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EX-24 - POWER OF ATTORNEY - AMCORE FINANCIAL INCdex24.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - AMCORE FINANCIAL INCdex21.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350 - AMCORE FINANCIAL INCdex321.htm
EX-23.1 - CONSENT OF DELOITTE & TOUCHE LLP - AMCORE FINANCIAL INCdex231.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14 AND RULE 15D-14 OF THE EXCHANGE ACT - AMCORE FINANCIAL INCdex312.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350 - AMCORE FINANCIAL INCdex322.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14 AND RULE 15D-14 OF THE EXCHANGE ACT - AMCORE FINANCIAL INCdex311.htm
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10–K

 

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 0–13393

 

 

 

AMCORE Financial, Inc.

 

NEVADA   36–3183870
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

501 Seventh Street, Rockford, Illinois 61104

Telephone Number (815) 968–2241

 

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 S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.  ¨

 

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 registrant’s 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.

 

Form 10–K Table of Contents

 

PART I

      Page
Number

Item 1

  

Business

   1

Item 1A

  

Risk Factors

   10

Item 1B

  

Unresolved Staff Comments

   17

Item 2

  

Properties

   17

Item 3

  

Legal Proceedings

   17

Item 4

  

Removed and Reserved

   17

PART II

     

Item 5

  

Market for the Registrant’s Common Equity and Related Stockholder Matters

   18

Item 6

  

Selected Financial Data

   19

Item 7

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    20

Item 7A

  

Quantitative and Qualitative Disclosures about Market Risk

   52

Item 8

  

Financial Statements and Supplementary Data

   58

Item 9

   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure    108

Item 9A

  

Controls and Procedures

   108

Item 9B

  

Other Information

   108

PART III

     

Item 10

  

Directors, Executive Officers and Corporate Governance

   109

Item 11

  

Executive Compensation

   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

  

Principal Accountant Fees and Services

   110

PART IV

     

Item 15

  

Exhibits and Financial Statements Schedules

   110

Signatures

   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 Company’s 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 Company’s 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 Company’s 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 AMCORE’s 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 Company’s 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 Company’s 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 AMCORE’s 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 Bank’s deposit levels and liquidity.

 

Consumer Banking Segment – Consumer banking provides services to individual customers through the Bank’s 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 Bank’s 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 Bank’s 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 AMCORE’s 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 full–service 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 AMCORE’s bank and non–bank 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 full–time 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 non–bank subsidiaries are permitted, among other activities, to engage in such banking–related 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 non–bank 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 Company’s 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 Bank’s 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 Bank’s 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 Company’s 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 Company’s current negative financial trends, the Company’s 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 Bank’s capital. In addition, on January 12, 2010, the FRB notified the Company that the Company’s 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 Bank’s 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 Bank’s 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 Company’s and Bank’s 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 Company’s and Bank’s proposals are accepted by the Company’s and Bank’s Federal regulators, that these proposals will be successfully implemented. While the Company’s 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 Company’s ability to continue as a going concern. Doubt as to the Company’s ability to continue as a going concern was previously disclosed in the Company’s 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 OCC’s 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 year’s 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 Bank’s 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 risk–based capital guidelines for bank holding companies. These capital rules require minimum capital levels as a percent of risk–weighted 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 AMCORE’s 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 open–market 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 Company’s 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 Management’s 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 AMCORE’s 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 Company’s ability to continue as a going concern.

 

The Company’s 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 Company’s 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 AMCORE’s 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 Bank’s 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 Company’s 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 Bank’s capital. In addition, on January 12, 2010, the FRB notified the Company that the Company’s 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 Bank’s 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 Bank’s 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 Company’s and Bank’s 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 Company’s and Bank’s proposals are accepted by the Company’s and Bank’s Federal regulators, that these proposals will be successfully implemented. While Company’s 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 Company’s ability to continue as a going concern. Doubt as to the Company’s ability to continue as a going concern was previously disclosed in the Company’s 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 OCC’s 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 Bank’s loan portfolio may continue to deteriorate in the current economic environment and thus continue to deplete the Bank’s 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 Company’s rights against third parties (including guarantors) may not be enforceable or realizable in all circumstances.

 

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The Company’s 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 Bank’s 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 Company’s 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 Company’s 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. Management’s Discussion and Analysis.

 

The Company’s 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 Company’s 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 Company’s 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 Bank’s borrowing costs and terms from regulatory authorities and other third parties, the Bank’s FDIC deposit insurance premiums, and AMCORE’s ability to access brokered CD markets.

 

The Company’s 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 Company’s business, financial condition and results of operations.

 

Liquidity risk could impair the Company’s 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 Company’s 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 Company’s 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 Bank’s deposit levels and liquidity. In particular, the inability to accept, renew, or roll over brokered deposits could put a severe strain on the Bank’s liquidity because of the limited ability to replace maturing brokered deposits with core deposits.

 

Current market developments may adversely affect AMCORE’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s ability to access capital and on its business, financial condition and results of operations.

 

AMCORE’s 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 institution’s 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 Company’s 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 Company’s powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on the Company’s 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 Company’s 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 AMCORE’s 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. Management’s 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 Company’s 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 Company’s ability to capture, process and accurately report these transactions.

 

The Company may fail to meet continued listing requirements with NASDAQ.

 

The Company’s 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 Company’s 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 AMCORE’s 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 Company’s 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 Company’s success.

 

Presently, the Company has four primary strategic initiatives: credit risk management, cost efficiencies, capital and liquidity, and broadening customer relationships. The Company’s 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 Bank’s 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, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Loss of or damage to the Company’s reputation may affect ongoing profitability.

 

Reputation risk arises from the possibility that negative publicity regarding the Company’s 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 company’s 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 AMCORE’s outstanding common stock and may adversely affect the market price of the Company’s 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, AMCORE’s 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 AMCORE’s financial condition and results of operations.

 

Changes in the value of financial instruments could adversely affect the Company’s 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 AMCORE’s 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 Company’s consolidated financial position or consolidated results of operations. Since the Company’s 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 Company’s 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 Company’s proportionate share of its liability to $292,000.

 

ITEM 4.

 

Removed and Reserved.

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

See Items 6 and 8 of this document for information on the Company’s stock price ranges and dividends. AMCORE’s common stock trades on the NASDAQ Stock Market under the symbol “AMFI.” There were approximately 9,000 holders of record of AMCORE’s common stock as of March 5, 2010. See Item 12 of this document for information on the Company’s equity compensation plans.

 

Historically, the Company’s policy had been to declare regular quarterly dividends based upon the Company’s 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 Company’s 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, Management’s 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 Company’s 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:

          

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:

          

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:

          

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. MANAGEMENT’S 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 Company’s 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 AMCORE’s 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 Company’s and Bank’s capital position and the Company’s current default under its senior debt facility could impact the Company’s 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 Company’s 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 Bank’s 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 organization’s hierarchy. Actions taken in 2009 included a five percent reduction in executive salaries, suspension of employee merit increases, bonuses, and the Company’s 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 Company’s 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 Bank’s 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 Bank’s liquidity reserves were approximately $625 million. See Regulatory Developments below for more information regarding the Bank’s liquidity risk management program.

 

Broadening Customer Relationships – The Company’s 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 AMCORE’s 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 Company’s 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 Company’s 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 Bank’s 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 Bank’s 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 Company’s 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 Company’s balance sheet (the “Goodwill Charge”). The write-off was due to the considerable and protracted discount of the Company’s 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 FDIC’s bank deposit insurance fund. AMCORE’s 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 Bank’s 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 Company’s 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 Company’s current negative financial trends, the Company’s 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 Bank’s capital. In addition, on January 12, 2010, the FRB notified the Company that the Company’s 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 Bank’s 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 Bank’s 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 Company’s and Bank’s 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 Company’s and Bank’s proposals are accepted by the Company’s and Bank’s Federal regulators, that these proposals will be successfully implemented. While the Company’s 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 Company’s ability to continue as a going concern. Doubt as to the Company’s ability to continue as a going concern was previously disclosed in the Company’s 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 OCC’s 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 transferor’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 management’s discussion and analysis are, to a large degree, dependent upon the Company’s 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 Company’s 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 Company’s 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 borrower’s 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 management’s 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 management’s 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 Company’s 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 management’s 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 Company’s 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 AMCORE’s 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 Company’s 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 Company’s 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 Company’s 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 management’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s basic contribution to the 401(k) plan, and a 25% reduction of its work force from the end of 2008. The Company’s 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 Bank’s 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 Company’s balance sheet (the “Goodwill Charge”). The write-off was due to the considerable and protracted discount of the Company’s 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

 

AMCORE’s 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 Company’s 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 Bank’s 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 Company’s 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 Bank’s 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 security’s 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 Company’s 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 Company’s 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 AMCORE’s 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 Company’s 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 Company’s 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 Bank’s 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 Company’s and the Bank’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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

 

AMCORE’s 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 customer’s 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 AMCORE’s 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 borrower’s 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 collateral’s 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 AMCORE’s 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 industry’s resources to be over burdened. The most recent appraised values may be adjusted if, in management’s judgment, experience and other market data indicate that the property’s 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 borrower’s 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 CD’s, 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 Bank’s deposit levels and liquidity. While Company’s 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 Company’s ability to continue as a going concern. Doubt as to the Company’s ability to continue as a going concern was previously disclosed in the Company’s 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 OCC’s 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 Company’s cash and cash equivalents was approximately $625 million.

 

Investment securities portfolio – Historically, scheduled maturities of the Company’s 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 CD’s, 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 Bank’s 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 Company’s 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 Bank’s 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 Company’s 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 Bank’s 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 Company’s 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 AMCORE’s 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 AMCORE’s 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 AMCORE’s 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, AMCORE’s 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. AMCORE’s asset and liability committee (ALCO) seeks to manage interest rate risk under a variety of rate environments by structuring the Company’s 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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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