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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 013393
AMCORE Financial, Inc.
NEVADA | 363183870 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
501 Seventh Street, Rockford, Illinois 61104
Telephone Number (815) 9682241
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.22 par value
Common Stock Purchase Rights
The NASDAQ Stock Market
(Name of Exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
As of February 11, 2010, 23,103,000 shares of common stock were outstanding. The aggregate market value of the common equity held by non-affiliates, computed by reference to the average bid and ask price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter was approximately $16.2 million.
Documents Incorporated by Reference:
Portions of the Proxy Statement and Notice of 2010 Annual Meeting, dated March 22, 2010 are incorporated by reference into Part III of the Form 10-K for the fiscal year ended December 31, 2009.
Table of Contents
AMCORE FINANCIAL, INC.
PART I |
Page Number | |||
Item 1 |
1 | |||
Item 1A |
10 | |||
Item 1B |
17 | |||
Item 2 |
17 | |||
Item 3 |
17 | |||
Item 4 |
17 | |||
PART II |
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Item 5 |
Market for the Registrants Common Equity and Related Stockholder Matters |
18 | ||
Item 6 |
19 | |||
Item 7 |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
Item 7A |
52 | |||
Item 8 |
58 | |||
Item 9 |
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | 108 | ||
Item 9A |
108 | |||
Item 9B |
108 | |||
PART III |
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Item 10 |
109 | |||
Item 11 |
109 | |||
Item 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 109 | ||
Item 13 |
Certain Relationships and Related Transactions, and Director Independence |
110 | ||
Item 14 |
110 | |||
PART IV |
||||
Item 15 |
110 | |||
113 |
Table of Contents
PART I
ITEM 1. | BUSINESS |
General
AMCORE Financial, Inc. (AMCORE or the Company) is a registered bank holding company incorporated under the laws of the State of Nevada in 1982. The Companys corporate headquarters is located at 501 Seventh Street in Rockford, Illinois. The operations are divided into three business segments: Commercial Banking, Consumer Banking, and Investment Management and Trust. For expanded discussion on the Companys segments, see Note 15 of the Notes to Consolidated Financial Statements. AMCORE owns directly or indirectly all of the outstanding common stock of each of its subsidiaries and provides its subsidiaries with advice and counsel on policies and operating matters among other things.
AMCORE provides free of charge, through the Companys Internet site at www.AMCORE.com/SEC, access to annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (SEC). However, the information found on AMCOREs website is not part of this or any other report. The Company has adopted a code of ethics applicable to all employees. The AMCORE Financial, Inc. Code of Ethics is posted on the Companys website at www.AMCORE.com/governance. The Company intends that this website posting and future postings of amendments, waivers or modifications of the Code of Ethics shall contain all required disclosures, however, a Form 8-K will be filed for amendments and waivers in order to meet the more stringent NASDAQ rules.
Banking Segments
General AMCORE directly owns AMCORE Bank, N.A. (the Bank), a nationally chartered bank. AMCORE dissolved a qualified intermediary subsidiary of the Bank, Property Exchange Company, in September of 2009.
Geographic and Economic Information The Bank conducts business at 66 branch locations throughout northern Illinois and southern Wisconsin (the Service Area). The Banking segments Service Area is dispersed among five basic economic areas: the Rockford, Illinois metropolitan area (Rockford), the Madison, Wisconsin metropolitan area (Madison), the Chicago, Illinois metropolitan area (Chicagoland), the Milwaukee, Wisconsin suburbs (Milwaukee) and community banking branches which are not otherwise specified (Community Banking). Locations in the Chicagoland, Rockford, Madison and Milwaukee economic areas are generally bounded by Interstates 94 in the north, 294 and 94 in the east, 80 in the south and 90 and 39 in the west.
Among the five economic areas, Rockford has the highest concentration of manufacturing activities. Community banking has a greater concentration of smaller-sized business and agricultural activities. All five economic areas are experiencing higher unemployment, compared to a year ago, with the Rockford Metropolitan Statistical Areas or MSA, showing the greatest increase in unemployment. The Midwest economy continues to experience deterioration in the real estate markets with tightened liquidity, lengthening of the sales cycle and declining collateral values.
The Bank has locations throughout northern Illinois, excluding the far northwestern counties, including the Illinois cities of Algonquin, Antioch, Aurora, Belvidere, Carol Stream, Carpentersville, Chicago, Crystal Lake, Deerfield, Dixon, Elgin, Freeport, Joliet, Lombard, Machesney Park, McHenry, Mendota, Mt. Prospect, Naperville, Northbrook, Oregon, Orland Park, Peru, Princeton, Rock Falls, Rockford, Roscoe, St. Charles, Schaumburg, South Beloit, Sterling, Vernon Hills, Wheaton, Willowbrook, Woodstock and the surrounding communities. The Bank conducts business at 14 locations throughout southern Wisconsin, including the Wisconsin cities of Baraboo, Lodi, Madison, Mt. Horeb, Portage, Sauk City, Verona, Waukesha and the surrounding communities.
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In fourth quarter 2009, the Company sold four branches in rural Wisconsin: Argyle, Belleville, Monroe and New Glarus (the Wisconsin Branch Sales) in two separate transactions. These transactions included approximately $87 million in loans, $166 million in deposits and sweep accounts, and $42 million in related trust accounts. The brokerage and 401(k) plan businesses were not part of the Wisconsin Branch Sales and will remain with AMCORE.
In fourth quarter 2009, the Company announced an agreement had been reached to sell 12 branches and two stand-alone drive-ups in the following rural Illinois communities: Dixon, Freeport, Mendota, Oregon, Peru, Princeton, Rock Falls and Sterling (the Illinois Branch Sale). This transaction includes approximately $483 million in loans, $540 million in deposits and sweep accounts, and up to $400 million in related trust and brokerage accounts. The 401(k) plan business is not part of the Illinois Branch Sale and will remain with AMCORE. In connection with the Illinois Branch Sale, which is expected to close in March 2010, the Company reclassified the $483 million of loans to held-for-sale.
Through its banking locations, AMCORE provides various consumer banking, commercial banking and related financial services. AMCORE also conducts banking business through four supermarket branches, which gives the customer convenient access to banking services seven days a week.
Investment Portfolio and Policies As a complement to its Commercial, Consumer Banking and Investment Management and Trust segments, the Bank also carries a securities investment portfolio. The level of assets that the Company holds in securities is dependent upon a variety of factors, including the efficient utilization of the Companys liquidity and capital. After consideration of loan demand, excess capital may be available to allocate to high-quality investment activities that can generate additional income for the Company. Conversely, when capital ratios are on the decline, securities may be decreased in order to preserve capital. In addition to producing additional interest spreads for the Bank, the investment portfolio is used as a source of liquidity, to manage interest rate risk and to meet pledging requirements of the Bank. The investment portfolio is governed by an investment policy designed to provide maximum flexibility in terms of liquidity and to contain risk from changes in interest rates. Individual holdings are diversified, maximum terms and durations are limited and minimum credit ratings are enforced and monitored. The amount of securities that the Company is permitted to invest in that have a higher degree of risk of loss are defined and limited by Company policy. Portfolio performance and changing risk profiles are regularly monitored by the Asset and Liability Committee (ALCO) and the Investment Committee of AMCOREs Board of Directors.
Sources of Funding Liquidity management is the process by which the Company, through ALCO and its capital markets and treasury function, ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, mortgage originations pending sale, withdrawals by depositors, repayment of debt when due or called, maintaining adequate collateral for secured deposits and borrowings, payment of dividends by the Company, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from bank-issued deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources have typically included brokered certificate of deposits (CDs), federal funds purchased lines, Federal Reserve Bank discount window advances, Treasury Tax & Loan note accounts, Term Auction Facility borrowings, Federal Home Loan Bank advances, repurchase agreements, the sale or securitization of loans, subordinated debentures, balances maintained at correspondent banks and access to other capital market instruments. In the current environment and due to the recent performance of the Bank, the Bank has been subject to increased collateral requirements and other limitations to secured funding. Bank-issued deposits, which exclude wholesale deposits, are considered by management to be the primary, most stable and most cost-effective source of funding and liquidity.
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As of the end of 2009, the Company and the Bank were below adequacy minimums for regulatory capital purposes. The Bank was undercapitalized for its Total Capital and Tier 1 Capital Ratios and significantly undercapitalized for its leverage ratio under applicable regulatory guidelines. The leverage capital ratio reflects, in part, the effect of maintaining high liquidity.
As a result, the Bank is no longer eligible to participate in the brokered CD market and is also subject to limitations with respect to interest rates it can offer on deposits, generally limited to rates equal to no more than 75 basis points above prevailing market rates. These limitations, as well as recent increased collateral requirements and advance limitations with respect to other funding sources, may have a material impact on the Banks deposit levels and liquidity.
Consumer Banking Segment Consumer banking provides services to individual customers through the Banks branch locations. The services provided by consumer banking include direct and indirect lending, checking, savings, money market accounts, CDs, safe deposit rental, automated teller machines (ATMs), and other traditional and electronic services.
Historically, home equity lending had the lowest risk profile due to the nature of the collateral. Recent declines in home values have increased the risk profile of home equity lending. Installment loans have an intermediate risk due to the lower principal amounts and the depreciating nature of the collateral. Personal lines and overdraft protection have the highest degree of risk since the loans are unsecured. The bankcard programs are a fee service for originating the relationship and the Bank retains no credit risk. The Bank manages its consumer lending risk via a centralized credit process, risk scoring, loan-to-value and other underwriting standards, and knowledge of its customers and their credit history. As a general rule, the Bank does not actively engage in consumer lending activities outside of its geographic market areas.
Consumer banking also provides a variety of mortgage lending products to meet its customers needs. The Company sells most of the loans it originates to a national mortgage services company, which provides private-label loan processing and servicing support on both sold and retained loans. As part of this arrangement, the Company sold the majority of its Originated Mortgage Servicing Rights (OMSR) portfolio. The arrangement offers AMCORE a greater breadth of products, more competitive pricing and greater processing efficiencies. Additionally, the cost structure in the mortgage banking business has become more variable in nature, allowing the Company to better absorb fluctuations in mortgage volumes. These include the costs of originating loans that are netted against mortgage banking income or interest income, as well as processing and servicing costs of loans retained in the Banks portfolio and that are a component of operating expenses. For segment financial information, see Note 15 of the Notes to Consolidated Financial Statements.
Commercial Banking Segment Commercial banking provides services to middle market and small business customers through the Banks branch locations. The services provided by commercial banking include lending, business checking and deposits, treasury management and other traditional as well as electronic services.
Commercial lending has a higher risk profile than does consumer lending due to the larger dollar amounts involved, the nature of the collateral and a greater variety of economic risks that could potentially affect the loan customer. The Bank manages its commercial lending risks through a centralized underwriting process, serial sign-off requirements as dollar amounts increase, lending limits, monitoring concentrations, regular loan review and grading of credits, and an active work-out management process for troubled credits. For segment financial information, see Note 15 of the Notes to Consolidated Financial Statements.
Other Financial Services The Bank provides various services to consumers, commercial customers and correspondent banks. Services available include safe deposit box rental, securities safekeeping, international services, remote deposit capture, and lock box, among other things.
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The Bank also offers several electronic banking services to commercial and retail customers. AMCORE Online provides retail customers with online capability to access deposit and loan account balances, transfer funds between accounts, make loan payments, view checks and pay bills. AMCORE Online For Business facilitates access to commercial customers accounts via personal computers. It also permits the transfer of funds between accounts and the initiation of wire transfers and ACH activity to accounts at other financial institutions. The AMCORE TeleBank service provides retail and commercial customers the opportunity to use their telephone 24 hours a day to obtain balance and other information on their checking and savings accounts, CDs, personal installment loans and retail mortgage loans; all from a completely automated system. Automated teller machines located throughout AMCOREs market area make banking transactions available to customers when the bank facilities or hours of operation are not convenient.
Investment Management and Trust Segment Effective December 31, 2008, AMCORE Investment Group, N.A. (the Investment Group), a nationally chartered non-depository bank, was merged into the Bank. The Investment Group operates as a separate business segment of the Bank and provides its clients with wealth management services, which include trust services, estate administration and financial planning. The Investment Group also provides employee benefit plan administration and recordkeeping services.
As a result of the merger of the Investment Group into the Bank, AMCORE Investment Services, Inc. (AIS) became a wholly owned subsidiary of the Bank. AIS was previously a wholly owned subsidiary of the Investment Group. AIS is incorporated under the laws of the State of Illinois and is a member of the Financial Industry Regulatory Authority (FINRA). AIS is a fullservice brokerage company and registered investment advisor that offers a full range of investment alternatives including managed accounts, annuities, mutual funds, stocks, bonds and other insurance products. AIS customers can get real time market quotes and account information 24 hours a day, 7 days a week through AMCORETrade.com.
Competition
Active competition exists for all services offered by AMCOREs bank and nonbank affiliates with other national and state banks, savings and loan associations, credit unions, finance companies, personal loan companies, brokerage and mutual fund companies, mortgage bankers, insurance agencies, financial advisory services, and other financial institutions serving the affiliates respective market areas. The principal competitive factors in the banking and financial services industry are quality of services to customers, ease of access to services and pricing of services, including interest rates paid on deposits, interest rates charged on loans, fees charged for fiduciary and other professional services, safety of and access to deposits and reputation.
Employment
AMCORE had 962 fulltime equivalent employees as of February 11, 2010. This compares to 1,272 full-time equivalent employees as of February 13, 2009. AMCORE provides a variety of benefit plans to its employees including health, dental, group term life and disability insurance, childcare reimbursement, flexible spending accounts, retirement, profit sharing, 401(k), stock option, stock purchase and dividend reinvestment plans.
Supervision and Regulation
AMCORE is subject to regulations under the Bank Holding Company Act of 1956, as amended (the Act), and is registered with the Federal Reserve Board (Fed) under the Act. AMCORE is required by the Act to file quarterly and annual reports of its operations and such additional information as the Fed may require and is subject, along with its subsidiaries, to examination by the Fed.
The acquisition of five percent or more of the voting shares or all or substantially all of the assets of any bank by a bank holding company requires the prior approval of the Fed and is subject to certain other federal and state law limitations. The Act also prohibits, with certain exceptions, a bank holding company from acquiring direct or
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indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than banking, managing and controlling banks or furnishing services to banks and their subsidiaries, except that holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Fed to be so closely related to banking as to be a proper incident thereto.
Under current regulations of the Fed, a bank holding company and its nonbank subsidiaries are permitted, among other activities, to engage in such bankingrelated businesses as sales and consumer finance, equipment leasing, computer service bureau and software operations, mortgage banking, brokerage and financial advisory services. The Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. In addition, federal legislation prohibits acquisition of control of a bank or bank holding company without prior notice to certain federal bank regulators. Control is defined in certain cases as acquisition of ten percent or more of the outstanding shares of a bank or bank holding company.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (FDIC) insurance fund in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the cross-guarantee provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. In general, the extent of these powers depends upon whether the institutions in question are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized, as such terms are defined under regulations issued by each of the federal banking agencies. In addition, federal banking agencies have the authority to impose, among other things, (i) higher minimum capital ratios beyond the well-capitalized level depending on the risk profile and performance of the insured depository institution; and (ii) institute receivership proceedings against institutions that fall below required capital levels. At December 31, 2009, the Bank was significantly undercapitalized, as defined by regulation, and is subject to a Consent Order with its primary regulator to achieve and maintain capital ratios that exceed well-capitalized. See Regulatory Developments, below.
In late 1992, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1992 that included many provisions that have had significant effects on the cost structure and operational and managerial standards of commercial banks. This Act contains provisions that revised bank supervision and regulation, including, among many other things, the monitoring of capital levels, additional management reporting and external audit requirements, and the addition of consumer provisions that include Truth-in-Savings disclosures.
The Gramm-Leach-Bliley Act (GLB Act) was enacted November 1999, and, among other things, established a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. To date, the GLB Act has not materially affected the Companys operations. However, to the extent the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves.
Effective in 2007, pursuant to the Federal Deposit Insurance Reform Act of 2005 and implementing regulations, FDIC-insured financial institutions are subject to a new risk-based premium assessment system that significantly
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increases the premiums that are paid on FDIC-insured deposits. As part of the new rules, the Bank, like many financial institutions, was eligible for a one-time assessment credit that offset the increase in premiums. The credit completely offset the Banks 2007 premium increase and offset a portion of the 2008 increase. This partial offset notwithstanding, the Bank realized a significant increase in its FDIC premiums in 2008 and 2009.
In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, subsequent to the end of third quarter 2008, Congress enacted and the President signed into law the Emergency Economic Stabilization Act of 2008 (ESA). Shortly thereafter, the Federal banking agencies announced the Troubled Asset Relief Program (TARP) and Capital Purchase Program (CPP). Collectively, these actions provided a variety of programs that financial institutions could participate in, including the potential sale of certain troubled loans to the United States Government, sale of preferred stock to the United States Treasury and temporary expansion of FDIC insured deposit levels (some voluntary and some automatic). To date, AMCORE has not directly benefited from any of the government programs other than the temporary expansion of FDIC insured deposit levels.
It is not entirely clear what impact the ESA, TARP, including the CPP, the temporary FDIC guarantee expansion and other liquidity and funding initiatives of the Fed and other agencies have had on the financial markets given the other difficulties described above, including the continued volatility and limited credit availability, or on the U.S. banking and financial industries and the broader U.S. and global economies.
On November 6, 2009, the President signed into law the Worker, Homeownership, and Business Act. Subject to certain limitations, the new law permits businesses, such as AMCORE, with losses in either 2008 or 2009 to claim refunds of taxes paid within the prior five years. As a result of tax legislation, the Company has filed refund claims in the amount of $36.9 million.
The foregoing references to applicable statutes and regulations are brief summaries thereof and are not intended to be complete and are qualified in their entirety by reference to the full text of such statutes and regulations.
AMCORE is supervised and examined by the FRB. The Bank is supervised and regularly examined by the Office of the Comptroller of the Currency (OCC) and is subject to examination by the FRB. In addition, the Bank is subject to periodic examination by the FDIC. AIS is supervised and examined by FINRA and the SEC.
Regulatory Developments
On May 15, 2008, the Bank entered into a written agreement (the OCC Agreement) with the OCC. The OCC Agreement described commitments made by the Bank to address and strengthen banking practices relating to asset quality and the overall administration of the credit function at the Bank.
The Company entered into a written agreement (the FRB Agreement) with the Federal Reserve Bank of Chicago (the FRB) dated June 26, 2009, and on June 25, 2009, the Bank agreed to the issuance of a consent order (the Consent Order) by the OCC. In general, the FRB Agreement and the Consent Order contained requirements to develop plans to raise capital and to revise and maintain a liquidity risk management program. The Consent Order required the Bank to, among other things, (i) develop and submit a capital plan (the Capital Plan) to the OCC by July 25, 2009, (ii) achieve and maintain by September 30, 2009, Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 risk-based capital at least equal to 9% of risk-weighted assets and total risk-based capital at least equal to 12% of risk-weighted assets, and (iii) revise and maintain a liquidity risk management program within 60 days from the date of the Consent Order. In addition, the FRB Agreement required the development of a capital plan for the Company, restricted the payment of dividends by the Company, as well as the taking of dividends or any other payment representing a reduction in capital from the Bank. The FRB Agreement further required that the Company not incur, increase, or guarantee any debt, repurchase or redeem any shares of its stock, or pay any interest or principal on subordinated debt or trust preferred securities, in each case without the prior approval of the FRB. In consultation with its professional
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advisors, and in compliance with the Consent Order, the Bank developed and timely submitted the Capital Plan and liquidity risk management program to the OCC, and the Company developed and timely submitted the capital plan to the FRB as required under the FRB Agreement.
By letter dated November 4, 2009 (the Letter), the OCC notified the Bank of its finding that the Capital Plan was not acceptable, stating that the OCC was unable to determine that the Capital Plan is likely to succeed in restoring the Banks capital at this time. The OCC further advised the Bank that it was being treated as significantly undercapitalized within the meaning of the prompt corrective action (the PCA) provisions of the Federal Deposit Insurance Act and implementing OCC regulations. As a result of this regulatory determination, the Bank thereupon became subject to the PCA activity and operational restrictions applicable to significantly undercapitalized depository institutions, including, among other things, the mandatory requirement that the Bank submit an acceptable Capital Restoration Plan (CRP), as required under the PCA guidelines, no later than December 4, 2009. The Letter also indicated that the OCC was requiring the Bank to prepare and submit to the OCC a plan for the sale or merger of the Bank (a Disposition Plan) by December 4, 2009, as specified under the Consent Order.
On November 6, 2009, the FRB notified the Company in writing that the Companys capital plan submitted under the terms of the FRB Agreement was unacceptable in addressing the capital erosion of the Company and the Bank. The FRB concluded that, based on the information provided by the Company, as well as the Companys current negative financial trends, the Companys capital plan was not viable.
Further, the Bank was unable to meet the regulatory capital maintenance requirements of the Consent Order by the required September 30, 2009 date. As a result of the OCC Agreement, as well as the FRB Agreement, the Consent Order and the Letter, the Company was ineligible for certain actions and expedited approvals without the prior written consent and approval of the applicable regulatory agency. These actions include, among other things, the appointment of directors and senior executives, making or agreeing to make certain payments to executives or directors, business combinations and branching.
In consultation with its professional advisors, the Bank resubmitted a combined CRP and Disposition Plan by the required December 4, 2009 due date. By return letter dated January 8, 2010 (the Response Letter), the OCC notified the Bank that its CRP was not acceptable. According to the OCC, the CRP was not accepted because, among other things, it did not meet the statutory requirements that the CRP be based on realistic assumptions and be likely to succeed in restoring the Banks capital. In addition, on January 12, 2010, the FRB notified the Company that the Companys capital plan previously submitted to the FRB continued to be unacceptable in addressing the capital erosion of the Company and the Bank. The Response Letter provided that even if the Banks capital ratios improve to the undercapitalized category, the Bank would continue to be subject to operational restrictions applicable to significantly undercapitalized institutions until such time as the Bank has submitted to the OCC an acceptable CRP. The OCC also stated its view that the recently announced asset sales by the Bank have increased the overall risk to the Banks capital base.
The Company and the Bank continue to diligently work with their financial and professional advisors in seeking qualified sources of outside capital, and in achieving compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter. The Company and the Bank continue to consult with the OCC, FRB and FDIC on a regular basis concerning the Companys and Banks proposals to obtain outside capital and to develop action plans that will be acceptable to federal regulatory authorities, but there can be no assurance that these actions will be successful, or that even if one or more of the Companys and Banks proposals are accepted by the Companys and Banks Federal regulators, that these proposals will be successfully implemented. While the Companys management continues to exert maximum effort to attract new capital, significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt as to the Companys ability to continue as a going concern. Doubt as to the Companys ability to continue as a going concern was previously disclosed in the Companys December 31, 2009 earnings release furnished with its February 2, 2010 Form 8-K, Current Report. If the Company is unable to achieve compliance
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with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter with the OCC and the FRB, or an acceptable CRP under the OCCs Prompt Corrective Action guidelines, and if the Company cannot otherwise comply with such commitments and regulations, the OCC could force a sale, liquidation or federal conservatorship or receivership of the Bank. For further discussion on going concern and federal receivership issues, see Item 1A Risk Factors.
Subsidiary Dividends and Capital
Legal limitations exist as to the extent to which the Bank can lend or pay dividends to AMCORE and/or its affiliates. The payment of dividends by a national bank without prior regulatory approval is limited to the current years net income plus the adjusted retained net income for the two preceding years. The payment of dividends by any bank or bank holding company is affected by the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Fed and regulations issued by the FDIC and the OCC (collectively the Agencies). Dividends paid by the Bank to AMCORE are currently prohibited since the Banks capital is below applicable minimum capital requirements. In 2010, dividends are not expected to be paid by the Bank. There were no loans outstanding from the Bank to affiliates at December 31, 2009. See Note 16 of the Notes to Consolidated Financial Statements included under Item 8.
The Fed issues riskbased capital guidelines for bank holding companies. These capital rules require minimum capital levels as a percent of riskweighted assets. In order to be adequately capitalized under these guidelines, banking organizations must have minimum capital ratios of 4% and 8% for Tier 1 capital and total capital, respectively. The Fed also established leverage capital requirements intended primarily to establish minimum capital requirements for those banking organizations that have historically invested a significant portion of their funds in low risk assets. Federally supervised banks are required to maintain a minimum leverage ratio of not less than 4%. Refer to the Liquidity and Capital Management section of Item 7 for a summary of AMCOREs capital ratios as of December 31, 2009 and 2008. See also Note 17 of the Notes to Consolidated Financial Statements included under Item 8.
Governmental Monetary Policies and Economic Conditions
The earnings of all subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Fed influences general economic conditions and interest rates through various monetary policies and tools. It does so primarily through openmarket operations in U.S. Government securities, varying the discount rate on member and non-member bank borrowings, and setting reserve requirements against bank deposits. Fed monetary policies have had a significant effect on the operating results of banks in the past and are expected to do so in the future. The general effect of such policies upon the future business and earnings of each of the subsidiary companies cannot accurately be predicted.
Interest rate sensitivity has a major impact on the earnings of banks. As market rates change, yields earned on assets may not necessarily move to the same degree as rates paid on liabilities. For this reason, AMCORE attempts to minimize earnings volatility related to fluctuations in interest rates through the use of a formal asset/liability management program and certain derivative activities. See Item 7A and Note 8 of the Notes to Consolidated Financial Statements included under Item 8 for additional discussion of interest rate sensitivity and related derivative activities.
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Executive Officers of the Registrant
The following table contains certain information about the executive officers of AMCORE. There are no family relationships between any director or executive officer of AMCORE.
Name |
Age | Principal Occupation Within the Last Five Years | ||
William R. McManaman | 62 | Chairman of the Board since May 2008 and Director of the Company since 1997. Chief Executive Officer of the Company and Chairman of the Board of the Bank since February 2008. Previously Executive Vice President and Chief Financial Officer, Ubiquity Brands from April 2006 to September 2007; and Senior Vice President and Chief Financial Officer of First Health Group Corporation from March 2004 until January 2005. | ||
Judith Carré Sutfin | 48 | Executive Vice President and Chief Financial Officer of AMCORE since December 2007, and Director of the Bank since January 2008. Previously held various executive positions at LaSalle Bank Corporation, Chicago, Illinois, with the most recent position being that of Executive Vice President and Head of Business Decision Support. | ||
Lori M. Burke | 57 | Executive Vice President and Chief Administrative Officer since February 2010. Director of the Bank since April 2009. Executive Vice President, Administrative Services of the Company from May 2008 to February 2010 and Executive Vice President, Administrative Services of the Bank from October 2007 to February 2010. Executive Vice President and Chief Human Resources Officer from October 2006 to October 2007 and previously Senior Vice President and Human Resources Manager. | ||
Russell Campbell |
53 | Executive Vice President, Investment Group since January 2009. Director of the Bank since December 2008. Executive Vice President and Director of the Investment Group from March 2007 to December 2008. Previously President and Chief Executive Officer at ABN AMRO Asset Management Holdings, Inc. | ||
Guy W. Francesconi |
50 | Executive Vice President and General Counsel since February 2006, Corporate Secretary since May 2008, and Corporate Secretary of the Bank since October 2007. Previously General Counsel to Merrill Lynch Capital and Merrill Lynch Business Financial Services. | ||
Thomas R. Szmanda |
50 | Executive Vice President, Consumer Banking Group since September 2005 and Director of the Bank since November 2005. Previously Senior Vice President and Chief Retail Officer of the Bank. |
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ITEM 1A. | Risk Factors |
The Company faces a variety of risks that are inherent in its business, including interest rate, credit, liquidity, capital, price/market, transaction/operation, compliance/legal, strategic and reputation. Following is a discussion of these risk factors. While the Companys business, financial condition and results of operations could be harmed by any of the following risks or other factors discussed elsewhere in this report, including Managements Discussion and Analysis and Notes to the Consolidated Financial Statements, the mere existence of risk is not necessarily reason for concern. However, the following risks could cause actual results to materially differ from those discussed in any forward-looking statement.
There is substantial doubt about AMCOREs ability to continue as a going concern.
As discussed in Note 1 of the Notes to Consolidated Financial Statements, significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt about the Companys ability to continue as a going concern.
The Companys Board of Directors continues to actively pursue strategic alternatives. The Company can give no assurance that AMCORE will identify an alternative that allows its stockholders to realize an increase in the value of the Companys stock. The Company also can give no assurance that a transaction or other strategic alternative, once identified, evaluated and consummated, will provide greater value to its stockholders than that reflected in the current stock price. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to its current stockholders and could adversely affect the price of AMCOREs common stock.
The Company and the Bank are subject to Regulatory Agreements and Orders that restrict the Company from taking certain actions.
On May 15, 2008, the Bank entered into the OCC Agreement with the OCC. The OCC Agreement described commitments made by the Bank to address and strengthen banking practices relating to asset quality and the overall administration of the credit function at the Bank. The Company entered into a written agreement (the FRB Agreement) with the FRB dated June 26, 2009, and on June 25, 2009, the Bank agreed to the issuance of a consent order (the Consent Order) by the OCC. In general, the FRB Agreement and the Consent Order contained requirements to develop plans to raise capital and to revise and maintain a liquidity risk management program.
By letter dated November 4, 2009 (the Letter), the OCC notified the Bank of its finding that the capital plan submitted pursuant to the Consent Order (the Capital Plan) was not acceptable, stating that the OCC was unable to determine that the Capital Plan was likely to succeed in restoring the Banks capital at this time. The OCC further advised the Bank that it was being treated as significantly undercapitalized within the meaning of the prompt corrective action (the PCA) provisions of the Federal Deposit Insurance Act and implementing OCC regulations. The Bank was required to submit a capital restoration plan and a disposition plan pursuant to the Letter. On November 6, 2009, the FRB notified the Company in writing that the Companys capital plan submitted under the terms of the FRB Agreement was unacceptable in addressing the capital erosion of the Company and the Bank. For further information regarding the requirements and limitations of the OCC Agreement, the FRB Agreement, the Consent Order and the Letter, see Note 17 of the Notes to the Consolidated Financial Statements.
Further, the Bank was unable to meet the regulatory capital maintenance requirements of the Consent Order by the required September 30, 2009 date. As a result of the OCC Agreement, as well as the FRB Agreement, the Consent Order and the Letter, the Company was ineligible for certain actions and expedited approvals without the prior written consent and approval of the applicable regulatory agency. These actions include, among other things, the appointment of directors and senior executives, making or agreeing to make certain payments to executives or directors, business combinations and branching.
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In consultation with its professional advisors, the Bank resubmitted a combined CRP and Disposition Plan by the required December 4, 2009 due date. By return letter dated January 8, 2010 (the Response Letter), the OCC notified the Bank that its CRP was not acceptable. According to the OCC, the CRP was not accepted because, among other things, it did not meet the statutory requirements that the CRP be based on realistic assumptions and be likely to succeed in restoring the Banks capital. In addition, on January 12, 2010, the FRB notified the Company that the Companys capital plan previously submitted to the FRB continued to be unacceptable in addressing the capital erosion of the Company and the Bank. The Response Letter provided that even if the Banks capital ratios improve to the undercapitalized category, the Bank would continue to be subject to operational restrictions applicable to significantly undercapitalized institutions until such time as the Bank has submitted to the OCC an acceptable CRP. The OCC also stated its view that the recently announced asset sales by the Bank have increased the overall risk to the Banks capital base.
The Company and the Bank continue to diligently work with their financial and professional advisors in seeking qualified sources of outside capital, and in achieving compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter. The Company and the Bank continue to consult with the OCC, FRB and FDIC on a regular basis concerning the Companys and Banks proposals to obtain outside capital and to develop action plans that will be acceptable to federal regulatory authorities, but there can be no assurance that these actions will be successful, or that even if one or more of the Companys and Banks proposals are accepted by the Companys and Banks Federal regulators, that these proposals will be successfully implemented. While Companys management continues to exert maximum effort to attract new capital, significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt as to Companys ability to continue as a going concern. Doubt as to the Companys ability to continue as a going concern was previously disclosed in the Companys December 31, 2009 earnings release furnished with its February 2, 2010 Form 8-K, Current Report. If the Company is unable to achieve compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter with the OCC and the FRB, or an acceptable CRP under the OCCs Prompt Corrective Action guidelines, and if the Company cannot otherwise comply with such commitments and regulations, the OCC could force a sale, liquidation or federal conservatorship or receivership of the Bank.
The Bank may be subject to a federal conservatorship or receivership if it cannot comply with the Consent Order, the FRB Agreement, the Letter, the Response Letter, or if its condition continues to deteriorate.
As noted above, the Consent Order requires the Bank to create and implement a capital plan. The Bank has twice submitted capital restoration plans that have been rejected by the OCC and there is no assurance it will be able to submit an acceptable plan. Moreover, the condition of the Banks loan portfolio may continue to deteriorate in the current economic environment and thus continue to deplete the Banks capital and other financial resources. Therefore, should the Bank fail to implement an acceptable CRP and comply with its terms, or fail to comply with capital and liquidity funding requirements, or suffer a continued deterioration in its financial condition, the Bank may be subject to being placed into a federal conservatorship or receivership by the OCC, with the FDIC appointed as conservator or receiver. If these events occur, AMCORE probably would suffer a complete loss of the value of its ownership interest in the Bank, and the Company subsequently may be exposed to significant claims by the FDIC and the OCC. See Regulatory Developments, under Item 1.
The Company is exposed to the risk that third parties that owe it money, securities, or other assets will not perform their obligations.
Credit risk arises anytime the Company extends, commits, invests, or otherwise exposes Company funds through contractual agreements, whether reflected on or off the balance sheet. These parties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. Credit risk includes the risk that the Companys rights against third parties (including guarantors) may not be enforceable or realizable in all circumstances.
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The Companys credit risk is concentrated in its loan portfolio (including commitments) and its investment portfolio. The Company also has credit risk through other financial instruments including derivative contracts and Company owned life insurance policies.
Credit risk is affected by a variety of factors including the credit-worthiness of the borrower or other party, the sufficiency of underlying collateral, the enforceability of third-party guarantees, errors in underwriting, changing economic and industry conditions and concentrations of credit by loan type, terms or geographic area, changes in the financial condition of the borrower or other party, and by credit and underwriting policies.
In addition to the risk of loss of principal associated with the loan portfolio, profitability is adversely affected by non-performing loans, which include non-accrual loans and loans past due 90 days or more.
Credit risk in the Banks portfolio is high due to a concentration in commercial real estate loans with significant deterioration in asset quality and collateral values. The value of real estate collateral supporting many construction and land development loans, commercial loans and multi-family loans have declined and may continue to decline. Extensions of credit for these types of loans has generally ceased, and AMCORE is working actively to manage its remaining construction and development and commercial real estate loan portfolios. However, AMCORE could experience further delinquencies and credit losses in these challenging economic times, if current trends in housing and real estate markets continue to deteriorate, and if efforts to limit losses through workouts of bad loans are unsuccessful.
Recent negative developments in the financial industry and credit markets may continue to adversely impact the Companys financial condition and results of operations. There is no precise method of predicting loan losses, and therefore there is a risk that charge-offs in future periods will exceed the allowance for loan losses or that additional increases in the allowance for loan losses will otherwise be required. Additions to the allowance for loan losses would cause results of operations to decline in the period(s) in which such additions occur and could also have a material adverse impact on the Companys capital and financial position. For further information regarding provisions for loan losses, concentrations, credit losses, and non-performing loans, see the discussion of provision for loan losses, and the Asset Quality Review and Credit Risk Management section of Item 7. Managements Discussion and Analysis.
The Companys earnings and cash flows are largely dependent upon net interest income.
The Company, like most financial institutions, is subject to interest-rate risk on the interest-earning assets in which it invests (primarily loans and securities) and the interest-bearing liabilities with which it funds (primarily customer deposits, brokered deposits and borrowed funds). This includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change to the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk).
Interest rates are sensitive to many factors that are beyond the Companys control, including general economic conditions, the policies of various governmental and regulatory agencies and competition. Changes in monetary policy, including changes in interest rates, could influence not only the interest that the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the ability to originate loans and obtain deposits, (ii) the fair value of financial assets and liabilities, and (iii) the average duration of loans and securities which are collateralized by mortgages. Earnings and cash flows could be adversely affected by interest rate changes.
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The Company has experienced steady declines in its capital levels as credit losses have risen.
Maintaining sufficient capital serves as a buffer against potential credit and other losses that the Company may encounter during difficult times. There are five levels of capital defined by regulation: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The OCC has advised the Bank that it is being treated as significantly undercapitalized. Capital risk includes the potential effect on the Companys reputation as well as certain other potential consequences should the capital level fall below well-capitalized. As a result of the Bank being significantly undercapitalized, the Bank is currently experiencing changes in the Banks borrowing costs and terms from regulatory authorities and other third parties, the Banks FDIC deposit insurance premiums, and AMCOREs ability to access brokered CD markets.
The Companys capital has declined due to recent credit losses. The Company lost $98 million during the year ended December 31, 2008 and lost $224 million during the year ended December 31, 2009. While it expects to be able to generate profits at some point in the future, there can be no assurance of when, or if, it will return to profitability. Given recent losses, asset quality issues, and overall financial condition, the Company must raise additional capital to provide it with sufficient capital resources and liquidity to comply with regulatory requirements and to meet its commitments and business needs. AMCORE may not be able to raise the necessary capital on favorable terms, or at all. An inability to raise additional capital on acceptable terms could have a materially adverse effect on the Companys business, financial condition and results of operations.
Liquidity risk could impair the Companys ability to fund operations.
Liquidity risk is the potential that the Company will be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund credit obligations to borrowers, mortgage originations pending sale, withdrawals by depositors, repayment of debt when due or called, dividends to shareholders, operating expenses and capital expenditures, among other things. Liquidity is derived primarily from bank-issued deposit growth and retention; principal and interest payments on loans; principal and interest payments from investment securities, sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.
The Companys liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or the Company, unfavorable pricing, competition, the Companys credit rating and regulatory restrictions applicable to the Company and its subsidiaries.
As of December 31, 2009, the Bank was considered significantly undercapitalized under applicable regulatory guidelines. As a result of this designation, the Bank is no longer eligible to participate in the brokered CD market and is also subject to limitations with respect to interest rates it can offer on deposits, generally limited to rates equal to no more than 75 basis points above prevailing market rates. These limitations, as well as recent increased collateral requirements and advance limitations with respect to other funding sources, may have a material impact on the Banks deposit levels and liquidity. In particular, the inability to accept, renew, or roll over brokered deposits could put a severe strain on the Banks liquidity because of the limited ability to replace maturing brokered deposits with core deposits.
Current market developments may adversely affect AMCOREs industry, business, financial condition and results of operations.
Dramatic declines in the housing market during the past two years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. Reflecting concern about
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the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect the Companys business, financial condition and results of operations. For example:
| Market developments may affect borrower confidence levels, behaviors and financial condition, which could impact their borrowing and payment activities, and the Companys ability to assess creditworthiness, which could impact lending activities, charge-offs and provision for loan losses. |
| Estimates of inherent losses in the loan portfolio rely on complex judgments, including forecasts of economic conditions and may no longer be capable of accurate estimation. |
| The ability to borrow from other financial institutions or other funding transactions could be adversely affected. |
| AMCORE may be required to pay significantly higher Federal Deposit Insurance Corporation (FDIC) premiums due to depletion of the insurance fund, and a reduction of the ratio of reserves to insured deposits. |
| Increased regulation in the financial services industry, including as a result of the ESA, could increase compliance costs and challenges, and limit the Companys ability to pursue business opportunities. |
| Industry competition could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions. |
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for over two years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that AMCORE will not experience an adverse effect, which may be material, on the Companys ability to access capital and on its business, financial condition and results of operations.
AMCOREs deposit insurance premiums have increased which could have a material adverse effect on future earnings.
Due to the impact on the FDIC insurance fund resulting from the recent increase in bank failures, the FDIC raised its insurance premiums and levied special assessments on all financial institutions. In addition, the FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the deposit insurance fund. The FDIC places all financial institutions into one of four risk categories using a two-step process based first on the respective institutions capital ratios and then on the CAMELS composite supervisory rating assigned to the institution by its primary federal regulator in connection with its periodic regulatory examinations. As of December 31, 2009, the Bank is significantly undercapitalized under regulatory guidelines. Due to the significantly undercapitalized status of the Bank and other factors indicating higher risk, the FDIC will charge the Bank a higher premium for deposit insurance. The combination of the general increase in FDIC insurance rates and higher FDIC insurance rates resulting from the classification of the Bank in a higher risk category will have an adverse impact on the Companys results of operations. At this time, the Company is unable to predict the impact in future periods in the event the economic crisis continues or the Bank continues to be deemed significantly undercapitalized.
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The Company and the Bank are subject to extensive regulation, supervision and examination by federal banking authorities.
Changes in applicable regulations or legislation could have a substantial impact on the Company and its operations. Additional legislation and regulations that could significantly affect the Companys powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on the Companys financial condition and results of operations. In that regard, proposals for legislation restructuring the regulation of the financial services industry are currently under consideration. Adoption of such proposals could, among other things, increase the overall costs of regulatory compliance. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. These powers recently have been utilized more frequently due to the serious national, regional and local economic conditions that the Company and other financial institutions are facing. The exercise of regulatory authority may have a negative impact on the Companys financial condition and results of operations.
AMCORE cannot predict the actual effects on the Company of various governmental, regulatory, monetary and fiscal initiatives, which have been and may be enacted on the financial markets. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity, and a continuation or worsening of current financial market and economic conditions could materially and adversely affect AMCOREs business, financial condition, results of operations, and the trading price of its common stock. In addition, failure or the inability to comply with these various requirements can lead to diminished reputation and investor confidence, reduced franchise value, loss of business, curtailment of expansion opportunities, fines and penalties, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. For further information, refer to discussion in Key Initiatives, Other Significant Items and Events section of Item 7. Managements Discussion and Analysis.
Company controls and procedures may fail or be circumvented.
Transaction/operation risk is a function of internal controls, information systems, employee integrity and operating processes. Significant deficiencies or material weaknesses in internal processes, controls, staff or systems could lead to impairment of liquidity, financial loss, disruption of the business, liability to clients, regulatory intervention or damage to the Companys reputation. For example, the Company is highly dependent on its ability to process, on a daily basis, a large number of transactions. Failure of financial, accounting, data processing or other operating systems and controls to operate properly, becoming disabled, or to keep pace with increasing volumes, could adversely affect the Companys ability to capture, process and accurately report these transactions.
The Company may fail to meet continued listing requirements with NASDAQ.
The Companys common stock is listed on the NASDAQ Global Select Market. As a NASDAQ Global Select Market listed company, AMCORE is required to comply with the continued listing requirements of the NASDAQ Market Place Rules to maintain its listing status which includes maintaining a minimum closing bid price of at least a $1.00 per share for common stock. During 2009, the Companys common stock traded below the minimum closing bid price requirement under the NASDAQ Market Place Rules.
The Company was notified by NASDAQ on December 9, 2009 of its non-compliance with listing standards. After regaining compliance on January 4, 2010, the Company once again was notified of non-compliance on March 8, 2010. The notification requires compliance with the NASDAQ continued listing requirements within 180 days. If the Company is unable to regain compliance, the common stock would be delisted from the NASDAQ Global Select Market. Delisting could reduce the ability of investors to purchase or sell AMCOREs common stock as quickly and as inexpensively as they have done historically.
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Not maintaining a listing on a major stock market or exchange may result in a material decline in the market price of the Companys common stock due to a decrease in liquidity and reduced interest by institutions and individuals in investing in the securities. Delisting could also make it more difficult to raise capital in the future.
Poor business decisions or improper implementation of those decisions could results in adverse consequences to the Company.
Identifying and defining goals for the continued growth and success of the Company, developing strategies to accomplish the goals, and acquiring, developing and retaining the physical resources and human capital necessary to successfully execute the strategies are critical to the Companys success.
Presently, the Company has four primary strategic initiatives: credit risk management, cost efficiencies, capital and liquidity, and broadening customer relationships. The Companys ability to successfully execute these initiatives depends upon a variety of factors, including its ability to attract and retain experienced personnel, the continued availability of desirable business opportunities and locations, the competitive responses from other financial institutions in its new market areas, the stability of the Banks commercial real estate loan portfolio, and the ability to manage client relationships across all of its business segments. For an expanded discussion on these initiatives, see Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
Loss of or damage to the Companys reputation may affect ongoing profitability.
Reputation risk arises from the possibility that negative publicity regarding the Companys business practices, whether true or not, will cause a decline in its customer base or result in costly litigation. In a service industry, such as the financial services industry, where product choices between companies are not always clearly distinguishable and which in many cases are interchangeable, a companys reputation for honesty, fair-dealing and good corporate governance may be one of its most important assets. Loss of or damage to that reputation can have severe consequences.
Capital raising activities could dilute the percentage ownership of existing AMCORE shareholders.
The Company is taking all appropriate actions, including pursuing capital raising activities in order to increase capital and otherwise comply with the requirements set forth in the FRB Agreement and Consent Order. There can be no assurance that the Company will be successful in those efforts. Any such capital raising alternatives could dilute the percentage ownership of existing holders of AMCOREs outstanding common stock and may adversely affect the market price of the Companys common stock.
The soundness of other financial institutions could adversely affect AMCORE.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose AMCORE to credit risk in the event of default of the counterparty or client. In addition, AMCOREs credit risk may be exacerbated when the collateral held by it cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan, investment or derivative exposure. There is no assurance that any such losses would not materially and adversely affect AMCOREs financial condition and results of operations.
Changes in the value of financial instruments could adversely affect the Companys earnings or capital.
Price/market risk is the risk to earnings or capital arising from adverse changes in the value of financial instruments. While this includes credit and liquidity risk, the Company considers interest-rate risk to be its most significant market risk. When interest rates increase, the fair value of a financial instrument on the asset side of the balance sheet will decrease. Conversely, when rates decline the fair value of the same instrument will increase.
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While this relationship applies to all fixed-rate financial instruments, the primary instruments whose carrying values are affected by price/market risk are traded instruments. Since the Company currently has only an available-for-sale portfolio and does not maintain investment securities in a trading account, market fluctuations are recorded through equity and not the statements of operations. On-going adverse fair values could cause some security fair values to deteriorate to the extent that they are considered to be other than temporary. At that time, the Company would be required to write-down security values to their fair value as a charge to earnings.
ITEM 1B. | Unresolved Staff Comments |
None.
ITEM 2. | PROPERTIES |
On December 31, 2009, AMCORE occupied 73 locations, of which 42 were owned and 31 were leased. The Commercial and Consumer segments occupied 66 locations, of which 38 were owned and 28 were leased. The Investment Management and Trust segment leased one facility. All of these locations are considered by management to be well maintained and adequate for the purpose intended. See Item 1 and Note 5 of the Notes to Consolidated Financial Statements included under Item 8 of this document for further information on properties.
During the second quarter 2008, the Bank joined the MoneyPass and Sum, surcharge-free ATM networks. As a result, AMCORE cardholders now have access to surcharge-free transactions at more than 20,000 ATMs across the United States, including a large concentration of ATMs conveniently located in the same geographic regions as AMCORE customers. These new relationships expand AMCOREs channel of ATMs from 350 at the beginning of 2008, some of which were owned and some co-branded, to more than 1,500 at the end of 2009 throughout Illinois and Wisconsin.
ITEM 3. | LEGAL PROCEEDINGS |
Management believes that no litigation is threatened or pending in which the Company faces a reasonable possibility of loss or exposure which will materially affect the Companys consolidated financial position or consolidated results of operations. Since the Companys subsidiaries act as depositories of funds, trustee and escrow agents, they occasionally are named as defendants in lawsuits involving claims to the ownership of funds in particular accounts. The Bank is also subject to counterclaims from defendants in connection with collection actions brought by the Bank. This and other litigation is incidental to the Companys business.
As a member of the VISA, Inc. organization (VISA), the Company had previously accrued a $338,000 liability as of December 31, 2008 for its proportionate share of various claims against VISA. Recent additional funding of a litigation escrow account established by VISA has reduced the Companys proportionate share of its liability to $292,000.
ITEM 4. |
Removed and Reserved.
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PART II
ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
See Items 6 and 8 of this document for information on the Companys stock price ranges and dividends. AMCOREs common stock trades on the NASDAQ Stock Market under the symbol AMFI. There were approximately 9,000 holders of record of AMCOREs common stock as of March 5, 2010. See Item 12 of this document for information on the Companys equity compensation plans.
Historically, the Companys policy had been to declare regular quarterly dividends based upon the Companys earnings, financial position, capital requirements and such other factors deemed relevant by the Board of Directors (the Board). This dividend policy was subject to change, however, and the payment of dividends was suspended during fourth quarter 2008. The payment of dividends on the Common Stock is also subject to regulatory capital requirements. For further information on quarterly dividend payments, see the Condensed Quarterly Earnings and Stock Price Summary at the end of Item 8.
The Companys principal source of funds for dividend payments to its stockholders is dividends received from the Bank. Under applicable banking laws, the declaration of dividends by the Bank in any year, in excess of its net profits, as defined, for that year, combined with its retained net profits of the preceding two years, must be approved by the Office of the Comptroller of the Currency. For further discussion of restrictions on the payment of dividends, see Item 7, Managements Discussion and Analysis of the Results of Operations and Financial Condition and Note 16 of the Notes to the Consolidated Financial Statements.
The following table presents information relating to all Company repurchases of common stock during the fourth quarter of 2009:
Issuer Purchases of Equity Securities
Period |
(a) Total # of Shares Purchased |
(b) Average Price Paid per Share |
(c) Total # of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum # (or Approx. Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
October 1 31, 2009 |
3,188 | $ | .97 | | | ||||
November 1 30, 2009 |
| | | | |||||
December 1 31, 2009 |
| | | | |||||
Total during quarter |
3,188 | $ | .97 | | | ||||
The Company does not have a formally announced Repurchase Program in place at this time; however, the Company may periodically repurchase shares in open-market transactions in accordance with Exchange Act Rule 10b-18 through a limited group of brokers. These repurchases are used to replenish the Companys treasury stock for re-issuances related to stock option exercises and other employee benefit plans. The repurchased shares above are direct repurchases of unvested shares from terminated participants, at their original discounted price, related to the administration of the Amended and Restated AMCORE Stock Option Advantage Plan. There were no shares tendered in the fourth quarter to effect stock option exercise transactions in the numbers above. On February 13, 2009, the Board passed a resolution that the Company would not increase its debt, pay dividends, or repurchase treasury stock without prior approval from the Board.
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ITEM 6. | SELECTED FINANCIAL DATA |
Five Year Comparison of Selected Financial Data
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
FOR THE YEAR: |
||||||||||||||||||||
Interest income |
$ | 189,725 | $ | 272,756 | $ | 344,016 | $ | 339,176 | $ | 280,609 | ||||||||||
Interest expense |
114,335 | 140,871 | 183,432 | 174,218 | 118,975 | |||||||||||||||
Net interest income |
75,390 | 131,885 | 160,584 | 164,958 | 161,634 | |||||||||||||||
Provision for loan losses |
190,157 | 202,716 | 29,087 | 10,120 | 15,194 | |||||||||||||||
Non-interest income |
85,421 | 74,602 | 70,997 | 75,589 | 66,413 | |||||||||||||||
Operating expenses |
168,560 | 172,479 | 165,339 | 165,365 | 145,365 | |||||||||||||||
(Loss) Income from continuing operations before income taxes |
(197,906 | ) | (168,708 | ) | 37,155 | 65,062 | 67,488 | |||||||||||||
Income tax expense (benefit) |
25,877 | (70,909 | ) | 8,914 | 18,035 | 19,501 | ||||||||||||||
(Loss) Income from continuing operations |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | $ | 47,027 | $ | 47,987 | ||||||||
Discontinued operations: |
||||||||||||||||||||
(Loss) Income from discontinued operations |
| | | (131 | ) | 707 | ||||||||||||||
Income tax (benefit) expense |
| | | (379 | ) | 3,753 | ||||||||||||||
Income (loss) from discontinued operations |
$ | | $ | | $ | | $ | 248 | $ | (3,046 | ) | |||||||||
Net (Loss) Income |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | $ | 47,275 | $ | 44,941 | ||||||||
Return on average assets (1) |
-4.70 | % | -1.91 | % | 0.54 | % | 0.88 | % | 0.94 | % | ||||||||||
Return on average equity (1) |
-114.05 | -29.64 | 7.32 | 11.76 | 12.18 | |||||||||||||||
Net interest margin |
1.72 | 2.84 | 3.35 | 3.38 | 3.51 | |||||||||||||||
AVERAGE BALANCE SHEET: |
||||||||||||||||||||
Total assets |
$ | 4,763,302 | $ | 5,113,525 | $ | 5,240,498 | $ | 5,369,268 | $ | 5,117,654 | ||||||||||
Gross loans |
3,339,750 | 3,860,934 | 3,977,028 | 3,858,163 | 3,480,947 | |||||||||||||||
Earning assets |
4,484,009 | 4,778,752 | 4,870,255 | 5,008,905 | 4,738,688 | |||||||||||||||
Deposits |
4,046,497 | 3,878,819 | 4,117,440 | 4,224,826 | 3,978,225 | |||||||||||||||
Long-term borrowings |
270,919 | 449,886 | 396,571 | 305,078 | 166,837 | |||||||||||||||
Stockholders equity |
196,222 | 329,920 | 385,570 | 399,916 | 394,117 | |||||||||||||||
ENDING BALANCE SHEET: |
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Total assets |
$ | 3,777,230 | $ | 5,059,824 | $ | 5,192,778 | $ | 5,292,383 | $ | 5,344,902 | ||||||||||
Gross loans |
2,152,557 | 3,786,029 | 3,932,684 | 3,946,551 | 3,721,864 | |||||||||||||||
Earning assets |
3,549,800 | 4,664,956 | 4,796,993 | 4,863,678 | 4,935,124 | |||||||||||||||
Deposits |
3,406,280 | 3,919,038 | 4,003,256 | 4,346,182 | 4,213,216 | |||||||||||||||
Long-term borrowings |
229,177 | 379,667 | 368,858 | 342,012 | 169,730 | |||||||||||||||
Stockholders equity |
36,007 | 261,998 | 368,567 | 400,046 | 398,517 | |||||||||||||||
FINANCIAL CONDITION ANALYSIS: |
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Allowance for loan losses to year-end loans |
6.74 | % | 3.60 | % | 1.35 | % | 1.04 | % | 1.10 | % | ||||||||||
Allowance to non-accrual loans |
44.85 | 44.85 | 129.70 | 136.16 | 187.99 | |||||||||||||||
Net charge-offs to average loans |
5.34 | 2.58 | 0.42 | 0.26 | 0.42 | |||||||||||||||
Non-accrual loans to gross loans |
15.02 | 8.03 | 1.04 | 0.76 | 0.58 | |||||||||||||||
Average long-term borrowings to average equity |
138.07 | 136.36 | 102.85 | 76.29 | 42.33 | |||||||||||||||
Average equity to average assets |
4.12 | 6.45 | 7.36 | 7.45 | 7.70 | |||||||||||||||
STOCKHOLDERS DATA: |
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Earnings Per Common Share |
||||||||||||||||||||
Basic: (Loss) Income from continuing operations |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 | $ | 1.87 | $ | 1.88 | ||||||||
Discontinued operations |
| | | 0.01 | (0.12 | ) | ||||||||||||||
Net (Loss) Income |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 | $ | 1.88 | $ | 1.76 | ||||||||
Diluted: (Loss) Income from continuing operations |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 | $ | 1.86 | $ | 1.86 | ||||||||
Discontinued operations |
| | | 0.01 | (0.11 | ) | ||||||||||||||
Net (Loss) Income |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 | $ | 1.87 | $ | 1.75 | ||||||||
Book value per share |
$ | 1.56 | $ | 11.55 | $ | 16.31 | $ | 16.36 | $ | 15.65 | ||||||||||
Dividends per share |
| 0.278 | 0.720 | 0.721 | 0.662 | |||||||||||||||
Dividend payout ratio |
| % | (6.43 | )% | 59.59 | % | 38.23 | % | 37.54 | % | ||||||||||
Average common shares outstanding |
22,876 | 22,629 | 23,546 | 25,125 | 25,473 | |||||||||||||||
Average diluted shares outstanding |
22,876 | 22,629 | 23,556 | 25,221 | 25,746 | |||||||||||||||
(1) | Ratios from continuing operations. |
(2) | All share data have been restated for effects of stock dividends in both June and September 2008. |
(3) | 2005 and 2006 includes amounts from discontinued operations in connection with the 2005 sale of Investors Management Group, Ltd. |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion highlights the significant factors affecting AMCORE Financial, Inc. and Subsidiaries (AMCORE or the Company) consolidated financial condition as of December 31, 2009 compared to December 31, 2008, and the consolidated results of operations for the three years ended December 31, 2009. The discussion should be read in conjunction with the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report, which have been prepared assuming that the Company will continue as a going concern.
FACTORS INFLUENCING FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains, and periodic filings with the Securities and Exchange Commission and written or oral statements made by the Companys officers and directors to the press, potential investors, securities analysts and others will contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby with respect to, among other things, the financial condition, results of operations, plans, objectives, future performance and business of AMCORE. Statements that are not historical facts, including statements about beliefs and expectations, are forward-looking statements. These statements are based upon beliefs and assumptions of AMCOREs management and on information currently available to such management. The use of the words believe, expect, anticipate, plan, estimate, should, may, will, or similar expressions identify forward-looking statements. Forward-looking statements speak only as of the date they are made, and AMCORE undertakes no obligation to update publicly any forward-looking statements in light of new information or future events.
Contemplated, projected, forecasted or estimated results in such forward-looking statements involve certain inherent risks and uncertainties. A number of factors many of which are beyond the ability of the Company to control or predict could cause actual results to differ materially from those in its forward-looking statements. These factors include, among others, the following possibilities: (I) heightened competition, including specifically the intensification of price competition, the entry of new competitors and the formation of new products by new or existing competitors; (II) adverse state, local and federal legislation and regulation or adverse findings or rulings made by local, state or federal regulators or agencies regarding AMCORE and its operations; (III) failure to obtain new customers and retain existing customers and related deposit relationships; (IV) inability to carry out marketing and/or expansion plans; (V) ability to attract and retain key executives or personnel; (VI) changes in interest rates including the effect of prepayments; (VII) general economic and business conditions which are less favorable than expected; (VIII) equity and fixed income market fluctuations; (IX) unanticipated changes in industry trends; (X) unanticipated changes in credit quality and risk factors; (XI) success in gaining regulatory approvals when required; (XII) changes in Federal Reserve Board monetary policies; (XIII) unexpected outcomes on existing or new litigation in which AMCORE, its subsidiaries, officers, directors or employees are named defendants; (XIV) technological changes; (XV) changes in accounting principles generally accepted in the United States of America; (XVI) changes in assumptions or conditions affecting the application of critical accounting estimates; (XVII) inability of third-party vendors to perform critical services for the Company or its customers; (XVIII) disruption of operations caused by the conversion and installation of data processing systems; (XIX) adverse economic or business conditions affecting specific loan portfolio types in which the Company has a concentration, such as construction, land development and other land loans; (XX) zoning restrictions or other limitations at the local level, which could prevent limited branch offices from transitioning to full-service facilities; (XXI) possible changes in the creditworthiness of customers and value of collateral and the possible impairment of collectability of loans; (XXII) changes in lending terms to the Company and the Bank by the Federal Reserve, Federal Home Loan Bank, or any other regulatory agency or third party; (XXIII) the recently enacted Emergency Economic Stabilization Act of 2008, and the various programs the U.S. Treasury and the banking regulators are implementing to address capital and liquidity issues in the banking system, all of which may have significant effects on the Company and the financial services industry, the exact
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nature and extent of which cannot be determined at this time; (XXIV) failure by the Company or Bank to comply with written agreements, consent orders, written directives, or to develop and implement an acceptable capital restoration plan under the Prompt Corrective Action guidelines, and if the Company cannot otherwise comply with such commitments and regulations, the possibility of a forced sale, liquidation or federal conservatorship or receivership of the Bank; (XXV) significant operating losses, the resulting deterioration in the Companys and Banks capital position and the Companys current default under its senior debt facility could impact the Companys ability to continue as a going concern; and (XXVI) the effect of receiving a going concern statement in the Report of Independent Registered Public Accounting Firm on the Companys 2009 Consolidated Financial Statements.
KEY INITIATIVES AND OTHER SIGNIFICANT ITEMS AND EVENTS
Key Initiatives
Credit risk management Over the past two years, actions that the Company has taken or is taking to enhance the credit risk administration and measurement processes of its banking subsidiary (the Bank) include: implemented an expanded risk grading system to provide more detailed information as to the conditions underlying the portfolio; engaged an independent third party to review a representative sample of the commercial loan portfolio to verify risk rating accuracy; shifted virtually all construction and development loan relationships to an experienced specialty unit to manage and reduce the concentration; reorganized the commercial credit approval process; enhanced the processes related to the allowance for loan losses calculation; implemented straight-through-processing system for commercial lending; increased staffing and resources in the Banks non-performing assets resolution specialty group, which pursues resolution of non-performing assets; hired a new chief credit officer with strong leadership and portfolio management skills; added qualified and experienced senior staff to manage the credit administration, loan review and appraisal functions; reorganized the commercial line of business to eliminate two layers of management, to improve communication and accelerate decision making; formed a risk committee that reviews the loan portfolio including segments that could develop into a concentration to ensure that the Company is appropriately monitoring and managing its credit portfolio risk; and initiated a plan to substantially lower its exposure to non-strategic, non-relationship based accounts, especially loans concentrated in single-service accounts such as investment real estate loans, while increasing its focus on commercial and industrial relationship lending.
Cost efficiencies The Company continues its efforts to realign its cost structure to be consistent with its revenue stream. This is being accomplished through a four-prong approach that focuses on automation, vendor management and contract re-negotiation, improved utilization of existing resources and flattening the organizations hierarchy. Actions taken in 2009 included a five percent reduction in executive salaries, suspension of employee merit increases, bonuses, and the Companys basic contribution to the 401(k) plan, and a 25% reduction of its work force (the Restructuring). The Company has not suspended or reduced its employer matching contributions to the 401(k) plan. Charges of $2.7 million (the Restructuring Charge) related to the Restructuring were recorded in 2009.
During 2008, the Company identified five under-utilized high-cost facilities that could be consolidated with other nearby locations (the Facilities Consolidation). These were two office buildings, one small older branch in a historical market, one leased Chicago suburban location with minimal consumer activity that housed mainly commercial lenders, and a leased branch with excess capacity, minimal access to customers and high maintenance costs. A $1.5 million non-cash impairment charge was recorded in second quarter 2008 in connection with the Facilities Consolidation. One property was sold during 2008 at an amount equal to its book value while the other properties continue to be listed for sale.
Continuing its efforts to improve efficiencies, better utilize existing space and reduce costs, the Company closed its Lake Zurich limited branch office (LBO) on June 30, 2009, relocating the commercial team to its nearby Vernon Hills branch. During fourth quarter 2009, the Company consolidated operations of three additional
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branches to other nearby facilities. These facilities included the Elgin-Big Timber branch, where customers will be able to utilize three nearby newer locations; the Wauwatosa, Wisconsin branch, where the commercial team relocated to a nearby leased facility; and the Northbrook LBO, which closed when the full service branch in Northbrook opened (see branch expansion below). Northbrook is the last of the Companys new branches to open and construction on this new branch was underway for more than a year. No impairment charges were required for any of the 2009 Facilities Consolidations.
Capital and Liquidity The Company and the Bank are taking all appropriate actions, including pursuing capital raising activities, in order to improve its capital ratios and otherwise enhance its capital position. During fourth quarter 2008, the Company merged its Investment Management and Trust Group into the main Bank charter and suspended its quarterly dividend to preserve capital and parent company liquidity. In 2009, the Bank completed the sale of four Wisconsin branches, sold $136 million in indirect loans, and entered into an agreement to sell fourteen locations in the rural Illinois markets. See Other Significant Items and Events branch and asset sales below for additional information on other actions taken to improve capital ratios. Also see Regulatory Developments below for additional information regarding the Banks plans to raise its capital levels. See Capital Management section below for an expanded discussion of the regulatory capital standards.
During 2009, the Bank continued to build its liquidity reserves to strengthen its funding stability as the economic environment became less stable. AMCORE has also elected to continue to participate in the FDIC Transaction Account Guarantee Program, providing unlimited insurance on non-interest bearing transaction accounts through June 30, 2010. At December 31, 2009, the Banks liquidity reserves were approximately $625 million. See Regulatory Developments below for more information regarding the Banks liquidity risk management program.
Broadening Customer Relationships The Companys reputation for customer and community service has always been an important driver of its business. Reducing its non-relationship accounts, while reaffirming and building upon its core customer relationships, is expected to build consistency across the Company footprint. Developing deep and enduring customer relationships across all our lines of business is a key objective. This One-Bank initiative for serving customers across all lines of business will continue as a focus for 2010. The initiative is expected to better leverage the combined expertise of the Company and its people across all lines of business to better meet the customers financial needs, while enhancing the profitability of the Company.
The Company also focused on measuring line of business performance and closely aligning profitability with incentive compensation in order to drive strong core customer-based growth. This focus on profitability, rather than volume only measures, has led to improved product pricing that is more reflective of true costs and market risks and is expected to help the Company strengthen its earnings stream as it emerges from this credit cycle.
During 2008, the Bank joined the MoneyPass and Sum, surcharge-free ATM networks. As a result, AMCORE cardholders now have access to surcharge-free transactions at more than 20,000 ATMs across the United States, including a large concentration of ATMs conveniently located in the same geographic regions as AMCORE customers. These new relationships expand AMCOREs channel of ATMs throughout Illinois and Wisconsin from roughly 350 at the beginning of 2008 to more than 1,500 as of December 31, 2009.
Other Significant Items and Events
Corporate restructuring and key personnel changes The previously mentioned reduction in workforce resulted in the elimination of approximately 116 positions, including that of the President and Chief Operating Officer, and the Executive Vice President, Commercial Banking Group. As a result of the workforce reductions, one layer and in some cases two layers of management were eliminated, in an effort to improve communications and accelerate decision making in the Company. The Companys objective is to build an organization that is streamlined, disciplined and driven to weather a variety of economic circumstances.
In May 2009, Ted Kopczynski was promoted to chief credit officer and senior vice president. As chief credit officer, he is responsible for developing, administering and providing general oversight of all credit policies and procedures; approving and recommending extensions of credit; and implementing effective credit risk
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management activities. Kopczynski has 27 years of experience in all phases of small and middle market loans and large structured transactions. Prior to joining AMCORE, he held senior credit, sales and leadership positions with Citibank, UBS Global Wealth Management and Merrill Lynch Business Financial Services Inc.
On February 22, 2008, the Board of Directors (the Board) elected William R. McManaman as Chief Executive Officer (CEO), effective February 25, 2008, upon the retirement of the former CEO. Prior to his appointment as CEO, Mr. McManaman, had served as a Director of the Company since 1997. On May 6, 2008, the Board elected Mr. McManaman as Chairman of the Board.
Branch expansion During 2009, the Bank opened three new branches, one in Antioch, Illinois, one in Naperville, Illinois, and one in Northbrook, Illinois. These three locations were already committed to and in the pipeline prior to the recent downturn in the credit cycle. This completes the Branch Expansion initiative that began in 2001. Modifications in branch hours were implemented in April 2009 to more closely reflect customer usage patterns and as part of the Companys cost reduction measures.
Branch and asset sales In fourth quarter 2009 the Company sold four branches in rural Wisconsin: Argyle, Belleville, Monroe and New Glarus (the Wisconsin Branch Sales) in two separate transactions. These transactions included approximately $87 million in loans, $166 million in deposits and sweep accounts, and $42 million in related trust accounts. The brokerage and 401(k) plan businesses were not part of the Wisconsin Branch Sales and will remain with AMCORE.
In fourth quarter 2009, the Company announced an agreement had been reached to sell 12 branches and two stand-alone drive-ups in the following rural Illinois communities: Dixon, Freeport, Mendota, Oregon, Peru, Princeton, Rock Falls and Sterling (the Illinois Branch Sale). The transaction includes approximately $483 million in loans, $540 million in deposits and sweep accounts, and up to $400 million in related trust and brokerage accounts. The 401(k) plan business is not part of the Illinois Branch Sale and will remain with AMCORE. In connection with the Illinois Branch Sale, which is expected to close in March 2010, the Company reclassified the $483 million of loans to held-for-sale.
In fourth quarter 2009, the Company sold $136 million in non-strategic, non-relationship indirect automobile loans (the Indirect Auto Loan Sale), at a gain of less than $0.1 million.
In third quarter 2008, the Bank sold $77 million of primarily non-performing and under-performing loans to a third party (the Loan Sale). The transaction removed further exposure from these loans and added incremental liquidity to the Bank. The Wisconsin Branch Sales, Illinois Branch Sale and the Indirect Auto Loan Sale have been undertaken or planned by the Company in its efforts to improve its capital ratios. See Regulatory Developments below for additional information regarding the Banks plans to raise it capital levels.
Other significant transactions During 2007, the Company entered into a strategic arrangement with a national mortgage services company to provide private-label loan processing and servicing support (the Mortgage Restructuring). As part of this arrangement, the Company sold the majority of its Other Mortgage Servicing Rights (OMSR) portfolio (the OMSR Sale) in which it recorded a $2.6 million gain (the OMSR Gain). The OMSR Gain was recorded in other income in the Consolidated Statement of Operations. The arrangement offers AMCORE a greater breadth of products, more competitive pricing and greater processing efficiencies. Additionally, the cost structure in the mortgage banking business has become almost entirely variable in nature, allowing the Company to better absorb fluctuations in mortgage volumes. These include the costs of originating loans that are netted against mortgage banking income or interest income, as well as processing and servicing costs of loans retained in the Banks portfolio and that are a component of operating expenses.
In 2007, AMCORE redeemed its $40 million, 9.35 percent coupon outstanding trust preferred securities (Trust Preferred) at a cost of $2.3 million that included both a call premium and unamortized issuance expenses (the Extinguishment Loss). The Extinguishment Loss was recorded in other expense in the Consolidated Statement
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of Operations. The redemption was funded with a new lower cost Trust Preferred issuance of $50 million at a rate of 6.45 percent. In first quarter of 2009, the Company elected to defer regularly scheduled quarterly interest payments on the Trust Preferred securities. The deferral of interest does not constitute an event of default, per the terms of the indentures. While the Company defers the payment of interest, it will continue to accrue expense for interest owed at a compounded rate.
On May 3, 2007, the Board authorized the repurchase (the Repurchase Program) of up to two million shares of the Companys stock. The authorization was for a twelve-month period to be executed through open market or privately negotiated purchases. This authorization replaced a previous Repurchase Program that expired May 3, 2007. During 2007, the Company repurchased 2.1 million shares at an average price of $27.92 per share. No shares were purchased during 2008 as increased risks in the economy and in the financial markets made the retention of capital a key consideration. The Repurchase Program expired on May 3, 2008.
In second quarter 2008, a $6.1 million non-cash charge was recorded that completely eliminated all goodwill previously carried on the Companys balance sheet (the Goodwill Charge). The write-off was due to the considerable and protracted discount of the Companys stock value compared to its book value, which affected all business segments, as well as due to the decline in the operations of the Company.
Net security gains of $23.4 million were realized during 2009 due to the sale of $870 million in bonds. The sale of the securities allowed the Company to restructure its balance sheet through selected debt extinguishments (the Debt Extinguishment(s)), enhanced regulatory treatment and improved liquidity. It also allowed the Company to capture gains that might otherwise be jeopardized by the risk of prepayment of the securities. The Company incurred $5.7 million of prepayment fees and costs in connection with the Debt Extinguishments. This amount was recorded in other operating expenses in the Consolidated Statements of Operations.
During second quarter 2009, the Federal Deposit Insurance Corporation (FDIC) assessed all insured depository institutions a special assessment, in addition to premiums that are normally assessed, to help replenish the FDICs bank deposit insurance fund. AMCOREs share of the special assessment (the FDIC Special Assessment) was $2.4 million. This amount was recorded in insurance expense in the Consolidated Statements of Operations.
Regulatory developments On May 15, 2008, the Bank entered into a written agreement with the Office of the Comptroller of the Currency (the OCC and the OCC Agreement). The OCC Agreement described commitments made by the Bank to address and strengthen banking practices relating to asset quality and the overall administration of the credit function at the Bank.
The Company entered into a written agreement (the FRB Agreement) with the Federal Reserve Bank of Chicago (the FRB) dated June 26, 2009, and on June 25, 2009, the Bank agreed to the issuance of a consent order (the Consent Order) by the OCC. In general, the FRB Agreement and the Consent Order contained requirements to develop plans to raise capital and to revise and maintain a liquidity risk management program. The Consent Order required the Bank to, among other things, (i) develop and submit a capital plan (the Capital Plan) to the OCC by July 25, 2009, (ii) achieve and maintain by September 30, 2009, Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 risk-based capital at least equal to 9% of risk-weighted assets and total risk-based capital at least equal to 12% of risk-weighted assets, and (iii) revise and maintain a liquidity risk management program within 60 days from the date of the Consent Order. In addition, the FRB Agreement required the development of a capital plan for the Company, restricted the payment of dividends by the Company, as well as the taking of dividends or any other payment representing a reduction in capital from the Bank. The FRB Agreement further required that the Company not incur, increase, or guarantee any debt, repurchase or redeem any shares of its stock, or pay any interest or principal on subordinated debt or trust preferred securities, in each case without the prior approval of the FRB. In consultation with its professional advisors, and in compliance with the Consent Order, the Bank developed and timely submitted the Capital Plan and liquidity risk management program to the OCC, and the Company developed and timely submitted the capital plan to the FRB as required under the FRB Agreement.
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By letter dated November 4, 2009 (the Letter), the OCC notified the Bank of its finding that the Capital Plan was not acceptable, stating that the OCC was unable to determine that the Capital Plan was likely to succeed in restoring the Banks capital at this time. The OCC further advised the Bank that it was being treated as significantly undercapitalized within the meaning of the prompt corrective action (the PCA) provisions of the Federal Deposit Insurance Act and implementing OCC regulations. As a result of this regulatory determination, the Bank thereupon became subject to the PCA activity and operational restrictions applicable to significantly undercapitalized depository institutions, including, among other things, the mandatory requirement that the Bank submit an acceptable Capital Restoration Plan (CRP), as required under the PCA guidelines, no later than December 4, 2009. The Letter also indicated that the OCC was requiring the Bank to prepare and submit to the OCC a plan for the sale or merger of the Bank (a Disposition Plan) by December 4, 2009, as specified under the Consent Order.
On November 6, 2009, the FRB notified the Company in writing that the Companys capital plan submitted under the terms of the FRB Agreement was unacceptable in addressing the capital erosion of the Company and the Bank. The FRB concluded that, based on the information provided by the Company, as well as the Companys current negative financial trends, the Companys capital plan was not viable.
Further, the Bank was unable to meet the regulatory capital maintenance requirements of the Consent Order by the required September 30, 2009 date. As a result of the OCC Agreement, as well as the FRB Agreement, the Consent Order and the Letter, the Company is ineligible for certain actions and expedited approvals without the prior written consent and approval of the applicable regulatory agency. These actions include, among other things, the appointment of directors and senior executives, making or agreeing to make certain payments to executives or directors, business combinations and branching.
In consultation with its professional advisors, the Bank resubmitted a combined CRP and a Disposition Plan by the required December 4, 2009 due date. By return letter dated January 8, 2010 (the Response Letter), the OCC notified the Bank that its CRP was not acceptable. According to the OCC, the CRP was not accepted because, among other things, it did not meet the statutory requirements that the CRP be based on realistic assumptions and be likely to succeed in restoring the Banks capital. In addition, on January 12, 2010, the FRB notified the Company that the Companys capital plan previously submitted to the FRB continued to be unacceptable in addressing the capital erosion of the Company and the Bank. The Response Letter provided that even if the Banks capital ratios improve to the undercapitalized category, the Bank would continue to be subject to operational restrictions applicable to significantly undercapitalized institutions until such time as the Bank has submitted to the OCC an acceptable CRP. The OCC also stated its view that the recently announced asset sales by the Bank have increased the overall risk to the Banks capital base.
The Company and the Bank continue to diligently work with their financial and professional advisors in seeking qualified sources of outside capital, and in achieving compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter. The Company and the Bank continue to consult with the OCC, FRB and FDIC on a regular basis concerning the Companys and Banks proposals to obtain outside capital and to develop action plans that will be acceptable to federal regulatory authorities, but there can be no assurance that these actions will be successful, or that even if one or more of the Companys and Banks proposals are accepted by the Companys and Banks Federal regulators, that these proposals will be successfully implemented. While the Companys management continues to exert maximum effort to attract new capital, significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt as to the Companys ability to continue as a going concern. Doubt as to the Companys ability to continue as a going concern was previously disclosed in the Companys December 31, 2009 earnings release furnished with its February 2, 2010 Form 8-K, Current Report. If the Company is unable to achieve compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter with the OCC and the FRB, or an acceptable CRP under the OCCs Prompt Corrective Action guidelines, and if the Company cannot otherwise comply with such commitments and regulations, the OCC could force a sale, liquidation or federal conservatorship or receivership of the Bank.
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Recent market and legislative developments Despite some signs of improvement, the global and U.S. economies continue to experience significantly reduced business activity and unemployment as a result of, among other factors, disruptions in the financial system during the past two years. Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government sponsored entities and major commercial and investment banks.
Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have been significantly adversely affected as a result. Volatility and disruption in the capital and credit markets has reached unprecedented levels. In many cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers underlying financial strength.
In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, subsequent to the end of third quarter 2008, Congress enacted and the President signed into law the Emergency Economic Stabilization Act of 2008 (ESA). Shortly thereafter, the Federal banking agencies announced the Troubled Asset Relief Program (TARP) and Capital Purchase Program (CPP). Collectively, these actions provided a variety of programs that financial institutions could participate in, including the potential sale of certain troubled loans to the United States Government, sale of preferred stock to the United States Treasury and temporary expansion of FDIC insured deposit levels (some voluntary and some automatic). To date, AMCORE has not directly benefited from any of the government programs other than the temporary expansion of FDIC insured deposit levels.
It is not entirely clear what impact the ESA, TARP, including the CPP, the temporary FDIC guarantee expansion and other liquidity and funding initiatives of the Federal Reserve Board (Fed) and other agencies have had on the financial markets given the other difficulties described above, including the continued levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies.
On November 6, 2009, the President signed into law the Worker, Homeownership, and Business Act. Subject to certain limitations, the new law permits businesses, such as AMCORE, with losses in either 2008 or 2009 to claim refunds of taxes paid within the prior five years. As a result of the legislation, the Company has filed refund claims of $36.9 million.
Impact of inflation Apart from operating expenses, the financial services industry is not directly affected by inflation, however, as the Fed monitors economic trends and developments, it may change monetary policy in response to economic changes which would have an influence on interest rates. See discussion of Net Interest Income, changes due to rate, below.
ACCOUNTING CHANGES AND CRITICAL ACCOUNTING ESTIMATES
Accounting Changes
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principals In June 2009, accounting standards were revised to establish the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification was effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing
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accounting standard documents were superseded. The Company adopted the Codification for the third quarter of 2009, and accordingly this Report on Form 10-K references the Codification as the sole source of authoritative literature.
Transfer of Financial Assets On June 9, 2009, accounting standards were amended to clarify when a transferor has surrendered control over transferred financial assets and thus is entitled to account for the transfer as a sale. The amendments require a transferor to evaluate its continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. The amendments limit the circumstances in which the transfer of a financial asset, or portion of a financial asset, may be treated as a sale. The amendments also establish specific conditions for reporting a transfer of a portion of a financial asset as a sale (i.e., a participating interest). If the transfer does not meet those conditions, a transferor should not account for the transfer as a sale. This amendment most commonly affects when a loan participation may be treated as a sale by the transferor. The amendments require that a transferor recognize and initially measure at fair value all assets obtained (including a transferors beneficial interest) and liabilities incurred as a result of a transfer of financial assets that are accounted for as a sale. The amendments also expand disclosure requirements. The amendments are effective for annual and interim periods beginning after November 15, 2009 and for transfers occurring on or after the effective date. The Company does not expect that adoption of this standard will have a material impact on its Consolidated Balance Sheets or Statements of Operations.
Subsequent Events On May 28, 2009, accounting standards were revised to set forth general standards for potential recognition or disclosure of events that occur after the balance sheet date but before financial statements are issued, or are available to be issued. The adoption of these amendments in second quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Fair Value Measurements In April 2009, accounting standards were amended to provide additional guidance for determining the fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly and also provides guidance for determining whether a transaction is orderly. The amendments must be applied prospectively and were effective for interim and annual reporting periods ending after June 15, 2009. Early adoption was permitted for periods ending after March 15, 2009. Adoption of the amendments in first quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Other-Than-Temporary Impairment In April 2009, accounting standards were revised to provide expanded guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities classified as available for sale or held to maturity. In addition, the amendments required enhanced disclosures concerning such impairment for both debt and equity securities. The amendments were effective for interim and annual reporting periods ending after June 15, 2009. Early adoption was permitted for periods ending after March 15, 2009. Adoption of the amendments in first quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Fair Value Disclosure In April 2009, accounting standards were amended to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. The amendments were effective for interim reporting periods ending after June 15, 2009. Adoption of these standards in second quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Minority Interests In December 2007, accounting standards were amended to require non-controlling minority interests be recorded as a separate component of equity and that net income attributable to minority interests be clearly identified on the Statement of Income. The amendments were effective for fiscal years and interim periods beginning on or after December 15, 2008, and were required to be applied prospectively, except for the presentation and disclosure requirements. Adoption of the amendments in first quarter 2009 did not have a material impact on the Consolidated Balance Sheets or Statements of Operations.
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Derivative Instruments and Hedging Activities Disclosure In 2008, accounting standards were amended to provide enhanced disclosures to improve the transparency of financial reporting. The amendments were effective for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. Adoption of the amendments in the first quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Critical Accounting Estimates
The financial condition and results of operations for AMCORE presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, selected financial data appearing elsewhere within this report, and managements discussion and analysis are, to a large degree, dependent upon the Companys accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.
Presented below are discussions of those accounting policies that management believes require its most difficult, subjective and complex judgments about matters that are inherently uncertain (Critical Accounting Estimates) and are most important to the portrayal and understanding of the Companys financial condition and results of operations. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different portrayal of financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.
Allowance for loan losses Loans, the Companys largest income earning asset category, are periodically evaluated by management in order to establish an adequate allowance for loan losses (Allowance) to absorb estimated losses that are probable as of the respective reporting date. This evaluation includes specific loss estimates on certain individually reviewed loans where it is probable that the Company will be unable to collect all of the amounts due (principal or interest) according to the contractual terms of the loan agreement (impaired loans) and statistical loss estimates for loan groups or pools that are based on historical loss experience. Also included are other loss estimates that reflect the current credit environment and that are not otherwise captured in the historical loss rates. These include the quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrowers ability to repay, and economic and industry conditions, among other things. The Allowance is also subject to periodic examination by regulators, whose review may include their own assessment as to its adequacy to absorb probable losses.
Additions to the Allowance are charged against earnings for the period as a provision for loan losses (Provision). Conversely, this evaluation could result in a decrease in the Allowance and Provision. Actual loan losses are charged against and reduce the Allowance when management believes that the collection of principal will not occur and the loss has been confirmed. In general, the amount that the carrying value of impaired real estate loans that is solely dependent upon the underlying collateral for repayment exceeds its appraised value is deemed a confirmed loss and is immediately charged off. Unpaid interest attributable to prior years for loans that are placed on non-accrual status is also charged against and reduces the Allowance. Unpaid interest for the current year for loans that are placed on non-accrual status is charged against and reduces the interest income previously recognized. Subsequent recoveries of amounts previously charged to the Allowance, if any, are credited to and increase the Allowance.
Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going creditworthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the value and sufficiency of underlying collateral, changes in the value of collateral since the most recent appraisal, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk grade changes, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the Allowance for actual losses that are greater or less than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors including the breadth and depth of experience of lending officers, credit administration and the corporate
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loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees.
While the Company strives to timely reflect all known risk factors in its evaluations, the Allowance is highly subjective and actual experience may differ from managements estimates. If different assumptions or conditions were to prevail, the amount and timing of interest income and loan losses could be materially different. These factors are most pronounced during economic downturns and may continue into an economic recovery, as specific credit performance may not be immediately affected by the stress of the downturn or the benefit of the recovery. Since, as described above, so many factors can affect the amount and timing of losses on loans, it is difficult to predict with a high degree of certainty the effect to income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to have adversely affected the December 31, 2009 carrying value of non-performing loans by ten percent, an additional Provision of $35 million may have been necessary. See also Table 2 and Note 4 of the Notes to Consolidated Financial Statements.
Income Taxes The Company is subject to the income tax laws of the United States and the states in which is conducts business. These laws are complex and are subject to different interpretations by the Company and the various taxing authorities that may result in certain uncertainties as to the final tax liability that is ultimately owed or refund that is due. Accounting standards prescribe a recognition threshold that the Company must evaluate before it can record the benefit of uncertain tax positions taken or expected to be taken in a tax return. When making these evaluations, management must make judgments and estimates about the interpretation and application of these inherently complex and constantly changing tax statutes, related regulations and case law. These judgments and interpretations are subject to challenge by the taxing authorities upon audit or to reinterpretation based on managements ongoing assessment of facts and evolving case law. As a result, the tax provision that is determined for a given period may subsequently be adjusted by amounts that may be material. The Company has no uncertain tax positions requiring an increase in its tax provision.
The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based upon the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. In addition to uncertainties that surround positions taken when preparing its tax return, the Company must also evaluate the probability that it will ultimately realize the full value of its deferred tax asset. The realization of the Companys deferred tax asset over time is dependent upon the existence of taxable income in carryback periods or the generation of sufficient taxable income in future periods. When evaluating the realizability of its deferred tax asset, the Company takes into account a number of factors including its taxable income during carryback periods, its recent earnings history, its expectations for earnings in the future, and the carryforward periods permitted by the various taxing jurisdiction. To the extent full realizability is not probable a valuation allowance is required.
As of September 30, 2009, after weighing all available positive and negative evidence, the Company concluded that it was no longer more likely than not that some or all of its net deferred tax asset would be realized. In arriving at this conclusion, management determined that the negative weight of increasing cumulative losses, the continued high-level of non-performing loans, declining loan collateral values supporting its non-performing loans and forecasted near-term results was greater than the positive weight of its historical profitability prior to the current economic environment and managements projections that sufficient taxable income would be generated within the carryforward periods allowed by current federal and state tax regulations. As a result a valuation allowance totaling $118 million, primarily comprised of future tax benefits associated with the allowance for loan losses and net operating loss carryforwards was established. At December 31, 2009 the valuation allowance totaled $110 million. The Company also had $7.7 million in net deferred tax assets
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associated with net security losses reported in other comprehensive income for which it has also established a valuation allowance. See Note 13 of the Notes to Consolidated Financial Statements.
If the Company generates taxable income in future periods, then the valuation allowance may be partially released to offset the tax on the then current taxable income and fully released when it becomes more likely than not that the remaining deferred tax asset value will be realized in future periods.
OVERVIEW OF OPERATIONS AND SIGNIFICANT CATEGORIES
Overview
AMCORE reported a net loss from continuing operations of $223.8 million or $9.78 per diluted share for the year ended December 31, 2009. This compares to a net loss of $97.8 million or $4.32 for the same period in 2008 and represents a $126.0 million or $5.46 decrease year to year. AMCORE had a negative return on average equity and on average assets from continuing operations for 2009 of 114.05% and 4.70%, respectively, compared to a negative 29.64% and 1.91%, respectively, in 2008.
Significant Categories
Changes in the most significant categories of 2009 net income from continuing operations, compared to 2008, were:
Net interest income Declined $56.5 million primarily due to lower average loan volume and spreads. Net interest margin was 1.72% in 2009 compared to 2.84% in 2008.
Provision for loan losses Decreased $12.6 million to $190.2 million in 2009 from $202.7 million in 2008, reflecting $178.4 million in net charge-offs and a $36.9 million net increase in non-performing loans for 2009. The continued replenishment of non-performing loans, coupled with further declines in the fair value of collateral on existing non-performing loans that are collateral dependent, contributed to the continued high level of Provision for 2009.
Non-interest income Increased $10.8 million to $85.4 million in 2009 compared to $74.6 million in 2008. Declines in investment management and trust income, service charges on deposits and brokerage commission income of $3.0 million, $5.9 million and $1.5 million, respectively, were more than offset by a $21.4 million increase in net security gains.
Operating expenses Decreased $3.9 million to $168.6 million in 2009 from $172.5 million in 2008. Operating expenses for 2009 included $5.7 million in costs in connection with the Debt Extinguishments, while 2008 operating expenses included the $6.1 million Goodwill Charge and the $1.7 million Facilities Consolidation impairment charge. Personnel costs declined $19.2 million in 2009, compared to 2008. Insurance expense and credit related expenses increased $16.8 million and $7.6 million, respectively. The increase in insurance expense was primarily due to higher FDIC insurance premiums, which included the $2.4 million FDIC Special Assessment.
Income taxes Income taxes was an expense of $25.9 million in 2009, compared to a benefit of $70.9 million in 2008, an increase of $96.8 million. The increase was primarily due to the $118.0 million charge to establish the deferred tax valuation allowance in third quarter 2009, partially offset by the $30.7 million tax loss carryback benefit recorded in fourth quarter 2009.
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EARNINGS REVIEW OF CONSOLIDATED STATEMENTS OF OPERATIONS
The following highlights a comparative discussion of the major components of net income and their impact for the last three years.
Net Interest Income
Net interest income is the Companys largest source of revenue and represents the difference between income earned on loans and investments (interest-earning assets) and the interest expense incurred on deposits and borrowed funds (interest-bearing liabilities). Fluctuations in interest rates as well as volume and mix changes in interest-earning assets and interest-bearing liabilities can materially affect the level of net interest income. Because the interest that is earned on certain loans and investment securities is not subject to federal income tax, and in order to facilitate comparisons among various taxable and tax-exempt interest-earning assets, the following discussion of net interest income is presented on a fully taxable equivalent, or FTE basis. The FTE adjustment was calculated using AMCOREs statutory federal income tax rate of 35%.
Net interest spread is the difference between the average yields earned on interest-earning assets and the average rates incurred on interest-bearing liabilities. Net interest margin represents net interest income divided by average interest-earning assets. Since a portion of the Companys funding is derived from interest-free sources, primarily demand deposits, other liabilities and stockholders equity, the effective interest rate incurred for all funding sources is lower than the interest rate incurred on interest-bearing liabilities alone.
Overview Net interest income, on an FTE basis, declined $58.1 million in 2009 and declined $28.1 million in 2008. Declines in FTE interest income of $84.6 million and $70.6 million in 2009 and 2008, respectively, were only partly offset by declines of $26.5 million and $42.6 million, respectively, in interest expense.
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(dollars in thousands) | ||||||||||||
Interest Income Book Basis |
$ | 189,725 | $ | 272,756 | $ | 344,016 | ||||||
FTE Adjustment |
1,668 | 3,227 | 2,584 | |||||||||
Interest Income FTE Basis |
191,393 | 275,983 | 346,600 | |||||||||
Interest Expense |
114,335 | 140,871 | 183,432 | |||||||||
Net Interest Income FTE Basis |
$ | 77,058 | $ | 135,112 | $ | 163,168 | ||||||
Net Interest Spread |
1.40 | % | 2.48 | % | 2.85 | % | ||||||
Net Interest Margin |
1.72 | % | 2.84 | % | 3.35 | % |
Net interest spread and margin (See Table 1) Net interest spread declined 108 basis points to 1.40% in 2009 from 2.48% in 2008, and decreased 37 basis points in 2008 from the 2007 level of 2.85%. The net interest margin was 1.72% in 2009, a decline of 112 basis points from 2.84% in 2008. The 2008 level was a decrease of 51 basis points from 3.35% in 2007.
The declines in net interest spread and net interest margin for both 2009 and 2008 were primarily due to lower loan yields that were driven by increased levels of non-accrual loans. These were not matched by declines in funding rates as the Bank sought term funding in the form of longer-term bank-issued deposits and wholesale funding sources, and held a portion of the proceeds in short-term liquid investments. In addition, some transactional deposit products have reached levels at which further reductions in rates paid are limited. The effect of shrinking the Companys loan portfolios also contributed to the decline in net interest income.
Changes due to volume (See Table 1, continued) In 2009, net interest income (FTE) decreased by $7.5 million due to average volume, which was mainly attributable to a $295 million decrease in average earning assets. Average loan balances decreased by $521 million, while average investment securities and short-term
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investments increased a combined $200 million. The reduction in average loans included the effect of an overall effort to reduce the Companys exposure to non-strategic, non-relationship based accounts, the Loan Sale, the Wisconsin Branch Sales and the Indirect Auto Loan Sale. In addition, the Company continues to hold a high proportion of cash equivalents and short-term investments in its efforts to maintain liquidity. The decrease in average loans came from a combined decrease of $448 million in commercial real estate and commercial loans. Average residential real estate loans, including home-equity products, decreased $43 million, while average consumer loan balances decreased $30 million.
In 2008, net interest income (FTE) declined due to average volume by $4.8 million when compared to 2007. This decline was comprised of a $6.4 million decline in interest income that was partially offset by a $1.6 million decrease in interest expense. The decline in interest income was attributable to a $116 million decrease in average loans, which included the Loan Sale. The decrease in average loans came from a combined decrease of $117 million in commercial real estate and commercial loans. Average residential real estate loans decreased $38 million, while average consumer loan balances increased $39 million. Average interest-bearing liabilities declined $37 million. This was comprised of a $347 million decrease in average interest-bearing bank-issued deposits and a $310 million increase in average wholesale funding.
Changes due to rate (See Table 1, continued) In 2009, net interest income FTE declined due to average rates by $50.5 million when compared with the same period in 2008. This was comprised of a $68.4 million decrease in interest income that was only partly offset by a $17.9 million decrease in interest expense. Both interest-earning asset yields and interest-bearing liability costs were affected by four separate decreases in the federal funds (Fed Funds) rate totaling a combined 200 basis points, all of which occurred since the first quarter of 2008. In addition, non-performing loans increased from $313 million at December 31, 2008 to $350 million as of December 31, 2009. Non-performing loans peaked at $431 million at September 30, 2009. The Bank must continue to fund these non-earnings assets until they are resolved.
The yield on average earnings assets decreased 151 basis points to 4.27% in 2009 compared to 5.78% in 2008. During the same time periods, the rate paid on average interest bearing liabilities decreased 43 basis points, to 2.87% from 3.30%. Average bank-issued interest-bearing transactional deposits declined $618 million on average, and were partly replaced by a combined $346 million average increase in higher cost bank-issued time deposits and wholesale funding sources. Transactional deposit products yielded 0.40% on average in 2009.
In 2008, net interest income (FTE) declined due to average rates by $23.2 million when compared with 2007. This was comprised of a $64.2 million decrease in interest income that was partially offset by a $41.0 million decrease in interest expense. Both interest-earning asset yields and interest-bearing liability costs were affected by seven separate decreases in the Fed Funds rate totaling a combined 400 basis points that occurred during 2008. In addition, non-performing loans increased from $71 million at December 31, 2007 to $313 million as of December 31, 2008. As noted above, the Bank must continue to fund these non-earning loans until they are resolved. The yield on average earning assets decreased 134 basis points to 5.78% during 2008, compared to 7.12% in 2007. During this same period of time, the rate paid on average interest bearing liabilities decreased 97 basis points, to 3.30% from 4.27%.
Interest rate risk Like most financial institutions, AMCORE has an exposure to changes in both short-term and long-term interest rates. Among those factors that could further affect net interest margin and net interest spread include: greater and more frequent changes in interest rates, including the impact of basis risk between various interest rate indices such as prime and LIBOR (as is the case with a significant divergence in current market rates), changes in the shape of the yield curve, mismatch in the duration of interest-earning assets and the interest-bearing liabilities that fund them, the effect of prepayments or renegotiated rates, increased price competition on both deposits and loans, promotional pricing on deposits, short-term liquidity needs that could drive up the cost of attracting new funding, changes in the mix of earning assets and the mix of liabilities, including greater or less use of wholesale sources, changes in the level of non-accrual loans, and in an environment where there are rapid and substantial declines in interest rates, the limited ability to reduce certain
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low-cost deposit product rates (such as NOW accounts) to the same extent that interest-earning assets reprice. As the increased level of non-accrual loans will take time to work out, the Company does not expect a significant recovery in the margin or spread statistics for several quarters.
Provision for Loan Losses
The 2009 Provision was $190 million, a decrease of $12.6 million from $203 million in 2008, reflecting $178 million in net charge-offs and a $36.9 million net increase in non-performing loans for 2009. The continued replenishment of non-performing loans, coupled with further declines in the fair value of collateral on existing non-performing loans that are collateral dependent, contributed to the continued high level Provision and charge-offs for 2009. Net charge-offs were 534 basis points of average loans in 2009, compared to 258 basis points of average loans in 2008. Non-performing loans were $350 million at December 31, 2009 compared to $313 million at December 31, 2008. Non-performing loans is the sum of non-accrual loans, loans that are ninety days past due but are still accruing interest and loans to troubled debtors that have been restructured with concessions made to the borrower (Troubled Debt Restructurings). Delinquencies, loans that are thirty to ninety days past due, decreased to $53.6 million at December 31, 2009 from $84.1 million as of December 31, 2008.
The 2008 Provision was $203 million, an increase of $174 million from $29.1 million in 2007. The increase was driven by $99.6 million in net charge-offs and by a $242 million increase in non-performing loans during 2008. Net charge-offs were $99.6 million or 258 basis points of average loans in 2008, compared to $16.9 million or 42 basis points of average loans in 2007. Non-performing loans were $313 million at December 31, 2008 compared to $70.8 million at December 31, 2007. Delinquencies, loans that are thirty to ninety days past due, also increased from $81.2 million at December 31, 2007 to $84.1 million as of December 31, 2008.
The determination of the amount of the Provision involves a variety of subjective judgments and assumptions. These include the initial and on-going creditworthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the value and sufficiency of underlying collateral, changes in the value of collateral since the most recent appraisal, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk grade changes, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the Allowance for actual losses that are greater or less than previously estimated. These judgments and assumptions are dependent upon or can be influenced by numerous factors including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees. While the Company strives to timely reflect all known risk factors in its evaluations, the Allowance is highly subjective and actual experience may differ from managements estimates. For additional information see above discussion of Critical Accounting Estimates and the discussion of Allowance for Loan Losses.
Non-Interest Income
Total non-interest income is comprised primarily of fee-based revenues from bank-related service charges on deposits and Investment Management and Trust. Income from bankcard fee income, Bank and Company owned life insurance (COLI), brokerage commission income, mortgage banking income and security gains (losses) are also included in this category.
Overview For 2009, non-interest income increased $10.8 million to $85.4 million from $74.6 million in 2008. Declines in investment management and trust income, service charges on deposits and brokerage commission income of $3.0 million, $5.9 million and $1.5 million, respectively, were more than offset by a $21.4 million increase in net security gains.
For 2008, non-interest income totaled $74.6 million, an increase of $3.6 million from $71.0 million in 2007. Service charges on deposits increased $3.6 million. A $7.9 million favorable swing in net security gains, from
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$5.9 million of losses in 2007 to $2.0 million of gains in 2008, were offset by a $6.3 million decline in other income, a $1.2 million decline in mortgage banking income and a $0.5 million decrease in investment management and trust income. Other income in 2007 included the $2.6 million OMSR Gain (see Significant Transactions, discussed above).
Investment management and trust income Investment Management and Trust (IMT) income includes trust services, investment management, estate administration, financial planning and employee benefit plan recordkeeping and administration. IMT income totaled $13.3 million in 2009, a decline of $3.0 million from $16.3 million in 2008. This followed a decrease of $0.5 million in 2008 from $16.8 million in 2007. The declines for both 2009 and 2008 were primarily attributable to lower average market values of the underlying managed and administered portfolios. Total assets under administration were $2.0 billion at both December 31, 2009 and 2008.
Service charges on deposits Service charges on deposits, the Companys largest source of non-interest income, totaled $27.3 million in 2009, a $5.9 million decline from $33.2 million in 2008. This more than offset a 2008 increase of $3.6 million from $29.6 million in 2007. The decline in 2009 was primarily due to service charges on consumer deposit accounts as consumers altered their spending habits in light of the continued recession. Further declines are expected in 2010 as the Companys deposit base declines due to the Wisconsin Branch Sales and the Illinois Branch Sale as well as legislative changes expected to be implemented in the middle of 2010.
Service charges on commercial deposit accounts was the primary driver for the 2008 increase as declining interest rates reduced the deposit credit offsetting commercial account activity fees. In addition, service charges on consumer deposits also increased due to enhancements to the Companys fee structure and waiver policies.
COLI income COLI income totaled $4.6 million in both 2009 and 2008. Improved yields and mark-to-market adjustments offset a lower earnings base attributable to a $10 million partial redemption of COLI policies in first quarter of 2009. The partial redemption was completed due to lower employee benefit program obligations and to provide additional liquidity at the parent. The $4.6 million of COLI income in 2008 was a $0.9 million decline from $5.4 million in 2007. The 2008 decline was due to the decline in market interest rates and negative mark-to-market adjustments on underlying investments. AMCORE has historically used COLI as a tax-advantaged means of financing its future obligations with respect to certain non-qualified retirement and deferred compensation plans in addition to other employee benefit programs, although the tax advantage is greatly diminished by the Companys current tax posture. See discussion of deferred tax valuation allowance in the Critical Accounting Estimate section above. As of December 31, 2009, the cash surrender value of COLI was $139 million, compared to $145 million at December 31, 2008.
Bankcard fee income Bankcard fee income totaled $8.2 million in 2009, a $0.4 million decline from $8.6 million in 2008 and an increase of $0.7 million over bankcard fee income in 2007 of $7.9 million. Decreased card utilization, as consumers altered their spending habits in light of the continued recession, led to the 2009 decline. Further declines are expected in 2010 as the Companys deposit base declines due to the Wisconsin Branch Sales and the Illinois Branch Sale. A larger cardholder base, increased card utilization and an expanded ATM network contributed to the increase in bankcard fee income in 2008.
Other non-interest income For 2009, other non-interest income, which includes brokerage commission income, net security gains (losses) and other, totaled $32.0 million, an increase of $20.1 million from $11.9 million in 2008. This was due to a $21.4 million increase in net security gains. The sale of the securities allowed the Company to restructure its balance sheet through the Debt Extinguishments, enhanced regulatory treatment and improved liquidity. It also allowed the Company to capture gains that might otherwise be jeopardized by the risk of prepayment of the securities. Partially offsetting the increase in net security gains was a $1.5 million decline in brokerage commission income.
For 2008, other non-interest income totaled $11.9 million, a $0.6 million increase from 2007. A $7.9 million favorable swing in net security gains, from $5.9 million of losses in 2007 to $2.0 million of gains in 2008, were
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offset by a $7.4 million decline in other income. Other income declined due to the 2007 $2.6 million OMSR Gain, a decline in customer service income, lower mortgage banking income and higher derivative mark-to-market losses. The derivative losses relate to economic hedges of various loan, deposit and COLI products that do not qualify for hedge accounting.
Operating Expenses
Overview In 2009, operating expenses were $169 million, a $3.9 million decrease from $173 million in 2008. Operating expenses for 2009 included $5.7 million in costs in connection with the Debt Extinguishments, while 2008 operating expenses included the $6.1 million Goodwill Charge and the $1.7 million Facilities Consolidation impairment charge. Personnel costs declined $19.2 million in 2009, compared to 2008. Insurance expense and credit related expenses increased $16.8 million and $7.6 million, respectively. The increased in insurance expense was primarily due to higher FDIC insurance premiums, which included the $2.4 million FDIC Special Assessment.
In 2008, total operating expenses were $173 million, an increase of $7.1 million or four percent increase from $165 million in 2007. The $6.1 million Goodwill Charge, an $8.2 million increase in credit related expenses, a $3.0 million increase in FDIC insurance costs, a $1.9 million increase in net occupancy expense, and the $1.7 million Facilities Consolidation impairment charge were partially offset by a $6.0 million decline in personnel costs, $4.4 million in various other expenses, a $2.3 million debt extinguishment loss incurred in 2007 and $1.3 million decline in advertising and business development costs.
The efficiency ratio was 105% in 2009, compared to 84% in 2008 and 71% in 2007. The efficiency ratio is calculated by dividing total operating expenses by revenues. Revenues are the sum of net interest income and non-interest income.
Personnel expense Personnel expense includes compensation expense and employee benefits and is the largest component of operating expenses, totaling a combined $69.8 million in 2009, $88.9 million in 2008 and $94.9 million in 2007. The 2009 decrease of $19.1 million was due to the Restructuring, which included a five percent reduction in executive salaries, suspension of employee merit increases, bonuses, and the Companys basic contribution to the 401(k) plan, and a 25% reduction of its work force from the end of 2008. The Companys matching contribution to the 401(k) plan was not affected. The reduction in personnel costs were net of the $2.7 million 2009 Restructuring Charge, compared to $1.9 million of severance related costs in 2008.
For 2008, personnel expenses decreased $6.0 million compared to 2007. The 2008 decrease was primarily due to lower salary and benefits. This included more than an 11% reduction in full-time equivalent positions since the beginning of the year.
Facilities expense Facilities expense, which includes net occupancy expense and equipment expense, was a combined $24.7 million in 2009, $26.5 million in 2008 and $24.6 million in 2007. This was a $1.8 million decrease in 2009 compared to 2008, and an increase of $1.8 million in 2008 compared to 2007. The decrease in 2009 was primarily due to lower property depreciation, lower utility costs and lower building and equipment service contracts and maintenance partly as a result of branch consolidations. In addition, equipment and software depreciation and desktop PC expenditures declined. The 2008 increase was due to higher rent expense, leasehold amortization and property taxes associated with branches that were not open at all or not open for the full period in 2007.
Professional fees Professional fees include legal, consulting, auditing and external portfolio management fees and totaled $8.5 million in 2009, $8.6 million in 2008 and $8.4 million in 2007. For 2009, increased regulatory fees, audit fees and legal expenses were offset by lower external portfolio management and consulting fees.
Loan related costs Loan related costs include loan processing and collection expense, provision for unfunded commitment losses and foreclosed real estate expense and totaled a combined $20.4 million in 2009, $12.8
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million in 2008 and $4.6 million in 2007. The $7.6 million increase in 2009 was due to higher foreclosed real estate costs, which included losses on properties held and sold and increased property taxes on higher balances. Also contributing to the $7.6 million increase were higher loan processing and collection costs as the non-performing loan volumes increased and settlement activity accelerated. Partly offsetting these increases were lower provisions for unfunded commitment losses. Expenses increased $8.2 million in 2008 due to increased collection costs on higher non-performing loan balances and estimated losses on letter of credit commitments on defaulted residential development loans.
Insurance expense Insurance expense, which includes FDIC insurance fund premiums, was $21.5 million, $4.7 million and $1.6 million, respectively, for 2009, 2008 and 2007. Second quarter 2009 included the $2.4 million FDIC Special Assessment. The Company has also experienced increases in FDIC insurance premiums, generally, since the first quarter of 2008, as insurance rates have increased and coverage has broadened, and specifically as the Banks risk profile has increased. Barring additional special assessments and general FDIC rate increases, the Company expects insurance costs to decline in 2010, primarily due to a lower deposit base associated with the Wisconsin Branch Sales and the Illinois Branch Sale. Partially offsetting lower FDIC insurance costs in 2010 are expected increases in directors/officers and errors/omissions insurance premium increases.
Goodwill impairment In second quarter 2008, a $6.1 million non-cash charge was recorded that completely eliminated all goodwill previously carried on the Companys balance sheet (the Goodwill Charge). The write-off was due to the considerable and protracted discount of the Companys stock value compared to its book value, which affected all business segments, as well as due to the decline in the operating results of the Company.
Other operating expenses Other operating expenses includes data processing expense, communication expense, and other costs, and were a combined $23.6 million in 2009, $24.8 million in 2008 and $31.2 million in 2007. For 2009, reductions in bankcard fees, fraud losses, various discretionary expenses such as travel, training and consumable stationary/supplies, communication and advertising/business development costs declined a net $5.2 million. These decreases were offset by the $5.7 million Extinguishment Loss in 2009, net of the $1.7 million 2008 Facilities Consolidation impairment charge. For 2008, other operating expenses declined a net $6.4 million. Included were reductions in bankcard fees, fraud losses, various discretionary expenses such as travel, training and consumable stationary/supplies, communication and advertising/business development costs and data processing costs. Partly offsetting the declines was the $1.7 million 2008 Facilities Consolidation impairment charge. Many of the reductions, for both 2009 and 2008, were related to the cost efficiencies Key Initiative.
Income Taxes
Income tax was an expense of $25.9 million in 2009, compared to a benefit of $70.9 million in 2008, and an expense of $8.9 million in 2007. The $25.9 million expense in 2009, despite a $197.9 million pre-tax loss, was primarily due to the $118.0 million charge to establish the deferred tax valuation allowance in third quarter 2009. This was partially offset by the $30.7 million tax loss carryback benefit recorded in fourth quarter 2009. The $70.9 million income tax benefit in 2008 was mainly due to pre-tax losses. The $8.9 million 2007 income tax expense was due to pre-tax income net of items that are exempt from taxes.
The effective tax rate was a negative 13.1% in 2009, and positive 42.0% and 24.0% in 2008 and 2007, respectively. The establishment of the deferred tax valuation allowance and its resulting charge to income tax expense led to the negative effective tax rate in 2009. Items that are exempt from taxes, such as municipal bond income and COLI income, while generally resulting in an effective tax rate that is lower than the statutory tax rate, have the opposite effect in a period where there is a loss before income taxes. Conversely, items that are not deductible for tax purposes, such as goodwill, while generally resulting in an effective tax rate that is higher than the statutory tax rate, have the opposite effect in a period where there is a loss before income taxes. The combined effect of these factors was an effective tax rate that was lower than the statutory tax rate in 2007, but higher than the statutory tax rate in 2008. See Note 13 of the Notes to Consolidated Financial Statements for a reconciliation of the effective tax rates.
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BUSINESS SEGMENT REVIEW
AMCOREs internal reporting and planning process focuses on three primary lines of business (Segment(s)): Commercial Banking, Consumer Banking and Investment Management and Trust. Note 15 of the Notes to Consolidated Financial Statements presents a condensed income statement and total assets for each Segment. The Company previously reported mortgage banking as a separate segment, however, due to the Restructuring, the mortgage business is now part of the consumer banking group.
The financial information presented was derived from the Companys internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, to portray each Segment as if it operated on a stand-alone basis. Thus, each Segment, in addition to its direct revenues, expenses, assets and liabilities, includes an allocation of shared support function expenses and corporate overhead. The Commercial and Consumer Segments also include funds transfer adjustments to appropriately reflect the cost of funds on loans made, funding credits on deposits generated and the cost of maintaining adequate liquidity. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of the Notes to Consolidated Financial Statements.
Since there are no comprehensive standards for management accounting that are equivalent to accounting principles generally accepted in the United States of America, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure. During 2009, operating expense allocations were revised to fully absorb corporate overhead and other previously unallocated costs, and revenues, to each of the segments and treasury operations. In addition, funds transfer prices were revised to allocate the cost of maintaining excess liquidity to the segments. Prior to 2009, both of these items were reflected in the Other column, as described below. Due to the practical difficulties associated with restating prior periods, prior periods have not been restated except as noted above combining the Mortgage Banking Segment with the Consumer Banking Segment. Segment results for 2009 have been presented to reflect both the new method with the above changes and the old method with none of the above changes.
Total Segment results differ from consolidated results primarily due to treasury and investment activities such as the offset to the funds transfer adjustments made to the Segments, interest income on the securities investment portfolio, gains and losses on the sale of securities, COLI, CRA related fund income and derivative gains and losses. The impact of these items is aggregated to reconcile the amounts presented for the Segments to the consolidated results and is included in the Other column of Note 15 of the Notes to Consolidated Financial Statements. The $118 million deferred tax valuation allowance recorded during the third quarter 2009 has been allocated to Other.
Commercial Banking
The Commercial Banking Segment (Commercial) provides commercial banking services to middle market and small business customers through the Banks branch locations. The services provided by Commercial include lending, business checking and deposits, treasury management and other traditional as well as electronic services.
Overview Commercial net loss for 2009 was $135 million, compared to a net loss of $85.8 million in 2008 and net income of $24.0 million in 2007. Commercial total assets were $2.3 billion at December 31, 2009 and represented 61% of total consolidated assets. This compares to $3.0 billion and 60% at December 31, 2008.
Comparison of 2009 to 2008 Commercial net loss for 2009 was $135 million, a decline of $49.0 million from 2008 net loss of $85.8 million. The decline was due to a $67.5 million decrease in net interest income and an $11.6 million increase in Provision that were partially offset by a $32.9 million increase in income tax benefit.
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The decrease in net interest income was driven by increased levels of non-accrual loans, lower average loan and deposit volumes and the reversal of accrued interest on loans that were placed on non-accrual status during the year and the allocated cost of maintaining excess liquidity. The reduction in average loans included the effect of an overall effort to reduce the Companys exposure to non-strategic, non-relationship based accounts, the Loan Sale, and the Wisconsin Branch Sales. The continued replenishment of non-performing loans, coupled with further declines in the fair value of collateral on existing non-performing loans that are collateral dependent, contributed to the increased Provision for 2009. A reduction in non-interest expense that was driven by lower direct personnel expenses, the Wisconsin Branch Sales and various cost efficiency initiatives were more than offset by increased allocated support/overhead costs and increased loan related costs. Income tax benefit increased due to a higher net loss before tax.
Comparison of 2008 to 2007 Commercial net loss for 2008 was $85.8 million, a decline of $109.8 million from 2007 net income of $24.0 million. The decline was due to a $156 million increase in Provision and a $22.9 million decrease in net-interest income that were partially offset by a $68.7 million decrease in income taxes.
The decrease in net interest income was driven by increased levels of non-accrual loans, decreased loan and deposit volumes and the reversal of accrued interest on loans placed on non-accrual status. The increase in Provision was primarily due to deterioration of credit quality and increased volumes of non-performing loans, particularly in the residential construction and development loans, which were affected by declining real estate sales activity, softening collateral values and large concentrations. Income taxes were lower due to a change from income before tax to a loss before tax.
Consumer Banking
The Consumer Banking Segment (Consumer) provides banking services to individual customers through the Banks branch locations. The services provided by Consumer include direct and indirect lending, checking, savings, money market and certificate of deposit (CD) accounts, safe deposit rental, ATMs, and other traditional and electronic services and a variety of mortgage lending products to meet its customers needs. It sells most of the mortgage loans it originates to a third-party mortgage services company, which provides private-label loan processing and servicing support on both sold and retained loans.
Overview Consumer net income for 2009 was $10.1 million, compared to $1.4 million in 2008 and $19.8 million in 2007. Consumer total assets were $674 million at December 31, 2009 and represented 18% of total consolidated assets. This compares to $1.0 billion and 20% at December 31, 2008.
Comparison of 2009 to 2008 Consumer net income for 2009 was $10.1 million, an increase of $8.7 million from 2008. The increase was primarily due to a $24.2 million decrease in Provision. These were partly offset by a $10.0 million decrease in net interest income, a $4.2 million decrease in non-interest income and a $3.3 million increase in income taxes.
The decrease in Provision was driven by a $249 million reduction in loan balances net of higher loss rates. Lower average loan volumes also contributed to the reduction in net interest income as did the allocated cost of maintaining excess liquidity. Lower loan volumes were due in part to the Wisconsin Branch Sales and the Indirect Auto Loan Sale. The decline in non-interest income was primarily due to lower deposit service fee income accounts as consumers altered their spending habits in light of the continued recession. A reduction in non-interest expense that was driven by lower direct personnel expenses, various cost efficiency initiatives and the Wisconsin Branch Sales were partly offset by increased allocated support/overhead costs. Income taxes increased due to a change from a net loss before tax to net income before tax.
Comparison of 2008 to 2007 Consumer net income for 2008 was $1.4 million, a decrease of $18.4 million from 2007. The decrease was primarily due to an $18.0 million increase in Provision and an $8.6 million increase in operating expenses. These were partly offset by a $9.5 million decrease in income taxes.
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The increase in Provision was mainly due to higher net charge-offs, including $2.5 million in charge-offs on two large home equity credits that were managed by Consumer. The increase in operating expenses was largely due to a $3.6 million goodwill write-off, higher rental expense associated with new branches that were not yet open or not open for the entire period in 2007, the effects of the Facilities Consolidation, and higher allocated expenses. Income taxes were lower due to a change from income before tax to a loss before tax. Higher service charges on deposits, brokerage commission referral income and bankcard fee income in 2008 more than offset the OMSR Gain reported in 2007 that did not recur in 2008 and lower servicing fee income in 2008 due to the OMSR Sale.
Investment Management and Trust
The Investment Management and Trust Segment (IMT) provides wealth management services, which includes trust services, investment management, estate administration, financial planning, employee benefit plan recordkeeping and administration and brokerage services.
Overview IMT net income for 2009 was $1.0 million, compared to $2.2 million in 2008 and $2.6 million in 2007. IMT total assets were $2 million at December 31, 2009 and represented less than 1% of total consolidated assets. At December 31, 2008, IMT total assets were $11 million, also less than 1% of total consolidated assets.
Comparison of 2009 to 2008 IMT net income for 2009 was $1.0 million, a decrease of $1.2 million from 2008. A decline in non-interest income was nearly offset by a decrease in non-interest expense and a $0.8 million decrease in income taxes.
The decline in non-interest income was due to lower average market values of the underlying managed and administered portfolios. The reduction in non-interest expense was driven by lower direct personnel expenses and support costs associated with the various cost efficiency initiatives, net of increased allocated support/overhead costs. Income taxes were lower due to lower earnings before income taxes.
Comparison of 2008 to 2007 IMT net income for 2008 was $2.2 million, a decrease of $0.4 million from 2007. A decline in non-interest income was more than offset by decreases in non-interest expense and income taxes.
The decline in non-interest income was due to lower retirement plan service fees and wealth management fees, both of which were affected by declining administered asset values.
BALANCE SHEET REVIEW
Total assets were $3.8 billion at December 31, 2009, a decrease of $1.3 billion or 25% from December 31, 2008. A $1.6 billion decline in loans and a $376 million decrease in securities available for sale, were partially offset by a $488 million increase in loans held for sale and a $408 million increase in interest earning deposits in banks and Fed Funds sold.
Total liabilities decreased $1.1 billion over the same period and stockholders equity decreased $226 million. Bank-issued deposits, wholesale deposits and borrowings decreased $239 million, $274 million and $538 million, respectively. These reductions were a reflection of the decreased funding needs associated with the decrease in assets. The decrease in stockholders equity was attributable to the net loss for 2009.
The following discusses changes in the major components of the Consolidated Balance Sheet since December 31, 2008.
Cash and Cash Equivalents
Cash and cash equivalents decreased $81 million from December 31, 2008 to December 31, 2009, as the cash used in financing activities of $884 million exceeded the cash provided by operating activities of $24 million
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plus the cash provided by investing activities of $779 million. This compares to an increase in cash and cash equivalents of $6 million from December 31, 2007 to December 31, 2008, as the cash provided by operating activities of $56 million exceeded the cash used in investing activities of $9 million plus the cash used in financing activities of $41 million.
The $24 million of cash provided by operating activities during 2009 compares with $56 million provided in 2008, representing a $32 million decrease in cash provided between the two years, primarily due to a decrease in pre-provision, pre-tax earnings. The $779 million of cash provided by investing activities during 2009 compares with $9 million cash used in 2008, for an increase of $788 million in cash provided between the two years. The increase was primarily due to combined increases in proceeds of $1.1 billion from the sales and maturities of securities available for sale, net of increased purchases of $720 million, a decrease in loans $746 million and an increase in loan sale proceeds of $79 million. These were partially offset by an increase in interest earning deposits in banks of $409 million. The $409 million year-over-year increase in interest earning deposits in banks was primarily on deposit with the FRB. The $884 million of cash used in financing activities during 2009 compares with $41 million cash used in 2008, or an increase of $843 million in cash used between the two years. This was primarily due to a $758 million decline wholesale deposits and a $350 million decline in long-term borrowing payments.
Interest Earning Deposits in Banks and Fed Funds Sold
Interest Earning Deposits in Banks and Fed Funds Sold increased to $409 million at December 31, 2009 from $2 million at December 31, 2008. The increase primarily relates to deposits at the FRB as the Company seeks to maintain sufficient liquidity during the current economic cycle.
Loans Held for Sale
Loans held for sale balances increased $488 million to $495 million at December 31, 2009 compared to $7 million at December 31, 2008. Loans totaling $483 million related to the Illinois Branch Sale were reclassified to held for sale during the fourth quarter. At December 31, 2009, mortgage origination fundings awaiting sale were $5 million, compared to $7 million at December 31, 2008. An additional $8 million of non-performing loans were held for sale at December 31, 2009. All loans held for sale are recorded at the lower of cost or market value. The majority of all mortgage loans are sold for a fee net of origination costs.
Securities Available for Sale
Total securities available for sale as of December 31, 2009 were $482 million, a decrease of $376 million or 44% from the prior year-end. At December 31, 2009, the total securities available for sale portfolio comprised 13% of total earning assets, including COLI, compared to 18% for 2008. Among the factors affecting the decision to purchase or sell securities are the current assessment of economic and financial conditions, including the interest rate environment, regulatory capital levels, the liquidity needs of the Company, and its pledging obligations.
As of December 31, 2009, mortgage-backed (MBS), collateralized mortgage obligations (CMO), and other asset-backed (ABS) securities totaled $429 million and represented 89% of total available for sale securities. The distribution included $169 million of MBS and $218 million of CMOs issued by U.S. Government sponsored enterprises (GSEs) and U.S. Government Agencies, and $21 million each of CMOs and ABS that were privately issued.
The $482 million of total securities available for sale includes gross unrealized gains of $2 million and gross unrealized losses of $13 million. Unrealized gains and unrealized losses is the difference between a securitys fair value and carrying value. The fair value of a security is generally influenced by two factors, market risk and credit risk. Market risk is the exposure of the security to changes in interest rate. There is an inverse relationship to changes in the fair value of the security with changes in interest rates, meaning that when rates increase the
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value of the security will decrease. Conversely, when rates decline the value of the security will increase. Credit risk arises from the extension of credit to a counter-party, for example a purchase of corporate debt in security form, and the possibility that the counter-party may not meet its contractual obligations. The Companys policy is to invest in securities with low credit risk, such as U.S. Treasuries, U.S. government agencies (such as the Government National Mortgage Association or GNMA), GSEs (such as the Federal Home Loan Mortgage Corporation or FHLMC and the Federal National Mortgage Association or FNMA), state and political obligations, and highly-rated private issue mortgage and asset-backed securities. Unlike agency debt, GSE debt is not secured by the full faith and credit of the United States.
The combined effect of the Companys gross unrealized gains and gross unrealized losses is included as other comprehensive income (OCI) in stockholders equity, as none of the securities with gross unrealized losses are considered other than temporarily impaired. Of the $13 million of gross unrealized losses, $10 million relate to securities that have had a fair value less than book value for over twelve months. Included in the $10 million is $1 million related to six private issue mortgage related collateral mortgage obligations and $9 million related to seven private issue asset backed obligations. The Company believes these bonds have sufficient credit enhancement and expects recovery of the entire cost basis of the securities. As of December 31, 2009, the Company does not intend to sell the securities and does not believe it will be required to sell the securities before their anticipated recovery.
For comparative purposes, at December 31, 2008, gross unrealized gains of $13 million and gross unrealized losses of $26 million were included in the securities available for sale portfolio. For further analysis of the securities available for sale portfolio, see Table 4 and Note 3 of the Notes to Consolidated Financial Statements.
Trading Securities
Debt and equity securities held for resale are classified as trading securities and reported at fair value. Realized gains or losses are reported in non-interest income. There were no trading securities at December 31, 2009.
Loans
Loans represent the largest component of AMCOREs earning asset base. At year-end 2009, total loans were $2.2 billion, a decrease of $1.6 billion from 2008, and represented 59% of total earning assets including COLI. Of the $1.6 billion decline, $706 million is attributable to loans sold or reclassified to loans held for sale in connection with the Wisconsin Branch Sales, the Indirect Auto Loan Sale and the Illinois Branch Sale. The remaining decrease largely reflects the Companys efforts to substantially reduce its exposure to non-strategic, non-relationship based accounts, especially loans concentrated in single-service accounts such as investment real estate loans, and increased charge-offs. See Table 2 and Note 4 of the Notes to Consolidated Financial Statements.
Total commercial real estate loans, including real estate construction loans, decreased $837 million or 38%. Commercial, financial and agricultural loans decreased $426 million or 55%. Installment and consumer loans decreased $249 million or 66%. Residential real estate loans, including home equity products, decreased $121 million or 27%.
Goodwill
The Companys goodwill balance of $6.1 million was written off during 2008.
Deposits
Total deposits at December 31, 2009 were $3.4 billion, a decrease of $513 million or 13% when compared to 2008. As noted above, the decrease was driven by reduced funding needs and was comprised of a $239 million decrease in bank-issued deposits and a $274 million decrease in wholesale deposits. The decline in bank-issued
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deposits included $166 million related to the Wisconsin Branch Sales. Bank-issued deposits represented 76% of total deposits at December 31, 2009 compared to 72% at December 31, 2008. Table 5 shows the maturity distribution of time deposits $100,000 and over.
Borrowings
Borrowings totaled $278 million at year-end 2009 and were comprised of $48 million of short-term and $229 million of long-term borrowings. Comparable amounts at the end of 2008 were $436 million and $380 million, respectively, for a combined decrease in borrowings of $538 million or 66%. The net decrease in borrowings was driven by reduced funding needs and included $248 million in Federal Home Loan Bank (FHLB) advances, $234 million in repurchase agreements (of which $94 million were the customer-sourced repo-sweep product, which is a secured form of borrowing) and $50 million in FRB Term Auction Facility (TAF). The decline in FHLB advances and repurchase agreements reflect the impact of the Debt Extinguishment. See Notes 6 and 7 of the Notes to Consolidated Financial Statements.
The Company has $50 million of Trust Preferred securities, $16 million of which qualifies as Tier 1 Capital and $34 million of which qualifies as Tier 2 Capital for regulatory capital purposes for the Company. In first quarter of 2009, the Company elected to defer regularly scheduled quarterly interest payments on the Trust Preferred securities. The deferral of interest does not constitute an event of default, per the terms of the indentures. While the Company defers the payment of interest, it continues to accrue expense for interest owed at a compounded rate. The Bank has two fixed/floating rate junior subordinated debentures totaling a combined $50 million of which $50 million and $31 million qualifies as Tier 2 Capital for regulatory capital purposes for the Bank and the Company, respectively. See also Note 17 of the Notes to the Consolidated Financial Statements.
As of December 31, 2009, the Company had $12.5 million outstanding from a $20 million senior debt facility agreement originally scheduled to mature April 2010. The FRB Agreement and the Consent Order caused the Company to be in technical default of this facility, although the Company had been current with all its payments due under the facility. In July 2009, AMCORE received a waiver of the technical default, paid the facility down by $7.5 million, and the maturity of the remaining $12.5 million was extended to April 2011. At September 30, 2009, as a result of dropping below adequately capitalized at the consolidated level, the Company once again was in technical default under the facility. On December 18, 2009, the Company entered into an amendment with the lender, which modified the covenant relating to capitalization at the parent and bank level so that the Company returned to full compliance with the terms of its credit agreement.
In connection with the amendment the Company paid all accrued interest through the date of the amendment, and agreed to make monthly interest payments thereafter. The Company established a $1.1 million cash interest reserve account with the lender, equal to the anticipated interest payments due from the date of the amendment through the maturity of the facility in April 2011. A new technical default occurred as a result of the Banks leverage ratio remaining at significantly undercapitalized as of December 31, 2009. All payments remain current under the facility. Both parties continue to work cooperatively and the Company has not been notified of any acceleration of maturity. Nevertheless, as this remains a potential remedy of the creditor that has not been waived, and notwithstanding the April 2011 due date, the Company has classified the facility as short-term.
For further information see Note 6 of the Notes to the Consolidated Financial Statements.
On January 28, 2009, Fitch downgraded the Companys and the Banks long-term Issuer Default ratings to CCC and B-, respectively. Short-term issuer default ratings for both the Company and the Bank were downgraded to C. In addition, Fitch revised the Rating Outlook to Rating Watch Off.
Stockholders Equity
See discussion below under Liquidity and Capital Management.
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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off-Balance Sheet Arrangements
During the ordinary course of its business, the Company engages in financial transactions that are not recorded on its Consolidated Balance Sheets, are recorded in amounts that are different than their full principal or notional amount, or are recorded on an equity or cost basis rather than being consolidated. Such transactions serve a variety of purposes including management of the Companys interest rate risk, liquidity and credit concentration risks, optimization of capital utilization, assistance in meeting the financial needs of its customers and satisfaction of CRA obligations in the markets that the Company serves.
Auto loan sales Historically, the Company has periodically transferred indirect automobile loans in securitization transactions in exchange for cash and certain retained residual interests. The transfers were structured as sales pursuant to accounting standards.
During 2007, the outstanding balances of the underlying loans fell to a level where the cost of servicing the loans became burdensome in relation to the benefits of servicing. As a result, the Company exercised its Clean-up Call option and repurchased the loans. The carrying value of the retained residual interests was written off.
Mortgage loan sales The Company sells the majority of the mortgage loans that it originates, including the rights to service the loans sold, to a national mortgage services company in a private-label loan processing and servicing support arrangement. Historically, the Company sold most of the mortgage loans that it originated to the secondary market, but retained the right to service the loans that were sold. As a result, the Company would record an OMSR asset and a gain on the sale of the loans that were transferred. During 2007, the Company sold the majority of its OMSR portfolio, recording the $2.6 million OMSR Gain. At December 31, 2009, the unpaid principal balance of mortgage loans serviced for others was $14 million, compared to $16 million at December 31, 2008. These loans are not recorded on the Companys Consolidated Balance Sheets. For both December 31, 2009 and December 31, 2008, the Company had recorded $0.1 million, of originated mortgage servicing rights. There were no impairment valuation allowances for either period.
Derivatives The Company periodically uses derivative contracts to help manage its exposure to changes in interest rates and in conjunction with its mortgage banking operations. The derivatives used most often are interest rate swaps, and on occasion caps, collars and floors (collectively the Interest Rate Derivatives), mortgage loan commitments and forward contracts. Interest Rate Derivatives are contracts with a third-party (the Counter-party) to exchange interest payment streams based upon an assumed principal amount (the Notional Principal Amount). The Notional Principal Amount is not advanced to/from the Counter-party. It is used only as a reference point to calculate the exchange of interest payment streams and is not recorded on the Consolidated Balance Sheets. AMCORE does not have any derivatives that are held or issued for trading purposes but it does have some derivatives that do not qualify for hedge accounting. AMCORE monitors credit risk exposure to the Counter-parties. All Counter-parties, or their parent company, have investment grade credit ratings and are expected to meet any outstanding interest payment obligations.
As of December 31, 2009, there were no interest rate swaps, caps, collars or floors outstanding. The total notional amount of Interest Rate Derivatives outstanding was $43 million as of December 31, 2008 with a net negative carrying and fair value of $1.0 million. The total notional amount of forward contracts outstanding for mortgage loans to be sold was $16 million and $61 million as of December 31, 2009 and December 31, 2008, respectively. As of December 31, 2009, the forward contracts had a net positive carrying and fair value of $0.3 million compared to a net negative carrying and fair value of $0.6 million at December 31, 2008. For further discussion of derivatives, see Notes 8 and 9 of the Notes to Consolidated Financial Statements.
Loan commitments and letters of credit The Company, as a provider of financial services, routinely enters into commitments to extend credit to its Bank customers, including a variety of letters of credit. Letters of credit are a
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conditional but generally irrevocable form of guarantee on the part of the Bank to make payments to a third party obligee, upon the default of payment or performance by the Bank customer or upon consummation of the underlying transaction as intended. While these represent a potential outlay by the Company, a significant amount of the commitments and letters of credit may expire without being drawn upon. Commitments and letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company.
At both December 31, 2009 and December 31, 2008, liabilities of less than $0.1 million, representing the value of the guarantee obligations associated with certain of the letters of credit, had been recorded. These amounts are expected to be amortized into income over the lives of the commitments. The contractual amount of all letters of credit was $22 million and $74 million at December 31, 2009 and 2008, respectively. See Notes 9 and 12 of the Notes to Consolidated Financial Statements.
The net carrying value of mortgage loan commitments was a $0.2 million liability and a $0.4 million asset at December 31, 2009 and December 31, 2008, respectively. These amounts represent the fair value of those commitments marked-to-market. The total notional amount of mortgage loan commitments was $11 million at December 31, 2009 and $55 million at December 31, 2008. See Note 8 of the Notes to Consolidated Financial Statements.
At December 31, 2009 and December 31, 2008, the Company had extended $356 million and $596 million, respectively, in loan commitments other than the mortgage loan commitments and letters of credit described above. This amount represented the notional amount of the commitment. A contingent liability of $1.8 million and $5.8 million has been recorded for the Companys estimate of probable losses on unfunded commitments including letters of credit outstanding at December 31, 2009 and December 31, 2008, respectively.
Equity investments The Company has some non-marketable equity investments that have not been consolidated in its financial statements but rather are recorded in accordance with either the cost or equity method of accounting depending on the percentage of ownership. At both December 31, 2009 and December 31, 2008, these investments included $4 million in CRA related investments. Not included in the carrying amount were commitments to fund an additional $1.3 million, at some future date. The Company also has recorded investments of $5 million, $20 million, and less than $0.1 million, respectively, in stock of the FRB, the FHLB and preferred stock of Federal Agricultural Mortgage Corporation at December 31, 2009 and December 31, 2008. These investments are recorded at amortized historical cost or fair value, as applicable, with income recorded when dividends are declared.
Other investments, comprised of various affordable housing tax credit projects (AHTCP) and other CRA related investments, totaled approximately $0.5 million and $0.6 million at December 31, 2009 and December 31, 2008, respectively. Losses are limited to the remaining investment and there are no additional funding commitments on the AHTCPs by the Company. Those investments without guaranteed yields were reported on the equity method, while those with guaranteed yields were reported using the effective yield method. The maximum exposure to loss for all non-marketable equity investments is the sum of the carrying amounts plus additional commitments, if any, and the potential for the recapture of tax credits on AHTCP should it fail to qualify for the entire period required by tax regulations.
Other investments The Company also holds $2 million in a common security investment in AMCORE Capital Trust II (the Capital Trust), to which the Company has $52 million in long-term debt outstanding. The Capital Trust, in addition to the $2 million in common securities issued to the Company, has $50 million in Trust Preferred securities outstanding. The $50 million in Trust Preferred securities were issued to non-affiliated investors during 2007 and are redeemable beginning in 2012. In its Consolidated Balance Sheets, the Company reflects its $2 million common security investment on the equity method and reports the entire $52 million as outstanding long-term debt. For regulatory purposes, $16 million of the Trust Preferred securities qualify as Tier 1 capital for the Company and $34 million qualify as Tier 2 capital for the Company.
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Fiduciary and agency The Companys subsidiaries also hold assets in a fiduciary or agency capacity that are not included in the Consolidated Financial Statements because they are not assets of the Company. Total assets administered by the Company were $2.0 billion at both December 31, 2009 and December 31, 2008.
Contractual Obligations
In the ordinary course of its business, the Company enters into certain contractual arrangements. These obligations include issuance of debt to fund operations, property leases and derivative transactions. With the predominant portion of its business being banking, the Company routinely enters into and exits various funding relationships including the issuance and extinguishment of long-term debt. See the discussion of Borrowings above, and Notes 6 and 7 of the Notes to Consolidated Financial Statements. During 2009, the Company entered into one new lease agreement. Other than these transactions, there were no material changes in the Companys contractual obligations since the end of 2008. Amounts as of December 31, 2009 are listed in the following table:
Payments due by period | |||||||||||||||
Contractual Obligations |
Total | Less than 1 Year |
1-3 Years |
3-5 Years |
More than 5 Years | ||||||||||
(in thousands) | |||||||||||||||
Time Deposits |
$ | 2,138,872 | $ | 1,081,449 | $ | 973,053 | $ | 83,913 | $ | 457 | |||||
Long-Term Debt (1) |
276,976 | 12,488 | 47,536 | 160,526 | 56,426 | ||||||||||
Capital Lease Obligations (2) |
2,255 | 225 | 457 | 366 | 1,207 | ||||||||||
Operating Leases |
67,065 | 4,354 | 7,844 | 7,050 | 47,817 | ||||||||||
Service Contracts |
1,076 | 415 | 661 | | | ||||||||||
Planned Pension Obligation Funding |
5,871 | 382 | 743 | 736 | 4,010 | ||||||||||
Total |
$ | 2,492,115 | $ | 1,099,313 | $ | 1,030,294 | $ | 252,591 | $ | 109,917 | |||||
(1) | Includes related interest. Interest calculations on debt with call features were calculated through the first call date. Any debt with floating rates was calculated using the rate in effect at December 31, 2009. See Note 7 of Notes to the Consolidated Financial Statements. |
(2) | Includes related interest. See Note 5 of Notes to the Consolidated Financial Statements. |
ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT
AMCOREs credit risk is centered in its loan portfolio, which totaled $2.2 billion, or 59% of earning assets, including COLI on December 31, 2009. The objective in managing loan portfolio risk is to quantify and manage credit risk on a portfolio basis as well as reduce the risk of a loss resulting from a customers failure to perform according to the terms of a transaction. To achieve this objective, AMCORE strives to maintain a loan portfolio that is diverse in terms of loan type, industry concentration and borrower concentration.
The Company is also exposed to carrier credit risk with respect to its $139 million investment in COLI. AMCORE has managed this risk by utilizing separate accounts in which its credit exposure is to a specific investment portfolio rather than the carrier. The underlying investment portfolios (which are managed by parties other than AMCORE) consist of investment grade securities and the investment guidelines typically have a requirement to sell if the securities are downgraded. Separate accounts constitute the majority of AMCOREs COLI portfolio. In terms of COLI accounts where AMCORE is directly exposed to carrier risk, this risk has been managed by diversifying its holdings among multiple carriers and by periodic internal credit reviews. All carriers have investment grade ratings from the major rating agencies.
Allowance for Loan Losses The Allowance is a significant estimate that is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb inherent losses that are probable as of the reporting date. If not, an additional Provision is made to increase the Allowance. Conversely, this review could result in a decrease in the Allowance.
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This evaluation includes specific loss estimates on certain individually reviewed impaired loans and statistical loss estimates for loan groups or pools that are based on historical loss experience. The loan pools for which historical loss rates are tracked and applied are: commercial and industrial loans; construction and development loans; commercial real estate loans; home equity lines of credit; home equity loans; first lien mortgages; indirect consumer loans; and direct consumer loans. Within these pool categories, the Company determines a range of loss rates by specific risk grades and credit score bands. Loss rates are updated quarterly, and due to the current point of the credit cycle, the Company has been applying loss rates at the higher end of the range. Also included are other loss estimates, which reflect the current credit environment, economic factors and concentration characteristics that are not otherwise captured in or have changed from the historical loss rates.
The determination by management of the appropriate level of the Allowance amounted to $145 million at December 31, 2009, compared to $136 million at December 31, 2008, an increase of $9 million or 6%. Specific loss estimates on individually reviewed impaired loans and loss estimates on loan pools increased $7 million and $2 million, respectively, at December 31, 2009 compared to December 31, 2008. The increase was due to higher specific loss estimates on individually reviewed impaired loans, higher estimated pool loss rates and continued deterioration of real estate values and reduced sales activity in the Midwest that affects the liquidity and capital resources of borrowers and the borrowers ability to make principal and interest payments when due. All of these factors are a reflection of the increases in non-performing loans and net charge-offs.
At December 31, 2009, the Allowance as a percent of total loans and of non-performing loans was 6.74% and 41%, respectively. These compare to the same ratios at December 31, 2008 of 3.60% and 44%.
Net Charge-offs Net charge-offs were $178 million in 2009, an increase of $78 million from $100 million in 2008. This was 5.34% and 2.58% of average loans, respectively. Increases included commercial real estate net charge-offs of $58 million, commercial and industrial net charge-offs of $16 million, and $6 million in consumer/installment net charge-offs. Net charge-offs of residential real estate loans declined $1 million.
For loans that are collateral dependent, such as most commercial real estate loans, losses are deemed confirmed for the portion of a loan that exceeds the fair value of the collateral that can be identified as uncollectible. In general, this is the amount that the carrying value exceeds its appraised value. As a result, charge-offs of collateral dependent loans typically occur earlier than a charge-off of a loan that is not collateral dependent. Loans become collateral dependent as other sources of repayment become inadequate over time and the importance of the collaterals value, as the sole source of repayment, increases. This has increasingly been the case as the effects of the economic downturn continues and other liquidity and capital resources of the borrowers and guarantors beyond the underlying collateral are depleted, and is the primary reason for the increase in net charge-offs in 2009 compared to 2008. In the event the deemed confirmed losses prove too conservative, some portion of these charge-offs will result in recoveries in future quarters. Generally, it is AMCOREs policy to not rely upon appraisals that are older than one year prior to the date that impairment is being measured, although it not always possible to obtain updated appraisals as frequently as they may be desired. This has especially been the case over the past two years as volatility in property values have caused the appraisal industrys resources to be over burdened. The most recent appraised values may be adjusted if, in managements judgment, experience and other market data indicate that the propertys value, use, condition, exit market or other variable affecting its value may have changed since the appraisal was performed. In those instances, new appraisals are typically ordered and an additional loss allocation may be provided, if there is an estimated decline in value, pending confirmation of the amount of the loss from an updated appraisal.
While the Company strives to reflect all known risk factors in its evaluation, the ultimate loss could differ materially from the current estimate. See Critical Accounting Estimates for a discussion of the judgments and assumptions that are most critical in determining the adequacy of the Allowance.
Non-performing Assets Non-performing assets consist of non-accrual loans, loans ninety days past due and still accruing interest, Troubled Debt Restructurings, foreclosed real estate and other repossessed assets. Troubled
Debt Restructurings are intended to result in loan terms that are more manageable for the borrower and result in a
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higher recovery value for the Company than proceeding with foreclosure or other collection activities. They can, under certain circumstances, also permit the loan to return to performing status at some point in the future. As the Company works out of and reduces its inventory of non-accrual loans, the level of restructured loans and foreclosed assets may increase for a period of time.
Non-performing assets totaled $381 million as of December 31, 2009, an increase of $51 million from $330 million at December 31, 2008. The increase since December 31, 2008 consisted of a $37 million increase in non-performing loans and a $14 million increase in foreclosed assets. Loans past due ninety or more days and still accruing interest declined by $5 million. The Company experienced growth in non-performing assets through third quarter 2009, peaking at $454 million. During fourth quarter 2009, non-performing assets declined by $73 million as resolution, collection and charge-offs exceeded deterioration for the first time since first quarter 2006. Total non-performing assets represented 10.08% and 6.53% of total assets at December 31, 2009 and December 31, 2008, respectively.
Delinquencies, loans that are thirty to eighty-nine days past due were $54 million at December 31, 2009, a decrease of $30 million or 36% since December 31, 2008. Fourth quarter 2009 was the third consecutive quarterly decrease in delinquencies, which are at their lowest level since fourth quarter 2006. To the extent that delinquencies are a potential pipeline into non-performing loans this, along with the fourth quarter decline in non-performing assets, could be an indication that recent credit cycle may be easing or at least in a pause.
In addition to the amount of non-accruing and delinquent loans over ninety days past due, management is aware that other possible credit problems of borrowers may exist. These include loans that are migrating from grades with lower risk of loss probabilities into grades with higher risk of loss probabilities, as performance and potential repayment issues surface. The Company monitors these loans and adjusts its historical loss rates in its Allowance evaluation accordingly. The most severe of these are credits that are classified as substandard assets due to either less than satisfactory performance history, lack of borrowers sound worth or paying capacity, or inadequate collateral. As of December 31, 2009 and December 31, 2008, there were $5 million and $11 million, respectively, in this risk category that were 60 to 89 days delinquent and $17 million and $20 million, respectively, that were 30 to 59 days past due. At December 31, 2009, 93% of these loans were current or less than thirty days past due.
Concentration of Credit Risks As previously discussed, AMCORE strives to maintain a diverse loan portfolio in an effort to minimize the effect of credit risk. Summarized below are the characteristics of classifications that exceed 10% of total loans.
Commercial, financial, and agricultural loans were $346 million at December 31, 2009, and comprised 16% of gross loans, of which 13.65%% were non-performing. Net charge-offs of commercial loans in 2009 and 2008 were 4.93% and 1.91%, respectively, of the average balance of the category.
Commercial real estate and construction loans were $1.4 billion at December 31, 2009, comprising 63% of gross loans, of which 21.31% were classified as non-performing. Net charge-offs of construction and commercial real estate loans during 2008 and 2007 were 6.73% and 3.30%, respectively, of the average balance of the category.
The above commercial loan categories included $382 million in construction, land development loans and other land loans and $495 million of loans to lessors of non-residential building, respectively. There were no other loan concentrations within these categories that exceeded 10% of total loans.
Residential real estate loans totaled $126 million at December 31, 2009, and represented 6% of gross loans, of which 7.79% were non-performing. Net charge-offs of residential real estate during 2009 and 2008 were 0.67% and 0.15%, respectively, of the average balance in this category. The Bank does not engage in sub-prime lending.
Home equity lines and loans were $191 million at December 31, 2009, and comprised 9% of gross loans, of which 0.74% were non-performing. Net charge-offs of home equity lines and loans during 2009 and 2008 were 0.67% and 1.51%, respectively, of the average balance in this category.
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Installment and consumer loans were $129 million at December 31, 2009, and comprised 6% of gross loans, of which 1.09% were non-performing. Net charge-offs of consumer loans during 2009 and 2008 were 3.60% and 1.61%, respectively, of the average balance of the category. Consumer loans are comprised primarily of in-market indirect auto loans and direct installment loans. Indirect auto loans totaled $97 million at December 31, 2009. Both direct loans and indirect auto loans are approved and funded through a centralized department utilizing the same credit scoring system to provide a standard methodology for the extension of consumer credit.
Contained within the concentrations described above, the Company has $893 million of interest-only loans, of which $468 million are included in the construction and commercial real estate loan category, $252 million are included in the commercial, financial, and agricultural loan category, and $166 million are in home equity loans and lines of credit. The Company does not have any negative amortization loans, and does not have material concentrations in relation to its total portfolio of high loan-to-value loans, option adjustable-rate mortgage loans or loans that initially have below market rates that significantly increase after the initial period. The Company does not ordinarily permit monthly payments that are less than the interest that is accrued on the loan other than in a Troubled Debt Restructuring or work-out situation.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity Management
Overview Liquidity management is the process by which the Company, through its Asset and Liability Committee (ALCO) and capital markets and treasury function, ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is derived primarily from bank-issued deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources have typically included brokered CDs, Fed Funds purchased lines, FRB discount window advances, Treasury, tax and loan (TT&L) note accounts, Term Auction Facility (TAF) borrowings, FHLB advances, repurchase agreements, the sale or securitization of loans, subordinated debentures, balances maintained at correspondent banks and access to other capital market instruments. In the current environment and due to the recent performance of the Company, the Company has been subject to increased collateral requirements and other limitations to secured funding. Bank-issued deposits, which exclude wholesale deposits, are considered by management to be the primary, most stable and most cost-effective source of funding and liquidity.
As of the end of 2009, both the Company and the Bank were below adequacy minimums for regulatory capital purposes. The Bank was undercapitalized for its Total Capital and Tier 1 Capital Ratios and significantly undercapitalized for its leverage ratio under applicable regulatory guidelines. The leverage capital ratio reflects, in part, the effect of maintaining high liquidity. As a result, the Bank is no longer eligible to participate in the brokered CD market and is also subject to limitations with respect to interest rates it can offer on deposits, generally limited to rates equal to no more than 75 basis points above prevailing market rates. These limitations, as well as recent increased collateral requirements and advance limitations with respect to other funding sources, may have a material impact on the Banks deposit levels and liquidity. While Companys management continues to exert maximum effort to retain existing funding sources and to attract new funding sources, significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt as to Companys ability to continue as a going concern. Doubt as to the Companys ability to continue as a going concern was previously disclosed in the Companys December 31, 2009 earnings release furnished with its February 2, 2010 Form 8-K, Current Report. If the Company is unable to achieve compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter with the OCC and the FRB, or an acceptable CRP under the OCCs Prompt Corrective Action guidelines, and if the Company cannot otherwise comply with such commitments and regulations, the OCC could force a sale, liquidation or federal conservatorship or receivership of the Bank.
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Uses of liquidity include funding credit obligations to borrowers, funding of mortgage originations pending sale, withdrawals by depositors, repayment of debt when due or called, maintaining adequate collateral for public deposits, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Since December 31, 2008, wholesale funding, which includes borrowings and brokered deposits, decreased $812 million, while bank-issued deposits declined $239 million. These, coupled with a $224 million net loss for the year, reflect a $1.3 billion decrease in total assets. The decrease in borrowings also reflects the impact of the Debt Extinguishments. Wholesale funding represented 29% of total assets at December 31, 2009, compared to 37% as of the end of 2008. As of December 31, 2009, the Companys cash and cash equivalents was approximately $625 million.
Investment securities portfolio Historically, scheduled maturities of the Companys investment securities portfolio and the prepayment of mortgage and asset backed securities represent a significant source of liquidity. Approximately $12 million, or three percent, of the securities portfolio will contractually mature in 2010. See Table 4. This does not include mortgage and asset backed securities since their payment streams may differ from contractual maturities because borrowers may have the right to prepay obligations, typically without penalty. For example, scheduled maturities for 2009, excluding mortgage and asset backed securities, were $82 million, whereas actual proceeds from the portfolio, which included scheduled payments and prepayments of mortgage and asset backed securities, were $626 million. This compares to proceeds of $304 million and $196 million in 2008 and 2007, respectively.
At December 31, 2009, securities available for sale were $482 million or 13% of total assets compared to $858 million or 17% at December 31, 2008.
Loans Continued funding of loans is the most significant liquidity need, representing 57% of total assets as of December 31, 2009. Since December 31, 2008, loans decreased $1.6 billion. Loans held for sale, which represents mortgage origination funding awaiting sale, the Illinois Branch Sale and certain non-performing loans held for sale increased $488 million. The scheduled repayments and maturities of loans represent a substantial source of liquidity. Table 3 shows, for selected loan categories, that $411 million in maturities are scheduled for 2010.
Bank-issued deposits Bank-issued deposits are the most cost-effective and reliable source of liquidity for the Company. During 2009, bank-issued deposits declined $239 million, reflecting in part the Wisconsin Branch Sales. Scheduled maturities of time deposits of $100,000 or more, as reflected in Table 5, are $615 million in 2010, of which $254 million are bank-issued. As a result of the FRB Agreement, the Consent Order, the Letter, and the Response Letter, the Bank is subject to restrictions on the interest rates that it may offer to its depositors. Under the applicable restrictions, the Bank cannot pay interest rates higher than 75 basis points above the prevailing market rates for each deposit type. To the extent local competitors offer higher rates, the Bank may be negatively affected in replacing run-off deposits and attracting new deposits.
Wholesale deposits Wholesale deposits, which includes brokered CDs, have historically been readily available source of liquidity for the Company. As noted above, the Bank is no longer eligible to participate in the brokered CD market. At December 31, 2009, wholesale deposit balances were $808 million. Due to the referenced limitations, as these deposits mature, the Bank will be required to replace the funding from other available sources of liquidity. During 2010, $361 million in wholesale deposits are scheduled to mature.
Parent company In addition to the overall liquidity needs of the Company, the parent company requires adequate liquidity to pay its expenses, repay debt when due and pay stockholder dividends. Historically, liquidity has been provided to the parent company through the Bank in the form of dividends. The Bank is currently limited by regulation, and by the FRB Agreement, the Consent Order, the Letter, and the Response Letter in the amount of dividends that it can pay, without prior regulatory approval. For the foreseeable future, Bank retained earnings are not expected to be paid as dividends absent prior regulatory approval, which is unlikely.
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Other sources of liquidity As of December 31, 2009, other sources of potentially available liquidity included secured borrowings from the FRB and the FHLB. Due to recent performance of the Company, unsecured borrowings from government agencies and other sources, such as Fed Funds, has been limited. The Banks indirect auto portfolio, which at December 31, 2009 was $97 million, is a potential source of liquidity through future loan sales or securitizations. During fourth quarter 2009, $136 million of loans were sold in the Indirect Auto Loan Sale. An extension of the Temporary Account Guaranty Program (currently scheduled to expire on June 30, 2010) could also serve as a continued source of liquidity. These potential sources are not committed lines, therefore the availability and terms (including advance rates on collateral) can vary. The recent trends have been for lower advance or lending rates on assets.
Other uses of liquidity At December 31, 2009, other potential uses of liquidity totaled $389 million and included $356 million in commitments to extend credit, $11 million in residential mortgage commitments primarily held for sale, and $22 million in letters of credit. At December 31, 2008, these amounts totaled $489 million. The June 30, 2010 scheduled expiration of the Temporary Account Guaranty Program could also result in a use of liquidity.
The Company entered into a stock redemption agreement (Redemption Agreement) on October 16, 1989, as amended September 30, 1993, pursuant to Section 303 of the Internal Revenue Code to pay death taxes and other related expenses of certain stockholders. Such redemptions may be subject to bank regulatory agency approvals or limited by debt covenant restrictions.
The Companys remaining $12.5 million credit facility is due April 15, 2011. However, as noted above, a technical default has occurred as a result of the Banks leverage ratio remaining at significantly undercapitalized as of December 31, 2009. All payments remain current under the facility, both parties continue to work cooperatively, and the Company has not been notified of any acceleration of maturity. Nevertheless, as this remains a potential remedy of the creditor that has not been waived, and notwithstanding the April 2011 due date, the Company has classified the facility as short-term.
Capital Management
Total stockholders equity at December 31, 2009 was $36 million, a decrease of $226 million from December 31, 2008. The decrease in stockholders equity was due to a $224 million decrease in retained earnings, which included the $118 million valuation allowance for deferred income taxes. No dividends were paid during 2009, compared to $6 million in 2008. In addition to the cash dividends, the Company paid stock dividends in June and September 2008 equivalent to $0.135 per share each. The book value per share decreased $9.99 per share to $1.56 at December 31, 2009, down from $11.55 at December 31, 2008.
The Company has occasionally repurchased shares in open market and private transactions in accordance with Exchange Act Rule 10b-18. These repurchases are used in part to replenish the Companys treasury stock for reissuances related to stock options and other employee benefit plans. Included in the repurchased shares are direct repurchases from participants related to the administration of the Amended and Restated AMCORE Stock Option Advantage Plan. In 2009, the Company repurchased 3,188 shares at an average price of $0.97. In 2008, the Company repurchased 15,315 shares in open-market and private transactions at an average price of $22.74 per share.
AMCORE has outstanding $52 million of capital securities through the Capital Trust, $2 million of which are common equity securities owned by the Company. Of the $50 million preferred securities, $16 million qualifies as Tier 1 capital and $34 million qualifies as Tier 2 Capital for regulatory capital purposes. The Company also has $50 million of fixed/floating rate junior subordinated debentures outstanding. The entire $50 million qualifies as Tier 2 Capital for the Bank while $31 million qualifies for the Company for regulatory capital purposes.
As the following table indicates, as of December 31, 2009, both the Company is below adequate regulatory minimums. The Bank is significantly undercapitalized. See Note 17, of the Notes to Consolidated Financial
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Statements for the Banks capital ratios. For the Bank, there are five levels of capital defined by the regulations: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At the current capital levels, the Bank is considered significantly undercapitalized. Like many financial institutions, the Bank has historically maintained capital at or above the well-capitalized minimum. Also, like many financial institutions during the past two years, the Bank has experienced steady declines in its capital levels as credit losses have risen. The Company expects the credit crisis that is affecting the economy in general to persist into 2010, and will likely bring with it additional credit losses. As a result of being below adequately capitalized, among other things, there will be increases in the Companys borrowing costs and the Bank is unable to access the brokered CD markets. As noted above under Regulatory Developments, the Company is subject to the FRB Agreement, the Consent Order, the Letter and the Response Letter requiring it to increase capital to a level greater than the level required to be considered well-capitalized under applicable regulations.
December 31, 2009 | December 31, 2008 | ||||||||||||
Consolidated |
Amount | Ratio | Amount | Ratio | |||||||||
(Dollars in thousands) | |||||||||||||
Total Capital (to Risk Weighted Assets) |
$ | 124,038 | 4.53 | % | $ | 408,205 | 10.04 | % | |||||
Total Adequately Capitalized Minimum |
218,986 | 8.00 | % | 325,333 | 8.00 | % | |||||||
Amount (Below) Above Regulatory Minimum |
$ | (94,948 | ) | (3.47 | )% | $ | 82,872 | 2.04 | % | ||||
Tier 1 Capital (to Risk Weighted Assets) |
$ | 62,019 | 2.27 | % | $ | 306,245 | 7.53 | % | |||||
Tier 1 Adequately Capitalized Minimum |
109,493 | 4.00 | % | 162,666 | 4.00 | % | |||||||
Amount (Below) Above Regulatory Minimum |
$ | (47,474 | ) | (1.73 | )% | $ | 143,579 | 3.53 | % | ||||
Tier 1 Capital (to Average Assets) |
$ | 62,019 | 1.50 | % | $ | 306,245 | 6.06 | % | |||||
Tier 1 Adequately Capitalized Minimum |
165,336 | 4.00 | % | 202,006 | 4.00 | % | |||||||
Amount (Below) Above Regulatory Minimum |
$ | (103,317 | ) | (2.50 | )% | $ | 104,239 | 2.06 | % | ||||
Risk Weighted Assets |
$ | 2,737,330 | $ | 4,066,661 | |||||||||
Average Assets |
$ | 4,133,408 | $ | 5,050,150 | |||||||||
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As part of its normal operations, AMCORE is subject to interest-rate risk on the assets it invests in (primarily loans and securities) and the liabilities it funds with (primarily customer deposits, brokered deposits and borrowed funds), as well as its ability to manage such risk. Fluctuations in interest rates may result in changes in the fair market values of AMCOREs financial instruments, cash flows and net interest income. Like most financial institutions, AMCORE has an exposure to changes in both short-term and long-term interest rates.
While AMCORE manages other risks in its normal course of operations, such as credit and liquidity risk, it considers interest-rate risk to be its most significant market risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of AMCOREs business activities and operations. In addition, since as of December 31, 2009 AMCORE does not hold a trading portfolio, it is not exposed to significant market risk from trading activities. During 2009, there were no material changes in AMCOREs primary market risk exposures. Based upon current expectations, no material changes are anticipated in the future in the types of market risks facing AMCORE.
Like most financial institutions, AMCOREs net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime) and balance sheet growth or contraction. AMCOREs asset and liability committee (ALCO) seeks to manage interest rate risk under a variety of rate environments by structuring the Companys balance sheet and off-balance sheet positions. The risk is monitored and managed within policy limits or approved exceptions.
The Company utilizes simulation analysis to quantify the impact on income before income taxes under various rate scenarios. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company are incorporated into the simulation model. Earnings at risk is calculated by comparing the income before income taxes of a stable interest rate environment to the income before income taxes of a different interest rate environment in order to determine the percentage change.
The following table summarizes the affect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 100 basis points and no change in the slope of the yield curve:
Change In Interest Rates | As of December 31, 2009 |
As of December 31, 2008 |
||||
+100 |
+8.8 | % | +4.6 | % | ||
-100 |
+0.4 | % | -8.3 | % |
The amounts and assumptions used in the simulation model should not be viewed as indicative of expected actual results. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. The above results do not take into account any management action to mitigate potential risk.
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TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
Years Ended December 31, | ||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||
Investment securities (1) (2) |
$ | 745,457 | $ | 24,512 | 3.29 | % | $ | 875,336 | $ | 41,225 | 4.71 | % | $ | 874,459 | $ | 39,391 | 4.50 | % | ||||||||||||
Short-term investments |
366,172 | 898 | 0.25 | % | 36,554 | 752 | 2.06 | % | 8,551 | 494 | 5.77 | % | ||||||||||||||||||
Loans held for sale |
32,630 | 1,692 | 5.18 | % | 5,928 | 388 | 6.55 | % | 10,217 | 606 | 5.94 | % | ||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||
Commercial |
631,434 | 28,837 | 4.57 | % | 774,948 | 45,206 | 5.83 | % | 798,290 | 64,949 | 8.14 | % | ||||||||||||||||||
Commercial real estate |
1,973,774 | 90,371 | 4.58 | % | 2,278,095 | 133,619 | 5.87 | % | 2,371,388 | 182,143 | 7.68 | % | ||||||||||||||||||
Residential real estate |
167,801 | 8,964 | 5.34 | % | 208,998 | 12,218 | 5.85 | % | 254,871 | 15,521 | 6.09 | % | ||||||||||||||||||
Home equity lines and loans |
244,062 | 11,074 | 4.54 | % | 246,121 | 14,697 | 5.97 | % | 238,595 | 19,207 | 8.05 | % | ||||||||||||||||||
Consumer |
322,679 | 25,045 | 7.76 | % | 352,772 | 27,878 | 7.90 | % | 313,884 | 24,289 | 7.74 | % | ||||||||||||||||||
Total loans (1) (3) |
$ | 3,339,750 | $ | 164,291 | 4.92 | % | $ | 3,860,934 | $ | 233,618 | 6.05 | % | $ | 3,977,028 | $ | 306,109 | 7.70 | % | ||||||||||||
Total interest-earning assets |
$ | 4,484,009 | $ | 191,393 | 4.27 | % | $ | 4,778,752 | $ | 275,983 | 5.78 | % | $ | 4,870,255 | $ | 346,600 | 7.12 | % | ||||||||||||
Allowance for loan losses |
(162,056 | ) | (102,853 | ) | (44,917 | ) | ||||||||||||||||||||||||
Non-interest-earning assets |
441,349 | 437,626 | 415,160 | |||||||||||||||||||||||||||
Total assets |
$ | 4,763,302 | $ | 5,113,525 | $ | 5,240,498 | ||||||||||||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||||||||||||||
Interest bearing deposits & savings deposits |
$ | 953,458 | $ | 3,840 | 0.40 | % | $ | 1,571,500 | $ | 26,607 | 1.69 | % | $ | 1,813,939 | $ | 59,984 | 3.31 | % | ||||||||||||
Time deposits |
1,471,880 | 48,851 | 3.32 | % | 1,035,212 | 40,807 | 3.94 | % | 1,139,694 | 53,053 | 4.66 | % | ||||||||||||||||||
Total bank issued interest-bearing deposits |
$ | 2,425,338 | $ | 52,691 | 2.17 | % | $ | 2,606,712 | $ | 67,414 | 2.59 | % | $ | 2,953,633 | $ | 113,037 | 3.83 | % | ||||||||||||
Wholesale deposits |
1,090,482 | 44,066 | 4.04 | % | 796,528 | 37,327 | 4.69 | % | 665,935 | 34,150 | 5.13 | % | ||||||||||||||||||
Short-term borrowings |
196,524 | 3,748 | 1.91 | % | 402,187 | 13,608 | 3.38 | % | 276,439 | 13,728 | 4.97 | % | ||||||||||||||||||
Long-term borrowings |
270,919 | 13,830 | 5.03 | % | 449,886 | 22,522 | 4.92 | % | 396,571 | 22,517 | 5.68 | % | ||||||||||||||||||
Total interest-bearing liabilities |
$ | 3,983,263 | $ | 114,335 | 2.87 | % | $ | 4,255,313 | $ | 140,871 | 3.30 | % | $ | 4,292,578 | $ | 183,432 | 4.27 | % | ||||||||||||
Non-interest bearing deposits |
530,677 | 475,579 | 497,872 | |||||||||||||||||||||||||||
Other liabilities |
53,140 | 52,713 | 64,478 | |||||||||||||||||||||||||||
Realized Stockholders Equity |
201,239 | 334,189 | 394,228 | |||||||||||||||||||||||||||
Other Comprehensive Loss |
(5,017 | ) | (4,269 | ) | (8,658 | ) | ||||||||||||||||||||||||
Total Liabilities & Stockholders Equity |
$ | 4,763,302 | $ | 5,113,525 | $ | 5,240,498 | ||||||||||||||||||||||||
Net Interest Income (FTE) |
$ | 77,058 | $ | 135,112 | $ | 163,168 | ||||||||||||||||||||||||
Net Interest Spread (FTE) |
1.40 | % | 2.48 | % | 2.85 | % | ||||||||||||||||||||||||
Interest Rate Margin (FTE) |
1.72 | % | 2.84 | % | 3.35 | % | ||||||||||||||||||||||||
(1) | The interest on tax-exempt securities and tax-exempt loans is calculated on a tax equivalent basis (FTE) assuming a federal tax rate of 35%. FTE adjustments totaled $1.7 million in 2009, $3.2 million in 2008, and $2.6 million in 2007. |
(2) | The average balances of the securities are based on amortized historical cost. |
(3) | The balances of nonaccrual loans are included in average loans outstanding. Interest on loans includes yield related loan fees of $2.5 million, $3.1 million, and $3.2 million for 2009, 2008, and 2007 respectively. |
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TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET(Continued)
Years Ended December 31, | ||||||||||||||||||||||||
2009/2008 | 2008/2007 | |||||||||||||||||||||||
Increase/(Decrease) Due to Change in |
Total Net Increase (Decrease) |
Increase/(Decrease) Due to Change in |
Total Net Increase (Decrease) |
|||||||||||||||||||||
Average Volume |
Average Rate |
Average Volume |
Average Rate |
|||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest Income: |
||||||||||||||||||||||||
Investment securities |
$ | (5,509 | ) | $ | (11,204 | ) | $ | (16,713 | ) | $ | 40 | $ | 1,794 | $ | 1,834 | |||||||||
Short-term investments |
1,340 | (1,194 | ) | 146 | 747 | (489 | ) | 258 | ||||||||||||||||
Loans held for sale |
1,401 | (97 | ) | 1,304 | (276 | ) | 58 | (218 | ) | |||||||||||||||
Loans: |
||||||||||||||||||||||||
Commercial |
(7,534 | ) | (8,835 | ) | (16,369 | ) | (1,918 | ) | (17,825 | ) | (19,743 | ) | ||||||||||||
Commercial real estate |
(16,368 | ) | (26,880 | ) | (43,248 | ) | (6,834 | ) | (41,690 | ) | (48,524 | ) | ||||||||||||
Residential real estate |
(2,265 | ) | (989 | ) | (3,254 | ) | (2,702 | ) | (601 | ) | (3,303 | ) | ||||||||||||
Home equity lines and loans |
(122 | ) | (3,501 | ) | (3,623 | ) | 589 | (5,099 | ) | (4,510 | ) | |||||||||||||
Consumer |
(2,343 | ) | (490 | ) | (2,833 | ) | 3,035 | 554 | 3,589 | |||||||||||||||
Total loans |
(29,064 | ) | (40,263 | ) | (69,327 | ) | (8,705 | ) | (63,786 | ) | (72,491 | ) | ||||||||||||
Total Interest-Earning Assets |
$ | (16,172 | ) | $ | (68,418 | ) | $ | (84,590 | ) | $ | (6,401 | ) | $ | (64,216 | ) | $ | (70,617 | ) | ||||||
Interest Expense: |
||||||||||||||||||||||||
Interest bearing deposits |
$ | (7,749 | ) | $ | (15,018 | ) | $ | (22,767 | ) | $ | (7,176 | ) | $ | (26,201 | ) | $ | (33,377 | ) | ||||||
Time deposits |
15,235 | (7,191 | ) | 8,044 | (4,585 | ) | (7,661 | ) | (12,246 | ) | ||||||||||||||
Total bank issued interest-bearing deposits |
(4,464 | ) | (10,259 | ) | (14,723 | ) | (12,132 | ) | (33,491 | ) | (45,623 | ) | ||||||||||||
Wholesale deposits |
12,394 | (5,655 | ) | 6,739 | 6,296 | (3,119 | ) | 3,177 | ||||||||||||||||
Short-term borrowings |
(5,320 | ) | (4,540 | ) | (9,860 | ) | 5,074 | (5,194 | ) | (120 | ) | |||||||||||||
Long-term borrowings |
(9,182 | ) | 490 | (8,692 | ) | 2,875 | (2,870 | ) | 5 | |||||||||||||||
Total Interest-Bearing Liabilities |
$ | (8,654 | ) | $ | (17,882 | ) | $ | (26,536 | ) | $ | (1,574 | ) | $ | (40,987 | ) | $ | (42,561 | ) | ||||||
Net Interest Income (FTE) |
$ | (7,518 | ) | $ | (50,536 | ) | $ | (58,054 | ) | $ | (4,827 | ) | $ | (23,229 | ) | $ | (28,056 | ) | ||||||
The above analysis shows the changes in interest income (tax equivalent FTE) and interest expense attributable to volume and rate variances. The change in interest income (tax equivalent) due to both volume and rate have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Because of changes in the mix of the components of interest-earning assets and interest-bearing liabilities, the computations for each of the components do not equal the calculation for interest-earning assets as a total or interest-bearing liabilities as a total.
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TABLE 2
ANALYSIS OF LOAN PORTFOLIO AND LOSS EXPERIENCE
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
LOAN PORTFOLIO AT YEAR END: |
||||||||||||||||||||
Commercial, financial and agricultural |
$ | 345,645 | $ | 771,679 | $ | 767,312 | $ | 798,168 | $ | 818,657 | ||||||||||
Real estate-commercial |
1,222,018 | 1,931,962 | 1,901,453 | 1,926,813 | 1,821,868 | |||||||||||||||
Real estate-construction |
139,532 | 267,061 | 459,727 | 420,379 | 310,006 | |||||||||||||||
Real estate-residential |
125,880 | 182,932 | 224,572 | 257,565 | 240,818 | |||||||||||||||
Home equity lines and loans |
190,579 | 254,945 | 243,848 | 235,935 | 219,005 | |||||||||||||||
Installment and consumer |
128,903 | 377,450 | 335,772 | 307,691 | 311,497 | |||||||||||||||
Direct lease financing |
| | | | 13 | |||||||||||||||
Gross loans |
$ | 2,152,557 | $ | 3,786,029 | $ | 3,932,684 | $ | 3,946,551 | $ | 3,721,864 | ||||||||||
Allowance for loan losses |
(145,022 | ) | (136,412 | ) | (53,140 | ) | (40,913 | ) | (40,756 | ) | ||||||||||
Net Loans |
$ | 2,007,535 | $ | 3,649,617 | $ | 3,879,544 | $ | 3,905,638 | $ | 3,681,108 | ||||||||||
SUMMARY OF LOSS EXPERIENCE: |
||||||||||||||||||||
Allowance for loan losses, beginning of year |
$ | 136,412 | $ | 53,140 | $ | 40,913 | $ | 40,756 | $ | 40,945 | ||||||||||
Amounts charged-off: |
||||||||||||||||||||
Commercial, financial and agricultural |
32,674 | 16,938 | 6,967 | 4,792 | 11,064 | |||||||||||||||
Real estate-commercial |
135,721 | 76,423 | 7,195 | 2,965 | 240 | |||||||||||||||
Real estate-residential |
1,161 | 314 | 278 | 376 | 742 | |||||||||||||||
Home equity lines and loans |
1,786 | 3,768 | 396 | 288 | 270 | |||||||||||||||
Installment and consumer |
13,584 | 7,978 | 6,318 | 6,096 | 5,354 | |||||||||||||||
Direct lease financing |
| | | 7 | 91 | |||||||||||||||
Total Charge-offs |
$ | 184,926 | $ | 105,421 | $ | 21,154 | $ | 14,524 | $ | 17,761 | ||||||||||
Recoveries on amounts previously charged off: |
||||||||||||||||||||
Commercial, financial and agricultural |
1,539 | 2,114 | 1,825 | 1,300 | 969 | |||||||||||||||
Real estate-commercial |
2,790 | 1,304 | 267 | 356 | 231 | |||||||||||||||
Real estate-residential |
43 | 1 | 91 | 412 | 94 | |||||||||||||||
Home equity lines and loans |
144 | 62 | 58 | 24 | 98 | |||||||||||||||
Installment and consumer |
1,976 | 2,299 | 2,053 | 2,469 | 1,700 | |||||||||||||||
Direct lease financing |
| | | | | |||||||||||||||
Total Recoveries |
$ | 6,492 | $ | 5,780 | $ | 4,294 | $ | 4,561 | $ | 3,092 | ||||||||||
Net Charge-offs |
$ | 178,434 | $ | 99,641 | $ | 16,860 | $ | 9,963 | $ | 14,669 | ||||||||||
Provision charged to expense |
190,157 | 202,716 | 29,087 | 10,120 | 15,194 | |||||||||||||||
Reductions due to sale of loans and other (1) |
3,113 | 19,803 | | | 714 | |||||||||||||||
Allowance for Loan Losses, end of year |
$ | 145,022 | $ | 136,412 | $ | 53,140 | $ | 40,913 | $ | 40,756 | ||||||||||
RISK ELEMENTS: |
||||||||||||||||||||
Non-accrual loans |
$ | 323,365 | $ | 304,176 | $ | 40,972 | $ | 30,048 | $ | 21,680 | ||||||||||
Past due 90 days or more not included above |
$ | 3,992 | $ | 8,889 | $ | 29,826 | $ | 2,315 | $ | 8,533 | ||||||||||
Troubled debt restructuring |
$ | 22,636 | $ | | $ | 11 | $ | 12 | $ | 13 | ||||||||||
RATIOS: |
||||||||||||||||||||
Allowance for loan losses to year-end loans |
6.74 | % | 3.60 | % | 1.35 | % | 1.04 | % | 1.10 | % | ||||||||||
Allowance to non-accrual loans |
44.85 | % | 44.85 | % | 129.70 | % | 136.16 | % | 187.99 | % | ||||||||||
Net charge-offs to average loans |
5.34 | % | 2.58 | % | 0.42 | % | 0.26 | % | 0.42 | % | ||||||||||
Recoveries to charge-offs |
3.51 | % | 5.48 | % | 20.30 | % | 31.40 | % | 17.41 | % | ||||||||||
Non-accrual loans to gross loans |
15.02 | % | 8.03 | % | 1.04 | % | 0.76 | % | 0.58 | % |
(1) | During 2009, the Bank sold $136 million of indirect loans to a third party and $89 million of loans in connection with the sale of four Wisconsin branches. Also in 2009, $489 million in loans were reclassed to loans held for sale on the Consolidated Financial Statements. During 2008, the Bank sold $77 million of primarily non-performing and under-performing loans to a third party. See Note 4 of the Notes to Consolidated Financial Statements for further information. 2005 includes estimated loss on unfunded commitments. See Note 12 of the Notes to Consolidated Financial Statements for further information. |
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TABLE 2
ANALYSIS OF LOAN PORTFOLIO AND LOSS EXPERIENCE(Continued)
The allocation of the allowance for loan and lease losses at December 31, was as follows:
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||
Amount | Percent of Loans in Category |
Amount | Percent of Loans in Category |
Amount | Percent of Loans in Category |
Amount | Percent of Loans in Category |
Amount | Percent of Loans in Category |
|||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 29,421 | 18.9 | % | $ | 23,700 | 20.1 | % | $ | 37,550 | 20.1 | % | $ | 20,730 | 21.2 | % | $ | 20,602 | 22.2 | % | ||||||||||
Commercial RE |
109,343 | 59.1 | % | 95,455 | 59.0 | % | 8,702 | 59.6 | % | 8,106 | 58.0 | % | 8,760 | 56.0 | % | |||||||||||||||
Residential RE |
808 | 5.0 | % | 954 | 5.4 | % | 327 | 6.4 | % | 508 | 6.8 | % | 502 | 6.5 | % | |||||||||||||||
Home equity lines and loans |
2,296 | 7.3 | % | 2,668 | 6.4 | % | 356 | 6.0 | % | 465 | 5.9 | % | 457 | 6.2 | % | |||||||||||||||
Installment and consumer |
3,154 | 9.7 | % | 13,635 | 9.1 | % | 6,205 | 7.9 | % | 6,410 | 8.1 | % | 6,436 | 9.1 | % | |||||||||||||||
Unallocated |
| * | | * | | * | 4,694 | * | 3,999 | * | ||||||||||||||||||||
Total |
$ | 145,022 | 100.0 | % | $ | 136,412 | 100.0 | % | $ | 53,140 | 100.0 | % | $ | 40,913 | 100.0 | % | $ | 40,756 | 100.0 | % | ||||||||||
* | Not applicable |
TABLE 3
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31, 2009 | ||||||||||||||||||
Time Remaining to Maturity | Loans Due After One Year | |||||||||||||||||
Due Within One Year |
One To Five Years |
After Five Years |
Total | Fixed Interest Rate |
Floating Interest Rate | |||||||||||||
(in thousands) | ||||||||||||||||||
Commercial, financial and agricultural |
$ | 284,469 | $ | 174,183 | $ | 34,363 | $ | 493,015 | $ | 143,951 | $ | 64,595 | ||||||
Real estate-construction |
126,594 | 13,900 | | 140,494 | 11,739 | 2,161 | ||||||||||||
Total |
$ | 411,063 | $ | 188,083 | $ | 34,363 | $ | 633,509 | $ | 155,690 | $ | 66,756 | ||||||
This table includes loans related to the pending sale of 14 locations to Midland States Bank, Effingham, Illinois that have been reclassified to held for sale.
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TABLE 4
MATURITY OF SECURITIES
December 31, 2009 | ||||||||||||||||||||||||||||||
U.S. Treasury | Government Sponsored Enterprises (1) |
States and Political Subdivisions (2) |
Corporate Obligations and Other (3) |
Total | ||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||
Securities Available for Sale (4): |
||||||||||||||||||||||||||||||
One year or less |
$ | 10,490 | 0.14 | % | $ | | | $ | 1,375 | 5.40 | % | $ | 401 | 0.13 | % | $ | 12,266 | 0.73 | % | |||||||||||
After one through five years |
| | | | 2,778 | 6.79 | % | | | 2,778 | 6.79 | % | ||||||||||||||||||
After five through ten years |
| | | | 5,765 | 6.19 | % | | | 5,765 | 6.19 | % | ||||||||||||||||||
After ten years |
| | | | 7,203 | 6.11 | % | 25,412 | 1.17 | % | 32,615 | 2.26 | % | |||||||||||||||||
Mortgage-backed and asset-backed securities (5) |
| | 386,990 | 3.78 | % | | | 42,029 | 3.48 | % | 429,019 | 3.75 | % | |||||||||||||||||
Total Securities Available for Sale |
$ | 10,490 | 0.14 | % | $ | 386,990 | 3.78 | % | $ | 17,121 | 6.19 | % | $ | 67,842 | 2.60 | % | $ | 482,443 | 3.62 | % | ||||||||||
(1) | Includes U.S. Government agencies. |
(2) | Yields were calculated on a tax equivalent basis assuming a federal tax rate of 35%. |
(3) | Includes fair value of $25 million in equity investments which are included in the due after ten years classifications. |
(4) | Amounts are reported at fair value. Yields were calculated based on amortized cost. |
(5) | Includes $9 million of general obligations of FHLB and FNMA that are structured to have payment characteristics of a collateralized mortgage obligation security. Mortgage-backed and asset-backed security maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. Therefore, these securities are not included within the maturity categories above. |
TABLE 5
MATURITY OF TIME DEPOSITS $100,000 OR MORE
As of December 31, 2009 | |||||||||||||||
Time Remaining to Maturity | |||||||||||||||
Due Within Three Months |
Three to Six Months |
Six to Twelve Months |
After Twelve Months |
Total | |||||||||||
(in thousands) | |||||||||||||||
Certificates of deposit |
$ | 161,533 | $ | 187,563 | $ | 266,070 | $ | 627,794 | $ | 1,242,960 | |||||
Other time deposits |
| | | 838 | 838 | ||||||||||
Total |
$ | 161,533 | $ | 187,563 | $ | 266,070 | $ | 628,632 | $ | 1,243,798 | |||||
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Table of Contents
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands, except share data) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 56,851 | $ | 138,017 | ||||
Interest earning deposits in banks and fed funds sold |
409,459 | 1,665 | ||||||
Loans held for sale |
495,198 | 6,749 | ||||||
Securities available for sale, at fair value |
482,443 | 858,218 | ||||||
Gross loans |
2,152,557 | 3,786,029 | ||||||
Allowance for loan losses |
(145,022 | ) | (136,412 | ) | ||||
Net loans |
$ | 2,007,535 | $ | 3,649,617 | ||||
Company owned life insurance |
139,191 | 144,599 | ||||||
Premises and equipment, net |
73,050 | 91,955 | ||||||
Foreclosed real estate, net |
30,629 | 16,899 | ||||||
Deferred tax assets |
| 69,490 | ||||||
Income tax receivable |
37,294 | | ||||||
Accrued interest receivable |
10,239 | 17,365 | ||||||
Other assets |
35,341 | 65,250 | ||||||
Total Assets |
$ | 3,777,230 | $ | 5,059,824 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Non-interest bearing deposits |
$ | 499,964 | $ | 465,382 | ||||
Interest bearing deposits |
766,921 | 1,224,166 | ||||||
Time deposits |
1,331,740 | 1,147,856 | ||||||
Total bank issued deposits |
$ | 2,598,625 | $ | 2,837,404 | ||||
Wholesale deposits |
807,655 | 1,081,634 | ||||||
Total deposits |
$ | 3,406,280 | $ | 3,919,038 | ||||
Short-term borrowings |
48,464 | 435,783 | ||||||
Long-term borrowings |
229,177 | 379,667 | ||||||
Accrued interest payable |
20,778 | 24,250 | ||||||
Accounts payable and accrued expenses |
21,982 | 21,994 | ||||||
Other liabilities |
14,542 | 17,094 | ||||||
Total Liabilities |
$ | 3,741,223 | $ | 4,797,826 | ||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, $1 par value; authorized 10,000,000 shares; none issued |
$ | | $ | | ||||
Common stock, $0.22 par value; authorized 45,000,000 shares; |
December 31, 2009 |
December 31, 2008 |
|||||||||||
Issued |
30,205,313 | 30,078,990 | ||||||||||
Outstanding |
23,103,072 | 22,682,317 | 6,712 | 6,684 | ||||||||
Treasury stock |
7,102,241 | 7,396,673 | (164,929 | ) | (172,293 | ) | ||||||
Additional paid-in capital |
62,804 | 69,838 | ||||||||||
Retained earnings |
141,901 | 365,684 | ||||||||||
Accumulated other comprehensive loss |
(10,481 | ) | (7,915 | ) | ||||||||
Total Stockholders Equity |
$ | 36,007 | $ | 261,998 | ||||||||
Total Liabilities and Stockholders Equity |
$ | 3,777,230 | $ | 5,059,824 | ||||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands, except share data) | ||||||||||||
INTEREST INCOME |
||||||||||||
Interest and fees on loans |
$ | 163,740 | $ | 233,056 | $ | 305,580 | ||||||
Interest on securities: |
||||||||||||
Taxable |
21,320 | 33,610 | 33,520 | |||||||||
Tax-exempt |
2,075 | 4,950 | 3,816 | |||||||||
Total Income on Securities |
$ | 23,395 | $ | 38,560 | $ | 37,336 | ||||||
Interest on federal funds sold and other short-term investments |
29 | 561 | 295 | |||||||||
Interest and fees on loans held for sale |
1,692 | 388 | 606 | |||||||||
Interest on deposits in banks |
869 | 191 | 199 | |||||||||
Total Interest Income |
$ | 189,725 | $ | 272,756 | $ | 344,016 | ||||||
INTEREST EXPENSE |
||||||||||||
Interest on deposits |
$ | 96,757 | $ | 104,741 | $ | 147,187 | ||||||
Interest on short-term borrowings |
3,748 | 13,608 | 13,728 | |||||||||
Interest on long-term borrowings |
13,830 | 22,522 | 22,517 | |||||||||
Total Interest Expense |
$ | 114,335 | $ | 140,871 | $ | 183,432 | ||||||
Net Interest Income |
75,390 | 131,885 | 160,584 | |||||||||
Provision for loan losses |
190,157 | 202,716 | 29,087 | |||||||||
Net Interest (Loss) Income After Provision for Loan Losses |
$ | (114,767 | ) | $ | (70,831 | ) | $ | 131,497 | ||||
NON-INTEREST INCOME |
||||||||||||
Investment management and trust income |
$ | 13,310 | $ | 16,269 | $ | 16,765 | ||||||
Service charges on deposits |
27,312 | 33,241 | 29,618 | |||||||||
Company owned life insurance income |
4,582 | 4,566 | 5,429 | |||||||||
Brokerage commission income |
2,730 | 4,273 | 4,174 | |||||||||
Bankcard fee income |
8,170 | 8,594 | 7,862 | |||||||||
Net security gains (losses) |
23,389 | 2,018 | (5,920 | ) | ||||||||
Other |
5,928 | 5,641 | 13,069 | |||||||||
Total Non-Interest Income |
$ | 85,421 | $ | 74,602 | $ | 70,997 | ||||||
OPERATING EXPENSES |
||||||||||||
Compensation expense |
$ | 56,264 | $ | 72,081 | $ | 75,822 | ||||||
Employee benefits |
13,497 | 16,831 | 19,102 | |||||||||
Net occupancy expense |
15,538 | 16,514 | 14,652 | |||||||||
Equipment expense |
9,184 | 9,943 | 9,963 | |||||||||
Data processing expense |
2,770 | 2,962 | 3,369 | |||||||||
Professional fees |
8,506 | 8,624 | 8,397 | |||||||||
Insurance expense |
21,532 | 4,687 | 1,603 | |||||||||
Communication expense |
4,317 | 5,054 | 5,258 | |||||||||
Loan processing and collection expense |
10,247 | 6,977 | 3,718 | |||||||||
Provision for unfunded commitment losses |
| 4,804 | (161 | ) | ||||||||
Foreclosed real estate expense |
10,146 | 1,031 | 1,088 | |||||||||
Goodwill impairment |
| 6,148 | | |||||||||
Other |
16,559 | 16,823 | 22,528 | |||||||||
Total Operating Expenses |
$ | 168,560 | $ | 172,479 | $ | 165,339 | ||||||
(Loss) Income before income taxes |
$ | (197,906 | ) | $ | (168,708 | ) | $ | 37,155 | ||||
Income tax expense (benefit) |
25,877 | (70,909 | ) | 8,914 | ||||||||
Net (Loss) Income |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | ||||
(LOSS) INCOME PER COMMON SHARE |
||||||||||||
Basic |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 | ||||
Diluted |
(9.78 | ) | (4.32 | ) | 1.20 | |||||||
DIVIDENDS PER COMMON SHARE |
$ | | $ | 0.278 | $ | 0.720 | ||||||
AVERAGE COMMON SHARES OUTSTANDING |
||||||||||||
Basic |
22,876 | 22,629 | 23,546 | |||||||||
Diluted |
22,876 | 22,629 | 23,556 |
See accompanying notes to consolidated financial statements.
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AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders Equity |
||||||||||||||||||
(in thousands, except share data) | |||||||||||||||||||||||
Balance at December 31, 2006 |
$ | 6,660 | $ | (120,859 | ) | $ | 66,851 | $ | 458,363 | $ | (10,969 | ) | $ | 400,046 | |||||||||
Comprehensive Income (Loss): |
|||||||||||||||||||||||
Net Income |
| | | 28,241 | | 28,241 | |||||||||||||||||
Net unrealized holding gains on securities available for sale arising during the period |
| | | | 6,363 | 6,363 | |||||||||||||||||
Less reclassification adjustment for net security losses included in net income |
| | | | 5,920 | 5,920 | |||||||||||||||||
Pension transition obligation amortization |
| | | | 42 | 42 | |||||||||||||||||
Income tax effect related to items of other comprehensive income |
| | | | (4,672 | ) | (4,672 | ) | |||||||||||||||
Comprehensive Income |
| | | 28,241 | 7,653 | 35,894 | |||||||||||||||||
Cash dividends on common stock-$0.720 per share |
| | | (16,829 | ) | | (16,829 | ) | |||||||||||||||
Purchase of 2,135,617 shares for the treasury |
| (59,609 | ) | | | | (59,609 | ) | |||||||||||||||
Deferred compensation and other |
| | 245 | | | 245 | |||||||||||||||||
Stock-based compensation |
| | 1,685 | | | 1,685 | |||||||||||||||||
Reissuance of 254,717 treasury shares for incentive plans |
| 8,078 | (1,608 | ) | | | 6,470 | ||||||||||||||||
Issuance of 28,883 common shares for Employee Stock Plan |
6 | | 659 | | | 665 | |||||||||||||||||
Balance at December 31, 2007 |
$ | 6,666 | $ | (172,390 | ) | $ | 67,832 | $ | 469,775 | $ | (3,316 | ) | $ | 368,567 | |||||||||
Comprehensive Income (Loss): |
|||||||||||||||||||||||
Net Loss |
| | | (97,799 | ) | | (97,799 | ) | |||||||||||||||
Net unrealized holding losses on securities available for sale arising during the period |
| | | | (5,639 | ) | (5,639 | ) | |||||||||||||||
Less reclassification adjustment for net security gains included in net loss |
| | | | (2,018 | ) | (2,018 | ) | |||||||||||||||
Pension transition obligation amortization |
| | | | 42 | 42 | |||||||||||||||||
Income tax effect related to items of other comprehensive income (loss) |
| | | | 3,016 | 3,016 | |||||||||||||||||
Comprehensive Income (Loss) |
| | | (97,799 | ) | (4,599 | ) | (102,398 | ) | ||||||||||||||
Cash dividends on common stock-$0.278 per share |
| | | (6,292 | ) | | (6,292 | ) | |||||||||||||||
Purchase of 15,315 shares for the treasury |
| (348 | ) | | | | (348 | ) | |||||||||||||||
Deferred compensation and other |
| | 53 | | | 53 | |||||||||||||||||
Stock-based compensation |
| | 2,122 | | | 2,122 | |||||||||||||||||
Reissuance of 20,015 treasury shares for incentive plans |
| 445 | (585 | ) | | | (140 | ) | |||||||||||||||
Issuance of 77,875 common shares for Employee Stock Plan |
18 | | 416 | | | 434 | |||||||||||||||||
Balance at December 31, 2008 |
$ | 6,684 | $ | (172,293 | ) | $ | 69,838 | $ | 365,684 | $ | (7,915 | ) | $ | 261,998 | |||||||||
Comprehensive Income (Loss): |
|||||||||||||||||||||||
Net Loss |
| | | (223,783 | ) | | (223,783 | ) | |||||||||||||||
Net unrealized holding gains on securities available for sale arising during the period |
| | | | 25,866 | 25,866 | |||||||||||||||||
Less reclassification adjustment for net security gains included in net loss |
| | | | (23,389 | ) | (23,389 | ) | |||||||||||||||
Pension transition obligation amortization |
| | | | 38 | 38 | |||||||||||||||||
Income tax effect related to items of other comprehensive income (loss) |
| | | | (5,081 | ) | (5,081 | ) | |||||||||||||||
Comprehensive Income (Loss) |
| | | (223,783 | ) | (2,566 | ) | (226,349 | ) | ||||||||||||||
Purchase of 3,188 shares for the treasury |
| (3 | ) | | | | (3 | ) | |||||||||||||||
Deferred compensation and other |
| | (62 | ) | | | (62 | ) | |||||||||||||||
Stock-based compensation |
| | 824 | | | 824 | |||||||||||||||||
Reissuance of 216,138 treasury shares for incentive plans, net of cancellations |
| 5,536 | (6,151 | ) | | | (615 | ) | |||||||||||||||
Issuance of 126,323 common shares; 81,482 treasury shares for Employee Stock Plan |
28 | 1,831 | (1,645 | ) | | | 214 | ||||||||||||||||
Balance at December 31, 2009 |
$ | 6,712 | $ | (164,929 | ) | $ | 62,804 | $ | 141,901 | $ | (10,481 | ) | $ | 36,007 | |||||||||
See accompanying notes to consolidated financial statements.
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AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Cash Flows From Operating Activities |
||||||||||||
Net (loss) income |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | ||||
Adjustments to reconcile net (loss) income from operations to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization of premises and equipment |
7,699 | 8,775 | 8,105 | |||||||||
Goodwill impairment |
| 6,148 | | |||||||||
Amortization and (accretion) of securities, net |
1,916 | (375 | ) | 588 | ||||||||
Stock-based compensation expense |
833 | 2,223 | 1,889 | |||||||||
Tax benefit on exercise of stock options |
| | 764 | |||||||||
Excess tax benefits from stock-based compensation |
| | (733 | ) | ||||||||
Provision for loan losses |
190,157 | 202,716 | 29,087 | |||||||||
Company owned life insurance income, net of claims |
(4,582 | ) | (4,567 | ) | (5,439 | ) | ||||||
Net gain on sale of branches |
(1,790 | ) | | | ||||||||
Net securities (gains) losses |
(23,389 | ) | (2,018 | ) | 5,920 | |||||||
Net loss (gain) on sale of loans |
22 | | (243 | ) | ||||||||
Valuation write downs on foreclosed real estate |
4,272 | (85 | ) | 778 | ||||||||
Net gain on sale of Other Mortgage Servicing Rights (OMSRs) |
| | (2,556 | ) | ||||||||
Net gain on sale of mortgage loans held for sale |
(764 | ) | (581 | ) | (1,002 | ) | ||||||
Originations of mortgage loans held for sale |
(284,051 | ) | (197,657 | ) | (238,924 | ) | ||||||
Proceeds from sales of mortgage loans held for sale |
287,047 | 195,125 | 250,108 | |||||||||
Deferred income tax (benefit) expense |
64,438 | (44,274 | ) | (9,848 | ) | |||||||
Decrease (increase) in other assets |
12,163 | (20,419 | ) | 6,837 | ||||||||
(Decrease) increase in other liabilities |
(5,856 | ) | 8,880 | (11,735 | ) | |||||||
Net cash provided by operating activities |
$ | 24,332 | $ | 56,092 | $ | 61,837 | ||||||
Cash Flows From Investing Activities |
||||||||||||
Proceeds from maturities of securities available for sale |
$ | 625,565 | $ | 304,447 | $ | 196,074 | ||||||
Proceeds from sales of securities available for sale |
870,385 | 50,829 | 200,159 | |||||||||
Purchase of securities available for sale |
(1,096,224 | ) | (376,277 | ) | (333,421 | ) | ||||||
Net decrease (increase) in federal funds sold and other short-term investments |
| 10,500 | (10,500 | ) | ||||||||
Net (increase) decrease in interest earning deposits in banks |
(407,794 | ) | 717 | 1,094 | ||||||||
Net decrease (increase) in loans |
690,492 | (55,064 | ) | (12,770 | ) | |||||||
Proceeds from the sale of loans |
136,172 | 57,558 | | |||||||||
Net proceeds from sale of OMSRs |
| | 17,529 | |||||||||
Proceeds from surrender of company owned life insurance |
10,000 | | | |||||||||
Net payments to settle branch sales |
(75,844 | ) | | | ||||||||
Premises and equipment expenditures, net |
843 | (8,034 | ) | (10,654 | ) | |||||||
Proceeds from the sale of foreclosed real estate |
25,447 | 6,294 | 2,199 | |||||||||
Net cash provided by (used in) investing activities |
$ | 779,042 | $ | (9,030 | ) | $ | 49,710 | |||||
Cash Flows From Financing Activities |
||||||||||||
Net increase (decrease) in non-interest-bearing demand deposits |
$ | 91,187 | $ | (43,007 | ) | $ | (34,681 | ) | ||||
Net (decrease) increase in interest-bearing demand deposits |
(387,905 | ) | (643,467 | ) | 66,298 | |||||||
Net increase (decrease) in time deposits |
224,367 | 118,438 | (175,490 | ) | ||||||||
Net (decrease) increase in wholesale deposits |
(273,979 | ) | 483,818 | (199,053 | ) | |||||||
Net (decrease) increase in short-term borrowings |
(487,798 | ) | (150,624 | ) | 116,316 | |||||||
Proceeds from long-term borrowings |
| 200,000 | 211,738 | |||||||||
Payment of long-term borrowings |
(50,008 | ) | (13 | ) | (41,245 | ) | ||||||
Dividends paid |
| (6,292 | ) | (16,829 | ) | |||||||
Issuance of shares for employee stock plan |
214 | 434 | 665 | |||||||||
(Cancellation) reissuance of treasury shares for incentive plans |
(615 | ) | (140 | ) | 5,706 | |||||||
Excess tax benefits from stock-based compensation |
| | 733 | |||||||||
Purchase of shares for treasury |
(3 | ) | (348 | ) | (59,609 | ) | ||||||
Net cash used in financing activities |
$ | (884,540 | ) | $ | (41,201 | ) | $ | (125,451 | ) | |||
Net change in cash and cash equivalents |
$ | (81,166 | ) | $ | 5,861 | $ | (13,904 | ) | ||||
Cash and cash equivalents: |
||||||||||||
Beginning of year |
138,017 | 132,156 | 146,060 | |||||||||
End of year (1) |
$ | 56,851 | $ | 138,017 | $ | 132,156 | ||||||
Supplemental Disclosures of Cash Flow Information |
||||||||||||
Cash payments for: |
||||||||||||
Interest paid to depositors |
$ | 100,585 | $ | 101,669 | $ | 152,308 | ||||||
Interest paid on borrowings |
$ | 17,221 | 34,686 | 35,193 | ||||||||
Income tax (refunds, net of payments), payments net of refunds |
(29,483 | ) | 294 | 18,715 | ||||||||
Non-Cash Investing and Financing |
||||||||||||
Foreclosed real estateacquired in settlement of loans |
45,510 | 18,997 | 5,903 | |||||||||
Transfer current portion of long-term borrowings to short-term borrowings |
100,482 | 189,319 | 144,025 | |||||||||
Capitalized interest |
48 | 116 | 139 |
(1) | For the year ended December 31, 2009, cash and cash equivalent balances included $1.1 million in restricted cash. See Note 1 of the Notes to Consolidated Financial Statements for further information. |
See accompanying notes to consolidated financial statements.
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AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of AMCORE Financial, Inc. (the Company) and its subsidiaries conform to accounting principles generally accepted in the United States of America in all material respects. The preparation of Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates.
Going Concern
The Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt about the Companys ability to continue as a going concern. See Note 12. Doubt as to the Companys ability to continue as a going concern was previously disclosed in the Companys December 31, 2009 earnings release furnished with its February 2, 2010 Form 8-K, Current Report. Other than a valuation allowance for deferred tax assets, the Consolidated Financial Statements do not include any adjustment that might result from the outcome of this uncertainty. See Note 13.
Description of the Business
The Company is a registered bank holding company headquartered in Rockford, Illinois, and conducts its principal business activities at locations within northern Illinois and southern Wisconsin. The primary business of the Company is the extension of credit and the collection of deposits with commercial and industrial, agricultural, real estate and consumer loan customers conducted through its banking subsidiary (the Bank). The Bank also offers products and services through its mortgage-banking and investment management and trust segments, and its brokerage subsidiary. Although the Company strives to maintain a diversified loan portfolio, adverse changes in the local economies or in the commercial real estate markets could have a direct impact on the credit risk in the portfolio.
Significant Accounting Policies
Principles of Consolidation The financial statements include the consolidated accounts of the Company. All intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation Loans and fixed assets related to the pending branch sale have been reclassified to loans held for sale and other assets, respectively, at lower of cost or market. See Note 2 for additional information.
Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash on hand, amounts due from banks, and cash items in process of clearing to be cash and cash equivalents. Cash flows for federal funds sold and interest-earning deposits in banks are not included in cash and cash equivalents. In connection with the December 2009 amendment to the senior debt, see Note 6 for further discussion, a cash reserve account in the amount of $1.1 million was established. The amount of the reserve account equals the anticipated interest payments due through maturity on said debt and is restricted as to access.
Loans Held for Sale Loans originated and intended for sale are recorded at the lower of cost or fair value. Mortgage loans originated and held for sale are sold for a fixed fee net of origination costs. Gains and losses on the sale of mortgage loans are included in other non-interest income.
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Securities and Other Investments Debt securities can be classified into three categories: held to maturity, trading, and available for sale. There were no held to maturity or trading securities outstanding during 2009 and 2008. Securities available for sale are reported at fair value with unrealized gains and losses excluded from earnings and reported in Accumulated Other Comprehensive Income (Loss) (OCI) until realized. The interest method is used for the amortization and accretion of premiums and discounts. The objective of the interest method is to measure periodic interest income at a constant effective yield. The cost of securities sold is determined on a specific identification method.
Non-marketable equity securities, which include community reinvestment act (CRA) related fund investments, are reported under the cost or equity method depending on percentage of ownership. Also included in non-marketable equity securities are investments in stock of the Federal Reserve Bank and the Federal Home Loan Bank. Investments in affordable housing tax credit projects without guaranteed yields are reported on the equity method. Those with guaranteed yields are reported using the effective yield method. CRA related fund and affordable housing tax credit investments are reported as other assets on the Consolidated Balance Sheets.
When it is determined that securities or other investments are impaired and the impairment is other than temporary, an impairment loss is recorded in earnings and a new basis is established. See Note 3 for additional information.
Loans and Allowance for Loan Losses Loans that management has the ability and intent to hold for the foreseeable future are recorded at the amount advanced to the borrower plus certain costs incurred by the Company to originate the loan, less certain origination fees that are collected from the borrower. The carrying amount of loans is reduced as principal payments are made. Payments made by the borrower are allocated between interest income and principal payment based upon the outstanding principal amount and the contractual rate of interest. The carrying amount is further adjusted to reflect amortization of the origination costs, net of origination fees. These items are amortized over the expected life of the loan using methods that approximate a constant effective yield.
Management periodically evaluates the loan portfolio in order to establish an adequate allowance for loan losses (the Allowance) to absorb estimated losses that are probable as of the respective reporting date. This evaluation includes specific loss estimates on certain individually reviewed loans where it is probable that the Company will be unable to collect all of the amounts due (principal or interest) according to the contractual terms of the loan agreement (impaired loans) and statistical loss estimates for loan groups or pools that are based on historical loss experience. Also included are loss estimates that reflect the current credit environment and that are not otherwise captured in the historical loss rates. These include the quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrowers ability to repay and current economic and industry conditions, among other things.
Additions to the Allowance are charged against earnings for the period as a provision for loan losses (the Provision). Actual loan losses are charged against the Allowance when management believes that the collection of principal will not occur and the loss has been confirmed. In general, the amount that the carrying value of impaired real estate loans that is solely dependent upon the underlying collateral for repayment exceeds its appraised value is deemed a confirmed loss and is immediately charged off. The accrual of interest income is generally discontinued (the Non-Accrual Status) when management believes that collection of principal and/or interest is doubtful. Generally, loans that are not well secured and in the process of collection are placed in Non-Accrual Status when payment becomes past due for more than 90 days except for residential real estate loans which are placed on Non-Accrual Status at 120 days past due. Unpaid interest attributable to prior years for loans that are placed on Non-Accrual Status are also charged against the Allowance. Unpaid interest for the current year for loans that are placed on Non-Accrual Status are reversed against the interest income previously recognized. Subsequent recoveries of amounts previously charged to the Allowance, if any, are credited to the Allowance. Payments received from the borrower after a loan is placed on Non-Accrual Status are applied to reduce the principal balance of the loan until such time that collectability of remaining principal and interest is no longer doubtful. See Note 4 for additional information.
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Concentration of Credit Risk The Company has a significant concentration in commercial real estate loans to builders and developers. Therefore, the Companys exposure to credit risk is significantly affected by changes in the real estate market.
Bank and Company Owned Life Insurance (COLI) The Company has purchased life insurance coverage for certain officers. Premiums paid for the policies, net of any charges that would not be recoverable upon surrender of the policies, are recorded as assets on the Consolidated Balance Sheets. Increases or decreases in cash surrender value (other than proceeds from death benefits) are recorded as other income. Proceeds from the death of an insured first reduce the cash surrender value attributable to the individual policy with any additional proceeds recorded as other income in the period of death.
Premises and Equipment Premises and equipment including leasehold improvements are stated at cost less accumulated depreciation and amortization. Land is carried at cost. Capitalized leases are recorded at the present value of minimum lease payments over the life of the lease (limited to the fair value of the property at the inception of the lease) less accumulated amortization. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 15 to 30 years. Furniture, fixtures, equipment and software are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leasehold improvements and capitalized leases are amortized straight-line over the lesser of their respective lease terms or useful lives. Rent expense for operating leases that include scheduled rent increases or rent holidays are recognized straight-line over the lease term, including the rent holiday period. Rent expense for operating leases that do not include scheduled rent increases or rent holidays are recognized in accordance with their contractual terms. See Note 5 for additional information.
Intangible Assets Certain intangible assets, such as goodwill, have arisen from the purchase of subsidiaries. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill is not amortized, but must be tested at least annually for impairment. See discussion under Impairment of Long-Lived Assets later in this note. During 2008, the Company wrote-off all goodwill previously carried on the Companys balance sheet.
Foreclosed Real Estate Foreclosed real estate comprises real properties acquired in partial or full satisfaction of loans. These properties are carried as other assets at the lower of cost or fair value less estimated costs to sell the properties. When the property is acquired through foreclosure, any excess of the related loan balance over the fair value less expected selling expenses, is charged against the Allowance. Subsequent declines in value or losses and gains upon sale, if any, are recognized in the Consolidated Statements of Operations.
Mortgage Servicing Rights The Company sells most of the one-to-four family residential real estate loans that it originates. Historically, these were primarily sold to the Federal Home Loan Mortgage Corporation (FHLMC), a U.S. government-sponsored enterprise (GSE). Gains recorded on the sale of the loans included the right to service the loans on behalf of FHLMC, a right that was retained by the Company, and that resulted in an originated mortgage servicing rights (OMSR) asset. The resulting OMSR asset was amortized as a charge against mortgage banking income in proportion to the principal amortization of the underlying serviced loans and as the actual servicing fee was collected.
During 2007, the Company sold the majority of its OMSR portfolio. The Company now sells most of the mortgage loans that it originates to a third-party mortgage loan processor and servicer and does not retain the OMSR.
Loan Securitization and Sales of Receivables The Company has periodically sold certain indirect automobile loans in securitization transactions in exchange for cash and certain retained residual interests.
During 2007, the outstanding balances of the underlying loans fell to a level where the cost of servicing the loans became burdensome in relation to the benefits of servicing. As a result, the Company exercised its option to repurchase the loans from the securitization trust. The repurchased loans were recorded at fair value, and the
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related retained residual interests were written off. As of December 31, 2009, the balance of repurchased loans included on the Companys Consolidated Balance Sheet was $1 million.
Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized by a reduction to the carrying amount of the asset, thus establishing a new cost basis, with an offsetting charge to expense.
Trust and Managed Assets Assets that are held by subsidiaries in a fiduciary or agency capacity are not included in the consolidated financial statements as they are not assets of the Company. The total assets either administered or managed by the Company at both December 31, 2009 and 2008 were $2.0 billion.
Derivative Financial Instruments and Hedging Activities The Company periodically uses certain financial instruments, called derivatives, to help manage (the Hedge) its risk or exposure to changes in interest rates and in conjunction with its mortgage banking operations. The types of derivatives used most often are interest rate swaps (the Interest Rate Derivatives), mortgage loan commitments and forward contracts. Interest Rate Derivatives are contracts with a third party (the Counter-party) to exchange interest payment streams based upon an assumed principal amount (the Notional Principal Amount). The Notional Principal Amount is not advanced to/from the Counter-party. It is used only as a reference point to calculate the exchange of interest payment streams.
The Company has used Interest Rate Derivatives to convert fixed-rate assets and liabilities (the Hedged Items) to floating-rate assets or liabilities. This is typically done when a fixed-rate liability has been incurred to fund a variable-rate loan or investment or when a commercial customer requires a long-term fixed-rate loan. The Interest Rate Derivative has the effect of matching the interest rate risk on the funding with the interest rate risk on the loans or investment or of eliminating the long-term interest rate risk, respectively. These types of Hedges are considered fair value Hedges. Interest rate swaps have also been used by the Company to convert assets and liabilities with variable-rate cash flows (the Hedged Items) to assets and liabilities with fixed-rate cash flows. Under this arrangement, the Company receives payments from or makes payments to the Counter-party at a specified floating-rate index that is applied to the Notional Principal Amount. This periodic receipt or payment essentially offsets floating-rate interest payments that the Company makes to its depositors or lenders or receives from its loan customers. In exchange for the receipts from or payments to the Counter-party, the Company makes payments to or receives a payment from the Counter-party at a specified fixed-rate that is applied to the Notional Principal Amount. Thus, what was a floating rate obligation or a floating rate asset before entering into the derivative arrangement is transformed into a fixed rate obligation or asset. These types of Hedges are considered cash flow Hedges.
All derivatives are recognized at fair value in the Consolidated Balance Sheets. Changes in fair value for derivatives that do not qualify for hedge accounting as defined by accounting principles generally accepted in the United States of America are recognized in the Consolidated Statements of Operations as they arise. If the derivative qualifies for hedge accounting, depending on the nature of the Hedge, changes in the fair value of the derivative are either offset in the Statements of Operations or recorded as a component of other comprehensive income (OCI) in the Consolidated Statements of Stockholders Equity. If the derivative is designated as a fair value Hedge, the changes in the fair value of the derivative net of the changes in fair value of the Hedged item attributable to the Hedged risk are recognized in the Statements of Operations. To the extent that fair value Hedges are highly effective, changes in the fair value of the derivatives will largely be offset by changes in the fair values of the Hedged items. If the derivative is designated as a cash flow Hedge, changes in the fair value due to the passage of time (the Time Value) are excluded from the assessment of Hedge effectiveness and therefore flow through the Statements of Operations for each period. The effective portion of the remaining changes in the fair value of the derivative (the Intrinsic Value) are recorded in OCI and are subsequently recognized in the Statements of Operations when the Hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow Hedges are recognized in the Statements of Operations. Hedge ineffectiveness is caused when the change in expected future cash flows or fair value of a Hedged item does not
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exactly offset the change in the future expected cash flows or fair value of the derivative instrument, and is generally due to differences in the interest rate indices or interest rate reset dates.
Also considered derivatives are one-to-four family residential mortgage loan commitments (the Commitments) and forward mortgage loan sales (the Forward Contracts) collectively (the Mortgage Loan Derivatives) that are reported at fair value on the Consolidated Balance Sheets. Changes in the fair value of the Mortgage Loan Derivatives are recognized in the Consolidated Statements of Operations.
The method that the Company uses to assess whether or not a Hedge is expected to be highly effective in achieving offsetting changes in cash flows or fair values of the risk that is being hedged (the Prospective Considerations) and the method that it uses to determine that the Hedge has been highly effective in achieving those offsets (the Retrospective Evaluations) are defined and documented at the inception of each Hedge and are consistently applied, on a quarterly basis, throughout the Hedge term in order to measure and record Hedge ineffectiveness. Hedges that are similar in nature are assessed in a similar manner. Hedge ineffectiveness is recognized in earnings for the period.
Fees paid or received on derivative financial contracts and gains or losses on sales or terminations of derivative contracts are amortized over their contractual life as a component of the interest reported on the asset or liability Hedged. See Note 8 for additional information.
Stock-Based Employee Compensation Plans The Company has stock-based employee compensation plans, which are described more fully in Note 10.
Legal and Other Contingencies The Company recognizes as an expense, legal and other contingencies when, based upon available information, it is probable that a liability has been incurred and the amount or range of amounts can be reasonably estimated. See Note 12 for additional information.
Income Taxes Deferred taxes are provided on the asset/liability method whereby net operating losses, tax credit carryforwards, and deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. See Note 13 for additional information.
Equity Stock dividends were issued during 2008 and were recorded by transferring the fair value, as of the dividend payable date, of the stock issued from retained earnings to treasury stock and additional paid in capital. Shares issued for payment of the dividend were issued from the Companys treasury stock. Fractional share amounts were paid in cash with a reduction in retained earnings. Treasury stock is carried at cost.
Dividend Restrictions Banking regulations require maintaining certain capital levels that restrict the amount of dividends that can be paid by the Bank to the holding company or by the holding company to shareholders.
Earnings Per Share Basic earnings per share is based on dividing net income or loss by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur if stock options granted pursuant to incentive stock option plans were exercised or converted into common stock, based on the treasury stock method, and any shares contingently issuable, that then shared in the earnings of the Company. In computing diluted EPS, only potential common shares that are dilutive those that reduce earnings per share or increase loss per share are included. Exercise of options is not assumed if the result would be antidilutive. See Note 14 for additional information.
Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
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particular items. Changes in assumptions or in market conditions could significantly affect the estimates. See Note 9 for additional information.
Segment Information The Company discloses operating segments based on the management approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Companys reportable segments. See Note 15 for additional information.
New Accounting Standards
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principals In June 2009, accounting standards were revised to establish the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents were superseded. The Company adopted the Codification for the third quarter of 2009, and accordingly its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and all subsequent filings will reference the Codification as the sole source of authoritative literature.
Transfer of Financial Assets On June 9, 2009, accounting standards were amended to clarify when a transferor has surrendered control over transferred financial assets and thus is entitled to account for the transfer as a sale. The amendments require a transferor to evaluate its continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. The amendments limit the circumstances in which the transfer of a financial asset, or portion of a financial asset, may be treated as a sale. The amendments also establish specific conditions for reporting a transfer of a portion of a financial asset as a sale (i.e., a participating interest). If the transfer does not meet those conditions, a transferor should not account for the transfer as a sale. This amendment most commonly affects when a loan participation may be treated as a sale by the transferor. The amendments require that a transferor recognize and initially measure at fair value all assets obtained (including a transferors beneficial interest) and liabilities incurred as a result of a transfer of financial assets that are accounted for as a sale. The amendments also expand disclosure requirements. The amendments are effective for annual and interim periods beginning after November 15, 2009 and for transfers occurring on or after the effective date. The Company has not yet evaluated this standard, but does not expect that it will have a material impact on its Consolidated Balance Sheets or Statements of Operations.
Subsequent Events On May 28, 2009, accounting standards were revised to set forth general standards for potential recognition or disclosure of events that occur after the balance sheet date but before financial statements are issued, or are available to be issued. The adoption of these amendments in second quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Fair Value Measurements In April 2009, accounting standards were amended to provide additional guidance for determining the fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly and also provides guidance for determining whether a transaction is orderly. The amendments must be applied prospectively and were effective for interim and annual reporting periods ending after June 15, 2009. Early adoption was permitted for periods ending after March 15, 2009. Adoption of the amendments in first quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Other-Than-Temporary Impairment In April 2009, accounting standards were revised to provide expanded guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities
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classified as available for sale or held to maturity. In addition, the amendments require enhanced disclosures concerning such impairment for both debt and equity securities. The amendments were effective for interim and annual reporting periods ending after June 15, 2009. Early adoption was permitted for periods ending after March 15, 2009. Adoption of the amendments in first quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Fair Value Disclosure In April 2009, accounting standards were amended to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. The amendments were effective for interim reporting periods ending after June 15, 2009. Adoption of these standards in second quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
Minority Interests In December 2007, accounting standards were amended to require non-controlling minority interests be recorded as a separate component of equity and that net income attributable to minority interests be clearly identified on the Statement of Income. The amendments were effective for fiscal years and interim periods beginning on or after December 15, 2008, and were required to be applied prospectively, except for the presentation and disclosure requirements. Adoption of the amendments in first quarter 2009 did not have a material impact on the Consolidated Balance Sheets or Statements of Operations.
Derivative Instruments and Hedging Activities Disclosure In 2008, accounting standards were amended to provide enhanced disclosures to improve the transparency of financial reporting. The amendments were effective for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. Adoption of the amendments in the first quarter 2009 did not have a material impact on the Companys Consolidated Balance Sheets or Statements of Operations.
NOTE 2 MERGERS, ACQUISITIONS AND DISPOSITIONS
Merger:
Effective December 31, 2008, AMCORE Investment Group, N.A. (the Investment Group), a nationally chartered non-depository bank, was merged into AMCORE Bank, N.A. (Bank). The Investment group operates as a separate business segment of the Bank and provides its clients with wealth management services, which include trust services, estate administration and financial planning. The Investment Group also provides employee benefit plan administration and recordkeeping services. Also effective December 31, 2008, AMCORE Investment Services, Inc., formerly a subsidiary of the Investment Group until its merger into the Bank on December 31, 2008, became a wholly-owned subsidiary of the Bank.
Dispositions:
During 2009, the Company sold four rural Wisconsin branches, located in Argyle, Belleville, Monroe, and New Glarus, in two separate transactions (the Wisconsin Branch Sales). The transactions resulted in $1.8 million pre-tax gains, net of associated costs, during the fourth quarter. The Wisconsin Branch Sales included the transfer of $87 million in loans and $166 million in deposits.
The Company entered into a definitive agreement on December 31, 2009 to sell 12 branches and two stand-alone drive-up facilities located in the Central Illinois cities of Dixon, Freeport, Mendota, Oregon, Peru, Princeton, Rock Falls, and Sterling (the Illinois Branch Sale). The transaction includes approximately $483 million in loans, $540 million in deposits and sweep accounts, up to $400 million in trust and brokerage account relationships, as well as the branch facilities, related fixed assets and leases. In connection with the sale, the Bank will receive a 1.5% deposit premium and a $1.5 million trust account premium. The transaction is subject to customary closing conditions and is expected to close during the first quarter of 2010. The Company expects to record a gain on the transaction.
Also, in fourth quarter 2009, the Company sold $136 million in non-strategic, non-relationship indirect automobile loans.
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NOTE 3 SECURITIES
A summary of information for investment securities, categorized by security type, at December 31, 2009, 2008 and 2007 follows. Fair values are determined pursuant to current accounting standards. See Note 9 for additional information.
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||
(in thousands) | |||||||||||||
December 31, 2009 |
|||||||||||||
Securities Available for Sale: |
|||||||||||||
U.S. Treasury |
$ | 10,493 | $ | | $ | (3 | ) | $ | 10,490 | ||||
U.S. Government sponsored enterprises (GSEs) (1) |
8,773 | 211 | | 8,984 | |||||||||
Mortgage-backed securities (2) |
378,596 | 1,885 | (2,475 | ) | 378,006 | ||||||||
State and political subdivisions |
17,052 | 183 | (114 | ) | 17,121 | ||||||||
Corporate obligations and other (3) |
77,982 | 9 | (10,149 | ) | 67,842 | ||||||||
Total Securities Available for Sale |
$ | 492,896 | $ | 2,288 | $ | (12,741 | ) | $ | 482,443 | ||||
December 31, 2008 |
|||||||||||||
Securities Available for Sale: |
|||||||||||||
U.S. Treasury |
$ | 75,000 | $ | 750 | $ | | $ | 75,750 | |||||
U.S. Government sponsored enterprises (GSEs) (1) |
52,527 | 1,518 | (17 | ) | 54,028 | ||||||||
Mortgage-backed securities (2) |
495,936 | 7,407 | (347 | ) | 502,996 | ||||||||
State and political subdivisions |
136,032 | 3,097 | (550 | ) | 138,579 | ||||||||
Corporate obligations and other (3) |
111,653 | | (24,788 | ) | 86,865 | ||||||||
Total Securities Available for Sale |
$ | 871,148 | $ | 12,772 | $ | (25,702 | ) | $ | 858,218 | ||||
December 31, 2007 |
|||||||||||||
Securities Available for Sale: |
|||||||||||||
U.S. Government sponsored enterprises (GSEs) (1) |
$ | 67,055 | $ | 86 | $ | (374 | ) | $ | 66,767 | ||||
Mortgage-backed securities (2) |
538,330 | 1,028 | (5,015 | ) | 534,343 | ||||||||
State and political subdivisions |
118,903 | 869 | (452 | ) | 119,320 | ||||||||
Corporate obligations and other (3) |
123,781 | 155 | (1,570 | ) | 122,366 | ||||||||
Total Securities Available for Sale |
$ | 848,069 | $ | 2,138 | $ | (7,411 | ) | $ | 842,796 | ||||
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During 2009, the Company adopted amendments to accounting standards relating to determining the fair value of financial assets and the recognition and measurement of other than temporary impairment of debt securities. See Note 1 for additional information. A summary of unrealized loss information for investment securities, categorized by security type, was as follows:
Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||
Fair Value | Unrealized Losses (4) |
Fair Value | Unrealized Losses (5) |
Fair Value | Unrealized Losses |
||||||||||||||||
(in thousands) | |||||||||||||||||||||
December 31, 2009 |
|||||||||||||||||||||
Securities Available for Sale: |
|||||||||||||||||||||
U.S. Treasury |
$ | 10,490 | $ | (3 | ) | $ | | $ | | $ | 10,490 | $ | (3 | ) | |||||||
Mortgage-backed securities |
237,475 | (2,475 | ) | | | 237,475 | (2,475 | ) | |||||||||||||
State and political subdivisions |
4,462 | (54 | ) | 1,019 | (60 | ) | 5,481 | (114 | ) | ||||||||||||
Corporate obligations and other |
621 | (22 | ) | 40,446 | (10,127 | ) | 41,067 | (10,149 | ) | ||||||||||||
Total Unrealized Losses on Securities Available for Sale |
$ | 253,048 | $ | (2,554 | ) | $ | 41,465 | $ | (10,187 | ) | $ | 294,513 | $ | (12,741 | ) | ||||||
December 31, 2008 |
|||||||||||||||||||||
Securities Available for Sale: |
|||||||||||||||||||||
U.S. Government sponsored enterprises (GSEs) |
$ | | $ | | $ | 4,614 | $ | (17 | ) | $ | 4,614 | $ | (17 | ) | |||||||
Mortgage-backed securities |
27,767 | (55 | ) | 46,204 | (292 | ) | 73,971 | (347 | ) | ||||||||||||
State and political subdivisions |
17,985 | (474 | ) | 2,347 | (76 | ) | 20,332 | (550 | ) | ||||||||||||
Corporate obligations and other |
29,072 | (1,679 | ) | 30,916 | (23,109 | ) | 59,988 | (24,788 | ) | ||||||||||||
Total Unrealized Losses on Securities Available for Sale |
$ | 74,824 | $ | (2,208 | ) | $ | 84,081 | $ | (23,494 | ) | $ | 158,905 | $ | (25,702 | ) | ||||||
December 31, 2007 |
|||||||||||||||||||||
Securities Available for Sale: |
|||||||||||||||||||||
U.S. Government sponsored enterprises (GSEs) |
$ | 21,448 | $ | (40 | ) | $ | 29,966 | $ | (334 | ) | $ | 51,414 | $ | (374 | ) | ||||||
Mortgage-backed securities |
107,229 | (656 | ) | 241,996 | (4,359 | ) | 349,225 | (5,015 | ) | ||||||||||||
State and political subdivisions |
19,342 | (255 | ) | 21,861 | (197 | ) | 41,203 | (452 | ) | ||||||||||||
Corporate obligations and other |
71,208 | (1,570 | ) | 1,178 | | 72,386 | (1,570 | ) | |||||||||||||
Total Unrealized Losses on Securities Available for Sale |
$ | 219,227 | $ | (2,521 | ) | $ | 295,001 | $ | (4,890 | ) | $ | 514,228 | $ | (7,411 | ) | ||||||
(1) | Includes the following U.S. Government agency obligations: $9 million of Small Business Administration at December 31, 2009, $44 million at December 31, 2008, and none at December 31, 2007. |
(2) | Includes the following U.S. Government agency obligations: $355 million of Government National Mortgage Association at December 31, 2009, $43 million at December 31, 2008 and $17 million at December 31, 2007. Also included were $3 million of United States Department of Veterans Affairs at December 31, 2008 and $4 million at December 31, 2007. |
(3) | Includes the following investments: $5 million in stock of the Federal Reserve Bank (FRB) and $20 million in stock of the Federal Home Loan Bank (FHLB) at December 31, 2009 and 2008. These amounts were $4 million and $20 million, respectively, at December 31, 2007. These investments are recorded at historical cost with income recorded when dividends are declared. A portion of the FRB and FHLB investments are restricted as to sale because they are held to satisfy membership requirements. |
(4) | As of December 31, 2009, the Company does not intend to sell the securities and does not believe that it is more likely than not that it will be required to sell the securities before their anticipated recovery. The total $3 million of unrealized losses less than 12 months is related to 29 securities, 17 of which are mortgage- |
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backed securities issued by investment grade GSEs. None of these unrealized losses were individually significant to the total, the largest being $675,000. The unrealized losses were caused by market interest rate increases since the security was originally acquired, rather than due to credit or other causes. |
(5) | As of December 31, 2009, the Company does not intend to sell the securities and does not believe that it is more likely than not that it will be required to sell the securities before their anticipated recovery. The total $10 million of unrealized losses 12 months or longer is related to 17 securities. Included in the $10 million of unrealized losses is $9 million related to seven private issue asset backed obligations, five of which are investment grade; and $1 million related to six private issue mortgage related collateral mortgage obligations, all of which are investment grade; the largest unrealized loss being $1.6 million. These bonds have sufficient credit enhancement and the Company expects recovery of the entire cost basis of the securities. The unrealized losses were caused by changes in interest rate and credit spreads since the security was originally acquired, and not necessarily principal recoverability. |
A summary of realized gain and loss information follows for the years ended December 31:
2009 | 2008 | 2007 | |||||||||
(in thousands) | |||||||||||
Realized Gains |
$ | 23,586 | $ | 2,018 | $ | | |||||
Realized Losses |
(197 | ) | | (5,920 | ) | ||||||
$ | 23,389 | $ | 2,018 | $ | (5,920 | ) | |||||
The $24 million security gains for 2009 related to the sale of $870 million of bonds in order to enhance regulatory capital treatment, improve liquidity and capture premiums before the underlying mortgages prepaid at par. The $0.2 million security losses for 2009 related to specific bonds that were at risk for additional loss in value due to potential federal bankruptcy law changes that were being considered. The bonds in the Companys portfolio that might have been affected if the legislation passed were sold to prevent further declines in value.
The amortized cost and fair value of securities available for sale as of December 31, 2009, by contractual maturity are shown below. Mortgage-backed and asset-backed security maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. Therefore, these securities are not included within the maturity categories.
Available for Sale | ||||||
Amortized Cost |
Fair Value | |||||
(in thousands) | ||||||
Due in one year or less |
$ | 12,261 | $ | 12,266 | ||
Due after one year through five years |
2,722 | 2,778 | ||||
Due after five years through ten years |
5,699 | 5,765 | ||||
Due after ten years |
32,705 | 32,615 | ||||
Mortgage-backed securities (GSEs and corporate) |
439,509 | 429,019 | ||||
Total Securities |
$ | 492,896 | $ | 482,443 | ||
At December 31, 2009, and 2008, securities with a fair value of $203 million and $637 million, respectively, were pledged to secure public deposits, FRB and FHLB borrowings, securities under agreements to repurchase, derivative credit exposure, certain settlement and trade credit obligations, and for other purposes required by law.
The above schedules include amortized cost and fair value of $25 million in equity investments at December 31, 2009, 2008 and 2007. These are included in the corporate obligations and other and the due after ten years classifications above.
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NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio at December 31, 2009 and 2008 was as follows:
2009 | 2008 | |||||||
(in thousands) | ||||||||
Commercial, financial and agricultural |
$ | 345,645 | $ | 771,679 | ||||
Real estate-commercial |
1,222,018 | 1,931,962 | ||||||
Real estate-construction |
139,532 | 267,061 | ||||||
Real estate-residential |
125,880 | 182,932 | ||||||
Home equity lines and loans |
190,579 | 254,945 | ||||||
Installment and consumer |
128,903 | 377,450 | ||||||
Gross loans |
$ | 2,152,557 | $ | 3,786,029 | ||||
Allowance for loan losses |
(145,022 | ) | (136,412 | ) | ||||
Net Loans |
$ | 2,007,535 | $ | 3,649,617 | ||||
An analysis of the allowance for loan losses for the periods ended December 31, 2009, 2008 and 2007 is presented below:
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Balance at beginning of year |
$ | 136,412 | $ | 53,140 | $ | 40,913 | ||||||
Provision charged to expense |
190,157 | 202,716 | 29,087 | |||||||||
Loans charged off |
(184,926 | ) | (105,421 | ) | (21,154 | ) | ||||||
Recoveries on loans previously charged off Reduction due to sale of loans |
|
6,492 (3,113 |
) |
|
5,780 (19,803 |
) |
|
4,294 |
| |||
Balance at end of period |
$ | 145,022 | $ | 136,412 | $ | 53,140 | ||||||
In fourth quarter 2009, the Company announced the Illinois Branch Sale. In connection with the Illinois Branch Sale, which is expected to close in March 2010, the Company reclassified $483 million of loans to held-for-sale. Also, in fourth quarter 2009, the Company sold $136 million in non-strategic, non-relationship indirect automobile loans. An additional $8 million of non-performing loans were reclassified to held-or-sale at December 31, 2009. Also in 2009, $87 million in loans were sold in connection with the Wisconsin Branch Sales.
In third quarter 2008, the Bank sold $77 million of primarily non-performing and under-performing loans to a third party (the Loan Sale). The transaction removed further exposure from these loans, and added incremental liquidity to the Bank.
Commercial, financial, and agricultural loans were $346 million at December 31, 2009, and comprised 16% of gross loans, of which 13.65% were non-performing. Net charge-offs of commercial loans in 2009 and 2008 were 4.93% and 1.91%, respectively, of the average balance of the category.
Commercial real estate and construction loans were $1.4 billion at December 31, 2009, comprising 63% of gross loans, of which 21.31% were classified as non-performing. Net charge-offs of construction and commercial real estate loans during 2009 and 2008 were 6.73% and 3.30%, respectively, of the average balance of the category.
The above commercial loan categories included $382 million in construction, land development loans and other land loans and $495 million of loans to lessors of non-residential buildings, which were 18% and 23% of total loans, respectively. There were no other loan concentrations within these categories that exceeded 10% of total loans.
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Residential real estate loans were $126 million at December 31, 2009, and comprised 6% of gross loans, of which 7.79% were non-performing. Net charge-offs of residential real estate during 2009 and 2008 were 0.67% and 0.15% respectively, of the average balance in this category. The Bank does not engage in sub-prime lending.
Home equity lines and loans were $191 million at December 31, 2009, and comprised 9% of gross loans, of which 0.74% were non-performing. Net charge-offs of home equity lines and loans during 2009 and 2008 were 0.67% and 1.51%, respectively, of the average balance in this category.
Installment and consumer loans were $129 million at December 31, 2009, and comprised 6% of gross loans, of which 1.09% were non-performing. Net charge-offs of consumer loans during 2009 and 2008 were 3.60% and 1.61%, respectively, of the average balance of the category. Consumer loans are comprised primarily of in-market indirect auto loans and direct installment loans. Indirect auto loans totaled $97 million at December 31, 2009. Both direct loans and indirect auto loans are approved and funded through a centralized department utilizing the same credit scoring system to provide a standard methodology for the extension of consumer credit.
Contained within the concentrations described above, the Company has $893 million of interest-only loans, of which $468 million are included in the construction and commercial real estate loan category, $252 million are included in the commercial, financial, and agricultural loan category, and $166 million are in home equity loans and lines of credit. The Company does not have any negative amortization loans, and does not have material concentrations in relation to its total portfolio of high loan-to-value loans, option adjustable-rate mortgage loans or loans that initially have below market rates that significantly increase after the initial period. The Company does not ordinarily permit monthly payments that are less than the interest that is accrued on the loan other than in a troubled debt restructuring or workout situation.
For purposes of impairment testing, non-accrual loans greater than $0.5 million (on a relationship basis) were evaluated. The fair value of collateral method (less estimated selling costs) was the primary method used to measure for impairment for loans greater than the $0.5 million threshold. Non-accrual loans equal to or less than the $0.5 million threshold were collectively evaluated as homogenous pools by loan type and risk grade within each loan type. The required valuation allowance is included in the Allowance in the Consolidated Balance Sheets. At December 31, the Companys recorded investments in impaired loans and the related valuation allowance consisted of the following:
2009 | 2008 | |||||||||||||
Recorded Investment |
Valuation Allowance |
Recorded Investment |
Valuation Allowance | |||||||||||
(in thousands) | ||||||||||||||
Total non-performing loans (including loans held for sale) |
$ | 357,751 | $ | 313,065 | ||||||||||
Less: non-performing loans held for sale |
(7,758 | ) | | |||||||||||
Total non-performing loans (excluding loans held for sale) |
$ | 349,993 | $ | 313,065 | ||||||||||
Less: loans 90 days or more past due and still accruing |
(3,992 | ) | (8,889 | ) | ||||||||||
troubled debt restructurings not evaluated (below threshold) |
(12,332 | ) | | |||||||||||
other loans excluded from individual evaluation (below threshold) |
(38,550 | ) | (15,957 | ) | ||||||||||
Impaired Loans Evaluated |
$ | 295,119 | $ | 288,219 | ||||||||||
Valuation allowance required |
$ | 172,498 | $ | 25,823 | $ | 211,427 | $ | 19,107 | ||||||
No valuation allowance required (1) |
122,621 | | 76,792 | | ||||||||||
Impaired Loans Evaluated |
$ | 295,119 | $ | 25,823 | $ | 288,219 | $ | 19,107 | ||||||
Troubled debt restructurings evaluated |
$ | 10,304 | $ | | $ | | $ | | ||||||
Other impaired loans evaluated |
284,815 | 25,823 | 288,219 | 19,107 | ||||||||||
Impaired Loans Evaluated (2) |
$ | 295,119 | $ | 25,823 | $ | 288,219 | $ | 19,107 | ||||||
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(1) | Includes loans that have been charged down to impaired value. |
(2) | The recorded investment in impaired loans is net of cash interest and principal payments received after being placed on non-accrual as well as previous write-downs. |
The average recorded investment in evaluated impaired loans for the years ended December 31, 2009 and 2008 amounted to $346 million and $324 million, respectively.
Interest payments received on nonaccrual loans are recorded as reductions of principal. Interest on restructured loans is recognized on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms and has had a minimum six month payment performance under the modified terms. Interest income recognized on other impaired loans evaluated amounted to $3.3 million in 2009, $10.9 million in 2008, and $0.7 million in 2007. The gross interest that would have been recognized had such loans been performing in accordance with their original terms would have been $16.3 million in 2009, $23.5 million in 2008, and $3.3 million in 2007.
Non-performing assets as of December 31, was as follows:
2009 | 2008 | |||||
(in thousands) | ||||||
Impaired Loans Evaluated (excluding troubled debt restructurings): |
||||||
Non-accrual: |
||||||
Commercial, financial and agricultural |
$ | 31,218 | $ | 47,392 | ||
Real estate |
253,597 | 240,827 | ||||
Total impaired loans evaluated (excluding troubled debt restructurings): |
$ | 284,815 | $ | 288,219 | ||
Loans excluded from individual evaluation (3) |
38,550 | 15,957 | ||||
Total non-accrual loans (excluding troubled debt restructurings) |
$ | 323,365 | $ | 304,176 | ||
Troubled debt restructurings not evaluated (below threshold) |
12,332 | | ||||
Troubled debt restructurings evaluated |
10,304 | | ||||
Total non-accrual loans (including troubled debt restructurings) |
$ | 346,001 | $ | 304,176 | ||
Loans 90 days or more past due and still accruing |
3,992 | 8,889 | ||||
Total non-performing loans (excluding loans held for sale) |
$ | 349,993 | $ | 313,065 | ||
Foreclosed real estate |
$ | 30,629 | $ | 16,899 | ||
Other foreclosed assets |
252 | 224 | ||||
Total foreclosed assets |
$ | 30,881 | $ | 17,123 | ||
Total Non-performing Assets |
$ | 380,874 | $ | 330,188 | ||
(3) | These loans are considered impaired but are not individually measured. |
Foreclosed real estate is principally comprised of commercial and residential properties acquired in partial or total satisfaction of problem loans. Activity relating to foreclosed real estate for the years ended December 31 consisted of the following:
2009 | 2008 | |||||||
(in thousands) | ||||||||
Foreclosed real estate: |
||||||||
Beginning Balance |
$ | 16,899 | $ | 4,108 | ||||
Additions, net of initial write-downs |
45,510 | 18,997 | ||||||
Dispositions |
(27,508 | ) | (6,291 | ) | ||||
Valuation Adjustments |
(4,272 | ) | 85 | |||||
Ending Balance |
$ | 30,629 | $ | 16,899 | ||||
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Upon foreclosure, any excess of the related loan balance over the fair value less expected selling expenses is charged against the Allowance. Subsequent declines in value are charged to foreclosed real estate expense in the Consolidated Statements of Operations. The amount of cumulative losses recorded on the Companys foreclosed real estate at December 31, 2009 was approximately 10.6% of the unpaid principal balance of the foreclosed loans.
The Bank has had, and is expected to have in the future, banking transactions with directors, executive officers, their immediate families and affiliated companies in which they are a principal stockholder (commonly referred to as related parties). These transactions were made in the ordinary course of of business on substantially the same terms as comparable transactions with other borrowers.
Related party loan transactions during 2009, 2008 and 2007 were as follows:
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Balance at beginning of year |
$ | 10,637 | $ | 11,544 | $ | 13,200 | ||||||
New loans |
5,047 | 13,963 | 6,278 | |||||||||
Repayments |
(10,733 | ) | (14,870 | ) | (7,934 | ) | ||||||
Balance at end of year |
$ | 4,951 | $ | 10,637 | $ | 11,544 | ||||||
NOTE 5 PREMISES, EQUIPMENT AND LEASE COMMITMENTS
A summary of premises and equipment at December 31, 2009 and 2008 follows:
2009 | 2008 | |||||||
(in thousands) | ||||||||
Land |
$ | 23,782 | $ | 26,253 | ||||
Buildings and improvements |
59,817 | 75,256 | ||||||
Furniture and equipment |
52,739 | 57,369 | ||||||
Leasehold improvements |
20,130 | 13,931 | ||||||
Construction in progress |
17 | 4,939 | ||||||
Total premises and equipment |
$ | 156,485 | $ | 177,748 | ||||
Accumulated depreciation and amortization |
(83,435 | ) | (85,793 | ) | ||||
Premises and Equipment, net |
$ | 73,050 | $ | 91,955 | ||||
For financial reporting purposes, the Company utilizes the straight-line depreciation method with salvage values employed when applicable. The depreciation term assigned to a specific asset will approximate the estimated useful life of the asset or in the case of capital leases and leasehold improvements the lesser of the non-cancellable lease term or the estimated useful life.
Certain branch locations, ATM equipment, and office equipment are leased under non-cancellable leases. There were 31 branch or office location leases, one of which is classified as a capital lease, and 13 equipment leases, of which one is classified as a capital lease. The leases expire at various dates through the year 2038; however, most of the Companys leases contain renewal options for multi-year periods at fixed or calculable rents. Some lease rents periodically adjust for changes in the consumer or other price indices. Most leases are periodically adjusted for changes in common area maintenance/operating expenses (CAM) or real estate taxes, or require the Company to pay real estate taxes directly to the taxing authority.
During 2008, the Company identified five under-utilized, high-cost facilities that could be consolidated with other nearby locations (the Facilities Consolidation). Two office buildings and one small older branch owned
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by the Company were reclassified as held for sale, with one property sold during 2008 at an amount equal to its book value, as recorded on the Consolidated Balance Sheets. The remaining two owned facilities continue to be held for sale and are periodically reviewed for additional impairment. There were also two leased facilities that were vacated during 2008, with customers reassigned to nearby branch locations. A $1.7 million non-cash impairment charge was recorded in connection with the Facilities Consolidation.
During 2009, the Company identified an additional four under-utilized branch facilities that could be consolidated with other nearby facilities. These were two leased branch facilities, which were closed with no early termination costs recorded, and two branch buildings. One of the branch buildings was sold during 2009 at a gain of $128,000. The other remains classified as held for sale at an amount equal to its book value.
Also in 2009, the Company entered into agreements to sell twelve branch locations in Illinois along with two drive-up facilities. The Illinois Branch Sale premises were reclassified to held for sale at an amount equal to their book value, with no impairment charges recorded. The Illinois Branch Sale is expected to close during the first quarter, 2010.
Assets that have been reclassified as held for sale are included as other assets on the Companys Consolidated Balance Sheets.
The following summary reflects the future minimum lease rental payments required under operating and capital leases that, as of December 31, 2009, have remaining non-cancellable lease terms in excess of one year.
Years ending December 31, |
Operating Leases |
Capital Leases |
|||||
(in thousands) | |||||||
2010 |
$ | 4,354 | $ | 225 | |||
2011 |
4,148 | 231 | |||||
2012 |
3,696 | 226 | |||||
2013 |
3,513 | 183 | |||||
2014 |
3,537 | 183 | |||||
Thereafter |
47,817 | 1,207 | |||||
Total minimum lease payments |
$ | 67,065 | $ | 2,255 | |||
Less: Amount representing interest |
(1,124 | ) | |||||
Present value of net minimum lease payments |
$ | 1,131 | |||||
2009 | 2008 | 2007 | |||||||
(in thousands) | |||||||||
Rental expense charged to net occupancy expense |
$ | 4,805 | $ | 4,549 | $ | 3,489 | |||
The following is an analysis of the leased property and equipment recorded under capital leases:
Asset balances at December 31, |
||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Branch facilities buildings and improvements |
$ | 1,070 | $ | 1,070 | ||||
Sorters |
234 | 234 | ||||||
Less: Accumulated amortization |
(561 | ) | (460 | ) | ||||
Net capitalized leases |
$ | 743 | $ | 844 | ||||
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NOTE 6 SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31, 2009 and 2008:
2009 | 2008 | |||||
(in thousands) | ||||||
Federal Home Loan Bank borrowings |
$ | 419 | $ | 197,573 | ||
Securities sold under agreements to repurchase Customer |
31,084 | 125,046 | ||||
Securities sold under agreements to repurchase Wholesale |
| 40,000 | ||||
Federal funds purchased |
| 200 | ||||
U.S. Treasury tax and loan note accounts |
4,389 | 2,898 | ||||
Commercial paper and other short-term borrowings |
72 | 66 | ||||
Federal Reserve Bank Term Auction Facility |
| 50,000 | ||||
Senior Debt |
12,500 | 20,000 | ||||
Total Short-Term Borrowings |
$ | 48,464 | $ | 435,783 | ||
Additional details are as follows:
Federal Home Loan Bank borrowings
Average balance during the year |
$ | 57,743 | $ | 148,649 | ||||
Maximum month-end balance during the year |
$ | 172,223 | $ | 197,573 | ||||
Weighted average rate during the year |
3.59 | % | 5.04 | % | ||||
Weighted average rate at December 31 |
6.69 | % | 3.81 | % |
Securities sold under agreements to repurchase Customer
Average balance during the year |
$ | 104,807 | $ | 80,785 | ||||
Maximum month-end balance during the year |
$ | 124,002 | $ | 128,982 | ||||
Weighted average rate during the year |
0.64 | % | 1.86 | % | ||||
Weighted average rate at December 31 |
0.42 | % | 0.99 | % |
As of December 31, 2009, the Company had $12.5 million outstanding from a $20 million senior debt facility agreement originally scheduled to mature April 2010. The FRB Agreement and the Consent Order caused the Company to be in technical default of this facility, although the Company had been current with all its payments due under the facility. In July 2009, AMCORE received a waiver of the technical default, paid the facility down by $7.5 million, and the maturity of the remaining $12.5 million was extended to April 2011. At September 30, 2009, as a result of dropping below adequately capitalized at the consolidated level, the Company once again was in technical default under the facility. On December 18, 2009, the Company entered into an amendment with the lender, which modified the covenant relating to capitalization at the parent and bank level so that the Company returned to full compliance with the terms of its credit agreement.
In connection with the amendment the Company paid all accrued interest through the date of the amendment, and agreed to make monthly interest payments thereafter. The Company established a $1.1 million cash interest reserve account with the lender, equal to the anticipated interest payments due from the date of the amendment through the maturity of the facility in April 2011. A new technical default occurred as a result of the Banks leverage ratio remaining at significantly undercapitalized as of December 31, 2009. All payments remain current under the facility. Both parties continue to work cooperatively and the Company has not been notified of any acceleration of maturity. Nevertheless, as this remains a potential remedy of the creditor that has not been waived, and notwithstanding the April 2011 due date, the Company has classified the facility as short-term.
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NOTE 7 LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at December 31, 2009 and 2008:
2009 | 2008 | |||||
(in thousands) | ||||||
Federal Home Loan Bank borrowings |
$ | 126,571 | $ | 176,989 | ||
Securities sold under agreements to repurchase Wholesale |
| 100,000 | ||||
Trust Preferred borrowings |
51,547 | 51,547 | ||||
Subordinated Debentures |
50,000 | 50,000 | ||||
Capitalized lease obligations |
1,059 | 1,131 | ||||
Total Long-Term Borrowings |
$ | 229,177 | $ | 379,667 | ||
The Company periodically borrows from the FHLB, collateralized by mortgage-backed securities and eligible one-to-four family and multi-family real estate loans. The average stated maturity of these borrowings at December 31, 2009 is 2.79 years, with a weighted average borrowing rate of 4.40%. Certain FHLB borrowings have prepayment penalties, with none having a call or conversion feature associated with them. Mortgage-related assets with a carrying value of $360 million were held as collateral for FHLB borrowings at December 31, 2009. The decline in FHLB advances and repurchase agreements in 2009 reflect the impact of debt extinguishments. Prepayment fees and costs of $5.7 million in connection with these debt extinguishments were recorded in other operating expenses in the Consolidated Statements of Operations.
The Trust preferred borrowings consist of $50 million of preferred capital securities and $2 million of common capital securities which pay cumulative cash distributions quarterly at an annual rate of 6.45%. After June 6, 2012, the securities are redeemable at par until June 6, 2037 when redemption is mandatory. Prior redemption, at a premium, is permitted under certain circumstances such as changes in tax or regulatory capital rules. The proceeds of the capital securities were invested in junior subordinated debentures that represent all of the assets of the Trust (Capital Trust II). The Company fully and unconditionally guarantees the capital securities through the combined operation of the debentures and other related documents. The Companys obligations under the guarantee are unsecured and subordinate to senior and subordinated indebtedness of the Company. The $52 million of debentures the Company has bears interest at a rate of 6.45% with put features that mirror the capital security call features. Of the $52 million, $16 million qualifies as Tier 1 Capital and $34 million qualifies for Tier 2 Capital for consolidated regulatory capital purposes.
In first quarter 2009, the Company elected to defer regularly scheduled quarterly interest payments on the debentures. The terms of the debentures and trust indentures (the Indentures) allow for the Company to defer payment of interest on the securities at any time or from time to time up to 20 consecutive quarters provided no event of default (as defined in the Indentures) has occurred and is continuing. The Company is not in default with respect to the Indentures, and the deferral of interest does not constitute an event of default under the Indentures. While the Company defers the payment of interest, it will continue to accrue expense for interest owed at a compounded rate. Upon the expiration of the deferral, all accrued and unpaid interest is due and payable. During the deferral period, the Company may not declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock. The total estimated annual interest that would be payable on the debentures and the underlying debt securities, if not deferred, is approximately $3.3 million.
The Bank has two fixed/floating rate junior subordinate debentures of $35 million and $15 million, respectively, for a total of $50 million. The average stated maturity of these debentures at December 31, 2009 is 11.9 years, with a weighted average interest rate of 6.93%. The initial interest rate is fixed and the earliest call date is September 15, 2016. After the first call date, successive payments, if any, due thereafter bear a weighted average interest rate equal to three-month LIBOR plus 1.66%. The entire $50 million qualifies as Tier 2 Capital for the Bank for regulatory capital purposes while $31 million qualifies for the Company.
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Other long-term borrowings include a capital lease with a net carrying value of $1.0 million on a branch facility. The Company is amortizing the capitalized lease obligation and depreciating the facility over the remaining non-cancellable term of the original lease, which expires or renews in 2021.
The Company reclassifies long-term borrowings to short-term borrowings when the remaining maturity becomes less than one year. Scheduled reductions of long-term borrowings are as follows:
Total at December 31, 2009 | |||
(in thousands) | |||
2011 |
$ | 25,085 | |
2012 |
88 | ||
2013 |
101,624 | ||
2014 |
61 | ||
2015 |
71 | ||
Thereafter. |
102,248 | ||
Total Long-Term Borrowings |
$ | 229,177 | |
NOTE 8 DERIVATIVE INSTRUMENTS
The Company, through its treasury risk management and mortgage banking operations, is party to various derivative instruments that are used for asset and liability management needs. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions between the parties. The notional amount is the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the net settlement between the parties and influences the market value of the derivative contract. Derivatives are recorded at fair value on the Companys Consolidated Balance Sheets as assets or liabilities. See Note 9 Fair Value for additional fair value information and disclosures.
The primary risks managed by the use of derivatives are interest rate risk and price risk. The primary derivatives that the Company uses to manage these risks are interest rate swaps and mortgage forward sale contracts. Interest rate swaps are entered into to manage interest rate risk associated with the Companys fixed rate obligations, notably fixed-rate certificates of deposit (CDs). Interest rate swaps have also been entered into to manage the risk associated with changes in value of the Companys investment in COLI. The Company uses mortgage forward sales contracts to manage price risk on mortgage loan commitments that it enters into with the intent to sell once the commitments are closed loans. Mortgage loan commitments are also considered derivatives.
Pursuant to current accounting standards, interest rate swaps used to manage interest rate risk on fixed rate CDs have been designated as fair value hedges. Interest rate swaps used to manage COLI and mortgage forward sales contracts have not been designated as hedges. The Company has no cash flow hedges.
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The following table summarizes the notional amounts and estimated fair values of the Companys derivative instruments at December 31, 2009 and December 31, 2008. The Notional Principal Amount is not advanced to/from the Counter-party. It is used only as a reference point to calculate the exchange of interest payment streams and is not recorded on the Companys Consolidated Balance Sheets. All interest rate swaps were terminated during 2009.
Asset Derivatives | Liability Derivatives | |||||||||||||||
Notional Value |
Fair Value |
Balance Sheet Category |
Notional Value |
Fair Value |
Balance Sheet Category | |||||||||||
(in thousands) | ||||||||||||||||
December 31, 2009 |
||||||||||||||||
Non-designated derivative instruments |
||||||||||||||||
Forward sale contracts |
$ | 15,958 | $ | 279 | Other assets | |||||||||||
Mortgage loan commitments |
$ | 11,400 | $ | 201 | Other liabilities | |||||||||||
December 31, 2008 |
||||||||||||||||
Derivative instruments designated as fair value hedges |
||||||||||||||||
Interest rate swap CDs |
$ | 24,970 | $ | 317 | Other assets | |||||||||||
Non-designated derivative instruments |
||||||||||||||||
Interest rate swap COLI |
$ | 18,000 | $ | 1,289 | Other liabilities | |||||||||||
Mortgage loan commitments |
$ | 55,358 | $ | 423 | Other assets | |||||||||||
Forward sale contracts |
$ | 60,857 | $ | 644 | Other liabilities |
The Company was required to pledge assets with a fair value of $401,000 in collateral for the interest rate swaps at December 31, 2008. Collateral has not been netted against the fair value of the derivatives in the above table. There are no material contingent credit features on any of the Companys derivatives.
The following table details the interest rate swap derivative instruments, the average remaining maturities and the weighted-average interest rates paid and received by the Company at December 31, 2008. There were no interest rate swap derivative instruments outstanding at December 31, 2009:
Weighted-Average Rate |
|||||||||||||||
Notional Value |
Fair Value |
Years to Maturity |
Receive Rate |
Pay Rate |
|||||||||||
(in thousands) | |||||||||||||||
December 31, 2008 |
|||||||||||||||
Derivative instruments designated as fair value hedges |
|||||||||||||||
Receive fixed/pay variable swaps |
$ | 24,970 | $ | 317 | 1.7 | 4.50 | % | 4.28 | % | ||||||
Non-designated derivative instruments |
|||||||||||||||
Pay fixed/receive variable swaps |
$ | 18,000 | $ | (1,289 | ) | 2.3 | 4.82 | % | 5.09 | % |
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For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recorded in the Consolidated Statements of Operations as follows:
Amount of Gain or (Loss) Recognized in Income on Derivatives |
||||||||||||||
For the Years Ended December 31, | ||||||||||||||
Derivatives Designated as Fair Value Hedging Relationships |
Statements of Operations Classification |
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||||
Hedged loans |
Other non-interest income | $ | | $ | | $ | 939 | |||||||
Hedged deposits |
Other non-interest income | (173 | ) | (444 | ) | (1,105 | ) | |||||||
Interest rate swap agreements Loans |
Other non-interest income | | | (939 | ) | |||||||||
Interest rate swap agreements CDs |
Other non-interest income | 214 | 393 | 1,146 | ||||||||||
Total |
$ | 41 | $ | (51 | ) | $ | 41 | |||||||
NOTE 9 FAIR VALUE
Accounting standards establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standards describe three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. A quoted price in an active market provides the most reliable evidence of fair value.
Level 2: Other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs that reflect a reporting entitys own judgments about the assumptions that market participants would use in pricing an asset or liability.
Assets and liabilities measured at fair value on a recurring basis. The following table summarizes, by measurement hierarchy, the various assets and liabilities of the Company that are measured at fair value on a recurring basis.
Fair Value Hierarchy | ||||||||||||
December 31, 2009 |
Level 1 | Level 2 | Level 3 | |||||||||
(in thousands) | ||||||||||||
Assets | ||||||||||||
U.S. Treasury securities |
$ | 10,490 | $ | 10,490 | $ | | $ | | ||||
U.S. Government sponsored enterprises securities |
8,984 | | 8,984 | | ||||||||
Mortgage-backed securities |
378,006 | | 378,006 | | ||||||||
State and political subdivision securities |
17,121 | | 17,121 | | ||||||||
Corporate obligations and other securities |
42,057 | 28 | 22,233 | 19,796 | ||||||||
Forward sale loan commitments |
279 | | 279 | | ||||||||
Total assets |
$ | 456,937 | $ | 10,518 | $ | 426,623 | $ | 19,796 | ||||
Liabilities | ||||||||||||
Forward sale loan commitments |
$ | 201 | $ | | $ | 201 | $ | | ||||
Total liabilities |
$ | 201 | $ | | $ | 201 | $ | | ||||
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Fair Value Hierarchy | ||||||||||||
December 31, 2008 |
Level 1 | Level 2 | Level 3 | |||||||||
(in thousands) | ||||||||||||
Assets | ||||||||||||
U.S. Treasury securities |
$ | 75,750 | $ | 75,750 | $ | | $ | | ||||
U.S. Government sponsored enterprises securities |
54,028 | | 54,028 | | ||||||||
Mortgage-backed securities |
502,996 | | 502,996 | | ||||||||
State and political subdivision securities |
138,579 | | 138,579 | | ||||||||
Corporate obligations and other securities |
60,069 | 13 | 49,612 | 10,444 | ||||||||
Interest rate swap agreements |
317 | | 317 | | ||||||||
Forward sale loan commitments |
423 | | 423 | | ||||||||
Total assets |
$ | 832,162 | $ | 75,763 | $ | 745,955 | $ | 10,444 | ||||
Liabilities | ||||||||||||
Hedged Deposits |
$ | 25,320 | $ | | $ | 25,320 | $ | | ||||
Interest rate swap agreements |
1,289 | | 1,289 | | ||||||||
Forward sale loan commitments |
644 | | 644 | | ||||||||
Total liabilities |
$ | 27,253 | $ | | $ | 27,253 | $ | | ||||
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities (Level 2 inputs).
Securities classified as Level 3 are pools backed by trust preferred securities issued by banks, thrifts, and insurance companies. Previously, the Companys valuations for these securities were based on broker quotes. The market for these securities (Level 1) at December 31, 2009 was not active or orderly and markets for similar securities (Level 2) were also not active or orderly. The Company utilized a discounted cash flow valuation methodology (Level 3) throughout 2009, which involves an evaluation of the credit quality of the underlying collateral, cash flow structure and risk adjusted discount rates, with market or broker quotes for certain senior tranche asset backed securities.
The Companys derivative instruments consist of mortgage loan commitments, forward contracts and interest rate swaps that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).
The fair value of hedged deposits is based on internal pricing models using observable market inputs (Level 2) and constant credit and liability spreads. Credit spread is negligible as the deposits are FDIC insured.
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Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs. The following table reconciles the beginning and ending balances of the assets of the Company that are measured at fair value on a recurring basis using significant unobservable inputs. There currently are no liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.
Level 3 | |||||||||||||||||||||
For the year ended December 31, 2009 |
For the year ended December 31, 2008 |
||||||||||||||||||||
Total | Corporate Obligation and Other Securities |
Hedged Loans |
Total | Corporate Obligation and Other Securities |
Hedged Loans |
||||||||||||||||
(in thousands) | |||||||||||||||||||||
Balance at beginning of period |
$ | 10,444 | $ | 10,444 | $ | | $ | 54,745 | $ | 30,772 | $ | 23,973 | |||||||||
Total realized/unrealized gains (losses) |
|||||||||||||||||||||
Included in earnings |
| | | 580 | | 580 | |||||||||||||||
Included in other comprehensive loss |
9,352 | 9,352 | | (18,956 | ) | (18,956 | ) | | |||||||||||||
Purchases, issuances, (sales) and (settlements) |
| | | (1,372 | ) | (1,372 | ) | | |||||||||||||
Transfers out of Level 3 |
| | | (24,553 | ) | | (24,553 | ) | |||||||||||||
Balance at end of period |
$ | 19,796 | $ | 19,796 | $ | | $ | 10,444 | $ | 10,444 | $ | | |||||||||
There were no gains (losses) for the periods included in earnings attributable to the change in unrealized gains (losses) related to assets still held at December 31, 2009 or 2008, for all categories listed above. The transfer out of level 3 for 2008 relates to loans previously recorded at fair value because they were subject to qualified fair value hedges. During 2008, the derivatives associated with the hedged loans were terminated. As a result, hedge accounting that required the previously hedged loans to be recorded at fair value was discontinued and a new cost basis carrying value for the loans was established.
Gains and losses (realized and unrealized) included in earnings for the above period are reported in other non-interest income.
December 31, 2009 |
December 31, 2008 |
||||||
(in thousands) | |||||||
Total gains included in earnings for the period |
$ | | $ | 580 | |||
Change in unrealized gains (losses) relating to assets still held at the end of the period |
$ | 9,352 | $ | (18,956 | ) | ||
Assets measured at fair value on a non-recurring basis. The following table summarizes, by measurement hierarchy, financial assets of the Company that are measured at fair value on a non-recurring basis.
December 31, 2009 |
Level 1 | Level 2 | Level 3 | Total Gains (Losses) |
||||||||||||
(in thousands) | ||||||||||||||||
Impaired loans |
$ | 146,674 | $ | | $ | | $ | 146,674 | $ | (6,716 | ) |
December 31, 2008 |
Level 1 | Level 2 | Level 3 | Total Gains (Losses) |
||||||||||||
(in thousands) | ||||||||||||||||
Impaired loans |
$ | 58,978 | $ | | $ | | $ | 58,978 | $ | (14,108 | ) |
The fair value of impaired loans with specific loan loss allocations is generally based on the most recent real estate appraisals, with further discounts applied, or discounted cash flows. Appraisals may utilize a single
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valuation approach or a combination of approaches including comparable sales and the income approach. Judgments used to determine appraised values can be subjective, discounts applied are typically significant, as the timing of expected cash flows can be fluid. All of these factors result in a Level 3 classification of the inputs for determining fair value.
As of December 31, 2009, and in accordance with current accounting standards, impaired loans with a remaining carrying amount of $172.5 million have been written down to an aggregate fair value of $146.7 million as measured by underlying collateral or discounted cash flow through loss allocations in the Allowance. The amount of the allocation related to these loans was $25.8 million at December 31, 2009, compared to $19.1 million for impaired loans at December 31, 2008, resulting in a net increase in the impairment charge of $6.7 million for the period ending December 31, 2009.
Foreclosed real estate is recorded at fair value based on property appraisals, less estimated selling costs, at the date of transfer. Subsequent to transfer, foreclosed real estate is carried at the lower of cost or fair value, less estimated selling costs. The carrying value of foreclosed real estate is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. At December 31, 2009 and 2008, the estimated fair value of foreclosed real estate, less selling costs, amounted to $30.6 million and $16.9 million, respectively.
Fair Value of Financial Instruments Recorded at Historical Cost. Fair values of financial instruments that are not recorded at fair value on the Companys financial statements on either a recurring or non-recurring basis have been estimated by the Company using available market information and appropriate valuation methodologies as discussed below. Considerable judgment was required, however, to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market exchange.
The following table shows the carrying amounts and estimated fair values of financial instruments that have liquid markets in which fair value is assumed to be equal to the carrying amount, and are based on quoted prices for similar financial instruments or represent quoted surrender values. Included in securities available for sale are investments in FHLB and FRB stock that are held to satisfy membership requirements. It is not practical to determine the fair value of these stocks due to restrictions placed on their transferability; therefore, they are presented at their carrying amount.
December 31, 2009 | December 31, 2008 | |||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||
(in thousands) | ||||||||||||
Cash and cash equivalents |
$ | 56,851 | $ | 56,851 | $ | 138,017 | $ | 138,017 | ||||
Interest earning deposits in banks and fed funds sold |
409,459 | 409,459 | 1,665 | 1,665 | ||||||||
Securities available for sale |
25,785 | 25,785 | 26,796 | 26,796 | ||||||||
Company owned life insurance |
139,191 | 139,191 | 144,599 | 144,599 |
The carrying amounts and estimated fair values of accruing loans, including those related to the pending Illinois Branch Sale, that have been reclassed to held for sale, at December 31, 2009 and December 31, 2008 were as follows:
December 31, 2009 | December 31, 2008 | |||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||
(in thousands) | ||||||||||||
Commercial, financial and agricultural |
$ | 452,364 | $ | 443,287 | $ | 720,997 | $ | 708,550 | ||||
Real estate |
1,720,242 | 1,596,022 | 2,384,308 | 2,325,329 | ||||||||
Installment and consumer, net |
136,854 | 136,524 | 376,548 | 370,839 | ||||||||
Total accruing loans |
$ | 2,309,460 | $ | 2,175,833 | $ | 3,481,853 | $ | 3,404,718 | ||||
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Fair values of loans were estimated for portfolios with similar characteristics. The fair value of loans was calculated by discounting contractual and prepayment cash flows using estimated market discount rates, which reflect the interest rate risk and liquidity risk inherent in the loan as well as estimated credit losses. The fair value of non-accrual loans was $308.0 million and $285.1 million at December 31, 2009 and December 31, 2008, respectively. See Note 4 for additional information.
The carrying value of interest receivable and payable approximates fair value due to the relatively short period of time between accrual and expected realization. At December 31, 2009 and December 31, 2008, interest receivable was $10.2 million and $17.4 million, respectively, and interest payable was $20.8 million and $24.3 million, respectively.
The following table shows the carrying amounts and estimated fair values of financial instrument liabilities at December 31, 2009 and December 31, 2008:
December 31, 2009 | December 31, 2008 | |||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||
(in thousands) | ||||||||||||
Non-interest-bearing deposits |
$ | 499,964 | $ | 499,964 | $ | 465,382 | $ | 465,382 | ||||
Interest-bearing deposits |
766,921 | 766,921 | 1,224,166 | 1,224,166 | ||||||||
Time deposits |
2,138,872 | 2,200,485 | 2,204,170 | 2,297,475 | ||||||||
Short-term borrowings |
48,464 | 44,689 | 435,783 | 439,018 | ||||||||
Long-term borrowings |
229,177 | 250,985 | 379,667 | 406,701 | ||||||||
Letters of credit |
85 | 92 | 233 | 354 | ||||||||
Deferred Compensation |
3,428 | 3,601 | 8,644 | 9,216 |
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW and money market accounts, is equal to the carrying amount in accordance with current accounting standards related to disclosures about fair value of financial instruments. There is, however, additional value to the deposits of the Company, a significant portion of which has not been recognized in the consolidated financial statements. This value results from the cost savings of these core-funding sources versus obtaining higher-rate funding in the market. The fair value of time deposits, short-term borrowings and long-term borrowings was determined by discounting contractual cash flows using offered rates for like instruments with similar remaining maturities.
The fair value of letters of credit is equal to the carrying amount of deferred fees charged and guaranteed liabilities accrued. See discussion included in Note 12 for additional information.
The above fair value estimates were made at a discrete point in time based on relevant market information and other assumptions about the financial instruments. As no active market exists for a significant portion of the Companys financial instruments, fair value estimates were based on judgments regarding current economic conditions, future expected cash flows and loss experience, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and therefore cannot be calculated with precision (Level 3). There may be inherent weaknesses in calculation techniques, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, which could significantly affect the results. In addition, the fair value estimates are based on existing off-balance sheet financial instruments without attempting to assess the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Premises and equipment are not considered financial instruments and have not been considered. The fair value of loans held for sale is based upon binding quotes from the Companys strategic arrangement with a national mortgage services company (Level 2 inputs) and definitive agreements with the purchasers on the Illinois Branch Sale.
Many of the above financial instruments are also subject to credit risk. Credit risk is the possibility that the Company will incur a loss due to the other partys failure to perform under its contractual obligations. The Companys exposure to credit loss in the event of non-performance by the other party with regard to
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commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for actual extensions of credit. The credit risk involved for commitments to extend credit and in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the customer. Collateral held varies, but may include accounts receivable, securities, inventory, property and equipment and income-producing commercial properties. The Company is also exposed to carrier credit risk with respect to its $139 million investment in COLI. AMCORE has managed this risk by utilizing separate accounts, in which its credit exposure is to a specific investment portfolio rather than a carrier. The underlying investment portfolios (which are managed by parties other than AMCORE) generally consist of investment grade securities and the investment guidelines typically have a requirement to sell if the securities are downgraded. In terms of COLI accounts where AMCORE is directly exposed to carrier credit risk, this risk has been managed by diversifying its holdings among multiple carriers and by periodic internal credit reviews. All carriers have investment grade ratings from the major ratings agencies.
A summary of the contract amount of the Companys exposure to off-balance sheet credit risk as of December 31, 2009 and December 31, 2008 is as follows:
December 31, 2009 |
December 31, 2008 | |||||
(in thousands) | ||||||
Financial instruments whose contract amount represent credit risk only: |
||||||
Commitments to extend credit |
$ | 355,903 | $ | 656,407 | ||
Letters of credit |
21,514 | 74,165 |
Commitments to extend credit are contractual agreements entered into with customers as long as there is no violation of any condition established on the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional, but irrevocable, commitments issued by the Company to guarantee the payment of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.
NOTE 10 STOCK-BASED COMPENSATION
The Company has several stock-based compensation plans. The Company provides an employee stock purchase plan and makes awards of stock options, restricted stock and performance share units (PSUs). The awards granted under those plans are accounted for using the fair value recognition provisions of current accounting standards.
The Companys actual expenses related to stock-based compensation for the years ended December 31, 2009, 2008, and 2007 were as follows:
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Compensation expense included in reported operating expenses: |
||||||||||||
Stock options |
$ | 889 | $ | 1,917 | $ | 2,182 | ||||||
Employee stock purchase plan |
38 | 158 | 102 | |||||||||
Performance share units |
(320 | ) | (131 | ) | (552 | ) | ||||||
Restricted stock |
226 | 279 | 157 | |||||||||
Total stock-based compensation expense |
$ | 833 | $ | 2,223 | $ | 1,889 | ||||||
Income tax benefits (1) |
$ | 300 | $ | 778 | $ | 676 |
(1) | Before valuation allowance |
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At December 31, 2009, total unrecognized stock-based compensation expense was $1.0 million, net of estimated forfeitures, which will be recognized over a weighted average amortization period of 1.2 years. Accounting standards require cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) to be classified as financing cash flows. For the twelve months ended December 31, 2009 and 2008, the Company did not have any excess tax benefit since there were no stock option exercises. For the twelve months ended December 31, 2007, $733,000 of excess tax benefits has been classified as an operating cash outflow and financing cash inflow.
The Company estimates the fair value of stock options using a Black-Scholes valuation model. The fair value of restricted stock, PSUs and employee stock purchase plan grants generally equals their intrinsic value on the date of grant. The fair value of stock-based grants is amortized to operating expense on a straight-line basis over the required vesting period of the grant. Stock option grants made to retirement eligible employees are fully expensed during the period in which the options are granted.
The Company annually evaluates the assumptions used in the Black-Scholes model. The Company believes that the combination of historical and implied volatility provides a reasonable estimate of expected stock price volatility and will continue to monitor these and other relevant factors to estimate expected volatility for future option grants. The Company utilizes the simplified method for estimating the expected term of options granted during the period as provided for in current accounting standards. The Company bases the estimate of risk-free rate on the U.S. Treasury yield curve in effect at the date of grant. Dividend yield is the Companys annual dividend rate expressed as a percentage of the closing stock price on grant date. Estimated forfeitures are based on historical employee termination experience. The estimate of forfeitures is adjusted to the extent that actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized in subsequent periods as they occur. The simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards has been used.
The fair value of the Companys employee and director stock options granted was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
2009 | 2008 | 2007 | ||||||||||
Expected dividend yield |
0.00 | % | 4.35 | % | 2.38 | % | ||||||
Expected price volatility |
37.99 | % | 25.86 | % | 19.16 | % | ||||||
Expected term in years |
6.2 | 6.2 | 6.1 | |||||||||
Expected risk-free interest rate |
2.69 | % | 3.38 | % | 4.64 | % | ||||||
Estimated average fair value of options granted |
$ | 0.69 | $ | 3.53 | $ | 6.33 |
Employee Stock Award and Incentive Plans. The 2005 Stock Award and Incentive Plan (SAIP) allows for awards to key employees of stock options, restricted shares, performance shares units (PSUs) and other forms of stock-based awards. The maximum number of shares to be granted under the plan is 2,125,000. The Company will not reprice any awards under the SAIP unless such repricing is approved by a majority vote of the Companys stockholders. Awards issued pursuant to the SAIP that expire, are forfeited or terminated for any reason shall again be available to grant.
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Stock Options. Non-qualified stock options are issued at an exercise price equal to the fair market value of the shares on the grant date and generally vest within three to four years and expire from seven to ten years from the date of grant. Options issued are valued using the Black-Scholes model. The activity during, and the total options outstanding and exercisable as of, 2009, 2008 and 2007 pursuant to the SAIP and previous incentive plans are as follows:
2009 | 2008 | 2007 | ||||||||||||||||
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price | |||||||||||||
Options outstanding at beginning of year |
2,319,361 | $ | 25.33 | 2,064,424 | $ | 27.33 | 1,954,194 | $ | 25.94 | |||||||||
Options granted |
249,500 | 1.66 | 536,275 | 17.97 | 486,994 | 31.33 | ||||||||||||
Option reloads |
| | | | 10,698 | 30.14 | ||||||||||||
Options exercised |
| | | | (231,859 | ) | 23.19 | |||||||||||
Options cancelled |
(636,953 | ) | 25.68 | (161,103 | ) | 26.43 | (43,196 | ) | 26.79 | |||||||||
Options forfeited |
(274,564 | ) | 16.56 | (120,235 | ) | 25.46 | (112,407 | ) | 29.55 | |||||||||
Options outstanding at end of year |
1,657,344 | $ | 23.08 | 2,319,361 | $ | 25.33 | 2,064,424 | $ | 27.33 | |||||||||
Options exercisable at end of year |
1,037,814 | $ | 26.30 | 1,334,441 | $ | 26.10 | 1,167,487 | $ | 25.12 |
Weighted average remaining contractual life of outstanding and exercisable shares at December 31, 2009 was 4.7 years and 3.3 years, respectively. For both options outstanding and those exercisable, there was no aggregate intrinsic value for the period ended December 31, 2009.
Performance Share Units. The Company grants PSUs pursuant to the terms and conditions of various sub-plans provided for in the SAIP. The sub-plans establish performance goals and performance periods that are approved by the Compensation Committee of the Companys Board of Directors. Each PSU represents the right to receive a share of the Companys common stock at the end of the performance period, some of which may be issued as restricted shares. One sub-plan allows for PSUs to be converted to common shares and issued at the end of the three-year performance. Two additional sub-plans allow for PSUs to be converted to restricted common shares after the performance period and vest over five years.
Compensation expense is calculated based upon the expected number of PSUs earned during the performance period and is recorded over the service period. The fair value is calculated equal to market value on the date of grant less the present value of dividends that are not earned during the performance period. Expense is adjusted for forfeitures as they occur. As of December 31, 2009, PSUs expected to be earned and the weighted average grant date fair value per PSU were as follows:
2009 | 2008 | 2007 | ||||||||||||||||
PSU | Weighted Average Exercise Price |
PSU | Weighted Average Exercise Price |
PSU | Weighted Average Exercise Price | |||||||||||||
Units outstanding at beginning of year |
38,810 | $ | 26.23 | 59,070 | $ | 27.42 | 119,511 | $ | 28.38 | |||||||||
Units estimated to be granted |
| | 2,000 | 30.30 | 27,600 | 24.68 | ||||||||||||
Units forfeited |
(16,530 | ) | 27.60 | (20,000 | ) | 29.70 | (26,375 | ) | 28.80 | |||||||||
Units released |
(2,480 | ) | 30.30 | | | | | |||||||||||
Adjustment to estimated grants |
(14,250 | ) | 22.35 | (2,260 | ) | 30.30 | (61,666 | ) | 27.45 | |||||||||
Units outstanding at end of year |
5,550 | $ | 30.30 | 38,810 | $ | 26.23 | 59,070 | $ | 27.42 | |||||||||
The remaining 5,550 PSUs at December 31, 2009 have been issued in the form of restricted shares with future vesting requirements. Weighted average remaining vesting period of outstanding shares at December 31, 2009, 2008 and 2007 were 2.4 years, 3.5 years and 4.0 years, respectively.
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Restricted Stock Awards. The Company has periodically granted restricted stock awards to certain key employees. The shares are restricted as to transfer, but are not restricted as to dividend payment and voting rights. Transfer restrictions lapse at the end of two, three or seven years contingent upon continued employment. Restricted stock grants are valued at market value on the date of grant and are expensed over the service period. As of December 31, 2009, non-vested shares totaled 168,500 with a weighted average fair value of $1.77 per share. During 2009, 171,500 shares were granted, 12,500 restricted shares were forfeited and returned to treasury, and 7,657 restrictions were released. During 2008, 14,000 were granted, 210 restricted shares were forfeited and returned to treasury, and restrictions were released on 4,816 shares.
Directors Stock Plans. The Restricted Stock Plan for Non-Employee Directors provides that eligible non-employee directors receive, in lieu of a cash retainer, shares of common stock of the Company. Since May 2007, the value of restricted common stock issued was equal to two thirds of the equivalent of three years annual retainer with the remaining one-third issued at the election of the director in either restricted stock, cash, or deposited to a Deferred Compensation account in the name of the director. Prior to May 2007, the value of restricted common stock issued was equal to three times the annual retainer. Restricted stock grants are valued at market value on the date of grant and are expensed over the required service period. The shares vest annually over a three-year period based upon the anniversary date of the election and continued service as a director. As of December 31, 2009, restricted shares totaled 63,390 with a weighted average fair value of $4.94 per share. A total of 54,349 shares were issued, restrictions were released on 5,827 shares, and no shares were cancelled during the year.
The 2001 Stock Option Plan for Non-Employee Directors (2001 Plan) provides that each current eligible non-employee director and each subsequently elected non-employee director receive options to purchase common stock of the Company. The maximum number of shares to be granted under the plan is 300,000. Options granted have an exercise price equal to the market value on the date of grant and generally vest within one to three years and expire in seven to ten years from the date of grant. Stock options granted pursuant to this plan are valued using a Black-Scholes model with assumptions as previously listed. The following table presents certain information with respect to stock options issued to non-employee directors pursuant to the 2001 Plan and previous stock option plans.
2009 | 2008 | 2007 | ||||||||||||||||
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price | |||||||||||||
Options outstanding at beginning of year |
157,000 | $ | 23.63 | 138,500 | $ | 25.73 | 117,250 | $ | 24.33 | |||||||||
Options granted |
24,000 | 1.31 | 24,000 | 11.96 | 30,000 | 29.71 | ||||||||||||
Options exercised |
| | | | (8,750 | ) | 20.59 | |||||||||||
Options cancelled |
(45,000 | ) | 23.73 | (5,500 | ) | 25.50 | | | ||||||||||
Options outstanding at end of year |
136,000 | $ | 19.66 | 157,000 | $ | 23.63 | 138,500 | $ | 25.73 | |||||||||
Options exercisable at end of year |
86,000 | $ | 25.05 | 106,330 | $ | 24.76 | 95,170 | $ | 23.95 |
Weighted average remaining contractual life of outstanding and exercisable shares at December 31, 2009 was 6.6 years and 5.4 years, respectively. For both options outstanding and those exercisable, there was no aggregate intrinsic value for the period ended December 31, 2009.
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Non-vested options and exercise proceeds. A summary of the Companys non-vested employee and director stock options is presented below.
Employee options | Director options | |||||||||||
Shares | Average Price |
Shares | Average Price | |||||||||
Non-vested options at beginning of year |
984,920 | $ | 24.27 | 50,670 | $ | 21.27 | ||||||
Options granted |
249,500 | 1.66 | 24,000 | 1.31 | ||||||||
Options forfeited |
(274,564 | ) | 16.56 | | | |||||||
Options vested |
(340,326 | ) | 25.91 | (24,670 | ) | 23.88 | ||||||
Non-vested options at December 31, 2009 |
619,530 | $ | 17.69 | 50,000 | $ | 10.40 | ||||||
2009 | 2008 | 2007 | |||||||
Fair value of stock options vested during year (000s) |
$ | 2,009 | $ | 2,334 | $ | 2,256 | |||
Per option fair value of stock options vested during year |
$ | 5.50 | $ | 6.77 | $ | 6.54 | |||
Number of shares exercised during year |
| | 240,609 | ||||||
Intrinsic value of options exercised during year (000s) |
$ | | $ | | $ | 2,062 |
During 2009, there were no options exercised, and therefore no cash or stock equivalent received or tax benefit recognized for exercises. The Company may periodically repurchase shares in open market and private transactions in accordance with Exchange Act Rule 10b-18 to replenish treasury stock for issuances related to stock option exercises and other employee benefit plans.
Employee Stock Purchase Plan. The AMCORE Stock Option Advantage Plan (ESPP) permits eligible employees to purchase from the Company shares of its common stock at an exercise or purchase price at 85% of the lower of the closing price of the Companys common stock on the NASDAQ Stock Market on the first or last day of each offering period. Reserved for issuance under the ESPP is a total of 600,000 shares of unissued common stock. Shares issued pursuant to the ESPP are prohibited from sale by a participant for two years after the date of purchase. Dividends earned are credited to a participants account and used to purchase shares from the Companys treasury stock at the same discounted price on the next purchase date. The 15% discount is recorded as compensation expense during the quarter in which the shares are issued. For the years ended 2009, 2008, and 2007, compensation expense totaled $38,000, $158,000, and $102,000 respectively.
The fourth quarter 2009 employee purchases were sufficient enough to bring the total shares issued under the Stock Option Advantage Plan to 600,000 shares. As a result, there are no additional shares available to be issued under the current plan.
NOTE 11 BENEFIT PLANS
Retirement Plans
The AMCORE Financial Security Plan (Security Plan) is a qualified defined contribution plan under Sections 401(a) and 401(k) of the Internal Revenue Code. All eligible employees of the Company participate the Security Plan, which, until March 2009, provided a basic retirement contribution funded by the Company. The Company suspended the basic retirement contribution effective April 1, 2009. In addition, employees have the opportunity to make contributions that are eligible to receive matching Company contributions up to certain levels. The Company match was not affected by the discontinuation of the basic retirement contributions. The expense related to the Security Plan for the years ended December 31, 2009, 2008, and 2007 was $1.9 million, $3.6 million, and $4.0 million, respectively. The Company also has a non-qualified profit sharing plan that provides cash payment based upon achievement of corporate performance goals, to all employees who have met service requirements. There was no profit sharing for 2009 or 2008. The expense for to 2007 was $458,000.
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The Company provides additional retirement benefits to certain senior officers through plans that are non-qualified, non-contributory and unfunded. Under one such arrangement, a defined contribution plan, the additional retirement benefits replace what would have been provided under the Companys defined contribution qualified plan in the absence of limits placed on qualified plan benefits by the Internal Revenue Code of 1986. The expense related to this arrangement for the years ended December 31, 2009, 2008, and 2007 was $68,000, $34,000, and $86,000, respectively.
Another arrangement, which is an unfunded, non-qualified, defined benefit plan, provides supplemental retirement benefits that are based upon three percent of final base salary, times the number of years of service. Benefits under this plan may not exceed 70% or be less than 45% of a participants final base salary less offsets for employer retirement plan benefits attributable to employer contributions and 50% of a participants Social Security benefit. Since the plan is unfunded, there are no plan assets. The Companys liquidity is sufficient to fund the benefits payable under the plan. The measurement date for obligations of this plan is as of December 31. The projected benefit obligation is $4.0 million, and $3.8 million, respectively at December 31, 2009 and 2008 and related solely to former executives of the Company. No current employees are participants in this plan. The periodic benefit costs for the years ended December 31, 2009, 2008, and 2007 were $1.0 million, $281,000, and $814,000, respectively.
The Company has discontinued a defined benefit plan that pays a lifetime annual retainer to certain retired non-employee directors. However, the Company continues to make payments to those non-employee directors that became eligible prior to the discontinuation of the plan. The plan is non-qualified and unfunded, and since the plan is unfunded, there are no plan assets. The Companys liquidity is sufficient to fund the benefits payable under the plan. The measurement date for obligations of this plan is as of December 31. The projected benefit obligation is $128,000, and $154,000, respectively, at December 31, 2009 and 2008. The periodic benefit cost for the years ended December 31, 2009, 2008, and 2007 was $52,000, $(42,000), and $204,000, respectively.
The following tables summarize, in aggregate for the two defined benefit retirement plans, the changes in obligations, net periodic benefit costs and other information for the years ended December 31. As of December 31, 2008, all participants under both plans are in payout.
2009 | 2008 | |||||||
(in thousands) | ||||||||
Change in benefit obligation: |
||||||||
Projected benefit obligation at beginning of year |
$ | 3,985 | $ | 3,700 | ||||
Service cost |
| 41 | ||||||
Interest cost |
228 | 214 | ||||||
Actuarial losses, settlement and adjustments |
310 | 424 | ||||||
Benefits paid |
(382 | ) | (394 | ) | ||||
Projected benefit obligation at end of year |
$ | 4,141 | $ | 3,985 | ||||
Plan Assets |
$ | | $ | | ||||
Funded Status |
4,141 | 3,985 | ||||||
Unrecognized transition obligation |
| (38 | ) | |||||
Unrecognized actuarial gain |
| (444 | ) | |||||
Liability recorded in Consolidated Balance Sheets |
$ | 4,141 | $ | 3,503 | ||||
Amounts recorded in Other Comprehensive Income: |
||||||||
Transition obligation |
$ | | $ | 7 | ||||
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2009 | 2008 | 2007 | ||||||||
(in thousands) | ||||||||||
Components of net periodic benefit cost: |
||||||||||
Service cost |
$ | | $ | 41 | $ | 71 | ||||
Interest cost |
228 | 214 | 201 | |||||||
Transition obligation amortization |
38 | 42 | 42 | |||||||
Actuarial losses (gains), settlement and adjustments |
792 | (58 | ) | 704 | ||||||
Net periodic cost |
$ | 1,058 | $ | 239 | $ | 1,018 | ||||
The net periodic costs for 2008 included an additional accrual for benefits payable to the retiring Chief Executive Officer and for 2007 included a lump-sum settlement in connection with the separation of a senior executive and an accrual to settle the obligations for two directors not yet in payout under the directors defined benefit plan. The remaining unrecognized transition obligation was fully amortized in 2009.
2009 | 2008 | 2007 | ||||||||
Weighted-average assumptions: |
||||||||||
Discount rate at end of year |
5.00 | % | 6.25 | % | 5.99 | % | ||||
Rate of compensation increase employee plan |
N/A | N/A | 4.00 | % | ||||||
Estimated benefit payments (in thousands): |
||||||||||
2010 |
|
$ | 382 | |||||||
2011 |
|
375 | ||||||||
2012 |
|
368 | ||||||||
2013 |
|
368 | ||||||||
2014 |
|
368 | ||||||||
2015-2019 |
|
1,768 |
Contributions of $382,000 and $394,000 were made during 2009 and 2008, respectively, to fund benefit payments. The plans have no assets at December 31, 2009 or 2008. The plans liabilities as of December 31, 2009 and 2008, were $4.1 million and $3.5 million, respectively,
Other Benefit Plans
The AMCORE Financial, Inc. Employee Health Benefit Plan (Health Plan) provides group medical, pharmacy, dental and vision benefits to eligible participating employees of the Company and their dependents. Employees, retirees, and COBRA beneficiaries contribute specific premium amounts determined annually by the Health Plans administrator based upon actuarial recommendations for coverage. Retirees and COBRA beneficiaries contribute 100% of their premiums. The Companys share of the employee premiums and other Health Plan costs are expensed as incurred. Expense related to the Health Plan was $4.7 million, $6.0 million, and $5.8 million for 2009, 2008, and 2007, respectively. Life insurance benefits are provided to eligible active employees. Because retiree premiums are actuarially based and are paid 100% by the retiree, the Company has not recorded a postretirement liability.
The Company provides a deferred compensation plan (entitled AMCORE Financial, Inc. Deferred Compensation Plan) for eligible managers and directors. This plan provides the opportunity to defer salary, bonuses and non-employee director fees. Participants may defer up to 90% of base compensation and up to 100% of bonus. The deferred compensation liability to participants is recorded in other liabilities in the Consolidated Balance Sheets. The deferrals and earnings grow tax deferred until withdrawn from the plan. The deferral amount and method of distribution are pre-defined by participants prior to each deferral year. In accordance with the 409A transition rules, participants were allowed a one-time opportunity to change their distribution elections if the change was made prior to December 31, 2008. Participants could elect to receive their account balance in the
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form of an in-service distribution as early as January 1, 2009. Earnings credited to individual accounts are recorded as compensation expense when earned. The total non-qualified deferred compensation plan liability totaled $3.4 million and $8.6 million as of December 31, 2009 and 2008, respectively. Expense related to the deferred compensation plan was $224,000, $(70,000), and $806,000 for 2009, 2008, and 2007, respectively.
The Company also has various short term, profit sharing and sales related incentive plans. The expense related to such plans was $(12,000), $4.3 million, and $3.4 million for 2009, 2008, and 2007, respectively.
NOTE 12 CONTINGENCIES, GUARANTEES AND REGULATORY MATTERS
Contingencies:
Management believes that no litigation is threatened or pending in which the Company faces a reasonable possibility of loss or exposure which will materially affect the Companys consolidated financial position or consolidated results of operations. Since the Companys subsidiaries act as depositories of funds, trustee and escrow agents, they occasionally are named as defendants in lawsuits involving claims to the ownership of funds in particular accounts. The Bank is also subject to counterclaims from defendants in connection with collection actions brought by the Bank. This and other litigation is incidental to the Companys business.
As a member of the VISA, Inc. organization (VISA), the Company had previously accrued a $338,000 liability as of December 31, 2008 for its proportionate share of various claims against VISA. Recent additional funding of a litigation escrow account established by VISA has reduced the Companys proportionate share of its liability to $292,000.
Guarantees:
The Bank, as a provider of financial services, routinely enters into commitments to extend credit to its customers, including a variety of letters of credit. Letters of credit are a conditional but generally irrevocable form of guarantee on the part of the Bank to make payments to a third party obligee, upon the default of payment or performance by the Bank customer or upon consummation of the underlying transaction as intended. Letters of credit are typically issued for a period of one year to five years, but can be extended depending on the Bank customers needs. As of December 31, 2009, the maximum remaining term for any outstanding letter of credit expires on March 31, 2013.
A fee is normally charged to compensate the Bank for the value of the letter of credit that is issued at the request of the Bank customer. The fees are deferred and recognized as income over the term of the guarantee. As of December 31, 2009, the carrying value of these deferrals was a deferred credit of $85,000. This amount included a $38,000 guarantee liability for letters of credit. The remaining $47,000 represented deferred fees charged for letters of credit.
At December 31, 2009, the contractual amount of all letters of credit was $21.5 million. These represent the maximum potential amount of future payments that the Company would be obligated to pay under the guarantees.
The issuance of a letter of credit is generally backed by collateral. The collateral can take various forms including, but not limited to, bank accounts, investments, fixed assets, inventory, accounts receivable and real estate. At the time that the letters of credit are issued, the value of the collateral is usually in an amount that is considered sufficient to cover the contractual amount of the letter of credit.
In addition to the guarantee liability and deferred fees described above, the Company has recorded a contingent liability for estimated probable losses on unfunded loan commitments and letters of credit outstanding. This liability was $1.8 million and $5.8 million as of December 31, 2009, and 2008, respectively, which was recorded in other expense in the Consolidated Statements of Operations.
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As noted above, as of December 31, 2009, the Company has an accrued liability of $292,000, representing the estimated fair value of its proportionate share of certain indemnification obligations against VISA.
Regulatory Matters:
On May 15, 2008, the Bank entered into a written agreement (the OCC Agreement) with the OCC. The OCC Agreement described commitments made by the Bank to address and strengthen banking practices relating to asset quality and the overall administration of the credit function at the Bank.
The Company entered into a written agreement (the FRB Agreement) with the Federal Reserve Bank of Chicago (the FRB) dated June 26, 2009, and on June 25, 2009, the Bank agreed to the issuance of a consent order (the Consent Order) by the OCC. In general, the FRB Agreement and the Consent Order contained requirements to develop plans to raise capital and to revise and maintain a liquidity risk management program. The Consent Order required the Bank to, among other things, (i) develop and submit a capital plan (the Capital Plan) to the OCC by July 25, 2009, (ii) achieve and maintain by September 30, 2009, Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 risk-based capital at least equal to 9% of risk-weighted assets and total risk-based capital at least equal to 12% of risk-weighted assets, and (iii) revise and maintain a liquidity risk management program within 60 days from the date of the Consent Order. In addition, the FRB Agreement required the development of a capital plan for the Company, restricted the payment of dividends by the Company, as well as the taking of dividends or any other payment representing a reduction in capital from the Bank. The FRB Agreement further required that the Company not incur, increase, or guarantee any debt, repurchase or redeem any shares of its stock, or pay any interest or principal on subordinated debt or trust preferred securities, in each case without the prior approval of the FRB. In consultation with its professional advisors, and in compliance with the Consent Order, the Bank developed and timely submitted the Capital Plan and liquidity risk management program to the OCC, and the Company developed and timely submitted the capital plan to the FRB as required under the FRB Agreement.
By letter dated November 4, 2009 (the Letter), the OCC notified the Bank of its finding that the Capital Plan was not acceptable, stating that the OCC was unable to determine that the Capital Plan was likely to succeed in restoring the Banks capital at this time. The OCC further advised the Bank that it was being treated as significantly undercapitalized within the meaning of the prompt corrective action (the PCA) provisions of the Federal Deposit Insurance Act and implementing OCC regulations. As a result of this regulatory determination, the Bank thereupon became subject to the PCA activity and operational restrictions applicable to significantly undercapitalized depository institutions, including, among other things, the mandatory requirement that the Bank submit an acceptable Capital Restoration Plan (CRP), as required under the PCA guidelines, no later than December 4, 2009. The Letter also indicated that the OCC was requiring the Bank to prepare and submit to the OCC a plan for the sale or merger of the Bank (a Disposition Plan) by December 4, 2009, as specified under the Consent Order.
On November 6, 2009, the FRB notified the Company in writing that the Companys capital plan submitted under the terms of the FRB Agreement was unacceptable in addressing the capital erosion of the Company and the Bank. The FRB concluded that, based on the information provided by the Company, as well as the Companys current negative financial trends, the Companys capital plan was not viable.
Further, the Bank was unable to meet the regulatory capital maintenance requirements of the Consent Order by the required September 30, 2009 date. As a result of the OCC Agreement, as well as the FRB Agreement, the Consent Order and the Letter, the Company was ineligible for certain actions and expedited approvals without the prior written consent and approval of the applicable regulatory agency. These actions include, among other things, the appointment of directors and senior executives, making or agreeing to make certain payments to executives or directors, business combinations and branching.
In consultation with its professional advisors, the Bank resubmitted a combined CRP and a Disposition Plan by the required December 4, 2009 due date. By return letter dated January 8, 2010 (the Response Letter), the OCC
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notified the Bank that its CRP was not acceptable. According to the OCC, the CRP was not accepted because, among other things, it did not meet the statutory requirements that the CRP be based on realistic assumptions and be likely to succeed in restoring the Banks capital. In addition, on January 12, 2010, the FRB notified the Company that the Companys capital plan previously submitted to the FRB continued to be unacceptable in addressing the capital erosion of the Company and the Bank. The Response Letter provided that even if the Banks capital ratios improve to the undercapitalized category, the Bank would continue to be subject to operational restrictions applicable to significantly undercapitalized institutions until such time as the Bank has submitted to the OCC an acceptable CRP. The OCC also stated its view that the recently announced asset sales by the Bank have increased the overall risk to the Banks capital base.
The Company and the Bank continue to diligently work with their financial and professional advisors in seeking qualified sources of outside capital, and in achieving compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter. The Company and the Bank continue to consult with the OCC, FRB and FDIC on a regular basis concerning the Companys and Banks proposals to obtain outside capital and to develop action plans that will be acceptable to federal regulatory authorities, but there can be no assurance that these actions will be successful, or that even if one or more of the Companys and Banks proposals are accepted by the Companys and Banks Federal regulators, that these proposals will be successfully implemented. While the Companys management continues to exert maximum effort to attract new capital, significant operating losses in 2008 and 2009, significant levels of criticized assets and low levels of capital raise substantial doubt as to the Companys ability to continue as a going concern. Doubt as to the Companys ability to continue as a going concern was previously disclosed in the Companys December 31, 2009 earnings release furnished with its February 2, 2010 Form 8-K, Current Report. If the Company is unable to achieve compliance with the requirements of the Consent Order, the FRB Agreement, the Letter and the Response Letter with the OCC and the FRB, or an acceptable CRP under the OCCs Prompt Corrective Action guidelines, and if the Company cannot otherwise comply with such commitments and regulations, the OCC could force a sale, liquidation or federal conservatorship or receivership of the Bank. See Note 1.
NOTE 13 INCOME TAXES
The components of income tax expense (benefit) were as follows:
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Currently (received) paid or (receivable) payable: |
||||||||||||
Federal |
$ | (38,439 | ) | $ | (26,656 | ) | $ | 18,666 | ||||
State |
(123 | ) | 21 | 96 | ||||||||
$ | (38,562 | ) | $ | (26,635 | ) | $ | 18,762 | |||||
Deferred: |
||||||||||||
Federal |
$ | 46,703 | $ | (30,425 | ) | $ | (7,660 | ) | ||||
State |
17,736 | (13,849 | ) | (2,188 | ) | |||||||
$ | 64,439 | $ | (44,274 | ) | $ | (9,848 | ) | |||||
Total Income Tax Expense (Benefit) |
$ | 25,877 | $ | (70,909 | ) | $ | 8,914 | |||||
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Income tax expense (benefit) was different than the amounts computed by applying the federal statutory rate of 35% due to the following:
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Income tax (benefit) expense at statutory rate |
$ | (69,267 | ) | $ | (59,048 | ) | $ | 13,004 | ||||
(Decrease) increase resulting from: |
||||||||||||
Tax-exempt income |
(1,024 | ) | (2,008 | ) | (1,327 | ) | ||||||
Company owned life insurance |
(1,604 | ) | (1,598 | ) | (1,900 | ) | ||||||
State income taxes, net of federal benefit (excluding impact of state law change and state valuation allowance) |
(9,859 | ) | (8,988 | ) | (772 | ) | ||||||
Increase (decrease) in deferred tax asset valuation allowance |
107,907 | 1,469 | 249 | |||||||||
Non-deductible expenses, net |
97 | 261 | 446 | |||||||||
Impact of state law change on deferred taxes |
| | (588 | ) | ||||||||
Goodwill |
9 | 2,102 | 37 | |||||||||
Other, net |
(382 | ) | (3,099 | ) | (235 | ) | ||||||
Total Income Tax Expense (Benefit) |
$ | 25,877 | $ | (70,909 | ) | $ | 8,914 | |||||
Effective Tax Rate |
(13.1 | )% | 42.0 | % | 24.0 | % | ||||||
The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
At December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Deferred compensation |
$ | 5,257 | $ | 7,338 | ||||
Allowance for loan losses |
57,923 | 54,362 | ||||||
Net operating loss and credit carryforwards |
52,235 | 9,389 | ||||||
Other |
5,026 | 3,021 | ||||||
Gross deferred tax assets |
$ | 120,441 | $ | 74,110 | ||||
Less: Valuation allowance |
(110,470 | ) | (2,563 | ) | ||||
Total deferred tax assets |
$ | 9,971 | $ | 71,547 | ||||
Deferred tax liabilities: |
||||||||
Premises and equipment |
$ | 3,579 | $ | 3,596 | ||||
Other |
6,392 | 3,512 | ||||||
Total deferred tax liabilities |
$ | 9,971 | $ | 7,108 | ||||
Net Deferred Tax Asset |
$ | | $ | 64,439 | ||||
Tax effect of net unrealized loss on securities available for sale reflected in stockholders equity |
7,682 | 5,051 | ||||||
Less: Valuation allowance |
(7,682 | ) | | |||||
Net Deferred Tax Asset Including Net Unrealized Loss on Securities Available for Sale |
$ | | $ | 69,490 | ||||
Net operating loss carryforwards for state income tax purposes were $344.6 million at December 31, 2009. The carryforwards expire beginning December 31, 2019 through December 31, 2029. Net operating loss carryforwards for federal income tax purposes were $98.6 million at December 31, 2009. The carryforwards expire on December 31, 2029. The Company also has contribution carryforwards and general business credit
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carryforwards in the amounts of $195,000 and $932,000, respectively at December 31, 2009. The contribution carryforwards expire beginning December 31, 2013 through December 31, 2014. The general business credit carryforwards expire beginning December 31, 2026 through December 31, 2028.
The Company has a deferred tax asset valuation allowance of $110.5 million and $2.6 million at December 31, 2009 and 2008, respectively. The Company also has a deferred tax asset valuation allowance of $7.7 million at December 31, 2009 associated with net security losses reported in other comprehensive income. Realization of the deferred tax asset over time is dependent upon the existence of taxable income in carryback periods or the Company generating sufficient taxable earnings in future periods. After weighing all available positive and negative evidence, the Company concluded during the third quarter of 2009 that it was no longer more likely than not that some or all of its net deferred tax asset would be realized and incurred a $118.0 million charge to establish a valuation allowance. If the Company generates taxable income in future periods, then the valuation allowance may be partially released to offset the tax on the then current taxable income and fully released when it becomes more likely than not that the remaining deferred tax asset value will be realized in future periods.
On November 6, 2009 the President signed into law the Worker, Homeownership, and Business Act. Subject to certain limitations, the new law permits businesses with losses in either 2008 or 2009 to claim refunds of taxes paid within the prior five years. As a result of this legislation, the Company has filed refund claims in the amount of $36.9 million.
Retained earnings at December 31, 2009 includes $3.2 million for which no provision for income tax has been made. This amount represents allocations of income to former thrift bad debt deductions for tax purposes only. This amount will only be taxable upon the occurrence of certain events. At this time, management does not foresee the occurrence of any of these events.
Tax (payables) benefits of ($101,000), $43,000 and $880,000 have been credited directly to paid in capital, with a corresponding (increase) decrease in the liability for current income taxes payable, for stock related incentives during the years ended December 31, 2009, 2008 and 2007, respectively.
The Company has no uncertain tax positions as of December 31, 2009 and is not aware of any significant changes that are reasonably possible within the next twelve months. It is the Companys policy to recognize accrued interest and penalties related to uncertain tax benefits in income taxes. The Internal Revenue Service and the State of Illinois have completed audits through the years 2006 and 2007, respectively. The State of Wisconsin is scheduled to commence an audit of the years 2005 through 2008 during 2010. All subsequent years remain open to examination.
NOTE 14 EARNINGS PER SHARE
Earnings per share (EPS) calculations are presented in the following table.
For the years ended December 31, | |||||||||||
2009 | 2008 | 2007 | |||||||||
(in thousands, except per share data) | |||||||||||
Numerator |
|||||||||||
Net (Loss) Income |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | |||
Denominator |
|||||||||||
Average number of shares outstanding basic |
22,876 | 22,629 | 23,546 | ||||||||
Plus: Contingently issuable shares |
| | 10 | ||||||||
Average number of shares outstanding diluted |
22,876 | 22,629 | 23,556 | ||||||||
(Loss) Earnings per share |
|||||||||||
Basic |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 | |||
Diluted |
$ | (9.78 | ) | $ | (4.32 | ) | $ | 1.20 |
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As prescribed by current accounting standards, basic EPS is computed by dividing income available to common stockholders (numerator) by the weighted-average number of common shares outstanding (denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding.
The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued and to include shares contingently issuable pursuant to employee incentive plans. Securities (e.g. options) that do not have a current right to participate fully in earnings but that may do so in the future by virtue of their option rights are potentially dilutive shares. The dilutive shares are calculated based on the treasury stock method meaning that, for the purposes of this calculation, all outstanding options are assumed to have been exercised during the period and the resulting proceeds used to repurchase Company stock at the average market price during the period. The assumed proceeds also include the amount of compensation cost attributed to future services and not yet recognized. In computing diluted EPS, only potential common shares that are dilutivethose that reduce earnings per share or increase loss per share are included. Exercise of options is not assumed if the result would be antidilutive. For the years ended 2009, 2008, and 2007, options to purchase 1.8 million shares, 2.5 million shares, and 1.0 million shares respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.
NOTE 15 SEGMENT INFORMATION
AMCOREs internal reporting and planning process focuses on its three primary lines of business (Segment(s)): Commercial Banking, Consumer Banking and Investment Management and Trust. The financial information presented was derived from the Companys internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, to portray each Segment as if it operated on a stand-alone basis. Thus, each Segment, in addition to its direct revenues, expenses, assets and liabilities, includes an allocation of shared support function expenses and corporate overhead. The Commercial and Consumer Segments also include funds transfer adjustments to appropriately reflect the cost of funds on loans made, funding credits on deposits generated, and the cost of maintaining adequate liquidity. Apart from these adjustments, the accounting policies used are similar to those described in Note 1.
Since there are no comprehensive standards for management accounting that are equivalent to accounting principles generally accepted in the United States of America, the information presented may not necessarily be comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign, and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure. During 2009, operating expense allocations were revised to fully absorb corporate overhead and other previously unallocated costs, and revenues, to each of the segments and treasury operations. In addition, funds transfer prices were revised to allocate the cost of maintaining excess liquidity to the segments. Prior to 2009, both of these items were reflected in the Other column, as described below. Finally as a result of corporate restructuring, Mortgage Banking Segment results are now combined with the Consumer Banking Segment. Due to practical difficulties associated with restating prior periods, prior periods have not been restated except as noted for combining the Mortgage Banking Segment with the Consumer Banking Segment. Segment results for 2009 have been presented to reflect both the new method with the above changes and the old method with none of the above changes.
Total Segment results differ from consolidated results primarily due to treasury and investment activities such as the offset to the funds transfer adjustments made to the Segments, interest income on the securities investment portfolio, gains and losses on the sale of securities, COLI, CRA-related fund investment income and derivative
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gains and losses. The impact of these items is aggregated to reconcile the amounts presented for the Segments to the consolidated results and is included in the Other column. The $118 million deferred tax valuation allowance recorded during the third quarter 2009 has been allocated to Other.
The Commercial Banking Segment provides commercial banking services including lending, business checking and deposits, treasury management and other traditional as well as electronic commerce commercial banking services to middle market and small business customers through the Banks branch locations.
The Consumer Banking Segment provides retail banking services including direct and indirect lending, checking, savings, money market and certificate of deposit (CD) accounts, safe deposit rental, automated teller machines and other traditional and electronic commerce retail banking services to individual customers through the Banks branch locations. The Consumer Banking Segment also provides a variety of mortgage lending products to meet customer needs. The majority of the mortgage loans it originates are sold to a third party mortgage services company, which provides private label loan processing and servicing support for both loans sold and loans retained by the Bank.
The Investment Management and Trust segment provides its clients with wealth management services, which include trust services, investment management, estate administration and financial planning, employee benefit plan administration and recordkeeping services. The Investment Management and Trust segment also includes AMCORE Investment Services, Inc., a fullservice brokerage company that offers a full range of investment alternatives including annuities, mutual funds, stocks, bonds and other insurance products.
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Operating Segments | ||||||||||||||||||||
Commercial Banking |
Consumer Banking |
Investment Management and Trust |
Other | Consolidated | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Year ended December 31, 2009 | ||||||||||||||||||||
Net interest income (loss) |
$ | 25,932 | $ | 51,451 | $ | (12 | ) | $ | (1,981 | ) | $ | 75,390 | ||||||||
Non-interest income |
6,962 | 34,201 | 16,122 | 28,136 | 85,421 | |||||||||||||||
Total revenue |
32,894 | 85,652 | 16,110 | 26,155 | 160,811 | |||||||||||||||
Provision (benefit) for loan losses |
192,050 | (1,893 | ) | | | 190,157 | ||||||||||||||
Depreciation and amortization |
952 | 2,900 | 286 | 3,561 | 7,699 | |||||||||||||||
Other non-interest expense |
60,894 | 68,070 | 14,260 | 17,637 | 160,861 | |||||||||||||||
(Loss) income before income taxes |
(221,002 | ) | 16,575 | 1,564 | 4,957 | (197,906 | ) | |||||||||||||
Income tax (benefit) expense |
(86,191 | ) | 6,465 | 603 | 105,000 | 25,877 | ||||||||||||||
Net (loss) income |
$ | (134,811 | ) | $ | 10,110 | $ | 961 | $ | (100,043 | ) | $ | (223,783 | ) | |||||||
Assets |
$ | 2,289,834 | $ | 674,351 | $ | 1,871 | $ | 811,174 | $ | 3,777,230 | ||||||||||
Year ended December 31, 2008 |
||||||||||||||||||||
Net interest income (loss) |
$ | 93,450 | $ | 61,421 | $ | 200 | $ | (23,186 | ) | $ | 131,885 | |||||||||
Non-interest income |
8,556 | 38,440 | 20,024 | 7,582 | 74,602 | |||||||||||||||
Total revenue (loss) |
102,006 | 99,861 | 20,224 | (15,604 | ) | 206,487 | ||||||||||||||
Provision for loan losses |
180,454 | 22,262 | | | 202,716 | |||||||||||||||
Depreciation and amortization |
1,360 | 3,431 | 75 | 3,909 | 8,775 | |||||||||||||||
Other non-interest expense |
59,278 | 69,561 | 16,556 | 18,309 | 163,704 | |||||||||||||||
(Loss) income before income taxes |
(139,086 | ) | 4,607 | 3,593 | (37,822 | ) | (168,708 | ) | ||||||||||||
Income tax (benefit) expense |
(53,315 | ) | 3,189 | 1,442 | (22,225 | ) | (70,909 | ) | ||||||||||||
Net (loss) income |
$ | (85,771 | ) | $ | 1,418 | $ | 2,151 | $ | (15,597 | ) | $ | (97,799 | ) | |||||||
Assets |
$ | 3,022,654 | $ | 1,025,442 | $ | 11,489 | $ | 1,000,239 | $ | 5,059,824 | ||||||||||
Year ended December 31, 2007 |
||||||||||||||||||||
Net interest income (loss) |
$ | 116,311 | $ | 62,993 | $ | 439 | $ | (19,159 | ) | $ | 160,584 | |||||||||
Non-interest income |
7,857 | 38,662 | 21,362 | 3,116 | 70,997 | |||||||||||||||
Total revenue (loss) |
124,168 | 101,655 | 21,801 | (16,043 | ) | 231,581 | ||||||||||||||
Provision for loan losses |
24,817 | 4,270 | | | 29,087 | |||||||||||||||
Depreciation and amortization |
1,146 | 3,908 | 69 | 2,982 | 8,105 | |||||||||||||||
Other non-interest expense |
58,848 | 60,962 | 17,332 | 20,092 | 157,234 | |||||||||||||||
Income (loss) before income taxes |
39,357 | 32,515 | 4,400 | (39,117 | ) | 37,155 | ||||||||||||||
Income tax expense (benefit) |
15,349 | 12,681 | 1,850 | (20,966 | ) | 8,914 | ||||||||||||||
Net income (loss) |
$ | 24,008 | $ | 19,834 | $ | 2,550 | $ | (18,151 | ) | $ | 28,241 | |||||||||
Assets |
$ | 3,139,733 | $ | 955,659 | $ | 12,824 | $ | 1,084,562 | $ | 5,192,778 | ||||||||||
Proforma 2009 Segment Results (1) |
||||||||||||||||||||
Net interest income (loss) |
$ | 55,379 | $ | 59,458 | $ | 54 | $ | (39,501 | ) | $ | 75,390 | |||||||||
Non-interest income |
6,841 | 34,048 | 16,095 | 28,437 | 85,421 | |||||||||||||||
Total revenue (loss) |
62,220 | 93,506 | 16,149 | (11,064 | ) | 160,811 | ||||||||||||||
Provision (benefit) for loan losses |
192,050 | (1,893 | ) | | | 190,157 | ||||||||||||||
Depreciation and amortization |
952 | 2,900 | 286 | 3,561 | 7,699 | |||||||||||||||
Other non-interest expense |
56,953 | 64,615 | 13,722 | 25,571 | 160,861 | |||||||||||||||
(Loss) income before income taxes |
(187,735 | ) | 27,884 | 2,141 | (40,196 | ) | (197,906 | ) | ||||||||||||
Income tax (benefit) expense |
(73,217 | ) | 10,876 | 828 | 87,390 | 25,877 | ||||||||||||||
Net (loss) income |
$ | (114,518 | ) | $ | 17,008 | $ | 1,313 | $ | (127,586 | ) | $ | (223,783 | ) | |||||||
(1) | Proforma 2009 Segment Results exclude the affects made during the year to fully absorb corporate overhead and other previously unallocated costs and to allocate the cost of maintaining excess liquidity. |
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NOTE 16 RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Legal limitations exist as to the extent to which the Bank can lend or pay dividends to AMCORE and/or its affiliates. The payment of dividends by a national bank without prior regulatory approval is limited to the current years net income plus the adjusted retained net income for the two preceding years. The payment of dividends by any bank or bank holding company is affected by the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Federal Reserve Board (Fed) and regulations issued by the FDIC and the OCC (collectively the Agencies). Dividends paid by the Bank to AMCORE are currently prohibited since the Banks capital is below applicable minimum capital requirements. In 2010, dividends are not expected to be paid by the Bank. There were no loans outstanding from the Bank to affiliates at December 31, 2009.
The amount available for loans or advances by the Bank to the Company and its affiliates amounted to $33 million, however, the Company does not have sufficient collateral to secure an advance.
NOTE 17 CAPITAL REQUIREMENTS
The Company and the Bank (Regulated Companies) are subject to various regulatory capital requirements administered by the federal banking agencies, the OCC, Fed and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by these regulators that, if undertaken, could have a direct material effect on the Companys Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Regulated Companies must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Regulated Companies to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 Capital to average assets. Tier 1 Capital includes common stockholders equity, qualifying preferred stock and Trust Preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable taxes, on available-for-sale securities carried at fair value). Total Capital includes Tier 1 Capital plus preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Company, the allowance for loan and lease losses and net unrealized gains on marketable equity securities, subject to limitations by the guidelines.
As the following table indicates, as of December 31, 2009, both the Company and the Bank were below adequacy minimums for regulatory capital purposes. The Bank, like many financial institutions, has historically maintained capital at or above the well-capitalized threshold. Also, like many financial institutions during the past two years, the Bank has experienced steady declines in its capital levels as credit losses have risen.
For the Bank, there are five levels of capital defined by the regulations: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At the current capital levels, the Bank is considered significantly undercapitalized. As noted previously, the Company expects the credit crisis that is affecting the economy in general to persist into 2010, and will likely bring with it additional credit losses. As a result of being below adequately capitalized, among other things, there will be increases in the Companys borrowing costs and AMCORE will be unable to access the brokered CD markets. AMCORE is also subject to limitations with respect to interest rates it can offer on deposits, generally limited to rates equal to no more than 75 basis points above prevailing market rates. These limitations, as well as recent increased collateral requirements and advance limitations with respect to other funding sources, may have a material impact on the Banks deposit levels and liquidity. As noted above in Note 12, Regulatory Matters section, the Company is subject to the FRB Agreement, the Consent Order, and the Letter requiring it to increase capital to a level greater than the level required to be considered well-capitalized under applicable regulations.
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For Capital Adequacy Purposes | ||||||||||||||||||||
Actual | Minimum | Well-Capitalized | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
As of December 31, 2009: |
||||||||||||||||||||
Total Capital (to Risk Weighted Assets): |
||||||||||||||||||||
Consolidated |
$ | 124,038 | 4.53 | % | $ | 218,986 | ³ | 8.00 | % | n/a | n/a | |||||||||
AMCORE Bank, N.A. |
193,287 | 7.07 | % | 218,676 | ³ | 8.00 | % | $ | 273,345 | ³ | 10.00 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets): |
||||||||||||||||||||
Consolidated |
$ | 62,019 | 2.27 | % | $ | 109,493 | ³ | 4.00 | % | n/a | n/a | |||||||||
AMCORE Bank, N.A. |
107,728 | 3.94 | % | 109,338 | ³ | 4.00 | % | $ | 164,007 | ³6.00 | % | |||||||||
Tier 1 Capital (to Average Assets): |
||||||||||||||||||||
Consolidated |
$ | 62,019 | 1.50 | % | $ | 165,336 | ³ | 4.00 | % | n/a | n/a | |||||||||
AMCORE Bank, N.A. |
107,728 | 2.61 | % | 165,056 | ³ | 4.00 | % | $ | 206,320 | ³5.00 | % | |||||||||
As of December 31, 2008: |
||||||||||||||||||||
Total Capital (to Risk Weighted Assets): |
||||||||||||||||||||
Consolidated |
$ | 408,205 | 10.04 | % | $ | 325,333 | ³ | 8.00 | % | n/a | n/a | |||||||||
AMCORE Bank, N.A. |
411,220 | 10.14 | % | 324,554 | ³ | 8.00 | % | $ | 405,692 | ³ | 10.00 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets): |
||||||||||||||||||||
Consolidated |
$ | 306,245 | 7.53 | % | $ | 162,666 | ³ | 4.00 | % | n/a | n/a | |||||||||
AMCORE Bank, N.A. |
309,379 | 7.63 | % | 162,277 | ³ | 4.00 | % | $ | 243,415 | ³6.00 | % | |||||||||
Tier 1 Capital (to Average Assets): |
||||||||||||||||||||
Consolidated |
$ | 306,245 | 6.06 | % | $ | 202,006 | ³ | 4.00 | % | n/a | n/a | |||||||||
AMCORE Bank, N.A. |
309,379 | 6.14 | % | 201,549 | ³ | 4.00 | % | $ | 251,937 | ³5.00 | % |
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NOTE 18 CONDENSED PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY BALANCE SHEETS
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 5,020 | $ | 1,193 | ||||
Short-term investments |
63 | 4,063 | ||||||
Investment in subsidiaries |
99,089 | 312,560 | ||||||
Other assets |
5,277 | 22,455 | ||||||
Total Assets |
$ | 109,449 | $ | 340,271 | ||||
LIABILITIES |
||||||||
Short-term borrowings |
$ | 12,500 | $ | 20,000 | ||||
Long-term borrowings |
51,547 | 51,547 | ||||||
Other liabilities |
9,395 | 6,726 | ||||||
Total Liabilities |
$ | 73,442 | $ | 78,273 | ||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock |
$ | | $ | | ||||
Common stock |
6,712 | 6,684 | ||||||
Treasury stock |
(164,929 | ) | (172,293 | ) | ||||
Additional paid-in capital |
62,804 | 69,838 | ||||||
Retained earnings |
141,901 | 365,684 | ||||||
Accumulated other comprehensive loss |
(10,481 | ) | (7,915 | ) | ||||
Total Stockholders Equity |
$ | 36,007 | $ | 261,998 | ||||
Total Liabilities and Stockholders Equity |
$ | 109,449 | $ | 340,271 | ||||
CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
INCOME |
||||||||||||
Dividends from subsidiaries |
$ | | $ | | $ | 60,000 | ||||||
Interest income |
71 | 224 | 465 | |||||||||
Non-interest income |
214 | 314 | 3,148 | |||||||||
Total Income |
$ | 285 | $ | 538 | $ | 63,613 | ||||||
EXPENSES |
||||||||||||
Interest expense |
$ | 4,180 | $ | 3,979 | $ | 3,771 | ||||||
Compensation expense and employee benefits |
3,533 | 5,119 | 4,019 | |||||||||
Other |
2,242 | 3,213 | 4,356 | |||||||||
Total Expenses |
$ | 9,955 | $ | 12,311 | $ | 12,146 | ||||||
(Loss) Income before taxes and undistributed net losses of subsidiaries |
$ | (9,670 | ) | $ | (11,773 | ) | $ | 51,467 | ||||
Income tax expense (benefit) |
1,366 | (4,446 | ) | (3,514 | ) | |||||||
(Loss) Income before undistributed net losses of subsidiaries |
$ | (11,036 | ) | $ | (7,327 | ) | $ | 54,981 | ||||
Equity in undistributed net losses of subsidiaries |
(212,850 | ) | (90,571 | ) | (26,845 | ) | ||||||
Net (Loss) Income before unconsolidated subsidiary |
$ | (223,886 | ) | $ | (97,898 | ) | $ | 28,136 | ||||
Income from unconsolidated subsidiary |
103 | 99 | 105 | |||||||||
Net (Loss) Income |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | ||||
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CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Cash Flows From Operating Activities |
||||||||||||
Net (Loss) Income |
$ | (223,783 | ) | $ | (97,799 | ) | $ | 28,241 | ||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||||||
Depreciation and amortization of premises and equipment |
3 | 11 | 21 | |||||||||
Equity in undistributed net losses of subsidiaries |
212,850 | 90,571 | 26,845 | |||||||||
Stock-based compensation expense |
470 | 1,315 | 856 | |||||||||
Tax benefits on exercise of stock options |
| | 764 | |||||||||
Excess tax benefits from stock-based compensation |
| | (733 | ) | ||||||||
Company owned life insurance (income) loss, net of claims |
(133 | ) | 220 | (890 | ) | |||||||
Decrease (increase) in other assets |
6,589 | (2,327 | ) | 3,454 | ||||||||
Increase (decrease) in other liabilities |
2,669 | (2,655 | ) | (208 | ) | |||||||
Other, net |
(934 | ) | (115 | ) | 1,100 | |||||||
Net cash (used in) provided by operating activities |
$ | (2,269 | ) | $ | (10,779 | ) | $ | 59,450 | ||||
Cash Flows From Investing Activities |
||||||||||||
Net decrease (increase) in short-term investments |
$ | 4,000 | 7,998 | $ | (12,061 | ) | ||||||
Proceeds from surrender of company owned life insurance |
10,000 | | | |||||||||
Other, net |
| (9 | ) | (15 | ) | |||||||
Net cash provided by (used in) investing activities |
$ | 14,000 | $ | 7,989 | $ | (12,076 | ) | |||||
Cash Flows From Financing Activities |
||||||||||||
Net (decrease) increase in short-term borrowings |
$ | (7,500 | ) | $ | (2,150 | ) | $ | 2,150 | ||||
Proceeds from long-term borrowings |
| 10,000 | 61,547 | |||||||||
Payment of long-term borrowings |
| | (41,238 | ) | ||||||||
Dividends paid |
| (6,292 | ) | (16,829 | ) | |||||||
Issuance of shares for employee stock plan |
214 | 434 | 665 | |||||||||
(Cancellation) reissuance of treasury shares for incentive plans |
(615 | ) | (140 | ) | 5,706 | |||||||
Excess tax benefits from stock-based compensation |
| | 733 | |||||||||
Purchase of shares for treasury |
(3 | ) | (348 | ) | (59,609 | ) | ||||||
Net cash (used in) provided by financing activities |
$ | (7,904 | ) | $ | 1,504 | $ | (46,875 | ) | ||||
Net change in cash and cash equivalents |
$ | 3,827 | $ | (1,286 | ) | $ | 499 | |||||
Cash and cash equivalents: |
||||||||||||
Beginning of year |
1,193 | 2,479 | 1,980 | |||||||||
End of year |
$ | 5,020 | $ | 1,193 | $ | 2,479 | ||||||
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CONDENSED QUARTERLY EARNINGS & STOCK PRICE SUMMARY (unaudited)
2009 | 2008 | |||||||||||||||||||||||||||||||
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Interest income |
$ | 53,878 | $ | 49,425 | $ | 45,530 | $ | 40,892 | $ | 75,801 | $ | 69,088 | $ | 66,452 | $ | 61,415 | ||||||||||||||||
Interest expense |
31,412 | 30,761 | 27,542 | 24,620 | 39,135 | 33,079 | 34,190 | 34,467 | ||||||||||||||||||||||||
Net interest income |
$ | 22,466 | $ | 18,664 | $ | 17,988 | $ | 16,272 | $ | 36,666 | $ | 36,009 | $ | 32,262 | $ | 26,948 | ||||||||||||||||
Provision for loan losses |
62,743 | 17,000 | 60,254 | 50,160 | 57,229 | 40,000 | 48,000 | 57,487 | ||||||||||||||||||||||||
Non-interest income |
21,391 | 28,534 | 16,707 | 18,789 | 17,899 | 19,533 | 20,245 | 16,925 | ||||||||||||||||||||||||
Operating expenses |
39,441 | 48,540 | 38,735 | 41,844 | 44,881 | 48,300 | 38,364 | 40,934 | ||||||||||||||||||||||||
(Loss) Income before income taxes |
$ | (58,327 | ) | $ | (18,342 | ) | $ | (64,294 | ) | $ | (56,943 | ) | $ | (47,545 | ) | $ | (32,758 | ) | $ | (33,857 | ) | $ | (54,548 | ) | ||||||||
Income tax (benefit) expense |
(27,929 | ) | (7,618 | ) | 92,101 | (30,677 | ) | (20,086 | ) | (12,524 | ) | (15,870 | ) | (22,429 | ) | |||||||||||||||||
Net (Loss) Income |
$ | (30,398 | ) | $ | (10,724 | ) | $ | (156,395 | ) | $ | (26,266 | ) | $ | (27,459 | ) | $ | (20,234 | ) | $ | (17,987 | ) | $ | (32,119 | ) | ||||||||
Per share data: |
||||||||||||||||||||||||||||||||
Basic |
$ | (1.34 | ) | $ | (0.47 | ) | $ | (6.81 | ) | $ | (1.14 | ) | $ | (1.21 | ) | $ | (0.89 | ) | $ | (0.79 | ) | $ | (1.42 | ) | ||||||||
Diluted |
(1.34 | ) | (0.47 | ) | (6.81 | ) | (1.14 | ) | (1.21 | ) | (0.89 | ) | (0.79 | ) | (1.42 | ) | ||||||||||||||||
Dividends |
| | | | 0.180 | 0.049 | 0.049 | | ||||||||||||||||||||||||
Stock price ranges high |
4.16 | 2.27 | 2.18 | 1.92 | 23.00 | 21.25 | 14.50 | 9.37 | ||||||||||||||||||||||||
low |
0.58 | 0.65 | 0.55 | 0.36 | 17.25 | 5.53 | 3.09 | 2.51 | ||||||||||||||||||||||||
close |
1.60 | 0.82 | 1.60 | 1.24 | 20.35 | 5.66 | 9.37 | 3.62 |
The financial information contains all normal and recurring reclassifications for a fair and consistent presentation.
Quotes have been obtained from NASDAQ.com. These quotes do not reflect retail mark-ups, mark-downs or commissions nor are they necessarily representative of actual transactions.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of AMCORE Financial, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of AMCORE Financial, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2009. We also have audited the Companys internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCORE Financial, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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The accompanying consolidated financial statements for the year ended December 31, 2009, have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Companys significant operating losses in 2008 and 2009, significant levels of criticized assets, and low levels of capital raise substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also discussed in Note 1 to the financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Milwaukee, Wisconsin
March 22, 2010
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
(a) | Managements Report on Internal Control over Financial Reporting |
Management of AMCORE Financial, Inc. and its subsidiaries (AMCORE) is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control contains monitoring mechanisms and actions are taken to correct deficiencies identified.
Management assessed AMCOREs internal control over financial reporting as of December 31, 2009. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management believes that, as of December 31, 2009, AMCORE maintained effective internal control over financial reporting, including policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and, provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the Companys financial statements.
The effectiveness of internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report dated March 22, 2010, which is included herein.
(b) | Report of Independent Registered Public Accounting Firm See report of Deloitte & Touche LLP included in Item 8 of this report on Form 10-K. |
Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter ending as of this report date to which this report relates that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The Proxy Statement and Notice of 2010 Annual Meeting, dated March 22, 2010, are incorporated herein by reference.
(a) | Executive Officers of the Registrant. The information is presented in Item 1 of this document. |
(b) | Code of Ethics. The Company has adopted a code of ethics applicable to all employees, including the principal executive, principal financial and principal accounting officers of the Company. The AMCORE Financial, Inc. Code of Ethics is posted on the Companys website at www.AMCORE.com/governance. See Part I, Item 1 of this report on Form 10-K for additional information. |
ITEM 11. | EXECUTIVE COMPENSATION |
The Proxy Statement and Notice of 2010 Annual Meeting, dated March 22, 2010, are incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The Proxy Statement and Notice of 2010 Annual Meeting, dated March 22, 2010, are incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth information as of the end of the Companys 2009 fiscal year with respect to all incentive/option plans under which equity securities are authorized for issuance.
Plan Category |
(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) |
(b) Weighted average exercise price of outstanding options, warrants and rights |
(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
Equity compensation plans approved by security holders (2)(3) |
1,793,344 | $ | 22.82 | 315,673 | |||
Equity compensation plans not approved by security holders |
N/A | N/A | N/A | ||||
Total |
1,793,344 | $ | 22.82 | 315,673 | |||
(1) | Includes options that have not vested and, therefore, are not currently exercisable. See Note 10 of the Notes to Consolidated Financial Statements for additional information on vesting schedules. For purposes of determining diluted shares for earnings per share calculations, only options which are in-the-money are included in the calculation. See Note 14 of the Notes to Consolidated Financial Statements for additional information. |
(2) | Includes options granted pursuant to the AMCORE Financial, Inc. 2005 Stock Award and Incentive Plan (SAIP) and previous stock incentive plans. The SAIP provides for the grant of stock options, stock appreciation rights, restricted stock awards, deferred stock, dividend equivalents, stock bonus awards, or performance unit awards either singly or in combination to employees of the Company or its subsidiaries. The total shares reserved for issuance is 2.5% of the total shares of the Companys outstanding common stock on the date of adoption and for each subsequent year the lesser of 425,000 shares or 1.5% of the total shares of the Companys outstanding common stock as of each January 1. The number of shares of stock available for issuance under the 2005 SAIP as of the beginning of any calendar year plus the number of |
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shares of stock reserved for outstanding awards shall not exceed 12% of the outstanding shares at such time. During the five-year term of the SAIP, total shares granted shall not exceed 2,125,000 shares, with a maximum of 550,000 shares granted in any one calendar year. The Company will not reprice any options under the SAIP unless such repricing is authorized by a majority vote of the shareholders. Any shares subject to an award that for any reason expires, is forfeited or is terminated unexercised shall again be available under the SAIP. Remaining shares available for grant total 14,664. |
(3) | The Directors Restricted Stock Plan for Non-employee Directors provides for the issuance of restricted shares. The remaining shares available for grant total 141,509. The 2001 Stock Option Plan for Non-employee Directors provides for the grant of stock options. The remaining shares available for grant total 159,500. |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The Proxy Statement and Notice of 2010 Annual Meeting, dated March 22, 2010, are incorporated herein by reference. See also Note 4 of the Notes to Consolidated Financial Statements.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The Proxy Statement and Notice of 2010 Annual Meeting, dated March 22, 2010, are incorporated herein by reference.
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES |
(a) | 1. FINANCIAL STATEMENTS |
The following Consolidated Financial Statements of AMCORE are filed as a part of this document under Item 8. Financial Statements and Supplementary Data. Consolidated Balance Sheets December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders Equity for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements December 31, 2009, 2008 and 2007
Reports of Independent Registered Public Accounting Firms
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(a) | 2. FINANCIAL STATEMENTS SCHEDULES |
All financial statements schedules have been included in the Consolidated Financial Statements or are either not applicable or not significant.
(a) | 3. EXHIBITS |
3.1 | Amended and Restated Articles of Incorporation of AMCORE Financial, Inc., dated April 8, 1986 (Incorporated by reference to Exhibit 3 of AMCOREs Quarterly Report on Form 10-Q for the quarter ended March 31, 1986); as amended May 3, 1988 to Article 8 (Incorporated by reference to AMCOREs definitive 1988 Proxy Statement dated March 18, 1988); and as amended May 1, 1990 to Article 5 (Incorporated by reference to AMCOREs definitive 1990 Proxy Statement dated March 21, 1990). | |
3.2 | By-laws of AMCORE Financial, Inc., as amended February 11, 2004 (Incorporated by reference to Exhibit 3.2 of AMCOREs Annual Report on Form 10-K for the year ended December 31, 2003). | |
4.1 | Indenture, dated as of March 27, 2007, between the Company and Wilmington Trust Company (Incorporated by reference to AMCOREs exhibit 4.1 of AMCOREs Quarterly Report on Form 10-Q for the quarter ended March 31, 2007). | |
4.2 | Form of New Guarantee between the Company and Wilmington Trust Company (Incorporated by reference to AMCOREs exhibit 4.2 of AMCOREs Quarterly Report on Form 10-Q for the quarter ended March 31, 2007). | |
10.1 | AMCORE Financial, Inc. 2000 Stock Incentive Plan (Incorporated by reference to AMCOREs Proxy Statement, Appendix A, filed as Exhibit 22 to AMCOREs Annual Report on Form 10-K for year ended December 31, 1999). | |
10.2 | AMCORE Financial, Inc. 2001 Stock Option Plan for Non-Employee Directors (Incorporated by reference to AMCOREs Proxy Statement, Appendix A, filed as Exhibit 22 to AMCOREs Annual Report on Form 10-K for year ended December 31, 2000). | |
10.3 | Amended and Restated AMCORE Stock Option Advantage Plan (Incorporated by reference to AMCOREs Proxy Statement, Appendix A, filed as Exhibit 22 to AMCOREs Annual Report on Form 10-K for year ended December 31, 2003). | |
10.4 | Supplemental Executive Retirement Plan, dated May 20, 1998 (Incorporated by reference to Exhibit 10.9 of AMCOREs Annual Report on Form 10-K for the year ended December 31, 1999). | |
10.5 | AMCORE Financial, Inc. Amended and Restated Deferred Compensation Plan (Incorporated by reference to Exhibit 10.3 of AMCOREs Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
10.6 | AMCORE Financial, Inc. Performance Share Program (Incorporated by reference to AMCOREs Form 8-K as filed with the Commission on May 9, 2005). | |
10.7 | AMCORE Financial, Inc. 2005 Stock Award and Incentive Plan (Incorporated by reference to AMCOREs Proxy Statement, Appendix A, filed as Exhibit 22 to AMCOREs Annual Report on Form 10-K for year ended December 31, 2004). | |
10.8 | Amended and Restated Transitional Compensation Agreement dated January 2, 2008, between AMCORE Financial, Inc. and the following individuals: Lori Burke, Russell Campbell, and Thomas R. Szmanda (Incorporated by reference to AMCOREs Form 10-K as filed with the Commission on March 19, 2009). | |
10.9 | Separation, Release, and Consulting Agreement, dated February 22, 2008, between AMCORE Financial, Inc. and Kenneth E. Edge (Incorporated by reference to AMCOREs Form 8-K as filed with the Commission on February 25, 2008). | |
10.10 | AMCORE Financial, Inc. Annual Incentive Plan as revised February 22, 2008 (Incorporated by reference to AMCOREs Form 10-K as filed with the Commission on March 17, 2008). |
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10.11 | Written Agreement between AMCORE Bank, N.A. and the Officer of the Comptroller of the Currency dated May 15, 2008 (Incorporated by reference to AMCOREs Form 8-K as filed with the Commission on May 16, 2008). | |
10.12 | Transitional Compensation Agreement dated May 6, 2008, between AMCORE Financial, Inc., and Judith C. Sutfin. (Incorporated by reference to AMCOREs exhibit 10.1 of AMCOREs Quarterly Report on Form 10-Q for the quarter ended June 30, 2008). | |
10.13 | Transitional Compensation Agreement dated August 25, 2008, between AMCORE Financial, Inc., and Guy Francesconi. (Incorporated by reference to AMCOREs exhibit 10.1 of AMCOREs Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | |
10.14 | Release Agreement, dated August 4, 2009 between AMCORE Bank, N.A. and Richard E. Stiles (Incorporated by reference to AMCOREs Current Report on Form 8-K as filed with the Commission on August 6, 2009). | |
10.15 | Release Agreement, dated August 18, 2009 between AMCORE Financial, Inc. and Donald H. Wilson (Incorporated by reference to AMCOREs Current Report on Form 8-K as filed with the Commission on August 18, 2009). | |
21 | Subsidiaries of the Registrant | |
23.1 | Consent of Deloitte & Touche LLP | |
24 | Power of Attorney | |
31.1 | Certification of CEO pursuant to Rule 13a-14 and Rule 15d-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of CFO pursuant to Rule 13a-14 and Rule 15d-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMCORE FINANCIAL, INC. | ||||
Date: March 22, 2010 |
By: |
| ||
Judith Carré Sutfin | ||||
Executive Vice President and | ||||
Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below on the 22nd day of March 2010 by the following persons on behalf of the Registrant in the capacities indicated.
Name |
Title | |
|
Chief Executive Officer | |
William R. McManaman | (principal executive officer) | |
Judith Carré Sutfin |
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) | |
Directors: Paula A. Bauer, Paul Donovan, John W. Gleeson, John A. Halbrook, Frederick D. Hay, Teresa Iglesias-Solomon, William R. McManaman, Steven S. Rogers, and Jack D. Ward
William R. McManaman * |
Judith Carré Sutfin * |
Attorney in Fact* |
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