred securities qualify as Tier 1 capital for regulatory purposes.
First Busey Corporation used the proceeds of these debentures for general
corporate purposes and to partially fund the acquisition of Tarpon Coast
Bancorp, Inc. (see note 10).
NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement 123 (Revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R)
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements over the period during which an employee
is required to provide service in exchange for the award. SFAS 123(R)
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based method in accounting for share-based transactions with employees. SFAS
123(R) also amends FASB Statement No. 95, "Statement of Cash Flows", to require
that excess tax benefits be reported as a financial cash inflow rather than as a
reduction of taxes paid. SFAS 123(R) is effective as of the beginning of the
first interim reporting period that begins after June 15, 2005. On April 14,
2005, the Securities and Exchange Commission amended the effective date of this
statement. As a result, SFAS 123(R) is now effective for most public companies
for annual (rather than interim) periods that begin after June 15, 2005. SFAS
123(R) is not expected to have a material effect on the Corporation's
consolidated financial position or results of operations.
In September, 2004, the FASB issued FASB Staff Position (FSP) Emerging Issues
Task Force (EITF) Issue No. 03-1-1 delaying the effective date of paragraphs
10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. On June 30, 2005, the FASB decided not to
provide additional guidance on the meaning of other-than-temporary impairment,
but directed its staff to issue proposed FSP (FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments").
This FSP will replace the guidance set forth in paragraphs 10-18 of Issue 03-1
with references to existing other-than-temporary impairment guidance and clarify
that an investor should recognize an impairment loss no later than when the
impairment is deemed other-than-temporary, even if a decision to sell has not
been made. FSP FAS 115-1 will be effective for other-than-temporary impairment
analysis conducted in periods beginning after September 15, 2005. Management
believes this guidance will not have a material impact on the Corporation.
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
13 0f 41
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, 2005 December 31, 2004
---------------- -----------------
(Dollars in thousands)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $ 473,036 $ 413,679
Standby letters of credit 11,879 12,507
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,
2005, and December 31, 2004, no amounts have been recorded as liabilities for
the Corporation's potential obligations under these guarantees.
BUSINESS COMBINATIONS
On June 1, 2004, First Busey Corporation acquired all the outstanding common
stock of First Capital Bankshares, Inc. and its subsidiary First Capital Bank, a
$239 million bank headquartered in Peoria, Illinois. This acquisition expands
the Corporation's banking presence in central Illinois into Peoria and
surrounding communities. The transaction has been accounted for as a purchase
and the results of operations of both entities since the acquisition date have
been included in the consolidated financial statements. The purchase price of
$42,072,000 was allocated based upon the fair value of the assets acquired and
liabilities assumed. The excess of the total acquisition cost over the fair
value of the net assets acquired has been allocated to core deposit intangible
and goodwill. The core deposit intangible of $2,383,000 is being amortized over
periods ranging from three to ten years.
On May 20, 2005, First Capital Bank merged into Busey Bank bringing all Illinois
banking locations under one state bank charter. Following the merger, Busey Bank
has 21 banking centers located in Illinois.
On February 24, 2005, the Board of Directors of First Busey Corporation entered
into an agreement with the
14 0f 41
Board of Directors of Tarpon Coast Bancorp, Inc. to acquire all of the issued
and outstanding stock of Tarpon Coast for $27.00 per share or approximately
$35.6 million. On June 20, 2005, at a special meeting of their shareholders,
Tarpon Coast Bancorp, Inc. approved the merger agreement, and the transaction
closed on July 29, 2005. Tarpon shareholders received $27.00 per share in a
combination of First Busey common shares and cash, while option and warrant
holders received $27.00 per share less exercise price. First Busey Corporation
issued 850,000 shares of common stock and paid cash of $18,797,000 to the Tarpon
shareholders, which was funded through the issuance of long-term debt and $10
million in additional trust preferred securities.
FORWARD LOOKING STATEMENTS
This presentation includes forward looking statements that are intended to be
covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements include but are not limited
to comments with respect to the objectives and strategies, financial condition,
results of operations and business of First Busey Corporation.
These forward looking statements involve numerous assumptions, inherent risks
and uncertainties, both general and specific, and the risk that predictions and
other forward looking statements will not be achieved. The Corporation cautions
you not to place undue reliance on these forward looking statements as a number
of important factors could cause actual future results to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in such
forward looking statements.
These risks, uncertainties and other factors include the general state of the
economy, both on a local and national level, the ability of the Corporation to
successfully complete acquisitions, the continued growth of 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, 2005
(unaudited), as compared with December 31, 2004 and the results of operations
for the six months ended June 30, 2005 and 2004 (unaudited), and the results of
operations for the three months ended June 30, 2005 and 2004 (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, 2004, to be
consistent with the classifications adopted as of and for the three and six
months ending June 30, 2005. Share and per share data have been retroactively
adjusted to effect a three-for-two common stock split declared on July 23, 2004,
as if it had occurred on January 1, 2004.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are critical to the portrayal and
understanding of the Corporation's financial condition and results of operations
and require management to make assumptions that are difficult, subjective or
complex. These estimates involve judgments, estimates and uncertainties that are
susceptible to change. In the event that different assumptions or conditions
were to prevail, and depending on the severity of such changes, the possibility
of materially different financial condition or results of operations is a
reasonable likelihood.
ALLOWANCE FOR LOAN LOSSES
15 0f 41
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 consolidated 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 evaluation,
on a monthly basis, of all impaired loans (loans are considered to be impaired
when based on current information and events, it is probable the Corporation
will not be able to collect all amounts due); and (e) an evaluation of the
underlying collateral for secured lending, including the use of independent
appraisals of real estate properties securing loans.
Periodic provisions for loan losses are determined by management based upon the
size and the quality of the loan portfolio measured against prevailing economic
conditions and historical loan loss experience and also based on specific
exposures in the portfolio. Management has instituted a formal loan review
system supported by an effective credit analysis and control process. The
Corporation will maintain the allowance for loan losses at a level sufficient to
absorb estimated uncollectible loans and, therefore, expects to make periodic
additions to the allowance for loan losses.
REVENUE RECOGNITION
Income on interest-earning assets is accrued based on the effective yield of the
underlying financial instruments. A loan is considered to be impaired when,
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due. The accrual of interest income on impaired
loans is discontinued when there is reasonable doubt as to the borrower's
ability to meet contractual payments of interest or principal.
FINANCIAL CONDITION AT JUNE 30, 2005 AS COMPARED TO DECEMBER 31, 2004
Total assets increased $63,421,000 or 3.2%, to $2,027,862,000 at June 30, 2005
from $1,964,441,000 at December 31, 2004. Most of the balance sheet growth
occurred in loans which increased $99,842,000 or 6.8% to $1,575,742,000 as of
June 30, 2005, compared to $1,475,900,000 as of December 31, 2004. This growth
in loans is primarily attributable to growth in real estate construction, 1-4
family residential mortgages, and non-farm nonresidential mortgages offset
partially by a decrease in commercial loan balances. Real estate construction
loans grew $63,268,000 or 26.9% to $298,815,000 as of June 30, 2005, compared to
$235,547,000 on December 31, 2004. The primary reason for the significant growth
in the real estate construction loans category was the increase in such loans at
Busey Bank Florida, under that bank's short-term residential construction
lending program, instituted in March, 2003. The lending program was developed at
Busey Bank Florida And was meant to capitalize on the tremendous growth in the
Southwest Florida real estate market. As a result of some concern regarding the
accelerated growth rate of loans made pursuant to this program, the Corporation
has terminated activity under the program. However, management believes the
loans provided under such program do not contain excessive risk and otherwise
meet the underwriting standards of Busey Bank Florida. While the growth rate in
real estate construction loans will not be as significant as that recorded over
the past year, management believes growth will nonetheless continue in this
category of loans, as long as the real estate market remains strong particularly
in the Southwest Florida region.
16 0f 41
Total deposits increased $73,892,000, or 4.7%, to $1,632,714,000 at June 30,
2005 from $1,558,822,000 at December 31, 2004. Noninterest-bearing deposits
decreased 4.1% to $205,212,000 at June 30, 2005 from $213,921,000 at December
31, 2004. Interest-bearing deposits increased 6.1% to $1,427,502,000 at June 30,
2005, from $1,344,901,000 at December 31, 2004. Busey Bank Florida's deposit
growth accounts for most of this deposit growth as its deposits grew $58,420,000
or 38.6% to $209,840,000 at June 30, 2005, from $151,420,000 at December 31,
2004.
During the first six months of 2005, the Corporation repurchased 100,000 shares
of its common stock at an aggregate cost of $2,065,000. Following the purchase
of these shares the Corporation has repurchased all shares under its 2001 Stock
Repurchase Plan. On February 27, 2004, First Busey's Board of Directors approved
a stock repurchase plan for the repurchase of 750,000 shares of common stock. Of
the shares repurchased during the first six months of 2005, 10,889 were
repurchased under the 2001 Stock Repurchase Plan, and the remaining 89,111 were
repurchased under the 2004 Plan. The Corporation is purchasing shares for the
treasury as they become available in order to meet future issuance requirements
of previously granted non-qualified stock options. As of June 30, 2005, there
were 398,325 options currently exercisable. There were an additional 347,900
stock options outstanding but not currently exercisable.
ASSET QUALITY
The following table sets forth the components of non-performing assets and past
due loans.
June 30, 2005 December 31, 2004
------------- -----------------
(Dollars in thousands)
Non-accrual loans $ 1,880 $ 1,523
Loans 90 days past due, still accruing 1,270 2,141
Restructured loans - -
Other real estate owned 3,801 4,212
Non-performing other assets 10 23
------------- -----------------
Total non-performing assets $ 6,961 $ 7,899
============= =================
Total non-performing assets as a percentage of total assets 0.34% 0.40%
============= =================
Total non-performing assets as a percentage of loans plus
non-performing assets 0.44% 0.53%
============= =================
Total non-performing assets decreased $938,000 or 11.9% to $6,961,000 as of June
30, 2005, from $7,899,000 as of December 31, 2004, due to decreases in the
balances of loans 90 days past due and still accruing and other real estate
owned which were partially offset by an increase in non-accrual loans. The
balance of other real estate owned decreased $411,000 during the six-month
period due to the sale of properties held in inventory and as depreciation
expense was recognized on a hotel property which has been held in the
Corporation's inventory of other real estate owned for more than one year.
In September, 2003, upon completion of foreclosure proceedings, Busey Bank
became owner of a hotel property in Bloomington, Illinois. In December, 2003,
ownership of this property was transferred to First Busey Resources, Inc., a
nonbank subsidiary of First Busey Corporation. The Corporation has marketed this
property for sale, and expects to close on the sale of the hotel by the end of
this year. After holding title for one year, in September, 2004, the Corporation
began to depreciate the property and its contents for book purposes.
Depreciation expense of $99,000 for the six months ended June 30, 2005, has been
included in other operating expenses as were all other expenses associated with
holding and maintaining properties held in other real estate owned. The carrying
value of this hotel property, included in other real estate owned, was
$3,148,000 as of June 30, 2005 and $3,247,000 as of December 31, 2004.
POTENTIAL PROBLEM LOANS
Potential problem loans are those loans which are not categorized as impaired,
non-accrual, past due or
17 0f 41
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 $10,346,000 at June 30, 2005, as
compared to $3,245,000 as of December 31, 2004.
Of the increase in potential problem loans, $6,322,000 is related to two large
commercial credits. $2,876,000 is related to an operating line to a commercial
customer that experiences seasonal cash flow deficiencies, and $3,545,000 is
related to a non-farm nonresidential mortgage loan.
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, 2005, AS COMPARED TO JUNE 30, 2004
SUMMARY
Net income for the six months ended June 30, 2005, increased 17.5% to
$12,812,000 compared to $10,901,000 for the comparable six-month period in 2004.
Year-to-date diluted earnings per share increased 17.0% to $0.62 for the six
months ending June 30, 2005, compared to $0.53 for the comparable period in
2004. The Corporation's return on average assets was 1.29% for the six months
ended June 30, 2005, compared to 1.38% for the comparable period in 2004. The
Corporation's return on average shareholders' equity was 18.51% for the six
months ended June 30, 2005, compared to 17.26% for the same period in 2004.
18 0f 41
FIRST BUSEY CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND INTEREST RATES
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
2005 2004
--------------------------------- -------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- --------- ------- ------------ --------- ------
(Dollars in thousands)
ASSETS
Interest-bearing bank deposits $ 1,232 $ 16 2.62% $ 1,009 $ 10 1.99%
Federal funds sold 22,308 $ 223 2.02% 5,631 28 1.00%
Investment securities
U.S. Government obligations 216,716 3,006 2.80% 142,304 1,890 2.67%
Obligations of states and political
subdivisions (1) 53,342 1,600 6.05% 47,392 1,423 6.04%
Other securities 49,291 980 4.01% 31,657 599 3.81%
Loans (net of unearned interest) (1) (2) 1,522,930 47,939 6.35% 1,256,235 34,824 5.57%
------------- --------- ------------ ---------
Total interest earning assets $ 1,865,819 $ 53,764 5.81% $ 1,484,228 $ 38,774 5.25%
========= =========
Cash and due from banks 47,316 43,237
Premises and equipment 27,230 23,166
Allowance for loan losses (19,819) (16,897)
Other assets 79,683 50,604
------------- ------------
Total Assets $ 2,000,229 $ 1,584,338
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction deposits $ 38,912 $ 163 0.84% $ 22,519 $ 54 0.48%
Savings deposits 112,830 374 0.67% 111,669 320 0.58%
Money market deposits 568,587 3,714 1.32% 475,380 1,546 0.65%
Time deposits 665,741 10,195 3.09% 503,290 6,977 2.79%
Short-term borrowings:
Federal funds purchased 11,524 118 2.06% 9,074 55 1.22%
Repurchase agreements 44,269 373 1.70% 14,374 62 0.87%
Other 7,740 90 2.34% 6,391 46 1.45%
Long-term debt 153,532 3,052 4.01% 108,970 2,231 4.12%
Junior subordinated debt owed
to unconsolidated trusts 41,429 1,559 7.59% 31,429 1,221 7.81%
------------- --------- ------------ ---------
Total interest-bearing liabilities $ 1,644,564 $ 19,638 2.41% $ 1,283,096 $ 12,512 1.96%
========= =========
Net interest spread 3.40% 3.29%
===== ====
Demand deposits 204,347 165,565
Other liabilities 11,731 8,636
Stockholders' equity 139,587 127,041
------------- ------------
Total Liabilities and Stockholders' Equity $ 2,000,229 $ 1,584,338
============= ============
Interest income / earning assets (1) $ 1,865,819 $ 53,764 5.81% $ 1,484,228 $ 38,774 5.25%
Interest expense / earning assets $ 1,865,819 $ 19,638 2.12% $ 1,484,228 $ 12,512 1.69%
--------- ----- --------- -----
Net interest margin (1) $ 34,126 3.69% $ 26,262 3.56%
========= ===== ========= =====
(1) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2005 and 2004.
(2) Non-accrual loans have been included in average loans, net of unearned
interest.
19 0f 41
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Change due to(1)
Average Average Total
Volume Yield/Rate Change
------- ---------- ---------
(Dollars in thousands)
Increase in interest income:
Interest-bearing bank deposits $ 2 $ 4 $ 6
Federal funds sold 145 50 195
Investment securities:
U.S. Government obligations 1,023 93 1,116
Obligations of states and political
subdivisions (2) 175 2 177
Other securities 348 33 381
Loans (2) 7,933 5,182 13,115
------- ---------- ---------
Change in interest income (2) $ 9,626 $ 5,364 $ 14,990
------- ---------- ---------
Increase (decrease) in interest expense:
Interest-bearing transaction deposits $ 54 $ 55 $ 109
Savings deposits 3 51 54
Money market deposits 351 1,817 2,168
Time deposits 2,412 806 3,218
Short-term borrowings:
Federal funds purchased 18 45 63
Repurchase agreements 213 98 311
Other 15 29 44
Long-term debt 878 (57) 821
Junior subordinated debt owed to unconsolidated trust 371 (33) 338
------- ---------- ---------
Change in interest expense $ 4,315 $ 2,811 $ 7,126
------- ---------- ---------
Increase in net interest income (2) $ 5,311 $ 2,553 $ 7,864
======= ========== =========
(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
2005 and 2004.
20 of 41
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $381,591,000 or 25.7% to $1,865,819,000 for the
six months ending June 30, 2005, as compared to $1,484,228,000 for the same
period last year. Average loan balances increased $266,695,000 or 21.2% to
$1,522,930,000 for the six months ending June 30, 2005, compared to
$1,256,235,000 during the first six months of 2004. This growth in average
earning assets and loans outstanding is due primarily to growth in Busey Bank
Florida and the acquisition of First Capital Bank, which occurred in June, 2004.
Interest-bearing liabilities averaged $1,644,564,000 during the first six months
of 2005, an increase of $361,468,000 or 28.2% from the average balance of
$1,283,096,000 for the same period in 2004. In comparing the average balance of
interest-bearing liabilities for the first six months of 2005 to the same period
in 2004, First Busey experienced growth in all categories of funding sources,
particularly money market deposits, time deposits, repurchase agreements, and
long-term debt. Again, this growth is related primarily to the addition of First
Capital Bank and growth in the Florida market.
Income on interest-earning assets is accrued 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 $7,864,000
or 29.9% to $34,126,000 for the six months ended June 30, 2005, compared to
$26,262,000 for the comparable period in 2004. 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 3.69% for the six months
ended June 30, 2005, as compared to 3.56% for the comparable period in 2004. The
net interest margin expressed as a percentage of average total assets, also on a
fully taxable equivalent basis, was 3.44% for the six months ended June 30,
2005, compared to 3.34% for the comparable period in 2004.
Interest income, on a tax equivalent basis, for the six months ended June 30,
2005, was $53,764,000, which is $14,990,000 or 38.7% higher than the $38,774,000
earned during the comparable period in 2004. The average yield on
interest-earning assets increased 56 basis points to 5.81% for the six months
ended June 30, 2005, compared to 5.25% for the comparable period in 2004. Asset
growth combined with higher yields on outstanding loans fueled the increase in
interest income.
Interest expense for the six months ended June 30, 2005, was $19,638,000, which
is $7,126,000 or 7.3% higher than the $12,512,000 recognized during comparable
period in 2004. The increase in interest expense is related predominantly
related to the increase in average outstanding balances of all categories of
funding sources, particularly in time deposits. Growth in the average balance of
time deposits, again, is related to the addition of First Capital and Busey Bank
Florida's growth. The average rate paid on interest-bearing liabilities
increased 45 basis points to 2.41% for the six months ended June 30, 2005,
compared to 1.96% for the comparable period in 2004. The average rates paid on
all categories of interest-bearing liabilities were lower during the first six
months of 2005 than in the comparable period in 2004 with the exception of
long-term debt and junior subordinated debt owed to unconsolidated trusts.
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses of $2,115,000 during the six months
ended June 30, 2005, is significantly higher than the $1,080,000 recorded during
the comparable period in 2004 due to an increase in potential problem loans and
to loan growth, specifically the loan growth under the short-term construction
loan program at Busey Bank Florida. The provision and net charge-offs of
$213,000 for the six-month period ending June 30, 2005, resulted in the
allowance representing 1.34% of total loans and 670% of non-performing loans as
of June 30, 2005, as compared to the allowance representing 1.30% of outstanding
loans and 524% of non-performing loans as of December 31, 2004. Net charge-offs
for the first six months of 2005 were $213,000
21 of 41
compared to $1,064,000 for the comparable period in 2004. The net charge-off
ratio (net charge-offs as a percentage of average loans) was 0.01% for the
six-month period ending June 30, 2005, reflecting an improvement from 0.08% for
the same period in 2004. Of the net charge-offs recognized during the first six
months of 2004, $850,000 was related to one commercial customer. Busey Bank
included additional balances of $560,000 included in nonaccrual loans to this
customer as of June 30, 2004, which were charged off by the end of 2004 as
management determined these balances were also uncollectible. The increase in
provision expense during the first six months of 2005 is related to general
growth in the portfolio combined with the increase in potential problem loans
during this same period. The adequacy of the allowance for loan losses is
consistent with management's consideration of the composition of the portfolio,
non-performing asset and potential problem loan 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 $67,000 or 0.6% to
$11,107,000 for the six months ended June 30, 2005, compared to $11,040,000 for
the same period in 2004. Growth in trust fees, service charges and other
operating income was partially offset by lower gains on the sale of mortgage
loans.
During the first six months of 2005 the Corporation recognized $1,012,000 on the
sale of $67,166,000 in mortgage loans compared to $1,281,000 on the sale of
$90,711,000 of loans during the prior year period. The interest-rate and debt
markets have strong influence on the level of mortgage loan originations and
sales volumes. Management anticipates continued sales from current production.
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.
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
transaction 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 six months ending June 30, 2005, the Corporation recognized security
gains of approximately $248,000 after income taxes, representing 1.9% of net
income. During the comparable period in 2004, security gains of approximately
$415,000 after income taxes were recognized, representing 3.8% 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 ten-year period.
Total other expenses increased $3,738,000 or 19.0% to $23,401,000 for the six
months ending June 30, 2005, compared to $19,663,000 for the comparable period
in 2004. Salary and wages, employee benefits, occupancy and furniture and
equipment expenses were higher during the first half of 2005 compared to the
first half of 2004 due primarily to the acquisition of First Capital.
Income taxes for the six months ended June 30, 2005, increased to $6,601,000 as
compared to $5,740,000 for the comparable period in 2004. As a percentage of
income before taxes, the provision for income taxes decreased slightly to 34.0%
for the six months ended June 30, 2005, from 34.5% for the comparable period in
2004.
22 of 41
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005, AS COMPARED TO JUNE 30, 2004
SUMMARY
Net income for three months ended June 30, 2005, increased $735,000 or 13.3% to
$6,276,000 compared to $5,541,000 for the three months ending June 30, 2004.
Fully diluted earnings per share increased $.04 or 14.8% to $0.31 for the three
months ending June 30, 2005, compared to $0.27 for the comparable period in
2004. The Corporation's return on average assets was 1.25% for the three-month
period ending June 30, 2005, compared to 1.35% for the comparable period in
2004. The return on average shareholders' equity was 17.89% for the three-month
period ending June 30, 2005, compared to 17.40% for the comparable period in
2004.
23 of 41
FIRST BUSEY CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND INTEREST RATES
QUARTERS ENDED JUNE 30, 2005 AND 2004
2005 2004
--------------------------------- -------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------ --------- ------ ------------ --------- ------
(Dollars in thousands)
ASSETS
Interest-bearing bank deposits $ 1,429 $ 10 2.81% $ 740 $ 10 5.42%
Federal funds sold 14,428 63 1.75% 10,652 27 1.02%
Investment securities
U.S. Government obligations 207,146 1,452 2.81% 142,862 934 2.62%
Obligations of states and political
subdivisions (1) 55,241 842 6.11% 48,002 726 6.07%
Other securities 48,408 492 4.08% 37,044 391 4.23%
Loans (net of unearned interest) (1)(2) 1,553,819 25,002 6.45% 1,306,537 18,141 5.57%
------------ --------- ------------ ---------
Total interest earning assets $ 1,880,471 $ 27,861 5.94% $ 1,545,837 $ 20,229 5.25%
========= =========
Cash and due from banks 46,208 45,882
Premises and equipment 27,609 23,873
Allowance for loan losses (20,141) (17,410)
Other assets 80,323 53,811
------------ ------------
Total Assets $ 2,014,470 $ 1,651,993
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction deposits $ 40,807 $ 77 0.76% $ 24,037 $ 34 0.57%
Savings deposits 111,253 189 0.68% 113,418 162 0.57%
Money market deposits 573,950 2,077 1.45% 491,086 832 0.68%
Time deposits 671,545 5,328 3.18% 528,603 3,622 2.75%
Short-term borrowings:
Federal funds purchased 19,488 118 2.43% 5,355 16 1.20%
Repurchase agreements 41,720 197 1.89% 18,419 45 0.98%
Other 6,111 37 2.43% 9,036 34 1.51%
Long-term debt 148,242 1,511 4.09% 119,477 1,215 4.08%
Junior subordinated debt owed
to unconsolidated trust 42,500 802 7.57% 36,250 658 7.28%
------------ --------- ------------ ---------
Total interest-bearing liabilities $ 1,655,616 $ 10,336 2.50% $ 1,345,681 $ 6,618 1.97%
========= =========
Net interest spread 3.44% 3.28%
==== ====
Demand deposits 206,170 169,587
Other liabilities 12,000 9,003
Stockholders' equity 140,684 127,722
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,014,470 $ 1,651,993
============ ============
Interest income / earning assets (1) $ 1,880,471 $ 27,861 5.94% $ 1,545,837 $ 20,229 5.25%
Interest expense / earning assets $ 1,880,471 $ 10,336 2.20% $ 1,545,837 $ 6,618 1.72%
--------- ---- --------- ----
Net interest margin (1) $ 17,525 3.74% $ 13,611 3.53%
========= ==== ========= ====
(1) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2005 and 2004.
(2) Non-accrual loans have been included in average loans, net of unearned
interest.
24 of 41
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
QUARTERS ENDED JUNE 30, 2005 AND 2004
Change due to(1)
Average Average Total
Volume Yield/Rate Change
------- ---------- ---------
(Dollars in thousands)
Increase (decrease) in interest income:
Interest-bearing deposits $ 6 $ (6) $ -
Federal funds sold 12 24 36
Investment securities:
U.S. Government obligations 446 72 518
Obligations of states and political
subdivisions (2) 111 5 116
Other securities 115 (14) 101
Loans (2) 3,730 3,131 6,861
------- ---------- ---------
Change in interest income (2) $ 4,420 $ 3,212 $ 7,632
------- ---------- ---------
Increase (decrease) in interest expense:
Interest-bearing transaction deposits $ 29 $ 14 $ 43
Savings deposits (3) 30 27
Money market deposits 161 1,084 1,245
Time deposits 1,077 629 1,706
Short-term borrowings:
Federal funds purchased 75 27 102
Repurchase agreements 88 64 152
Other (4) 7 3
Long-term debt 293 3 296
Junior subordinated debt owed to unconsolidated trust 117 27 144
------- ---------- ---------
Change in interest expense $ 1,833 $ 1,885 $ 3,718
------- ---------- ---------
Increase in net interest income (2) $ 2,587 $ 1,327 $ 3,914
======= ========== =========
(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
2005 and 2004.
25 of 41
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $334,634,000 or 21.6% to $1,880,471,000 for the
three months ended June 30, 2005, compared to $1,545,837,000 for the comparable
period last year. The average balance of loans outstanding, in particular,
increased $247,282,000 or 18.9% to $1,553,819,000 for the second quarter of 2005
compared to $1,306,537,000 during the comparable period in 2004.
Interest-bearing liabilities averaged $1,655,616,000 during the three months
ended June 30, 2004, an increase of $309,935,000 or 23.0% from the average
balance of $1,345,681,000 for the comparable period in 2004. Most of this growth
in funding sources occurred in money market deposits, time deposits, short-term
borrowings, long-term debt, and trust preferred securities.
Net interest income on a fully taxable equivalent basis, increased $3,914,000 or
28.8% to $17,525,000 for the three months ended June 30, 2005, compared to
$13,611,000 for the comparable period in 2004. 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 3.74% for the three
months ended June 30, 2005, compared to 3.53% for the comparable period in 2004.
Net interest margin expressed as a percentage of average total assets, also on a
fully taxable equivalent basis, was 3.49% for the three months ended June 30,
2005, compared to 3.30% for the comparable period in 2004.
Interest income, on a tax equivalent basis, for the three months ended June 30,
2005, was $27,861,000, which is $7,632,000 or 37.7% higher than the $20,229,000
earned during the comparable period in 2004. The average yield on
interest-earning assets increased 69 basis points to 5.94% for the three months
ended June 30, 2005, compared to 5.25% for the three months ended June 30, 2004.
The increase in yields is due primarily to an increase in the yield on
outstanding loan balances.
Interest expense for the three months ended June 30, 2005, was $10,336,000,
which is $3,718,000 or 56.2% higher than the $6,618,000 during the comparable
period in 2004. The average rate paid on interest-bearing liabilities increased
53 basis points to 2.50% for the three months ended June 30, 2004, compared to
1.97% during the comparable period in 2004. Growth in the average balance of
money market deposits and long-term debt financing combined with increases in
the average rates paid on all categories of interest-bearing liabilities,
particularly in money market and time deposits, contributed to this higher cost
of funds.
OTHER INCOME, OTHER EXPENSE, AND INCOME TAXES
Total other income, excluding security transactions, increased $177,000 or 3.2%
to $5,714,000 for the three months ended June 30, 2005, compared to $5,537,000
for the comparable period in 2004. Moderate increases in trust fees, gains on
the sales of loans, and other operating income were partially offset by the
decline in commissions and brokerage fees. Gains of $589,000 were recognized on
the sale of $36,132,000 of mortgage loans during the three months ending June
30, 2005, compared to gains of $459,000 on the sale of $47,029,000 in mortgage
loans during the prior year period.
During the three-month period ending June 30, 2005, the Corporation recognized
security gains of approximately $151,000, after income taxes, representing 2.4%
of net income. During the comparable period in 2004, security gains of
approximately $299,000, after income taxes, were recognized, representing 5.4%
of net income.
Total other expenses increased $1,956,000 or 19.2% to $12,152,000 for the three
months ending June 30, 2005, compared to $10,196,000 for the comparable period
in 2004. Salaries and wage expense increased $855,000 or 18.7% to $5,438,000 for
the three months ended June 30, 2005, as compared to $4,583,000 during the
comparable period last year. Again, the increase in salary and wage expense is
due to the addition of First Capital and Busey Bank Florida expansion.
26 of 41
Income taxes for the three-month period ending June 30, 2005, increased to
$3,260,000 compared to $2,936,000 for the comparable period in 2004. As a
percentage of income before taxes, the provision for income taxes decreased
slightly to 34.2% for the three months ended June 30, 2005, from 34.6% for the
comparable period in 2003.
REPORTABLE SEGMENTS AND RELATED INFORMATION
First Busey Corporation has three reportable segments, Busey Bank, Busey Bank
Florida, and Busey Investment Group. Busey Bank provides a full range of banking
services to individual and corporate customers through its branch network in
Champaign, McLean, Peoria, Tazewell, and Ford Counties in Illinois, through its
branch in Indianapolis, Indiana, and through its loan production office in Fort
Myers, Florida. Busey Bank Florida provides a full range of banking services to
individual and corporate customers in Fort Myers and Cape Coral, Florida.
First Capital Bank, acquired by First Busey Corporation on June 1, 2004, merged
into Busey Bank on May 20, 2005. Prior to this merger, First Capital Bank was a
separate reportable segment providing a full range of banking services to
individual and corporate customers in Peoria and Pekin, Illinois. Following the
merger, the assets and operating results of the Peoria and Pekin markets are
included in Busey Bank. Segment information for the period ended June 30, 2004,
has been restated to reflect the combination of Busey Bank and First Capital
Bank.
Busey Investment Group is a wholly-owned subsidiary of First Busey Corporation
and owns three subsidiaries: First Busey Trust & Investment Co. which provides
trust and asset management services to individual and corporate customers
throughout Central Illinois; First Busey Securities, Inc., a full-service
broker/dealer subsidiary; and Busey Insurance Services, Inc., an insurance
agency which provides personal insurance products and specializes in long-term
healthcare insurance.
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 these
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.
27 of 41
Following is a summary of selected financial information for the Corporation's
business segments for the six-month periods ended June 30, 2005, and June 30,
2004:
Six Months Ended June 30,
2005 2004
---------- ----------
(dollars in thousands)
Interest Income:
Busey Bank $ 45,661 $ 34,596
Busey Bank Florida 7,285 3,430
Busey Investment Group 84 72
All Other 18 70
---------- ----------
Total Interest Income $ 53,048 $ 38,168
---------- ----------
Interest Expense:
Busey Bank $ 15,188 $ 10,063
Busey Bank Florida 2,351 1,125
Busey Investment Group - -
All Other 2,099 1,324
---------- ----------
Total Interest Expense $ 19,638 $ 12,512
---------- ----------
Other Income:
Busey Bank $ 7,746 $ 7,867
Busey Bank Florida 251 222
Busey Investment Group 3,777 3,752
All Other (255) (113)
---------- ----------
Total Other Income $ 11,519 $ 11,728
---------- ----------
Net Income:
Busey Bank $ 12,367 $ 10,307
Busey Bank Florida 1,226 573
Busey Investment Group 1,095 1,064
All Other (1,876) (1,043)
---------- ----------
Total Net Income $ 12,812 $ 10,901
---------- ----------
Goodwill:
Busey Bank $ 30,237 $ 30,182
Busey Bank Florida - -
Busey Investment Group - -
All Other 1,548 1,548
---------- ----------
Total Goodwill $ 31,785 $ 31,730
---------- ----------
Net Assets:
Busey Bank $1,781,061 $1,723,212
Busey Bank Florida 241,375 136,663
Busey Investment Group 6,649 5,870
All Other (1,223) 9,313
---------- ----------
Total Assets $2,027,862 $1,875,058
---------- ----------
28 of 41
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 repayments, deposits, and capital funds.
Additional liquidity is provided by brokered deposits, bank lines of credit,
repurchase agreements and the ability to borrow from the Federal Reserve Bank
and the Federal Home Loan Bank. The Corporation has an operating line in the
amount of $10,000,000, all of which was available as of June 30, 2005. 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 2005 the
Corporation originated $72,573,000 and sold $67,166,000 in mortgage loans for
sale compared to originations of $86,104,000 and sales of $90,711,000 during the
first six months of 2004. As of June 30, 2005, the Corporation held $14,981,000
in loans held for sale. Management intends to sell these loans during the third
quarter of 2005.
The Corporation recently completed two acquisitions, of First Capital
Bankshares, Inc. of Peoria, Illinois (June, 2004) and of Tarpon Coast Bancorp,
Inc. of Port Charlotte, Florida (July, 2005). The First Capital acquisition
consisted of all cash consideration, and the Tarpon Coast acquisition
consideration was stock/cash transaction. Cash requirements for each acquisition
($42,070,000 for the First Capital acquisition and $18,070,000 for the Tarpon
acquisition) were satisfied through both the issuance of long-term subordinated
debt within a privately-placed trust preferred securities structure and
commercial borrowings. An aggregate of $25,000,000 of trust preferred securities
were issued by the Corporation's two trust subsidiaries formed for such
issuances with the balance borrowed in the form of a long-term note payable. The
note payable requires annual principal reductions of $4,000,000 beginning in
January, 2007, and matures in June, 2011. The Corporation will review various
alternatives for refinancing the debt associated with both of these transactions
on a longer-term basis and intends to determine its course of action during the
first quarter of 2006.
The objective of liquidity management by the Corporation is to ensure that funds
will be available to meet demand in a timely and efficient manner. Based upon
the level of investment securities that reprice within 30 days and 90 days,
management currently believes that adequate liquidity exists to meet all
projected cash flow obligations. The Corporation achieves a satisfactory degree
of liquidity through actively managing both assets and liabilities. Asset
management guides the proportion of liquid assets to total assets, while
liability management monitors future funding requirements and prices liabilities
accordingly.
The Corporation's banking subsidiaries routinely enter into commitments to
extend credit in the normal course of their business. As of June 30, 2005, and
2004, the Corporation had outstanding loan commitments including lines of credit
of $473,036,000 and $347,556,000, 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.
29 of 41
The following table summarizes significant contractual obligations and other
commitments as of June 30, 2005:
Securities
Sold under
Agreements to Junior
Repurchase and Subordinated
Short- and Debt Owed to
Certificates Long-term Unconsolidated
Due Within of Deposit Borrowings Leases Trusts Total
- ---------- ------------ -------------- ------- -------------- -----------
(Dollars in thousands)
1 year $ 392,102 $ 57,794 $ 973 $ - $ 450,869
2 years 156,866 36,878 909 - 194,653
3 years 81,325 36,373 785 - 118,483
4 years 29,442 20,623 428 - 50,493
5 years 28,916 22,123 277 - 51,316
Thereafter 613 16,542 46 50,000 67,201
------------ -------------- ------- -------------- -----------
Total $ 689,264 $ 190,333 $ 3,418 $ 50,000 $ 933,015
============ ============== ======= ============== ===========
Commitments to extend credit $ 473,036
===========
Net cash flows provided by operating activities totaled $10,111,000 during the
six months ended June 30, 2005, compared to $17,959,000 during the prior year
period. Significant items affecting the cash flows provided by operating
activities are net income, depreciation and amortization expense, the provision
for loan losses, and activities related to the origination and sale of loans
held for sale. Operating cash flow decreased during the first six months of 2005
compared to the same period in 2004 due primarily to lower mortgage loan sale
activity. During the first six months of 2005 the Corporation originated
$72,573,000 in loans held for sale and generated $68,178,000 from the sale of
held-for-sale loans resulting in net cash used in loan originations and sale of
$4,395,000. During the comparable period in 2004, the Corporation originated
$86,104,000 in held-for-sale loans and generated $91,992,000 from the sale of
held-for-sale loans leading to net cash provided by loan originations and sale
of $5,888,000.
Net cash used in investing activities was $52,144,000 for the six months ended
June 30, 2005, compared to $167,613,000 for the comparable period in 2004.
Significant activities affecting cash flows from investing activities are those
activities associated with managing the Corporation's investment portfolio,
loans held in the Corporation's portfolio, and subsidiary or business unit
acquisition activities. During the six months ended June 30, 2005, proceeds from
the sales and maturities of securities classified as available for sale totaled
$65,286,000, and the Corporation purchased $20,392,000 in securities resulting
in net cash generated by securities activity of $44,894,000. In the comparable
period of 2004 proceeds from the sales and maturities of securities classified
as available for sale totaled $45,035,000, and the Corporation purchased
$57,024,000 in securities resulting in net cash used by securities activity of
$11,989,000. The Corporation's loan portfolio increased $95,203,000 during the
first six months of 2005, compared to an increase of $113,055,000 in the
comparable period of 2004. During June, 2004, the Corporation purchased the
outstanding shares of First Capital Bankshares resulting in the net use of
$35,990,000.
Net cash provided by financing activities was $49,653,000 during the first six
months of 2005 compared to $144,499,000 for the comparable period in 2004.
Significant items affecting cash flows from financing activities are deposits,
short-term borrowings, long-term debt, and proceeds from the issuance of junior
subordinated debt owed to unconsolidated trusts. Deposits, which are the
Corporation's primary funding source, grew $73,892,000 during the first six
months of 2005, down slightly compared to the net increase of $79,518,000 during
the comparable period in 2004 The Corporation has increased its use of
short-term and long-term advances from the Federal Home Loan Banks of Chicago
and Atlanta to partially fund loan growth. The Corporation issued $15,000,000 in
long-term subordinated debt in April, 2004, to partially fund the First Capital
acquisition. In
30 of 41
June, 2004, the Corporation issued long-term debt to fund the remainder of the
purchase price of First Capital. These two issues represent a significant
portion of the net cash provided by financing activities for the first six
months of 2004. In June, 2005, the Corporation issued $10,000,000 in long-term
subordinated debt to partially fund the cash consideration requirements related
to the Tarpon acquisition.
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, 2005,
the Corporation earned $12,812,000 and paid dividends of $5,718,000 to
stockholders, resulting in retention of current earnings of $7,094,000. The
Corporation's dividend payout for the six months ended June 30, 2005 was 44.6%.
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, 2005, that the Corporation and the
Banks meet all capital adequacy requirements to which they are subject.
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, 2005:
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $ 174,971 11.33% $ 123,512 8.00% N/A N/A
Busey Bank $ 152,414 11.37% $ 107,245 8.00% $ 134,056 10.00%
Busey Bank Florida $ 23,071 12.36% $ 14,937 8.00% $ 18,671 10.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $ 147,866 9.58% $ 61,756 4.00% $ N/A N/A
Busey Bank $ 130,682 9.75% $ 53,623 4.00% $ 80,434 6.00%
Busey Bank Florida $ 20,726 11.10% $ 7,469 4.00% $ 11,203 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS)
Consolidated $ 147,866 7.52% $ 78,645 4.00% N/A N/A
Busey Bank $ 130,682 7.53% $ 69,434 4.00% $ 86,792 5.00%
Busey Bank Florida $ 20,726 9.28% $ 8,929 4.00% $ 11,162 5.00%
31 of 41
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of change in asset values due to movements in underlying
market rates and prices. Interest rate risk is the risk to earnings and capital
arising from movements in interest rates. Interest rate risk is the most
significant market risk affecting the Corporation as other types of market risk,
such as foreign currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Corporation's business activities.
The Corporation's subsidiary banks, Busey Bank and Busey Bank Florida have
asset-liability committees which meet at least quarterly to review current
market conditions and attempt to structure the banks' balance sheets to ensure
stable net interest income despite potential changes in interest rates with all
other variables constant.
The asset-liability committees use gap analysis to identify mismatches in the
dollar value of assets and liabilities subject to repricing within specific time
periods. The Funds Management Policies established by the asset-liability
committees and approved by the Banks' and Corporation's Board of Directors
establish guidelines for maintaining the ratio of cumulative rate-sensitive
assets to rate-sensitive liabilities within prescribed ranges at certain
intervals.
Interest-rate sensitivity is a measure of the volatility of the net interest
margin as a consequence of changes in market rates. The rate-sensitivity chart
shows the interval of time in which given volumes of rate-sensitive earning
assets and rate-sensitive interest-bearing liabilities would be responsive to
changes in market interest rates based on their contractual maturities or terms
for repricing. It is, however, only a static, single-day depiction of the
Corporation's rate sensitivity structure, which can be adjusted in response to
changes in forecasted interest rates.
32 of 41
The following table sets forth the static rate-sensitivity analysis of the
Corporation as of June 30, 2005:
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 $ 717 $ - $ - $ - $ - $ 717
Federal funds sold 1,600 - - - - 1,600
Investment securities
U.S. Governments 3,681 16,139 25,910 46,761 109,091 201,582
Obligations of states and
political subdivisions 555 - 8,043 4,895 43,395 56,888
Other securities 15,411 1,068 1,402 2,058 27,582 47,521
Loans (net of unearned int.) 679,423 96,735 119,410 177,140 503,034 1,575,742
------------ ------------ ------------ ------------ ----------- ------------
Total rate-sensitive assets $ 701,387 $ 113,942 $ 154,765 $ 230,854 $ 683,102 $ 1,884,050
------------ ------------ ------------ ------------ ----------- ------------
Interest bearing transaction
deposits $ 68,997 $ - $ - $ - $ - 68,997
Savings deposits 107,763 - - - - 107,763
Money market deposits 561,478 - - - - 561,478
Time deposits 96,562 58,078 96,108 166,768 271,748 689,264
Short-term borrowings:
Repurchase agreements 37,532 - - - - 37,532
Other - - - 1,000 - 1,000
Long-term debt 2,000 3,800 6,220 33,301 106,480 151,801
Junior subordinated debt owed
to unconsolidated trust - 25,000 - - 25,000 50,000
------------ ------------ ------------ ------------ ----------- ------------
Total rate-sensitive liabilities $ 874,332 $ 86,878 $ 102,328 $ 201,069 $ 403,228 $ 1,667,835
Rate-sensitive assets less
rate-sensitive liabilities $ (172,945) $ 27,064 $ 52,437 $ 29,785 $ 279,874 $ 216,215
------------ ------------ ------------ ------------ ----------- ------------
Cumulative Gap $ (172,945) $ (145,881) $ (93,444) $ (63,659) $ 216,215
============ ============ ============ ============ ===========
Cumulative amounts as a
percentage of total
rate-sensitive assets -9.18% -7.74% -4.96% -3.38% 11.48%
============ ============ ============ ============ ===========
Cumulative ratio 0.80 0.85 0.91 0.95 1.13
============ ============ ============ ============ ===========
The funds management policy of First Busey Corporation require the banks to
maintain a cumulative rate-sensitivity ratio of .75 - 1.25 in the 90-day,
180-day, and 1-year time periods. As of June 30, 2005, the Banks and the
Corporation, on a consolidated basis, are within those guidelines.
The foregoing table shows a negative (liability-sensitive) rate-sensitivity gap
of $173 million in the 1-30 day repricing period as there were more liabilities
subject to repricing during that time period than there were assets subject to
repricing within that same time period. The volume of assets subject to
repricing exceeds the volume of liabilities subject to repricing for all time
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, 2005, indicates the Corporation would benefit more if interest rates
decrease during the next year by allowing the net interest margin to grow as the
volume of interest-bearing liabilities subject to repricing would be greater
than the volume of interest-earning assets subject to repricing during the same
period.
The Corporation's asset-liability committees do not rely solely on gap analysis
to manage interest-rate risk as interest rate changes do not impact all
categories of assets and liabilities equally or simultaneously. The
asset-liability committees supplement gap analysis with balance sheet and income
simulation analysis to determine the potential impact on net interest income of
changes in market interest rates. In these simulation models the balance sheet
is projected over a one-year period and net interest income is calculated under
current market rates,
33 of 41
and then assuming permanent instantaneous shifts of +/-100 basis points and +200
basis points. Management measures such changes assuming immediate and sustained
shifts in the Federal funds rate and the corresponding shifts in other rate
indices based on their historical changes relative to changes in the Federal
funds rate. The model assumes asset and liability balances remain constant at
June 30, 2005, balances. The model uses repricing frequency on all variable-rate
assets and liabilities. The model also uses a historical decay rate on all
fixed-rate core deposit balances. Prepayment speeds on loans have been adjusted
up and down to incorporate expected prepayment in both a declining and rising
rate environment. Utilizing this measurement concept the interest rate risk of
the Corporation, expressed as a change in net interest income as a percentage of
the net income calculated in the constant base model, due to an immediate and
sustained change in interest rates at June 30, 2005, and December 31, 2004 was
as follows:
Basis Point Changes
------------------------------
-100 +100 +200
----- ---- ----
June 30, 2005 -3.43% 1.55% 3.09%
December 31, 2004 (5.57%) 3.05% 6.06%
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation conducted an evaluation, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Corporation's disclosure controls and procedures as of June 30, 2005. The
Corporation's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Corporation in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and
reported on a timely basis.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures as
of June 30, 2005, are effective in timely alerting them to material information
relating to First Busey Corporation, including its consolidated subsidiaries,
required to be included in the Corporation's periodic filings under the Exchange
Act.
CHANGES IN INTERNAL CONTROLS
During the quarter ended June 30, 2005, the Corporation did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in First Busey Corporation's
reports filed under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to management, as appropriate to allow timely decisions regarding required
disclosure. Internal controls are procedures which are designed with the
objective of providing reasonable assurance that transactions are properly
authorized, assets are safeguarded against unauthorized or improper use, and
transactions are properly recorded and reported, all to permit the preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America.
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LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
First Busey Corporation's management does not expect that our disclosure
controls or our internal controls will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of the control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within First Busey Corporation
have been detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
Not Applicable
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents for the periods indicated a summary of
the purchases made by or on behalf of First Busey Corporation of
shares of its common stock.
Total Maximum
Number of Number of
Shares Shares
Purchased that May
as Part of Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid per Plans or Plans or
Purchased Share Programs Programs (1,2)
--------- -------------- ---------- --------------
January 1 - 31, 2005 25,000 $ 20.93 25,000 735,889
February 1 - 28, 2005 20,000 20.81 20,000 715,889
March 1 - 31, 2005 40,000 20.75 40,000 675,889
April 1 - 30, 2005 15,000 19.75 15,000 660,889
May 1 - 31, 2005 - - - 660,889
June 1 - 30, 2005 - - - 660,889
------- -------------- -------
Total 100,000 $ 20.66 100,000
(1) First Busey Corporation's board of directors approved a stock purchase plan
on March 20, 2001, for the repurchase of up to 750,000 shares of common stock.
The Corporation has repurchased all shares under the 2001 repurchase plan. First
Busey Corporation's board of directors approved a stock purchase plan on
February 17, 2004 for the repurchase of up to 750,000 shares of common stock.
The Corporation's 2004 repurchase plan has no expiration date.
(2) Share and per share amounts have been retroactively adjusted to effect a
three-for-two common stock split
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declared on July 23, 2004, as if it had occurred on January 1, 2004.
ITEM 3: Defaults Upon Senior Securities
Not Applicable
ITEM 4: Submission of Matters to a Vote of Security Holders (still waiting on
these numbers) The annual meeting of the stockholders of First Busey
Corporation was held on April 26, 2004. The shareholders approved the
election of Directors with the votes casted as follows:
FOR WITHHELD
---------- ---------
ELECTION OF DIRECTORS
DIRECTOR
Joseph M. Ambrose 16,699,724 3,877,927
David L. Ikenberry 17,368,715 3,208,936
E. Phillips Knox 17,421,267 3,156,384
V. B. Leister, Jr. 17,428,070 3,149,581
Douglas C. Mills 17,367,954 3,209,697
Joseph E. O'Brien 17,275,104 3,302,547
Arthur R. Wyatt 17,254,789 3,322,862
The shareholders voted in favor of adopting the Amended and Restated
Articles of Incorporation of the Company, which increased the par
value of the Company's capital stock from no par value per share to
$.001 par value per share with votes cast as follows:
For 17,327,526
Against 78,261
Abstain 606,167
Broker Non-votes 2,565,697
ITEM 5: Other Information
Not Applicable
ITEM 6: 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.
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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: //Douglas C. Mills//
------------------------------------
Douglas C. Mills
Chairman of the Board and Chief Executive
Officer
By: //Barbara J. Harrington//
------------------------------------
Barbara J. Harrington
Chief Financial Officer
(Principal financial and accounting officer)
Date: August 9, 2005
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