SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended 9/30/2005 Commission File No. 0-15950
FIRST BUSEY CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 37-1078406
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
201 W. Main St.,
Urbana, Illinois 61801
-------------------------------- ---------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (217) 365-4556
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act)
Yes X No
--- ---
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act)
Yes No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2005
--------------------------------------------------------------------------------
Common Stock, $.001 par value 21,452,876
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(UNAUDITED)
September 30, 2005 December 31, 2004
------------------ -----------------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 59,826 $ 47,991
Federal funds sold 56,541 3,100
Securities available for sale (amortized cost 2005, $321,326;
2004, $337,037) 333,444 352,256
Loans 1,709,182 1,475,900
Allowance for loan losses (22,620) (19,217)
------------ ------------
Net loans $ 1,686,562 $ 1,456,683
Premises and equipment 36,994 26,295
Cash surrender value of bank owned life insurance 18,225 17,634
Goodwill 52,976 31,785
Other intangible assets 7,158 3,852
Other assets 25,846 24,845
------------ ------------
Total assets $ 2,277,572 $ 1,964,441
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 256,933 $ 213,921
Interest bearing 1,566,561 1,344,901
------------ ------------
Total deposits $ 1,823,494 $ 1,558,822
Federal funds purchased & securities sold under agreements
to repurchase 48,025 41,558
Short-term borrowings 1,000 11,250
Long-term debt 175,501 165,374
Junior subordinated debt owed to unconsolidated trusts 50,000 40,000
Other liabilities 14,362 8,565
------------ ------------
Total liabilities $ 2,112,382 $ 1,825,569
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 22 6,291
Common stock to be issued 495 -
Surplus 44,435 21,696
Retained earnings 126,150 114,359
Accumulated other comprehensive income 7,296 9,170
------------ ------------
Total stockholders' equity before treasury stock, unearned ESOP
shares and deferred compensation for stock grants $ 178,398 $ 151,516
Treasury stock, at cost (10,745) (10,173)
Unearned ESOP shares and deferred compensation for stock grants (2,463) (2,471)
------------ ------------
Total stockholders' equity $ 165,190 $ 138,872
------------ ------------
Total liabilities and stockholders' equity $ 2,277,572 $ 1,964,441
============ ============
Common shares outstanding at period end 21,462,876 20,608,151
============ ============
See accompanying notes to unaudited consolidated financial statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- ---------
(Dollars in thousands,
INTEREST INCOME: except per share amounts)
Interest and fees on loans $75,453 $55,804
Interest and dividends on investment securities:
Taxable interest income 5,458 3,592
Non-taxable interest income 1,668 1,428
Dividends 556 532
Interest on Federal funds sold 358 93
------- -------
Total interest income $83,493 $61,449
------- -------
INTEREST EXPENSE:
Deposits $23,375 $14,858
Federal funds purchased and securities sold under agreements to
repurchase 805 245
Short-term borrowings 100 107
Long-term debt 4,837 3,803
Junior subordinated debt owed to unconsolidated trusts 2,492 1,936
------- -------
Total interest expense $31,609 $20,949
------- -------
Net interest income $51,884 $40,500
Provision for loan losses 2,765 2,320
------- -------
Net interest income after provision for loan losses $49,119 $38,180
------- -------
OTHER INCOME:
Trust $ 4,277 $ 4,002
Commissions and brokers fees, net 1,679 1,774
Service charges on deposit accounts 5,835 5,830
Other service charges and fees 1,701 1,523
Security gains, net 306 1,090
Gain on sales of loans 1,932 1,984
Increase in cash surrender value of life insurance 591 606
Other operating income 1,316 940
------- -------
Total other income $17,637 $17,749
------- -------
OTHER EXPENSES:
Salaries and wages $16,697 $14,353
Employee benefits 3,711 3,160
Net occupancy expense of premises 3,323 2,898
Furniture and equipment expenses 2,278 1,772
Data processing 1,496 1,417
Stationery, supplies and printing 826 743
Amortization of intangible assets 724 435
Other operating expenses 7,509 6,035
------- -------
Total other expenses $36,564 $30,813
------- -------
Income before income taxes $30,192 $25,116
Income taxes 9,821 8,431
------- -------
NET INCOME $20,371 $16,685
======= =======
BASIC EARNINGS PER SHARE $ 0.99 $ 0.82
======= =======
DILUTED EARNINGS PER SHARE $ 0.98 $ 0.81
======= =======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.42 $ 0.38
======= =======
See accompanying notes to unaudited consolidated financial statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- ---------
(Dollars in thousands,
INTEREST INCOME: except per share amounts)
Interest and fees on loans $ 27,670 $ 21,088
Interest and dividends on investment securities:
Taxable interest income 1,831 1,562
Non-taxable interest income 628 503
Dividends 181 63
Interest on federal funds sold 135 65
-------- --------
Total interest income $ 30,445 $ 23,281
-------- --------
INTEREST EXPENSE:
Deposits $ 8,929 $ 5,961
Federal funds purchased and securities sold under agreements to
Repurchase 315 128
Short-term borrowings 9 61
Long-term debt 1,785 1,572
Junior subordinated debt owed to unconsolidated trusts 933 715
-------- --------
Total interest expense $ 11,971 $ 8,437
-------- --------
Net interest income $ 18,474 $ 14,844
Provision for loan losses 650 1,240
-------- --------
Net interest income after provision for loan losses $ 17,824 $ 13,604
-------- --------
OTHER INCOME:
Trust $ 1,366 $ 1,211
Commissions and brokers' fees, net 628 578
Service charges on deposit accounts 2,067 2,090
Other service charges and fees 617 542
Security (losses) gains, net (106) 402
Gains on sales of loans 920 703
Increase in cash surrender value of life insurance 200 191
Other operating income 426 304
-------- --------
Total other income $ 6,118 $ 6,021
-------- --------
OTHER EXPENSES:
Salaries and wages $ 6,062 $ 5,229
Employee benefits 1,332 924
Net occupancy expense of premises 1,255 1,081
Furniture and equipment expenses 852 649
Data processing 429 529
Stationary, supplies and printing 312 289
Amortization of intangible assets 334 201
Other operating expenses 2,587 2,248
-------- --------
Total other expenses $ 13,163 $ 11,150
-------- --------
Income before income taxes $ 10,779 $ 8,475
Income taxes 3,220 2,691
-------- --------
NET INCOME $ 7,559 $ 5,784
======== ========
BASIC EARNINGS PER SHARE $ 0.36 $ 0.28
======== ========
DILUTED EARNINGS PER SHARE $ 0.36 $ 0.28
======== ========
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.14 $ 0.13
======== ========
See accompanying notes to unaudited consolidated financial statements.
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (Dollars in thousands)
Net income $ 20,371 $ 16,685
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation 8 19
Depreciation and amortization 3,263 2,577
Provision for loan losses 2,765 2,320
Provision for deferred income taxes (339) (239)
Stock dividends (339) (332)
Amortization of investment security discounts (609) (330)
Gain on sales of investment securities, net (306) (1,090)
Gain on sales of loans (1,932) (1,984)
Gain on sales of ORE properties (180) (18)
Market valuation adjustment on ORE property - 16
(Gain) loss on sale and disposition of premises and equipment (3) 25
Increase in deferred compensation 105 63
Change in assets and liabilities:
(Increase) decrease in other assets (1,991) 1
Increase in accrued expenses 2,488 1,059
Increase in interest payable 1,128 926
Increase in income taxes receivable (1,195) (901)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
LOAN ORIGINATIONS AND SALES $ 23,234 $ 18,797
--------- ---------
Loans originated for sale (133,714) (116,948)
Proceeds from sales of loans 132,256 141,683
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 21,776 $ 43,532
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities classified available for sale 42,166 34,625
Proceeds from maturities of securities classified available for sale 83,312 65,048
Purchase of securities classified available for sale (87,515) (122,570)
Increase in federal funds sold (49,695) (49,057)
Increase in loans (115,138) (148,932)
Proceeds from sale of premises and equipment 70 6
Proceeds from sale of ORE properties 4,675 66
Purchases of premises and equipment (4,518) (2,646)
Increase in cash surrender value of bank owned life insurance (591) (606)
Purchase of subsidiary, net of cash and due from banks acquired (12,364) (35,990)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES $(139,598) $(260,056)
--------- ---------
(continued on next page)
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES (Dollars in thousands)
Net increase in certificates of deposit $ 46,425 $ 95,427
Net increase in demand, money market and saving deposits 78,817 59,540
Cash dividends paid (8,580) (7,729)
Purchase of treasury stock (2,131) (2,168)
Proceeds from sale of treasury stock 1,746 2,785
Net decrease in Federal funds purchased and securities sold under
agreement to repurchase 3,503 (2,432)
Proceeds from short-term borrowings 4,000 15,250
Principal payments on short-term borrowings (14,250) (5,250)
Proceeds from issuance of long-term debt 51,500 74,655
Principal payments on long-term borrowings (41,373) (19,034)
Proceeds from issuance of junior subordinated debt owed to
unconsolidated Trusts 10,000 15,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 129,657 $ 226,044
--------- ---------
NET INCREASE IN CASH AND DUE FROM BANKS $ 11,835 $ 9,520
Cash and due from banks, beginning 47,991 $ 52,397
--------- ---------
Cash and due from banks, ending $ 59,826 $ 61,917
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
OTHER REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS $ 635 $ -
========= =========
PURCHASE OF SUBSIDIARY:
Cash payment $ 19,103 $ 42,072
Common stock issued 16,778 -
--------- ---------
Total purchase price $ 35,881 $ 42,072
========= =========
Assets acquired:
Cash and due from other banks $ 6,739 6,082
Federal funds sold 3,746 1,593
Securities available for sale 21,007 49,285
Loans held for sale - 1,853
Loans (net of allowance for loan losses) 114,744 147,758
Premises and equipment 8,787 3,483
Goodwill 21,163 24,405
Other intangible assets 4,030 2,383
Other assets 1,710 4,392
Liabilities assumed:
Deposits (139,430) (147,084)
Short-term borrowings (2,964) (26,707)
Long-term debt - (23,322)
Other liabilities (3,651) (2,049)
--------- ---------
$ 35,881 $ 42,072
========= =========
See accompanying notes to unaudited consolidated financial statements
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FIRST BUSEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
-------- --------
(Dollars in thousands)
Net income $ 20,371 $ 16,685
======== ========
Other comprehensive income, before tax: Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period $ (3,407) $ 784
Less reclassification adjustment for gains included in net
Income (306) (1,090)
-------- --------
Other comprehensive loss, before tax $ (3,101) $ (306)
Income tax benefit related to items of other comprehensive loss (1,227) (171)
-------- --------
Other comprehensive loss, net of tax $ (1,874) $ (135)
-------- --------
Comprehensive income $ 18,497 $ 16,550
======== ========
See accompanying notes to unaudited consolidated financial statements.
FIRST BUSEY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTERIM FINANCIAL STATEMENTS
The consolidated interim financial statements of First Busey Corporation and
Subsidiaries are unaudited, but in the opinion of management reflect all
necessary adjustments, consisting only of normal recurring accruals, for a fair
presentation of results as of the dates and for the periods covered by the
financial statements. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted within the United
States of America for interim financial data and with the instructions to Form
10-Q and Article 10 of Regulation S-X. The results for the interim periods are
not necessarily indicative of the results of operations that may be expected for
the fiscal year. These unaudited consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004.
In preparing the consolidated financial statements, the Corporation's management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
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NOTE 2: UNREALIZED LOSSES ON INVESTMENT SECURITIES
Information pertaining to securities with gross unrealized losses as of
September 30, 2005, aggregated by investment category and length of time that
individual securities have been in continuous loss position follows:
Continuous unrealized Continuous unrealized
losses existing for less losses existing for greater
than 12 months than 12 months Total
----------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------------------------------------------------------------------------
(Dollars in thousands)
September 30, 2005:
-------------------
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $137,013 $ 1,483 $ 36,037 $ 494 $173,050 $ 1,977
Obligations of states and
political subdivisions 33,698 404 1,819 21 35,517 425
Mortgage-backed securities 5,658 103 - - 5,658 103
Corporate securities 1,277 15 394 14 1,671 29
-------- -------- -------- -------- -------- --------
Subtotal, debt securities $177,646 $ 2,005 $ 38,250 $ 529 $215,896 $ 2,534
Mutual funds and other equity
securities - - 49 14 49 14
-------- -------- -------- -------- -------- --------
Total temporarily impaired
securities $177,646 $ 2,005 $ 38,299 $ 543 $215,945 $ 2,548
======== ======== ======== ======== ======== ========
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Corporation
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value. The unrealized losses as of
September 30, 2005, summarized in the table above, were due to changes in
interest rates subsequent to acquisition of the securities and were not related
to changes in the credit risk of the issuers.
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NOTE 3: LOANS
The major classifications of loans as of September 30, 2005 and December 31,
2004 were as follows:
September 30, 2005 December 31, 2004
-----------------------------------------
(Dollars in thousands)
Commercial $ 203,166 $ 216,290
Real estate construction 310,362 235,547
Real estate - farmland 10,796 11,750
Real estate - 1-4 family residential mortgage 524,057 452,894
Real estate - multifamily mortgage 110,344 106,163
Real estate - non-farm nonresidential mortgage 476,059 363,993
Installment 49,970 63,315
Agricultural 23,473 25,224
----------- -----------
$ 1,708,227 $ 1,475,176
Plus net deferred loan costs 955 724
----------- -----------
1,709,182 1,475,900
Less:
Allowance for loan losses (22,620) (19,217)
----------- -----------
Net loans $ 1,686,562 $ 1,456,683
=========== ===========
The real estate 1-4 family residential mortgage category includes loans held for
sale with carrying values of $12,964,000 at September 30, 2005 and $9,574,000 at
December 31, 2004; these loans had fair market values of $13,118,000 and
$9,717,000 respectively.
Changes in the allowance for loan losses were as follows:
2005 2004
------------------------
(Dollars in thousands)
Balance, beginning of year $ 19,217 $ 16,228
Addition due to acquisition 1,208 2,069
Provision of loan losses 2,765 2,320
Recoveries applicable to loan balances previously
charged off 182 140
Loan balances charged off (752) (2,054)
-------- --------
Balance, September 30 $ 22,620 $ 18,703
======== ========
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NOTE 4: EARNINGS PER SHARE
Net income per common share has been computed as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------
Net income $ 7,559,000 $ 5,784,000 $20,371,000 $16,685,000
=========== =========== =========== ===========
Shares:
Weighted average common shares outstanding 21,031,477 20,365,239 20,631,146 20,352,434
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method 98,680 135,185 113,939 141,319
----------- ----------- ----------- -----------
Weighted average common shares outstanding,
as adjusted for diluted earnings per share calculation 21,130,157 20,500,424 20,745,085 20,493,753
=========== =========== =========== ===========
Basic earnings per share $ 0.36 $ 0.28 $ 0.99 $ 0.82
=========== =========== =========== ===========
Diluted earnings per share $ 0.36 $ 0.28 $ 0.98 $ 0.81
=========== =========== =========== ===========
NOTE 5: STOCK-BASED COMPENSATION
First Busey Corporation applies Accounting Principles Board Opinion No. 25 in
accounting for stock options and discloses the fair value of options granted as
permitted by SFAS No. 123. The Corporation has recorded no compensation expense
associated with stock options as all options granted under its plan had an
exercise price equal to the market value of the common stock when granted.
The following summarizes the pro-forma effects assuming compensation expense had
been recorded based upon the estimated fair value:
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
(dollars in thousands except per share data )
2005 2004 2005 2004
-----------------------------------------------------
NET INCOME AS REPORTED $ 7,559 $ 5,784 $ 20,371 $ 16,685
Less compensation expense determined under fair value
method for all options granted, net of related tax effects 96 216 216 361
---------- ---------- ---------- ----------
Pro-forma net income $ 7,463 $ 5,568 $ 20,155 $ 16,324
========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Reported net income $ 0.36 $ 0.28 $ 0.99 $ 0.82
Less compensation expense 0.01 0.01 0.01 0.02
---------- ---------- ---------- ----------
Pro-forma net income $ 0.35 $ 0.27 $ 0.98 $ 0.80
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Reported net income $ 0.36 $ 0.28 $ 0.98 $ 0.81
Less compensation expense 0.01 0.01 0.01 0.01
---------- ---------- ---------- ----------
Pro-forma net income $ 0.35 $ 0.27 $ 0.97 $ 0.80
========== ========== ========== ==========
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In April, 2005, the Corporation granted 54,000 stock options to individuals
serving as directors on the boards of First Busey Corporation, Busey Bank, Busey
Bank Florida, and Busey Investment Group, Inc.. The fair value of the stock
options granted has been estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Number of options granted 54,000
Risk-free interest rate 3.28%
Expected life, in years 4.64
Expected volatility 18.02%
Expected dividend yield 2.82%
Estimated fair value per option $ 2.82
NOTE 6: JUNIOR SUBORDINATED DEBT OWED TO UNCONSOLIDATED TRUSTS
First Busey Corporation has established statutory trusts for the sole purpose of
issuing trust preferred securities and related trust common securities. The
proceeds from such issuances were used by the trusts to purchase junior
subordinated notes of the Corporation, which are the sole assets of each trust.
Concurrent with the issuance of the trust preferred securities, First Busey
issued guarantees for the benefit of the holders of the trust preferred
securities. The trust preferred securities are issues that qualify, and are
treated by First Busey, as Tier I regulatory capital. First Busey owns all of
the common securities of each trust. The trust preferred securities issued by
each trust rank equally with the common securities in right of payment, except
that if an event of default under the indenture governing the notes has occurred
and is continuing, the preferred securities will rank senior to the common
securities in right of payment.
The table below summarizes the outstanding junior subordinated notes and the
related trust preferred securities issued by each trust as of September 30, 2005
and December 31, 2004:
First Busey Capital First Busey Statutory First Busey Statutory
Trust I Trust II Trust III(1)
--------------------------------------------------------------------------------------------------------------------------
Junior Subordinated Notes:
Principal balance $25,000,000 $15,000,000 $10,000,000
Annual interest rate 9.00% 3-mo LIBOR + 2.65% 3-mo LIBOR + 1.75%
Stated maturity date June 18, 2031 June 17, 2034 June 15, 2035
Call date June 18, 2006 June 17, 2009 June 15, 2010
Trust Preferred Securities:
Face value $25,000 $15,000 $10,000
Annual distribution rate 9.00% 3-mo LIBOR + 2.65% 3-mo LIBOR + 1.75%
Issuance date June 18, 2001 April 30, 2004 June 15, 2005
Distribution dates(2) Quarterly Quarterly Quarterly
(1) Established June 15, 2005
(2) All cash distributions are cumulative
As of January 1, 2004, the Corporation adopted FASB Interpretation No. 46,
Consolidated of Variable Interest Entities, as revised in December, 2003. Upon
adoption, the Corporation deconsolidated the capital trust entities outstanding
as of that date.
The trust preferred securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated notes at par value at the
stated maturity date or upon redemption of the junior subordinated notes on a
date no earlier than June 18, 2006, for First Busey Capital Trust I, June 17,
2009, for First Busey Statutory Trust II, and June 15, 2010, for First Busey
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Statutory Trust III. Prior to these respective redemption dates, the junior
subordinated notes may also be redeemed by the Corporation (in which case the
trust preferred securities would also be redeemed) after the occurrence of
certain events that would have a negative tax effect on the Corporation or the
trusts, would cause the trust preferred securities to no longer qualify for Tier
1 capital, or would result in a trust being treated as an investment company.
Each trust's ability to pay amounts due on the trust preferred securities is
solely dependent upon the Corporation making payment on the related junior
subordinated notes. The Corporation's obligations under the junior subordinated
notes and other relevant trust agreements, in aggregate, constitute a full and
unconditional guarantee by the Corporation of each trust's obligations under the
trust preferred securities issued by each trust. The Corporation has the right
to defer payment of interest on the notes and, therefore, distributions on the
trust preferred securities, for up to five years, but not beyond the stated
maturity date in the table above.
In March, 2005, the Board of Governors of the Federal Reserve System issued a
final rule allowing bank holding companies to continue to include qualifying
trust preferred securities in their Tier I Capital for regulatory capital
purposes, subject to a 25% limitation to all core (Tier I) capital elements, net
of goodwill less any associated deferred tax liability. The final rule provides
a five-year transition period, ending March 31, 2009, for applications of the
aforementioned quantitative limitation. As of September 30, 2005, 100% of the
trust preferred securities noted in the table above qualified as Tier I capital
under the final rule adopted in March, 2005.
NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement 123 (Revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R)
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements over the period during which an employee
is required to provide service in exchange for the award. SFAS 123(R)
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based method in accounting for share-based transactions with employees. SFAS
123(R) also amends FASB Statement No. 95, "Statement of Cash Flows", to require
that excess tax benefits be reported as a financial cash inflow rather than as a
reduction of taxes paid. SFAS 123(R) is effective as of the beginning of the
first interim reporting period that begins after June 15, 2005. On April 14,
2005, the Securities and Exchange Commission amended the effective date of this
statement. As a result, SFAS 123(R) is now effective for most public companies
for annual (rather than interim) periods that begin after June 15, 2005. SFAS
123(R) is not expected to have a material effect on the Corporation's
consolidated financial position or results of operations.
In September, 2004, the FASB issued FASB Staff Position (FSP) Emerging Issues
Task Force (EITF) Issue No. 03-1-1 delaying the effective date of paragraphs
10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. On June 30, 2005, the FASB decided not to
provide additional guidance on the meaning of other-than-temporary impairment,
but directed its staff to issue proposed FSP (FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments").
This FSP will replace the guidance set forth in paragraphs 10-18 of Issue 03-1
with references to existing other-than-temporary impairment guidance and clarify
that an investor should recognize an impairment loss no later than when the
impairment is deemed other-than-temporary, even if a decision to sell has not
been made. FSP FAS 115-1 will be effective for other-than-temporary impairment
analysis conducted in periods beginning after September 15, 2005. Management
believes this guidance will not have a material impact on the Corporation.
NOTE 8: BUSINESS COMBINATIONS
On June 1, 2004, First Busey Corporation acquired all the outstanding common
stock of First Capital Bankshares, Inc. and its subsidiary First Capital Bank, a
$239 million bank headquartered in Peoria, Illinois. This acquisition expanded
the Corporation's banking presence in central Illinois into Peoria and
surrounding communities. The transaction was accounted for as a purchase and the
results of operations of both entities since the acquisition date have been
included in the consolidated financial statements. The purchase price of
$42,072,000 was allocated based upon the fair value of the assets acquired and
liabilities assumed. The excess of the total acquisition cost
13 of 43
over the fair value of the net assets acquired has been allocated to core
deposit intangible and goodwill. The core deposit intangible of $2,383,000 is
being amortized over periods ranging from three to ten years.
On May 20, 2005, First Capital Bank merged into Busey Bank bringing all Illinois
banking locations under one state bank charter. Following the merger, Busey Bank
has 21 banking centers located in Illinois.
On July 29, 2005, First Busey Corporation acquired all the outstanding common
stock of Tarpon Coast Bancorp, Inc. (Tarpon) and its subsidiary, Tarpon Coast
National Bank, a $153 million bank headquartered in Port Charlotte, Florida.
Tarpon shareholders received $27.00 per share in a combination of First Busey
common shares and cash, while option and warrant holders received $27.00 per
share less exercise price. First Busey Corporation issued 849,965 shares of
common stock and paid cash of $18,797,000 to Tarpon shareholders, which was
funded through the issuance of long-term debt and $10 million in additional
trust preferred securities. Of the 849,965 shares of common stock issued in the
Tarpon acquisition, stock certificates representing 25,090 shares have not been
issued to shareholders by First Busey pending the receipt of the appropriate
instructions from Tarpon shareholders. The value of these shares has been
included in "Common stock to be issued" on First Busey's consolidated balance
sheet. The transaction has been accounted for as a purchase and the results of
operations since the acquisition date have been included in the consolidated
financial statements. The purchase price of $35,881,000 was allocated based upon
the fair value of the assets acquired and liabilities assumed. The excess of the
total acquisition cost over the fair value of the net assets acquired has been
allocated to core deposit intangible and goodwill. The core deposit intangible
of $1,710,000 is being amortized over periods ranging from three to five years.
Pro forma unaudited operating results for the nine months ended September 30,
2005 and 2004, giving effect to the Tarpon Coast acquisition as if it had
occurred as of January 1, 2004, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------- ------- ------- -------
(Dollars in thousands except per share data)
Interest income $31,131 $25,035 $88,143 $66,384
Interest expense 12,151 8,949 33,017 22,450
Provision for loan losses 650 1,273 2,825 2,417
Noninterest income 6,186 6,299 18,306 18,708
Noninterest expense 14,880 12,642 41,143 35,034
------- ------- ------- -------
Income before income taxes $ 9,637 $ 8,470 $29,464 $25,191
Income taxes 2,968 2,690 9,715 8,464
------- ------- ------- -------
Net income $ 6,669 $ 5,780 $19,749 $16,727
======= ======= ======= =======
Earnings per share - basic $ 0.31 $ 0.27 $ 0.93 $ 0.79
======= ======= ======= =======
Earnings per share - diluted $ 0.31 $ 0.27 $ 0.92 $ 0.78
======= ======= ======= =======
14 of 43
NOTE 9: OUTSTANDING COMMITMENTS
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers in
the way of commitments to extend credit. They involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheets.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Corporation uses
the same credit policies in making commitments and conditional obligations as
they do for on-balance-sheet instruments.
A summary of the contractual amount of the Corporation's exposure to off-balance
sheet risk follows:
September 30, 2005 December 31, 2004
------------------ -----------------
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $508,211 $413,679
Standby letters of credit 11,613 12,507
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments are generally at variable interest rates and generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The customer's credit worthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Corporation upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including bond financing and similar transactions, and primarily have terms of
one year or less. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds collateral, which may include accounts receivable,
inventory, property and equipment, income producing properties, supporting those
commitments if deemed necessary. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the Corporation
would be required to fund the commitment. The maximum potential amount of future
payments the Corporation could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Corporation would be entitled to seek recovery from the customer. As of
September 30, 2005, and December 31, 2004, no amounts have been recorded as
liabilities for the Corporation's potential obligations under these guarantees.
As of September 30, 2005, Busey Bank had entered into contractual commitments
for the construction of a new branch location in Normal, Illinois. Busey Bank
Florida had entered into separate contractual commitments for the construction
of a new branch location in Cape Coral, Florida. Total commitment for these two
projects is approximately $3,407,000. These projects are expected to be
completed during the first quarter of 2006.
15 of 43
NOTE 10: REPORTABLE SEGMENTS AND RELATED INFORMATION
First Busey Corporation has four reportable segments, Busey Bank, Busey Bank
Florida, Tarpon Coast National Bank, and Busey Investment Group. Busey Bank
provides a full range of banking services to individual and corporate customers
through its branch network in Champaign, McLean, Peoria, Tazewell, and Ford
Counties in Illinois, through its branch in Indianapolis, Indiana, and through
its loan production office in Fort Myers, Florida. Busey Bank Florida provides a
full range of banking services to individual and corporate customers in Fort
Myers and Cape Coral, Florida. Tarpon Coast National Bank provides a full range
of banking services to individuals and commercial customers in Charlotte and
Sarasota Counties in Southwest Florida.
First Capital Bank, acquired by First Busey Corporation on June 1, 2004, merged
into Busey Bank on May 20, 2005. Prior to this merger, First Capital Bank was a
separate reportable segment providing a full range of banking services to
individual and corporate customers in Peoria and Pekin, Illinois. Following the
merger, the assets and operating results of the Peoria and Pekin markets are
included in Busey Bank. Segment information for the period ended September 30,
2004, has been restated to reflect the combination of Busey Bank and First
Capital Bank.
Busey Investment Group is a wholly-owned subsidiary of First Busey Corporation
and owns three subsidiaries: First Busey Trust & Investment Co. which provides
trust and asset management services to individual and corporate customers
throughout Central Illinois; First Busey Securities, Inc., a full-service
broker/dealer subsidiary; and Busey Insurance Services, Inc., an insurance
agency which provides personal insurance products and specializes in long-term
healthcare insurance.
The Corporation's four reportable segments are strategic business units that are
separately managed as they offer different products and services and have
different marketing strategies.
The segment financial information provided below has been derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the Corporation. The accounting policies of these
segments are the same as those described in the summary of significant
accounting policies in the annual report. The Corporation accounts for
intersegment revenue and transfers at current market value.
16 of 43
Following is a summary of selected financial information for the Corporation's
business segments for the nine-month periods ended September 30, 2005, and
September 30, 2004:
Nine Months Ended September 30,
2005 2004
----------- -------------
(dollars in thousands)
Interest Income:
Busey Bank $ 70,304 $ 55,505
Busey Bank Florida 11,639 5,739
Tarpon Coast National Bank 1,384 -
Busey Investment Group 131 108
All Other 35 97
----------- -----------
Total Interest Income $ 83,493 $ 61,449
----------- -----------
Interest Expense:
Busey Bank $ 24,031 $ 16,834
Busey Bank Florida 3,893 1,855
Tarpon Coast National Bank 260 -
Busey Investment Group - -
All Other 3,425 2,260
----------- -----------
Total Interest Expense $ 31,609 $ 20,949
----------- -----------
Other Income:
Busey Bank $ 11,666 $ 12,111
Busey Bank Florida 479 377
Tarpon Coast National Bank 257 -
Busey Investment Group 5,617 5,498
All Other (382) (237)
----------- -----------
Total Other Income $ 17,637 $ 17,749
----------- -----------
Net Income:
Busey Bank $ 18,821 $ 15,845
Busey Bank Florida 2,332 1,021
Tarpon Coast National Bank 158 -
Busey Investment Group 1,603 1,534
All Other (2,543) (1,715)
----------- -----------
Total Net Income $ 20,371 $ 16,685
----------- -----------
Goodwill:
Busey Bank $ 30,237 $ 30,299
Busey Bank Florida - -
Tarpon Coast National Bank 21,191 -
Busey Investment Group - -
All Other 1,548 1,548
----------- -----------
Total Goodwill $ 52,976 $ 31,847
----------- -----------
Net Assets:
Busey Bank $ 1,845,048 $ 1,789,554
Busey Bank Florida 241,832 161,924
Tarpon Coast National Bank 176,705 -
Busey Investment Group 6,713 6,159
All Other (42,726) 7,861
----------- -----------
Total Assets $ 2,227,572 $ 1,965,498
----------- -----------
17 of 43
FORWARD LOOKING STATEMENTS
This presentation includes forward looking statements that are intended to be
covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements include but are not limited
to comments with respect to the objectives and strategies, financial condition,
results of operations and business of First Busey Corporation.
These forward looking statements involve numerous assumptions, inherent risks
and uncertainties, both general and specific, and the risk that predictions and
other forward looking statements will not be achieved. The Corporation cautions
you not to place undue reliance on these forward looking statements as a number
of important factors could cause actual future results to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in such
forward looking statements.
These risks, uncertainties and other factors include the general state of the
economy, both on a local and national level, the ability of the Corporation to
successfully complete acquisitions, the continued growth of geographic regions
served by the Corporation, and the retention of key individuals in the
Corporation's management structure.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial condition
of First Busey Corporation and Subsidiaries ("Corporation") at September 30,
2005 (unaudited), as compared with December 31, 2004 and the results of
operations for the nine months ended September 30, 2005 and 2004 (unaudited),
and the results of operations for the three months ended September 30, 2005 and
2004 (unaudited). This discussion and analysis should be read in conjunction
with the Corporation's consolidated financial statements and notes thereto
appearing elsewhere in this quarterly report.
Certain reclassifications have been made to the balances, with no effect on net
income, as of and for the three and nine months ended September 30, 2004, to be
consistent with the classifications adopted as of and for the three and nine
months ended September 30, 2005.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are critical to the portrayal and
understanding of the Corporation's financial condition and results of operations
and require management to make assumptions that are difficult, subjective or
complex. These estimates involve judgments, estimates and uncertainties that are
susceptible to change. In the event that different assumptions or conditions
were to prevail, and depending on the severity of such changes, the possibility
of materially different financial condition or results of operations is a
reasonable likelihood.
ALLOWANCE FOR LOAN LOSSES
First Busey Corporation has established an allowance for loan losses which
represents the Corporation's estimate of the probable losses that have occurred
as of the date of the consolidated financial statements.
Management has established an allowance for loan losses which reduces the total
loans outstanding by an estimate of uncollectible loans. Loans deemed
uncollectible are charged against and reduce the allowance. Periodically, a
provision for loan losses is charged to current expense. This provision acts to
replenish the allowance for loan losses and to maintain the allowance at a level
that management deems adequate.
There is no precise method of predicting specific loan losses or amounts which
ultimately may be charged off on
18 of 43
segments of the loan portfolio. The determination that a loan may become
uncollectible, in whole or in part, is a matter of judgment. Similarly, the
adequacy of the allowance for loan losses can be determined only on a judgmental
basis, after full review, including (a) consideration of economic conditions and
their effect on particular industries and specific borrowers; (b) a review of
borrowers' financial data, together with industry data, the competitive
situation, the borrowers' management capabilities and other factors; (c) a
continuing evaluation of the loan portfolio, including monitoring by lending
officers and staff credit personnel of all loans which are identified as being
of less than acceptable quality; (d) an in-depth evaluation, on a monthly basis,
of all impaired loans (loans are considered to be impaired when based on current
information and events, it is probable the Corporation will not be able to
collect all amounts due); and (e) an evaluation of the underlying collateral for
secured lending, including the use of independent appraisals of real estate
properties securing loans.
Periodic provisions for loan losses are determined by management based upon the
size and the quality of the loan portfolio measured against prevailing economic
conditions and historical loan loss experience and also based on specific
exposures in the portfolio. Management has instituted a formal loan review
system supported by an effective credit analysis and control process. The
Corporation will maintain the allowance for loan losses at a level sufficient to
absorb estimated uncollectible loans and, therefore, expects to make periodic
additions to the allowance for loan losses.
REVENUE RECOGNITION
Income on interest-earning assets is accrued based on the effective yield of the
underlying financial instruments. A loan is considered to be impaired when,
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due. The accrual of interest income on impaired
loans is discontinued when there is reasonable doubt as to the borrower's
ability to meet contractual payments of interest or principal.
FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AS COMPARED TO DECEMBER 31, 2004
Total assets increased $313,131,000 or 15.9%, to $2,277,572,000 at September 30,
2005 from $1,964,441,000 at December 31, 2004. Of the increase in total assets,
$176,920,000 is attributable to the acquisition of Tarpon Coast National Bank.
Most of the balance sheet growth occurred in loans which increased $233,282,000
or 15.8% to $1,709,182,000 as of September 30, 2005, compared to $1,475,900,000
as of December 31, 2004. Of the increase in loans, $122,114,000 is attributable
to the Tarpon Coast National Bank acquisition. The remaining growth in loans is
primarily attributable to growth in real estate construction, 1-4 family
residential mortgages, and non-farm nonresidential mortgages offset partially by
decreases in commercial loan balances and installment loans. Real estate
construction loans grew $74,815,000 or 31.8% to $310,362,000 as of September 30,
2005, compared to $235,547,000 on December 31, 2004.
The primary reason for the significant growth in the real estate construction
loans category was the increase in such loans at Busey Bank Florida, under that
bank's short-term residential construction lending program, instituted in March,
2003. The lending program was developed at Busey Bank Florida and was meant to
capitalize on the tremendous growth in the Southwest Florida real estate market.
As a result of some concern regarding the accelerated growth rate of loans made
pursuant to this program, the Corporation has terminated activity under the
program. However, management believes the loans provided under such program do
not contain excessive risk and otherwise meet the underwriting standards of
Busey Bank Florida. While management believes growth will continue in real
estate construction loans as long as the real estate market remains strong,
particularly in Southwest Florida, management does not expect this growth rate
will be as significant as that recorded over the past eighteen months.
Total deposits increased $264,672,000, or 17.0%, to $1,823,494,000 at September
30, 2005 from $1,558,822,000 at December 31, 2004. Noninterest-bearing deposits
increased 20.1% to $256,933,000 at September 30, 2005 from $213,921,000 at
December 31, 2004. Interest-bearing deposits increased 16.5% to $1,566,561,000
at September 30, 2005, from $1,344,901,000 at December 31, 2004. At acquisition,
Tarpon Coast National Bank had $139,430,000 in total deposits, $47,185,000 in
noninterest-bearing deposits and $92,245,000 in interest-
19 of 43
bearing deposits. Busey Bank's deposit growth accounts for $79,851,000 and Busey
Bank Florida accounts for the $56,735,000 of the remaining deposit growth.
During the first nine months of 2005, the Corporation repurchased 103,340 shares
of its common stock at an aggregate cost of $2,131,000. Following the purchase
of these shares the Corporation has repurchased all shares under its 2001 Stock
Repurchase Plan. On February 27, 2004, First Busey's Board of Directors approved
a stock repurchase plan for the repurchase of 750,000 shares of common stock. Of
the shares repurchased during the first nine months of 2005, 10,889 were
repurchased under the 2001 Stock Repurchase Plan, and the remaining 92,451 were
repurchased under the 2004 Plan. The Corporation is purchasing shares for the
treasury as they become available in order to meet future issuance requirements
of previously granted non-qualified stock options. As of September 30, 2005,
there were 374,325 options currently exercisable. There were an additional
346,400 stock options outstanding but not currently exercisable.
ASSET QUALITY
The following table sets forth the components of non-performing assets and past
due loans.
September 30, 2005 December 31, 2004
------------------ -----------------
(Dollars in thousands)
Non-accrual loans $1,656 $1,523
Loans 90 days past due, still accruing 913 2,141
Other real estate owned 221 4,212
Non-performing other assets 1 23
------ ------
Total non-performing assets $2,791 $7,899
====== ======
Total non-performing assets as a percentage of total assets 0.12% 0.40%
====== ======
Total non-performing assets as a percentage of loans plus
non-performing assets 0.16% 0.53%
====== ======
Total non-performing assets decreased $5,108,000 to $2,791,000 as of September
30, 2005, from $7,899,000 as of December 31, 2004, due to a decrease in the
balances of loans 90 days past due and still accruing and a decrease in other
real estate owned, which were partially offset by an increase in non-accrual
loans. The balance of other real estate owned decreased $3,991,000 during the
nine-month period.
In September, 2003, upon completion of foreclosure proceedings, Busey Bank
became owner of a hotel property in Bloomington, Illinois. In December, 2003,
ownership of this property was transferred to First Busey Resources, Inc., a
nonbank subsidiary of First Busey Corporation. The Corporation sold this
property in September, 2005, for $3,157,000. In September, 2004, after holding
title for one year, the Corporation began to depreciate the property and its
contents for book purposes. Depreciation expense of $132,000 for the nine months
ended September 30, 2005, has been included in other operating expenses as were
all other expenses associated with holding and maintaining properties held in
other real estate owned. The carrying value of this hotel property, included in
other real estate owned, was $3,115,000 when it was sold in September, 2005, and
$3,247,000 as of December 31, 2004.
20 of 43
POTENTIAL PROBLEM LOANS
Potential problem loans are those loans which are not categorized as impaired,
non-accrual, past due or restructured, but where current information indicates
that the borrower may not be able to comply with present loan repayment terms.
Management assesses the potential for loss on such loans as it would with other
problem loans and has considered the effect of any potential loss in determining
its provision for loan losses. Potential problem loans totaled $11,467,000 at
September 30, 2005, as compared to $3,245,000 as of December 31, 2004.
Of the increase in potential problem loans, $6,313,000 is related to two large
commercial credits. $2,289,000 is related to an operating line to a commercial
customer that experiences seasonal cash flow deficiencies. A plan is in place to
significantly reduce the outstanding balances to this customer through the sale
of real estate and collection of commercial receivables. $4,024,000 is related
to a non-farm nonresidential mortgage loan due to the loss of a tenant which
occupied a significant portion of the building. There are no other loans
identified which management believes represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources. There are no other credits
identified about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrower(s) to
comply with the loan repayment terms.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED TO SEPTEMBER 30, 2004
SUMMARY
Net income for the nine months ended September 30, 2005, increased 22.1% to
$20,371,000 compared to $16,685,000 for the comparable nine-month period in
2004. Year-to-date diluted earnings per share increased 21.0% to $0.98 for the
nine months ended September 30, 2005, compared to $0.81 for the comparable
period in 2004. The Corporation's return on average assets was 1.33% for the
nine months ended September 30, 2005, compared to 1.32% for the comparable
period in 2004. The Corporation's return on average shareholders' equity was
18.8% for the nine months ended September 30, 2005, compared to 17.34% for the
same period in 2004.
21 of 43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND INTEREST RATES
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
--------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------- ---------------------------------------
(Dollars in thousands)
ASSETS
Interest-bearing bank deposits $ 1,592 $ 35 2.94% $ 3,466 $ 17 0.66%
Federal funds sold 19,886 $ 358 2.41% 8,491 93 1.46%
Investment securities
U.S. Government obligations 211,771 4,548 2.87% 151,178 2,968 2.62%
Obligations of states and political
subdivisions (1) 57,575 2,566 5.96% 48,847 2,197 6.01%
Other securities 48,744 1,431 3.93% 39,782 1,139 3.83%
Loans (net of unearned interest) (1) (2) 1,567,303 75,685 6.46% 1,322,833 55,989 5.65%
-------------------------- --------------------------
Total interest earning assets $ 1,906,871 $ 84,623 5.93% $ 1,574,597 $ 62,403 5.29%
========== ===========
Cash and due from banks 48,674 45,024
Premises and equipment 29,268 24,060
Allowance for loan losses (20,494) (17,353)
Other assets 85,479 59,275
-------------- -------------
Total Assets $ 2,049,798 $ 1,685,603
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction deposits $ 39,643 $ 253 0.85% $ 24,539 $ 120 0.65%
Savings deposits 115,680 604 0.70% 111,899 514 0.61%
Money market deposits 582,597 6,324 1.45% 496,296 2,712 0.73%
Time deposits 678,030 16,194 3.19% 547,117 11,512 2.81%
Short-term borrowings:
Federal funds purchased 9,973 181 2.43% 6,606 63 1.27%
Repurchase agreements 43,781 624 1.91% 21,330 182 1.14%
Other 5,487 100 2.44% 8,636 107 1.66%
Long-term debt 161,000 4,837 4.02% 127,157 3,803 3.99%
Junior subordinated debt owed
to unconsolidated trusts 44,000 2,492 7.57% 34,000 1,936 7.61%
-------------------------- --------------------------
Total interest-bearing liabilities $ 1,680,191 $ 31,609 2.52% $ 1,377,580 $ 20,949 2.03%
========== ===========
Net interest spread 3.41% 3.26%
============= =============
Demand deposits 212,268 170,476
Other liabilities 12,483 9,046
Stockholders' equity 144,856 128,501
-------------- -------------
Total Liabilities and Stockholders' Equity $ 2,049,798 $ 1,685,603
============== =============
Interest income / earning assets (1) $ 1,906,871 $ 84,623 5.93% $ 1,574,597 $ 62,403 5,29%
Interest expense / earning assets $ 1,906,871 $ 31,609 2.21% $ 1,574,597 $ 20,949 1.77%
----------------------- ------------------------
Net interest margin (1) $ 53,014 3.72% $ 41,454 3.52%
======================= ========================
(1) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2005 and 2004.
(2) Non-accrual loans have been included in average loans, net of unearned
interest.
22 of 43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Change due to(1)
Average Average Total
Volume Yield/Rate Change
------------------------------------------
(Dollars in thousands)
Increase in interest income:
Interest-bearing bank deposits $ (3) $ 21 $ 18
Federal funds sold 179 86 265
Investment securities:
U.S. Government obligations 1,280 300 1,580
Obligations of states and political
subdivisions (2) 389 (20) 369
Other securities 262 30 292
Loans (2) 11,174 8,522 19,696
------------------------------------------
Change in interest income (2) $ 13,281 $ 8,939 $ 22,220
------------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction deposits $ 88 $ 45 $ 133
Savings deposits 18 72 90
Money market deposits 541 3,071 3,612
Time deposits 2,993 1,689 4,682
Short-term borrowings:
Federal funds purchased 42 76 118
Repurchase agreements 273 169 442
Other (47) 40 (7)
Long-term debt 1,017 17 1,034
Junior subordinated debt owed to unconsolidated trusts 566 (10) 556
------------------------------------------
Change in interest expense $ 5,491 $ 5,169 $ 10,660
------------------------------------------
Increase in net interest income (2) $ 7,790 $ 3,770 $ 11,560
==========================================
(1) Changes due to both rate and volume have been allocated proportionally.
(2) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2005 and 2004.
23 of 43
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $332,274,000 or 21.1% to $1,906,871,000 for the
nine months ended September 30, 2005, as compared to $1,574,597,000 for the same
period last year. Average loan balances increased $244,470,000 or 18.5% to
$1,567,303,000 for the nine months ended September 30, 2005, compared to
$1,322,833,000 during the first nine months of 2004. This growth in average
earning assets and loans outstanding is due primarily to growth in Busey Bank
Florida and the acquisition of First Capital Bank in June, 2004. The acquisition
of Tarpon Coast National Bank had limited impact on increase in average earning
assets and associated interest income on a year-to-date basis through September
30, 2005, as Tarpon results have been included in the consolidated totals since
acquisition on July 29, 2005.
Interest-bearing liabilities averaged $1,680,191,000 during the first nine
months of 2005, an increase of $302,611,000 or 22.0% from the average balance of
$1,377,580,000 for the comparable period in 2004. In comparing the average
balance of interest-bearing liabilities for the first nine months of 2005 to the
same period in 2004, First Busey experienced growth in all categories of funding
sources except other short-term borrowings. Growth was particularly strong in
money market deposits, time deposits, repurchase agreements, and long-term debt.
Again, this growth is related primarily to the June, 2004, addition of First
Capital, growth in the Florida market, and moderately by the addition of Tarpon
Coast.
Income on interest-earning assets is accrued on the effective yield of the
underlying financial instruments. A loan is considered to be impaired when,
based on current information and events, it is probable the Corporation will not
be able to collect all amounts due. The accrual of interest income on impaired
loans is discontinued when there is reasonable doubt as to the borrower's
ability to meet contractual payments of interest or principal.
Net interest income, on a fully taxable equivalent basis, increased $11,560,000
or 27.9% to $53,014,000 for the nine months ended September 30, 2005, compared
to $41,454,000 for the comparable period in 2004. Net interest margin, the
Corporation's net interest income, expressed as a percentage of average earning
assets stated on a fully taxable equivalent basis, was 3.72% for the nine months
ended September 30, 2005, as compared to 3.52% for the comparable period in
2004. The net interest margin expressed as a percentage of average total assets,
also on a fully taxable equivalent basis, was 3.46% for the nine months ended
September 30, 2005, compared to 3.29% for the comparable period in 2004.
Interest income, on a tax equivalent basis, for the nine months ended September
30, 2005, was $84,623,000, which is $22,220,000 or 35.6% higher than the
$62,403,000 earned during the comparable period in 2004. The average yield on
interest-earning assets increased 64 basis points to 5.93% for the nine months
ended September 30, 2005, compared to 5.29% for the comparable period in 2004.
Asset growth, particularly in loans, combined with higher yields on outstanding
loans fueled the increase in interest income.
Interest expense for the nine months ended September 30, 2005, was $31,609,000,
which is $10,660,000 or 50.9% higher than the $20,949,000 recognized during
comparable period in 2004. The increase in interest expense is related
predominantly to the increase in average outstanding balances of the various
funding sources, particularly in time deposits. Growth in the average balance of
time deposits, again, is related to the addition of First Capital and Busey Bank
Florida's growth. The average rate paid on interest-bearing liabilities
increased 49 basis points to 2.52% for the nine months ended September 30, 2005,
compared to 2.03% for the comparable period in 2004. The average rates paid on
all categories of interest-bearing liabilities were higher during the first nine
months of 2005 than in the comparable period in 2004 with the exception of
junior subordinated debt owed to unconsolidated trusts.
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses of $2,765,000 during the nine months
ended September 30, 2005, an increase of $445,000 or 19.2% from the $2,320,000
recorded during the comparable period in 2004 due to loan growth, specifically
the loan growth under the short-term construction loan program at Busey Bank
Florida. The
24 of 43
provision and net charge-offs for the nine-month period ended September 30,
2005, resulted in the allowance representing 1.32% of total loans and 881% of
non-performing loans as of September 30, 2005, as compared to the allowance
representing 1.30% of outstanding loans and 524% of non-performing loans as of
December 31, 2004. Net charge-offs for the first nine months of 2005 were
$570,000 compared to $1,914,000 for the comparable period in 2004. The net
charge-off ratio (net charge-offs as a percentage of average loans) was 0.05%
for the nine-month period ended September 30, 2005, reflecting an improvement
from 0.19% for the same period in 2004. Of the net charge-offs recognized during
the first nine months of 2004, $1,394,000 was related to one commercial
customer. The increase in provision expense during the first nine months of 2005
is related to general growth in the portfolio combined with the increase in
potential problem loans during this same period. The adequacy of the allowance
for loan losses is consistent with management's consideration of the composition
of the portfolio, non-performing asset and potential problem loan levels, recent
credit quality experience, historic charge-off trends, and prevailing economic
conditions among other factors.
OTHER INCOME, OTHER EXPENSE, AND INCOME TAXES
Total other income, excluding security gains, increased $672,000 or 4.0% to
$17,731,000 for the nine months ended September 30, 2005, compared to
$16,659,000 for the same period in 2004. Growth in trust fees, service charges
and other operating income was partially offset by lower commissions and
brokerage fees.
During the first nine months of 2005 the Corporation recognized gains of
$1,932,000 on the sale of $130,324,000 in mortgage loans compared to gains of
$1,984,000 on the sale of $139,699,000 of loans during the prior year period.
The interest-rate and debt markets have strong influence on the level of
mortgage loan originations and sales volumes. Management anticipates continued
sales from current production. The Corporation may realize gains and/or losses
on these sales dependent upon interest-rate movements and upon how receptive the
debt markets are to mortgage-backed securities.
Income recognized on service charges, trust fees, commissions, and loan gains is
recognized based on contractual terms and are accrued based on estimates, or are
recognized as transactions occur or services are provided. Income from the
servicing of sold loans is recognized based on estimated asset valuations and
transaction volumes. While these estimates and assumptions may be considered
complex, First Busey has implemented controls and processes to ensure the
accuracy of these accruals.
During the nine months ending September 30, 2005, the Corporation recognized
security gains of approximately $184,000 after income taxes, representing 0.9%
of net income. During the comparable period in 2004, security gains of
approximately $657,000 after income taxes were recognized, representing 3.9% of
net income. The Corporation owns a position in a qualified equity security with
substantial appreciated value. First Busey's Board of Directors has authorized
an orderly liquidation of this asset over a ten-year period.
Total other expenses increased $5,751,000 or 18.7% to $36,564,000 for the nine
months ending September 30, 2005, compared to $30,813,000 for the comparable
period in 2004. Salary and wages, employee benefits, occupancy and furniture and
equipment expenses were higher during the first nine months of 2005 compared to
the first nine months of 2004 due primarily to the acquisition of First Capital
Bank in June, 2004, and Tarpon Coast National Bank in July, 2005.
Income taxes for the nine months ended September 30, 2005, increased to
$9,821,000 as compared to $8,431,000 for the comparable period in 2004. As a
percentage of income before taxes, the provision for income taxes decreased
slightly to 32.5% for the nine months ended September 30, 2005, from 33.6% for
the comparable period in 2004.
25 of 43
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED TO SEPTEMBER 30, 2004
SUMMARY
Net income for three months ended September 30, 2005, increased $1,775,000 or
30.7% to $7,559,000 compared to $5,784,000 for the three months ended September
30, 2004. Fully diluted earnings per share increased $.08 or 28.6% to $0.36 for
the three months ended September 30, 2005, compared to $0.28 for the comparable
period in 2004. The Corporation's return on average assets was 1.39% for the
three-month period ended September 30, 2005, compared to 1.20% for the
comparable period in 2004. The return on average shareholders' equity was 19.50%
for the three-month period ended September 30, 2005, compared to 17.51% for the
comparable period in 2004.
26 of 43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND INTEREST RATES
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
--------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------- ---------------------------------------
(Dollars in thousands)
ASSETS
Interest-bearing bank deposits $ 2,300 $ 19 3.28% $ 3,058 $ 7 0.91%
Federal funds sold 15,318 135 3.50% 17,355 65 1.49%
Investment securities
U.S. Government obligations 202,985 1,542 3.01% 171,064 1,078 2.50%
Obligations of states and political
subdivisions (1) 65,904 966 5.82% 52,447 774 5.85%
Other securities 47,798 451 3.74% 60,119 540 3.56%
Loans (net of unearned interest) (1) (2) 1,663,366 27,746 6.62% 1,473,532 21,165 5.70%
-------------------------- --------------------------
Total interest earning assets $ 1,997,671 $ 30,859 6.13% $ 1,777,575 $ 23,629 5.27%
========== =============
Cash and due from banks 51,788 49,323
Premises and equipment 33,925 26,356
Allowance for loan losses (21,909) (18,506)
Other assets 93,343 78,632
-------------- -------------
Total Assets $ 2,154,818 $ 1,913,380
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction deposits $ 43,013 $ 91 0.84% $ 29,637 $ 66 0.885%
Savings deposits 123,204 229 0.74% 112,567 194 0.68%
Money market deposits 611,233 2,610 1.69% 539,988 1,166 0.86%
Time deposits 703,831 5,999 3.38% 645,533 4,535 2.79%
Short-term borrowings:
Federal funds purchased 6,921 64 3.67% 1,734 8 1.83%
Repurchase agreements 43,107 251 2.31% 38,673 120 1.23%
Other 1,000 9 3.57% 13,076 61 1.85%
Long-term debt 172,216 1,785 4.11% 168,723 1,572 3.70%
Junior subordinated debt owed
to unconsolidated trusts 50,000 933 7.40% 40,000 715 7.09%
-------------------------- --------------------------
Total interest-bearing liabilities $ 1,754,525 $ 11,971 2.71% $ 1,589,931 $ 8,437 2.11%
========== ==========
Net interest spread 3.42% 3.16%
=========== =========
Demand deposits 232,309 182,363
Other liabilities 14,153 10,001
Stockholders' equity 153,831 131,085
-------------- -------------
Total Liabilities and Stockholders' Equity $ 2,154,818 $ 1,913,380
============== =============
Interest income / earning assets (1) $ 1,997,671 $ 30,859 6.13% $ 1,777,575 $ 23,629 5.27%
Interest expense / earning assets $ 1,997,671 $ 11,971 2.38% $ 1,777,575 $ 8,437 1.88%
----------------------- ----------------------
Net interest margin (1) $ 18,888 3.75% $ 15,192 3.39%
======================= ======================
(1) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2005 and 2004.
(2) Non-accrual loans have been included in average loans, net of unearned
interest.
27 of 43
FIRST BUSEY CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
Change due to(1)
Average Average Total
Volume Yield/Rate Change
---------------------------------------
(Dollars in thousands)
Increase (decrease) in interest income:
Interest-bearing deposits $ (1) $ 13 $ 12
Federal funds sold (7) 77 70
Investment securities:
U.S. Government obligations 221 243 464
Obligations of states and political
subdivisions (2) 197 (5) 192
Other securities (115) 26 (89)
Loans (2) 2,921 3,660 6,581
---------------------------------------
Change in interest income (2) $ 3,216 $ 4,014 $ 7,230
---------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction deposits $ 28 $ (3) $ 25
Savings deposits 19 16 35
Money market deposits 172 1,272 1,444
Time deposits 437 1,027 1,464
Short-term borrowings:
Federal funds purchased 40 16 56
Repurchase agreements 16 115 131
Other (84) 32 (52)
Long-term debt 33 180 213
Junior subordinated debt owed to unconsolidated trusts 185 33 218
---------------------------------------
Change in interest expense $ 846 $ 2,688 $ 3,534
---------------------------------------
Increase in net interest income (2) $ 2,370 $ 1,326 $ 3,696
=======================================
(1) Changes due to both rate and volume have been allocated proportionally.
(2) On a tax-equivalent basis, assuming a federal income tax rate of 35% for
2005 and 2004.
28 of 43
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST MARGIN
Average earning assets increased $220,096,000 or 12.4% to $1,997,671,000 for the
three months ended September 30, 2005, compared to $1,777,575,000 for the
comparable period last year. The average balance of loans outstanding, in
particular, increased $189,834,000 or 12.9% to $1,663,366,000 for the third
quarter of 2005 compared to $1,473,532,000 during the comparable period in 2004.
The averages of Tarpon Coast National Bank balance sheet items were included in
the calculation of the Corporation's consolidated average balances from
acquisition date, so were not included for the entire quarter, yet the addition
of Tarpon Coast National Bank contributed $90,962,000 to the growth in average
assets and $79,533,000 in average outstanding loans during the third quarter of
2005 as compared to the third quarter of 2004. Of the remaining growth in
average earning assets and average outstanding loans is attributable to growth
at Busey Bank Florida which experienced increases of $92,845,000 in average
earning assets and $91,493,000 in average outstanding loans.
Interest-bearing liabilities averaged $1,754,525,000 during the three months
ended September 30, 2005, an increase of $164,594,000 or 10.4% from the average
balance of $1,589,931,000 for the comparable period in 2004. Of this growth in
average interest-bearing liabilities, the addition of Tarpon Coast National Bank
contributed $62,209,000. Most of the remaining growth in funding sources is
related to funding requirements for the continued growth in Busey Bank Florida
as well as funding associated with the acquisition of Tarpon Coast.
Net interest income on a fully taxable equivalent basis, increased $3,696,000 or
24.3% to $18,888,000 for the three months ended September 30, 2005, compared to
$15,192,000 for the comparable period in 2004. Net interest margin, the
Corporation's net interest income, expressed as a percentage of average earning
assets stated on a fully taxable equivalent basis, was 3.75% for the three
months ended September 30, 2005, compared to 3.39% for the comparable period in
2004. Net interest margin expressed as a percentage of average total assets,
also on a fully taxable equivalent basis, was 3.48% for the three months ended
September 30, 2005, compared to 3.15% for the comparable period in 2004.
Interest income, on a tax equivalent basis, for the three months ended September
30, 2005, was $30,859,000, which is $7,230,000 or 30.6% higher than the
$23,629,000 earned during the comparable period in 2004. The average yield on
interest-earning assets increased 86 basis points to 6.13% for the three months
ended September 30, 2005, compared to 5.27% for the three months ended September
30, 2004. The increase in yields is due primarily to growth in the average
balance of outstanding loans relative to other interest-earning assets combined
with an increase in the yield on outstanding loans.
Interest expense for the three months ended September 30, 2005, was $11,971,000,
which is $3,534,000 or 41.9% higher than the $8,437,000 during the comparable
period in 2004. The average rate paid on interest-bearing liabilities increased
60 basis points to 2.71% for the three months ended September 30, 2005, compared
to 2.11% during the comparable period in 2004. Growth in the average balance of
interest-bearing deposit sources and debt financing combined with increases in
the average rates paid on most categories of interest-bearing liabilities,
particularly in money market and time deposits, contributed to this higher cost
of funds.
OTHER INCOME, OTHER EXPENSE, AND INCOME TAXES
Total other income, excluding security transactions, increased $605,000 or 10.8%
to $6,224,000 for the three months ended September 30, 2005, compared to
$5,619,000 for the comparable period in 2004. Growth in trust and brokerage
fees, fee income, gains on the sales of loans, and other operating income
account for most of this growth. Gains of $920,000 were recognized on the sale
of $63,158,000 of mortgage loans during the three months ending September 30,
2005, compared to gains of $703,000 on the sale of $48,988,000 in mortgage loans
during the prior year period.
During the three-month period ending September 30, 2005, the Corporation
recognized net security losses of approximately $64,000, after income taxes,
representing -0.8% of net income. During the comparable period in 2004, net
security gains of approximately $242,000, after income taxes, were recognized,
representing 4.2% of
29 of 43
net income. The Corporation recognized the losses during the third quarter of
2005 in order to reposition the investment portfolio for better performance
under the current interest-rate environment and to restructure maturities of
certain securities to better meet the liquidity needs of the organization.
Total other expenses increased $2,013,000 or 181% to $13,163,000 for the three
months ending September 30, 2005, compared to $11,150,000 for the comparable
period in 2004. Salaries and wage expense increased $833,000 or 15.9% to
$6,062,000 for the three months ended September 30, 2005, as compared to
$5,229,000 during the comparable period last year due to the addition of Tarpon
Coast National Bank combined with Busey Bank Florida expansion.
Income taxes for the three-month period ending September 30, 2005, increased to
$3,220,000 compared to $2,691,000 for the comparable period in 2004. As a
percentage of income before taxes, the provision for income taxes decreased
slightly to 30.0% for the three months ended September 30, 2005, from 31.7% for
the comparable period in 2004.
LIQUIDITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available to meet the present and future cash flow
obligations arising in the daily operations of the business. These financial
obligations consist of needs for funds to meet commitments to borrowers for
extensions of credit, funding capital expenditures, withdrawals by customers,
maintaining deposit reserve requirements, servicing debt, paying dividends to
shareholders, and paying operating expenses.
The Corporation's most liquid assets are cash and due from banks,
interest-bearing bank deposits, and Federal funds sold. The balances of these
assets are dependent on the Corporation's operating, investing, lending and
financing activities during any given period.
The Corporation's primary sources of funds consist of deposits, investment
maturities and sales, loan principal repayments, deposits, and capital funds.
Additional liquidity is provided by bank lines of credit, repurchase agreements,
brokered deposits, and the ability to borrow from the Federal Reserve Bank and
the Federal Home Loan Bank. The Corporation has an operating line in the amount
of $10,000,000, all of which was available as of September 30, 2005. Long-term
liquidity needs will be satisfied primarily through retention of capital funds.
An additional source of liquidity that can be managed for short-term and
long-term needs is the Corporation's ability to securitize or package loans
(primarily mortgage loans) for sale. During the first nine months of 2005 the
Corporation originated $133,714,000 and sold $130,324,000 in mortgage loans for
sale compared to originations of $116,948,000 and sales of $139,699,000 during
the first nine months of 2004. As of September 30, 2005, the Corporation held
$12,964,000 in loans held for sale. Management intends to sell these loans
during the fourth quarter of 2005.
The Corporation recently completed the acquisition of First Capital Bankshares,
Inc. of Peoria, Illinois (June, 2004) and of Tarpon Coast Bancorp, Inc. of Port
Charlotte, Florida (July, 2005). The First Capital acquisition consisted of all
cash consideration, and the Tarpon Coast acquisition consideration was a
stock/cash transaction. Cash requirements for each acquisition ($42,070,000 for
the First Capital acquisition and $19,103,000 for the Tarpon acquisition) were
satisfied through both the issuance of long-term subordinated debt within a
privately-placed trust preferred securities structure and commercial borrowings.
An aggregate of $25,000,000 of trust preferred securities were issued by the
Corporation's two trust subsidiaries formed for such issuances with the balance
borrowed in the form of a long-term note payable. The note payable requires
annual principal reductions of $4,000,000 beginning in January, 2007, and
matures in June, 2011. The Corporation will review various alternatives for
refinancing the debt associated with both of these transactions on a longer-term
basis and intends to determine its course of action during the first quarter of
2006.
The objective of liquidity management by the Corporation is to ensure that funds
will be available to meet
30 of 43
demand in a timely and efficient manner. Based upon the level of investment
securities that reprice within 30 days and 90 days, management currently
believes that adequate liquidity exists to meet all projected cash flow
obligations. The Corporation achieves a satisfactory degree of liquidity through
actively managing both assets and liabilities. Asset management guides the
proportion of liquid assets to total assets, while liability management monitors
future funding requirements and prices liabilities accordingly.
The Corporation's banking subsidiaries routinely enter into commitments to
extend credit in the normal course of their business. As of September 30, 2005,
the Corporation had outstanding loan commitments including lines of credit of
$508,211,000 compared to $413,679,000 as of December 31, 2004. The balance of
commitments to extend credit represents future cash requirement and some of
these commitments may expire without being drawn upon. The Corporation
anticipates it will have sufficient funds available to meet its current loan
commitments, including loan applications received and in process prior to the
issuance of firm commitments.
The Corporation has entered into certain contractual obligations and other
commitments. Such obligations generally relate to funding of operations through
deposits, debt issuance, and property and equipment leases.
The following table summarizes significant contractual obligations and other
commitments as of September 30, 2005:
Securities
Sold under
Agreements to Junior
Repurchase and Subordinated
Short- and Debt Owed to
Certificates Long-term Unconsolidated
Due Within of Deposit Borrowings Leases Trusts Total
----------------------------------------------------------------------------------
(Dollars in thousands)
1 year $ 455,396 $ 77,343 $ 977 $ - $ 533,716
2 years 155,220 26,223 902 - 182,345
3 years 62,329 42,373 747 - 105,449
4 years 37,673 17,373 318 - 55,364
5 years 21,712 15,872 116 - 37,700
Thereafter 588 44,542 181 50,000 95,311
-------------------------------------------------------------------
Total $ 732,918 $ 223,726 $ 3,241 $ 50,000 $ 1,009,885
===================================================================
Commitments to extend credit $ 508,211
===========
Net cash flows provided by operating activities totaled $21,776,000 during the
nine months ended September 30, 2005, compared to $43,532,000 during the prior
year period. Significant items affecting the cash flows provided by operating
activities are net income, depreciation and amortization expense, the provision
for loan losses, and activities related to the origination and sale of loans
held for sale. Operating cash flow decreased during the first nine months of
2005 compared to the same period in 2004 due primarily to higher mortgage loan
production. During the first nine months of 2005 the Corporation originated
$133,714,000 in loans held for sale and generated $132,256,000 from the sale of
held-for-sale loans resulting in net cash used in loan originations and sale of
$1,458,000. During the comparable period in 2004, the Corporation originated
$116,948,000 in held-for-sale loans and generated $141,683,000 from the sale of
held-for-sale loans leading to net cash provided by loan originations and sale
of $24,735,000.
Net cash used in investing activities was $139,598,000 for the nine months ended
September 30, 2005, compared to $260,056,000 for the comparable period in 2004.
Significant activities affecting cash flows from investing activities are those
activities associated with managing the Corporation's investment portfolio,
loans held in the Corporation's portfolio, and subsidiary or business unit
acquisition activities. During the nine months ended
31 of 43
September 30, 2005, proceeds from the sales and maturities of securities
classified as available for sale totaled $125,478,000, and the Corporation
purchased $87,515,000 in securities resulting in net cash generated by
securities activity of $37,963,000. In the comparable period of 2004 proceeds
from the sales and maturities of securities classified as available for sale
totaled $99,673,000, and the Corporation purchased $122,570,000 in securities
resulting in net cash used by securities activity of $22,897,000. The
Corporation's loan portfolio increased $115,138,000 during the first nine months
of 2005, compared to an increase of $148,932,000 in the comparable period of
2004. In July, 2005, the Corporation purchased the outstanding shares of Tarpon
Coast Bancorp resulting in the net use of $12,364,000. In June, 2004, the
Corporation purchased the outstanding shares of First Capital Bankshares
resulting in the net use of $35,990,000.
Net cash provided by financing activities was $129,657,000 during the first nine
months of 2005 compared to $226,044,000 for the comparable period in 2004.
Significant items affecting cash flows from financing activities are deposits,
short-term borrowings, long-term debt, and proceeds from the issuance of junior
subordinated debt owed to unconsolidated trusts. Deposits, which are the
Corporation's primary funding source, grew $125,242,000 during the first nine
months of 2005, down compared to the net increase of $154,967,000 during the
comparable period in 2004 The Corporation has increased its use of short-term
and long-term advances from the Federal Home Loan Banks of Chicago and Atlanta
to partially fund loan growth. The Corporation issued $10,000,000 in June, 2005,
and $15,000,000 in April, 2004, in long-term subordinated debt. Proceeds from
these issuances were used to partially fund the acquisitions of Tarpon Coast
National Bank in July, 2005, and First Capital Bank in June, 2004. The
Corporation also issued other long-term debt to fund the remainder of the
purchase prices in these acquisitions. These issues represent a significant
portion of the net cash provided by financing activities for the first nine
months of 2005 and 2004.
32 of 43
CAPITAL RESOURCES
Other than from the issuance of common stock, the Corporation's primary source
of capital is retained net income. During the nine months ended September 30,
2005, the Corporation earned $20,371,000 and paid dividends of $8,580,000 to
stockholders, resulting in retention of current earnings of $11,791,000. The
Corporation's dividend payout for the nine months ended September 30, 2005 was
42.1%.
The Corporation and the Banks are subject to regulatory capital requirements
administered by federal and state banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Banks must meet specific capital guidelines that involve the
quantitative measure of their assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Quantitative measures
established by regulation to ensure capital adequacy require the Corporation and
the Banks to maintain minimum amounts and ratios (set forth in the table below)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and Tier 1 capital (as defined) to average assets (as
defined).
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------
(Dollars in thousands)
AS OF SEPTEMBER 30, 2005:
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $ 173,802 10.34% $ 134,442 8.00% N/A N/A
Busey Bank $ 155,542 11.41% $ 109,024 8.00% $ 136,280 10.00%
Busey Bank Florida $ 24,212 12.79% $ 15,140 8.00% $ 18,925 10.00%
Tarpon Coast Nat'l Bank $ 13,119 9.86% $ 10,645 8.00% $ 13,306 10.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $ 146,803 8.74% $ 67,221 4.00% $ N/A N/A
Busey Bank $ 133,342 9.78% $ 54,512 4.00% $ 81,768 6.00%
Busey Bank Florida $ 21,834 11.54% $ 7,570 4.00% $ 11,355 6.00%
Tarpon Coast Nat'l Bank $ 11,911 8.95 $ 5,323 4.00% $ 7,984 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS)
Consolidated $ 146,803 7.05% $ 83,240 4.00% N/A N/A
Busey Bank $ 133,342 7.65% $ 76,285 4.00% $ 95,356 5.00%
Busey Bank Florida $ 21,834 9.10% $ 10,476 4.00% $ 13,094 5.00%
Tarpon Coast Nat'l Bank $ 11,911 8.30% $ 7,068 4.00% $ 8,835 5.00%
33 of 43
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of change in asset values due to movements in underlying
market rates and prices. Interest rate risk is the risk to earnings and capital
arising from movements in interest rates. Interest rate risk is the most
significant market risk affecting the Corporation as other types of market risk,
such as foreign currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Corporation's business activities.
The Corporation's subsidiary banks, Busey Bank and Busey Bank Florida have
asset-liability committees which meet at least quarterly to review current
market conditions and attempt to structure the banks' balance sheets to ensure
stable net interest income despite potential changes in interest rates with all
other variables constant.
The asset-liability committees use gap analysis to identify mismatches in the
dollar value of assets and liabilities subject to repricing within specific time
periods. The Funds Management Policies established by the asset-liability
committees and approved by the Banks' and Corporation's Board of Directors
establish guidelines for maintaining the ratio of cumulative rate-sensitive
assets to rate-sensitive liabilities within prescribed ranges at certain
intervals.
Interest-rate sensitivity is a measure of the volatility of the net interest
margin as a consequence of changes in market rates. The rate-sensitivity chart
shows the interval of time in which given volumes of rate-sensitive earning
assets and rate-sensitive interest-bearing liabilities would be responsive to
changes in market interest rates based on their contractual maturities or terms
for repricing. It is, however, only a static, single-day depiction of the
Corporation's rate sensitivity structure, which can be adjusted in response to
changes in forecasted interest rates.
34 of 43
The following table sets forth the static rate-sensitivity analysis of the
Corporation as of September 30, 2005:
Rate Sensitive Within
--------------------------------------------------------------------------------------------
1-30 31-90 91-180 181 Days - Over
Days Days Days 1 Year 1 Year Total
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing deposits $ 432 $ - $ - $ - $ - $ 432
Federal funds sold 56,541 - - - - 56,541
Investment securities
U.S. Governments 12,685 46,305 17,960 43,832 90,356 211,138
Obligations of states and
political subdivisions 1,304 6,723 3,004 2,548 61,151 74,730
Other securities 14,094 843 929 2,684 29,015 47,565
Loans (net of unearned int.) 696,631 103,881 119,424 163,477 625,769 1,709,182
--------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 781,687 $ 157,752 $ 141,317 $ 212,541 $ 806,291 $2,099,588
--------------------------------------------------------------------------------------------
Interest bearing transaction
deposits $ 43,895 $ - $ - $ - $ - $ 43,895
Savings deposits 128,806 - - - - 128,806
Money market deposits 660,942 - - - - 660,942
Time deposits 67,521 79,393 125,563 185,276 275,165 732,918
Short-term borrowings:
Repurchase agreements 48,025 - - - - 48,025
Other - - 1,000 - - 1,000
Long-term debt 2,720 3,500 53,456 13,500 102,325 175,501
Junior subordinated debt owed
to unconsolidated trusts - 25,000 - - 25,000 50,000
--------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 951,909 $ 107,893 $ 180,019 $ 198,776 $ 402,490 $1,841,087
Rate-sensitive assets less
rate-sensitive liabilities $ (170,222) $ 49,859 $ (38,702) $ 13,765 $ 403,801 $ 258,501
--------------------------------------------------------------------------------------------
Cumulative Gap $ (170,222) $ (120,363) $ (159,065) $ (145,300) $ 258,501
============================================================================
Cumulative amounts as a
percentage of total
rate-sensitive assets -8.11% -5.73% -7.58% -6.92% 12.31%
============================================================================
Cumulative ratio 0.82 0.89 0.87 0.90 1.14
============================================================================
The funds management policy of First Busey Corporation require the banks to
maintain a cumulative rate-sensitivity ratio of .75 - 1.25 in the 90-day,
180-day, and 1-year time periods. As of September 30, 2005, the Banks and the
Corporation, on a consolidated basis, are within those guidelines.
The foregoing table shows a negative (liability-sensitive) rate-sensitivity gap
of $170 million in the 1-30 day repricing period as there were more liabilities
subject to repricing during that time period than there were assets subject to
repricing within that same time period. On a cumulative basis, the gap remains
liability sensitive through one year. The composition of the gap structure at
September 30, 2005, indicates the Corporation would benefit more if interest
rates decrease during the next year by allowing the net interest margin to grow
as the volume of interest-bearing liabilities subject to repricing would be
greater than the volume of interest-earning assets subject to repricing during
the same period.
The Corporation's asset-liability committees do not rely solely on gap analysis
to manage interest-rate risk as interest rate changes do not impact all
categories of assets and liabilities equally or simultaneously. The
asset-liability committees supplement gap analysis with balance sheet and income
simulation analysis to determine the potential impact on net interest income of
changes in market interest rates. In these simulation models the balance sheet
is projected over a one-year period and net interest income is calculated under
current market rates, and then assuming permanent instantaneous shifts of +/-100
basis points and +200 basis points. Management
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measures such changes assuming immediate and sustained shifts in the Federal
funds rate and the corresponding shifts in other rate indices based on their
historical changes relative to changes in the Federal funds rate. The model
assumes asset and liability balances remain constant at September 30, 2005,
balances. The model uses repricing frequency on all variable-rate assets and
liabilities. The model also uses a historical decay rate on all fixed-rate core
deposit balances. Prepayment speeds on loans have been adjusted up and down to
incorporate expected prepayment in both a declining and rising rate environment.
Utilizing this measurement concept the interest rate risk of the Corporation,
expressed as a change in net interest income as a percentage of the net income
calculated in the constant base model, due to an immediate and sustained change
in interest rates at September 30, 2005, and December 31, 2004 was as follows:
Basis Point Changes
---------------------------------
-100 +100 +200
---------------------------------
September 30, 2005 (2.50%) 1.14% 2.21%
December 31, 2004 (5.57%) 3.05% 6.06%
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ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation conducted an evaluation, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Corporation's disclosure controls and procedures as of September 30, 2005. The
Corporation's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Corporation in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and
reported on a timely basis.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures as
of September 30, 2005, are effective in timely alerting them to material
information relating to First Busey Corporation, including its consolidated
subsidiaries, required to be included in the Corporation's periodic filings
under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
During the quarter ended September 30, 2005, the Corporation did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in First Busey Corporation's
reports filed under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to management, as appropriate to allow timely decisions regarding required
disclosure. Internal controls are procedures which are designed with the
objective of providing reasonable assurance that transactions are properly
authorized, assets are safeguarded against unauthorized or improper use, and
transactions are properly recorded and reported, all to permit the preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
First Busey Corporation's management does not expect that our disclosure
controls or our internal controls will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of the control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within First Busey Corporation
have been detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
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PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
Not Applicable
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents for the periods indicated a summary of
the purchases made by or on behalf of First Busey Corporation of
shares of its common stock.
Total Maximum
Number of Number of
Shares Shares
Purchased that May
as Part of Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid per Plans or Plans or
Purchased Share Programs Programs 1,2
-----------------------------------------------------------------------------------------------------
January 1 - 31, 2005 25,000 $ 20.93 25,000 735,889
February 1 - 28, 2005 20,000 20.81 20,000 715,889
March 1 - 31, 2005 40,000 20.75 40,000 675,889
April 1 - 30, 2005 15,000 19.75 15,000 660,889
May 1 - 31, 2005 - - - 660,889
June 1 - 30, 2005 - - - 660,889
July 1 - 31, 2005 3,340 19.76 3,340 657,549
August 1 - 31, 2005 - - - 657,549
September 1 - 30, 2005 - - - 657,549
--------------------------------------------
Total 103,340 $ 20.63 103,340
1 First Busey Corporation's board of directors approved a stock purchase plan on
March 20, 2001, for the repurchase of up to 750,000 shares of common stock. The
Corporation has repurchased all shares under the 2001 repurchase plan. First
Busey Corporation's board of directors approved a stock purchase plan on
February 17, 2004 for the repurchase of up to 750,000 shares of common stock.
The Corporation's 2004 repurchase plan has no expiration date.
2 Share and per share amounts have been retroactively adjusted to effect a
three-for-two common stock split declared on July 23, 2004, as if it had
occurred on January 1, 2004.
ITEM 3: Defaults Upon Senior Securities
Not Applicable
ITEM 4: Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5: Other Information
Not Applicable
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ITEM 6: Exhibits
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Corporation's Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Corporation's Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BUSEY CORPORATION
(REGISTRANT)
By: /s/ Douglas C. Mills
-----------------------------------------
Douglas C. Mills
Chairman of the Board and Chief Executive
Officer
By: /s/ Barbara J. Harrington
-----------------------------------------
Barbara J. Harrington
Chief Financial Officer
(Principal financial and accounting
officer)
Date: November 9, 2005
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