Upon disclosing its third and largest branch deal Tuesday, Amcore Financial Inc. made another announcement: its capital ratios are finally headed in the right direction.

The Rockford, Ill., company said it has reached a definitive agreement to sell 12 of its branches and two stand-alone drive-ups to Midland States Bank in Effingham, Ill.

Analysts applauded news of the branch deal but stopped short of saying the $4 billion-asset Amcore is on the mend.

"So this deal puts them above water. It is nothing to do cartwheels down the hall about. Unfortunately, I think the rebound of the ratios could be very fleeting," said Justin Barr, managing principal of Loan Workout Advisers LLC in Chicago. "As long as they still have significant nonperforming or subperforming assets, particularly in construction, they will have further capital hits."

Barr and other analysts were less than enthused because these sales do nothing to reduce the $454 million in nonperforming assets the company held at the end of the third quarter, which account for more than 10% of its total assets.

William McManaman, Amcore's chairman and chief executive, said in a press release that if the sale unfolds as planned the bank will become "adequately capitalized and approaching well-capitalized" at the end of the first quarter. "The sale of these branches, when completed, demonstrates that our rebuilding efforts continue to move forward and remain on track," he said.

Barr said Amcore is believed to be shopping around a large chunk of its real estate-secured nonperforming asset portfolio, though it has yet to strike a deal.

"It would be a big 'congratulations to them' and would signal a closing of the bid-ask spread that we've seen," Barr said. "It could very well pave the way for other institutions to cleanse themselves of distressed assets, as well."

Amcore grew aggressively in the early part of the last decade through a large branch expansion and massive bets on residential development.

But it was among the first community banking companies to report heavy losses on its residential construction portfolio, after the collapse of the residential real estate market. It has reported $253 million in losses since the beginning of 2008.

Amcore has been diligent about trying to resolve its problem credits through evaluations and by taking losses early. Despite those efforts, problems have continued to mount.

Data from the Federal Deposit Insurance Corp. shows the bank has $57 million of loans that are 30 to 89 days past due.

In early 2008 Amcore's branch count peaked at 79, more than double the 2001 number. After closing the Midland deal Amcore would have 52 branches, all in Illinois and Wisconsin.

The deal, which is expected to close this quarter, includes $480 million of loans, $540 million of deposits and up to $400 million of trust and brokerage accounts. Midland would pay a 1.5% deposit premium and a $1.5 million trust account premium.

Though Amcore did not specify whether the loans it was unloading are performing or not, experts said branch sales these days, particularly those involving struggling banks, rarely include nonperforming assets.

Phone calls Tuesday to Amcore and Midland were not returned.

In the fourth quarter Amcore closed two deals in which it sold four branches in rural Wisconsin. It also sold $135 million of noncore, nonrelationship loans in December to an undisclosed buyer. Its capital ratios are expected to benefit from as much as $30 million it expects in its federal income tax return.

Those actions are expected to remove the "significantly undercapitalized" distinction the Amcore Bank unit held at the end of the third quarter. Its capital ratios for the fourth quarter were not disclosed.

Regulators have demanded that Amcore Bank increase its leverage ratio to 8% and its total risk-based capital ratio to 12%. At the end of the third quarter those ratios were 2.83% and 6.94%.

Michael Iannaccone, president of MDI Investments Inc. in Chicago, said those figures indicate Amcore would need to reduce its assets by $1.35 billion to satisfy regulators' expectations. It appears to have reduced its assets by roughly $300 million since the end of the third quarter.

Iannaccone said that math does not take into account more losses on loans or other events that could cause equity to further deteriorate. Still, the reduction is buying Amcore time.

"It really is a race to the finish," he said. "They appear to be doing everything they can to survive, hoping that it buys them enough time to work out the problems. These steps give a damaged bank the potential to possibly survive."

Amcore said in November, after regulators rejected its capital plan, that it could fail. At the time the company reported it had until Dec. 4 to submit a new plan that would find favor with regulators or face conservatorship. Iannaccone said Amcore has likely been working with regulators to improve its capital plan. He added that regulators have been trying to be lenient where possible to avoid more bank failures.

"We are seeing a bit of flexibility. They are still very constrained by the time lines of the law," Iannaccone said. "But if you can show them what you want to do and demonstrate that you are prepared to do it, they are willing to discuss it."

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