Amcore Financial Inc.'s loan losses have been mounting for several quarters, so investors and analysts had been expecting first-quarter earnings to be so-so at best.
What they did not expect from the Rockford, Ill., company was the $27.5 million loss it reported Thursday or its $57.2 million loan-loss provision, up from $6.4 million just three months earlier. In the fourth quarter, even as nonperforming loans spiked, it still reported a $7.5 million profit.
"We knew they were struggling with commercial real estate loans to developers," said John Pancari, an analyst at JPMorgan Chase & Co.'s JPMorgan Securities Inc. "But the magnitude and the rate of deterioration … is what's surprising."
The news sent Amcore's shares tumbling to their lowest level in 11 years, when adjusted for stock splits. The stock price fell 29.5% Thursday, to close at $13.71.
The $5.2 billion-asset company also disclosed Thursday that its Amcore Bank would soon enter into a written agreement with the Office of the Comptroller of the Currency requiring it to address commercial lending weaknesses.
In a conference call, president and chief operating officer Don Wilson said Amcore has acted to improve its underwriting standards in the last year, including firing some commercial lenders. He also said that, as part of an effort to contain costs, the company would open no branches that are not already in the pipeline. Amcore has opened roughly 30 branches since 2002.
Most of the credit-quality problems relate directly to commercial real estate loans for residential developments, though Mr. Pancari said the problems could spread to areas of commercial real estate such as retail development.
For the quarter, net chargeoffs nearly tripled from the fourth quarter, to $13.6 million.
In a research note, Ben Crabtree, an analyst at Stifel, Nicolaus & Co. Inc., said he believes management is "dealing aggressively" with loan problems "but that does not mean that new ones won't crop up due to the sluggish economy and continuing pressures on real estate values. We are assuming that charge-offs will remain high and probably even go higher for the next few quarters."
The quarterly results also fueled speculation that mounting credit-quality problems may have hastened a management shakeup that took place in February, when Kenneth E. Edge abruptly resigned as chief executive. Though analysts agree that Mr. Edge's resignation (he remains chairman) was part of the company's broader transition to a new management team, the timing "does make you scratch your head a bit," Mr. Pancari said.
Mr. Crabtree said the burgeoning chargeoffs and loan-loss provision could have been the new management team's attempt to "take every hit they could legitimately support.
"If they deal with it now," he said in an interview, "it's cleaning up the previous administration's problems."
Mr. Wilson also announced that the company plans to bring in a consulting or accounting firm to review the company's loan portfolio.
