Busey Shopper

Busey Shopper

BANKING by Jean Gruss | Editor/Lee-Collier

Busey Bank executives are scouting for acquisitions, hoping to buy local banks that are struggling due to the real estate downturn. But first, the bank plans to tidy its own house.

Commercial real estate lending is the golden goose of Florida community banking.

Will it fall the way residential lending has?

If it does, Busey Bank N.A. executives say they'll be ready to buy local banks struggling under the weight of commercial real estate loan losses.

"That's when opportunities will become apparent," says Thomas Good, the Fort Myers-based bank's president and chief executive officer.

Busey Bank has a rich parent. It is a subsidiary of Urbana, Ill.-based First Busey Corp., with over $4 billion in assets.

So far, commercial real estate has held its own in Southwest Florida. But it always lags residential development by a few years and a downturn in residential construction eventually spreads to commercial development. "It has an impact, I promise," says Good.

If the real estate downturn worsens, the acquisition opportunities could be plentiful by the middle of 2008. "We're in a recession," Good says. "I'm not negative on Southwest Florida [but] we've got to deal with the situation at hand."

Good says it's not the loans or deposits Busey's after. There's no formula for what price Busey is willing to pay for a bank. Instead, he says, "It's all about the people." When the real estate market rebounds in Southwest Florida, Busey wants to have the talent in place to take advantage of the recovery.

Busey Bank N.A. operates nine offices in Sarasota, Charlotte and Lee counties, mostly as a commercial bank. But Good plans to shift more to serving retail customers by adding as many as 10 new branches in the area over the next three years, including in north Collier County. That will help it garner increasingly precious deposits to fund loans. "We're going through market studies right now," Good says.

Within those branches, Busey will also have brokers who can help customers manage their investments. It's partly the result of First Busey's acquisition of Illinois rival Mainstreet Bank & Trust earlier this year, which converted all its brokerage clients to the Raymond James Financial Services system following the purchase.

Although money management is a lower-margin business than traditional banking, Good says he plans to double the assets under management to $250 million by the end of next year. It's a good way for the bank to diversify its income, especially as the margins on traditional lending continue to shrink.

Like most banks on the Gulf Coast, Busey must deal with the rising number of problem loans, finding good new loans to make and paying more for increasingly scarce deposits. "Our bank will have a very off year," acknowledges Good, who also doubles as the First Busey's executive vice president of risk management.

But Good takes a broader view. "This is what happens in Florida. The highs are high and the lows are low. I don't feel alone."

Cleaning house

Good recently was appointed president and chief executive officer of Busey Bank N.A., succeeding Mike Geml, a longtime Fort Myers banker who became the bank's chairman. The bank has $478 million in assets and 175 employees.

But Good is only in Fort Myers for a year or two, enough time he says to get the bank through these tough times. "We don't wan to make a new CEO until we have a better feel for what's going on," Good says.

Like many of its competitors, Busey is feeling the pinch from the real estate downturn, figures from the Federal Deposit Insurance Corp. show. Net income so far this year through Sept. 30 has fallen 54% compared to the same period in 2006. Problem loans are up 294% and real estate acquired through foreclosure rose 612%.

Loans on which payments have fallen behind schedule rose from 0.45% of total loans in September 2006 to 1.66% of total loans in September 2007, FDIC data shows. As of September 30, 3.29% of construction and development loans are behind schedule on payments, up from 1.34% at the same time last year.

At Busey, real estate loans account for 97% of net loans. Of those, 40% are one- to four-family residential loans. The other major loan categories are construction, land development and commercial real estate loans.

Most of the problems so far have been in residential lending, though Good is watching commercial real estate loans to see if they go down the same path. In particular, residential construction loans have been especially problematic as homebuyers fail to make payments. At the urging of regulators, Busey shut down a profitable residential construction-lending operation in January 2005.

To deal with its residential portfolio, Good has assigned employees to help borrowers keep their homes by lowering interest rates and reducing the principal owed.

"In the old days we used to take the write-off and take the house," Good says. When foreclosure is inevitable, Good says it's important to seize the house and sell it quickly before the market deteriorates further.

There aren't enough homebuyers now to know whether Southwest Florida has reached bottom in real estate. "If you've got money, you're not parting with it yet," Good says.

What's more, interest margins have shrunk. That's the difference between what the bank pays to depositors and what it earns from borrowers. While the bank has been able to modestly maintain interest income, it's paying a lot more for deposits. For the first nine months of this year, interest expense rose 38%, contributing to a 19% drop in net interest income.

Good blames the numerous banks that were started during the recent boom years for pushing up interest expense. In their quest for deposits and increasing market share, these startup banks advertise higher-than-market deposit rates that force competitors to raise theirs, too. "That adds a lot of issues to the marketplace," Good says.

As the real estate downturn takes hold, businesses and investors have less cash to deposit. Many of those who have cash put it to work elsewhere. "Liquidity has moved out of Southwest Florida," Good says.

Growing a presence

Despite the challenges, Good plans to grow the bank in Southwest Florida over the next few years. "I think we're on top of our issues," he says.

The choice Busey faces is growing in Southwest Florida or selling out to a competitor. "We could sell this franchise and be out of here in a New York minute," Good says. Busey has decided on the former.

Lee and Charlotte counties are the top two areas on Good's radar screen. He's looking to acquire community banks, though he says asking prices are too high now. "There are several merger partners here," Good says, declining to name his targets. Good says the target banks' financial situations may deteriorate next year, which will reward patient buyers.

In addition, Busey would like to build branches in the wealthy northern part of Collier County, close to Bonita Springs. Busey's roots are in smaller metropolitan areas. That's partly why Good says he won't expand into the Tampa Bay area. "I don't want to be a metro bank," he says.

Whatever happens in the next few years, Good hopes the area can end its dependence on real estate for its economic well-being. "Anything to diversify the economy would be good," he says.

In particular, local governments should provide tax breaks and other incentives to help businesses in diverse industries grow here. Southwest Florida International Airport should be a crucial element in their recruitment efforts. "You really want to work that," he says.

But the key to Southwest Florida's economic prospects will continue to be its growing population. There's been evidence lately that some of that growth is slowing, but Good is confident it will continue. "As long as population is growing there's going to be a way out," he says.

BY THE NUMBERS

BUSEY BANK N.A.

(Dollars in thousands)

ASSETS AND LIABILITIES 9/30/06 9/30/07 %change

Total assets 443,529 477,880 8%

Net loans and leases 367,851 394,302 7%

Total liabilities 378,971 397,943 5%

Equity capital 64,558 79,937 24%

Noncurrent loans and leases 1,680 6,623 294%

Average assets, year-to-date 430,151 455,609 6%

Insider loans 6,280 5,980 ‑5%

Tier 1 (core) capital 40,377 47,661 18%

INCOME AND EXPENSES YTD 9/30/06 YTD 9/30/07 %change

Total interest income 19,810 20,634 4%

Total interest expense 7,921 10,950 38%

Net interest income 11,889 9,684 ‑19%

Provision for loan and lease losses 100 775 675%

Total noninterest income 1,775 3,117 76%

Total noninterest expense 9,232 9,933 8%

Salaries and employee benefits 4,719 4,825 2%

Pre-tax net operating income 4,332 2,093 ‑52%

Net income 2,858 1,314 ‑54%

PERFORMANCE RATIOS YTD 9/30/06 YTD 9/30/07

Net interest margin 4.25% 3.26%

Return on assets 0.89% 0.38%

Return on equity 6.03% 2.54%

Efficiency ratio 64.08% 74.29%

Noncurrent assets

plus other real estate owned to assets 0.42% 1.67%

Core capital (leverage) ratio 9.92% 11.05%

Tier 1 risk-based capital 12.12% 13.39%

Total risk-based capital ratio 13.37% 14.64%

Source: Federal Deposit Insurance Corp.

REVIEW SUMMARY

Industry: Banking

Company:Busey Bank N.A.

Key: An economic slowdown may present opportunities for acquisitive banks.