AMCORE Financial, Inc. (AMFI)  Add to position on valuation. – -2009-Nov-05 12:44:13: BUY AMFI @ 0.70

AMFI reported a net loss of ($156.4) million for third quarter 2009, compared to a net loss of ($10.7) million in the previous quarter and a net loss of ($18.0) million in the prior-year period. The third quarter loss includes two significant items: first, a $60 million provision for loan losses; and second, a $92 million net tax provision reflecting a $118 million valuation allowance for deferred tax assets recorded for the quarter. The resulting loss per diluted share was ($6.81) for third quarter 2009, which compares to a loss of ($0.47) in the previous quarter and a loss of ($0.79) per diluted share in third quarter 2008. As a result, AMCORE is undercapitalized or significantly undercapitalized under some regulatory capital standards at the consolidated and bank levels; however the bank’s Tier 1 capital remains adequately capitalized.

“On a net basis after charge-offs and settlements, delinquencies and non-performing loans have remained about flat with second quarter’s level. We aggressively 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,” said William R. McManaman, Chairman and CEO of AMCORE. “However, the decreased values of collateral supporting our non-performing loans necessitated a large increase in the loan loss provision. Additionally, we took a necessary accounting action to establish a deferred tax valuation allowance reflecting the uncertainty surrounding the realization of those tax benefits. That charge alone increased the net loss per share $5.14 and represented 75 percent of the loss for the quarter.”

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. Potential future credit losses can ultimately be absorbed from these sources.

Additionally, liquidity continues to exceed $500 million. Also, significant progress was made reducing core expenses $25 million on an annualized basis.

“We value the hard and diligent work of our employees who have established a new credit culture appropriate for this economic environment. Our people have built on our legacy of customer commitment and hard work, and they remain focused on addressing 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.”

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 the entire amount in all noninterest-bearing deposit accounts for participating banks are fully guaranteed by the FDIC through June 30, 2010. This is in addition to, and separate from, the $250,000 coverage available under the FDIC’s general deposit insurance rules which are in effect until December 31, 2013.

“We have had, and continue to have, discussions with numerous sources for capital. Currently, however, capital markets remain largely inaccessible to small and mid-size banks with our profile,” said Mr. McManaman. “Nevertheless, we will continue to pursue all capital raising activities, including exploring additional government programs recently announced targeting small and mid-size banks.”

Headlines

  * Net Interest Income - Net interest income was $18.0 million or
    1.67 percent of average earning assets in third quarter 2009,
    compared to $18.7 million or 1.59 percent of average earning
    assets in second quarter 2009 and $32.3 million or 2.76 percent of
    average earning assets in third quarter 2008. In the third quarter
    2009, investment proceeds were used to pay off wholesale funding.
    Quarter over quarter, this resulted in a decrease in margin
    dollars and an increase in margin percent. 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.

    -- Average loan balances decreased seven percent, or $260 million,
       to $3.2 billion compared to second quarter 2009, while ending
       balances decreased $748 million, or 20 percent, to $3.0 billion
       from December 31, 2008.  The decreases were mainly the result
       of strategic actions taken by the Company to reduce its
       non-relationship credits.

    -- Average bank issued deposits decreased five percent, or $151
       million, primarily due to seasonal increases in public funds
       in the prior quarter. Ending balances increased $57 million, or
       two percent, to $2.9 billion from December 31, 2008 reflecting
       efforts to increase liquidity, primarily in non-interest
       bearing and time deposits.

    -- Average investment securities and short-term investments
       decreased a combined $248 million compared to second quarter
       2009.  Ending balances increased a combined $147 million from
       December 31, 2008. The decreases from the previous quarter
       reflect the usage of investment portfolio proceeds to pay down
       wholesale funding.

    -- As part of its continued liquidity management efforts, AMCORE
       maintained cash equivalents and other liquid assets of
       approximately $575 million at quarter end compared to $650
       million for the previous quarter.

  * Provision for Loan Losses and Credit Quality - Provision for loan
    losses was $60.3 million, a $43.3 million increase from $17
    million in second quarter 2009 and a $12.3 million, or 26 percent,
    increase from $48 million in third quarter 2008.

    -- Non-performing loans, net of charge-offs and settlements, were
       $431 million at September 30, 2009, compared to $416 million at
       June 30, 2009 and $191 million at September 30, 2008.  For the
       past two quarters, AMCORE's non-performing loans have increased
       three percent, which has been the lowest net increase since
       third quarter 2007.

    -- Delinquencies declined by $5 million, or eight percent, to $57
       million compared to second quarter 2009, their lowest level
       since third quarter 2007.

    -- Net charge-offs were $59.4 million compared to $20.7 million in
       second quarter 2009 and $26.8 million in third quarter 2008.
       Charge-offs increased reflecting ultimate losses that were
       required for non-performing loans that are collateral dependent.

    -- The allowance to total loans was 5.35 percent at September 30,
       2009, up from 4.81 percent at June 30, 2009 and up from 3.54
       percent at September 30, 2008.

    -- The percentage of total non-accrual loans to total loans was
       13.7 percent at September 30, 2009, up from 12.3 percent at
       June 30, 2009 and 5.0 percent at September 30, 2008.  The
       percentage increase from second quarter 2009 was primarily due
       to the decline in overall loan balances.

  * Non-interest Income - Non-interest income was $16.7 million in the
    third quarter 2009 compared to $28.5 million in second quarter
    2009 and $20.2 million in the third quarter 2008.

    -- The decline is due primarily to a $12.9 million security gain
       in the previous quarter, compared to $1.5 million gain in third
       quarter 2009 and none in third quarter 2008.

    -- Excluding security gains, non-interest income was essentially
       flat compared to the previous quarter.

  * Operating Expenses - Operating expense was $38.7 million in the
    third quarter 2009 compared to $48.5 million in the second quarter
    2009 and $38.4 million in the third quarter 2008.

    -- Third quarter 2009 included $6.1 million of other loan related
       expenses including processing and collection expenses and
       foreclosed property expenses.  This compares to $4.3 million in
       the second quarter 2009 and $1.7 million in the third quarter
       2008.

    -- The previous quarter included $9.7 million in higher expenses
       relating to debt extinguishment costs, special FDIC insurance
       assessments and severance related to the corporate
       restructuring.

    -- Corporate restructuring and other cost reduction measures that
       the Company has taken over the past year has improved the
       efficiency of operations. Core operating costs, excluding
       restructuring and loan related costs as well as regular FDIC
       insurance costs, have declined approximately $25 million on an
       annualized basis.

  * Tax Valuation Allowance - At September 30, 2009, AMCORE evaluated
    the expected realization of its deferred tax assets totaling $118
    million, primarily comprised of future tax benefits associated
    with the allowance for loan losses and net operating loss
    carryforwards, and concluded that a valuation allowance was
    required.

    -- During third quarter 2009, income tax expense of $92.1 million
       was recorded, which includes the recognition of a $118 million
       non-cash charge to establish a valuation allowance for deferred
       tax assets.

  * Capital - The Company at the consolidated level is significantly
    undercapitalized for all three regulatory capital ratios, which is
    the result of the losses for the quarter and technical limitations
    that now restrict the inclusion of certain components in
    regulatory capital.  The Bank is significantly undercapitalized
    for only its leverage ratio, undercapitalized for its total
    capital ratio, and adequately capitalized for its Tier 1 capital
    ratio.  The Bank's total capital was $224 million as of September
    30, 2009.

    -- The leveraged capital ratio reflects, in part, the effect of
       maintaining high liquidity. The Company has estimated this
       ratio at the bank level may improve to undercapitalized after
       the branch sales are completed in November.

    -- As a result of dropping below adequately capitalized, the Bank,
       among other limitations, continues to be prohibited from
       accepting or renewing brokered deposits and cannot pay
       excessive interest rates on deposits.  This will continue to
       have an impact on the Bank's liquidity particularly as current
       brokered deposits mature.

    -- As a result of dropping below adequately capitalized at the
       consolidated level, the parent company is in technical default
       under its credit agreement with JPMorgan Chase Bank, N.A.
       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 previously in technical default.
       AMCORE paid down the $20 million loan to $12.5 million and the
       maturity was extended to April 2011. Both parties continue to
       work cooperatively.

    -- AMCORE has not received a formal response from its regulators
       regarding its capital plan. AMCORE submitted its plan and
       continues to work to implement that plan, including the branch
       sales that are expected to be completed in November.

Additional financial data for the Company’s earnings call will be available in the presentation section of the Investor Relations page on the Company’s website at www.AMCORE.com.

ABOUT AMCORE

AMCORE Financial, Inc. is headquartered in Northern Illinois and has banking assets of $4.4 billion with 73 locations in Illinois and Wisconsin. AMCORE provides a full range of consumer and commercial banking services, a variety of mortgage lending products and wealth management services including trust, brokerage, private banking, financial planning, investment management, insurance and comprehensive retirement plan services.

AMCORE common stock is listed on The NASDAQ Stock Market under the symbol “AMFI.” Further information about AMCORE Financial, Inc. can be found at the Company’s website at www.AMCORE.com.