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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] 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
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(Address of principal (Zip Code)
executive offices)
(217) 365-4513
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 3, 2000, the aggregate market value of the Common Stock held by
non-affiliates was $150,997,815. The market value of the Class A Common Stock
is based on the closing price for such stock as reported on the Nasdaq National
Market on that date. Affiliates include all directors, executive officers and
beneficial holders owning 5% or more of the shares.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 3, 2000
----- ----------------------------
Common Stock, without par value 13,486,344
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 20, 2000 for First Busey
Corporation's Annual Meeting of Stockholders to be held April 25, 2000, (the
"1999 Proxy Statement") are incorporated by reference into Part III.
(This page intentionally left blank)
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FIRST BUSEY CORPORATION
Form 10-K Annual Report
Table of Contents
PART 1
Item 1 Business 4
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for Registrant's Common Equity and Related 13
Stockholder Matters
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16
Item 7A Quantitative and Qualitative Disclosures About Market Risk . 30
Item 8 Financial Statements and Supplementary Data 31
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 10 Directors and Executive Officers of the Registrant 31
Item 11 Executive Compensation 31
Item 12 Security Ownership of Certain Beneficial Owners and Management 31
Item 13 Certain Relationships and Related Transactions . 31
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
First Busey Corporation ("First Busey"), a Nevada corporation, is a bank
holding company located in Urbana, Illinois. As of December 31, 1999, First
Busey had ten wholly owned, directly and indirectly, subsidiaries: one
community bank, one savings and loan, a thrift holding company, a trust company,
a securities broker-dealer, an ATM company, an insurance company, a real estate
company, a travel agency, and a securities service company. First Busey is
engaged primarily in commercial, retail and correspondent banking and provides
trust services, insurance services, and travel services. Based on assets of
$1.25 billion as of December 31, 1999, First Busey, with deposits of $1.03
billion and stockholders' equity of $82 million, is one of the largest financial
institutions headquartered in east central Illinois. First Busey's largest
subsidiary, Busey Bank, with continuous operations since 1868, is one of the
oldest banks chartered in Illinois.
First Busey's strategic plan is to provide a full range of financial
services including commercial, retail and correspondent banking services through
its banking subsidiaries, with emphasis on commercial and retail services. The
strategic plan also emphasizes the operation of its banking centers
autonomously, allowing them to tailor their service and products to the
particular markets they serve while consolidating back-room operations. First
Busey intends to continue its expansion and growth in the three counties it
currently serves in Illinois, Champaign, McLean and Ford County, its banking
center in Indianapolis, Indiana, and its Loan Production Offices in Ft. Myers
and Naples, Florida. In addition to the Florida loan production offices, Busey
has under construction a 24,000 square foot full-service facility in Fort Myers,
Florida, which is expected to open in October, 2000, as a branch of First
Federal Savings and Loan Association of Bloomington. First Busey engages in
exploratory discussions regarding potential acquisitions from time to time;
however, First Busey does not currently have any commitments to acquire or merge
with any financial institution.
First Busey Corporation's operations are conducted primarily through its
lead bank, Busey Bank (twenty-two locations), First Federal Savings and Loan
Association (four locations), the trust company and the securities broker-dealer
subsidiary. First Busey provides its subsidiaries with both financial and
managerial support. Each subsidiary operates under the direction of its own
Board of Directors.
BUSEY BANK
Busey Bank was established on January 13, 1868 and is a state-chartered
bank. As of December 31, 1999, Busey Bank had total assets of $1.05 billion,
representing 84% of First Busey's assets, and had total revenues of $80 million,
representing 90% of First Busey's revenues. Busey Bank provides a full range of
banking services including commercial and retail banking products. The services
available to its commercial and retail customers include a broad selection of
depository and lending activities. In the commercial lending area, Busey Bank
is designated a Small Business Administration Preferred Lender authorized to
fund government guaranteed loans on an expedited basis and is also an approved
lender under the Federal National Mortgage Association Program, permitting
expedited origination of single- and multi-family mortgage loans. Busey Bank's
other commercial lending activities consist primarily of secured loans to
borrowers in many different industries. Busey Bank's retail services include
consumer lending, numerous types of deposit accounts and certain specialized
programs such as the Fortune Five-O Program for the mature market.
Management's philosophy continues to be to develop programs tailored to
specific market segments of its customer base with particular emphasis on retail
services. The Busey organization emphasizes establishing strong relationships
with its customers. Busey Bank has adopted a strategy to increase other income
by emphasizing fee-based services, including transaction accounts, full service
brokerage, mortgage origination and other loan services generating fees.
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Guidelines for Busey Bank for various collateral advance ratios are set
forth in the Loan Review Grading System under "Collateral Position." Loan
Officers are required to use the grading system in determining an acceptable
collateral position on any given credit request. Collateral coverage
percentages for various types of credit are set forth in the following table:
Collateral Type Coverage Ratio
--------------------- ---------------
Commercial Loans: Real Estate 125%
Accounts Receivable 125%
Inventory & Equipment 200%
Consumer Real Estate Loans: Real Estate 125%
Installment Loans: Cash or Equivalent 110%
Vehicle 140%
Mobile Homes 150%
Other Collateral 160%
All commercial loans must be supported by a completed and signed financial
statement, which should include a minimum of a balance sheet and income
statement. Loan Officers are encouraged to require borrowers to provide annual
statements prepared by a CPA firm. Where possible, an audit should be obtained,
however, a review or compilation is acceptable. The Credit Analysis Department
tracks delinquent financial statements and provides weekly reports to the
Commercial Loan Department. In addition, the Senior Loan Committee receives a
monthly report detailing delinquent financial statements for customers with
large loan balances. A borrower's financial position including cash flow is
monitored at least annually through an annual review process.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON
First Busey Corporation acquired First Federal Savings & Loan Assocation of
Bloomington on October 29, 1999, when it acquired the outstanding shares of
First Federal's parent Eagle BancGroup, Inc. This transaction was accounted for
as a purchase and resulted in intangible assets totaling $8,728,000. Of this,
$2,114,000 was allocated to core deposit intangible which will be amortized over
7 years at the rate of approximately $302,000 per year. The remaining
$6,614,000 was recorded as goodwill and will be amortized over 20 years at the
rate of approximately $331,000 per year. First Federal was established in 1919
and is a federally chartered capital stock savings association regulated by the
Office of Thrift Supervision (OTS). As of December 31, 1999, First Federal had
total assets of $183 million, representing 15% of First Busey's assets. First
Federal offers a wide range of retail deposit products and invests those
deposits in one-to-four family residential mortgage loans, commercial real
estate loans, commercial business loans and automobile and other consumer loans.
First Federal has one wholly-owned service corporation, FFS Investment Services
(FFS) which sells investment products, including annuities, providing customers
with alternatives to the traditional deposit products offered by First Federal.
FIRST BUSEY TRUST AND INVESTMENT COMPANY
First Busey Trust and Investment Company began operation on January 1, 1987
as a successor to the combined trust departments of Busey Bank and Champaign
County Bank & Trust Co., which began trust operations in 1967 and 1947,
respectively. First Busey Trust operates as the asset management subsidiary of
the organization and is exclusively dedicated to providing a full range of trust
and investment management services. In addition to trust and investment
management services, First Busey Trust offers such ancillary services as farm
management, real estate brokerage, estate and retirement planning, tax
preparation, custody services, and philanthropic advisory services.
First Busey plans to continue to expand its trust activities by increasing
assets under control, currently approximately $970 million, and by developing
new financial services. For the year ending December 31, 1999, First Busey
Trust & Investment Company generated net income of $1.3 million representing 10%
of First Busey's earnings.
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OTHER SUBSIDIARIES
First Busey Resources, Inc., owns and manages Busey Plaza, a 90,000 square
foot building which is fully leased to unaffiliated tenants.
First Busey Corporation formed Busey Business Bank on January 12, 1998.
This is a de novo bank established in Indianapolis, Indiana. Upon the
establishment of this chartered bank, Busey Bank closed its Loan Production
Office in Indianapolis. In October of 1998, Busey Business Bank was merged into
Busey Bank and continued to operate as a full-service banking center.
Busey Bank established a full service securities broker-dealer subsidiary,
First Busey Securities, Inc., on April 1, 1991. Through the offering of full
service brokerage, along with various insurance and annuity products, new
sources of fee income are available to Busey Bank.
In October of 1997, Busey Bank established an insurance subsidiary, Busey
Insurance Services, Inc., to further enhance the services available to its
customers. This subsidiary serves primarily the McLean County market. During
1997, Busey Bank established a subsidiary, BAT, Inc, which owns and operates
automated teller machines. In January of 1998, Busey Bank acquired Busey Carter
Travel, a travel agency serving primarily Champaign County. This acquisition
was also completed to enhance the services available to the customers of Busey
Bank. In January 1999, this subsidiary changed its name to Busey Travel, Inc.
COMPETITION
First Busey faces intense competition in all phases of its banking business
from other banks and financial institutions. First Busey's subsidiary banks
compete for deposits with a large number of depository institutions including
commercial banks, savings and loan associations, credit unions, money market
funds and other financial institutions and financial intermediaries serving
Champaign County, McLean County, Illinois, and Hamilton County, Indiana.
Principal competitive factors with respect to deposits include interest rates
paid on deposits, customer service, convenience and location.
First Busey's subsidiary banks compete for loans with other banks
headquartered in Illinois and Indiana, with loan production offices of large
money center banks headquartered in other states, as well as with savings and
loan associations, credit unions, finance companies, mortgage bankers, leasing
companies and other institutions. Competitive factors with respect to loans
include interest rates charged, customer service and responsiveness in tailoring
financial products to the needs of customers. First Busey's subsidiary banks
compete for loans primarily by designing their products for and directing their
marketing efforts to businesses in the markets they serve which are locally
owned, well-capitalized and well-managed.
Many of the entities that compete with First Busey's subsidiary banks are
substantially larger in size than First Busey and First Busey's subsidiary
banks, and many non-bank financial intermediaries are not subject to the
regulatory restrictions applicable to First Busey's bank subsidiaries. First
Busey and its subsidiary banks have experienced an increase in the level of
competition as well as the number of competitors in recent years. See
"Supervision and Regulation."
EMPLOYEES
First Busey and its subsidiaries employed 494 employees (full-time
equivalent) on December 31, 1999. Management considers its relationship with
its employees to be good.
6
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of First Busey and its subsidiary banks can be
materially affected not only by management decisions and general economic
conditions, but also by applicable statutes and regulations and other regulatory
pronouncements and policies promulgated by regulatory agencies with jurisdiction
over First Busey and its subsidiary banks, such as the Federal Reserve Board
("FRB"), Federal Deposit Insurance Corporation ("FDIC") and the State of
Illinois Office of Banks and Real Estate, and the effect of such statutes,
regulations and other pronouncements and policies can be significant, cannot be
predicted with a high degree of certainty and can change over time.
Furthermore, such statutes, regulations and other pronouncements and policies
are intended to protect the depositors and the FDIC's deposit insurance funds,
not to protect stockholders.
Bank holding companies and banks are subject to enforcement actions by
their regulators for regulatory violations. In addition to compliance with
statutory and regulatory limitations and requirements concerning financial and
operating matters, regulated financial institutions such as First Busey and its
subsidiary banks must file periodic and other reports and information with their
regulators and are subject to examination by each of their regulators.
The statutory requirements applicable to and regulatory supervision of bank
holding companies and banks have increased significantly and have undergone
substantial change in recent years. To a great extent, these changes are
embodied in the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), enacted in August 1989, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, and the
regulations promulgated under FIRREA and FDICIA.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof. This discussion is not intended to constitute and does not purport to
be a complete statement of all legal restrictions and requirements applicable to
First Busey and its subsidiary bank and all such descriptions are qualified in
their entirety by reference to applicable statutes, regulations and other
regulatory pronouncements.
INTERSTATE BANKING AND BRANCHING LEGISLATION
On September 29, 1994, the Riegle-Neal Interstate Banking and Efficiency
Act of 1994 (the "Interstate Banking Act") was enacted. Under the Interstate
Banking Act, adequately capitalized and adequately managed bank holding
companies will be allowed to acquire banks across state lines subject to certain
limitations. In addition, under the Interstate Banking Act, since June 1, 1997,
banks have been permitted, under some circumstances, to merge with one another
across state lines and thereby create a main bank with branches in separate
states. After establishing branches in a state through an interstate merger
transaction, a bank may establish and acquire additional branches at any
location in the state where any bank involved in the interstate merger could
have established or acquired branches under applicable federal and state law.
Under the Interstate Banking Act, states could adopt legislation permitting
interstate mergers before June 1, 1997. Alternatively, states could adopt
legislation before June 1, 1997, subject to certain conditions, opting out of
interstate branching. Illinois adopted legislation, effective September 29,
1995, permitting interstate mergers beginning on June 1, 1997. It is
anticipated that this interstate merger and branching ability will increase
competition and further consolidate the financial institutions industry.
REGULATION OF BANK HOLDING COMPANIES AND THEIR NON-BANK SUBSIDIARIES
First Busey is a registered bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended ("BHCA"). As such, First Busey is
subject to regulation, supervision and examination by the FRB. First Busey is
also subject to the limitations and requirements of the Illinois Bank Holding
Company Act ("IBHCA"). These limitations and requirements, however, are no more
restrictive in most instances than those imposed by the BHCA and the FRB. The
7
business and affairs of First Busey are regulated in a variety of ways,
including limitations on acquiring control of other banks and bank holding
companies, limitations on activities and investments, limitations on interstate
acquisitions, regulatory capital requirements and limitations on payment of
dividends. In addition, it is the FRB's policy that a bank holding company is
expected to act as a source of financial strength to banks that it owns or
controls and, as a result, the FRB could require First Busey to commit resources
to support its subsidiary bank in circumstances in which First Busey might not
do so absent the FRB's policy.
First Busey Trust & Investment Co. is subject to regulation and examination
by the State of Illinois Office of Banks and Real Estate and the FRB. The
federal and state laws generally applicable to a trust company subsidiary of a
bank holding company regulate, among other things, the scope of its business,
investments and other activities. Busey Insurance Services, Inc. is regulated
by the Illinois Department of Insurance. First Busey Securities, Inc. is
regulated by the National Association of Securities Dealers ("NASD").
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the Act), which allows bank holding companies to engage
in a wider range of non-banking activities. A bank holding company which elects
to become a financial holding company under this act would be allowed to engage
in any activity the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines by regulation or order to be financial in nature,
incidental to any such financial activity or complementary to any such financial
activity and does not present a substantial risk to the safety or soundness of
depository institutions or the financial system in general. The Act does not
allow 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.
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES
The BHCA generally prohibits a bank holding company from (1) acquiring,
directly or indirectly, more than 5% of the outstanding shares of any class of
voting securities of a bank or bank holding company, (2) acquiring control of a
bank or another bank holding company, (3) acquiring all or substantially all the
assets of a bank, or (4) merging or consolidating with another bank holding
company, without first obtaining FRB approval. In considering an application
with respect to any such transaction, the FRB is required to consider a variety
of factors, including the potential anti-competitive effects of the transaction,
the financial condition and future prospects of the combining and resulting
institutions, the managerial resources of the resulting institution, the
convenience and needs of the communities the combined organization would serve,
the record of performance of each combining organization under the Community
Reinvestment Act and the Equal Credit Opportunity Act, and the prospective
availability to the FRB of information appropriate to determine ongoing
regulatory compliance with applicable banking laws.
In addition, both the federal Change in Bank Control Act and the Illinois
Banking Act ("IBA") impose limitations on the ability of one or more individuals
or other entities to acquire control of First Busey or its subsidiary banks.
The BHCA generally imposes certain limitations on extensions of credit
and other transactions by and between banks that are members of the Federal
Reserve System and other banks and non-bank companies in the same holding
company. Under the BHCA and the FRB's regulations, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The BHCA prohibits a bank holding company from acquiring control of a bank
whose principal office is located outside of the state in which its principal
place of business is located unless specifically authorized by applicable state
law. The IBHCA permits Illinois bank holding companies to acquire control of
banks in any state and permits bank holding companies whose principal place of
8
business is in another state to acquire control of Illinois banks or bank
holding companies if that state affords reciprocal rights to Illinois bank
holding companies and certain other requirements are met.
The restrictions described above represent limitations on expansion by
First Busey and its subsidiary banks, the acquisition of control of First Busey
by another company and the disposition by First Busey of all or a portion of the
stock of its subsidiary banks or by its subsidiary banks of all or a substantial
portion of its assets.
PERMITTED NON-BANKING ACTIVITIES
The BHCA generally prohibits a bank holding company from engaging in
activities or acquiring or controlling, directly or indirectly, the voting
securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or another activity
that the FRB has determined, by regulation or otherwise, to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Subject to certain exceptions, before making any such acquisition or
engaging in any such activity, a bank holding company must obtain the prior
approval of the FRB as provided in applicable regulations.
In evaluating such applications, the FRB will consider, among other
relevant factors, whether permitting the bank holding company to engage in the
activity in question can reasonably be expected to produce benefits to the
public (such as increased convenience, competition or efficiency) that outweigh
any possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or safety and soundness
concerns). Those activities that the FRB has determined by regulation to be
closely related to banking include making, acquiring and servicing loans or
other extensions of credit by consumer finance companies.
Notwithstanding applicable restrictions on acquisition or control of banks,
bank assets, bank holding companies and companies engaged in permitted
non-banking activities, a bank holding company may acquire, without the prior
approval of the FRB, 5% or less of the outstanding shares of any class of voting
securities of a company assuming the investment does not otherwise result in
control of such company. The BHCA prohibits bank holding companies, with
certain exceptions, from acquiring direct or indirect ownership of more than
five percent of the voting securities of any company that is not a bank or does
not engage in any of the activities described in the preceding paragraph.
ALLOWANCE FOR LOAN LOSS
First Busey Corporation maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance is based on management's
estimated range of those losses. Actual loan losses may vary significantly from
this estimate. The methodology and assumptions used in calculating the
allowance are continually reviewed as to their appropriateness given recent loss
experience and other factors that influence the estimation process.
First Busey Corporation's loan loss allowance is categorized into six
groups of loans: real estate mortgages, personal loans, commercial loans,
sensitive assets, dealer paper, and credit card loans. Balances for each group
of loans are multiplied by individual risk factors to determine the minimum
reserve allocation for each category. The risk factors are based on historical
losses, credit quality of the portfolio, and current economic conditions and are
updated quarterly. The total of the calculated minimum reserve allocations is
compared to the reserve balance at the end of each quarter. The reserve balance
is then adjusted to meet the calculated minimum reserve. If the reserve balance
is greater than the calculated minimum reserve, no addition to the loan loss
provision is made during the period.
The Corporation evaluates sensitive assets individually; sensitive assets
are defined as nonaccrual loans, loans past due 90 days and still accruing,
loans on the Bank's watch loan report, and other loans identified as having more
than reasonable potential for loss. The remaining loan categories listed above
are evaluated as groups.
In determining the risk factors used to calculate the minimum reserve
allocation for each loan category, the Corporation considers guidelines issued
by federal and state regulatory agencies, historical loss experience for each
9
category, current economic conditions, the level of nonaccrual loans, and
current delinquency reports for each loan class.
CAPITAL REQUIREMENTS
Regulatory capital requirements applicable to all regulated financial
institutions, including bank holding companies and banks, have increased
significantly in recent years and further increases are possible in future
periods. The FRB has adopted risk-based capital standards for bank holding
companies. The articulated objectives of Congress and the FRB in establishing a
risk-based method of measuring capital adequacy are (i) to make regulatory
capital requirements applicable to bank holding companies more sensitive to
differences in risk profiles among bank holding companies, (ii) to factor
off-balance sheet liabilities into the assessment of capital adequacy, (iii) to
reduce disincentives for bank holding companies to hold liquid, low risk assets
and (iv) to achieve greater consistency in the evaluation of capital adequacy of
major banking organizations throughout the world by conforming to the framework
developed jointly by supervisory authorities from countries that are parties to
the so-called "Basle Accord" adopted by such supervisory authorities in July
1988.
The FRB requires bank holding companies to maintain a minimum ratio of
risk-weighted capital to total risk-adjusted assets. Banking organizations,
however, generally are expected to operate well above the minimum risk-based
ratios. Risk-adjusted assets include a "credit equivalent amount" of
off-balance sheet items, determined in accordance with conversion formulae set
forth in the FRB's regulations. Each asset and off-balance sheet item, after
certain adjustments, is assigned to one of four risk-weighting categories, 0%,
20%, 50% or 100%, and the risk-adjusted values are then added together to
determine risk-weighted assets.
A bank holding company must meet two risk-based capital standards, a "core"
or "Tier 1" capital requirement and a total capital requirement. The current
regulations require that a bank holding company maintain Tier 1 capital equal to
4% of risk-adjusted assets and total capital equal to 8% of risk-adjusted
assets. Tier 1 capital must represent at least 50% of total capital and may
consist of those items defined in applicable regulations as core capital
elements. Core capital elements include common stockholders' equity; qualifying
noncumulative, nonredeemable perpetual preferred stock; qualifying (i.e., up to
25% of total Tier 1 capital) cumulative, nonredeemable perpetual preferred
stock; and minority interests in the equity accounts of consolidated
subsidiaries. Core capital excludes goodwill and other intangible assets
required to be deducted in accordance with applicable regulations.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists of
allowances for loan and lease losses; perpetual preferred stock (to the extent
not included in Tier 1 capital); hybrid capital instruments; perpetual debt;
mandatory convertible debt securities; term subordinated debt; and intermediate
term preferred stock, in each case subject to applicable regulatory limitations.
The maximum amount of Tier 2 capital that may be included in an organization's
qualifying total capital cannot exceed 100% of Tier 1 capital. In
determining total capital, a bank holding company must deduct from the sum
of Tier 1 and Tier 2 capital its investments in unconsolidated
subsidiaries; reciprocal holdings of certain securities of banking
organizations; and other deductions required by regulation or determined on a
case-by-case basis by the appropriate supervisory authority.
Another capital measure, the Tier 1 leverage ratio, is defined as Tier 1
capital divided by average total assets (net of allowance for losses and
goodwill). The minimum leverage ratio is 3% for banking organizations that do
not anticipate significant growth and that have well-diversified risk (including
no undue interest rate risk), excellent asset quality, high liquidity and good
earnings. Other banking organizations are expected to have ratios of at least
4% to 5%, depending upon their particular condition and growth plans. Higher
capital ratios could be required if warranted by the particular circumstances or
risk profile of a given banking organization. The FRB has not advised First
Busey of any specific minimum Tier 1 leverage ratio applicable to it.
As of December 31, 1999, First Busey's Tier 1 and total risk-based
capital ratios were 7.81% and 9.40%, respectively, and its Tier 1 leverage ratio
was 5.62%.
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The failure of a bank holding company to meet its risk-weighted
capital ratios may result in supervisory action, as well as inability to obtain
approval of any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend
upon the level of noncompliance. Under the IBHCA, no bank holding company may
acquire control of a bank if, at the time it applies for approval or at the time
the transaction is consummated, its ratio of total capital to total assets, as
determined in accordance with then applicable FRB regulations, is or will be
less than 7%.
Risk-based capital ratios focus principally on broad categories of credit
risk and do not incorporate factors that can affect the Company's financial
condition, such as overall interest rate risk exposure, liquidity, funding and
market risks, the quality and level of earnings, investment or loan portfolio
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks. For this reason, the overall financial health of
First Busey and its subsidiary banks and the assessment of First Busey and its
subsidiary banks by various regulatory agencies may differ from conclusions that
might be drawn solely from the level of First Busey or its subsidiary banks'
risk-based capital ratios.
During 1994, the federal banking regulators announced a joint decision not
to modify risk-based capital and leverage requirements for regulatory capital to
reflect the impact of unrealized gains and losses for securities classified as
"available for sale." This decision was made in response to the Financial
Accounting Standards Board's issuance of Statement No. 115 "Accounting for
Certain Investments in Debt and Equity Securities."
Regulation of Banks
Busey Bank is a banking corporation organized under the IBA. As such,
it is subject to regulation, supervision and examination by the State of
Illinois Office of Banks and Real Estate. The deposit accounts of the bank
subsidiary are insured up to applicable limits by the FDIC's Bank Insurance Fund
(the "BIF"). Thus, Busey Bank is also subject to regulation, supervision and
examination by the FDIC. In certain instances, the statutes administered by and
regulations promulgated by certain of these agencies are more stringent than
those of other agencies with jurisdiction. In these instances, Busey Bank must
comply with the more stringent restrictions, prohibitions or requirements.
First Federal is a federally chartered capital stock savings association
regulated by the Office of Thrift Supervision (OTS). Its deposits are insured
up to applicable limits by the FDIC's Savings Association Insurance Fund (the
"SAIF"). This regulatory framework sets parameters for First Federal's
activities and operations and grants the OTS extensive discretion with regard to
its supervisory and enforcement powers and examination policies. First Federal
files periodic reports with the OTS concerning its activities and financial
condition, must obtain OTS approval prior to entering into certain transactions
or initiating new activities, and is subject to periodic examination by the OTS
to evaluate First Federal's compliance with various regulatory requirements.
The business and affairs of Busey Bank and First Federal Savings and
Loan Association of Bloomington are regulated in a variety of ways. Regulations
apply to, among other things, insurance of deposit accounts, capital ratios,
payment of dividends, liquidity requirements, the nature and amount of the
investments that the bank subsidiary may make, transactions with affiliates,
community and consumer lending laws, internal policies and controls, reporting
by and examination of the bank subsidiaries and changes in control of the bank
subsidiaries.
11
Dividends
The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies. In the policy statement, the FRB expressed its view
that a bank holding company experiencing weak earnings should not pay cash
dividends which exceed its net income or which could only be funded in
ways that would weaken its financial health, such as by borrowing. The FRB
also may impose limitations on the payment of dividends as a condition to its
approval of certain applications, including applications for approval of mergers
and acquisitions. First Busey uses funds derived primarily from the payment of
dividends by its largest banking subsidiary for, among other purposes, the
payment of dividends to First Busey's stockholders. Under provisions of the
IBA, dividends may not be declared by banking subsidiaries except out of the
bank's net profit (as defined), and unless the bank has transferred to surplus
at least one-tenth of its net profits since the date of the declaration of the
last preceding dividend, until the amount of its surplus is at least equal to
its capital. Presently, the surplus of Busey Bank exceeds its capital.
All dividends paid by First Busey's banking subsidiaries are
restricted by capital adequacy requirements imposed by federal regulators
regarding the maintenance of the risk-weighted asset ratios and the leverage
ratio (as defined by regulatory agencies). At December 31, 1999, Busey Bank
had $27,641,000 and First Federal had $384,000 available for the payment of
dividends to First Busey. Sound banking practices require the maintenance of
adequate levels of capital. State and federal regulatory authorities have
adopted standards for the maintenance of capital by banks and savings
associations and adherence to such standards further limits the ability of banks
to pay dividends.
First Busey Trust & Investment Co., as an Illinois corporation, is
permitted to make distributions to its stockholder as authorized by its Board of
Directors, except that as long as it continues in a fiduciary business, it may
not withdraw for purposes of payment of dividends or otherwise any portion of
its capital account except with the approval of the State of Illinois Office of
Banks and Real Estate.
MONETARY POLICY AND ECONOMIC CONDITION
The earnings of commercial banks and bank holding companies are affected
not only by general economic conditions but also by the policies of various
governmental regulatory authorities. In particular, the FRB influences
conditions in the money and capital markets, which affect interest rates and the
growth in bank credit and deposits. FRB monetary policies have had a
significant effect on the operating results of commercial banks in the past and
this is expected to continue in the future. The general effect, if any, of such
policies upon the future business and earnings of First Busey and its subsidiary
banks cannot be predicted.
ITEM 2. PROPERTIES
As of March 1, 1999, First Busey and its subsidiaries conduct
business in twenty-five locations. First Busey Corporation and Busey Bank have
their headquarters at the Busey Bank Building, a 40,000 square foot building
owned by Busey Bank. In addition to the Busey Bank Building, First Busey and/or
its subsidiaries own the land and building for fifteen locations, own the
building and lease the land for two locations and lease eight locations. The
Bloomington facility, the Busey Plaza Building, the Indianapolis location, the
Fort Myers location, and the Naples location are the only facilities not fully
occupied by First Busey or its subsidiaries. The Busey Plaza Building, a
five-story 90,000 square foot office building, is leased to unaffiliated
tenants.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to the business, to which First Busey or its subsidiaries
are a part of or which any of their property is the subject.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Office (year first elected as an officer) Age
- -------------------- ------------------------------------------------ ---
Douglas C. Mills Chairman of the Board, President and Chief 59
Executive Officer of First Busey (1971)
Edwin A. Scharlau II Chairman of the Board of First Busey Trust & 55
Investment Co. and First Busey Securities, Inc.
(1967)
P. David Kuhl President and Chief Executive 50
Officer of Busey Bank (1979)
Each executive officer also serves on First Busey's Board of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective October 1, 1998, First Busey Class A common stock began
trading on the Nasdaq national market under the symbol BUSE. Prior to that the
stock was traded and quoted in the National Quotation Bureau's "Pink Sheets"
(1988-1997) and on the OTC Bulletin Board (1997-1998). Although a limited
trading market for shares of First Busey Class A Common Stock has developed
recently, there can be no assurance that it will continue.
13
The following table presents for the periods indicated the high and low
closing price for First Busey Class A Common Stock as provided by the
Corporation's market maker Stephens, Inc. and reported on the OTC Bulletin
Board or the Nasdaq National Market, as the case may be.
1999 1998
---------------- ----------------
Market Prices of Common Stock High Low High Low
- ----------------------------- ------- ------- ------- -------
First Quarter $19.500 $18.000 $15.750 $13.750
Second Quarter $26.750 $18.500 $16.750 $15.750
Third Quarter $26.500 $19.500 $20.500 $16.688
Fourth Quarter $24.375 $21.000 $19.250 $18.000
During 1999 and 1998, First Busey, declared cash dividends per share of common
stock as follows:
1999 COMMON STOCK
---- ------------
January $ .1100
April $ .1100
July $ .1100
October $ .1100
1998
----
January $ .0900
April $ .1000
July $ .1000
October $ .1000
All issued and outstanding shares of Class B Common Stock were converted to
Class A Common Stock on December 31, 1997.
A two-for-one stock split on Common Stock occurred on August 3, 1998. A
three-for-two stock split on both Class A and Class B Common Stock occurred on
May 7, 1996.
For a discussion of restrictions on dividends, please see the discussion of
dividend restrictions under Item 1, Business, Dividends on page 12.
As of March 3, 2000 there were approximately 970 holders of First Busey
Common Stock.
14
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, 1999, have been derived from First Busey's annual
consolidated financial statements audited by McGladrey & Pullen, LLP,
independent certified public accountants, whose report on the financial position
as of December 31, 1999 and December 31, 1998, and the results of operations for
each of the three years in the period ended December 31, 1999, 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.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
BALANCE SHEET ITEMS
- -------------------
Securities $ 225,046 $217,991 $215,514 $226,350 $284,517
Loans, net of unearned interest 886,684 662,281 602,937 569,500 481,772
Allowance for loan losses 10,403 7,101 6,860 6,131 5,473
Total assets 1,247,123 951,531 915,540 864,918 844,666
Total deposits 1,027,981 826,704 811,453 766,927 744,897
Long-term debt 55,849 25,000 10,000 5,000 5,000
Stockholders' equity 82,284 87,103 81,279 73,417 67,778
RESULTS OF OPERATIONS
- ---------------------
Interest income $ 72,311 $ 67,048 $ 63,831 $ 61,197 $ 54,494
Interest expense 34,920 32,975 31,119 30,033 26,515
---------- -------- -------- -------- --------
Net interest income 37,391 34,073 32,712 31,164 27,979
Provision for loan losses 2,570 700 1,075 1,100 395
Net income $ 12,548 11,398 $ 10,371 $ 9,306 $ 8,775
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
PER SHARE DATA(1)
- -----------------
Diluted earnings $ .90 $ .81 $ .74 $ .67 $ .63
Cash dividends (Class A) .44 .39 .35 .33 .29
Book value 6.08 6.36 5.92 5.36 4.97
Closing price $22.625 18.25 13.75 11.125 9.00
OTHER INFORMATION
- -----------------
Return on average assets 1.22% 1.22% 1.18% 1.08% 1.15%
Return on average equity 14.68% 14.02% 13.42% 13.40% 13.86%
Net interest margin(2) 4.03% 4.10% 4.20% 4.13% 4.20%
Stockholders' equity to assets 6.60% 9.15% 8.88% 8.49% 8.02%
(1) Per share amounts have been restated to give retroactive effect to the two-for-one stock split
which occurred August 3, 1998, and the three-for-two stock split which occurred May 7, 1996.
(2) Calculated as a percent of average earning assets.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the financial
condition and results of operations of First Busey Corporation and Subsidiaries
(the "Corporation") for the years ended December 31, 1999, 1998 and 1997. It
should be read in conjunction with "Business," "Selected Financial Data," the
consolidated financial statements and the related notes to the consolidated
financial statements and other data included in this Annual Report. All per
share amounts have been restated to give retroactive effect to the two-for-one
stock split which occurred August 3, 1998.
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 a travel agency. All
of the banks acquired during those years were accounted for using the purchase
method of accounting, except for Bank of Urbana which was accounted for using
the pooling of interests method. All subsidiary banks owned by the Corporation
as of November 1991 were merged with Busey Bank. Under the purchase method of
accounting, the earnings of the acquired subsidiaries are included in the
Corporation's earnings only for the periods subsequent to acquisition. The
following table illustrates the amounts of net income contributed by each
subsidiary (on a pre-consolidation basis) since January 1, 1997, less purchase
accounting adjustments (net income for Busey Bank in following table excludes
income from Bank subsidiaries and includes deduction of $554,000 for
amortization expense recorded on parent company statements).
Subsidiary Acquired 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(dollars in thousands)
Busey Bank(1) 3/20/80 11,256 83.5% $10,630 86.5% $ 9,645 88.3%
First Federal Savings and Loan
Association of Bloomington(2) 10/29/99 392 2.9% -- -- -- --
First Busey Trust & Investment Co.(3) -- 1,304 9.6% 1,175 9.6% 987 9.0%
First Busey Securities, Inc.(4) -- 352 2.6% 301 2.4% 234 2.1%
First Busey Resources, Inc.(5) -- 159 1.2% 205 1.7% 102 0.9%
Busey Insurance Services, Inc.(6) -- 6 0.0% (14) -0.1% (26) -0.2%
BAT, Inc.(7) -- 14 0.1% (3) -0.0% (12) -0.1%
Busey Travel, Inc.(8) 1/1/98 9 0.1% (10) -0.1% -- --
FFS Investments(9) 10/29/99 (7) 0.0% -- -- -- --
-------------------------------------------------------------
Total 13,485 100.0% $12,284 100.0% $10,930 100.0%
=============================================================
(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.
(4) Formed as a subsidiary of Busey Bank as of April 1, 1991.
(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's balance sheet were transferred to
subsidiary as of that date.
(6) Formed as a subsidiary of Busey Bank as of October 1, 1997.
(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.
(9) Acquired as a subsidiary of First Federal Savings and Loan Association of Bloomington as of
October 29, 1999.
Busey Bank, First Federal Savings and Loan Association of Bloomington and
First Busey Trust & Investment Co. are the three subsidiaries which contributed
more than 10% of the Corporation's consolidated net income. Busey Bank provides
a full range of banking services to individual and corporate customers through
its branch network in central Illinois, through its branch in Indianapolis,
16
Indiana, and through its loan production office in Fort Myers, Florida. First
Federal Savings and Loan Association of Bloomington provides a full range of
banking services to individual and corporate customers in Bloomington, Illinois
and the surrounding communities. First Busey Trust & Investment provides trust
and asset management services to individual and corporate customers throughout
central Illinois.
RESULTS OF OPERATIONS-THREE YEARS ENDED DECEMBER 31, 1999
SUMMARY
The Corporation reported net income of $12,548,000 in 1999, up 10.1% from
$11,398,000 in 1998, which had increased 9.9% from $10,371,000 in 1997. Diluted
earnings per share in 1999 increased 11.1% to $.90 from $.81 in 1998, which
was a 9.5% increase from $.74 in 1997. The main factors contributing to the
increase in net income in 1998 were increases in net interest income, trust
fees, and other service charges and fees. Operating earnings, which exclude
security gains and the gain on sales of loans and the related tax expense, were
$11,384,000 or $.82 per share for 1999; $9,948,000, or $.71 per share for 1998;
and $9,748,000, or $.70 per share for 1997.
Security gains after the related tax expense were $624,000 or 5.0% of net
income in 1999; $808,000 or 7.1% of net income in 1998; and $338,000 or 3.3% of
net income in 1997. First Busey Corporation owns a position in a qualified
equity security with substantial appreciated value. During 1998 First Busey's
Board authorized an orderly liquidation of this asset over a five-year period.
The Corporation's return on average assets was 1.22%, 1.22% and 1.18% for
1999, 1998, and 1997, respectively, and return on average equity was 14.68%,
14.02%, and 13.42% for 1999, 1998, and 1997, respectively. On an operating
earnings basis, return on average assets was 1.10%, 1.07%, and 1.11% for 1999,
1998, and 1997, respectively, and return on average equity was 13.32%, 12.55%
and 12.98% for 1999, 1998, and 1997, respectively.
NET INTEREST INCOME
Net interest income on a tax equivalent basis for 1999 increased 9.7% to
$38,668,000 from $35,262,000 for 1998, which reflected a 3.5% increase from
$34,075,000 in 1997. Net interest income increased in 1999 and 1998 due to
continued growth in average loan balances outstanding.
Average interest-earning assets increased to $959,860,000 in 1999 from
$860,350,000 and $811,010,000 in 1998 and 1997, respectively. The growth in
interest-earning assets during 1998 was funded by growth in core deposits and
debt. Internally generated growth accounted for the increase in average
interest-earning assets in 1997.
The net interest margin was 4.03% in 1999, 4.10% in 1998, and 4.20% in
1997. Interest rate trends had a significant impact on the Corporation's yields
and costs during the period from 1997 through 1999. The decrease in the net
interest margin for 1999 was due to the 26 basis point decline in the average
rate earned on interest-earning assets which was only partially offset by the 22
basis point decrease in the average rate paid on interest-bearing liabilities.
The decline in the average rate earned on interest-earning assets was partially
offset by the $99,510,000 increase in total interest-earning assets.
In 1998, the average yield on interest earning assets declined 11basis
points while the average cost of interest-bearing liabilities increased by 5
basis points. The decline in the average rate earned on interest-earning assets
was offset by the $49,340,000 increase in total interest earning assets. This
resulted in the net interest margin declining to 4.10% for 1998 from 4.20% in
1997. [See "Selected Statistical Information, Consolidated Average Balance
Sheets and Interest Rates."]
PROVISION FOR LOAN LOSSES
The provision for loan losses, which is a current charge against income,
represents an amount which management believes is sufficient to maintain an
adequate allowance for future loan losses. In assessing the adequacy of the
allowance for loan losses, management considers the size and quality of the loan
portfolio measured against prevailing economic conditions, regulatory
17
guidelines, and historical loan loss experience, credit quality of the
portfolio, prevailing economic conditions, and regulatory guidelines. 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 to $2,570,000 in 1999 from $700,000
in 1998 and $1,075,000 in 1997. The increase in 1999 is due primarily to the
growth in outstanding loan balances, which increased 34% over the balance as of
December 31, 1998. During this same period nonaccrual loans increased from
$526,000 to $1,200,000, primarily in commercial and real estate loans.
Depressed prices for agricultural products combined with the increase in
interest rates over the past year have also resulted in higher risk within the
agricultural loan portfolio. The ratio of the allowance for loan losses to
non-performing loans as of December 31, 1999, is consistent with that of prior
periods.
Sensitive assets include nonaccrual loans, loans 90 days past and still
accruing, 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.
The provision for 1997 was large relative to net charge-offs to restore the
ratio of the allowance for loan losses to non-performing loans. Net charge-offs
decreased to $369,000 in 1999 from $459,000 in 1998 which had increased from
$346,000 in 1997.
The risk factors for all loan categories increased slightly from those used
in prior periods with the exception of the dealer paper portfolio factor. The
risk factor for sensitive assets increased from 2.00% in 1998 to 2.50% in 1999
due to an increase in problem loans. The risk factors for mortgage loans and
commercial loans increased 0.10% and 0.05% respectively due to the increase in
nonaccrual loans for those categories. The risk factor for personal loans
increased from 2.00% in 1998 to 2.35% in 1999 due to the uncertainties regarding
underwriting standards employed in originating the loans acquired in the First
Federal transaction.
OTHER INCOME
Other income increased 19.7% in 1999 to $16,192,000 from $13,530,000 in
1998, which reflected an 30.4% increase from $10,379,000 in 1997. The increase
in 1999 is due primarily to increases in service charges on deposit accounts,
trust fee income, commissions and brokers' fees, other service charges and fees,
and net commissions from travel services. As a percentage of total income,
other income was 18.3%, 16.8%, and 14.0% in 1999, 1998, and 1997, respectively.
Gains on the sale of securities, as a component of other income, totaled
$1,035,000 (6.4%) in 1999, $1,243,000 (9.2%) in 1998, and $520,000 (5.0%) in
1997. Other income also includes gains on sales of loans, as a component of
other income, of $895,000 (5.5%), $988,000 (7.3%), and $439,000 (4.2%) in 1999,
1998, and 1997, respectively.
Additional components of other income were fee income and trust fees.
Service charges and other fee income increased 25.5% to $7,572,000 in 1999 from
$6,034,000 in 1998 which was a 14.1% increase from $5,290,000 in 1997. The
growth in fee income in 1999 is due to increases in service charges on deposit
accounts and fees for customer services. The growth in fee income in 1998 and
1997 was due to increases in other service charges and fees. Trust fees
increased 16.5% in 1999; revenues were $4,013,000 in 1999, $3,445,000 in 1998,
and $3,156,000 in 1997. Increases in trust department revenues in each year
were primarily due to increases in assets under care to $971,554,000 at December
31, 1999, from $783,226,000 at December 31, 1998, which is an increase from
$660,846,000 from December 31, 1997. Remaining other income increased 47.1% to
$2,677,000 in 1999 from $1,820,000 in 1998 which was an 87.2% increase from
$972,000 in 1997. The increase in 1998 is related to the addition of $862,000
in net commissions from travel services.
OTHER EXPENSES
Other expenses increased 8.8% in 1999 to $33,063,000 from $30,400,000 in
1998, which reflected an increase from $27,266,000 in 1997. As a percentage of
total income, other expenses were 37.4%, 37.7%, and 36.7% in 1999, 1998, and
1997, respectively. Employee related expenses, including salaries and wages and
employee benefits, increased 9.1% in 1999 to $17,565,000, as compared to
$16,095,000 in 1998, which was a 10.1% increase from $14,615,000 in 1997. As a
18
percent of average assets, employee related expenses were 1.70%, 1.73%, and
1.66%, in 1999, 1998, and 1997, respectively. The Corporation had 494, 433 and
393 full-time equivalent employees at December 31, 1999, 1998, and 1997,
respectively. Net occupancy expense of bank premises and furniture and
equipment expenses increased 23.5% in 1999 to $6,010,000 as compared to
$4,867,000 in 1998 and $4,063,000 in 1997. The increases were primarily due to
expenses associated with remodeling of existing facilities.
Remaining other expenses increased 0.5% to $9,488,000 in 1999 from
$9,438,000 in 1998, which was a 9.9% increase from $8,588,000 in 1997. The
increase in 1998 was due primarily to increased costs associated with Busey
Bank's card services and electronic banking product delivery, increased data
processing costs, and the addition of costs associated with more recently
acquired and formed subsidiaries.
Income Taxes
Income tax expense in 1999 was $5,402,000 as compared to $5,105,000 in 1998
and $4,379,000 in 1997. The provision for income taxes as a percent of income
before income taxes was 30.1%, 30.9%, and 29.7%, for 1999, 1998, and 1997,
respectively.
BALANCE SHEET-DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets on December 31, 1999 were $1,247,123,000, an increase of 31.1%
from $951,531,000 on December 31, 1998. Total loans, net of unearned interest,
increased 33.9% to $886,684,000 on December 31, 1999, as compared to
$662,281,000 on December 31, 1998. Deposits increased 24.3% to $1,027,981,000
on December 31, 1999 as compared to $826,704,000 on December 31, 1998.
Interest-bearing deposits increased $194,831,000 or 26.7% during 1999.
Non-interest bearing deposits increased $6,446,000 or 6.7% during 1999. Total
stockholders' equity decreased 5.5% to $82,284,000 on December 31, 1999, as
compared to $87,103,000 on December 31, 1998.
EARNING ASSETS
The average interest-earning assets of the Corporation were 93.0%, 92.4%,
and 92.1%, of average total assets for the years ended December 31, 1999, 1998,
and 1997, respectively.
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, 1999, the fair value of these securities was $225,046,000 and the amortized
cost was $221,601,000. There were $7,165,000 of gross unrealized gains and
$3,720,000 of gross unrealized losses for a net unrealized gain of $3,445,000.
The after-tax effect ($2,074,000) of this unrealized gain has been included in
stockholders' equity. The decrease in market value for the debt securities in
this classification was a result of rising interest rates. The fair value
increase in the equity securities was primarily due to a $770,000 increase in
the value of 134,000 shares of Student Loan Marketing Association (SLMA) common
stock owned by the Corporation.
19
The composition of securities available for sale is as follows:
Years ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies 164,565 159,261 $161,762 $159,044 $213,862
Equity securities 13,079 12,550 11,994 9,065 7,589
States and political subdivisions 41,554 37,398 32,351 1,253 202
Other 5,848 8,782 9,407 1,881 1,363
---------------------------------------------------
Fair value of securities available for sale 225,046 217,991 $215,514 $171,243 $223,016
===================================================
Amortized cost 221,601 207,531 $206,589 $166,189 $218,257
===================================================
Fair value as a percentage of amortized cost 101.55% 105.04% 104.32% 103.04% 102.18%
===================================================
The maturities, fair values and weighted average yields of securities
available for sale as of December 31, 1999 are:
Due in 1 year or less Due after 1 year Due after 5 years Due after
through 5 years through 10 years 10 years
-----------------------------------------------------------------------------------------
Fair Weighted Fair Weighted Fair Weighted Fair Weighted
Value Average Value Average Value Average Value Average
Investment Securities(1) Yield Yield Yield Yield
-----------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies $60,142 5.56% $104,406 5.53% $ 17 10.25% $ - -
States and political subdivisions(2) 4,449 8.74% 15,387 8.23% 19,749 7.04% 1,969 6.46%
Other 953 5.44% 2,485 6.51% 2,410 6.20% - -
-----------------------------------------------------------------------------------------
Total $65,544 5.77% $122,278 5.89% $22,176 6.95% $1,969 6.46%
=========================================================================================
(1) Excludes equity securities and mortgage backed securities.
(2) On a tax-equivalent basis, assuming a federal income tax rate of 35% (the effective federal income tax rate as
of December 31, 1999)
The securities held to maturity portfolio consisted of debt securities
which provided the Corporation with a relatively stable source of income.
Additionally, the investment portfolio provides a balance to interest rate and
credit risk in other categories of the balance sheet while providing a vehicle
for the investment of available funds and supplying securities to pledge as
required collateral for certain deposits. All remaining securities were
transferred to the available for sale portfolio as of December 31, 1997.
The composition of securities held to maturity was as follows:
Years ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
(dollars in thousands)
U.S. Treasuries and Agencies - - - $ 8,635 $13,198
States and political subdivisions - - - 36,607 37,043
Other - - - 9,865 11,260
---------------------------------------------------
Amortized cost of securities held to maturity - - - $55,107 $61,501
===================================================
Fair value of securities held to maturity - - - $55,800 $62,625
===================================================
Fair value as a percentage of book value - - - 101.26% 101.83%
===================================================
The Corporation also uses its investment portfolio to manage its tax
position. Depending upon projected levels of taxable income for the
Corporation, periodic changes are made in the mix of tax-exempt and taxable
securities to achieve maximum yields on a tax-equivalent basis. U.S. government
and agency securities as a percentage of total securities increased to 73.2% at
December 31, 1999 from 73.1% at December 31, 1998 while obligations of state and
political subdivisions (tax-exempt obligations) as a percentage of total
securities increased to 18.5% at December 31, 1999, from 17.2% at December 31,
1998.
20
LOAN PORTFOLIO
Loans, before allowance for loan losses, increased 33.9% to $886,684,000
in 1999 from $662,281,000 in 1998. Non-farm non-residential real estate
mortgage loans increased $44,208,000, or 26.2%, to $213,156,000 in 1998 from
$168,948,000 in 1998. 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 $108,406,000, or 46.1%, to
$343,739,000 in 1999 from $235,333,000 in 1998. It is intended that
residential mortgage loan origination will generate income and develop retail
and other banking relationships. The Corporation has no loans to customers
engaged in oil and gas exploration or to foreign companies or governments.
Commitments under standby letters of credit, unused lines of credit and other
conditionally approved credit lines, totaled approximately $169,686,000 as of
December 31, 1999.
The loan portfolio includes a concentration of loans for commercial real
estate amounting to approximately $276,961,000 and $220,836,000 as of December
31, 1999 and 1998, 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.
The composition of loans is as follows:
Years ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
(dollars in thousands)
Commercial and financial $119,800 $ 80,958 $ 63,861 $ 62,065 $ 55,687
Agricultural 20,126 19,072 17,403 16,537 12,594
Real estate-farmland 15,841 14,184 11,782 11,468 11,162
Real estate-construction 52,479 44,713 31,306 26,184 25,566
Real estate-mortgage 622,075 467,435 439,660 413,541 334,417
Installment loans to individuals 56,470 35,919 38,925 39,707 42,353
---------------------------------------------------
$886,791 $662,281 $602,937 $569,502 $481,779
Unearned interest (107) - - (2) (7)
---------------------------------------------------
Loans $886,684 $662,281 $602,937 $569,500 $481,772
===================================================
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, 1999.
1 Year or Less 1 to 5 Years Over 5 Years Total
-------------------------------------------------------
(dollars in thousands)
Commercial, financial and agricultural $ 92,968 $ 30,202 $ 16,756 $139,926
Real estate-construction 35,682 11,549 5,248 52,479
-------------------------------------------------------
Total $ 128,650 $ 41,751 $ 22,004 $192,405
-------------------------------------------------------
Interest rate sensitivity of selected loans
Fixed rate $ 39,786 $ 18,166 $ 4,929 $ 62,881
Adjustable rate 88,864 23,585 17,075 129,524
-------------------------------------------------------
Total $ 128,650 $ 41,751 $ 22,004 $192,405
-------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Management has established an allowance for loan losses which reduces the
total loans outstanding by an estimate of uncollectible loans. Loans deemed
uncollectible are charged against and reduce the allowance. Periodically, a
provision for loan losses is charged to current expense. This provision acts to
replenish the allowance for loan losses and to maintain the allowance at a level
that management deems adequate.
21
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 loans judged to present a possibility of loss (if, as
a result of such monthly appraisals, the loan is judged to be not fully
collectible, the carrying value of the loan is reduced to that portion
considered collectible); and (e) an evaluation of the underlying collateral for
secured lending, including the use of independent appraisals of real estate
properties securing loans.
Periodic provisions for loan losses are determined by management based upon
the size and the quality of the loan portfolio measured against prevailing
economic conditions and historical loan loss experience and also based on
specific exposures in the portfolio. Management has instituted a formal loan
review system supported by an effective credit analysis and control process.
The Corporation will maintain the allowance for loan losses at a level
sufficient to absorb estimated uncollectible loans and, therefore, expects to
make periodic additions to the allowance for loan losses.
The following table shows activity affecting the allowance for loan losses:
Years ended December 31
-----------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------
(dollars in thousands)
Average loans outstanding during period $731,491 $621,475 $584,327 $525,311 $453,915
=====================================================
Allowance for loan losses:
Balance at beginning of period 7,101 $ 6,860 $ 6,131 $ 5,473 $ 5,235
-----------------------------------------------------
Loans charged-off:
Commercial, financial and agricultural $ 40 $ 62 $ 192 $ 227 $ 339
Real estate-construction - - - 19 -
Real estate-mortgage 145 282 50 32 55
Installment loans to individuals 366 260 317 404 286
-----------------------------------------------------
Total charge-offs $ 551 $ 604 $ 559 $ 682 $ 680
-----------------------------------------------------
Recoveries:
Commercial, financial and agricultural $ 16 $ 12 $ 13 $ 43 $ 414
Real estate-construction - - - 50 -
Real estate-mortgage 67 49 110 - 3
Installment loans to individuals 99 84 90 147 106
-----------------------------------------------------
Total recoveries $ 182 $ 145 $ 213 $ 240 $ 523
-----------------------------------------------------
Net loans charged-off $ 369 $ 459 $ 346 $ 442 $ 157
-----------------------------------------------------
Provision for loan losses $ 2,570 $ 700 $ 1,075 $ 1,100 $ 395
-----------------------------------------------------
Net additions due to acquisition $ 1,101 - - - -
-----------------------------------------------------
Balance at end of period $ 10,403 $ 7,101 $ 6,860 $ 6,131 $ 5,473
=====================================================
Ratios:
Net charge-offs to average loans 0.05% 0.07% 0.06% 0.08% 0.03%
=====================================================
Allowance for loan losses to total
loans at period end 1.17% 1.07% 1.14% 1.08% 1.14%
=====================================================
22
The following table sets forth the allowance for loan losses by loan
categories as of December 31 for each of the years indicated:
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------------
(dollars in thousands)
Commercial, financial,
agri-cultural and real estate-farmland $ 3,391 17.6% $ 1,757 17.2% $ 1,059 15.4% $ 766 15.8% $ 785 16.5%
Real estate-construction - 5.9% - 6.8% - 5.2% - 4.6% - 5.3%
Real estate-mortgage 5,708 70.1% 4,380 70.6% 4,456 72.9% 3,505 72.6% 3,476 69.4%
Installment loans to individuals 1,293 6.4% 964 5.4% 1,045 6.5% 1,189 7.0% 1,097 8.8%
Unallocated 11 N/A - N/A 300 N/A 671 N/A 115 N/A
-----------------------------------------------------------------------------------
Total $10,403 100% $ 7,101 100% $ 6,860 100% $ 6,131 100% $ 5,473 100%
===================================================================================
NON-PERFORMING LOANS
It is management's policy to place commercial and mortgage loans on
non-accrual status when interest or principal is 90 days or more past due. Such
loans may continue on accrual status only if they are both well-secured and in
the process of collection.
The following table sets forth information concerning non-performing loans at
December 31 for each of the years indicated:
Years ended December 31,
-------------------------------------------
1998 1997 1996 1995
-------------------------------------------
(dollars in thousands)
Non-accrual loans $1,220 $ 526 $ 628 $ - $ 532
Loans 90 days past due and still accruing 897 1,052 1,033 1,002 897
Restructured loans - - - - -
-------------------------------------------
Total non-performing loans $2,117 $1,578 $1,661 $1,002 $1,429
-------------------------------------------
Repossessed assets $ 459 $ 320 $ 516 $ 805 $1,380
Other assets acquired in satisfaction of debts
previously contracted 5 14 5 1 1
-------------------------------------------
Total non-performing other assets $ 464 $ 334 $ 521 $ 806 $1,381
-------------------------------------------
Total non-performing loans and non-
performing other assets $2,581 $1,912 $2,182 $1,808 $2,810
===========================================
Non-performing loans to loans, before
Allowance for loan losses 0.24% 0.24% 0.28% 0.18% 0.30%
===========================================
Non-performing loans and non-performing
other assets to loans, before allowance for
loan losses 0.29% 0.29% 0.36% 0.32% 0.58%
===========================================
On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118, which requires loans to be considered
impaired when, based on current information and events, it is probable the
Corporation will not be able to collect all amounts due. The accrual of
interest income on impaired loans is discontinued when there is reasonable doubt
as to the borrower's ability to meet contractual payments of interest or
principal. Interest income on these loans is recognized to the extent interest
payments are received and the principal is considered fully collectible. For
the year ended December 31, 1999, no interest was recognized from impaired
loans, and $4,000 was recognized for the year ended December 31, 1998.
23
The gross interest income that would have been recorded in the years ended
December 31, 1999 and 1998 if the non-accrual and restructured loans had been
current in accordance with their original terms was $31,000 and $31,000,
respectively. The amount of interest collected on those loans that was included
in interest income was $0 for the year ended December 31, 1999, and $9,000 for
the year ended December 31, 1998.
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 $1,702,000 at December 31, 1999. 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.
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 have decreased to 89.5% for the year ended
December 31, 1999 from 89.9% for the year ended December 31, 1998.
December 31,
----------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------------
(dollars in thousands)
Average % Total Average Average % Total Average Average % Total Average
Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------------------------------
Non-interest bearing demand deposits
$ 91,484 10.5% -% $ 80,986 10.1% -% $ 73,345 9.4% -%
Interest bearing demand deposits
13,951 1.6% 2.01% 19,271 2.4% 1.96% 110,940 14.2% 1.97%
Savings/Money Market 390,781 44.9% 2.98% 351,695 43.9% 3.14% 234,865 30.1% 3.32%
Time deposits 373,563 43.0% 5.13% 349,956 43.6% 5.49% 360,968 46.3% 5.54%
----------------------------------------------------------------------------------------
Total $869,779 100.0% 3.99% $801,908 100.0% 4.25% $780,118 100.0% 4.24%
========================================================================================
Certificates of deposit of $100,000 and over and other time deposits of $100,000
and over at December 31, 1999, had the following maturities (dollars in
thousands):
Under 3 months $ 57,692
3 to 6 months 14,610
6 to 12 months 13,842
Over 12 months 20,827
--------
Total $106,971
========
24
SHORT-TERM BORROWINGS
The following table sets forth the distribution of short-term borrowings
and weighted average interest rates thereon at the end of each of the last three
years. Federal funds purchased and securities sold under agreements to
repurchase generally represent overnight borrowing transactions. Other
short-term borrowings consist of various demand notes and notes with maturities
of less than one year.
Federal funds purchased and
securities sold under agreements Other short-term
to repurchase borrowings
-----------------------------------------------------
(dollars in thousands)
1999
Balance, December 31, 1999 $23,580 $48,327
Weighted average interest rate at end of period 5.68% 7.04%
Maximum outstanding at any month end $42,931 $49,727
Average daily balance $16,068 $15,510
Weighted average interest rate during period(1) 5.53% 5.96%
1998
Balance, December 31, 1998 $ - $ 5,900
Weighted average interest rate at end of period - 7.25%
Maximum outstanding at any month end $ 7,900 $16,550
Average daily balance $ 1,686 $12,981
Weighted average interest rate during period(1) 5.29% 7.78%
1997
Balance, December 31, 1997 $ - $ 6,550
Weighted average interest rate at end of period - 7.35%
Maximum outstanding at any month end $13,550 $ 8,000
Average daily balance $ 1,678 $ 6,542
Weighted average interest rate during period(1) 6.14% 7.21%
(1) The weighted average interest rate is computed by dividing total interest for
the year by the average daily balance outstanding.
LIQUIDITY
Liquidity is the availability of funds to meet all present and future cash
flow obligations arising in the daily operations of the business at a minimal
cost. These financial obligations consist of needs for funds to meet extensions
of credit, deposit withdrawals and debt servicing.
The sources of short-term liquidity utilized by the Corporation consist of
asset maturities, sales, deposits and capital funds. Additional liquidity is
provided by bank lines of credit, repurchase agreements and the ability to
borrow from the Federal Reserve Bank and Federal Home Loan Bank. The
Corporation does not deal in or use brokered deposits as a source of liquidity.
Long-term liquidity needs will be satisfied primarily through retention of
capital funds. An additional source of liquidity that can be managed for
short-term and long-term needs is the Corporation's ability to securitize or
package loans (primarily mortgage loans) for sale.
The objective of liquidity management by the Corporation is to ensure that
funds will be available to meet demand in a timely and efficient manner. Based
upon the level of investment securities that reprice within 30 days and 90 days,
management believes that adequate liquidity exists to meet all projected cash
flow obligations.
25
The Corporation achieves a satisfactory degree of liquidity through
actively managing both assets and liabilities. Asset management guides the
proportion of liquid assets to total assets, while liability management
monitors future funding requirements and prices liabilities accordingly.
Average liquid assets are shown in the table below:
LIQUID ASSETS
Years Ended December 31,
---------------------------
Average Balances 1999 1998 1997
---------------------------
(dollars in thousands)
Federal funds sold $10,723 $16,463 $8,899
===========================
Percentage of average total assets 1.04% 1.77% 1.01%
===========================
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, 1998:
Rate Sensitive Within
----------------------------------------------------------------------------------
1-30 Days 31-90 Days 91-180 Days 181 Days-1 Yr Over 1 Yr Total
----------------------------------------------------------------------------------
(dollars in thousands)
Interest-bearing deposits $ 8,092 $ - $ - $ - $ - $ 8,092
Federal funds sold 13,500 - - - - 13,500
Investment securities
U.S. Treasuries and Agencies 2,950 17,878 19,737 14,736 109,264 164,565
States and political subdivisions 720 31 978 2,690 37,135 41,554
Other securities 7,977 - - 200 10,750 18,927
Loans (net of unearned interest) 253,239 68,372 56,541 132,622 375,910 886,684
----------------------------------------------------------------------------------
Total rate-sensitive assets $ 286,478 $ 86,281 $ 77,256 $ 150,248 $ 533,059 $1,133,322
----------------------------------------------------------------------------------
Interest bearing transaction deposits 50,556 - - - - 50,556
Savings deposits 95,642 - - - - 95,642
Money market deposits 295,601 - - - - 295,601
Time deposits 76,028 76,987 66,278 89,560 174,328 483,181
Short-term borrowings 58,907 13,000 - - - 71,907
Long-term debt - 7,927 1,000 6,928 39,994 55,849
----------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 576,734 $ 97,914 $ 67,278 $ 96,488 $ 214,322 $1,052,736
----------------------------------------------------------------------------------
Rate-sensitive assets less rate-
sensitive liabilities $ (290,256) $ (11,633) $ 9,978 $ 53,760 $ 318,737 $ 80,586
----------------------------------------------------------------------------------
Cumulative Gap $ (290,256) $ (301,889) $ (291,911) $ (238,151) $ 80,586
======================================================================
Cumulative amounts as a percentage
of total rate-sensitive assets -25.61% -26.64% -25.76% -21.01% 7.11%
======================================================================
Cumulative Ratio 0.50x 0.55x 0.61x 0.72x 1.08x
======================================================================
The foregoing table shows a negative (liability sensitive) cumulative
unadjusted gap of approximately $290 million in the 1-30 day repricing category.
The gap from 31 to 90 days is nearly matched, and beyond 90 days becomes less
liability sensitive as rate-sensitive assets that reprice beyond 91 days
gradually become greater in volume than rate-sensitive liabilities that are
subject to repricing in the same respective time periods. The composition of
the gap structure at December 31, 1999 will benefit the Corporation more if
interest rates fall during the next 90 days by allowing the net interest margin
to grow as liability rates would reprice more quickly than rates on
rate-sensitive assets.
26
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, 1999, the Corporation earned $12,548,000 and paid dividends
of $6,004,000 to stockholders, resulting in a retention of current earnings of
$6,544,000.
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, 1999, the Corporation
had a total capital to total risk-weighted asset ratio of 9.40%, a Tier 1
capital to risk-weighted asset ratio of 7.81% and a Tier 1 leverage ratio of
5.62%; the Corporation's bank subsidiary, Busey Bank, had ratios of 11.88%,
10.28%, and 7.06%, respectively; the Corporation's savings and loan subsidiary,
First Federal Savings and Loan Association of Bloomington, had ratios of 15.06%,
14.06%, and 9.13%, respectively. As these ratios show, the Corporation and its
bank subsidiaries significantly 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
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998 by the
Financial Accounting Standards Board. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June of 1999, Statement of Financial Accounting Standard No. 137 was issued
to extend the effective date by one year to all fiscal quarters of fiscal years
beginning after June 15, 2000. Because the Corporation does not use
derivatives, management does not believe the adoption of the Statement will have
a material impact on the consolidated financial statements.
EFFECTS OF INFLATION
The effect of inflation on a financial institution differs significantly
from the effect on an industrial company. While a financial institution's
operating expenses, particularly salary and employee benefits, are affected by
general inflation, the asset and liability structure of a financial institution
consists largely of monetary items. Monetary items, such as cash, loans and
deposits, are those assets and liabilities which are or will be converted into a
fixed number of dollars regardless of changes in prices. As a result, changes
in interest rates have a more significant impact on a financial institution's
performance than does general inflation. For additional information regarding
interest rates and changes in net interest income see "Selected Statistical
Information."
YEAR 2000 COMPLIANCE
We have tested our products and believe that they are year 2000 compliant.
We have also inquired of significant vendors of our internal systems as to their
year 2000 readiness, and we have also tested our material internal systems. We
believe that, based on these tests and assurances of our vendors, we will not
incur material costs to resolve year 2000 issues for our products and internal
systems. Furthermore, to date we have not experienced any year 2000 problems
and our customers or vendors have not informed us of any material year 2000
problems. If it comes to our attention that there are any 2000 problems with
our products or that some of our third-party hardware and software used in our
internal systems are not year 2000 compliant, then we will endeavor to make
modifications to our products and internal systems, or purchase new internal
systems, to quickly respond to the problem. The costs already incurred by us to
date related to year 2000 compliance are not material, and we do not anticipate
incurring additional material costs related to year 2000 compliance.
27
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.
28
The following table shows the consolidated average balance sheets,
detailing the major categories of assets and liabilities, the interest income
earned on interest-earning assets, the interest expense paid for
interest-bearing liabilities, and the related interest rates:
Consolidated Average Balance Sheets and Interest Rates
Years Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------
(dollars in thousands)
Assets
Federal funds sold $ 10,723 $ 479 4.47% $ 16,463 $ 891 5.41% $ 8,899 $ 488 5.49%
Investment securities:
U.S. Treasuries and Agencies 153,576 8,637 5.62% 169,680 9,776 5.76% 160,394 9,309 5.80%
States and political
subdivisions(1) 40,006 3,000 7.50% 33,683 2,665 7.91% 36,064 3,022 8.38%
Other securities 24,064 1,187 4.93% 19,049 980 5.14% 21,326 1,008 4.73%
Loans (net of unearned
discount)(1,2) 731,491 60,285 8.24% 621,475 53,925 8.68% 584,327 51,367 8.79%
------------------------------------------------------------------------------------------
Total interest-earning assets(1) $ 959,860 $ 73,588 7.67% $860,350 $ 68,237 7.93% $811,010 $ 65,194 8.04%
==========================================================================================
Cash and due from banks 30,726 32,175 35,695
Premises and equipment 25,437 24,243 22,535
Allowance for loan losses (7,777) (7,253) (6,480)
Other assets 23,532 21,648 18,139
----------- --------- ---------
Total assets $1,031,778 $931,163 $880,899
=========== ========= =========
Liabilities and Stockholders' Equity
Interest bearing transaction deposits $ 13,951 $ 280 2.01% $ 19,271 $ 377 1.96% $110,940 $ 2,182 1.97%
Savings deposits 85,720 2,554 2.98% 80,648 2,635 3.27% 79,888 2,617 3.28%
Money market deposits 305,061 9,105 2.98% 271,047 8,419 3.11% 154,977 5,192 3.35%
Time deposits 373,563 19,146 5.13% 349,956 19,211 5.49% 360,968 20,011 5.54%
Short-term borrowings:
Federal funds purchased and
repurchase agreements 16,068 888 5.53% 1,686 89 5.29% 1,678 103 6.14%
Other 15,510 924 5.96% 12,981 1,010 7.78% 6,542 472 7.21%
Long-term debt 36,505 2,023 5.54% 22,548 1,234 5.47% 9,301 542 5.83%
------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 846,378 $ 34,920 4.13% $758,137 $ 32,975 4.35% $724,294 $ 31,119 4.30%
==========================================================================================
Net interest spread 3.54% 3.58% 3.74%
======= ======= =======
Demand deposits 91,484 80,986 73,345
Other liabilities 8,425 10,724 5,954
Stockholders' equity 85,491 81,316 77,306
----------- --------- ---------
Total liabilities and
stockholders' equity $1,031,778 $931,163 $880,899
=========== ========= =========
Interest income/earning assets(1) $ 959,860 $ 73,588 7.67% $860,350 $ 68,237 7.93% $811,010 $ 65,194 8.04%
Interest expense/earning assets $ 959,860 $ 34,920 3.64% $860,350 $ 32,975 3.83% 811,010 31,119 3.84%
------------------------------------------------------------------------------------------
Net interest margin1 $ 38,668 4.03% $ 35,262 4.10% $ 34,075 4.20%
================= ================= =================
(1) On a tax equivalent basis, assuming a federal income tax rate of 35%
(2) Non-accrual loans have been included in average loans, net of unearned discount
29
Changes In Net Interest Income
Years Ended December 31, 1999, 1998, and 1997
------------------------------------------------------------------------
Year 1999 vs 1998 Change due to(1) Year 1998 vs 1997 Change due to(1)
------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Yield/Rate Change Volume Yield/Rate Change
------------------------------------------------------------------------
(dollars in thousands)