The losses First Busey Corp. is projecting for the third quarter would have left it in dire straits without the capital it just raised.

Hammered by bad loans in southwest Florida, the $4.3 billion-asset company in Urbana, Ill., said it expects to take up to a $125 million loan-loss provision for the third quarter. Analysts said this surprisingly large hit — on top of other hefty provisions in recent quarters — would have resulted in dangerously low capital levels.

But First Busey raised $122 million last week, becoming the latest example of a struggling company to find investors in the thawing capital markets.

"We are starting to see a small opening in the marketplace for institutions with solid bases and strong market positions, even if they have experienced some really tough times," said Eliot Stark, a managing director at the investment bank Capital Insight Partners Inc. "It is still a trickle, not a torrent, but some companies have become more realistic about pricing and are doing a better job of convincing investors that they are at the bottom."

First Busey's capital raise did come at a cost.

The company had expected to sell the shares for more than $6 each. But they priced at $4 — a 38% discount from where the stock closed before the offering announcement. And the number of shares outstanding is expected to increase by 85%.

Analysts called the dilution painful, but necessary. Daniel Arnold of Sandler O'Neill & Partners LP said that without the added capital cushion, the company's tangible common equity ratio would have shrunk to 2.72%, a range in which its outlook would be considered grim. Now he estimates the ratio will be a much more palatable 5.7%.

Though it still has much work ahead, this fresh capital should be enough for First Busey to absorb its Florida loan losses and begin to maneuver a rebound, Arnold said. "This really takes the juice out of the downward momentum that they have been experiencing."

The company had received $100 million of government capital in March, but still found itself needing more.

By June 30, it had provisioned a total of $156 million for loan losses across three consecutive quarters.

John Rodis, an analyst at Howe Barnes Hoefer & Arnett Inc., said First Busey is well regarded in its home markets of Illinois and Indiana, but a foray into Florida led to massive loan trouble over the past year or so. "They really are a tale of two franchises," he said. "Florida is just killing them."

At the end of the second quarter, First Busey's nonperforming loans in Florida totaled $90.4 million, or 13.6% of its loans from that state. The nonperformers were concentrated in residential real estate construction.

The considerably smaller Indiana business had $11.2 million, or 6.1%, of its loans nonperforming.

But the company showed little stress in its home state. The Illinois nonperforming loans totaled $25.5 million, or 1.1% of the total loans there.

In September, First Busey hired a firm to assess the risk ratings on its commercial loans. The review covered 70% of those loans in Florida and half of them in Illinois and Indiana.

The results prompted the company to project chargeoffs of $110 million to $115 million in the third quarter, with nearly all of that because of Florida loans.

First Busey estimates that it will have taken a cumulative 35.9% loss on its Florida portfolio from the fourth quarter of 2007 through 2010.

"This was a really aggressive writedown," Arnold said. "This presumably fixes Florida."

In its filings with the Securities and Exchange Commission about the stock offering, First Busey said that the capital could be used to buy failed banks from the Federal Deposit Insurance Corp.

But analysts said that's unlikely, at least for the foreseeable future.

"I don't view them as an acquirer right now. They may have been able to take losses, but will still need to work through a lot," Rodis said. "Down the road, could they ultimately be a buyer? Yeah, but I don't see it in the near term."

This skepticism about the company being fully on the path to recovery arises partly from questions about whether its Illinois and Indiana loans can hold up as First Busey expects. It projected cumulative losses of 1.5% on its Midwest loans from the fourth quarter of 2007 through 2010.

Several analysts noted a lack of provisioning for those loans, saying the company left itself with little wiggle room should the economy continue to struggle.

"I would have liked for them to plan for it a bit more. If you are already taking such massive losses, why not reserve for 2.5% to 3%?" Rodis said. "1.5% just seems low."

First Busey took in $72 million of capital from the stock offering last week, and analysts expect the underwriters to exercise the option to buy an additional $10.8 million.

Another $39.3 million of capital would come from mandatory convertible preferred stock being exchanged for common equity, also at $4 per share.

The preferred exchange, which is being done by executives and directors, primarily the family of director August C. Meyer Jr., was contingent on the successful completion of the common stock offering.

However, the Federal Reserve must approve the Meyers' investment, since it would raise the family's stake in the company from around 5% to 19.9%.

First Busey is still facing an ugly third quarter. The provision is expected to result in a net loss of $62.5 million to $67.5 million, compared with earnings of $8.8 million a year earlier.

The projection did not include any goodwill impairment charges the company might have. In an SEC filing last week, First Busey said that it is evaluating its $208.2 million of goodwill and that all or substantially all of it could be impaired.

The company did not provide any guidance on its capital levels, and it did not return calls seeking comment for this story.

But analysts said the outlook is decidedly more hopeful than it could have been after such a tough quarter. "The losses without this raise would have left them with unsustainably low capital levels," Arnold said. "This should be enough to give them enough power to start earning money and building that capital through earnings."

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