A week after proclaiming that it was on the mend, Amcore Financial Inc. appears to have taken a turn for the worse.
The Rockford, Ill., company announced in a Securities and Exchange Commission filing Wednesday that regulators had rejected a second capital plan for both the company and its Amcore Bank.
Bank consultants say the double denial could signal that the significantly undercapitalized Amcore is running out of options and that without dramatic action to restore its languishing capital the bank's days could be numbered.
"It is a really bad sign when two regulators publicly don't approve your capital plan. If there was something doable, I don't think we would see a flat-out denial," said Ken Thomas, an independent bank consultant and economist in Miami. "This narrows their options and doesn't give them a whole lot of time to do much."
Amcore's attempts to repair its capital structure have centered on asset sales. In the fourth quarter the $4 billion-asset company sold four branches in Wisconsin and a $135 million pool of loans. Last week the company said it had agreed to sell 12 central Illinois branches to Midland States Bank in Effingham, Ill.
It had said the branch deal, slated to close this quarter, would supply it with enough capital to regain an adequately capitalized designation.
But in Wednesday's filing Amcore said regulators had indicated they thought the asset deals further jeopardized Amcore's capital base. That's because the deals were for performing assets. While that shrinks Amcore's balance sheet and boosts capital ratios, it also reduces earnings power and magnifies the problem loans.
"The sale of performing assets, as well as branch deals, has been a part of the death spiral for troubled banks," said Justin Barr, managing principal of Loan Workout Advisers LLC in Chicago. "But those actions do nothing to reduce the legacy risk of the loan portfolio that is Amcore's Achilles' heel."
Thomas said Amcore could have a hard time obtaining regulatory approval for the branch deal, because regulators may view such a deal as diminishing the value of the bank should it fail.
"The regulators don't want to be in a position where they let the company sell off all the prime branches and then they are left with the junk," Thomas said.
The company said by e-mail that regulators had not given it a new deadline by which it must file another plan.
Regulatory attorneys said a bank that has twice had its capital plan denied by its regulator and has been deemed significantly undercapitalized for months could expect to receive a harsher order — demanding that it be well capitalized, raise capital quickly or face receivership.
"A denial indicates that a capital plan is not realistic in terms of the bank's ability or it is not sufficient to solve the problems or both," said Frank Bonaventure, a principal at Ober, Kaler, Grimes & Shriver and a former OCC senior counsel. "From there, a bank like that could expect to receive a capital directive ordering them to raise capital in a very short time frame."
Thomas said the denials likely demonstrate a breakdown of communication, because banks and regulators typically prepare capital plans in concert.
However, Eric Luse, a partner at the law firm Luse Gorman Pomerenk & Schick PC, said the denial could simply be a function of further deterioration at the bank. "The OCC could think really highly of them but see their pro forma numbers as not improving and no longer have confidence in their survival," Luse said.
Experts say the bank has two other options to resolve its problems: sell its problem assets or embark on a highly dilutive effort to raise capital to keep the company afloat — both of which would be tough to accomplish.
"It appears they are under enormous pressure to expedite capital accretive transactions," Jon Winick, president of Clark Street Capital Management LLC, a marketer of bank real estate debt in Chicago, said by e-mail. "Certainly, there is significant interest by private capital to invest in banks, but agreeing on the valuation of the loan portfolio presents challenges. It's also difficult for an institution to dilute their equity, except under a bayonet."
Amcore is rumored to be shopping a portfolio of distressed real estate loans, though no deal has been announced. William R. McManaman, Amcore's chairman and chief executive, told customers and shareholders in a letter Wednesday that the company does not think it could carry out a capital raise.
"I have frequently stated during the past several months that capital markets continue to be largely inaccessible to small and midsize banks with our profile," McManaman said. Because of this, he said, the bank would not "expect to attract a large infusion of capital on an immediate basis."
The latest round of denials from the Office of the Comptroller of the Currency and the Federal Reserve follow rejections of Amcore's capital plans by those same regulators in November.
At the time the company said its Amcore Bank could face receivership if it failed to submit an acceptable plan.