AMCORE Financial, Inc. Q3 2009 Earnings Call Transcript

AMCORE Financial, Inc. (AMFI)

Q3 2009 Earnings Call Transcript

October 27, 2009 12:00 pm ET

Executives

William McManaman – Chairman and CEO

Judith Sutfin – EVP and CFO

Analysts

Chris McGratty – KBW

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the AMCORE Financial third quarter earnings results conference call. (Operator instructions)

Please note that this conference is being recorded and is also being web cast, and can be accessed at www.AMCORE.com, and will be archived for an additional four weeks.

Statements made in the course of this conference call stating the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are considered forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings and within the press release itself.

Conducting the call today will be Mr. William McManaman, Chief Executive Officer, and Mr. Judith Sutfin, Chief Financial Officer.

I will now turn it over to Mr. Bill McManaman. Sir, you may begin.

William McManaman

Thanks and good morning. We appreciate the time you have taken to listen to this conference call and welcome questions from our analysts at the end of our comments.

We assume that you have seen a copy of the press release we issued this morning. It can be found on our website at www.amcore.com.

While some of our financial leaders have proclaimed the recession is very likely over, Main Street will continue dealing with its effects for some time. During these past 21 months AMCORE’s leadership team and our employees have worked tirelessly and with great focus to address extraordinary challenges in this unprecedented economic environment, and we will continue to do so. It is important to acknowledge that hard work and perseverance continue as the core values of this organization.

The third-quarter loss of $156 million includes two significant items. First, a $60 million provision for loan losses; and second, a $118 million valuation allowance for deferred tax assets. With these two actions, AMCORE’s regulatory capital ratios have declined to significantly undercapitalized, however, the Tier I capital at the bank level remains adequately capitalized.

Our delinquencies and non-performing loans on a net basis after charged-offs and settlements have remained about flat with the second quarter’s level. We charged-off almost $60 million of non-performing loans, and we have reduced the total loan portfolio almost $900 million during the last seven quarters. These are aggressive actions that are reflective of current market realities in the portfolio.

However, the decreased values of collateral supporting our non-performing loans necessitated a large increase in the loan loss provision. Also we took the necessary accounting action to establish a deferred tax valuation allowance reflecting the uncertainty surrounding the realization of those potential future tax benefits. That charge alone increased the net loss per share $5.14 and represented 75% of the loss for the quarter.

I would like to emphasize that the total regulatory capital and loan loss reserves both provide the basis against which bad loans are eventually charged off. The sum of AMCORE’s regulatory bank capital and reserves was $430 million at the beginning of the quarter and $350 million at the end of the quarter.

There are some positives to talk about as well. As part of our efforts to improve our fundamentals, we have reduced our core expenses approximately $25 million on an annualized basis. The sale of four rural Wisconsin branches that will be completed in November allows us to raise capital as we continue to focus on serving our core markets.

Additionally, our liquidity continues to exceed $500 million. This leadership team and our employees remain fully committed to serving our customers and communities during these unprecedented economic times. During the quarter, we set aside $60 million in provisions for loan losses, and as I mentioned before we charged off almost a like amount.

Our allowance to total loans increased to 5.35%. We also have been reducing our non-strategic assets and have decreased our concentration in construction and development loans by 34% from a year ago. Our actions to decrease expenses, sell branches, which are not core to our markets, actively manage our loan portfolio, and reduce our non-strategic assets are all part of our efforts to raise capital and solidify our balance sheets.

Our balance sheet has become simpler. We now have a balance sheet with no intangible assets and no deferred taxes. We also continue to maintain a solid loan loss reserve. With our customers’ protection and security at the forefront of our commitments, AMCORE has chosen to continue participating in the FDIC's Transaction Account Guarantee Program, where all non-interest-bearing deposits accounts for participating banks are fully guaranteed by the FDIC for the entire amount in the account through June 30 of 2010.

This is in addition to and separate from the $250,000 available under the FDIC’s general deposit insurance rules, which are in effect until December 31 of 2013. This speaks to our commitment of our team to fortify our business and deliver service excellence to our customers. We value the diligent work of our employees who have established a new credit culture appropriate for this economic environment and our portfolio challenges.

Our people have built on our legacy of customer commitment to create a work ethic focused on dealing with our non-performing loans and continuing to improve our relationship with our loyal customers. We have been blessed with the staunch support of the communities and customers throughout our footprint and for that we are proud and grateful.

Now I would like to turn the call over to Judith Sutfin for a discussion of our financial statements.

Judith Sutfin

Thank you, Bill, and good morning. AMCORE continues to focus on the fundamentals of our business to improve efficiencies, to work to raise capital, and actively manage our loan portfolio. Rather than outline all the financials that are detailed in our press release, I would like to highlight the main points.

Four factors contributed to a loss for the quarter. First, the impact on margin revenues of carrying $417 million in non-accrual loans; second, margin compression from the cost of maintaining approximately $575 million in liquid assets; third, a $60 million provision for potential loan losses related more specifically to the credit quality of certain (inaudible), the $59 million in charge-offs.

First let us look at the margin or net interest income. Margin income decreased from the previous quarter by $676,000 and it was down $14.3 million from the year ago quarter. They were two main causes of this reduction. We actively reduced our credit portfolio by 10% or $322 million quarter-end-over-quarter-end as part of an overall effort to reduce our exposure to non-strategic non-relationship-based accounts.

We maintained approximately $575 million in liquid assets as cushion. The cost of holding this liquidity and the cost of obtaining term funding reduced our margin income by approximately 3.6 million compared to the third quarter of 2008. In times of stress, we believe substantial liquidity is the lifeblood of a banking organization.

The net interest margin statistic for the quarter was 1.67%, up 8 basis points from the previous quarter and down 109 basis points from the year ago quarter. The decrease in margin from a year ago was primarily due to the cost of building liquidity and the higher level of non-accrual loans. The increase for last quarter was primarily the result of using investment proceeds to play down higher cost wholesale deposits.

Normalizing the margin to exclude the excess cash on hand and bringing non-performing loans down to a more typical level of 2% to 3% of total loans would result in a margin of approximately 3%.

Moving on to our deposits, average bank issued deposits decreased 5% over last quarter due to seasonal increases in public funds in the prior quarter, and remained flat compared to the year ago quarter. Ending balances increased $57 million or 2% to $2.9 billion from December 31, 2008, reflecting efforts to increase liquidity primarily in non-interest-bearing and time deposits.

As we noted last quarter, we do not have an other than temporary impairment charge for any investments we currently hold in our portfolio given that 89% of that portfolio is agency guaranteed or rated AAA. This is reflective of our conservative investment philosophy. We did not pursue securities backed by sub-prime or alternative-A mortgages and we did not purchase mezzanine tranches of securitizations detailed on the portfolios in the investor relations section of our website under presentations.

Bill will cover our capital position in his closing remarks, however, one item I would like to cover if the credit facility the parent company has with JP Morgan Chase. As the result of the capital ratio dropping to significantly undercapitalized, the parent company is in technical default under the agreement. AMCORE is and has been current with all its payments due under that facility. AMCORE previously received a waiver from JP Morgan on July 31, when it was in technical default. AMCORE paid down the $20 million loan to $12.5 million and the maturity was extended to April of 2011. Both parties are working co-operatively.

Now turning our attention to credit condition, given our portfolios overweighting and construction and land development loans, trends in property values have tended to directly correlate, although construction and development loans including vacant land account for 19% of the commercial portfolio. These loans comprise 58% or $234 million of the non-accruing commercial loans and account for approximately 73% of our specific allocation made in the determination of our allowance for loan and lease losses.

It should be noted that commensurate with our efforts to manage down our exposure, the balances in this portfolio subset have decreased by 34% year-over-year. This is illustrated in the charts under presentations in the investor relations section of our website. A factor that negatively affects the communities we serve is unemployment. Unemployment continues to rise throughout our footprint. The Rockford area in particular has experienced higher levels in the national averages.

For instance, the national unemployment rate was 9.8% in September compared to 10.5% in Illinois and 17.2% in Rockford. Despite this, our retail portfolio performed significantly better than the retail portfolios of many of our peers. As noted in our press release, we have taken a more conservative stance on reserving for non-performing loans and charge-offs, which is reflective of the current economic condition. Our current provision stands at 5.35% of total loans compared to 4.81% in the previous quarter and 3.54% in the year ago period.

AMCORE believes that the provision is sufficient to support current loss expectations. Delinquencies which include loans more than 30 days past due declined by $5 million quarter-over-quarter, an 8% decrease. The drop in delinquencies was entirely attributable to the commercial portfolio. This is the lowest level of delinquency since third quarter 2007.

In summary, we did not see significant new or unforeseen deterioration, rather a continuing deterioration of the collateral values supporting our existing non-performing loans. This combined with the effects of prolonged economic distress exhausted the resources of borrowers that previously had been making payments through personal or corporate sources of liquidity.

Now let me turn the call over to Bill.

William McManaman

Thanks Judie. Now, I would like to spend some time talking about capital. We submitted our capital plan to our regulators and continue to work to implement that plan. We have not yet received a formal response from the regulators.

The sale of the four rural Wisconsin branches that I mentioned previously is part of that plan, and we estimate the leverage capital ratio at the bank level will improve to undercapitalized after the branch sales are completed in November, provided there is no significant additional deterioration in our portfolio.

Capital markets remain largely inaccessible to small and mid-sized banks with our profile. Nevertheless, we continue to pursue all capital raising activities, including frequent discussions with numerous sources of capital. There are some additional government programs currently under discussion targeting small and mid-sized banks that we intend to explore further.

As you know, capital levels at many financial institutions this year, including AMCORE have declined as credit losses have increased and significant reserves have been established. While AMCORE’s total capital ratio is now considered undercapitalized, I would like to point out that both total regulatory capital and loan loss reserves provide the basis against which non-performing loans are eventually charged-off. The sum of AMCORE’s regulatory bank capital and reserves was $350 million at the end of the third quarter.

In closing, our entire management team will continue to take aggressive actions to meet our challenges and move forward with determination and perseverance. We recognize our strength as the drive and passion that our AMCORE team has for our business and our customers.

We appreciate their support and their confidence. Hilda, you may now open the lines for questions from our analysts. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Chris McGratty from KBW.

Chris McGratty – KBW

Yes, good afternoon.

William McManaman

Good afternoon.

Chris McGratty – KBW

Just a quick question on deferred tax asset, Bill did you say it was entirely written off, the 118 was the entire deferred tax asset?

William McManaman

Yes, that is correct.

Chris McGratty – KBW

Okay, maybe you could just spend a minute and kind of walk me through, I guess a decision in discussion to come to this decision, and maybe walk me through the look-back period and the look-forward period in terms of realization of the DTA. That will be helpful, thanks.

William McManaman

Well, as we all know today, deferred taxes is a very complicated issue. Ours arise out of nondeductible for tax purposes, loan loss provisions, number one; and number two, tax loss carry-forwards. We have utilized all of our tax loss carry backs, which is an important point. Every company as it goes through difficult times and long periods of operating losses and we have had some in consecutive quarters of operating losses, needs to evaluate the future realizability of those tax benefits and the management of AMCORE came to the conclusion that it was appropriate and prudent at this time to establish a valuation allowance for those deferred tax assets.

Chris McGratty – KBW

All right. Thank you.

Judith Sutfin

And Chris, can I add that we can still use them to reduce taxes on future earnings, but we just can’t count them until that actually happens.

Chris McGratty – KBW

So, I guess from a forward-looking perspective, if you are not profitable, I say next quarter, there will be no offset; it will be once you do return to profitability?

Judith Sutfin

Correct.

Chris McGratty – KBW

Okay, thanks. It is helpful.

Operator

(Operator instructions) Mr. McManaman I show no further questions at this time.

William McManaman

Okay. Thank you very much for attending our conference call. We appreciate it. Thank you.

Operator

Thank you ladies and gentlemen. This concludes your conference call. You may now disconnect.

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Comments

[lamoille:]

Take a look at pnbc balance sheet/portfolio Bill. Might be a tip or two to gain .Just a thought. PS: Acumulate AMFI per Peter Lynch...

Oct 29 03:51 AM