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| AMFI > SEC Filings for AMFI > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following discussion highlights the significant factors affecting AMCORE Financial, Inc. and subsidiaries' ("AMCORE" or the "Company") consolidated financial condition as of September 30, 2009 compared to December 31, 2008, and the consolidated results of operations for the three months and nine months ended September 30, 2009 compared to the same periods in 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. The Company has evaluated subsequent events through November 9, 2009, the date the accompanying Consolidated Financial Statements were filed with the Securities and Exchange Commission.
This report on Form 10-Q 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 nature and extent of
which cannot be determined at this time; and (XXIV) failure by the Company to
comply with the provisions of any regulatory order or agreement to which the
Company is subject could result in additional and material enforcement actions
by the applicable regulatory agencies.
Key Initiatives
Credit quality-Over the last seven quarters, 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, decreases in the Company's basic contribution to the 401(k) plan, and a 23 percent 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 $2.4 million (the "Restructuring Charge") related to the Restructuring have been recorded year-to-date in 2009. Since the end of third quarter 2008, full-time equivalent positions have declined 23%.
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 will consolidate operations of three additional branches to other nearby facilities. These facilities include the Elgin-Big Timber branch, where customers will be able to utilize three nearby newer locations; the Wauwatosa, Wisconsin branch, where the commercial team will relocate to a nearby leased facility; and the Northbrook LBO, which will close when a full service branch in Northbrook opens. Northbrook is the last of the Company's new branches to open and construction on this new branch has been underway for more than a year. No impairment charges are expected 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 increase capital and otherwise enhance its capital position. 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 has 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.
On July 25, 2009, the Bank submitted a capital plan to the Office of the Comptroller of the Currency (the "OCC). See Regulatory Developments below for more information regarding the Bank's capital plan. In connection with the plan, during August 2009 the Company announced agreements had been reached to sell four branches in rural Wisconsin: Argyle, Belleville, Monroe and New Glarus (the "Branch Sales"). These transactions include approximately $90 million in loans, $170 million in deposits and sweep accounts, and up to $45 million in related trust accounts. The brokerage and 401(k) plan business are not part of the Branch Sales and will remain with AMCORE. In connection with the Branch Sales, which are expected to close in November 2009, the Company reclassified the $91 million of loans to held-for-sale.
During 2008, the Bank continued to build its liquidity reserves to strengthen its funding stability as the economic environment became less stable, and during third quarter 2009 submitted a liquidity risk management program to its regulators. See Regulatory Developments below for more information regarding the Bank's liquidity risk management program. At September 30, 2009, the Bank's liquidity reserves were approximately $575 million.
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. The "One-Bank" initiative for serving customers across all lines of business continues to be a focus for 2009. The initiative is expected to better leverage the combined expertise of the Company 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 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 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 throughout Illinois and Wisconsin from roughly 800 at September 30, 2008 to more than 1,400 as of September 30, 2009.
Other Significant Items
Capital-The Company at the consolidated level fell to significantly undercapitalized for all three regulatory capital ratios as of September 30, 2009 due to losses for the quarter and technical limitations that now restrict the inclusion of certain components in regulatory capital. The Bank is significantly undercapitalized for its leverage ratio, undercapitalized for its total capital ratio and adequately capitalized for its Tier 1 capital ratio. As a result of dropping below adequately capitalized, the Bank, among other limitations, continues to be prohibited from accepting or renewing brokered deposits and cannot pay excessive interest rates on deposits. This will continue to have an impact on the Bank's liquidity particularly as brokered deposits mature. See Capital Management discussion, below.
As a result of dropping below adequately capitalized at the consolidated level, the Company is in technical default under its credit agreement with JPMorgan Chase Bank, N.A. AMCORE is and has been current with all its payments due under that facility. AMCORE received a waiver from JP Morgan on July 31 when it was previously in technical default. For further information regarding the credit agreement, see Note 4 of the Notes to the Consolidated Financial Statements. Both parties continue to work cooperatively.
Corporate restructuring and key personnel changes-The previously mentioned reduction in workforce resulted in the elimination of approximately 116 positions, including that of Donald H. Wilson, President and Chief Operating Officer, and Richard E. Stiles, 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. This is expected 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 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, Kenneth E. Edge retired as Chief Executive Officer (the "Executive Retirement") of the Company, 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 of Directors of the Company elected William R. McManaman as Chief Executive Officer. 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 first quarter 2009, the Bank opened two new branches, one in Antioch, Illinois and one in Naperville, Illinois, and, as noted previously, has plans to open a third in Northbrook, Illinois during the fourth quarter. 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.
Significant transactions-Net security gains of $21.2 million have been realized year-to-date 2009 due to the sale of $743 million in bonds. The sale of the securities has 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. Year-to-date the Company has incurred $5.4 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.
Trust preferred interest deferral-The Company has $50 million of Trust Preferred securities, of which $22 million qualify as Tier 1 Capital and $28 million qualify as Tier 2 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 will continue to accrue expense for interest owed at a compounded rate.
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 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 is "not acceptable", stating that the OCC is 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 is 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. The Bank may develop one plan to satisfy both the requirements of a CRP and a Disposition Plan required pursuant to the Letter, provided the plan meets the requirements of both. In consultation with its professional advisors, the Bank intends to resubmit a CRP and a Disposition Plan by the required date.
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.
The Company and the Bank are diligently continuing to 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 and the 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.
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 year and a half. 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). These programs continue to evolve as the administration strives to keep pace with rapidly changing economic conditions. AMCORE continues to review these programs for their potential to add value to its shareholders, customers and business and the potential impact of the ESA or related programs on the financial markets generally and the Company's future financial position, results of operation, cash flows or liquidity.
It is not yet 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, and any additional programs that may be initiated in the future, will ultimately have on the financial markets and the other difficulties described above, including the extreme 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 . . .
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