Saturday, November 21, 2009 East Central Illinois

First Busey chairman comments on stock price drop

By Don Dodson
Wednesday, November 4, 2009 7:00 AM CDT

CHAMPAIGN – The price of First Busey stock fell below $4 a share after the Champaign-based bank holding company announced a $284 million quarterly loss last week.

But First Busey Chairman Van Dukeman said he believes the price drop was related more to investors being less confident about the economy.

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"I don't pretend to understand what happens in the market. But I think the market over the last couple weeks turned bearish, led by financial stocks," Dukeman said in an interview Monday.

Investors are wondering whether the nation will slip back into recession after the economic stimulus is spent, he said.

For a while, investors were optimistic about recovery, "but the last two to three weeks they've turned the other way," he said. Banking and financial stocks were among the biggest losers.

First Busey stock was trading at $20 a share or higher as recently as the spring of 2008. But when the company's Florida banking operations got hit by Florida's collapsing real estate market, the price dropped to the $12 range.

It briefly recovered, but toppled early this year, plummeting from $18 a share to $6 a share in the matter of seven weeks. In September, prices fell to the $4.50 range.

In the 10 trading days between Oct. 21 and Nov. 3, First Busey's share price dropped 20 percent. That drop was steeper than the Standard & Poor's Banking Index, which fell about 7 percent.

Dukeman also addressed other topics, among them:

– The company plans to sell off nonperforming loans in the fourth quarter, with the most likely buyers being private equity funds, insurance companies and "highly liquid individuals." Some buyers will hold the underlying properties long enough to realize a gain on them.

The loans will be marketed by "aggregators," who will present the properties to potential investors, much as a broker would.

Even though Busey Bank doesn't want to hang onto those loans, Dukeman said there's a "very liquid" market for them.

How much the loans will sell for "depends on the underlying collateral," he said.

Undeveloped land in distressed areas may sell for anywhere from 10 cents to 20 cents on the dollar, depending on the location.

Improved properties, completed or close to completion, could sell for as little as 25 to 30 cents on the dollar, or as much as 50 to 60 cents on the dollar, depending on the location and condition of the property.

– First Busey wrote off all the goodwill on its Illinois and Indiana banking operations in the third quarter, after earlier writing off all the goodwill on its Florida banking operations.

The only goodwill left on the company's books is that associated with First Busey's non-bank subsidiaries, Busey Wealth Management and FirsTech.

Goodwill is an intangible asset that may reflect the value of a company's brand or reputation. Often, a company puts goodwill on its balance sheet when it acquires a firm and the purchase price exceeds the firm's tangible assets.

Dukeman said there's still value to the Busey name. But the company had to write down the bank's goodwill because the market value of the company shrank so much.

– First Busey recently made arrangements to raise $122 million in private capital, and as a result, it can reduce the amount of stock the federal government has a warrant to purchase.

Under the Troubled Asset Relief Program, the company issued $100 million of preferred stock to the federal government and also issued warrants that could be exercised for the purchase of $15 million in common stock. Now the warrant will be for only half that amount, or $7.5 million.

– Dukeman cited several "bright signs" for the company. For one, loans 30 to 89 days past due are at the lowest levels since the first quarter of 2008.

Also, "underlying core earnings are really good, and we're seeing improvement in the net interest margin," he said.

That margin – the difference between the interest the bank receives on its investments and the interest paid out on deposits – rose from 2.92 percent to 3.03 percent in the third quarter.

Each basis point (or each one-hundredth of a percentage point) equates to about $400,000 a year in pre-tax, pre-provision operating profit, he said.

"That margin improvement is an important factor in those core earnings as we move forward," he said.

Plus, Dukeman said he believes the company won't be taking any more "outsized provisions" for loan losses – and that will have a big effect on profitability.

"I believe the worst is behind us at this point. ... If we don't have outsized provisioning, profitability will be almost like a slingshot. It goes from turning a loss to making a significant profit," he said.

Another bright spot, he said, is that "inside" investors – First Busey executives and directors – accounted for nearly 30 percent of the recent capital raise, indicating they feel good about the company.

Although the company has shrunk a bit in recent months, Dukeman said he expects that will change in the long term.

"Moving into 2010, assuming the economy continues on a growth path, I would expect the bank to be growing again," he said.

– Dukeman said this summer that the company would probably take 24 to 36 months to determine whether the Florida banking operations makes sense as part of the Busey brand. He stood by that Monday and said no decision has been made yet.

– Dukeman was asked whether Busey Bank would still be around if Main Street Trust Inc. had not merged with First Busey Corp. in 2007. The merger increased the size of the bank, expanded the investor base and, since Main Street's operations were all in Illinois, made the Florida operations a smaller part of the overall business.

"I don't want to answer that question because it's moot," Dukeman said. "We're all one company. It's not something I want to address. It doesn't really matter."

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