UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-13393
AMCORE FINANCIAL, INC.
NEVADA 36-3183870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Seventh Street, Rockford, Illinois 61104
Telephone number (815) 968-2241
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.
Yes X No
The number of shares outstanding of the registrant's common stock, par value
$.22 per share, at October 31, 2000 was 26,460,033 shares.
Index of Exhibits on Page 32
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
- ------ -----------
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 31
PART II
- -------
Item 1 Legal Proceedings 32
Item 4 Submission of Matters to a Vote of Security Holders 32
Item 6 Exhibits and Reports on Form 10-Q 32
Signatures 33
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2000 1999
==================================================================================================================================
(in thousands, except share data)
Assets Cash and cash equivalents....................................................... $111,233 $179,113
Interest earning deposits in banks.............................................. 10,893 6,039
Federal funds sold and other short-term investments............................. 1,975 -
Loans and leases held for sale.................................................. 30,604 13,974
Securities available for sale................................................... 1,249,015 1,227,396
Securities held to maturity (fair value of $ 10,893 in 2000; $ 13,818 in 1999).. 11,003 13,977
------------------------------------
Total securities ........................................................... $1,260,018 $1,241,373
Loans and leases, net of unearned income........................................ 2,695,999 2,746,613
Allowance for loan and lease losses............................................. (29,013) (28,377)
------------------------------------
Net loans and leases........................................................ $2,666,986 $2,718,236
Premises and equipment, net .................................................... 53,833 55,618
Intangible assets, net.......................................................... 17,203 17,102
Foreclosed real estate.......................................................... 2,522 2,675
Other assets.................................................................... 146,450 113,491
------------------------------------
TOTAL ASSETS................................................................ $4,301,717 $4,347,621
====================================
Liabilities LIABILITIES
And Deposits:
Stockholders' Demand deposits............................................................... $1,236,174 $1,202,632
Equity Savings deposits.............................................................. 136,342 145,795
Other time deposits........................................................... 1,705,074 1,667,981
------------------------------------
Total deposits............................................................. $3,077,590 $3,016,408
Short-term borrowings........................................................... 552,342 699,398
Long-term borrowings ........................................................... 320,733 285,270
Other liabilities............................................................... 57,123 52,817
------------------------------------
TOTAL LIABILITIES.......................................................... $4,007,788 $4,053,893
------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000 shares; none issued....... $ - $ -
Common stock, $.22 par value: authorized 45,000,000 shares;
September 30, December 31,
2000 1999
---- ----
Issued 29,684,582 29,648,571
Outstanding 26,590,274 27,949,431 6,592 6,585
Additional paid-in capital...................................................... 75,077 74,244
Retained earnings .............................................................. 291,365 271,781
Deferred compensation non-employee directors.................................... (1,514) (1,533)
Treasury stock ................................................................. (57,239) (30,442)
Accumulated other comprehensive loss............................................ (20,352) (26,907)
------------------------------------
TOTAL STOCKHOLDERS' EQUITY................................................. $293,929 $293,728
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $4,301,717 $4,347,621
====================================
See accompanying notes to consolidated financial statements (unaudited).
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
================================================================================================================================
(in thousands, except per share data)
Interest Interest and fees on loans and leases............................ $59,517 $54,294 $175,399 $158,668
Income Interest on securities:
Taxable........................................................ 16,666 16,398 51,614 48,661
Tax-exempt..................................................... 3,710 4,264 11,277 12,899
---------------------------------------------------
Total Income from Securities................................ $20,376 $20,662 $62,891 $61,560
---------------------------------------------------
Interest on federal funds sold and other short-term investments.. $101 $87 $201 $179
Interest and fees on loans and leases held for sale.............. 1,214 404 2,061 1,524
Interest on deposits in banks.................................... 240 223 651 533
---------------------------------------------------
Total Interest Income....................................... $81,448 $75,670 $241,203 $222,464
---------------------------------------------------
Interest Interest on deposits............................................ $36,002 $29,526 $102,863 $86,597
Expense Interest on short-term borrowings............................... 9,346 8,192 27,709 24,001
Interest on long-term borrowings................................ 5,146 4,514 14,690 13,983
---------------------------------------------------
Total Interest Expense..................................... $50,494 $42,232 $145,262 $124,581
---------------------------------------------------
Net Interest Income........................................ $30,954 $33,438 $95,941 $97,883
Provision for loan and lease losses............................. 2,640 2,613 7,370 6,990
---------------------------------------------------
Net Interest Income After Provision for Loan and
Lease Losses............................................... $28,314 $30,825 $88,571 $90,893
---------------------------------------------------
Non- Trust and asset management income............................... $7,491 $7,497 $22,666 $21,793
Interest Service charges on deposits..................................... 2,932 2,606 8,327 7,232
Income Mortgage revenues............................................... 1,793 1,791 3,913 6,485
Other........................................................... 3,696 3,172 9,475 8,419
---------------------------------------------------
Non-Interest Income, Excluding Net Realized Security
Gains (Losses)............................................. $15,912 $15,066 $44,381 $43,929
Net realized security gains (losses) ........................... 39 (341) 1,135 231
---------------------------------------------------
Total Non-Interest Income.................................. $15,951 $14,725 $45,516 $44,160
Operating Compensation expense............................................ $13,533 $13,501 $40,014 $42,526
Expenses Employee benefits............................................... 3,207 3,012 9,846 10,210
Net occupancy expense........................................... 1,950 1,688 5,502 5,039
Equipment expense............................................... 1,988 2,299 6,452 6,867
Data processing expense......................................... 1,428 1,536 4,466 5,950
Professional fees............................................... 918 1,162 2,987 4,600
Advertising and business development............................ 863 975 3,005 2,738
Amortization of intangible assets............................... 529 498 1,586 1,493
Communication expense........................................... 951 951 2,993 3,341
Other........................................................... 3,874 4,190 11,940 13,493
---------------------------------------------------
Total Operating Expenses................................... $29,241 $29,812 $88,791 $96,257
---------------------------------------------------
Income Before Income Taxes...................................... $15,024 $15,738 $45,296 $38,796
Income taxes.................................................... 4,220 4,501 12,724 10,397
---------------------------------------------------
NET INCOME................................................. $10,804 $11,237 $32,572 $28,399
===================================================
BASIC EARNINGS PER COMMON SHARE................................. $ 0.40 $ 0.40 $ 1.20 $ 1.00
DILUTED EARNINGS PER COMMON SHARE............................... 0.40 0.39 1.19 0.99
DIVIDENDS PER COMMON SHARE...................................... 0.16 0.14 0.48 0.42
AVERAGE COMMON SHARES OUTSTANDING............................... 26,885 28,306 27,153 28,344
AVERAGE DILUTED SHARES OUTSTANDING.............................. 27,166 28,731 27,465 28,785
See accompanying notes to consolidated financial statements (unaudited).
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Deferred
Additional Compensation
Common Paid-in Retained Non-Employee
Stock Capital Earnings Directors
----------------------------------------------
(in thousands, except share data)
Balance at December 31, 1998................................................... $ 6,572 $ 75,260 $ 247,486 $ (1,706)
----------------------------------------------
Comprehensive Income:
Net Income................................................................... - - 28,399 -
Unrealized holding losses on securities available for sale arising
during the period........................................................ - - - -
Less reclassification adjustment for realized gains included in net income.. - - - -
Income tax effect related to items of other comprehensive income.............. - - - -
----------------------------------------------
Net unrealized gains (losses) on securities available for sale................ - - - -
----------------------------------------------
Comprehensive Income........................................................... - - 28,399 -
----------------------------------------------
Cash dividends on common stock-$.42 per share................................ - - (11,882) -
Purchase of shares for the treasury.......................................... - - - -
Issuance of common shares for employee stock plan............................ 6 460 - -
Reissuance of treasury shares for Non-Employee
Directors stock plan....................................................... - (9) - (346)
Deferred compensation expense................................................ - - - 380
Reissuance of treasury shares for employee incentive plans................... - (1,382) - -
----------------------------------------------
Balance at September 30, 1999.................................................. $ 6,578 $ 74,329 $ 264,003 $ (1,672)
----------------------------------------------
----------------------------------------------
Balance at December 31, 1999 $ 6,585 $ 74,244 $ 271,781 $ (1,533)
----------------------------------------------
Comprehensive Income:
Net Income................................................................... - - 32,572 -
Unrealized holding losses on securities available for sale arising
during the period........................................................ - - - -
Less reclassification adjustment for realized gains included in net income.. - - - -
Income tax effect related to items of other comprehensive income.............. - - - -
----------------------------------------------
Net unrealized gains (losses) on securities available for sale................ - - - -
----------------------------------------------
Comprehensive Income........................................................... - - 32,572 -
----------------------------------------------
Cash dividends on common stock-$.48 per share................................ - - (12,988) -
Purchase of shares for the treasury.......................................... - - - -
Issuance of common shares for employee stock plan............................ 7 548 - -
Reissuance of treasury shares for Non-Employee
Directors stock plan....................................................... - (9) - (318)
Deferred compensation expense................................................ - - - 337
Reissuance of treasury shares for employee incentive plans................... - 294 - -
----------------------------------------------
Balance at September 30, 2000.................................................. $ 6,592 $ 75,077 $ 291,365 $ (1,514)
----------------------------------------------
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock (Loss) Equity
--------------------------------------
Balance at December 31, 1998................................................... $ (8,263) $ (3,266) $ 316,083
--------------------------------------
Comprehensive Income:
Net Income................................................................... - - 28,399
Unrealized holding losses on securities available for sale arising
during the period........................................................ - (22,326) (22,326)
Less reclassification adjustment for realized gains included in net income.. - (231) (231)
Income tax effect related to items of other comprehensive income.............. - 8,985 8,985
--------------------------------------
Net unrealized gains (losses) on securities available for sale................ - (13,572) (13,572)
--------------------------------------
Comprehensive Income........................................................... - (13,572) 14,827
--------------------------------------
Cash dividends on common stock-$.42 per share................................ - - (11,882)
Purchase of shares for the treasury.......................................... (18,188) - (18,188)
Issuance of common shares for employee stock plan............................ - - 466
Reissuance of treasury shares for Non-Employee
Directors stock plan....................................................... 355 - -
Deferred compensation expense................................................ - - 380
Reissuance of treasury shares for employee incentive plans................... 5,354 - 3,972
--------------------------------------
Balance at September 30, 1999..................................................$ (20,742) $ (16,838) $ 305,658
--------------------------------------
--------------------------------------
Balance at December 31, 1999 $ (30,442) $ (26,907) $ 293,728
--------------------------------------
Comprehensive Income:
Net Income................................................................... - - 32,572
Unrealized holding losses on securities available for sale arising
during the period........................................................ - 10,699 10,699
Less reclassification adjustment for realized gains included in net income.. - (1,135) (1,135)
Income tax effect related to items of other comprehensive income.............. - (3,009) (3,009)
--------------------------------------
Net unrealized gains (losses) on securities available for sale................ - 6,555 6,555
--------------------------------------
Comprehensive Income........................................................... - 6,555 39,127
--------------------------------------
Cash dividends on common stock-$.48 per share................................ - - (12,988)
Purchase of shares for the treasury.......................................... (30,050) - (30,050)
Issuance of common shares for employee stock plan............................ - - 555
Reissuance of treasury shares for Non-Employee
Directors stock plan....................................................... 377 - 50
Deferred compensation expense................................................ - - 337
Reissuance of treasury shares for employee incentive plans................... 2,876 - 3,170
--------------------------------------
Balance at September 30, 2000..................................................$ (57,239) $ (20,352) $ 293,929
--------------------------------------
See accompanying notes to consolidated financial statements (unaudited).
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(in thousands) 2000 1999
========================================================================================================================
Cash Flows Net income................................................................. $ 32,572 $ 28,399
From Adjustments to reconcile net income to net
Operating cash provided by operating activities:
Activities Depreciation and amortization of premises and equipment............... 5,343 5,356
Amortization and accretion of securities, net......................... 1,052 7,697
Provision for loan and lease losses................................... 7,370 6,990
Amortization of intangible assets..................................... 1,586 1,493
Net gain on sale of securities available for sale..................... (1,135) (231)
Deferred income taxes................................................. 2 4,367
Originations of loans held for sale................................... (216,115) (224,856)
Proceeds from sales of loans held for sale............................ 199,485 253,387
Stock options deferred tax ........................................... 156 1,237
Other, net............................................................ 5,829 (9,121)
----------------------------
Net cash provided by operating activities.......................... $ 36,145 $ 74,718
----------------------------
Cash Flows Proceeds from maturities of securities available for sale.................. $ 136,855 $ 272,900
From Proceeds from maturities of securities held to maturity.................... 2,680 2,037
Investing Proceeds from sales of securities available for sale....................... 74,906 121,471
Activities Purchase of securities held to maturity.................................... - (450)
Purchase of securities available for sale.................................. (170,757) (375,511)
Net increase in federal funds sold and other short-term investments........ (1,975) (3,923)
Net increase in interest earning deposits in banks......................... (4,854) (12,178)
Proceeds from the sale of loans and leases................................. 3,696 22,756
Loans and leases made to customers
and principal collection of loans and leases, net....................... (13,560) (280,733)
Premises and equipment expenditures, net................................... (3,568) (3,254)
Investment in company owned life insurance................................. (40,000) (127)
Proceeds from the sale of foreclosed real estate........................... 2,324 2,125
-----------------------------
Net cash used for investing activities............................. $ (14,253) $ (254,887)
-----------------------------
Cash Flows Net increase (decrease) in demand deposits and savings accounts............ $ 24,089 ($40,446)
From Net increase in time deposits.............................................. 37,093 85,621
Financing Net (decrease) increase in short-term borrowings........................... (147,147) 120,295
Activities Proceeds from long-term borrowings......................................... 65,000 16,500
Payment of long-term borrowings............................................ (29,494) (2,495)
Dividends paid............................................................. (12,988) (11,882)
Issuance of common shares for employee benefit incentive plans............. 555 466
Reissuance of treasury shares for employee benefit incentive plans......... 3,170 3,972
Purchase of shares for treasury ........................................... (30,050) (18,188)
-----------------------------
Net cash (used for) provided by financing activities............... $ (89,772) $ 153,843
-----------------------------
Net change in cash and cash equivalents.................................... $ (67,880) $ (26,326)
Cash and cash equivalents:
Beginning of year........................................................ 179,113 144,199
-----------------------------
End of period............................................................ $ 111,233 $ 117,873
=============================
Supplemental Cash payments for:
Disclosures of Interest paid to depositors.............................................. $ 99,564 $ 86,965
Cash Flow Interest paid on borrowings.............................................. 41,267 37,960
Information Income taxes paid........................................................ 5,816 6,505
Non-Cash Foreclosed real estate - acquired in settlement of loans................... 2,275 1,957
Investing and Transfer of long-term borrowings to short-term borrowings.................. 91 33,650
Financing Transfer of loans and leases to loans held for sale........................ 45,362 -
Activities Non-cash transfer of loans to securities................................... 51,548 19,174
See accompanying notes to consolidated financial statements (unaudited).
AMCORE FINANCIAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, these financial statements do not include all the
information and footnotes required by generally accepted accounting principles.
These financial statements include, however, all adjustments (consisting of
normal recurring accruals), which in the opinion of management, are considered
necessary for the fair presentation of the financial position and results of
operations for the periods shown.
Operating results for the three and nine month periods ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K Annual Report of AMCORE Financial, Inc. and Subsidiaries (the "Company")
for the year ended December 31, 1999.
New Accounting Standards
We will be required to adopt Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by
Statement of Financial Accounting Standards No. 138, on January 1, 2001. This
Statement outlines accounting and reporting standards for derivative instruments
and hedging activities.
Under this standard, all derivatives will be recognized at fair value in the
balance sheet. Changes in fair value for derivatives that are not hedges will be
recognized in the Consolidated Statement of Income as they arise. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset in the Consolidated Statement of
Income against the change in the fair value of the hedged asset, liability or
firm commitment or it will be recognized in other comprehensive income until the
hedged item is recognized in the Consolidated Statement of Income. If the change
in the fair value of the derivative is not completely offset by the change in
the value of the item it is hedging, the difference will be recognized
immediately in the Consolidated Statement of Income.
The ultimate impact of this standard on our earnings and financial position is
dependent on the hedging strategies applied to our derivative portfolio and the
composition of that portfolio on and after January 1, 2001. If this standard was
implemented on October 1, 2000, the transition adjustments arising from its
application would have increased consolidated assets by approximately $206,000,
increased consolidated liabilities by approximately $202,000, decreased other
comprehensive income by approximately $235,000, and increased net income by
approximately $239,000.
In September 2000, The Financial Accounting Standards Board issued Financial
Accounting Standard ("SFAS") No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities - a replacement of FASB
Statement No. 125". This Statement revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of SFAS No. 125's provisions
without reconsideration. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. This Statement is effective for recognition and reclassification of
collateral and for disclosures relative to securitization transactions and
collateral for fiscal years ending after December 15, 2000.
NOTE 2 - EARNINGS PER SHARE
For the Three Months For the Nine Months
Earnings per share calculations are as follows: Ended September 30, Ended September 30,
2000 1999 2000 1999
-------------------------------------------
(in thousands, except per share data)
Net Income $10,804 $11,237 $32,572 $28,399
Basic earnings per share:
Weighted average shares outstanding 26,885 28,306 27,153 28,344
Shares related to IMG earned not issued 36 19 36 19
-------------------------------------------
Average basic shares outstanding 26,921 28,325 27,189 28,363
-------------------------------------------
Earnings per share $ .40 $ 0.40 $ 1.20 $ 1.00
-------------------------------------------
Diluted earnings per share:
Weighted average shares outstanding 26,885 28,306 27,153 28,344
Net effect of the assumed purchase of stock
under the stock option and stock purchase
plans - based on the treasury stock
method using average market price 163 328 194 344
Shares related to IMG earned not issued 36 19 36 19
Contingently issuable shares under IMG
purchase agreement 82 78 82 78
-------------------------------------------
Average diluted shares outstanding 27,166 28,731 27,465 28,785
-------------------------------------------
Diluted Earnings per share $ .40 $ 0.39 $ 1.19 $ 0.99
-------------------------------------------
NOTE 3 - SECURITIES
A summary of securities at September 30, 2000 and December 31, 1999 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(in thousands)
At September 30, 2000
Securities Available for Sale:
U.S. Treasury $ 37,746 $ 86 $ (144) $ 37,688
U.S. Government agencies 50,796 17 (710) 50,103
Agency mortgage-backed securities 781,408 944 (28,508) 753,844
State and political subdivisions 295,106 2,500 (5,501) 292,105
Corporate obligations and other 117,549 153 (2,427) 115,275
--------------------------------------------------
Total Securities Available for Sale $1,282,605 $ 3,700 $ (37,290) $1,249,015
--------------------------------------------------
Securities Held to Maturity:
U.S. Treasury $ 802 $ -- $ (3) $ 799
U.S. Government agencies 24 -- -- 24
State and political subdivisions 10,177 40 (147) 10,070
Corporate obligations and other -- -- -- --
--------------------------------------------------
Total Securities Held to Maturity $ 11,003 $ 40 $ (150) $ 10,893
--------------------------------------------------
Total Securities $1,293,608 $ 3,740 $ (37,440) $1,259,908
==================================================
At December 31, 1999
Securities Available for Sale:
U.S. Treasury $ 61,466 $ 171 $ (258) $ 61,379
U.S. Government agencies 32,390 3 (847) 31,546
Agency mortgage-backed securities 746,953 1,308 (31,951) 716,310
State and political subdivisions 299,304 1,254 (11,055) 289,503
Corporate obligations and other 131,572 85 (2,999) 128,658
--------------------------------------------------
Total Securities Available for Sale $1,271,685 $ 2,821 $ (47,110) $1,227,396
--------------------------------------------------
Securities Held to Maturity:
U.S. Treasury $ 1,053 $ -- $ (8) $ 1,045
U.S. Government agencies 25 -- -- 25
State and political subdivisions 12,898 53 (204) 12,747
Corporate obligations and other 1 -- -- 1
--------------------------------------------------
Total Securities Held to Maturity $ 13,977 $ 53 $ (212) $ 13,818
--------------------------------------------------
Total Securities $1,285,662 $ 2,874 $ (47,322) $1,241,214
==================================================
Realized gross gains resulting from the sale of securities available for sale
were $39,000 and $87,000 for the three months ended September 30, 2000 and 1999,
respectively, and $1,136,000 and $922,000 for the nine months ended September
30, 2000 and 1999, respectively. Realized gross losses were $0 and $427,000 for
the three months ended September 30, 2000 and 1999, respectively and $1,000 and
$691,000 for the nine months ending September 30, 2000 and 1999, respectively.
At September 30, 2000 and 1999, securities with a fair value of $930.4 million
and $914.2 million, respectively, were pledged to secure public deposits,
securities under agreements to repurchase and for other purposes required by
law.
NOTE 4 - LOANS AND LEASES
The composition of the loan and lease portfolio at September 30, 2000 and
December 31, 1999, was as follows:
September 30, 2000 December 31, 1999
-------------------------------------
(in thousands)
Commercial, financial and agricultural ...................... $ 709,980 $ 710,302
Real estate-construction .................................... 106,871 121,216
Real estate-commercial ...................................... 775,594 732,447
Real estate-residential ..................................... 675,985 689,702
Installment and consumer .................................... 424,705 489,586
Direct lease financing ...................................... 2,979 3,489
------------------------------
Gross loans and leases ................................. $ 2,696,114 $ 2,746,742
Unearned income ........................................ (115) (129)
------------------------------
Loans and leases, net of unearned income ............... $ 2,695,999 $ 2,746,613
Allowance for loan and lease losses .................... (29,013) (28,377)
------------------------------
NET LOANS AND LEASES................................... $ 2,666,986 $ 2,718,236
==============================
$72.8 million in installment and consumer loans were either sold or reclassified
to loans held for sale during the nine
months ended September 30, 2000.
NOTE 5 - Short-Term Borrowings
Short-term borrowings consisted of the following:
September 30, 2000 December 31, 1999
---------------------------------------
(in thousands)
Securities sold under agreements to repurchase........ $ 434,302 $ 456,227
Federal Home Loan Bank borrowings..................... 56,590 114,479
Federal funds purchased............................... 49,450 118,000
U.S. Treasury tax and loan note accounts.............. 12,000 10,692
--------------------------------------
Total Short-Term Borrowings........................ $ 552,342 $ 699,398
======================================
NOTE 6 - Long-Term Borrowings
Long-term borrowings consisted of the following:
September 30, 2000 December 31, 1999
---------------------------------------
(in thousands)
Federal Home Loan Bank borrowings...................... $ 279,877 $ 244,018
Capital Trust preferred securities..................... 40,000 40,000
Other long-term borrowings............................. 856 1,252
--------------------------------------
Total Long-Term Borrowings................ $ 320,733 $ 285,270
======================================
AMCORE Bank, N.A., periodically borrows additional funds from the Federal Home
Loan Bank (FHLB) in connection with the purchase of mortgage-backed securities.
Certain Federal Home Loan Bank borrowings have prepayment penalties and call
features associated with them. The current balance of the long-term borrowings
was $279.9 million with an average maturity of 5.34 years, and a weighted
average borrowing rate of 5.71%.
Repayments of FHLB borrowings based upon call features, assuming they are called
at the earliest call date, are as follows at September 30, 2000:
Total
--------------
(in thousands)
2000 ................................. $ 82,000
2001 ................................. 150,000
2002 ................................. 15,000
2003 ................................. 4,000
--------
Total callable FHLB borrowings $251,000
========
The Company has $40.0 million of capital securities outstanding through AMCORE
Capital Trust I ("Trust"), a statutory business trust. All of the common
securities of the Trust are owned by the Company. The capital securities pay
cumulative cash distributions semiannually at an annual rate of 9.35%. The
securities are redeemable from March 25, 2007 until March 25, 2017 at a
declining rate of 104.6750% to 100% of the principal amount. After March 25,
2017, they are redeemable at par until June 15, 2027 when redemption is
mandatory. Prior redemption is permitted under certain circumstances such as
changes in tax or regulatory capital rules. The proceeds of the capital
securities were invested by the Trust in junior subordinated debentures which
represents all of the assets of the Trust. The Company fully and unconditionally
guarantees the capital securities through the combined operation of the
debentures and other related documents. The Company's obligations under the
guarantee are unsecured and subordinate to senior and subordinated indebtedness
of the Company.
Other long-term borrowings include a non-interest bearing note requiring annual
payments of $444,000 through 2002. The note was recorded at its present value
using a discount rate of 8.0%.
Repayments of long-term borrowings based upon scheduled maturity dates are as
follows at September 30, 2000:
Total
--------------
(in thousands)
2001 ............................. $ 454
2002 ............................. 31,285
2003 ............................. 50,092
2004 ............................. 50,056
2005 ............................. 15,510
Thereafter ....................... 173,336
--------
Total Long-term Borrowings $320,733
========
NOTE 7 - SEGMENT INFORMATION
The Company's operations include three business segments: Banking, Trust and
Asset Management, and Mortgage Banking. The Banking segment provides commercial
and personal banking services through its 64 banking locations in northern
Illinois and south-central Wisconsin, and the Consumer Finance subsidiary. The
services provided by this segment include lending, deposits, cash management,
safe deposit box rental, automated teller machines, and other traditional
banking services. The Trust and Asset Management segment provides trust,
investment management, employee benefits recordkeeping and administration, and
brokerage services. It also acts as an advisor and provides fund administration
to the Vintage Mutual Funds. These products are distributed nationally (i.e.
Vintage Equity Fund is available through Charles Schwab), regionally to
institutional investors and corporations, and locally through AMCORE's 64
banking locations. The Mortgage Banking segment originates residential mortgage
loans for sale to AMCORE's banking affiliate and the secondary market, as well
as providing servicing of these mortgage loans.
The Company's three reportable segments are strategic business units that are
separately managed as they offer different products and services. The Company
evaluates financial performance based on several factors, of which the primary
financial measure is segment profit before remittances to the banking affiliate.
The Company accounts for intersegment revenue, expenses and transfers at current
market prices.
BUSINESS SEGMENTS
Trust and Asset Mortgage Total
For the three months ended September 30, 2000 Banking Management Banking Segments
---------------------------------------------
(in thousands)
Net interest income $ 30,662 $ 78 $ 625 $ 31,365
Provision for loan and lease losses 2,640 -- -- 2,640
Non-interest income 7,376 7,930 1,788 17,094
Operating expenses 21,949 5,435 1,727 29,111
Income taxes 3,455 1,106 273 4,834
---------------------------------------------
Segment profit $ 9,994 $ 1,467 $ 413 $ 11,874
After tax restructuring charges (reversals) (10) -- -- (10)
---------------------------------------------
Segment profit before restructuring charges (reversals) $ 9,984 $ 1,467 $ 413 $ 11,864
=============================================
For the three months ended September 30, 1999
Net interest income $ 33,287 $ 70 $ 514 $ 33,871
Provision for loan and lease losses 2,613 -- -- 2,613
Non-interest income 5,726 7,950 2,036 15,712
Operating expenses 22,496 5,182 2,064 29,742
Income taxes 3,626 1,234 196 5,056
---------------------------------------------
Segment profit $ 10,278 $ 1,604 $ 290 $ 12,172
=============================================
Trust and Asset Mortgage Total
For the nine months ended September 30, 2000 Banking Management Banking Segments
-------------------------------------------------------
(in thousands)
Net interest income $ 95,238 $ 270 $ 1,647 $ 97,155
Provision for loan and lease losses 7,370 -- -- 7,370
Non-interest income 20,379 24,117 5,201 49,697
Operating expenses 66,108 16,766 5,052 87,926
Income taxes 11,055 3,286 711 15,052
-------------------------------------------------------
Segment profit $ 31,084 $ 4,335 $ 1,085 $ 36,504
After tax restructuring reversals (145) (6) -- (151)
-------------------------------------------------------
Segment profit before restructuring reversals $ 30,939 $ 4,329 $ 1,085 $ 36,353
=======================================================
Segment assets $ 4,266,114 $ 19,625 $ 23,039 $ 4,308,778
=======================================================
For the nine months ended September 30, 1999
Net interest income $ 97,509 $ 178 $ 1,760 $ 99,447
Provision for loan and lease losses 6,990 -- -- 6,990
Non-interest income 16,267 23,428 7,395 47,090
Operating expenses 72,018 15,789 6,853 94,660
Income taxes 8,289 3,386 925 12,600
-------------------------------------------------------
Segment profit $ 26,479 $ 4,431 $ 1,377 $ 32,287
After tax restructuring charges 3,767 -- -- 3,767
-------------------------------------------------------
Segment profit before restructuring charges $ 30,246 $ 4,431 $ 1,377 $ 36,054
=======================================================
Segment assets $ 4,416,841 $ 19,549 $ 27,570 $ 4,463,960
=======================================================
NOTE 7 - SEGMENTS (continued)
Reconcilement of Segment Information to Financial Statements
For the three months ended For the three months ended
September 30, September 30,
Net interest income and non-interest income 2000 1999 2000 1999
- ------------------------------------------- --------------------------- ----------------------------
(in thousands)
Total for segments $ 48,459 $ 49,583 $ 146,852 $ 146,537
Unallocated revenues:
Holding company (825) 6,099 (3,208) 18,451
Other 19 17 56 42
Elimination of intersegment revenues (748) (7,536) (2,243) (22,987)
--------------------------- ---------------------------
Consolidated total revenues $ 46,905 $ 48,163 $ 141,457 $ 142,043
=========================== ===========================
Profit
- ------
Total for segments $ 11,874 $ 12,172 $ 36,504 $ 32,287
Unallocated loss:
Holding company (1,330) (965) (4,060) (3,529)
Other (30) (6) (93) (203)
Elimination of intersegment gain/(loss) 290 36 221 (156)
--------------------------- ---------------------------
Consolidated net income $ 10,804 $ 11,237 $ 32,572 $ 28,399
=========================== ===========================
Assets
- ------
Total for segments $ 4,308,778 $ 4,463,960
Unallocated assets:
Holding company 32,492 52,052
Other 43,309 43,492
Elimination of intersegment assets (82,862) (245,421)
---------------------------
Consolidated assets $ 4,301,717 $ 4,314,083
===========================
NOTE 8 - RESTRUCTURING CHARGE
The components of the 1999 restructuring charge and the activity during the
third quarter and year to date for 2000 were as follows:
June 30, 2000 Third Quarter Third Quarter September 30, 2000
Balance Cash Payments Adjustments(1) Reversal(2) Balance
----------------------------------------------------------------------------
(in thousands)
Compensation expense . . . . . . . . $ 231 $ (78) $ - $ (9) $ 144
Employee benefits . . . . . . . . .(3) 17 (33) 27 (0) 11
Data processing expense . . . . . .(4) 115 (31) 0 (30) 54
Professional fees . . . . . . . . .(5) 75 0 0 (5) 70
Other . . . . . . . . . . . . . . .(6) 23 (2) 0 0 21
----------------------------------------------------------------------------
Charge before income taxes . . . . . 461 (144) 27 (44) 300
Income taxes . . . . . . . . . . . . 183 (57) 11 (18) 119
----------------------------------------------------------------------------
Charge after income taxes . . . . . $ 278 $ (87) $ 16 $ (26) $ 181
============================================================================
December 31, 1999 Year to Date Year to Date September 30, 2000
Balance Cash Payments Adjustments(1) Reversal(2) Balance
-------------------------------------------------------------------------------------
(in thousands)
Compensation expense. . . . . . . .(7) $ 972 $ (692) $ - $ (136) $ 144
Employee benefits . . . . . . . . .(3) 83 (132) 102 (42) 11
Data processing expense . . . . . .(4) 459 (337) 0 (68) 54
Professional fees . . . . . . . . .(5) 290 (151) 0 (69) 70
Other . . . . . . . . . . . . . . .(6) 75 (16) 0 (38) 21
-------------------------------------------------------------------------------------
Charge before income taxes . . . . . 1,879 (1,328) 102 (353) 300
Income taxes . . . . . . . . . . . . 747 (528) 41 (141) 119
-------------------------------------------------------------------------------------
Charge after income taxes . . . . . $ 1,132 $ (800) $ 61 $ (212) $ 181
=====================================================================================
(1) Items related to restructuring that were expensed as incurred and were not
included in the original restructuring charge.
(2) Reversal of items included in the original charge that are no longer
expected to be paid.
(3) Social security and medicare taxes on severance and incentives, and
relocation expenses.
(4) Amounts represent costs to convert data processing records of nine separate
banks into one.
(5) Amounts represent legal fees for regulatory filings and advice as well as
consulting fees for process review, systems redesign and implementation.
(6) Amounts include outplacement services for terminated employees and customer
notifications.
(7) Staff reductions totaling 187 employees are planned. Through September 30,
2000, 85 employees had been terminated and paid severance benefits. An
additional 91 employees had transferred to other open positions due to
attrition, or had voluntarily left the Company prior to the time severance
benefits became payable. As of September 30, 2000, 11 employees remained to
be severed.
NOTE 9 - CONTINGENCIES
Management believes that no litigation is threatened or pending in which AMCORE
faces potential loss or exposure which will materially affect AMCORE's financial
position or results of operations, other than noted below. Since AMCORE's
subsidiaries act as depositories of funds, trustee and escrow agents, they are
named as defendants in lawsuits involving claims to the ownership of funds in
particular accounts. This and other litigation is incidental to AMCORE's
business.
On August 26, 1999, Willie Parker and five other plaintiffs filed a civil action
in the Circuit Court of Humphreys County, Mississippi against AMCORE Consumer
Finance Company, Inc., a subsidiary of AMCORE, and other defendants containing
twelve separate counts related to the sale and financing of residential
satellite dish systems. Though the actual purchase price for each of these
systems involves a principal amount of less than $3,000, the complaint prays for
economic loss and compensatory damages in the amount of $5 million for each
plaintiff and punitive damages in the amount of $100 million for each plaintiff.
AMCORE has denied the plaintiffs' allegations and has removed the case to the
United States District Court for the Northern District of Mississippi. The
proceedings are currently stayed pending resolution of the plaintiffs' motion to
remand the case to the state court. Although at this early date the ultimate
disposition of the case cannot be predicted with certainty, based on information
currently available, AMCORE believes that the plaintiffs' damage claims are
disproportionate and that the final outcome of the case will not have a
materially adverse effect on AMCORE's consolidated financial condition, though
it could have a materially adverse affect on AMCORE's consolidated results of
operations in a given year. AMCORE has not recorded an accrual for payment of
the damages in this case because, in management's opinion, an unfavorable
outcome in this litigation is not probable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis focuses on the significant factors which
affected AMCORE Financial, Inc. and subsidiaries ("AMCORE") Consolidated Balance
Sheet as of September 30, 2000 as compared to December 31, 1999 and the results
of operations for the three and nine months ended September 30, 2000 as compared
to the same periods in 1999. This discussion is intended to be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this report.
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to 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 are forward looking statements.
Forward-looking statements speak only as of the date they are made, and AMCORE
undertakes no obligation to update publicly any of them 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 and existing competitors; (II) adverse state
and federal legislation and regulation; (III) failure to obtain new customers
and retain existing customers; (IV) inability to carry out marketing and/or
expansion plans; (V) loss of key executives or personnel; (VI) changes in
interest rates including the effect of prepayment; (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) inability to fully realize cost savings from the
new organizational structure within the expected time frame or additional or
unexpected costs are incurred; (XIV) unexpected outcomes on existing or new
litigation in which AMCORE, its subsidiaries, officers, directors or employees
are named defendants; (XV) technological changes; (XVI) changes in Generally
Accepted Accounting Principles: and (XVII) inability of third-party vendors to
perform critical services to the company.
OVERVIEW OF OPERATIONS
AMCORE's net income for the three months ended September 30, 2000 was $10.8
million, a decrease of $433,000 from the $11.2 million reported in the 1999
comparable period. Net income for the nine months ended September 30, 2000 was
$32.6 million, an increase of $4.2 million from the $28.4 million reported in
1999. Net income from operations, which excludes $151,000 in net after-tax
reversals of excess restructuring-related charges (the "Restructuring Reversal")
in year-to-date 2000 results and $3.8 million of after-tax restructuring-related
charges (the "Restructuring Charge") in year-to-date 1999 results, was $32.4
million and $32.2 million, respectively, for the nine months ended September 30,
2000 and 1999. This represented an increase of $255,000 or 0.8%.
Diluted earnings per share were $0.40 and $1.19 for the three and nine months
ended September 30, 2000, respectively, compared to $0.39 and $0.99 for the same
periods in 1999. Excluding the above mentioned Restructuring Reversal and
Restructuring Charge, diluted earnings per share from operations for the nine
month periods ended September 30, 2000 and 1999 were $1.18 and $1.12,
respectively, an increase of 5.4%. The 5.4% increase on a diluted per share
basis is nearly seven times the 0.8% increase on a dollar basis, reflecting a
1.3 million share decrease in average diluted shares outstanding attributable to
AMCORE's previously announced stock repurchase programs.
AMCORE's annualized return on average equity for the third quarter and
year-to-date for 2000 was 14.72% and 15.18%, respectively. Annualized return on
average equity for the comparable periods in 1999 was 14.71% and 12.17%. If the
above mentioned Restructuring Reversal and Restructuring Charge are excluded,
the annualized return on average equity for the nine months ended September 30,
2000 and 1999 was 15.10% and 13.78% respectively.
The third quarter annualized return on average assets was 0.99% in 2000 versus
1.06% in 1999. For the first nine months of 2000 and 1999 the annualized return
on average assets was 1.00% and 0.91%. Excluding the Restructuring Reversal and
Restructuring Charge, the annualized return on average assets for year-to-date
2000 and 1999 was 1.00% and 1.03%, respectively.
Net interest income for the third quarter of 2000 declined $2.5 million or 7.4%
from the same period a year ago. Average earning assets rose 2.1%, which
combined with a 39 basis point increase in yields contributed to a $5.8 million
or 7.6% increase in interest income. These gains were overshadowed by an $8.3
million or 19.6% increase in interest expense as interest bearing liabilities
continued to reprice more rapidly than earning assets in a rising short-term
rate environment. This resulted in a 75 basis points increase in the average
rate paid on interest bearing liabilities. Overall, net interest margin declined
34 basis points to 3.26% in the third quarter of 2000, compared to 3.60% a year
ago.
Non-interest income, excluding net realized security gains, increased $846,000
or 5.6% in the third quarter of 2000 compared to the third quarter of 1999. The
improvement was attributable to higher service charges on deposits, increased
net surrender values on bank-owned life insurance and gain on loan sales. These
were partially offset by a decline in insurance commission income and a
non-recurring gain in the third quarter of 1999 associated with the merger and
reorganization of an ATM service provider. The increase in service charges on
deposits was attributable to higher average deposit balances, revised fee
schedules and overdraft handling processes. The gain on loan sales was almost
exclusively related to the sale of $55.3 million in auto loans. Lower insurance
commission income was attributable to rebates and the sale of the Company's
insurance agency in the third quarter of 1999.
Net realized security gains (losses) showed an improvement of $380,000,
reflecting $39,000 in net security gains in the third quarter of 2000 compared
to $341,000 in net security losses in the third quarter of 1999.
The provision for loan and lease losses was nominally higher,
quarter-to-quarter.
Third quarter 2000 operating expenses were down $571,000 from the same period a
year ago. The primary factor contributing to the reduction in operating expenses
were cost savings, primarily compensation expense and employee benefits,
resulting from AMCORE's new Customer Focused Organizational Structure that
offset normal cost-of-living and merit increases. In addition, equipment
expense, professional fees, loan processing and collection expenses, advertising
and business development expenses and data processing expenses were all down
from the third quarter of 1999. These reductions were partially offset by higher
occupancy expenses and higher than expected employee health care costs.
Both AMCORE and the bank subsidiary (the "BANK") continue to exceed the minimum
capital requirements established by regulators for banks and bank holding
companies.
On October 11, 2000, AMCORE announced that it is considering the sale of ten
branches (the "Branch Sales") as part of its strategic objective to invest in
and reallocate capital to high growth areas. The branches include Aledo,
Gridley, Mendota, Freeport, Mount Morris, Oregon, Ashton, Rochelle, Wyanet and
Sheffield. All are located in Illinois. Combined the branches represent
approximately $170 million in loans and other assets and $310 million in
deposits. To date, no firm commitments have been made and AMCORE will only
consider a sale if full financial value will be realized. None of the assets are
impaired and full financial value is expected to result in a gain individually
and in total.
On October 18, 2000, AMCORE announced the introduction of a new technology fund.
The Vintage Technology Fund is the eleventh fund in AMCORE's proprietary Vintage
Fund Family. The Vintage Technology
Fund will consist of an actively managed investment portfolio of approximately
40 to 60 technology sector stocks.
Year 2000
AMCORE has not experienced any significant disruptions to its existing or
continuing financial and operating activities caused by a failure of its
application software programs, operating systems or other systems to accommodate
the date value for the year 2000 ("Year 2000"). The Company has no information
that would indicate that any material borrower has experienced significant Year
2000 issues that would materially impact their ability to service their loan or
otherwise fulfill their borrowing agreement's terms and/or covenants. In
addition, AMCORE is not aware of any situation indicating that a significant
vendor or service provider may be unable to sell goods or provide services to
the company as the result of a Year 2000 issue.
1999 Restructuring Charge
In the second quarter 1999, AMCORE announced a new "Customer Focused
Organizational Structure" (the "CFOS"). Events giving rise to the announcement
was a recognition by AMCORE that its corporate structure of nine separate
banking charters was perpetuating operational inefficiencies, staffing
redundancies and burdensome regulatory reporting requirements. The new CFOS is
expected to improve efficiency, enhance responsiveness to local markets and
increase shareholder value. It will increase the ability of staff to focus on
serving customers and their communities by centralizing or regionalizing certain
support functions.
To accomplish the new CFOS, AMCORE merged its nine banks into one charter as
AMCORE Bank, N.A. (the "BANK"). The centralization of retail operations and
corporate support functions, including the conversion of data processing records
into one bank, ("Phase 1") has been completed in all material respects.
During the fourth quarter of 1999, in continuation of the CFOS restructuring
initiative, AMCORE adopted plans to centralize its commercial loan operations
and to streamline personal trust administration ("Phase 2"). AMCORE expects to
complete this phase of its CFOS restructuring by the end of 2000.
AMCORE's pre-tax charges (the "Restructuring Charge") related to the CFOS
restructuring totaled $6.1 million for Phase 1 and $537,000 for Phase 2 in the
second and fourth quarters of 1999, respectively. The major components of the
Restructuring Charge included employee severance and benefits, systems and
integration costs, legal and professional fees and other related expenses.
Excess Restructuring Charges of $1.4 million pre-tax, related to Phase 1 were
reversed during the fourth quarter of 1999. Additional net pre-tax reversal (the
"Restructuring Reversal") of excess Restructuring Charges of $234,000 and
$17,000 were taken in the second and third quarters of 2000, respectively. These
reversals related to lower than expected severance and benefits due to unplanned
employee attrition in positions unaffected by the CFOS restructuring that
permitted the retention of some employees whose positions were otherwise being
eliminated and by some affected employees leaving for positions outside the
company before their severance became payable. In addition, systems integration
costs were completed at a lower cost than expected.
The amount of the Restructuring Charge relating to CFOS restructuring activities
not yet completed, or that otherwise remains unpaid, is $300,000 pre-tax as of
September 30, 2000. Of this amount, $24,000 and $276,000 relate to Phase 1 and
Phase 2, respectively. See Note 8 to the Notes to Consolidated Financial
Statements for a tabular presentation of the Restructuring Charge by major
component.
Altogether, staff reductions of 187 employees were planned. Through September
30, 2000, 85 employees had been terminated and paid severance benefits. An
additional 91 employees had transferred to other open positions due to
attrition, or had voluntarily left the Company prior to the time severance
benefits became payable. As of September 30, 2000, 11 employees remained to be
severed.
EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process has identified three business
segments: Banking, Trust and Asset Management, and Mortgage Banking. Note 7 to
the Notes to Consolidated Financial Statements presents a condensed income
statement for each segment.
The financial results of each segment are presented as if operated on a
stand-alone basis. There are no comprehensive authorities for management
accounting equivalent to generally accepted accounting principles. Therefore,
the information provided is not necessarily comparable with similar information
from other financial institutions.
Banking Segment
The Banking segment provides commercial and personal banking services through
its 64 banking locations in northern Illinois and south-central Wisconsin, and
the Consumer Finance subsidiary. The services provided by this segment include
lending, deposits, cash management, automated teller machines, and other
traditional banking services.
The Banking segment's profit for the third quarter of 2000, excluding
Restructuring Reversals, was $10.0 million, a decrease of $287,000 or 2.8% from
the same period in 1999. Declining net interest income was largely offset by
increased non-interest income, lower operating expenses and a decrease in income
taxes.
Net interest income declined $2.6 million or 7.9% in the third quarter of 2000
compared to the same period a year ago. The Banking segment continued to
experience solid loan growth as well as improved yields on interest earning
assets. However, these gains were more than offset by increased interest expense
as interest bearing liabilities repriced more rapidly than earning assets and by
decreased levels of investment securities related to the planned reduction of
the investment portfolio.
Non-interest income increased $1.7 million or 28.9%. The improvement was
attributable to higher service charges on deposits, increases in net surrender
values on bank-owned life insurance, gain on the sale of auto loans and net
realized security gains. These were partially offset by a decline in insurance
commission income quarter-to-quarter and a non-recurring gain in the third
quarter of 1999 associated with the merger and reorganization of an ATM service
provider in which the Banking segment had an interest. The increase in service
charges on deposits was attributable to higher average deposit balances, revised
fee schedules and overdraft handling processes. The gain on loan sales was
almost exclusively related to the sale of $55.3 million in auto loans in the
third quarter of 2000. The increase in net realized security gains (losses)
reflects net security gains in the third quarter of 2000 versus net security
losses in the third quarter of 1999. Lower insurance commission income was
attributable to higher rebate levels in the third quarter of 2000 compared to
the same period in 1999.
Operating expenses decreased $547,000 or 2.4%. Cost savings from AMCORE's new
CFOS were more than sufficient to offset normal merit increases, cost-of-living
adjustments, year-to-year inflation increases, increased employee medical claims
and higher occupancy costs. Occupancy expenses were higher, due in part to the
expansion of the Crystal Lake, IL, facility, rental expenses associated with our
new Huntley, IL, branch and the expenses related to the centralization of loan
operations.
Income taxes were lower as a result of lower segment earnings before taxes.
Excluding Restructuring Reversals and the Restructuring Charges, the Banking
segment represented 84.2% and 84.4% of total segment profit in the third quarter
of 2000 and 1999, respectively. Year-to-date the Banking segment represented
85.1% and 83.9%, respectively, for 2000 and 1999.
Trust and Asset Management Segment
The Trust and Asset Management segment provides trust, investment management,
employee benefit recordkeeping and administration and brokerage services. It
also acts as an advisor and provides fund administration to the Vintage Mutual
Funds. These products are distributed nationally (i.e. Vintage Equity Fund is
available through Charles Schwab OneSource(TM)), regionally to institutional
investors and corporations, and locally through AMCORE's banking locations.
The Trust and Asset Management segment's profit, excluding the Restructuring
Charge, decreased $137,000 or 8.5% from the third quarter of 1999 to $1.5
million in the third quarter of 2000.
Revenues were flat at $8.0 million quarter-to-quarter. Insurance commissions
decreased $136,000 reflecting the sale of AMCORE's insurance agency business on
August 27, 1999. A decline in employee benefits accounts resulted in decreased
employee benefit fees of $175,000. In addition, the third quarter of 1999
included $421,000 of additional investment advisory fee income as the accrual
methodology was refined to more accurately reflect the fees earned at any given
period end. These factors offset what would have been a revenue increase of
9.5%.
Operating expenses, excluding Restructuring Charges, increased $253,000 or 4.9%.
The increase was primarily attributable to increased personnel costs associated
with the growth of the business, normal merit and cost-of-living increases, and
increased advertising and business development costs. These increases were
partially offset by the elimination of expenses associated with the operation of
the insurance agency business.
Income taxes were lower as a result of lower segment earnings before taxes.
As of September 30, 2000, trust assets under management totaled $4.4 billion,
including $1.4 billion in the Vintage Mutual Fund family. This compares to $4.2
billion and $1.4 billion, respectively, as of September 30, 1999. Total assets
under administration at September 30, 2000, which include managed and custodial
assets, totaled $5.0 billion.
Excluding Restructuring Reversals and the Restructuring Charges, the Trust and
Asset Management segment represented 12.4% and 13.2% of total segment profit in
the third quarter of 2000 and 1999, respectively. Year-to-date the Trust and
Asset Management segment represented 11.9% and 12.3%, respectively, for 2000 and
1999.
Mortgage Banking Segment
The Mortgage Banking segment originates residential mortgage loans for sale to
the BANK and the secondary market, and provides servicing of these mortgage
loans.
The Mortgage Banking segment's profit for the third quarter of 2000 was
$413,000, an increase of $123,000 or 42.4% over the same period a year ago.
Mortgage revenues declined $248,000 from the third quarter of 1999 as
origination volume and refinancing activity were negatively impacted by
increasing interest rates. Net interest income increased $111,000 from the third
quarter a year ago, also the result of increasing interest rates and higher
average escrow balances.
The decrease in origination volumes and refinancing activity caused a
corresponding reduction in variable production costs. Servicing right
amortization was also lower as increased interest rates led to slower
pre-payments on the existing servicing portfolio. These factors resulted in a
$337,000 decrease in operating expenses.
Income taxes were higher as a result of increased segment earnings before taxes.
Excluding the Restructuring Reversal and the Restructuring Charge, the Mortgage
Banking segment represented 3.4 % and 2.4% of total segment profit in the third
quarter of 2000 and 1999, respectively. Year-to-date the Mortgage Banking
segment represented 3.0% and 3.8%, respectively, for 2000 and 1999.
CONSOLIDATED EARNINGS ANALYSIS
The analysis below discusses by major components the changes in net income when
comparing the three and nine-month periods ended September 30, 2000 and 1999.
Net Interest Income
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred on interest-bearing liabilities. The
interest income on certain loans and municipal securities is not subject to
federal income tax. For analytical purposes, the interest income and rates on
these types of assets are adjusted to a "fully taxable equivalent" basis. The
fully taxable equivalent adjustment was calculated using the statutory federal
income tax rate of 35%. Adjusted interest income is as follows (in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-----------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------
(in thousands)
Interest Income Book Basis $81,448 $75,670 $241,203 $222,464
Taxable Equivalent Adjustment 2,227 2,506 6,763 7,560
----------------------------------------------------
Interest Income Taxable Equivalent Basis 83,675 78,176 247,966 230,024
Interest Expense 50,494 42,232 145,262 124,581
----------------------------------------------------
Net Interest Income Taxable Equivalent Basis
$33,181 $35,944 $102,704 $105,443
====================================================
Net interest income on a fully taxable equivalent basis decreased $2.8 million
or 7.7% during the third quarter of 2000 over the same period in 1999. Average
earning assets rose 2.1%, which combined with a 39 basis point increase in
yields, contributed to a $5.5 million or 7.0% increase in interest income on a
fully taxable equivalent basis. These gains were overshadowed by a $8.3 million
or 19.6% increase in interest expense as interest bearing liabilities repriced
more rapidly than earning assets in a rising short-term rate environment
resulting in a 75 basis points increase in the average rate paid on interest
bearing liabilities. Overall, net interest margin declined 34 basis points to
3.26% in the third quarter of 2000, compared to 3.60% a year ago.
The growth in average earning assets was led by a $115.5 million or 4.4%
increase in average loans, when comparing the third quarters of 2000 and 1999.
The sale of $55.3 million in auto loans and the securitization of $51.5 million
in 1 - 4 family mortgage loans impacted loan growth. Excluding these
transactions, average loans would have risen by 6.7 percent. Average investment
securities declined $56.5 million or 4.3%, quarter-to-quarter. Excluding the
securitization of 1-4 family mortgage loans noted above, average investment
securities declined 4.7%. This planned reduction reflects AMCORE's strategy to
emphasize liquidity, reduced interest rate risk and loan growth funding.
The net interest spread is the difference between the average rates on
interest-earning assets and the average rates on interest-bearing liabilities.
The interest rate margin represents net interest income divided by average
earning assets. These ratios can also be used to analyze net interest income.
Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and stockholders' equity, the
effective rate paid for all funding sources is lower than the rate paid on
interest-bearing liabilities alone.
As the table below indicates, the net interest spread decreased 36 basis points
to 2.64% in the third quarter of 2000 when compared to the 3.00% during the same
period in 1999. The net interest margin was 3.26% during the third quarter of
2000, a decrease of 34 basis points from 3.60% in the comparable period in 1999.
Quarter Ended Quarter Ended
September 30, 2000 September 30, 1999
----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 969,184 $ 16,666 6.88% $ 986,244 $ 16,398 6.65%
Tax-exempt securities (1) 297,188 5,708 7.68% 336,608 6,560 7.80%
----------------------------------------------------------------------------------
Total Securities (2) 1,266,372 22,374 7.07% 1,322,852 22,958 6.94%
Loans held for sale (3) 45,932 1,043 9.05% 16,116 282 7.00%
Loans (1) (4) 2,740,658 59,746 8.69% 2,625,129 54,504 8.26%
Other earning assets 20,239 341 6.68% 26,535 310 4.63%
Fees on loans held for sale (3) - 171 - - 122 -
----------------------------------------------------------------------------------
Total Interest-Earning Assets $ 4,073,201 $ 83,675 8.19% $ 3,990,632 $ 78,176 7.80%
Non Interest-Earning Assets:
Cash and due from banks 99,958 92,499
Other assets 180,841 146,756
Allowance for loan and lease losses (29,730) (28,078)
--------------- -----------
Total Assets $ 4,324,270 $ 4,201,809
=============== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,003,999 $ 9,819 3.88% $ 969,915 $ 7,344 3.00%
Time deposits 1,714,007 26,143 6.05% 1,624,116 22,047 5.39%
----------------------------------------------------------------------------------
Total interest-bearing deposits 2,718,006 35,962 5.26% 2,594,031 29,391 4.50%
Short-term borrowings 570,567 9,245 6.45% 594,019 8,497 5.68%
Long-term borrowings 330,196 5,287 6.37% 301,779 4,344 5.71%
----------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 3,618,769 $ 50,494 5.55% $ 3,489,829 $ 42,232 4.80%
Noninterest-Bearing Liabilities:
Demand deposits 352,189 352,709
Other liabilities 61,256 56,216
--------------- -----------
Total Liabilities $ 4,032,214 $ 3,898,754
Stockholders' Equity 292,056 303,055
--------------- -----------
Total Liabilities and
Stockholders' Equity $ 4,324,270 $ 4,201,809
=============== ===========
Net Interest Income $ 33,181 $ 35,944
=========== ===========
Net Interest Spread 2.64% 3.00%
===== =====
Interest Rate Margin 3.26% 3.60%
===== =====
Notes:
(1) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balances of the investments are based on amortized historical
cost.
(3) The yield-related fees recognized from the origination of loans held for
sale are in addition to the interest earned on the loans during the period
in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
As the table below indicates, the net interest spread decreased 21 basis points
to 2.73% for the first nine months of 2000 when compared to the 2.94% during the
same period in 1999. The net interest margin was 3.34% for the first nine months
of 2000, a decrease of 21 basis points from 3.55% in the comparable period in
1999.
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 995,903 $ 51,614 6.91% $ 1,022,405 $ 48,661 6.35%
Tax-exempt securities (1) 301,030 17,349 7.68% 341,102 19,845 7.76%
------------------------------------------------------------------------------------
Total Securities (2) 1,296,933 68,963 7.09% 1,363,507 68,506 6.70%
Loans held for sale (3) 25,130 1,640 8.71% 22,473 1,025 6.08%
Loans (1) (4) 2,763,162 176,089 8.51% 2,555,331 159,282 8.33%
Other earning assets 18,000 853 6.33% 22,402 712 4.25%
Fees on loans held for sale (3) - 421 - - 499 -
------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 4,103,225 $ 247,966 8.07% $ 3,963,713 $ 230,024 7.75%
Non Interest-Earning Assets:
Cash and due from banks 102,096 98,418
Other assets 159,633 156,460
Allowance for loan and lease losses (29,473) (27,641)
--------------- -----------
Total Assets $ 4,335,481 $ 4,190,950
=============== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,005,767 $ 27,702 3.67% $ 960,279 $ 20,491 2.85%
Time deposits 1,713,583 74,953 5.83% 1,602,623 65,570 5.47%
------------------------------------------------------------------------------------
Total interest-bearing deposits 2,719,350 102,655 5.04% 2,562,902 86,061 4.49%
Short-term borrowings 591,436 27,513 6.21% 597,075 25,458 5.70%
Long-term borrowings 320,637 15,094 6.29% 305,751 13,062 5.71%
------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 3,631,423 $ 145,262 5.34% $ 3,465,728 $ 124,581 4.81%
Noninterest-Bearing Liabilities:
Demand deposits 359,552 357,221
Other liabilities 57,800 55,989
--------------- -----------
Total Liabilities $ 4,048,775 $ 3,878,938
Stockholders' Equity 286,706 312,012
--------------- -----------
Total Liabilities and
Stockholders' Equity $ 4,335,481 $ 4,190,950
=============== ===========
Net Interest Income $ 102,704 $ 105,443
=========== ===========
Net Interest Spread 2.73% 2.94%
===== =====
Interest Rate Margin 3.34% 3.55%
===== =====
Notes:
(1) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balances of the investments are based on amortized historical
cost.
(3) The yield-related fees recognized from the origination of loans held for
sale are in addition to the interest earned on the loans during the period
in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
The level of net interest income is the result of the relationship between total
volume and mix of interest-earning assets and the rates earned and the total
volume and mix of interest-bearing liabilities and the rates paid. The rate and
volume components associated with interest-earning assets and interest-bearing
liabilities are segregated in the table above to analyze the changes in net
interest income. Changes due to rate/volume variances and changes due to the
extra day in 2000 due to leap year have been allocated between changes due to
average volume and changes due to average rate based on the absolute value of
each to the total change of both categories. 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 and interest-bearing liabilities as a total.
The table below presents an analysis of the changes in net interest income for
the third quarter of 2000 compared to the third quarter of 1999.
Quarter Ended
September 2000/September 1999
-------------------------------------------------------------
Increase(Decrease) Due to Change In Total Net
Average Volume Average Rate Increase(Decrease)
-------------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ (289) $ 557 $ 268
Tax-exempt securities (1) (758) (94) (852)
-------------------------------------------------------------
Total Securities (2) (995) 411 (584)
Loans held for sale (3) 657 104 761
Loans (1) (4) 2,401 2,841 5,242
Other earning assets (82) 113 31
Fees on loans held for sale (3) 0 49 49
-------------------------------------------------------------
Total Interest-Earning Assets $ 1,608 $ 3,891 $ 5,499
=============================================================
Interest Expense:
Interest-bearing demand and savings deposits $ 706 $ 1,769 $ 2,475
Time deposits 1,285 2,811 4,096
-------------------------------------------------------------
Total interest-bearing deposits 1,436 5,135 6,571
Short-term borrowings (350) 1,098 748
Long-term borrowings 424 519 943
-------------------------------------------------------------
Total Interest-Bearing Liabilities $ 1,582 $ 6,680 $ 8,262
=============================================================
Net Interest Margin / Net Interest Income (FTE) $ 26 $ (2,789) $ (2,763)
=============================================================
The above table 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 has been allocated
to volume and rate in proportion to the absolute dollar amounts of the change in
each.
(1) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balances of the investments are based on amortized historical
cost.
(3) The yield-related fees recognized from the origination of loans held for
sale are in addition to the interest earned on the loans during the period
in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
The decrease in net interest income, when comparing the third quarter of 2000
with the third quarter of 1999, is almost exclusively attributable to changes in
average interest rates. The past twelve months has been a period of rising
short-term rates as the Federal Reserve raised rates four times for a total of
125 basis points. Quarter-to-quarter AMCORE experienced a corresponding increase
of 75 basis points in the average rate paid on deposits and borrowings,
resulting in higher funding costs. These costs were only partially offset by a
39 basis
point increase in average yields on loans and securities, which over the same
period, repriced at a slower pace than did the deposits and borrowings.
Changes in net interest income attributable to changes in average volume
increased nominally in the third quarter of 2000, compared to the third quarter
of 1999. Average loans grew by 4.4% quarter-to-quarter, while average investment
securities declined by 4.3%. The net effect was a 2.1% increase in average
earning assets. The resulting increase in interest income was almost totally
offset by an increase in interest expense associated with a 3.7% increase in
average interest-bearing deposits and borrowings that were needed to fund the
growth in average earning assets.
The table below presents an analysis of the changes in net interest income for
the first nine months of 2000 compared to the first nine months of 1999.
Nine Months Ended
September 2000/September 1999
--------------------------------------------------------
Increase Total Net
(Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
--------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ (1,286) $ 4,239 $ 2,953
Tax-exempt securities (1) (2,311) (185) (2,496)
--------------------------------------------------------
Total Securities (2) (3,432) 3,889 457
Loans held for sale (3) 132 483 615
Loans (1) (4) 13,271 3,536 16,807
Other earning assets (157) 298 141
Fees on loans held for sale (3) 0 (78) (78)
--------------------------------------------------------
Total Interest-Earning Assets $ 8,302 $ 9,640 $ 17,942
========================================================
Interest Expense:
Interest-bearing demand and savings deposits $ 2,686 $ 4,525 $ 7,211
Time deposits 4,951 4,432 9,383
--------------------------------------------------------
Total interest-bearing deposits 5,499 11,095 16,594
Short-term borrowings (241) 2,296 2,055
Long-term borrowings 662 1,370 2,032
--------------------------------------------------------
Total Interest-Bearing Liabilities $ 6,258 $ 14,423 $ 20,681
========================================================
Net Interest Margin / Net Interest Income (FTE) $ 2,044 $ (4,783) $ (2,739)
========================================================
The above table 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 has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(1) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balances of the investments are based on amortized historical
cost.
(3) The yield-related fees recognized from the origination of loans held for
sale are in addition to the interest earned on the loans during the period
in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
The decrease in net interest income, when comparing the first nine months of
2000 with the first nine months of 1999, is primarily attributable to changes in
average interest rates. The previously noted rising rate environment translated
to a 53 basis point increase in the average rate paid on deposits and
borrowings, resulting in higher funding costs, period-to-period. These costs
were only partially offset by a 32 basis point increase in average yields on
total interest-earning assets, which over the same period, repriced at a slower
pace than did the deposits and borrowings.
Changes in net interest income attributable to changes in average volume
increased in the first nine months of 2000, compared to the first nine months of
1999. Average loans grew by 8.1% period-to-period, while average investment
securities decreased by 4.9%. The net effect was a 3.5% increase in average
earning assets. This
increase was partially offset by a 4.8% increase in average interest-bearing
deposits and borrowings needed to fund the growth in average earning assets.
AMCORE has implemented, or is investigating, a variety of initiatives designed
to lessen the stress on net interest margin by reducing high-cost wholesale
funding, attracting lower-cost funding, improved pricing of loan and deposit
products and decreasing certain lower-return holdings with long-term interest
rate risk. These initiatives include: continuation of the investment portfolio
run-off, noted above, implementation of a LIBOR-based fund transfer-pricing
system to foster product-pricing discipline, reduced holdings in one-to-four
family low-rate adjustable and other low spread mortgages to reduce long-term
interest rate risk, internal incentive programs that promote growth of
commercial demand deposits, remix of the balance sheet through possible Branch
Sales and the securitization of a portion of AMCORE's indirect auto portfolio
with proceeds used to further reduce wholesale funding.
Provision for Loan and Lease Losses
The provision for loan and lease losses is an amount added to the allowance for
loan and lease losses to provide for the known and estimated amount of loans
that ultimately will not be collected. When loans become uncollectible they are
written off against the allowance for loan and lease losses. Management
determines an appropriate provision for loan losses based upon historical loss
experience, regular evaluation of collectibility by lending officers, credit
administration and the corporate loan review staff, and the size and nature of
and other known factors about the loan portfolios. Other factors include the
current economic and industry environment, concentration characteristics of the
loan portfolio and the composition and underlying collateral of impaired and
potential problem loans.
The provision for loan and lease losses was $2.6 million during the third
quarter of 2000, an increase of $27,000 or 1.0% from the same period in 1999.
Annualized net charge-offs to average loans were 0.46% in the third quarter of
2000 and 0.27% during the same period of 1999. The majority of the increase in
net charge-offs was due to a $1.1 million charge of a grain elevator credit and
a $419,000 charge of a loan to a furniture store. In both cases, the
collectibility of the balances were largely dependent upon guarantees that were
being challenged in legal proceedings.
The provision for loan and lease losses for the first nine months of 2000 was
$7.4 million, an increase of $380,000 or 5.4% from the same period in 1999. The
increase in the provision as well as an increase in the allowance for loan and
lease losses is in response to the growth in total loans, a higher level of
charge-offs and an increase in non-performing loans.
The allowance for loan and lease losses as a percent of total loans was 1.08%
and 1.03% at September 30, 2000 and December 31, 1999, respectively.
Non-Interest Income
Total non-interest income was $16.0 million in the third quarter of 2000, an
increase of $1.2 million or 8.3% from the same period in 1999.
Trust and asset management income was flat at $7.5 million for the third quarter
of 2000 and 1999. A decline in employee benefits accounts resulted in decreased
employee benefit fees of $175,000. In addition, the third quarter of 1999
included $421,000 of additional investment advisory fee income as the accrual
methodology was refined to more accurately reflect the fees earned at any given
period end. As of September 30, 2000, trust assets under management totaled $4.4
billion, including $1.4 billion in the Vintage Mutual Fund family. Total assets
under administration, which include managed and custodial assets, totaled $5.2
billion.
Service charges on deposits increased $326,000 or 12.5% from the third quarter
of 1999 to $2.9 million for the third quarter of 2000. An increase in average
deposit balances of $123.5 million or 4.2% from third quarter 1999
to third quarter 2000, revised fee schedules and overdraft handling processes
contributed to the increase in fee income.
Mortgage revenues were flat at $1.8 million for the third quarter of 2000 and
1999. Revenues from origination volume and refinancing activity declined
$248,000 quarter-to-quarter, the result of increasing interest rates. This
decline was completely offset by servicing rights that were recognized as the
result of the securitization of $51.5 million in 1 - 4 family mortgage loans.
Other income increased to $3.7 million in the third quarter of 2000, a $524,000
or 16.5% increase from the $3.2 million in the same period a year ago. The
improvement was primarily attributable to a $697,000 gain recorded on the sale
of auto loans and a $688,000 increase in net surrender values on bank-owned life
insurance. These were partially offset by a $267,000 decline in insurance
commission income and a $750,000 non-recurring gain in the third quarter of 1999
associated with the merger and reorganization of an ATM service provider in
which the Banking segment had an interest. Lower insurance commission income was
attributable to rebate adjustments in the third quarter of 2000 and the sale of
AMCORE's insurance agency business on August 27, 1999.
Net security gains totaled $39,000 in the third quarter of 2000 as compared to a
loss of $341,000 in the third quarter of 1999. The level of security gains or
losses is dependent on the size of the available for sale portfolio, interest
rate levels, AMCORE's liquidity needs, and balance sheet risk objectives.
Operating Expenses
Operating expenses totaled $29.2 million for the third quarter of 2000, a
decrease of $571,000 from the third quarter of 1999. The primary factor
contributing to the reduction in operating expenses were cost savings, primarily
compensation expense and employee benefits, resulting from AMCORE's new Customer
Focused Organizational Structure that offset normal cost-of-living and merit
increases. In addition, equipment expense, professional fees, loan processing
and collection expenses, advertising and business development expenses and data
processing expenses were all down from the third quarter of 1999. These
reductions were partially offset by higher occupancy expenses and higher than
expected employee health care costs.
The efficiency ratio was 59.31% in the third quarter of 2000, a 66 basis point
increase from 58.65% in the third quarter of 1999. This reflects the negative
impact of declining net interest income quarter-to-quarter.
Personnel costs, which include compensation expense and employee benefits, the
largest component of operating expenses, were $16.7 million in the third quarter
of 2000, an increase of $227,000 or 1.4% from the third quarter of 1999. Cost
savings from AMCORE's new CFOS structure more than offset normal merit
increases, cost-of-living adjustments and growth of the trust and asset
management segment. However, increases in self-funded employee health benefit
expenses plus some large dollar claims led to increased personnel costs
quarter-to-quarter, overall. Higher employee health care costs are expected to
continue into the fourth quarter.
Net occupancy expense increased to $2.0 million, an increase of $262,000 or
15.5% from the third quarter of 1999. The increase was due in part to the
expansion of the Crystal Lake, IL, facility, rental expenses associated with our
new Huntley, IL, branch and the expenses related to the centralization of loan
operations.
Equipment expense decreased $311,000 or 13.5% from the third quarter of 1999 to
total $2.2 million. The decrease is primarily attributable to lower software
maintenance and Y2K expense, lower depreciation on equipment and software, and
lower equipment maintenance and contract costs.
Data processing expense was $1.4 million in the third quarter of 2000, compared
to $1.5 million in the third quarter of 1999, a decrease of $108,000 or 7.0%.
The decrease was primarily attributable to processing efficiencies resulting
from the company restructuring.
Professional fees decreased $244,000 or 21.0% from the third quarter of 1999 to
the third quarter of 2000 mainly due to a number of non-recurring consulting
expenses in the third quarter of 1999.
Advertising and business development expenses decreased $112,000 or 11.5% from
the third quarter of 1999 to total $863,000. The decrease is mainly the result
of timing of advertising and promotional campaign spending year-to-year, as well
as a planned reduction in radio and television advertising due to the higher
cost of advertising during the election season.
Other operating expenses decreased $316,000 or 7.5% when comparing the third
quarter of 2000 with the third quarter of 1999. A $216,000 decrease in loan
processing and collection expense associated with decreased origination volumes,
refinancing activity and servicing right amortization was the primary reason for
the decline. In addition, operating losses from tax advantaged investments in
affordable income housing projects declined $148,000 from third quarter 1999.
Income Taxes
Income tax expense decreased $281,000 to $4.2 million for the third quarter of
2000, the result of lower income before taxes quarter-to-quarter. The effective
tax rates were 28.1% and 28.6% for the third quarter of 2000 and 1999,
respectively.
Balance Sheet Review
Total assets were $4.3 billion at September 30, 2000, a decrease of $45.9
million or 1.1% from December 31, 1999. Total earning assets decreased $8.5
million from December 31, 1999. Non-earning assets decreased $37.4 million over
the same period. The decrease was primarily attributable to reductions in excess
cash that had been held for potential Year 2000 related withdrawals and seasonal
decreases in cash equivalents.
Included in loans and leases held for sale are $17.5 million in automobile loans
expected to be sold at a gain during the fourth quarter. Additional loans
originated during the fourth quarter may also be sold during the quarter.
Deposit growth was $61.2 million from December 31, 1999. The growth in deposits
and the decrease in assets led to a reduction in total borrowed funds of $111.6
million over the same period.
Stockholders' equity remained relatively flat, at $293.9 million at September
30, 2000, compared to $293.7 million at December 31, 1999. Earnings in excess of
dividends paid to shareholders and increased other comprehensive income
associated with improving fair values of the investment portfolio was offset by
the acquisition of treasury shares in connection with AMCORE's announced share
repurchase programs.
ASSET QUALITY REVIEW
Allowance for Loan and Lease Losses
The allowance for loan and lease losses was $29.0 million at September 30, 2000,
an increase of $636,000 from December 31, 1999. The allowance represented 1.08%
of total loans and 118.8% of non-performing loans at September 30, 2000. The
comparable ratios were 1.03% and 159.16% at December 31, 1999. Reserve coverage
of non-performing loans of 118.8% percent at September 30, 2000, improved
significantly from the 103.2 percent reported for June 30, 2000.
Net charge-offs were $3.2 million during the third quarter of 2000 versus $1.8
for the same quarter of 1999. The increase in net charge-offs was attributable
to a $1.1 million charge of a grain elevator credit and a $419,000 charge of a
loan to a furniture store, both of which had been provided for in the allowance
for loan and lease losses in periods prior to the charge-off.
The $1.1 million charge-off of the grain elevator credit reduces the carrying
value of this loan to zero as of September 30, 2000. Collection efforts continue
via bankruptcy proceedings against the borrower and legal action against a
third-party guarantor. However, the Circuit Court of Lee County of the State of
Illinois recently held the third-party guarantee to be unenforceable. AMCORE is
presently reviewing grounds for an appeal.
An analysis of the allowance for loan and lease losses for the periods ended
September 30, 2000 and 1999 is presented below:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
-------------------------------------------
Balance at beginning of period ........... $30,132 $27,636 $28,377 $26,403
Charge-Offs:
Commercial, financial and agricultural 1,934 612 2,880 2,318
Real estate ........................... 278 322 1,104 605
Installment and consumer .............. 1,336 1,254 3,543 3,263
-------------------------------------------
3,548 2,188 7,527 6,186
Recoveries:
Commercial, financial and agricultural 73 76 504 314
Real estate ........................... 20 2 72 50
Installment and consumer .............. 282 296 803 864
-------------------------------------------
375 374 1,379 1,228
-------------------------------------------
Net Charge-Offs .......................... 3,173 1,814 6,148 4,958
Provision charged to expense ............. 2,640 2,613 7,370 6,990
Reductions due to sale of loans .......... 586 - 586 -
-------------------------------------------
Balance at end of period ................. $29,013 $28,435 $29,013 $28,435
===========================================
Ratio of net-charge-offs during the period
to average loans outstanding during the
period (1) ............................... 0.46% 0.27% 0.30% 0.26%
===========================================
(1) On an annualized basis.
Non-Performing Assets
Non-performing assets increased $6.9 million from December 31, 1999 to $28.3
million at September 30, 2000. Total non-performing assets at September 30, 2000
decreased 14 percent or $4.8 million from $33.1 million at June 30, 2000.
Non-performing assets as of September, 2000 and December 31, 1999 are presented
below.
September 30, December 31,
2000 1999
-----------------------------
Impaired loans:
Non-accrual loans and leases
Commercial ............................... $ 7,920 $12,632
Real estate .............................. 13,590 3,278
Other non-performing:
Non-accrual loans (1) .................... 2,911 1,919
-------------------------
Total non-performing loans ............... $24,421 $17,829
=========================
Foreclosed assets
Real estate .............................. 2,522 2,675
Other .................................... 1,404 958
-------------------------
Total foreclosed assets .................. $ 3,926 $ 3,633
=========================
Total non-performing assets .............. $28,347 $21,462
=========================
Loans 90 days or more past due and still accruing $11,907 $10,197
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
Capital Management
Total stockholders' equity was $293.9 million at September 30, 2000, an increase
of $201,000 from December 31, 1999. The book value per share of AMCORE common
stock was $11.05 and $10.79 at September 30, 2000 and 1999, respectively. AMCORE
paid $.16 and $.14 per share dividends during the third quarter of 2000 and
1999, respectively.
On November 24, 1999, AMCORE announced a stock repurchase program for up to five
percent of its common stock or 1.41 million shares. The repurchased shares will
become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option and
other employee benefit plans. Through September 30, 2000, all authorized shares
have been repurchased at an average price of $19.80. On August 8, 2000, AMCORE
announced a stock repurchase program for up to five percent of its common stock
or 1.35 million shares. Through September 30, 2000, 73,994 shares have been
repurchased at an average price of $19.06.
The BANK is considered a "well capitalized" institution based on regulatory
guidelines. AMCORE's leverage ratio of 7.82% at September 30, 2000 exceeds the
regulatory guidelines of 5% for well-capitalized institutions. AMCORE's ratio of
Tier I capital at 11.37% and total risk based capital of 12.35% significantly
exceed the regulatory minimums (as set forth in the table below), as of
September 30, 2000.
September 30, 2000 September 30, 1999
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- --------- -----
(Dollars in thousands)
Total Capital $365,917 12.35% $373,180 12.79%
Total Capital Minimum 237,124 8.00% 233,448 8.00%
-------- ------- -------- -------
Amount in Excess of Minimum $128,793 4.35% $139,732 4.79%
======== ======= ======== =======
Tier I Capital (to Risk Weighted Assets) $336,904 11.37% $344,746 11.81%
Tier I Capital Minimum 118,562 4.00% 116,724 4.00%
-------- ------- -------- -------
Amount in Excess of Minimum $218,342 7.37% $228,022 7.81%
======== ======= ======== =======
Tier I Capital (to Average Assets) $336,904 7.82% $344,746 8.24%
Tier I Capital Minimum 172,284 4.00% 167,370 4.00%
--------- ------- -------- -------
Amount in Excess of Minimum $164,620 3.82% $177,376 4.24%
========= ======= ======== =======
Risk adjusted assets $2,964,051 $2,918,104
========== ==========
Average assets $4,307,100 $4,184,257
========== ==========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's 1999 Annual Report on Form 10K. There have been no
material changes in the assumptions used or result obtained regarding market
risk.
PART II.
ITEM 1. Legal Proceedings
Management believes that no litigation is threatened or pending in which AMCORE
faces potential loss or exposure which will materially affect AMCORE's financial
position or results of operations, other than noted below. Since AMCORE's
subsidiaries act as depositories of funds, trustee and escrow agents, they are
named as defendants in lawsuits involving claims to the ownership of funds in
particular accounts. This and other litigation is incidental to AMCORE's
business.
On August 26, 1999, Willie Parker and five other plaintiffs filed a civil action
in the Circuit Court of Humphreys County, Mississippi against AMCORE Consumer
Finance Company, Inc., a subsidiary of AMCORE, and other defendants containing
twelve separate counts related to the sale and financing of residential
satellite dish systems. Though the actual purchase price for each of these
systems involves a principal amount of less than $3,000, the complaint prays for
economic loss and compensatory damages in the amount of $5 million for each
plaintiff and punitive damages in the amount of $100 million for each plaintiff.
AMCORE has denied the plaintiffs' allegations and has removed the case to the
United States District Court for the Northern District of Mississippi. The
proceedings are currently stayed pending resolution of the plaintiffs' motion to
remand the case to the state court. Although at this early date the ultimate
disposition of the case cannot be predicted with certainty, based on information
currently available, AMCORE believes that the plaintiffs' damage claims are
disproportionate and that the final outcome of the case will not have a
materially adverse effect on AMCORE's consolidated financial condition, though
it could have a materially adverse affect on AMCORE's consolidated results of
operations in a given year. AMCORE has not recorded an accrual for payment of
the damages in this case because, in management's opinion, an unfavorable
outcome in this litigation is not probable.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a)-(d) None
ITEM 6. Exhibits and Reports on Form 10-Q
(a) 3 Amended and Restated Articles of Incorporation of AMCORE
Financial, Inc. dated May 1, 1990 (Incorporated by reference to
Exhibit 23 of AMCORE's Annual Report on Form 10-K for the year
ended December 31, 1989).
3.1 By-laws of AMCORE Financial, Inc. as amended May 17, 2000.
4 Rights Agreement dated February 21, 1996, between AMCORE
Financial, Inc. and Firstar Trust Company (Incorporated by
reference to AMCORE's Form 8-K as filed with the Commission on
February 28, 1996).
10.1 Amendment dated October 2, 2000 to the Transitional
Compensation Agreement dated May 1, 1999 between
AMCORE Financial, Inc. and Bruce W. Lammers.
27 Financial Data Schedule
99 Additional exhibits - Press release dated August 8, 2000
- Press release dated October 11, 2000
- Press release dated October 18, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCORE Financial, Inc.
(Registrant)
Date: November 14, 2000
/s/ John R. Hecht
--------------------------------------
John R. Hecht
Executive Vice President and Chief
Financial Officer
(Duly authorized officer of the
registrant and principal financial
officer)