Add
AMFI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AMFI > SEC Filings for AMFI > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
The following discussion highlights the significant factors affecting AMCORE Financial, Inc. and Subsidiaries' ("AMCORE" or the "Company") consolidated financial condition as of December 31, 2008 compared to December 31, 2007, and the consolidated results of operations for the three years ended December 31, 2008. 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.
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;
(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 collectibility 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;
and, (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 nature and extent of which cannot be determined at this
time.
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. 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, 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 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, judgment errors may occur. 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 adequacy of the Allowance by ten percent during 2008, an additional Provision of $13.6 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. In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" that clarified the accounting for uncertain tax positions recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". This interpretation prescribes a recognition threshold that the Company must evaluate before it can record the benefit of 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. At December 31, the Company had a valuation allowance of $2.6 million due to the uncertain realization of certain state loss carryforwards. See Note 14 of the Notes to Consolidated Financial Statements.
Accounting Changes
Split-Dollar Life Insurance - In September 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-4 "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The issue requires companies to recognize a liability for future benefits on split dollar insurance arrangements if the benefit to the employee extends to postretirement periods. The issue is required to be applied to fiscal years beginning after December 15, 2007, with earlier application permitted. This standard was adopted in first quarter 2008 and did not have a material affect on the Company's Consolidated Balance Sheets or Statements of Operations.
Fair Value Measurements- In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard applies to other accounting
pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. For some entities, the application of the standard may change how fair value is measured. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. The FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. This standard was adopted in first quarter 2008 and did not have a material affect on the Company's Consolidated Balance Sheets or Statements of Operations.
Fair Value Option for Financial Assets and Financial Liabilities - In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." The fair value option established by this standard permits all entities to choose to measure eligible items at fair value at specified election dates. Under SFAS No. 159, a business entity is required to report unrealized gains and losses on items for which the fair value option have been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The standard was effective as of January 1, 2008. The Company did not adopt fair value for any new items.
Loan Commitments Recorded at Fair Value Through Earnings- In November 2007, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin (SAB) No. 109, which superseded SAB No. 105, which applied only to derivative loan commitments that are accounted for at fair value through earnings. The new guidance states that, consistent with the guidance in SFAS No. 156, "Accounting for Servicing of Financial Assets", and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities", the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. This standard was adopted in first quarter 2008 and did not have a material affect on the Company's Consolidated Balance Sheets or Statements of Operations.
Minority Interests - In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements - an amendment of Accounting Research Bulletin (ARB) No. 51." Among other things, SFAS No. 160 requires minority interests be recorded as a separate component of equity and that net income attributable to minority interests be clearly identified on the Statements of Operations. SFAS No. 160 is effective for fiscal years and interim periods beginning on or after December 15, 2008. Earlier adoption is prohibited. Statement No. 160 is required to be applied prospectively, except for the presentation and disclosure requirements. Adoption of this standard in fiscal year 2009 is not expected to have a material impact on the Company's Consolidated Balance Sheets or Statements of Operations.
Business Combinations - In December 2007, the FASB issued SFAS No. 141R, "Business Combinations", to improve financial reporting on business combinations, including recognition and measurement of assets acquired, liabilities assumed, noncontrolling interests, and goodwill. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply this Statement before that date.
Simplified Method for Share Option Grants - In December 2007, the SEC issued SAB No. 110, which expresses the views of he SEC regarding the use of a "simplified" method, as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123(R), Share-Based Payment. The SEC concluded that a company could, under certain circumstances, continue to use the simplified method for share option grants after December 31, 2007. Due to the significant differences in terms and types of option grants received by employees, and recent significant structural changes, historical exercise data did not provide a reasonable basis upon which to estimate expected term. The Company, therefore, continued its use of the simplified method for determining an estimate of expected term for its share options granted during 2008.
Derivative Instruments and Hedging Activities Disclosure - In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" to provide enhanced disclosures and thereby improve the transparency of financial reporting. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. Adoption of this standard is not expected to have a material impact on the Company's Consolidated Balance Sheets or Statements of Operations.
Key Initiatives
Credit quality - The Company continues to enhance the credit risk administration and measurement processes of its banking subsidiary (the "Bank"). Actions already taken or underway include: implemented a new risk grading system in 2007 to provide more detailed information as to the conditions underlying the portfolio; engaged an independent third party during third quarter 2008 to review a representative sample of the commercial loan portfolio to verify risk rating accuracy; hired an experienced commercial lending leader in second quarter 2007; shifted the management of virtually all residential development loan relationships to an experienced specialty unit; continued increased focus on commercial and industrial relationship lending; reorganized the commercial credit approval process; increased the allowance for loan losses and enhanced the processes related to the allowance 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 in second quarter 2008; added qualified and experienced senior staff to manage the credit administration, loan review and appraisal functions in second quarter 2008; and, redeployed a senior commercial manager to a special assignment to enhance portfolio management efforts and credit monitoring processes during fourth quarter 2008. Over the next few months, the Bank plans 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.
Cost efficiencies - For 2008, the Company targeted a three percent per year reduction pre-FDIC insurance operating expenses for 2008. Excluding a $6.2 million write-off for goodwill, a credit-related reserve for unfunded loan commitments of $4.8 million and FDIC insurance premiums of $3.6 million, the Company realized a four percent reduction. This included more than an 11% reduction in full-time equivalent positions since the beginning of 2008.
In addition, 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 retail activity that housed mainly commercial lenders, and a leased branch with excess capacity, minimal access to customers, and high maintenance costs. A $1.7 million non-cash impairment charge was recorded in connection with the Facilities Consolidation. One property was sold during 2008 at an amount equal to its book value, as recorded on the Consolidated Balance Sheets.
Going forward, the Company will continue its efforts to right size its cost structure to its revenue stream. For example, the Company will only hire for essential positions critical to operations.
Capital and Liquidity - The Company is actively pursuing opportunities to raise additional capital and otherwise enhance its capital position through a variety of means. During fourth quarter 2008, the Company merged its Investment Management and Trust Group, into the main Bank charter. This added more than $8 million of capital to the Bank, a more efficient use of the capital of the organization. See Capital Management section below for an expanded discussion of the regulatory capital standards. This also allows the Company to serve its customers
with greater "One-Bank" operational clarity. In fourth quarter 2008, the Company suspended its quarterly dividend to preserve capital and parent company liquidity. AMCORE also elected to participate in the FDIC Transaction Account Guarantee Program, providing unlimited insurance on non-interest bearing transaction accounts through December 2009. During 2008, the Bank built its liquidity reserves, ending the year with more than $75 million of short-term investments to strengthen its funding stability as the economic environment became less stable.
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 the business is a key objective. The "One-Bank" initiative for serving customers across all lines of business continues to be a focus for 2009. It will allow the Company to leverage the combined expertise of the organization and its people across the 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 continue to strengthen its earnings stream.
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 19,000 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 324 at the beginning of 2008 to more than 1,300 at the end of 2008 throughout Illinois and Wisconsin.
Other Significant Items and Events
Key personnel changes - On February 25, 2008, the Company announced that Kenneth E. Edge had elected to retire as Chief Executive Officer (the "Executive Retirement") of the Company, effective as of February 22, 2008, and remained as Chairman of the Board of Directors (the "Board") of the Company until May 6, 2008.
Also, on February 22, 2008, the Board elected William R. McManaman as Chief Executive Officer, effective February 25, 2008. Prior to his appointment as Chief Executive Officer, Mr. McManaman, age 60, 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 2008, the Bank opened three new branches, one in Mt. Prospect, Illinois, one in Wheaton, Illinois and one in Vernon Hills, Illinois. The Bank has slowed the opening of new branches to only those already in the construction pipeline or under contract. In 2009, this included branches in Antioch, Illinois and Naperville, Illinois, which opened January 26, 2009 and February 13, 2009, respectively. There are no more branches in the construction pipeline.
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 arrangement offers AMCORE a greater breadth of products, more competitive pricing and greater processing efficiencies and is expected to better position the Company for future loan origination growth. As a result of this arrangement, AMCORE expects to better control the risks associated with its mortgage banking business.
. . .
|
|