Amcore Financial Inc.'s management is asking analysts and investors to be patient with its expansion strategy.
Frustrated with Amcore's first-quarter earnings, analysts and investors questioned the Rockford, Ill., company's branch-building strategy in a conference call with the management team Tuesday, and they urged it to use its capital to buy back stock to increase earnings per share.
They also said that if the $5.4 billion-asset company's performance does not improve, the management team should seriously consider selling it.
But Kenneth E. Edge, Amcore's chairman, president, and chief executive officer, said it needs to continue building branches and add market share if it hopes to deliver the earnings that investors expect.
Amcore has opened 25 branches since 2001, mainly in the Chicago, Milwaukee, and Madison, Wis., areas, and it plans to open as many as 10 a year through 2009.
"Yes, if we stop branching, we would get better returns short-term, but if that levels off, we lose momentum," Mr. Edge said in an interview Wednesday. "It is hard to get double-digit earnings increases to the shareholders if you don't keep growing."
Investors are wondering how long they will have to wait before getting those returns.
Net income was flat in the first three quarters of last year and took a big drop in the fourth. The stock price has been stuck at around $30 a share for much of the last 18 months.
The first quarter of this year was especially disappointing to Amcore investors. Diluted earnings per share fell 13% from the same quarter last year, to 42 cents, or 6 cents below analysts' estimates, and net income from continuing operations fell 14%, to $10.5 million.
The performance ratios were similarly lackluster. Amcore reported a return on average assets of 0.79%, a return on average equity of 10.6%, and an efficiency ratio of 70.7%.
In the conference call, Amcore blamed the earnings drop on increased hiring in the first quarter, a $1 million charge for expensing stock options, and rising short-term interest rates that increased deposit costs.
But investors and analysts have their own explanations. They say that the company's branch-building strategy is too expensive, its securities portfolio, which holds 22% of its assets, is too large, and its deposits are priced too high. Though total deposits rose 12% from a year earlier, the high costs associated with them was one reason its net interest margin fell 13 basis points, to 3.44%.
Brian Rohman, a managing director with Weiss, Peck & Greer LLC, a New York money management firm that owns Amcore stock, said in the conference call that investors are getting tired of the management team touting the long-term benefits of its strategy, and that it needs to start thinking about the near-term benefits.
"Have you guys considered selling the company?" he asked.
In a follow-up interview Wednesday, Mr. Rohman said, "We've been hearing this story about payoff from the branch expansion for a long time."
Kevin K. Reevey, an analyst with BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc., said he would like to see Amcore let its securities portfolio run off and buy back more stock. He also said the earnings miss would put pressure on the company to either improve returns or consider a sale.
"I think management is going to have to really put its nose to the grindstone from here on in if it intends to remain independent," he said.
Mr. Edge, though, said that he would not manage Amcore with a "quarter-to-quarter" strategy. "You make bad long-term decisions trying to satisfy one quarter's expectations."
Responding to the concerns about this securities portfolio, he said that his company plans to let its securities run off and use the proceeds to make more loans. Amcore also needs to offer attractive deposit rates to bring in customers in areas where it opens branches, at least until it builds enough of a critical mass that it no longer has to compete on price, he said.
The first-quarter numbers were skewed somewhat, because Amcore hired more people than it would in a typical quarter, Mr. Edge said. By yearend he expects the efficiency ratio to fall to the mid-60s, and the ROE to rise to around 13%, as it adds loans and reprices deposits at branches that are starting to mature.
By the end of 2008, Mr. Edge expects Amcore to have an ROE of 15% to 16%, an ROA of 1.2% to 1.3%, and an efficiency ratio of 50% to 54%.
"From now on you should see the trend going north," he said.
