Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15950
FIRST BUSEY CORPORATION
(Exact name of registrant as specified in its Charter)
Nevada 37-1078406
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
201 West Main Street
Urbana, Illinois 61801
(Address of principal executive offices) (Zip Code)
(217) 365-4513
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.).
Yes [X] No [ ]
The aggregate market value of the voting and nonvoting Common Stock
held by non-affiliates was $201,795,237 based on the closing price for the stock
as reported on the Nasdaq National Market as of June 30, 2002 or as of the last
business day of the registrants most recently completed second fiscal quarter.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 21, 2003
----- --------------------------------
Common Stock, without par value 13,635,620
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 19, 2003 for
First Busey Corporation's Annual Meeting of Stockholders to be held April 22,
2003, (the "2003 Proxy Statement") are incorporated by reference into Part III.
(This page intentionally left blank)
2
FIRST BUSEY CORPORATION
Form 10-K Annual Report
Table of Contents
PART 1
Item 1 Business...................................................................... 4
Item 2 Properties.................................................................... 7
Item 3 Legal Proceedings............................................................. 8
Item 4 Submission of Matters to a Vote of Security Holders........................... 8
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......... 9
Item 6 Selected Financial Data....................................................... 10
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 12
Item 7A Quantitative and Qualitative Disclosures About Market Risk.................... 29
Item 8 Financial Statements and Supplementary Data................................... 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 29
PART III
Item 10 Directors and Executive Officers of the Registrant............................ 30
Item 11 Executive Compensation........................................................ 30
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................... 30
Item 13 Certain Relationships and Related Transactions and Compensation Committee
Interlocks and Insider Participation.......................................... 30
Item 14 Controls and Procedures....................................................... 31
PART IV
Item 15 Exhibits, Financial Statement Schedules and reports on Form 8-K............... 31
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
First Busey Corporation ("First Busey" or the "Corporation"), a Nevada
Corporation, is a $1.4 billion financial holding company which was initially
organized as a bank holding company in 1980. First Busey conducts a broad range
of financial services through its banking and non-banking subsidiaries at 21
locations. First Busey is headquartered in Urbana, Illinois and its common stock
is traded on the Nasdaq National Market under the symbol "BUSE."
First Busey's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports are
currently made available free of charge via the Corporation's internet website
(www.busey.com) as soon as practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange Commission.
BANKING AND NON-BANKING SUBSIDIARIES
First Busey currently has two wholly owned banking subsidiaries located
in three states, Busey Bank and Busey Bank Florida (the "Banks").
Busey Bank, a state-chartered bank organized in 1868, is a full service
commercial bank offering a wide variety of services to individual, business,
institutional and governmental customers, including retail products and
services. Busey Bank has 18 locations in Illinois and one in Indianapolis,
Indiana.
First Busey acquired Eagle BancGroup, Inc., parent of First Federal
Savings & Loan Association ("First Federal"), in October, 1999. First Federal,
located in Bloomington, Illinois, was established in 1919 as a federally
chartered capital stock savings association. In June, 2000, First Federal
changed its name to Busey Bank fsb. At the same time, four of Busey Bank's
branches, located in LeRoy and Bloomington, Illinois, were transferred into
Busey Bank fsb. In October, 2000, Busey Bank fsb opened an additional branch in
Fort Myers, Florida. In November, 2001, Busey Bank fsb transferred its charter
to Florida, and changed its name to Busey Bank Florida. Simultaneously, the
Illinois assets of Busey Bank fsb were merged into Busey Bank. Busey Bank
Florida, a federally chartered savings association, is a full service bank
offering commercial and retail banking services. Busey Bank Florida has one
location in Fort Myers, Florida.
The Banks offer a full range of banking services, including commercial,
financial, agricultural and real estate loans, and retail banking services,
including accepting customary types of demand and savings deposits, making
individual, consumer, installment, first mortgage and second mortgage loans,
offering money transfers, safe deposit services, IRA, Keogh and other fiduciary
services, automated banking and automated fund transfers.
Busey Investment Group, Inc., a wholly owned non-banking subsidiary,
located in Champaign, Illinois, and formed in February, 1999, is the parent
company of: (1) First Busey Trust & Investment Co., organized in January, 1987,
which is exclusively dedicated to providing a full range of trust and investment
management services, including farm management, estate and financial planning,
tax preparation, custody services and philanthropic advisory services; (2) First
Busey Securities, Inc., organized in April, 1991, which is a full service
broker/dealer and provides individual investment advice; and (3) Busey Insurance
Services, Inc., organized in October, 1997, which offers a variety of insurance
products.
First Busey Resources, Inc., a wholly owned non-banking subsidiary,
located in Urbana, Illinois, owns and manages Busey Plaza, a professional office
building that is fully leased to unaffiliated tenants.
First Busey Capital Trust I ("Capital Trust I"), a statutory business
trust organized under the Delaware Business Trust Act, was formed in June, 2001.
First Busey owns all of the Common Securities of Capital Trust I.
4
COMPETITION
The Banks compete actively with national and state banks, savings and
loan associations and credit unions for deposits and loans primarily in central
and east-central Illinois, southwest Florida, and central Indiana. In addition,
First Busey and its non-bank subsidiaries compete with other financial
institutions, including asset management and trust companies, security
broker/dealers, personal loan companies, insurance companies, finance companies,
leasing companies, mortgage companies and certain governmental agencies, all of
which actively engage in marketing various types of loans, deposit accounts and
other products and services.
Based on information obtained from FDIC/OTS Summary of Deposits dated
June, 2002, First Busey ranked first in total deposits in the Champaign and Ford
County markets and fifth in McLean County. Customers for banking services are
generally influenced by convenience, quality of service, personal contacts,
price of services and availability of products. Although the market share of
First Busey varies in different markets, First Busey believes that its
affiliates effectively compete with other banks, thrifts and financial
institutions in their relevant market areas.
SUPERVISION, REGULATION AND OTHER FACTORS
GENERAL
First Busey is a financial holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve") under the Bank Holding Company Act ("BHCA"), and by the Illinois Bank
Holding Company Act ("IBHCA"). First Busey's state-chartered bank is subject to
regulation and examination primarily by the State of Illinois Office of Banks
and Real Estate ("SIOBRE") and, secondarily, by the Federal Deposit Insurance
Corporation ("FDIC"). First Busey's federally chartered capital stock savings
association is subject to regulation and examination primarily by the Office of
Thrift Supervision ("OTS") and, secondarily, by the FDIC. Numerous other federal
and state laws, as well as regulations promulgated by the Federal Reserve,
SIOBRE, FDIC and OTS govern almost all aspects of the operations of the Banks.
Various federal and state bodies regulate and supervise First Busey's
non-banking subsidiaries including its brokerage, investment advisory and
insurance agency operations. These include, but are not limited to, SIOBRE,
Federal Reserve, Securities and Exchange Commission, National Association of
Securities Dealers, Inc., Illinois Department of Insurance, federal and state
banking regulators and various state regulators of insurance and brokerage
activities.
Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a financial holding company may engage in any activity
that the Federal Reserve, in consultation with the Secretary of the Treasury,
determines by regulation or order is: (1) financial in nature; (2) incidental to
any such financial activity; or (3) complementary to any such financial activity
and does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. This Act makes significant
changes in U.S. banking law, principally by repealing certain restrictive
provisions of the 1933 Glass-Steagall Act. The Act specifies certain activities
that are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting and selling insurance; providing financial, investment, or economic
advisory services; underwriting, dealing in or making a market in, securities;
and any activity currently permitted for bank holding companies by the Federal
Reserve under Section 4(c)(8) of the BHCA. The Act does not authorize banks or
their affiliates to engage in commercial activities that are not financial in
nature. A bank holding company may elect to be treated as a financial holding
company only if all depository institution subsidiaries of the holding company
are well-capitalized, well-managed and have at least a satisfactory rating under
the Community Reinvestment Act.
5
In addition to the Act, there have been a number of legislative and
regulatory proposals that would have an impact on bank/financial holding
companies and their bank and non-bank subsidiaries. It is impossible to predict
whether or in what form these proposals may be adopted in the future and if
adopted, what their effect will be on First Busey.
DIVIDENDS
The Federal Reserve has issued a policy statement on the payment of
cash dividends by financial holding companies. In the policy statement, the
Federal Reserve expressed its view that a bank holding company experiencing weak
earnings should not pay cash dividends in excess of its net income or which
could only be funded in ways that would weaken its financial health, such as by
borrowing. First Busey is also subject to certain contractual and regulatory
capital restrictions that limit the amount of cash dividends that First Busey
may pay. The Federal Reserve also may impose limitations on the payment of
dividends as a condition to its approval of certain applications, including
applications for approval of mergers and acquisitions.
The primary sources of funds for First Busey's payment of dividends to
its shareholders are dividends and fees to First Busey from its banking and
nonbanking affiliates. Various federal and state statutory provisions and
regulations limit the amount of dividends that the subsidiary banks of First
Busey may pay. Under provisions of the Illinois Banking Act ("IBA"), dividends
may not be declared by banking subsidiaries except out of the bank's net profit
(as defined), and unless the bank has transferred to surplus at least one-tenth
of its net profits since the date of the declaration of the last preceding
dividend, until the amount of its surplus is at least equal to its capital.
Federal and state banking regulations applicable to First Busey and its
banking subsidiaries require minimum levels of capital, which limit the amounts
available for payment of dividends.
CAPITAL REQUIREMENTS
First Busey is required to comply with the capital adequacy standards
established by the Federal Reserve, and its banking subsidiaries must comply
with similar capital adequacy standards established by the OTS, FDIC, and
SIOBRE, as applicable. There are two basic measures of capital adequacy for
financial holding companies and their banking subsidiaries that have been
promulgated by the Federal Reserve and the FDIC: a risk-based measure and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company or a bank to be considered in compliance.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC insured depository
institutions that fail to meet applicable capital requirements. See "Prompt
Corrective Action."
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system the federal banking
regulators are required to rate supervised institutions on the basis of five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and to take
certain mandatory supervisory actions, and are authorized to take other
discretionary actions, with respect to institutions in the three
undercapitalized categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, subject to a narrow
exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
Pursuant to FDICIA, the Federal Reserve, the FDIC, and the OTS have
adopted regulations setting forth a five-tier scheme for measuring the capital
adequacy of the financial institutions they supervise. Under the regulations, an
institution would be placed in one of the following capital categories:
6
(i) well capitalized (an institution that has a Total Capital ratio of at least
10%, a Tier 1 Capital ratio of at least 6% and a Tier 1 Leverage Ratio of at
least 5%); (ii) adequately capitalized (an institution that has a Total Capital
ratio of at least 8%, a Tier 1 Capital ratio of at least 4% and a Tier 1
Leverage Ratio of a least 4%); (iii) undercapitalized (an institution that has a
Total Capital ratio of under 8%, a Tier 1 Capital ratio of under 4% or a Tier 1
Leverage Ratio of under 4%); (iv) significantly undercapitalized (an institution
that has a Total Capital ratio of under 6%, a Tier 1 Capital ratio of under 3%
or a Tier 1 Leverage Ratio of under 3%); and (v) critically undercapitalized (an
institution whose tangible equity is not greater than 2% of total tangible
assets). The regulations permit the appropriate federal banking regulator to
downgrade an institution to the next lower category if the regulator determines
(i) after notice and opportunity for hearing or response, that the institution
is in an unsafe or unsound condition or (ii) that the institution has received
(and not corrected) a less-than-satisfactory rating for any of the categories of
asset quality, management, earnings or liquidity in its most recent examination.
Supervisory actions by the appropriate federal banking regulator depend upon an
institution's classification within the five categories. First Busey's
management believes that First Busey and its significant bank subsidiaries have
the requisite capital levels to qualify as well capitalized institutions under
the FDICIA regulations.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. Federal banking agencies may not accept a capital
plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
EMPLOYEES
As of December 31, 2002, First Busey and its subsidiaries had a total
of 491 employees (full-time and equivalents).
EXECUTIVE OFFICERS (as of January 1, 2003)
NAME AGE POSITION HELD
---- --- -------------
Douglas C. Mills 62 Chairman of the Board and CEO - First Busey Corp.
P. David Kuhl 53 Chairman of the Board and CEO - Busey Bank
Barbara J. Kuhl 52 President and COO of First Busey Corp.
Barbara J. Jones 43 CFO of First Busey Corp.
David D. Mills 32 President and COO of Busey Bank
Edwin A. Scharlau II 58 Chairman of the Board of Busey Investment Group
Vice Chairman of the Board of First Busey Corp.
ITEM 2. PROPERTIES
The location and general character of the materially important physical
properties of First Busey and its subsidiaries are as follows: First Busey,
where corporate management and administration operate, is headquartered at 201
West Main Street, Urbana, Illinois. Busey Bank has properties located at 201
West Main Street, Urbana, Illinois, 909 West Kirby Avenue, Champaign, Illinois,
and 301 Fairway Drive, Bloomington, Illinois. These facilities offer commercial
banking services, including commercial, financial, agricultural and real estate
loans, and retail banking services, including accepting customary types of
demand and savings deposits, making individual, consumer, installment, first
mortgage and second mortgage loans. Busey Bank Florida, located at 7980
Summerlin Lakes Drive, Fort Myers, Florida, offers similar services as Busey
Bank. Busey Investment Group, Inc., located at 502 West Windsor Road, Champaign,
Illinois, through its subsidiaries, provides a full range of trust and
investment management services, execution of securities transactions as a
full-service broker/dealer and provide individual investment advice on equity
and other securities as well as insurance agency services. First Busey
Resources, Inc., located at 102 East Main Street, Urbana, Illinois, owns and
manages Busey Plaza, which is fully leased to unaffiliated tenants.
First Busey and its subsidiaries own or lease all of the real property
and/or buildings on which each respective entity is located.
7
ITEM 3. LEGAL PROCEEDINGS
As part of the ordinary course of business, First Busey and its
subsidiaries are parties to litigation that is incidental to their regular
business activities.
There is no material pending litigation in which First Busey or any of
its subsidiaries is involved or of which any of their property is the subject.
Furthermore, there is no pending legal proceeding that is adverse to First Busey
in which any director, officer or affiliate of First Busey, or any associate of
any such director or officer, is a party, or has a material interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table presents for the periods indicated the high and low
closing price for First Busey common stock as reported on the Nasdaq National
Market.
2002 2001
------------------ ---------------------
Market Prices of Common Stock High Low High Low
- ----------------------------- ---- --- ---- ---
First Quarter 21.75 19.55 $20.50 $17.81
Second Quarter 22.61 20.30 $21.50 $19.69
Third Quarter 23.00 21.00 $22.00 $18.50
Fourth Quarter 23.57 22.14 $22.00 $19.00
During 2002 and 2001, First Busey declared cash dividends per share of common
stock as follows:
2002 COMMON STOCK
- ---- ------------
January $ .15
April $ .15
July $ .15
October $ .15
2001
- ----
January $ .13
April $ .13
July $ .13
October $ .13
For a discussion of restrictions on dividends, please see the
discussion of dividend restrictions under Item 1, Business, Dividends on page 6.
As of February 21, 2003, there were approximately 939 holders of common
stock.
9
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data for each of the five years in the
period ended December 31, 2002, have been derived from First Busey's annual
consolidated financial statements and the results of operations for each of the
three years in the period ended December 31, 2002, appears elsewhere in this
report. This financial data should be read in conjunction with the financial
statements and the related notes thereto appearing in this report.
2002 2001 2000 1999 1998
---------------------------------------------------------------------------
(dollars in thousands, except per share data)
BALANCE SHEET ITEMS
Securities $ 233,830 $ 210,869 $ 228,597 $ 225,046 $ 217,991
Loans 1,101,043 978,106 984,369 886,684 662,281
Allowance for loan losses 15,460 13,688 12,268 10,403 7,101
Total assets 1,435,578 1,300,689 1,355,044 1,247,123 951,531
Total deposits 1,213,605 1,105,999 1,148,787 1,027,981 826,704
Long-term debt 71,759 47,021 55,259 55,849 25,000
Company obligated mandatorily
redeemable preferred securities 25,000 25,000 - - -
Stockholders' equity 115,163 105,790 92,325 82,284 87,103
RESULTS OF OPERATIONS
Interest income $ 76,085 $ 89,985 $ 93,242 $ 72,311 $ 67,048
Interest expense 30,494 46,435 50,476 34,920 32,975
Net interest income 45,591 43,550 42,766 37,391 34,073
Provision for loan losses 3,125 2,020 2,515 2,570 700
Net income(1) 17,904 15,653 14,053 12,548 11,398
PER SHARE DATA
Diluted earnings $ 1.31 $ 1.15 $ 1.03 $ .90 $ .81
Cash dividends .60 .52 .48 .44 .39
Book value 8.49 7.73 6.86 6.08 6.36
Closing price 23.06 21.48 19.9375 22.625 18.25
OTHER INFORMATION
Return on average assets 1.33% 1.19% 1.12% 1.22% 1.22%
Return on average equity 16.31% 15.80% 16.56% 14.68% 14.02%
Net interest margin(2) 3.74% 3.64% 3.74% 4.02% 4.10%
Stockholders' equity to assets 8.02% 8.13% 6.81% 6.60% 9.15%
(1) Effective January 1, 2002, First Busey adopted Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 142 changed the accounting for goodwill from a model that required
amortization of goodwill, supplemented by impairment tests, to an
accounting model that is based solely upon impairment tests.
10
A reconcilation of First Busey's Consolidated Statements of Income for each of
the five years ending December 31, 2002, from amounts reported to amounts
exclusive of goodwill amortization is shown below:
FINANCIAL ACCOUNTING STANDARDS NO. 142 DISCLOSURE
Net income as reported $ 17,904 $ 15,653 $ 14,053 $ 12,548 $ 11,398
Goodwill amortization, after tax - 651 677 322 300
---------------------------------------------------------------------------
Net income as adjusted $ 17,904 $ 16,304 $ 14,730 $ 12,870 $ 11,698
---------------------------------------------------------------------------
Diluted earnings per share of common stock:
As reported $ 1.31 $ 1.15 $ 1.03 $ .90 $ .81
Goodwill amortization - .05 .05 .02 .02
---------------------------------------------------------------------------
Earnings per share as adjusted $ 1.31 $ 1.20 $ 1.08 $ .92 $ .83
---------------------------------------------------------------------------
(2) Calculated as a percent of average earning assets.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the financial
condition and results of operations of First Busey Corporation and Subsidiaries
for the years ended December 31, 2002, 2001, and 2000. It should be read in
conjunction with "Business," "Selected Financial Data," the consolidated
financial statements and the related notes to the consolidated financial
statements and other data included in this Annual Report.
GENERAL
The Corporation's consolidated income is generated primarily by the
financial services activities of its subsidiaries. Since January 1, 1982, the
Corporation has acquired eleven banks and sold two; acquired six savings and
loan branches and two bank branches; acquired a bank branch in an FDIC assisted
acquisition of a failed bank; acquired a thrift holding company and federal
savings and loan; formed a trust company subsidiary; formed an insurance agency
subsidiary; formed a non-bank ATM subsidiary and acquired and liquidated a
travel agency. The following table illustrates the amounts of net income
contributed by each subsidiary (on a pre-consolidation basis) since January 1,
2000, less purchase accounting adjustments (net income for Busey Bank in
following table excludes income from Bank subsidiaries and includes deduction
for amortization expense recorded on parent company statements).
Subsidiary Acquired 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Busey Bank(1) 3/20/80 $ 18,541 91.9% $ 13,574 79.2% $ 13,094 82.6%
Busey Bank Florida(2) 10/29/99 24 0.1% 1,984 11.6% 937 5.9%
First Busey Trust & Investment Co.(3) - 1,419 7.0% 1,391 8.1% 1,459 9.2%
First Busey Securities, Inc.(4) - 258 1.3% (40) -0.2% 357 2.3%
First Busey Resources, Inc.(5) - 149 0.7% 130 0.8% 154 1.0%
Busey Insurance Services, Inc.(6) - 39 0.2% 10 0.0% (38) -0.2%
BAT, Inc.(7) - (282) -1.4% 81 0.5% 20 0.1%
Busey Travel, Inc.(8) 1/1/98 33 0.2% (6) 0.0% (153) -1.0%
FFS Investments(9) 10/29/99 - 0.0% - 0.0% 19 0.1%
-------------------------------------------------------------------
Total $ 20,214 100.0% $ 17,124 100.0% $ 15,849 100.0%
===================================================================
(1) City Bank of Champaign and Champaign County Bank & Trust were merged into
Busey Bank as of January 1, 1987. First National Bank of Thomasboro was
merged into Busey Bank as of January 1,1988. State Bank of St. Joseph was
merged into Busey Bank as of November 3, 1989. The Bank of Urbana, Citizens
Bank of Tolono, and the assets of Community Bank of Mahomet subject to its
liabilities were merged into Busey Bank as of November 16, 1991. Busey Bank
of McLean County was merged into Busey Bank as of January 1, 1996. Busey
Business Bank was formed on January 12, 1998, and merged into Busey Bank as
of October 30, 1998.
(2) Acquired as a subsidiary of Eagle BancGroup, Inc. as of October 29, 1999.
(3) Formed as a subsidiary of the Corporation as of January 1, 1987 as a
successor to the combined trust departments of Busey Bank and Champaign
County Bank & Trust; transferred to Busey Investment Group on January 1,
2001.
(4) Formed as a subsidiary of Busey Bank as of April 1, 1991; transferred to
Busey Investment Group on January 1, 2001.
(5) Reactivated as a subsidiary of First Busey Corporation as of January 1,
1997. Real estate and certain other assets previously carried on the parent
company and subsidiary balance sheets were transferred to subsidiary as of
that date.
(6) Formed as a subsidiary of Busey Bank as of October 1, 1997; transferred to
Busey Investment Group on January 1, 2001.
(7) Reactivated as a subsidiary of Busey Bank as of July 1, 1997.
(8) Acquired as a subsidiary of Busey Bank as of January 1, 1998; liquidated
November 30, 2002.
(9) Acquired as a subsidiary of First Federal Savings and Loan Association of
Bloomington as of October 29, 1999; liquidated December 7, 2000.
12
Busey Bank, Busey Bank Florida and First Busey Trust & Investment Co.
are the three subsidiaries which have each contributed 10% of the Corporation's
consolidated net income in at least one of the last three years.
RESULTS OF OPERATIONS-THREE YEARS ENDED DECEMBER 31, 2002
SUMMARY
The Corporation reported net income of $17,904,000 in 2002, up 14.4%
from $15,653,000 in 2001, which had increased 11.4% from $14,053,000 in 2000.
Diluted earnings per share in 2002 increased 13.9% to $1.31 from $1.15 in 2001,
which was a 11.7% increase from $1.03 in 2000. The main factors contributing to
the increase in net income in 2002 were increases in net interest income,
service charges on deposit accounts, and gains on the sale of mortgage loans.
Operating earnings, which exclude security gains and the related tax expense,
were $17,445,000 or $1.28 per share for 2002; $14,878,000, or $1.09 per share
for 2001; and $13,608,000, or $1.00 per share for 2000.
Security gains after the related tax expense were $459,000 or 2.6% of
net income in 2002; $775,000 or 5.0% of net income in 2001; and $445,000 or 3.2%
of net income in 2000. First Busey Corporation owns a position in a
bank-qualified equity security (SLM Corp.) with substantial appreciated value.
First Busey's Board has authorized an orderly liquidation of this asset over a
ten-year period.
The Corporation's return on average assets was 1.33%, 1.19% and 1.12%
for 2002, 2001, and 2000, respectively, and return on average equity was 16.31%,
15.80%, and 16.56% for 2002, 2001, and 2000, respectively. On an operating
earnings basis, return on average assets was 1.30%, 1.13%, and 1.08% for 2002,
2001, and 2000, respectively, and return on average equity was 15.89%, 15.02%
and 16.03% for 2002, 2001, and 2000, respectively.
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased 1.6% or $20,304,000 to $1,253,193,000
during 2002 from the 2001 average balance of $1,232,889,000. The average balance
of loans increased 5.5% or $53,294,000 to $1,015,073,000 for 2002 from 2001
average balance of $961,779,000. The increase in loans was partially offset by
decreases in the average balances of interest-bearing bank deposits, Federal
funds sold and U.S. Treasuries and Agencies.
The balance of interest bearing liabilities averaged $1,091,587,000 for
2002, an increase of $7,401,000 or .7% from the 2001 average balance of
$1,084,186,000. Growth in the average balances of savings deposits, money market
deposits and long-term debt was offset by declines in the average balances of
interest-bearing transaction deposits, time deposits and short-term borrowings.
The Corporation's net interest margin expressed as a percentage of
average earning assets, stated on a fully taxable equivalent basis, was 3.74%
for 2002, an increase of 10 basis points from the 3.64% for 2001. The net
interest margin expressed as a percentage of average total assets, also on a
fully taxable equivalent basis, was 3.50% for 2002, an improvement of 8 basis
points from the 3.42% net interest margin for 2001.
Interest income on a tax equivalent basis decreased $13,925,000 or
15.2% to $77,393,000 for 2002 as compared to the interest income of $91,318,000
for 2001. The decrease in interest income is primarily attributable to the
decline in average rates paid on all categories of interest-earning assets. The
average yield on interest-earning assets fell 123 basis points to 6.18% for 2002
as compared to 7.41% for 2001. Growth in the average balance of loans partially
offset the impact of the decline in interest rates.
Interest expense decreased $15,941,000 or 34.3% to $30,494,000 during
2002 as compared to interest expense of $46,435,000 for 2001. This decline
resulted partially from changes in the mix of funding sources but primarily is
the result of the decline in rates paid on all categories of deposits,
short-term borrowings and long-term debt.
13
Net interest income on a tax equivalent basis increased 4.5% in 2002 to
$46,899,000 from $44,883,000 in 2001, which reflected a 1.8% increase from
$44,083,000 in 2000. The decrease in interest rates throughout 2002 led to
declines in the amount of income earned on interest-earning assets as well as
the amount of expense recognized on interest-bearing liabilities. The average
yield on interest-earning assets decreased 123 basis points from 7.41% in 2001
to 6.18% in 2002. The change in the mix of interest-earning assets partially
offset the decline in the yield on interest-earning assets as growth occurred in
higher-yielding loans. The low interest rate environment also had significant
impact on the rates paid on interest-bearing liabilities with the average rate
falling 149 basis points from 4.28% in 2001 to 2.79% in 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses, which is a current charge against
income, represents an amount which management believes is sufficient to maintain
an adequate allowance for known and probable losses. In assessing the adequacy
of the allowance for loan losses, management considers the size and quality of
the loan portfolio measured against prevailing economic conditions, regulatory
guidelines, and historical loan loss experience and credit quality of the
portfolio. When a determination is made by management to charge off a loan
balance, such write-off is charged against the allowance for loan losses.
The provision for loan losses increased $1,105,000 to $3,125,000 in
2002 from $2,020,000 in 2001 which had decreased from $2,515,000 in 2000. Net
charge-offs increased to $1,353,000 in 2002 from $600,000 in 2001, and total
non-performing loans increased slightly to $2,228,000 as of December 31, 2002,
compared to $2,224,000 as of December 31, 2001. Net charge-offs were $650,000 in
2000, and non-performing loans totaled $5,434,000 as of December 31, 2000.
Sensitive assets include nonaccrual loans, loans on First Busey
Corporation's watch loan report, and other loans identified as having more than
reasonable potential for loss. The watch loan list is comprised of loans which
have been restructured or involve customers in industries which have been
adversely affected by market conditions. The majority of these loans are being
repaid in conformance with their contracts.
OTHER INCOME
Other income increased 5.0% in 2002 to $22,537,000 from $21,460,000 in
2001, which reflected a 17.3% increase from $18,288,000 in 2000. The increases
in 2002 and 2001 are due primarily to increases in service charges on deposit
accounts and gains on the sale of loans. As a percentage of total income, other
income was 22.9%, 19.3%, and 16.4% in 2002, 2001, and 2000, respectively. Gains
on the sale of securities, as a component of other income, totaled $762,000
(3.4%) in 2002, $1,285,000 (6.0%) in 2001, and $737,000 (4.0%) in 2000. Gains on
sales of loans, as a component of other income totaled $3,995,000 (17.7%),
$2,296,000 (10.7%), and $1,112,000 (6.1%) in 2002, 2001, and 2000, respectively.
Additional components of other income were fee income and trust fees.
Service charges and other fee income increased 10.3% to $10,976,000 in 2002 from
$9,950,000 in 2001, which was a 6.8% increase from $9,317,000 in 2000. The
growth in fee income in 2002 and 2001 is due primarily to increases in service
charges on deposit accounts. Despite the poor equity market in 2002 and 2001,
trust fees declined just 0.9% in 2002 and increased 5.6% in 2001. Trust revenues
were $4,567,000 in 2002, $4,607,000 in 2001, and $4,364,000 in 2000. Trust
revenues in each year were directly related to the total trust assets under
care. Remaining other income decreased 32.7% to $2,237,000 in 2002 from
$3,322,000 in 2001 which was a 20.5% increase from $2,758,000 in 2000. In
December, 2001, the Corporation sold the customer list of its travel agency
subsidiary. As a result of this sale, no commissions from travel services were
recognized in 2002. The Corporation recognized $655,000 on the increase in the
cash surrender value of bank owned life insurance during 2002 compared to
$111,000 during 2001.
OTHER EXPENSES
Other expenses decreased slightly in 2002 to $38,926,000 from
$38,974,000 in 2001, which reflected an increase from $37,249,000 in 2000. As a
percentage of total income, other expenses were 39.5%, 35.0%, and 33.4% in 2002,
2001, and 2000, respectively. Employee related expenses, including
14
salaries and wages and employee benefits, decreased slightly in 2002 to
$21,003,000, as compared to $21,066,000 in 2001, which was a 10.4% increase from
$19,080,000 in 2000. As a percent of average assets, employee related expenses
were 1.57%, 1.61%, and 1.51% in 2002, 2001, and 2000, respectively. The
Corporation had 491, 498, and 484 full-time equivalent employees at December 31,
2002, 2001, and 2000, respectively. The declines in employee-related expense and
number of employees is related to the sale of the travel business. Net occupancy
expense of bank premises and furniture and equipment expenses decreased 5.9% in
2002 to $6,545,000 as compared from $6,957,000 in 2001 and $6,729,000 in 2000.
Remaining other expenses increased $427,000 or 3.9% to $11,378,000 in
2002 from $10,951,000 in 2001, which was a 4.3% decrease from $11,440,000 in
2000. Data processing expenses increased 11.1% to $888,000 for the year ended
December 31, 2002, compared to $799,000 for the year ended December 31, 2001,
and $1,142,000 for the year ended December 31, 2000. Data processing expenses
were higher in 2000 due to one-time conversion and setup expenses. Amortization
and impairment expenses declined in 2002 as compared to 2001 due to the adoption
of Statement of Financial Accounting standards No. 142. Amortization and
impairment expenses also declined in 2001 as compared to 2000. During the year
ended December 31, 2001, the Corporation recognized an impairment write-down of
$325,000 on a customer list purchased by First Busey Securities, Inc. Revenues
generated from this customer list were lower than originally projected. During
the year ended December 31, 2000, the Corporation recognized an impairment
write-down of $600,000 on the core deposit intangible associated with the
acquisition of Busey Bank Florida (formerly First Federal and Busey Bank fsb).
Remaining other expenses increased $1,435,000 or 19.4% to $8,820,000
during the year ended December 31, 2002, as compared to the year ended December
31, 2001. Of this increase, $1,036,000 is related to increase in expenses
associated with other real estate owned. On June 28, 2002 Busey Bank became
mortgagee in possession of a hotel property in McLean County. Busey Bank will
remain mortgagee in possession of this property pending completion of
foreclosure proceedings which are expected to be completed during the second
quarter of 2003. The other expense line includes $700,000 in fair market
valuation adjustments on the carrying value of this property and a net OREO
expense of $282,000 associated with operating this property during 2002. Busey
Bank operates this hotel through an operating agreement with its fully-owned
subsidiary BAT, Inc.
INCOME TAXES
Income tax expense in 2002 was $8,173,000 as compared to $8,363,000 in
2001 and $7,237,000 in 2000. The provision for income taxes as a percent of
income before income taxes was 31.3%, 34.8%, and 34.0%, for 2002, 2001, and
2000, respectively. The provision for income taxes as a percentage of income
before income taxes decreased due to the increase in income from bank owned life
insurance, which is not taxable to the Corporation, and to the reduction in
nondeductible amortization expense.
15
BALANCE SHEET-DECEMBER 31, 2002 AND DECEMBER 31, 2001
Total assets on December 31, 2002, were $1,435,578,000, an increase of
10.4% from $1,300,689,000 on December 31, 2001. Total loans, net of unearned
interest, increased 12.6% to $1,101,043,000 on December 31, 2002, as compared to
$978,106,000 on December 31, 2001. Total deposits increased 9.7% to
$1,213,605,000 on December 31, 2002 as compared to $1,105,999,000 on December
31, 2001. Non-interest bearing deposits increased $12,420,000 or 9.0% during
2002. Interest-bearing deposits increased $95,186,000 or 9.8% during 2002.
Total stockholders' equity increased 8.9% to $115,163,000 on December
31, 2002, as compared to $105,790,000 on December 31, 2001. Growth in equity is
due primarily to $9,778,000 earnings retained in the Corporation combined with a
net increase of $2,148,000 in unrealized gains on available for sale securities
and a $2,411,000 increase in Treasury stock. Treasury shares will be reissued in
future years as participants exercise outstanding options under the
Corporation's stock option plan which is discussed in Note 16 to the
Corporation's consolidated financial statements.
A. EARNING ASSETS
The average interest-earning assets of the Corporation were 93.4%,
94.0%, and 93.6%, of average total assets for the years ended December 31, 2002,
2001, and 2000, respectively.
B. INVESTMENT SECURITIES
The Corporation has classified all investment securities as securities
available for sale. These securities are held with the option of their disposal
in the foreseeable future to meet investment objectives or for other operational
needs. Securities available for sale are carried at fair value. As of December
31, 2002, the fair value of these securities was $233,830,000 and the amortized
cost was $216,801,000. There were $17,040,000 of gross unrealized gains and
$11,000 of gross unrealized losses for a net unrealized gain of $17,029,000. The
after-tax effect ($10,276,000) of this unrealized gain has been included in
stockholders' equity. The increase in market value for the debt securities in
this classification was a result of declining interest rates. The fair value
increase in the equity securities was primarily due to a $1,831,000 increase in
the value of 92,280 shares of SLM Corporation common stock owned by the
Corporation as of year end.
The composition of securities available for sale is as follows:
As of December 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies $ 158,324 $ 143,490 $ 162,886 $ 164,565 $ 159,261
Equity securities 20,326 18,058 15,479 13,079 12,550
States and political subdivisions 51,434 43,767 43,197 41,554 37,398
Other 3,746 5,554 7,035 5,848 8,782
---------------------------------------------------------------------------
Fair value of securities available for sale $ 233,830 $ 210,869 $ 228,597 $ 225,046 $ 217,991
===========================================================================
Amortized cost $ 216,801 $ 197,398 $ 218,790 $ 221,601 $ 207,531
===========================================================================
Fair value as a percentage of amortized
cost 107.85% 106.82% 104.48% 101.55% 105.04%
===========================================================================
16
The maturities, fair values and weighted average yields of debt
securities available for sale as of December 31, 2002, are:
Due in 1 year or Due after 1 year Due after 5 years Due after
less through 5 years through 10 years 10 years
--------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average
Investment Securities(1) Value Yield Value Yield Value Yield Value Yield
--------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies $ 83,242 4.09% $ 74,969 3.47% $ 113 5.28% $ - 0.00%
States and political subdivisions(2) 5,563 5.88% 17,311 6.49% 25,997 6.82% 2,563 7.11%
Other 103 5.57% 1,998 6.19% 270 6.24% 1,375 9.72%
--------------------------------------------------------------------------------
Total $ 88,908 4.20% $ 94,278 4.08% $ 26,380 6.81% $ 3,938 8.02%
================================================================================
(1) Excludes equity securities and mortgage backed securities.
(2) On a tax-equivalent basis, assuming a federal income tax rate of 35% (the
effective federal income tax rate as of December 31, 2002)
The Corporation also uses its investment portfolio to manage its tax
position. Depending upon projected levels of taxable income for the Corporation,
periodic changes are made in the mix of tax-exempt and taxable securities to
achieve maximum yields on a tax-equivalent basis. U.S. government and agency
securities as a percentage of total securities decreased to 67.7% at December
31, 2002, from 68.0% at December 31, 2001, while obligations of state and
political subdivisions (tax-exempt obligations) as a percentage of total
securities increased to 22.0% at December 31, 2002, from 20.8% at December 31,
2001.
LOAN PORTFOLIO
Loans, including loans held for sale, before allowance for loan losses,
increased 12.6% to $1,101,043,000 in 2002 from $978,106,000 in 2001. Non-farm
non-residential real estate mortgage loans increased $20,221,000, or 8.0%, to
$274,153,000 in 2002 from $253,932,000 in 2001. This increase reflects
management's emphasis on commercial loans secured by mortgages. Also, 1 to 4
family residential real estate mortgage loans (not held for sale) increased
$20,158,000, or 5.8%, to $369,428,000 in 2002 from $349,270,000 in 2001. In
2002's low interest rate environment, the Corporation experienced significant
refinance activity. The Corporation has no loans to customers engaged in oil and
gas exploration or to foreign companies or governments. Commitments under
standby letters of credit, unused lines of credit and other conditionally
approved credit lines, totaled approximately $235,545,000 as of December 31,
2002.
The loan portfolio includes a concentration of loans for commercial
real estate amounting to approximately $331,712,000 and $308,197,000 as of
December 31, 2002 and 2001, respectively. Generally, these loans are
collateralized by assets of the borrowers. The loans are expected to be repaid
from cash flows or from proceeds from the sale of selected assets of the
borrowers. Credit losses arising from lending transactions for commercial real
estate entities are comparable with the Corporation's credit loss experience on
its loan portfolio as a whole.
17
The composition of loans is as follows:
As of December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------------------
(dollars in thousands)
Commercial and financial $ 118,004 $ 121,694 $ 124,052 $ 119,800 $ 80,958
Agricultural 22,034 21,022 20,844 20,126 19,072
Real estate-farmland 13,421 14,414 15,411 15,841 14,184
Real estate-construction 129,872 83,701 75,672 52,479 44,713
Real estate-mortgage 761,901 679,351 697,410 622,075 467,435
Installment loans to individuals 55,811 57,924 50,980 56,363 35,919
-----------------------------------------------------------------------
Loans $ 1,101,043 $ 978,106 $ 984,369 $ 886,684 $ 662,281
=======================================================================
The following table sets forth remaining maturities of selected loans
(excluding certain real estate-farmland, real estate-mortgage loans and
installment loans to individuals) at December 31, 2002:
1 Year or
Less 1 to 5 Years Over 5 Years Total
--------------------------------------------------------------
(dollars in thousands)
Commercial, financial and agricultural $ 83,033 $ 35,926 $ 21,079 $ 140,038
Real estate-construction 78,726 44,276 6,870 129,872
--------------------------------------------------------------
Total $ 161,759 $ 80,202 $ 27,949 $ 269,910
==============================================================
Interest rate sensitivity of selected loans
Fixed rate $ 45,777 $ 21,106 $ 3,385 $ 70,268
Adjustable rate 115,982 59,096 24,564 199,642
--------------------------------------------------------------
Total $ 161,759 $ 80,202 $ 27,949 $ 269,910
==============================================================
18
ALLOWANCE FOR LOAN LOSSES
The following table shows activity affecting the allowance for loan losses:
Years ended December 31
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(dollars in thousands)
Average loans outstanding during period $ 1,015,073 $ 961,779 $ 937,239 $ 731,491 $ 621,475
========================================================================
Allowance for loan losses:
Balance at beginning of period $ 13,688 $ 12,268 $ 10,403 $ 7,101 $ 6,860
------------------------------------------------------------------------
Loans charged-off:
Commercial, financial and agricultural $ 775 $ 103 $ 70 $ 40 $ 62
Real estate-construction 76 - - - -
Real estate-mortgage 659 408 290 145 282
Installment loans to individuals 319 265 414 366 260
------------------------------------------------------------------------
Total charge-offs $ 1,829 $ 776 $ 774 $ 551 $ 604
------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural $ 349 $ 15 $ 22 $ 16 $ 12
Real estate-construction - - - - -
Real estate-mortgage 26 42 4 67 49
Installment loans to individuals 101 119 98 99 84
------------------------------------------------------------------------
Total recoveries $ 476 $ 176 $ 124 $ 182 $ 145
------------------------------------------------------------------------
Net loans charged-off $ 1,353 $ 600 $ 650 $ 369 $ 459
------------------------------------------------------------------------
Provision for loan losses $ 3,125 $ 2,020 $ 2,515 $ 2,570 $ 700
------------------------------------------------------------------------
Net additions due to acquisition - - - 1,101 -
------------------------------------------------------------------------
Balance at end of period $ 15,460 $ 13,688 $ 12,268 $ 10,403 $ 7,101
========================================================================
Ratios:
Net charge-offs to average loans 0.13% 0.06% 0.07% 0.05% 0.07%
========================================================================
Allowance for loan losses to total loans
at period end 1.40% 1.40% 1.25% 1.17% 1.07%
========================================================================
The following table sets forth the allowance for loan losses by loan
categories as of December 31 for each of the years indicated:
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------
(dollars in thousands)
Commercial, financial,
agricultural and real
estate-farmland $ 2,143 13.9% $ 1,880 16.1% $ 1,854 16.3% $ 3,391 17.6% $ 1,757 17.2%
Real estate-construction - 11.8% - 8.6% - 7.7% - 5.9% - 6.8%
Real estate-mortgage 12,451 69.2% 10,880 69.4% 9,051 70.8% 5,708 70.1% 4,380 70.6%
Installment loans to
individuals 779 5.1% 811 5.9% 708 5.2% 1,293 6.4% 964 5.4%
Unallocated 87 N/A 117 N/A 655 N/A 11 N/A - N/A
---------------------------------------------------------------------------------------
Total $ 15,460 100.0% $13,688 100.0% $ 12,268 100.0% $10,403 100.0% $ 7,101 100.0%
=======================================================================================
This table indicates growth in the allowance for loan losses for real
estate mortgages as of December 31, 2002 as compared to December 31, 2001. The
increase in the allowance allocated to real estate mortgages is due primarily to
growth in the outstanding balances of these loan categories.
19
NON-PERFORMING LOANS
It is management's policy to place commercial and mortgage loans on
non-accrual status when interest or principal is 90 days or more past due. Such
loans may continue on accrual status only if they are both well-secured and in
the process of collection.
The following table sets forth information concerning non-performing loans at
December 31 for each of the years indicated:
Years ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------
(dollars in thousands)
Non-accrual loans $ 1,265 $ 1,265 $ 767 $ 1,220 $ 526
Loans 90 days past due and still accruing 963 959 4,667 897 1,052
Restructured loans - - - - -
---------------------------------------------------------------
Total non-performing loans $ 2,228 $ 2,224 $ 5,434 $ 2,117 $ 1,578
---------------------------------------------------------------
Repossessed assets $ 5,724 $ 30 $ 230 $ 459 $ 320
Other assets acquired in satisfaction of debts
previously contracted 1 1 11 5 14
---------------------------------------------------------------
Total non-performing other assets $ 5,725 $ 31 $ 241 $ 464 $ 334
---------------------------------------------------------------
Total non-performing loans and non-
performing other assets $ 7,953 $ 2,255 $ 5,675 $ 2,581 $ 1,912
===============================================================
Non-performing loans to loans, before
allowance for loan losses 0.20% 0.23% 0.55% 0.24% 0.24%
===============================================================
Non-performing loans and non-performing
other assets to loans, before allowance for
loan losses 0.72% 0.23% 0.58% 0.29% 0.29%
===============================================================
The ratio of non-performing loans and non-performing other assets to
loans, before allowance to loan losses, increased from 0.23% as of December 31,
2001, to 0.72% as of December 31, 2002 due primarily to the addition of one
large commercial credit in the hotel industry. Busey Bank became mortgagee in
possession on June 28, 2002, and will remain so pending completion of
foreclosure proceedings which are expected to be completed during the second
quarter of 2003. After recording the costs to complete the renovation of the
hotel and recording a $700,000 reduction in its carrying value, the balance
associated with this property in repossessed assets is $4.3 million as of
December 31, 2002.
A loan is considered to be impaired when, based on current information
and events, it is probable the Corporation will not be able to collect all
amounts due. The accrual of interest income on impaired loans is discontinued
when there is reasonable doubt as to the borrower's ability to meet contractual
payments of interest or principal. Interest income on these loans is recognized
to the extent interest payments are received and the principal is considered
fully collectible. For the years ended December 31, 2002, 2001, and 2000,
$14,000, $9,000 and $0 were recognized from impaired loans, respectively.
The gross interest income that would have been recorded in the years
ended December 31, 2002, 2001 and 2000 if the non-accrual and restructured loans
had been current in accordance with their original terms was $211,000, $84,000,
and $41,000, respectively. The amount of interest collected on those loans that
was included in interest income was $0 for the year ended December 31, 2002,
$17,000 for the year ended December 31, 2001, and $2,000 for the year ended
December 31, 2000.
POTENTIAL PROBLEM LOANS
Potential problem loans are those loans which are not categorized as
impaired, non-accrual, past due or restructured, but where current information
indicates that the borrower may not be able to comply with present loan
repayment terms. Management assesses the potential for loss on such loans as it
would with other problem loans and has considered the effect of any potential
loss in determining its provision for possible loan losses. Potential problem
loans totaled $1,053,000 at December 31, 2002. There are no other loans
identified which management believes represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital
20
resources. There are no other credits identified about which management is aware
of any information which causes management to have serious doubts as to the
ability of such borrower(s) to comply with the loan repayment terms.
OTHER INTEREST-BEARING ASSETS
There are no other interest-bearing assets which are categorized as
impaired.
DEPOSITS
As indicated in the following table, average interest-bearing deposits
as a percentage of average total deposits decreased to 88.4% for the year ended
December 31, 2002, from 89.3% for the year ended December 31, 2001, which was a
decrease from 89.6% for the year ended December 31, 2000.
December 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------------------------------
(dollars in thousands)
Average Average Average Average Average Average
Balance % Total Rate Balance % Total Rate Balance % Total Rate
---------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits $ 129,766 11.6% -% $ 119,274 10.7% -% $ 107,882 10.4% -%
Interest bearing demand
deposits 11,477 1.0% 1.15% 34,199 3.1% 2.15% 28,976 2.8% 2.86%
Savings/Money Market 507,931 45.3% 1.19% 449,874 40.5% 2.59% 411,262 39.6% 3.37%
Time deposits 472,000 42.1% 3.90% 508,400 45.7% 5.55% 489,779 47.2% 5.63%
---------------------------------------------------------------------------------------------------
Total $ 1,121,174 100.0% 2.19% $ 1,111,747 100.0% 3.65% $ 1,037,899 100.0% 4.07%
===================================================================================================
Certificates of deposit of $100,000 and over and other time deposits of
$100,000 and over at December 31, 2002, had the following maturities (dollars in
thousands):
Under 3 months $ 48,857
3 to 6 months 17,652
6 to 12 months 12,841
Over 12 months 30,808
----------
Total $ 110,158
==========
21
SHORT-TERM BORROWINGS
The following table sets forth the distribution of short-term
borrowings and weighted average interest rates thereon at the end of each of the
last three years. Federal funds purchased and securities sold under agreements
to repurchase generally represent overnight borrowing transactions. Other
short-term borrowings consist of various demand notes and notes with maturities
of less than one year.
Federal funds purchased and
securities sold under agreements to Other short-term
repurchase borrowings
---------------------------------------------------------------
(dollars in thousands)
2002
Balance, December 31, 2002 $ 2,467 $ -
Weighted average interest rate at end of period 5.68% 0.00%
Maximum outstanding at any month end $ 26,739 $ 2,000
Average daily balance $ 7,955 $ 462
Weighted average interest rate during period(1) 4.69% 4.55%
2001
Balance, December 31, 2001 $ 9,767 $ 2,000
Weighted average interest rate at end of period 5.68% 6.73%
Maximum outstanding at any month end $ 18,126 $ 30,000
Average daily balance $ 15,692 $ 14,985
Weighted average interest rate during period(1) 6.25% 7.39%
2000
Balance, December 31, 2000 $ 18,890 $ 30,000
Weighted average interest rate at end of period 5.68% 8.29%
Maximum outstanding at any month end $ 24,064 $ 82,120
Average daily balance $ 29,504 $ 44,961
Weighted average interest rate during period(1) 5.94% 7.76%
(1)The weighted average interest rate is computed by dividing total interest for
the year by the average daily balance outstanding.
LIQUIDITY
Liquidity management is the process by which the Corporation ensures
that adequate liquid funds are available to meet the present and future cash
flow obligations arising in the daily operations of the business. These
financial obligations consist of needs for funds to meet commitments to
borrowers for extensions of credit, funding capital expenditures, withdrawals by
customers, maintaining deposit reserve requirements, servicing debt, paying
dividends to shareholders, and paying operating expenses.
The Corporation's most liquid assets are Cash and due from banks,
Interest-bearing bank deposits, and Federal funds sold. The balances of these
assets are dependent on the Corporation's operating, investing, lending, and
financing activities during any given period.
Average liquid assets are summarized in the table below:
Years Ended December 31,
2002 2001 2000
--------------------------------------------------------------
(dollars in thousands)
Cash and due from banks $ 33,633 $ 31,690 $ 28,772
Interest-bearing bank deposits 1,039 13,721 8,714
Federal funds sold 16,633 30,142 10,310
--------------------------------------------------------------
Total $ 51,305 $ 75,553 $ 47,796
==============================================================
Percent of average total assets 3.8% 5.8% 3.8%
==============================================================
22
The Corporation's primary sources of funds consist of deposits,
investment maturities and sales, loan principal repayment,, deposits and capital
funds. Additional liquidity is provided by bank lines of credit, repurchase
agreements and the ability to borrow from the Federal Reserve Bank and Federal
Home Loan Bank. The Corporation has not dealt in or used brokered deposits as a
source of liquidity. Additional liquidity is provided by bank lines of credit,
repurchase agreements and the ability to borrow from the Federal Reserve Bank
and the Federal Home Loan Banks of Chicago and Atlanta. The Corporation has an
operating line with Bank One in the amount of $10,000,000, all of which was
available as of December 31, 2002.
On December 31, 2002, the Corporation held $47,645,000 in liquid assets
as compared to $61,580,000 as of December 31, 2001. The reduction in liquid
assets is offset by growth in the increase in the balance of U.S. Treasuries and
Agency securities available for sale. These investments are highly liquid and
provide additional interest income.
An additional source of liquidity that can be managed for short-term
and long-term needs is the Corporation's ability to securitize or package loans
(primarily mortgage loans) for sale. During 2002 and 2001 the Corporation
realized increased activity in the origination and sale of loans held for sale
due to the low interest-rate environment. The Corporation sold $257,220,000 in
mortgage loans during 2002 and $260,797,000 during 2001. As of December 31,
2002, the Corporation held $60,761,000 in loans held for sale. Management
intends to sell these loans during the first quarter of 2003.
The Corporation also realized significant growth in loans held for
investment during 2002. This loan growth was funded primarily through deposit
growth and growth in the outstanding balances of advances from the Federal Home
Loan Bank of Chicago. In December, 2002, the Corporation prepaid Federal Home
Loan Bank advances totaling $10,000,000 and incurred prepayment penalties
totaling $388,000 in order to more closely match the term and cost of funds to
the loan growth.
The objective of liquidity management by the Corporation is to ensure
that funds will be available to meet demand in a timely and efficient manner.
Based upon the level of investment securities that reprice within 30 days and 90
days, management currently believes that adequate liquidity exists to meet all
projected cash flow obligations.
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 inter into commitments
to extend credit in the normal course of their business. As of December 31, 2002
and 2001, the Corporation had outstanding loan commitments including lines of
credit of $222,407,000 and $226,651,000, respectively. The balance of
commitments to extend credit represents future cash requirement and some of
these commitments may expire without being drawn upon. The Corporation
anticipates it will have sufficient funds available to meet its current loan
commitments, including loan applications received and in process prior to the
issuance of firm commitments.
As of December 31, 2002 and 2001 certificates of deposit which are
scheduled to mature within one year were $323,580,000 and $332,229,000,
respectively.
The Company has entered into certain contractual obligations and other
commitments. Such obligations generally relate to funding of operations through
deposits, debt issuances, and property and equipment leases.
23
The following table summarizes significant contractual obligations and
other commitments as of December 31, 2002:
Company
Obligated
Mandatorily
Short- and Redeemable
Certificates of Long-term Preferred
Deposit Borrowing Leases Securities Total
----------------------------------------------------------------------------------------------
(dollars in thousands)
2003 $ 323,580 $ 262 $ 761 $ - $ 324,603
2004 73,793 5,262 764 - 79,819
2005 50,383 13,262 713 - 64,358
2006 22,067 15,262 702 - 38,031
2007 44,768 12,237 642 - 57,647
Thereafter 119 25,474 868 25,000 51,461
----------------------------------------------------------------------------------------------
Total $ 514,710 $ 71,759 $ 4,450 $ 25,000 $ 615,919
==============================================================================================
Commitments to extend credit $ 222,407
==============
RATE SENSITIVE ASSETS AND LIABILITIES
Interest rate sensitivity is a measure of the volatility of the net
interest margin as a consequence of changes in market rates. The
rate-sensitivity chart shows the interval of time in which given volumes of
rate-sensitive earning assets and rate-sensitive interest bearing liabilities
would be responsive to changes in market interest rates based on their
contractual maturities or terms for repricing. It is however, only a static,
single-day depiction of the Corporation's rate sensitivity structure, which can
be adjusted in response to changes in forecasted interest rates.
The following table sets forth the static rate-sensitivity analysis of the
Corporation as of December 31, 2002:
Rate Sensitive Within
-----------------------------------------------------------------------------------
181 Days -
1-30 Days 31-90 Days 91-180 Days 1 Year Over 1 Year Total
------------------------------------------------------------------------------------
(dollars in thousands)
Interest-bearing deposits $ 110 $ - $ - $ - $ - $ 110
Federal funds sold - - - - - -
Investment securities
U.S. Treasuries and Agencies 9,002 16,076 21,399 36,766 75,081 158,324
States and political
subdivisions 2,986 992 645 3,746 43,065 51,434
Other securities 10,741 - - 104 13,226 24,071
Loans (net of unearned interest) 467,919 69,704 97,964 109,540 355,916 1,101,043
-----------------------------------------------------------------------------------
Total rate-sensitive assets $ 490,758 $ 86,772 $ 120,008 $150,156 $ 487,288 $1,334,982
-----------------------------------------------------------------------------------
Interest bearing transaction
deposits $ 42,894 $ - $ - $ - $ - $ 42,894
Savings deposits 98,274 - - - - 98,274
Money market deposits 406,622 - - - - 406,622
Time deposits 71,515 64,043 86,263 105,698 187,191 514,710
Fed funds purchased and repurchase
agreements 2,467 - - - - 2,467
Long-term debt 1,759 - 1,500 - 68,500 71,759
Company obligated mandatorily -
redeemable preferred securities - - - - 25,000 25,000
-----------------------------------------------------------------------------------
Total rate-sensitive
liabilities $ 623,531 $ 64,043 $ 87,763 $105,698 $ 280,691 $1,161,726
-----------------------------------------------------------------------------------
Rate-sensitive assets less
rate-sensitive liabilities $ (132,773) $ 22,729 $ 32,245 $ 44,458 $ 206,597 $ 173,256
-----------------------------------------------------------------------------------
Cumulative Gap $ (132,773) $ (110,044) $ (77,799) $(33,341) $ 173,256
===================================================================
Cumulative amounts as a percentage
of total rate-sensitive assets -9.95% -8.24% -5.83% -2.50% 12.98%
===================================================================
Cumulative Ratio 0.79 0.84 0.90 0.96 1.15
===================================================================
24
The forgoing table shows a negative (Liability-sensitive)
rate-sensitivity gap of $132.8 million in the 1-30 day repricing category as
there were more liabilities subject to repricing during that time period than
there were assets subject to repricing within that same time period. The volume
of assets subject to repricing exceeds the volume of liabilities subject to
repricing for all time period beyond 30 days. On a cumulative basis, however,
the gap remains liability sensitive through one year. The composition of the gap
structure as of December 31, 2002, will benefit the Corporation more if interest
rates decrease during the next year by allowing the net interest margin to grow
as liability rates would reprice more quickly than the rates on rate-sensitive
assets. After one year, a rate increase would benefit the Corporation because
the volume of rate-sensitive assets subject to repricing would exceed the volume
of rate-sensitive liabilities subject to repricing.
The funds management policies of Busey Bank and Busey Bank Florida
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 December 31, 2002, the
banks and the Corporation, on a consolidated basis, are within those guidelines.
CAPITAL RESOURCES
Other than from the issuance of common stock, the Corporation's primary
source of capital is net income retained by the Corporation. During the year
ended December 31, 2001, the Corporation earned $17,904,000 and paid dividends
of $8,126,000 to stockholders, resulting in a retention of current earnings of
$9,778,000.
The Federal Reserve Board uses capital adequacy guidelines in its
examination and regulation of bank holding companies and their subsidiary banks.
Risk-based capital ratios are established by allocating assets and certain
off-balance sheet commitments into four risk-weighted categories. These balances
are then multiplied by the factor appropriate for that risk-weighted category.
The guidelines require bank holding companies and their subsidiary banks to
maintain a total capital to total risk-weighted asset ratio of not less than
8.00%, of which at least one half must be Tier 1 capital, and a Tier 1 leverage
ratio of not less than 4.00%. As of December 31, 2002, the Corporation had a
total capital to total risk-weighted asset ratio of 13.31%, a Tier 1 capital to
risk-weighted asset ratio of 11.58% and a Tier 1 leverage ratio of 8.66%; the
Corporation's bank subsidiary, Busey Bank, had ratios of 11.13%, 9.44%, and
7.03%, respectively; the Corporation's thrift subsidiary, Busey Bank Florida,
had ratios of 25.47%, 24.34%, and 16.50%, respectively. As these ratios
indicate, the Corporation and its bank subsidiaries exceed the regulatory
capital guidelines.
REGULATORY CONSIDERATIONS
It is management's belief that there are no current recommendations by
the regulatory authorities which if implemented, would have a material effect on
the Corporation's liquidity, capital resources, or operations.
NEW ACCOUNTING PRONOUNCEMENTS
Information relating to new accounting pronouncements appears in Note 1
in the Notes to the consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are critical to the
portrayal and understanding of the Corporation's financial condition and results
of operations and require management to make assumptions that are difficult,
subjective or complex. These estimates involve judgments, estimates and
uncertainties that are susceptible to change. In the event that different
assumptions or conditions were to prevail, and depending on the severity of such
changes, the possibility of materially different financial condition or results
of operations is a reasonable likelihood.
First Busey's significant accounting policies are described in Note 1
in the Notes to the Consolidated Financial Statements. The majority of these
accounting policies do not require management to make difficult, subjective or
complex judgments or estimates or the vairability of the estimates is not
material. However, the following policies could be deemed critical.
25
ALLOWANCE FOR LOAN LOSSES
First Busey Corporation has established an allowance for loan losses
which represents the corporation's estimate of the probable losses that have
occurred as of the date of the financial statements.
Management has established an allowance for loan losses which reduces
the total loans outstanding by an estimate of uncollectible loans. Loans deemed
uncollectible are charged against and reduce the allowance. Periodically, a
provision for loan losses is charged to current expense. This provision acts to
replenish the allowance for loan losses and to maintain the allowance at a level
that management deems adequate.
There is no precise method of predicting specific loan losses or
amounts which ultimately may be charged off on segments of the loan portfolio.
The determination that a loan may become uncollectible, in whole or in part, is
a matter of judgment. Similarly, the adequacy of the allowance for loan losses
can be determined only on a judgmental basis, after full review, including (a)
consideration of economic conditions and their effect on particular industries
and specific borrowers; (b) a review of borrowers' financial data, together with
industry data, the competitive situation, the borrowers' management capabilities
and other factors; (c) a continuing evaluation of the loan portfolio, including
monitoring by lending officers and staff credit personnel of all loans which are
identified as being of less than acceptable quality; (d) an in-depth appraisal,
on a monthly basis, of all impaired (loans are considered to be impaired when
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due); and (e) an evaluation of the underlying
collateral for secured lending, including the use of independent appraisals of
real estate properties securing loans.
Periodic provisions for loan losses are determined by management based
upon the size and the quality of the loan portfolio measured against prevailing
economic conditions and historical loan loss experience and also based on
specific exposures in the portfolio. Management has instituted a formal loan
review system supported by an effective credit analysis and control process. The
Corporation will maintain the allowance for loan losses at a level sufficient to
absorb estimated uncollectible loans and, therefore, expects to make periodic
additions to the allowance for loan losses.
REVENUE RECOGNITION
Income on interest-earning assets is accrued based on the effective
yield of the underlying financial instruments. A loan is considered to be
impaired when, based on current information and events, it is probable the
Corporation will not be able to collect all amounts due. The accrual of interest
income on impaired loans is discontinued when there is reasonable doubt as to
the borrower's ability to meet contractual payments of interest or principal.
Income recognized on service charges, trust fees, commissions, and loan
gains is recognized based on contractual terms and are accrued based on
estimates, or are recognized as transactions occur or services are provided.
Income from the servicing of sold loans is recognized based on estimated asset
valuations and transactions volumes. While these estimates and assumptions may
be considered complex, First Busey has implemented controls and processes to
ensure the accuracy of these accruals.
EFFECTS OF INFLATION
The effect of inflation on a financial institution differs
significantly from the effect on an industrial company. While a financial
institution's operating expenses, particularly salary and employee benefits, are
affected by general inflation, the asset and liability structure of a financial
institution consists largely of monetary items. Monetary items, such as cash,
loans and deposits, are those assets and liabilities which are or will be
converted into a fixed number of dollars regardless of changes in prices. As a
result, changes in interest rates have a more significant impact on a financial
institution's performance than does general inflation. For additional
information regarding interest rates and changes in net interest income see
"Selected Statistical Information."
26
C. SELECTED STATISTICAL INFORMATION
The following tables contain information concerning the consolidated
financial condition and operations of the Corporation for the periods, or as of
the dates, shown. All average information is provided on a daily average basis.
The following table shows the consolidated average balance sheets,
detailing the major categories of assets and liabilities, the interest income
earned on interest-earning assets, the interest expense paid for
interest-bearing liabilities, and the related interest rates:
Years Ended December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/Ex Yield/
Balance Expense Rate Balance Expense Rate Balance pense Rate
-------------------------------------------------------------------------------------------------
(dollars in thousands)
Assets
Interest-bearing bank deposits $ 1,039 $ 12 1.15% $ 13,721 $ 513 3.74% $ 8,714 $ 228 2.62%
Federal funds sold 16,633 260 1.56% 30,142 1,179 3.91% 10,310 627 6.08%
Investment securities:
U.S. Treasuries and
Agencies 149,670 6,387 4.27% 159,969 8,726 5.45% 162,526 9,434 5.80%
Obligations of states and
political subdivisions(1) 46,577 3,140 6.74% 43,896 3,169 7.22% 40,833 3,129 7.66%
Other securities 24,201 800 3.31% 23,382 889 3.80% 19,623 995 5.07%
Loans (net of unearned
discount)(1,2) 1,015,073 66,794 6.58% 961,779 76,842 7.99% 937,239 80,146 8.55%
-------------------------------------------------------------------------------------------------
Total interest-earning
assets(1) $1,253,193 $77,393 6.18% $1,232,889 $91,318 7.41% $1,179,245 $ 94,559 8.02%
=================================================================================================
Cash and due from banks 33,633 31,690 28,772
Premises and equipment 28,375 30,283 30,399
Allowance for loan losses (14,001) (12,774) (11,077)
Other assets 40,209 30,173 32,777
---------- ---------- ----------
Total assets $1,341,409 $1,312,261 $1,260,116
========== ========== ==========
Liabilities and Stockholders'
Equity
Interest bearing transaction
deposits $ 11,477 $ 132 1.15% $ 34,199 $ 734 2.15% $ 28,976 $ 830 2.86%
Savings deposits 96,495 1,059 1.10% 90,544 2,059 2.27% 91,750 2,794 3.05%
Money market deposits 411,436 4,997 1.21% 359,330 9,614 2.68% 319,512 11,073 3.47%
Time deposits 472,000 18,410 3.90% 508,400 28,207 5.55% 489,779 27,589 5.63%
Short-term borrowings:
Federal funds purchased
and repurchase
agreements 7,955 373 4.69% 15,692 981 6.25% 29,504 1,752 5.94%
Other 462 21 4.55% 14,985 1,108 7.39% 44,961 3,491 7.76%
Long-term debt 66,762 3,252 4.87% 47,703 2,532 5.31% 53,240 2,947 5.54%
Company obligated mandatorily
redeemable preferred
securities 25,000 2,250 9.00% 13,333 1,200 9.00% - -
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $1,091,587 $30,494 2.79% $1,084,186 $46,435 4.28% $ ,057,722 $ 50,476 4.77%
=================================================================================================
3.39% 3.13% 3.25%
==== ==== =========
Demand deposits 129,766 119,274 107,882
Other liabilities 10,286 9,746 9,628
Stockholders' equity 109,770 99,055 84,884
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,341,409 $1,312,261 $1,260,116
========== ========== ==========
Interest income/earning
assets(1) $1,253,193 $77,393 6.18% $1,232,889 $91,318 7.41% $1,179,245 $ 94,559 8.02%
Interest expense/earning
assets $1,253,193 $30,494 2.44% $1,232,889 $46,435 3.77% $1,179,245 $ 50,476 4.28%
-------------------------------------------------------------------------------------------------
Net interest margin(1) 46,899 3.74% $44,883 3.64% $ 44,083 3.74%
=============== ================ =================
(1) On a tax equivalent basis, assuming a federal income tax rate of 35%
(2) Non-accrual loans have been included in average loans, net of unearned
discount
27
Changes In Net Interest Income
Years Ended December 31, 2002, 2001, and 2000
-------------------------------------------------------------------------------
Year 2002 vs. 2001 Change due to(1) Year 2001 vs. 2000 Change due to(1)
-------------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Yield/Rate Change Volume Yield/Rate Change
-------------------------------------------------------------------------------
(dollars in thousands)
Increase (decrease) in interest income:
Interest-bearing bank deposits $ (285) $ (216) $ (501) $ 163 $ 122 $ 285
Federal funds sold (393) (526) (919) 678 (126) 552
Investment securities:
U.S. Treasuries and Agencies (534) (1,805) (2,339) (147) (561) (708)
States and political subdivisions(2) 345 (374) (29) 175 (135) 40
Other securities 33 (122) (89) 346 (452) (106)
Loans(2) 4,601 (14,649) (10,048) 2,190 (5,494) (3,304)
----------------------------------------------------------------------------
Change in interest income(2) $ 3,767 $ (17,692) $(13,925) $ 3,405 $ (6,646) $(3,241)
============================================================================
Increase (decrease) in interest expense:
Interest bearing transaction deposits $ (354) $ (248) $ (602) $ 245 $ (341) $ (96)
Savings deposits 145 (1,145) (1,000) (36) (699) (735)
Money market deposits 1,669 (6,286) (4,617) 1,759 (3,218) (1,459)
Time deposits (1,903) (7,894) (9,797) 1,023 (405) 618
Federal funds purchased and repurchase
agreements (403) (205) (608) (869) 98 (771)
Other (779) (308) (1,087) (2,223) (160) (2,383)
Long-term debt 907 (187) 720 (742) 327 (415)
Company obligated mandatorily
redeemable preferred securities 1,050 - 1,050 1,200 - 1,200
----------------------------------------------------------------------------
Change in interest expense $ 332 $ (16,273) $(15,941) $ 357 $ (4,398) $(4,041)
----------------------------------------------------------------------------
Increase (decrease) in net interest
income(2) $ 3,435 $ (1,419) $ 2,016 $ 3,048 $ (2,248) $ 800
============================================================================
Percentage increase in net interest income
over prior period 4.5% 1.8%
======= =======
(1) Changes due to both rate and volume have been allocated proportionally
(2) On a tax equivalent basis, assuming a federal income tax rate of 35%
FORWARD LOOKING STATEMENTS
This presentation includes forward looking statements that are intended
to be covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements include but are not limited
to comments with respect to the objectives and strategies, financial condition,
results of operations and business of the Corporation.
These forward looking statements involve numerous assumptions, inherent
risks and uncertainties, both general and specific, and the risk that
predictions and other forward looking statements will not be achieved. The
Corporation cautions you not to place undue reliance on these forward looking
statements as a number of important factors could cause actual future results to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward looking statements.
These risks, uncertainties and other factors include the general state
of the economy, both on a local and national level, the ability of the
Corporation to successfully complete acquisitions, the continued growth in the
geographic area in which the banking subsidiaries operate, and the retention of
individuals who currently are very important in the management structure of the
Corporation.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of change in asset values due to movements in
underlying market rates and prices. Interest rate risk is the risk to earnings
and capital arising from movements in interest rates. Interest rate risk is the
most significant market risk affecting the Corporation as other types of market
risk, such as foreign currency exchange rate risk and commodity price risk, do
not arise in the normal course of the Corporation's business activities.
The Corporation's subsidiary banks, Busey Bank and Busey Bank fsb, 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 Policy established by the asset
liability committees and approved by the Corporation's Board of Directors
establishes guidelines for maintaining the ratio of cumulative rate-sensitive
assets to rate-sensitive liabilities within prescribed ranges at certain
intervals. A summary of the Corporation's gap analysis is summarized on page 24.
The 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 out
over a one-year period and net interest income is calculated under current
market rates, and then assuming permanent instantaneous shifts in the yield
curve of +/- 100 basis points, -125 basis points and + 200 basis points.
Management measure such changes assuming immediate and sustained shifts in the
Federal funds rate and the corresponding shifts in other rate indices based on
their historical changes relative to changes in the Federal funds rate. The
model assumes asset and liability balances remain constant at December 31, 2002
balances. The model uses repricing frequency on all variable-rate assets and
liabilities. The model also uses a historical decay rate on all fixed-rate core
deposit balances. Prepayment speeds on loans have been adjusted up and down to
incorporate expected prepayment in both a rising and declining rate environment.
Utilizing this measurement concept the interest rate risk of the Corporation,
expressed as a change in net interest income as a percentage of the net income
calculated in the constant base model, due to changes in interest rates at
December 31, 2002, was as follows:
Basis Point Changes
-----------------------------------------------
-125 -100 +100 +200
-----------------------------------------------
Percentage change in net interest income due to an immediate change
in interest over a one-year period (1.90%) (0.47%) 2.86% 4.83%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are presented beginning on page 37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant. Incorporated by reference is the
information set forth on pages 4-6 of the 2003 Proxy Statement.
(b) Executive Officers of the Registrant. Please refer to Part I of this
Form 10-K.
ITEM 11. EXECU