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 June 30, 2001
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 July 31, 2001 was 25,511,124 shares.
Index of Exhibits on Page 38
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2001 and 2000 4
Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 31
PART II
Item 1 Legal Proceedings 37
Item 4 Submission of Matters to a Vote of Security Holders 38
Item 6 Exhibits and Reports on Form 10-Q 38
Signatures 39
2
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
=================================================================================================================================
(in thousands, except share data)
Assets Cash and cash equivalents................................................... $111,943 $118,807
Interest earning deposits in banks.......................................... 16,431 21,562
Federal funds sold and other short-term investments......................... 9,000 36,000
Loans and leases held for sale.............................................. 41,712 27,466
Securities available for sale............................................... 1,143,308 1,223,785
Securities held to maturity (12/31/00 fair value of $10,635 )............... - 10,661
----------------------------------
Total securities ....................................................... $1,143,308 $1,234,446
Loans and leases, net of unearned income.................................... 2,501,753 2,627,157
Allowance for loan and lease losses......................................... (33,006) (29,157)
----------------------------------
Net loans and leases.................................................... $2,468,747 $2,598,000
Bank owned life insurance................................................... 97,163 54,733
Premises and equipment, net ................................................ 50,337 52,554
Intangible assets, net...................................................... 16,946 16,683
Foreclosed real estate...................................................... 1,960 3,282
Other assets................................................................ 73,680 80,573
----------------------------------
TOTAL ASSETS............................................................ $4,031,227 $4,244,106
==================================
Liabilities LIABILITIES
And Deposits:
Stockholders' Demand deposits........................................................... $1,232,897 $1,268,253
Equity Savings deposits.......................................................... 122,979 127,706
Other time deposits....................................................... 1,520,236 1,747,602
----------------------------------
Total deposits......................................................... $2,876,112 $3,143,561
Short-term borrowings....................................................... 460,515 460,634
Long-term borrowings ....................................................... 310,309 265,830
Other liabilities........................................................... 70,907 65,584
----------------------------------
TOTAL LIABILITIES...................................................... $3,717,843 $3,935,609
----------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000 shares; none issued.... $ - $ -
Common stock, $.22 par value: authorized 45,000,000 shares;
June 30, December 31,
2001 2000
---- ----
Issued 29,723,930 29,700,201
Outstanding 25,609,540 25,985,432 6,601 6,596
Additional paid-in capital.................................................. 74,685 74,900
Retained earnings .......................................................... 309,372 297,703
Deferred compensation....................................................... (2,355) (1,651)
Treasury stock ............................................................. (77,420) (69,385)
Accumulated other comprehensive income...................................... 2,501 334
----------------------------------
TOTAL STOCKHOLDERS' EQUITY............................................. $313,384 $308,497
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $4,031,227 $4,244,106
==================================
See accompanying notes to consolidated financial statements (unaudited).
3
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
=================================================================================================================================
(in thousands, except per share data)
Interest Interest and fees on loans and leases............................ $52,466 $58,808 $107,123 $115,882
Income Interest on securities:
Taxable........................................................ 14,890 17,445 30,917 34,948
Tax-exempt..................................................... 3,518 3,771 7,072 7,567
-----------------------------------------------
Total Income from Securities................................ $18,408 $21,216 $37,989 $42,515
-----------------------------------------------
Interest on federal funds sold and other short-term investments.. $133 $69 $267 $100
Interest and fees on loans and leases held for sale.............. 975 555 1,912 847
Interest on deposits in banks.................................... 125 175 442 411
-----------------------------------------------
Total Interest Income....................................... $72,107 $80,823 $147,733 $159,755
-----------------------------------------------
Interest Interest on deposits............................................. $31,641 $34,460 $66,888 $66,861
Expense Interest on short-term borrowings................................ 5,734 9,147 12,193 18,363
Interest on long-term borrowings................................. 5,497 5,191 10,191 9,544
-----------------------------------------------
Total Interest Expense...................................... $42,872 $48,798 $89,272 $94,768
-----------------------------------------------
Net Interest Income......................................... $29,235 $32,025 $58,461 $64,987
Provision for loan and lease losses.............................. 7,557 2,340 9,713 4,730
-----------------------------------------------
Net Interest Income After Provision for Loan
and Lease Losses........................................ $21,678 $29,685 $48,748 $60,257
-----------------------------------------------
Non- Trust and asset management income................................ $6,835 $7,553 $13,617 $15,175
Interest Service charges on deposits...................................... 3,734 2,781 6,808 5,395
Income Mortgage revenues................................................ 1,855 963 3,296 1,648
Bank owned life insurance income................................. 1,386 380 2,430 542
Gain on branch sales............................................. 8,695 - 8,695 -
Other............................................................ 2,227 2,592 5,436 5,337
-----------------------------------------------
Non-Interest Income, Excluding Net
Security Gains (Losses)................................. $24,732 $14,269 $40,282 $28,097
Net security gains (losses)...................................... (2,272) 393 (1,529) 1,096
-----------------------------------------------
Total Non-Interest Income................................... $22,460 $14,662 $38,753 $29,193
Operating Compensation expense............................................. $14,319 $13,557 $27,032 $26,481
Expenses Employee benefits................................................ 3,138 3,400 7,097 6,739
Net occupancy expense............................................ 1,798 1,715 3,860 3,552
Equipment expense................................................ 2,014 2,181 4,174 4,464
Data processing expense.......................................... 1,486 1,446 3,002 3,038
Professional fees................................................ 1,036 1,061 2,152 2,069
Communication expense............................................ 1,003 966 2,047 2,042
Advertising and business development............................. 1,289 1,159 2,125 2,142
Amortization of intangible assets................................ 534 529 1,085 1,057
Other............................................................ 4,650 3,700 8,615 7,594
-----------------------------------------------
Total Operating Expenses.................................... $31,267 $29,714 $61,189 $59,178
-----------------------------------------------
Income Before Income Taxes....................................... $12,871 $14,633 $26,312 $30,272
Income taxes..................................................... 3,109 3,952 6,581 8,504
-----------------------------------------------
Net Income before Accounting Change......................... $9,762 $10,681 $19,731 $21,768
Cumulative effect of accounting change (net of tax)....... - - 225 -
-----------------------------------------------
NET INCOME.................................................. $9,762 $10,681 $19,956 $21,768
===============================================
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Net Income before Accounting Change
Basic............................................................ $ 0.38 $ 0.39 $ 0.76 $ 0.80
Diluted.......................................................... 0.38 0.39 0.75 0.79
Cumulative Effect of Accounting Change
Basic............................................................ N/A N/A $ 0.01 N/A
Diluted.......................................................... N/A N/A 0.01 N/A
Net Income
Basic............................................................ 0.38 0.39 0.77 0.80
Diluted.......................................................... 0.38 0.39 0.76 0.79
DIVIDENDS PER COMMON SHARE...................................................... 0.16 0.16 0.32 0.32
AVERAGE COMMON SHARES OUTSTANDING
Basic............................................................ 25,740 27,101 25,898 27,289
Diluted.......................................................... 25,967 27,421 26,138 27,625
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements (unaudited).
4
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Deferred Treasury Comprehensive Stockholders'
Stock Capital Earnings Compensation Stock Income (Loss) Equity
--------------------------------------------------------------------------------
(in thousands, except share data)
Balance at December 31, 1999...................... $ 6,585 $ 74,244 $ 271,781 $ (1,533) $ (30,442) $ (26,907) $ 293,728
======= ======== ========= ======== ========= ========= =========
Comprehensive Income:
Net Income................................. - - 21,768 - - - 21,768
Unrealized holding losses on securities
available for sale arising during the
period.................................. - - - - - (3,223) (3,223)
Less reclassification adjustment for security
gains included in net income............ - - - - - (1,096) (1,096)
Income tax effect related to items of other
comprehensive income.................... - - - - - 1,749 1,749
------- -------- --------- -------- --------- --------- ---------
Net unrealized gains (losses) on securities
available for sale........................... - - - - - (2,570) (2,570)
------- -------- --------- -------- --------- --------- ---------
Comprehensive Income.................... - - 21,768 - - (2,570) 19,198
------- -------- --------- -------- --------- --------- ---------
Cash dividends on common stock-$0.32
per share............................... - - (8,744) - - - (8,744)
Purchase of shares for the treasury.......... - - - - (20,592) - (20,592)
Reissuance of treasury shares under
non-employee directors stock plan....... - (11) - (238) 249 - -
Deferred compensation expense................ - - - 230 - - 230
Reissuance of treasury shares for
employee incentive plans................ - 351 - - 2,840 - 3,191
Issuance of common shares for
Employee Stock Plan..................... 6 402 - - - - 408
------- -------- --------- -------- --------- --------- ---------
Balance at June 30, 2000.......................... $ 6,591 $ 74,986 $ 284,805 $ (1,541) $ (47,945) $ (29,477) $ 287,419
======= ======== ========= ======== ========= ========= =========
Balance at December 31, 2000...................... $ 6,596 $ 74,900 $ 297,703 $ (1,651) $ (69,385) $ 334 $ 308,497
======= ======== ========= ======== ========= ========= =========
Comprehensive Income:
Net Income before accounting change........ - - 19,731 - - - 19,731
Cumulative effect of accounting change,
net of tax.............................. - - 225 - - (1,548) (1,323)
Current period transactions, net of tax...... - - - - - (378) (378)
Reclassification to earnings, net of tax..... - - - - - (663) (663)
------- -------- --------- -------- --------- --------- ---------
Net cumulative effect of FAS 133 - - 225 - - (2,589) (2,364)
------- -------- --------- -------- --------- --------- ---------
Unrealized holding gains on securities
available for sale arising during the
period.................................. - - - - - 6,535 6,535
Less reclassification adjustment for security
losses included in net income........... - - - - - 1,309 1,309
Income tax effect related to items of other
comprehensive income.................... - - - - - (3,088) (3,088)
------- -------- --------- -------- --------- --------- ---------
Net unrealized gains (losses) on securities
available for sale........................... - - - - - 4,756 4,756
------- -------- --------- -------- --------- --------- ---------
Comprehensive Income.................... - - 225 - - 2,167 2,392
------- -------- --------- -------- --------- --------- ---------
Cash dividends on common stock-$0.32
per share............................... - - (8,287) - - - (8,287)
Purchase of shares for the treasury.......... - - - - (14,387) - (14,387)
Reissuance of treasury shares under
non-employee directors stock plan....... - 18 - (78) 60 - -
Deferred compensation expense................ - - - 297 - - 297
Reissuance of treasury shares for
incentive plans........................ - (638) - (923) 6,292 - 4,731
Issuance of common shares for
Employee Stock Plan..................... 5 405 - - - - 410
------- -------- --------- -------- --------- --------- ---------
Balance at June 30, 2001.......................... $ 6,601 $ 74,685 $ 309,372 $ (2,355) $ (77,420) $ 2,501 $ 313,384
======= ======== ========= ======== ========= ========= =========
See accompanying notes to consolidated financial statements (unaudited).
5
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
(in thousands) 2001 2000
=======================================================================================================================
Cash Flows Net income before accounting change................................... $ 19,731 $ 21,768
From Cumulative effect of accounting change, net of tax.................... 225 -
Operating Gain on branch sales.................................................. (8,695) -
Activities Adjustments to reconcile net income from operations to net
cash provided by operating activities:
Depreciation and amortization of premises and equipment.......... 3,598 3,598
Amortization and accretion of securities, net.................... 1,027 1,012
Provision for loan and lease losses.............................. 9,713 4,730
Amortization of intangible assets................................ 1,085 1,057
Net securities losses (gains).................................... 1,529 (1,096)
Net gain on sale of loans held for sale.......................... (857) (50)
Deferred income taxes (benefits)................................. 2,117 (323)
Originations of loans held for sale.............................. (279,076) (118,650)
Proceeds from sales of loans held for sale....................... 264,830 89,204
Tax benefit on exercise of stock options ........................ (635) (135)
Other, net....................................................... 2,051 (210)
------------------------------
Net cash provided by operating activities..................... $ 16,643 $ 905
------------------------------
Cash Flows Proceeds from maturities of securities available for sale............. $ 162,166 $ 92,911
From Proceeds from maturities of securities held to maturity............... - 2,463
Investing Proceeds from sales of securities available for sale.................. 114,926 68,557
Activities Purchase of securities available for sale............................. (180,666) (155,412)
Net decrease in federal funds sold and other short-term investments... 27,000 -
Net decrease (increase) in interest earning deposits in banks......... 5,131 (34,506)
Proceeds from the sale of loans and leases............................ 2,991 2,152
Net decrease (increase) in loans and leases........................... 65,446 (38,913)
Investment in bank owned life insurance............................... (40,000) (20,000)
Premises and equipment expenditures, net.............................. (2,569) (2,923)
Proceeds from the sale of foreclosed real estate...................... 2,003 1,914
------------------------------
Net cash provided by (used for) investing activities.......... $ 156,428 $ (83,757)
------------------------------
Cash Flows Net increase in demand deposits and savings accounts.................. $ 20,769 $ 43,290
From Net (decrease) increase in time deposits.............................. (137,978) 54,588
Financing Net decrease in short-term borrowings................................. (869) (100,104)
Activities Proceeds from long-term borrowings.................................... 46,700 65,000
Payment of long-term borrowings....................................... (1,479) (14,477)
Net payments to settle branch sales................................... (90,180) -
Dividends paid........................................................ (8,287) (8,744)
Issuance of common shares for employee stock plan..................... 410 408
Reissuance of treasury shares for employee benefit incentive plans.... 5,366 3,326
Purchase of shares for treasury ...................................... (14,387) (20,592)
------------------------------
Net cash (used for) provided by financing activities.......... $ (179,935) $ 22,695
------------------------------
Net change in cash and cash
equivalents........................................................... $ (6,864) $ (60,157)
Cash and cash equivalents:
Beginning of year................................................... 118,807 179,113
------------------------------
End of period....................................................... $ 111,943 $ 118,956
==============================
Supplemental Cash payments for:
Disclosures of Interest paid to depositors......................................... $ 75,001 $ 64,346
Cash Flow Interest paid on borrowings......................................... 23,663 27,226
Information Income tax payment.................................................. 5,934 5,816
Non-Cash Foreclosed real estate - acquired in settlement of loans.............. 1,880 1,545
Investing and Transfer of long-term borrowings to short-term borrowings............. 750 91
Financing Transfer of held to maturity securities to available for sale......... 10,635 -
Activities
Activity for items such as deposits, loans, and fixed assets are shown excluding
balance changes resulting from branch sales.
See accompanying notes to consolidated financial statements (unaudited).
6
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 accounting principles generally accepted in the United States
of America 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 accounting principles
generally accepted in the United States of America. 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 six month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2001. 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, 2000.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No.
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but will rather be tested at least annually for
impairment. SFAS No. 142 is effective January 1, 2002 for calendar year
companies, however, any acquired goodwill or intangible assets recorded in
transactions closed subsequent to June 30, 2001 will be subject immediately to
the nonamortization and amortization provisions of SFAS No. 142. As required
under SFAS No. 142, the Company will discontinue the amortization of goodwill
with an expected net carrying value of $15.6 million at the date of adoption and
annual amortization of $1.9 million that resulted from business combinations
prior to the adoption of SFAS No. 141. However, the Company continues to
evaluate the additional effect, if any, that adoption of SFAS No. 141 and SFAS
No. 142 will have on the Company's consolidated financial statements.
In September 2000, the Financial Accounting Standards Board issued 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 and was implemented by the Company during the first quarter of
2001.
The Company adopted Statement of Financial Accounting Standards (SFAS) 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. See Note 10 of the Notes to Consolidated Financial
Statements.
Pending and Completed Divestitures:
On October 11, 2000, AMCORE announced that it was considering the sale of ten
branches (the "Branch Sales") as part of its strategic objective to invest in
and reallocate capital to high growth Midwestern markets. The branches
considered for sale included Aledo, Gridley, Mendota, Freeport, Mount Morris,
Oregon, Ashton, Rochelle, Wyanet and Sheffield. AMCORE has since concluded that
Mendota, Oregon and Freeport no longer
7
fit in its contemplated divestiture program and are no longer being considered
for sale.
Six branch sales were completed during the second quarter and these include
Ashton/Rochelle to the First National Bank of Rochelle, IL; Mount Morris to
UNION Savings BANK, Freeport, IL; Aledo to THE National Bank, Bettendorf, Iowa;
and Sheffield and Wyanet to Peoples National Bank of Kewanee. Peoples National
Bank of Kewanee then immediately announced the sale of the Wyanet branch to
Citizens First State Bank of Walnut. The gain on the sale of six branches was
$8.7 million on a pre-tax basis, net of associated costs. For the six branches
sold, $152 million in deposits, $50.7 million in loans and $1.1 million in
premises and equipment were transferred to the respective buyers. The average
gross premium on the branch sales during the quarter was 6.4 percent. The sale
of the Gridley branch is expected to close August 17, 2001 with a pre-tax net
gain of approximately $1.8 million.
NOTE 2 - SECURITIES
A summary of securities at June 30, 2001 and December 31, 2000 were as follows:
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
(in thousands)
At June 30, 2001
Securities Available for Sale:
U.S. Treasury $ 30,137 $ 327 $ -- $ 30,464
U.S. Government agencies 28,826 261 (53) 29,034
Agency mortgage-backed securities 676,269 3,459 (2,487) 677,241
State and political subdivisions 289,778 7,266 (891) 296,153
Corporate obligations and other 109,990 805 (379) 110,416
--------------------------------------------------------
Total Securities Available for Sale $1,135,000 $ 12,118 $ (3,810) $ 1,143,308
========================================================
At December 31, 2000
Securities Available for Sale:
U.S. Treasury $ 35,751 $ 215 $ (34) $ 35,932
U.S. Government agencies 51,091 142 (18) 51,215
Agency mortgage-backed securities 728,782 4,737 (7,634) 725,885
State and political subdivisions 289,496 5,630 (2,060) 293,066
Corporate obligations and other 118,201 296 (810) 117,687
--------------------------------------------------------
Total Securities Available for Sale $1,223,321 $ 11,020 $ (10,556) $ 1,223,785
--------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury $ 802 $ 4 $ -- $ 806
U.S. Government agencies 24 -- -- 24
State and political subdivisions 9,835 47 (77) 9,805
--------------------------------------------------------
Total Securities Held to Maturity $ 10,661 $ 51 $ (77) $ 10,635
--------------------------------------------------------
Total Securities $1,233,982 $ 11,071 $ (10,633) $ 1,234,420
========================================================
Realized gross gains resulting from the sale of securities available for sale
were $141,000 and $394,000 for the three months ended June 30, 2001 and 2000,
respectively, and $884,000 and $1.1 million for the six months ended June 30,
2001 and 2000, respectively. Realized gross losses were $604,000 and $1.0
million for the three months ended June 30, 2001 and 2000, respectively and
$604,000 and $1.0 million for the six months ending June 30, 2001 and 2000,
respectively. An impairment of loss $1.8 million was recorded during the second
quarter of 2001 related to specific securities for which a decision to sell has
been made. At June 30, 2001 and 2000, securities with a fair value of $839.9
million and $953.1 million, respectively, were pledged to secure public
deposits, securities under agreements to repurchase and for other purposes
required by law.
8
NOTE 3 - LOANS AND LEASES
The composition of the loan and lease portfolio at June 30, 2001 and December
31, 2000, was as follows:
June 30, 2001 December 31, 2000
--------------------------------
(in thousands)
Commercial, financial and agricultural......... $ 711,542 $ 697,056
Real estate-construction....................... 95,214 111,156
Real estate-commercial......................... 724,106 762,320
Real estate-residential........................ 580,267 662,778
Installment and consumer....................... 386,684 390,970
Direct lease financing......................... 3,940 2,877
----------------------------
Loans and leases, net of unearned income.. $ 2,501,753 $ 2,627,157
Allowance for loan and lease losses....... (33,006) (29,157)
----------------------------
NET LOANS AND LEASES...................... $ 2,468,747 $ 2,598,000
============================
$37.5 million in installment and consumer loans were either sold or reclassified
to loans held for sale during the six months ended June 30, 2001.
9
NOTE 4 - SALE OF RECEIVABLES
During the second quarter of 2001, the Company sold $12.2 million of indirect
automobile loans in securitization transactions, recognizing pre-tax gains of
$29,000. Upon securitization, the Company retained servicing responsibilities,
interest only strips and subordinated credit enhancement tranches. At the date
of each securitization, five in all since the third quarter of 2000, these
retained interests were allocated a carrying value of $8.1 million. The Company
receives monthly servicing fees equal to 0.75 percent per annum of the
outstanding beginning principal balance of the loans serviced for the month and
rights to future cash flows arising after the investors in the securitization
trust have received the returns for which they have contracted. The investors
and the securitization trust have no other recourse to the Company's other
assets for failure of debtors to pay when due. The Company's retained interests
are subordinate to investor's interests. Their value is subject to credit and
prepayment risk on the transferred auto loans.
Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of June 30, 2001 including the sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows:
As Of June 30, 2001
-------------------------------------
Date Of 10% Adverse 20% Adverse
Securitization Actual Change Change
-------------- ------ ----------- -----------
(in thousands)
Prepayment speed assumptions
Prepayment speed 1.5% 1.5% 1.7% 1.8%
Weighted average life (in months) 22.2 20.5 19.7 19.0
Fair value of retained interests $ 8,309 $ 8,264 $ 8,146 $ 8,036
Change in fair value $ -- $ -- $ (118) $ (229)
Expected credit loss assumptions
Expected credit losses (loss to liquidation) 1.0% - 1.7% 1.0% 1.1% 1.2%
Fair value of retained interests $ 8,309 $ 8,264 $ 8,166 $ 8,075
Change in fair value $ -- $ -- $ (98) $ (189)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual) 7.4% - 9.1% 7.4% 8.1% 8.9%
Fair value of retained interests $ 8,309 $ 8,264 $ 8,079 $ 7,904
Change in fair value $ -- $ -- $ (186) $ (360)
These sensitivities are hypothetical and should be used with caution. Changes in
fair value based on a 10 percent variation should not be extrapolated because
the relationship of the change in assumption to the change in fair value may not
always be linear. Also, in this table, the effect of a variation in a particular
assumption on the fair value of the retained interests is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might magnify or
counteract the sensitivities.
Total cash flows attributable to the indirect auto loan securitization
transactions was an inflow of $12.2 million in the second quarter of 2001. The
following table summarizes the various cash flows received from and (paid to)
the securitization trust:
Proceeds From Servicing Fees Other
Securitizations Collected Cash Flows Fees Paid
--------------- --------- ---------- ---------
(in thousands)
Cash flows received from and (paid to) trust $ 11,624 $ 200 $ 407 $ (1)
Other retained interests represents net cash flows received from retained
interests by the transferor other than servicing fees. Other cash flows include,
for example, gross cash flows from interest-only strips net of reductions in
such cash flows for loan defaults.
The following table presents quantitative information about delinquencies (loans
30+ days past due plus non-accruals), net credit losses, and components of
securitized indirect auto loans and other assets managed together with them.
Loan amounts represent the principal amount of the loan only. Retained interests
held for securitized assets are excluded from this table because they are
recognized separately.
Indirect Installment Loans
----------------------------------------------------------
Held In Portfolio Securitized Held For Sale Total
----------------- ----------- ------------- -----
(in thousands)
Total principal amount of loans at June 30, 2001 $ 274,341 $ 99,294 $ 7,628 $381,263
Delinqencies based on end of period loans $ 6,328 $ 1,664 $ - $ 7,992
Net credit losses year-to-date $ 1,195 $ 380 $ - $ 1,575
Actual and projected static pool credit losses, as a percentage of indirect auto
loans securitized in 2001, are 0.02%, 0.34% and 0.76% as of the quarters ended
June 30, 2001, June 30, 2002 and June 30, 2003, respectively. Static pool losses
are calculated by summing the actual and projected future credit losses and
dividing them by the original balance of each pool of assets. The amount shown
here for each year is a weighted average for all securitizations during the
period.
10
NOTE 5 - Short-Term Borrowings
Short-term borrowings at June 30, 2001 and December 31, 2000 consisted of the
following:
June 30, 2001 December 31, 2000
--------------------------------
(in thousands)
Securities sold under agreements to repurchase.. $ 363,522 $ 439,367
Federal Home Loan Bank borrowings............... 40,821 70
Federal funds purchased......................... 22,600 9,990
U.S. Treasury tax and loan note accounts........ 12,000 11,207
Commercial paper borrowings..................... 21,572 -
--------------------------
Total short-term borrowings.................. $ 460,515 $ 460,634
==========================
NOTE 6 - Long-Term Borrowings
Long-term borrowings at June 30, 2001 and December 31, 2000 consisted of the
following:
June 30, 2001 December 31, 2000
--------------------------------
(in thousands)
Federal Home Loan Bank borrowings............ $ 269,873 $ 224,957
Capital Trust preferred securities........... 40,000 40,000
Other long-term borrowings................... 436 873
--------------------------
Total long-term borrowings...... $ 310,309 $ 265,830
==========================
AMCORE Bank, N.A. periodically borrows additional funds from the Federal Home
Loan Bank (FHLB) in connection with the purchase of mortgage-backed securities
and the financing of 1-4 family real estate loans. Certain FHLB borrowings have
prepayment penalties and call features associated with them. The average
maturity of these borrowings at June 30, 2001 is 4.66 years, with a weighted
average borrowing rate of 5.09%.
Reductions of FHLB borrowings with call features, assuming they are called at
the earliest call date, are as follows at June 30, 2001:
Total
--------------
(in thousands)
2001........................................... $ 176,000
2002........................................... 15,000
2003........................................... 4,000
---------------
Total callable FHLB borrowings......... $ 195,000
===============
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 discounted at an interest rate
of 8.0%.
Scheduled reductions of long-term borrowings are as follows:
Total
--------------
(in thousands)
2002........................................... $ 10,473
2003........................................... 75,072
2004........................................... 25,042
2005........................................... 15,684
2006........................................... 11,711
Thereafter..................................... 172,327
--------------
Total long-term borrowings............. $ 310,309
==============
11
NOTE 7 - EARNINGS PER SHARE
For the Three Months For the Six Months
Earnings per share calculations are as follows: Ended June 30, Ended June 30,
2001 2000 2001 2000
---------------------------------------------------
(in thousands, except per share data)
Net Income $ 9,762 $10,681 $19,956 $ 21,768
Basic earnings per share:
---------------------------------------------------
Average basic shares outstanding 25,740 27,137 25,898 27,325
---------------------------------------------------
Earnings per share $ 0.38 $ 0.39 $ 0.77 $ 0.80
---------------------------------------------------
Diluted earnings per share:
Weighted average shares outstanding 25,740 27,101 25,898 27,289
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 227 232 240 248
Contingently issuable shares under IMG
purchase agreement -- 88 -- 88
---------------------------------------------------
Average diluted shares outstanding 25,967 27,421 26,138 27,625
---------------------------------------------------
Diluted Earnings per share $ 0.38 $ 0.39 $ 0.76 $ 0.79
---------------------------------------------------
12
NOTE 8 - RESTRUCTURING CHARGE
The components of the 1999 restructuring charge as shown below had a
balance of zero at December 31, 2000 and, therefore, there was no activity
during 2001. The activity during the second quarter and year-to-date for 2000
were as follows:
March 31, 2000 Second Quarter Second Quarter June 30, 2000
Balance Cash Payments(1) Reversal(2) Balance
-------------- ---------------- -------------- -------------
(in thousands)
Compensation expense . . . . . . . . $ 461 $ (103) $ (127) $ 231
Employee benefits . . . . . . . .(3) 65 (6) (42) 17
Data processing expense . . . . .(4) 239 (86) (38) 115
Professional fees . . . . . . . .(5) 219 (80) (64) 75
Other . . . . . . . . . . . . . .(6) 73 (12) (38) 23
------- ------- ------ ------
Charge before income taxes . . . . . 1,057 (287) (309) 461
Income taxes . . . . . . . . . . . . 420 (114) (123) 183
------- ------- ------ ------
Charge after income taxes . . . . . $ 637 $ (173) $ (186) $ 278
======= ======= ====== ======
December 31, 1999 Year to Date Year to Date June 30, 2000
Balance Cash Payments(1) Reversal(2) Balance
----------------- ---------------- ------------ -------------
(in thousands)
Compensation expense . . . . . . (7) $ 972 $ (614) $ (127) $ 231
Employee benefits . . . . . . . .(3) 83 (24) (42) 17
Data processing expense . . . . .(4) 459 (306) (38) 115
Professional fees . . . . . . . .(5) 290 (151) (64) 75
Other . . . . . . . . . . . . . .(6) 75 (14) (38) 23
------- ------- ------ ------
Charge before income taxes . . . . 1,879 (1,109) (309) 461
Income taxes . . . . . . . . . . . 747 (441) (123) 183
------- ------- ------ ------
Charge after income taxes . . . . $ 1,132 $ (668) $ (186) $ 278
======= ======= ====== ======
- ----------------
(1) Includes items totaling $75,000 related to restructuring that were expensed
as incurred and were not included in the original restructuring charge.
(2) Second quarter 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 June 30, 2000,
78 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 June 30, 2000, 18 employees remained to be severed.
13
NOTE 9 - 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 62 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 and
regionally to institutional investors and corporations, and locally through
AMCORE's 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.
14
NOTE 9 - SEGMENT INFORMATION (Continued)
For the three months ended June 30, 2001 --------------------- Operating Segments --------------------
Trust and Asset Mortgage Eliminations
Banking Management Banking And Other Consolidated
(dollars in thousands)
Net interest income..................... $28,740 $ 50 $ 1,003 $ (558) $29,235
Non-interest income..................... 14,757 7,240 2,315 (1,852) 22,460
-------------------------------------------------------------
Total Revenue...................... 43,497 7,290 3,318 (2,410) 51,695
Provision for loan and lease losses..... 7,557 -- -- -- 7,557
Depreciation and amortization........... 1,838 292 10 31 2,171
Other non-interest expense.............. 21,569 5,260 2,489 (222) 29,096
-------------------------------------------------------------
Pretax earnings.................... 12,533 1,738 819 (2,219) 12,871
Income taxes............................ 2,895 760 327 (873) 3,109
-------------------------------------------------------------
Earnings........................... $ 9,638 $ 978 $ 492 $(1,346) $ 9,762
=============================================================
Segment profit percentage............... 86.8% 8.8% 4.4% N/M 100.0%
=============================================================
For the three months ended June 30, 2000
Net interest income..................... $31,788 $ 100 $ 590 $ (453) $32,025
Non-interest income..................... 6,499 7,991 1,577 (1,405) 14,662
-------------------------------------------------------------
Total Revenue...................... 38,287 8,091 2,167 (1,858) 46,687
Provision for loan and lease losses..... 2,340 -- -- -- 2,340
Depreciation and amortization........... 1,990 263 22 54 2,329
Other non-interest expense.............. 20,117 5,324 1,453 491 27,385
-------------------------------------------------------------
Pretax earnings.................... 13,840 2,504 692 (2,403) 14,633
Income taxes............................ 3,500 1,081 276 (905) 3,952
-------------------------------------------------------------
Earnings........................... $10,340 $ 1,423 $ 416 $(1,498) $10,681
=============================================================
Segment profit percentage............... 84.9% 11.7% 3.4% N/M 100.0%
=============================================================
For the six months ended June 30, 2001 --------------------------- Operating Segments ----------------------
Trust and Asset Mortgage Eliminations
Banking Management Banking And Other Consolidated
---------------------------------------------------------------------
(dollars in thousands)
Net interest income.................................. $ 57,557 $ 126 $ 1,826 $ (1,048) $ 58,461
Non-interest income.................................. 23,755 14,438 4,471 (3,543) 39,121
---------------------------------------------------------------------
Total Revenue................................... 81,312 14,564 6,297 (4,591) 97,582
Provision for loan and lease losses.................. 9,713 -- -- -- 9,713
Depreciation and amortization........................ 3,710 608 24 131 4,473
Other non-interest expense........................... 41,872 10,657 4,574 (387) 56,716
---------------------------------------------------------------------
Pretax earnings................................. 26,017 3,299 1,699 (4,335) 26,680
Income taxes......................................... 6,220 1,472 677 (1,645) 6,724
---------------------------------------------------------------------
Earnings $ 19,797 $ 1,827 $ 1,022 $ (2,690) $ 19,956
Cumulative effect of accounting change (net of tax) (209) -- (16) -- (225)
---------------------------------------------------------------------
Earnings before accounting change............... 19,588 1,827 1,006 (2,690) 19,731
=====================================================================
Segment profit percentage............................ 87.4% 8.1% 4.5% N/M 100.0%
=====================================================================
Assets.............................................. $ 3,982,243 $ 19,817 $ 47,848 $ (18,681) $ 4,031,227
=====================================================================
For the six months ended June 30, 2000
Net interest income.................................. $ 64,576 $ 192 $ 1,022 $ (803) $ 64,987
Non-interest income.................................. 12,994 16,187 2,941 (2,929) 29,193
---------------------------------------------------------------------
Total Revenue................................... 77,570 16,379 3,963 (3,732) 94,180
Provision for loan and lease losses.................. 4,730 -- -- -- 4,730
Depreciation and amortization........................ 3,983 517 47 108 4,655
Other non-interest expense........................... 40,176 10,814 2,806 727 54,523
---------------------------------------------------------------------
Pretax earnings................................. 28,681 5,048 1,110 (4,567) 30,272
Income taxes......................................... 7,600 2,180 438 (1,714) 8,504
---------------------------------------------------------------------
Earnings........................................ $ 21,081 $ 2,868 $ 672 $ (2,853) $ 21,768
=====================================================================
Segment profit percentage............................ 85.7% 11.6% 2.7% N/M 100.1%
=====================================================================
Assets............................................... $ 4,366,260 $ 19,653 $ 26,427 $ (19,964) $ 4,392,376
=====================================================================
15
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
The Company adopted Statement of Financial Accounting Standards (SFAS) 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, including certain derivative instruments embedded in other
contracts, and hedging activities.
The Company uses derivative instruments to help manage its exposure to interest
rate risk by modifying the existing interest rate risk characteristics of
on-balance sheet assets and liabilities. The derivatives utilized as part of the
asset/liability management program are predominately comprised of interest rate
swap and collar contracts. Most of these instruments are designed to hedge
exposure to floating rate liabilities where the Company is most vulnerable to
interest rate risk. In addition, caps are also used to hedge exposure to
increasing costs of floating rate liabilities, and interest rate floors are used
to manage the exposure to falling interest rates of the originated mortgage
servicing rights intangible asset. Also considered derivatives under SFAS No.
133 are 1-4 family residential loan (Mortgage Loans) commitments and forward
Mortgage Loan sales to the secondary market (collectively "Mortgage Loan
Derivatives"). The Company also has a deposit product whose interest rate is
tied to the S & P index. The longest-term derivative that the Company has used
to hedge its interest rate exposure expires in September of 2004.
Under SFAS No. 133, all derivatives will be recognized at fair value in the
Consolidated Balance Sheets. Changes in fair value for derivatives that are not
hedges will be recognized in the Consolidated Statement of Income (Income
Statement) 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 Income Statement or recorded as a component of other comprehensive income
(OCI) in the Consolidated Statement of Stockholders' Equity. If the derivative
is designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in the Income Statement. If the derivative is designated as a cash flow hedge,
changes in the fair value due to the passage of time (Time Value) are excluded
from the assessment of hedge effectiveness and therefore flow through the Income
Statement for each period. The effective portion of the remaining changes in the
fair value of the derivative (Intrinsic Value) are recorded in OCI and are
subsequently recognized in the Income Statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in the Income Statement. Hedge ineffectiveness is caused when the
change in expected future cash flows of a hedged item does not exactly offset
the change in the future expected cash flows of the derivative instrument, and
is generally due to differences in the interest rate indices or interest rate
reset dates.
The Company implemented SFAS No. 133 on January 1, 2001, and, as such, the
impact of the transition to this standard on the Company's earnings and
financial position was dependent on the composition of the hedging portfolio at
that date. The after-tax transition adjustment due to the adoption of FAS No.
133 resulted in an increase in consolidated assets of $2.1 million, an increase
in consolidated liabilities of $3.4 million, a reduction in OCI of $1.5 million,
and an increase in net income of $225,000. The increase in net income is mostly
attributable to the $353,000 favorable Time Value component of the market value
of the cash flow hedges. As part of the adoption of this standard, $10.7 million
of held to maturity securities were reclassified to available for sale resulting
in an unrealized loss of $15,000 recorded in OCI.
The Income Statement for the three months ended June 30, 2001 included the
following derivative related activity in other non-interest income: $11,000
income due to the increase in the Time Value component of the market value of
cash flow hedges, $78,000 loss related to the ineffective portion of the cash
flow hedges, $144,000 loss related to Mortgage Loan Derivatives, and $2,000
income related to the S & P 500 embedded derivative. These items, net of taxes
of $81,000, total a $128,000 loss recorded for the quarter ended June 30, 2001.
In addition to the transition adjustment, the Income Statement for the six
months ended June 30, 2001 included the following derivative related activity in
other non-interest income: $285,000 loss due to the decrease in the Time Value
component of the market value of cash flow hedges, $38,000 income related to the
ineffective portion of the cash flow hedges, $40,000 loss related to Mortgage
Loan Derivatives, and $4,000 income related to the S & P 500 embedded
derivative. These items, net of taxes of $111,000, total a $172,000 loss
recorded for the
16
six months ended June 30, 2001.
Reclassification from OCI to the Income Statement occurs each period as
continuing cash flow payments bring the Intrinsic Value component of the market
value of each cash flow hedge closer to zero. Reclassifications also occur when
cash flow hedges no longer meet the requirements to qualify for hedge
accounting. Of the net derivative losses included in OCI as of the January 1,
2001 transition date, $2.3 million pre-tax is expected to be reclassified to the
Income Statement as additional interest expense during the twelve months ended
December 31, 2001, mostly through the normal postings of cash receipts and cash
payments related to the derivatives and the hedged items.
NOTE 11 - CONTINGENCIES
Management believes that no litigation is threatened or pending in which the
Company faces potential loss or exposure which will materially affect the
Company's financial position or results of operations, other than noted below.
Since the Company'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 the Company'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 the Company 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. The Company has denied the plaintiffs' allegations and removed the
case to the United States District Court for the Northern District of
Mississippi. Plaintiffs' filed a motion seeking to remand the case back to state
court.
During the second quarter of 2001, the Company made a settlement offer to
Plaintiff's counsel. The Company recorded an accrual reflecting the amount
offered. There were no other developments during the quarter. Subsequent to the
end of the second quarter of 2001, the Company was notified of the several
developments. First, the federal district court ordered the case to be sent to
the federal bankruptcy court to determine if it wants to pursue this case as an
asset of one of the plaintiffs who previously filed for bankruptcy relief and to
remand the case back to state court if the federal bankruptcy court did not keep
jurisdiction. The Company intends to file a motion to reconsider this order as
the federal district court failed to address the issue of diversity of the
parties. Second, plaintiffs' attorneys have rejected the Company's settlement
offer. In addition, they have notified the Company's counsel that they have
identified 17 more individuals with potential claims similar to those of the
named Plaintiffs'. No suits have yet been filed on their behalf. Company's
counsel is currently investigating these allegations and analyzing whether new
suits may be barred by the Mississippi statute of limitations. Plaintiff's
counsel has made a counter offer to settle the suits. The Company is reviewing
with counsel its response to the offer.
Although the ultimate disposition of the cases cannot be predicted with
certainty, based on information currently available, the Company believes that
the plaintiffs' damage claims are disproportionate and that the final outcome of
the cases will not have a materially adverse effect on the Company's
consolidated financial condition, though it could have a materially adverse
affect on the Company's consolidated results of operations in a given year. The
Company has not adjusted its accrual for payment of the damages in these cases
because, in management's opinion, an unfavorable outcome in this litigation
beyond the accrual is not probable.
17
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operation
Management's discussion and analysis focuses on the significant factors which
affected AMCORE Financial, Inc. and subsidiaries ("AMCORE") Consolidated Balance
Sheet as of June 30, 2001 as compared to December 31, 2000 and the results of
operations for the three and six months ended June 30, 2001 as compared to the
same periods in 2000. 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", "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) unexpected outcomes on existing or new
litigation in which AMCORE, its subsidiaries, officers, directors or employees
are named defendants; (XIV) technological changes; (XV) changes in accounting
principles generally accepted in the United States of America; and (XVI)
inability of third-party vendors to perform critical services to the Company or
its customers.
OVERVIEW OF OPERATIONS
AMCORE (or the "Company") reported net income of $9.8 million for the three
months ended June 30, 2001, a decrease of $919,000 or 8.6% from the $10.7
million reported for the comparable period in 2000. Net income for the six
months ended June 30, 2001 was $20.0 million, a decrease of $1.8 million or 8.3%
from the $21.8 million reported in 2000.
Diluted earnings per share were $0.38 and $0.76 for the three and six months
ended June 30, 2001, respectively, compared to $0.39 and $0.79 for the same
periods in 2000. Year-to-date this represents a 3.8% decrease in earnings, on a
diluted per share basis, compared to the 8.3% decrease on a dollar basis, and
reflects a 1.5 million decrease in average diluted shares outstanding
attributable to AMCORE's previously announced stock repurchase programs.
AMCORE's annualized return on average equity for the second quarter and
year-to-date for 2001 was 12.50% and 12.74%, respectively. Annualized return on
average equity for the comparable periods in 2000 was 15.20% and 15.41%. The
annualized return on average assets for the second quarter of 2001
18
was 0.96% compared to 0.99% for the same period in 2000. For the first six
months of 2001 and 2000, the annualized return on average assets was 0.96% and
1.01%, respectively.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statement of Financial Accounting Standards No. 138.
This Statement outlines accounting and reporting standards for derivative
instruments and hedging activities. Net income for the first quarter of 2001
included a cumulative effect of $225,000 in net income attributable to the
adoption of the new accounting standard (the "Accounting Change"). See Note 10
of the Notes to Consolidated Financial Statements (unaudited).
On October 11, 2000, AMCORE announced that it was considering the sale of ten
Illinois branches (the "Branch Sales") as part of its strategic objective to
invest in and reallocate capital to higher growth Midwestern markets. The
branches included Aledo, Gridley, Mendota, Freeport, Mount Morris, Oregon,
Ashton, Rochelle, Wyanet and Sheffield. AMCORE has since concluded that Mendota,
Oregon and Freeport no longer fit in its contemplated divestiture program and
are no longer being considered for sale. During the second quarter of 2001, six
of the seven branches were sold resulting in $5.2 million in after-tax gains,
net of associated costs (the "Branch Gains"). The seventh branch in Gridley is
expected to close August 17, 2001 with a net after-tax gain of $1.1 million. The
final net gain on sale of the Gridley branch will be dependent upon deposit
levels at the time of sale. For the six branches sold, $50.7 million in loans,
$152.1 million in deposits and $1.1 million in premises and equipment were
transferred to the respective buyers.
During the second quarter, AMCORE recognized $1.4 million in net after-tax
security losses related to investment portfolio restructuring (the "Security
Portfolio Restructuring") designed to reduce interest rate risk. The
restructuring plan focused on mortgage-related securities having a higher degree
of interest rate risk associated with changes in prepayment speeds and on
securities with low yields and/or longer durations. The restructuring is
intended to improve the stability and quality of future earnings especially in
periods of rising interest rates.
During the second quarter, AMCORE announced business changes designed to better
integrate banking and asset management services to its customers. To better
support these structural changes, AMCORE streamlined its management team
resulting in the departure of certain senior managers. Severance charges related
to these structural changes were $464,000, after-tax (the "Severance Charge").
During the second quarter, the bank subsidiary (the "BANK") opened two branches
along the I-90 growth corridor - the Perryville branch on Rockford's fast
growing east side and an office in Geneva, IL, an affluent suburb in Kane
County. In addition, one potential site is being considered in St. Charles, IL
located between the Geneva and Elgin markets, and one site in McHenry, IL. All
sites are in strong markets where AMCORE has existing name recognition. The
sites in Kane and McHenry counties are expected to add significantly to the
BANK's presence in the Fox River Valley and strategically position it along I-90
in the western Chicago suburbs.
On April 23, 2001, AMCORE announced a stock repurchase program for up to five
percent of its common stock or 1.29 million shares. As of January 1, 2001,
AMCORE also had 338,000 shares remaining from the Company's August 8, 2000 stock
repurchase authorization. Shares repurchased pursuant to these authorizations
will become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option plan
and other employee benefit plans. As of June 30, 2001, 1.24 million shares
remained to be repurchased pursuant to the April 23, 2001 authorization, while
all authorized shares had been repurchased related to the August 8, 2000
authorization. For the six month period ended June 30, 2001 the Company
repurchased 681,000 shares at an average price of $20.09.
Net income, excluding the Accounting Change, the Branch Gains, the Security
Portfolio Restructuring and the Severance Charge, was $16.4 million or $0.63 per
diluted share for the first six months of 2001. Net income for the first six
months of 2000, excluding a $141,000 net after-tax reversal of excess
19
restructuring-related charges (the "Restructuring Reversal), was $21.6 million
or $0.78 per diluted share. This was a $5.2 million decline, when comparing the
two periods, or $0.16 per diluted share. Lower net interest income, increased
provisions for loan and lease losses and lower trust and asset management income
were the primary factors leading to the decline. Increases in deposit service
charges, mortgage revenues and cash surrender values (CSV) of bank owned life
insurance (BOLI) partially offset these declines. AMCORE expects its performance
during the remainder of the year will outpace its first half performance. Net
income, excluding the items noted above, is expected to range between $1.45 to
$1.50 per diluted share for the full year.
EARNINGS REVIEW OF CONSOLIDATED INCOME STATEMENT
The following highlights a comparative discussion of the major components of net
income and their impact for the three and six months ended June 30, 2001 and
2000.
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 investment 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" or FTE basis.
The FTE adjustment was calculated using AMCORE's statutory Federal income tax
rate of 35%. Adjusted interest income is as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
=============== ================ ================ ================
(in thousands)
Interest Income Book Basis $72,107 $80,823 $147,733 $159,755
FTE Adjustment 2,098 2,261 4,215 4,537
--------------- ---------------- ---------------- ----------------
Interest Income FTE Basis 74,205 83,084 151,948 164,292
Interest Expense 42,872 48,798 89,272 94,768
--------------- ---------------- ---------------- ----------------
Net Interest Income FTE Basis $31,333 $34,286 $62,676 $69,524
=============== ================ ================ ================
Net interest income on an FTE basis declined $3.0 million or 8.6% during the
second quarter of 2001 over the same period in 2000. Average earning assets
declined $366.4 million or 8.9%, as the Company focused on interest-rate risk
reduction and liquidity driven strategies that included the sale of indirect
auto loans (the "Auto Loan Sales"), the continued reduction/restructuring of its
investment portfolio and reduced exposures to 1-4 family residential real estate
loans. Yields on average earning assets declined 17 basis points. The net impact
was a $8.9 million or 10.7% decrease in interest income on an FTE basis.
Rates paid on interest-bearing liabilities declined 24 basis points on average
quarter-to-quarter. Average balances of interest-bearing liabilities declined
$304.3 million, as the Company continued to decrease its dependence on high-cost
funding sources. The net impact was a $5.9 million or 12.1% decrease in interest
expense.
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
20
divided by average earning assets. These ratios can 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 Table 1 indicates, the interest rate spread increased 7 basis points to 2.77%
in the second quarter of 2001 when compared to the 2.70% during the same period
in 2000. Net interest margin increased 1 basis point to 3.32% in the second
quarter of 2001, compared to 3.31% for the same period a year ago.
As Table 2 indicates, the interest rate spread declined 8 basis points to 2.68%
for the first six months of 2001 when compared to the 2.76% during the same
period in 2000. Net interest margin declined 10 basis points to 3.27% for the
first six months of 2001, compared to 3.37% for the same period a year ago.
While on a year-to-date basis the interest rate spread and net interest margins
have declined from the same period a year ago, recent trends and expectations
are more favorable. Interest rate spread and net interest margins in the second
quarter of 2001 have improved 17 and 10 basis points, respectively, since the
first quarter of 2001 with improvements of 28 and 18 basis points, respectively,
since the fourth quarter of 2000. The current and projected interest rate
environment, significant reductions in wholesale funding, a new free-checking
product and the near-term maturity/repricing of higher-rate certificates of
deposit (CDs) are expected to result in a lower cost of funds and improving
margins throughout 2001. Specifically, higher cost wholesale funding has
decreased $242.9 million on average since the second quarter of 2000 while NOW
(i.e., checking) accounts have increased $31.9 million, on average, over the
same period. In addition, during the third quarter, $215.8 million in CDs with
rates in excess of 6.0% will mature. Renewals for comparable instruments are
expected to reprice at rates that are 150 to 175 basis points lower. Additional
actions by the Federal Reserve (the "Fed") to lower short-term interest rates
could further lower the cost of these funds. As a result of the foregoing, the
Company expects net interest margin to approach 3.60% to 3.65% by the end of the
year with full year margins in the range of 3.35% to 3.40%.
The level of net interest income is the result of the relationship between the
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 can be segregated to analyze the quarter-to-quarter
changes in net interest income. Changes due to rate/volume variances 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. Tables 3 and 4 analyze the changes
attributable to the rate and volume components of net interest income for the
three and six-months ended June 30, 2001, respectively, as compared to the same
periods in 2000.
Changes Due to Volume
In the second quarter of 2001, net interest income declined due to average
volume by $3.3 million, when compared with the second quarter of 2000. This was
comprised of a $7.1 million decline in interest income that was partially offset
by a $3.8 million decrease in interest expense.
21
The $7.1 million decline in interest income was driven by a $259.0 million or
9.3% decline in average loans and a $137.8 million or 10.5% decrease in average
investment securities. The decrease in average loans was the result of Auto Loan
Sales of $98.6 million and the decrease of $114 million in 1-4 family real
estate loans due to higher prepayments, refinancing and securitization.
Commercial loan volume also decreased $28.6 million due to stricter pricing
policies, tighter credit standards and a slow down in the economy. In addition,
there was the transfer of $16.6 million in average loans from the Branch Sales.
The decline in average investment securities was the result of AMCORE's
continuing strategy to reduce and restructure its investment portfolio as well
as prepayments driven by falling interest rates. Planned reductions have
primarily focused on mortgage-related securities having a higher degree of
interest rate risk associated with changing prepayment speeds. The strategy has
also focused on reducing certain securities with low yields and/or longer
durations.
The decline in average earning assets, quarter-to-quarter, led to a $304.3
million or 8.3% decrease in average interest-bearing liabilities and the
resulting $3.8 million reduction in interest expense. This was largely
attributable to a $242.9 million average reduction in wholesale funding since
the second quarter of 2000. This was a deliberate strategy aimed at reducing the
Company's reliance on these higher-cost funding sources and to reduce interest
rate risk. The Branch Sales accounted for an additional $44.8 million reduction
in average interest-bearing liabilities.
For the first six months of 2001, net interest income declined due to average
volume by $5.4 million, when compared with the same period in 2000. This was
comprised of a $11.9 million decline in interest income that was partially
offset by a $6.5 million decrease in interest expense. Average loans over this
period declined $213.1 million or 7.7%, while average securities decreased
$115.4 million or 8.8%. This led to a decline in average interest-bearing
liabilities of $239.8 million or 6.6%.
Changes Due to Rate
In the second quarter of 2001, net interest income increased due to average
rates by $357,000, when compared with the second quarter of 2000. This was
comprised of a $1.7 million decline in interest income that was more than offset
by a $2.1 million decrease in interest expense.
The yield on earning assets declined 17 basis points during the second quarter
of 2001, compared to the same period in 2000. The yield on average loans
decreased 16 basis points and was primarily driven by commercial loans. The
yield on average investment securities decreased by 17 basis points, as
higher-yielding agency mortgage-backed securities prepaid during the second
quarter of 2001, also the result of declining interest rates.
The rate paid on interest bearing liabilities decreased 24 basis points during
the second quarter of 2001, compared to the second quarter of 2000. This was
primarily due to decreased rates on AMDEX money market accounts and on
repurchase agreements. The AMDEX accounts reprice monthly off the three-month
Treasury bill discount rate, and have benefited from the recent decline in
short-term interest rates. Repurchase agreements are short-term financings that
have renewed at lower rates due to the decline in short-term interest rates. As
noted above, repricing of higher-yielding CDs maturing during the third quarter
is expected to result in declining CD rates in the third and fourth quarter.
For the first six months of 2001, net interest income declined due to average
rates by $1.4 million, when compared with the same period in 2000. This was
comprised of a $413,000 decline in interest income and a $1.0 million increase
in interest expense. The yield on earning assets declined a modest 2 basis
points, while average rates paid on interest bearing liabilities increased 6
basis points.
22
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 will not be collected. Loan and lease losses are charged against the
allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
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, adverse situations that may affect the
borrower's ability to repay and the estimated value of any underlying collateral
of impaired and potential problem loans.
The provision for loan and lease losses was $7.6 million in the second quarter
of 2001, an increase of $5.2 million over the $2.3 million recorded in the same
period a year ago. For the first six months of 2001, the provision for loan and
lease losses was $9.7 million, an increase of $5.0 million over the $4.7 million
recorded in the same period a year ago. Increases in non-performing loans, net
charge-offs and delinquencies, coupled with concerns over the economy's impact,
particularly on commercial borrowers, contributed to the increased provisions.
Future growth in the loan portfolio, further weakening in economic conditions or
specific credit deterioration, among other things, could result in provisions
for loan and lease losses for the remainder of 2001 higher than those in
comparable periods in 2000.
AMCORE recorded net charge-offs of $3.5 million during the second quarter
compared to $1.4 million for the same period of 2000. Annualized net charge-offs
more than doubled to 56 basis points of average loans in the second quarter of
2001 compared to 20 basis points in the same period in 2000. Over two-thirds of
the increase relates to six medium-sized credits that were fully or partially
charged-off during the second quarter of 2001.
The allowance for loan and lease losses as a percent of total loans was 1.32%
and 1.08% at June 30, 2001 and 2000, respectively. The higher level of the
allowance for loan and lease losses, as a percent of total loans, reflects the
factors listed above as well as a $277.2 million or 10.0% decrease in loans over
the periods noted.
Non-Interest Income
Total non-interest income is comprised primarily of fee-based revenues from
mortgage, trust, brokerage, asset management and insurance services. Fees from
bank-related services, mainly on deposits and electronic banking, along with net
security gains or losses, gains from loan sales and increases in CSV of BOLI are
also included in this category. Non-interest income, excluding net security
gains and losses, increased $10.5 million in the second quarter of 2001 compared
to the second quarter of 2000, primarily as a result of the Branch Gains.
Excluding the Branch Gains, which were $8.7 million on a pre-tax basis,
non-interest income increased $1.8 million, or 12.4%. The improvement was
attributable to increased net CSV on BOLI, increased service charges on
deposits, servicing income on Auto Loan Sales and higher mortgage revenues.
These were partially offset by a decline in trust and asset management revenues,
unfavorable derivative fair value and hedge ineffectiveness adjustments,
customer service fees and brokerage commissions.
Trust and asset management income, the largest source of fee based revenues,
totaled $6.8 million in the second quarter of 2001, a decline of $718,000 or
9.5% from $7.6 million in the second quarter of 2000. The overall decline in the
stock market during the second quarter of 2001, compared to the second quarter
of 2000, impacted equity values upon which fees are based. This, along with some
lost employee benefit accounts, were the primary factors leading to the decline
in trust and asset management revenues. The impact was lessened, however,
because of the composition of the Company's asset
23
management mix, which is fairly evenly divided among equity, fixed income and
money market investments. Therefore, when one sector is experiencing pressure,
as the equity markets have been recently, other sectors can lessen the impact.
Thus, while the S&P 500 and the NASDAQ were down nearly 16% and 46%,
respectively, from June 30, 2000 to June 30, 2001, favorable outcomes in the
fixed income market enabled the Company to limit the decrease in trust and asset
management revenue to 9.5%. As of June 30, 2001, assets under management totaled
$4.3 billion, including $1.2 billion in the AMCORE family of Vintage Mutual
Funds. Total assets under administration, which include managed and custodial
assets, totaled $5.0 billion. In addition to overall market performance, trust
and asset management revenues are dependent upon plan terminations, corporate
profit sharing contributions, and other economic factors.
Service charges on deposits totaled $3.7 million in the second quarter of 2001,
an increase of $953,000 or 34.3% from the $2.8 million in the second quarter of
2000. Non-sufficient funds, stop payment and return check fees, primarily
personal, and increased commercial account maintenance fees contributed to the
increase over the second quarter of 2000. Lower short-term interest rates have
reduced the value of balances maintained to compensate the bank for deposit
services and this has resulted in higher fees collected for account maintenance.
Mortgage revenues include fees generated from underwriting, originating and
servicing of mortgage loans along with gains realized from the sale of these
loans. A declining interest rate environment during the second quarter of 2001,
compared to an increasing interest rate environment during the same quarter in
2000, resulted in increased volumes quarter-over-quarter. Second quarter 2001
volume was $142 million, principally refinancings, up from $52 million in the
second quarter of 2000. This resulted in second quarter 2001 mortgage revenues
of $1.9 million, an increase of $892,000 or 92.6% from the $963,000 in the
second quarter of 2000. Mortgage revenues for the second quarter of 2001
included a $94,000 servicing rights impairment charge reversal.
Strong name recognition and scalable processing systems should enable AMCORE to
efficiently capture additional refinancing and origination volume as a result of
the current interest rate environment. As of June 30, 2001, AMCORE had $8.5
million of capitalized mortgage servicing rights, net of a $200,000 impairment
reserve. The portfolio of loans serviced for third-party investors was $902.1
million.
BOLI income totaled $1.4 million in the second quarter of 2001, compared to
$380,000 in the second quarter of 2000, reflecting an increase in average
investment of $63.4 million. AMCORE uses BOLI as a tax-advantaged means of
financing its future obligations with respect to certain non-qualified
retirement and deferred compensation plans and other employee benefit programs.
Other non-interest income, which includes customer service charges, credit card
and merchant fees, brokerage commissions, insurance commissions and other
miscellaneous income, was $2.2 million for the second quarter of 2001, a
$365,000 or 14.1% decline from the second quarter 2000. The decrease was
primarily attributable to negative mark-to-market and hedge ineffectiveness
adjustments on derivatives, lower customer service fees and decreased brokerage
commissions, that were partially offset by servicing income on Auto Loan Sales
and increased credit card and merchant fee income.
Net security losses were $2.3 million for the second quarter of 2001 compared to
a gain of $393,000 in the same period in 2000. The loss in the second quarter of
2001 is attributable to the Security Portfolio Restructuring. The Security
Portfolio Restructuring is intended to improve the stability and quality of
future earnings especially in periods of rising interest rates. The level of
security gains or losses are typically dependent on the size of the available
for sale portfolio, interest rate levels, AMCORE's liquidity needs, and balance
sheet risk objectives.
24
Operating Expenses
Total operating expense was $31.3 million in the second quarter of 2001, an
increase of $1.6 million or 5.2% from $29.7 million in the second quarter of
2000. Excluding the Severance Charge in 2001 and the Restructuring Reversal in
2000, the increase quarter-to-quarter was $559,000 or 1.9%. The increase was
primarily due to increased loan processing and collection expenses and losses in
value on foreclosed real estate.
The efficiency ratio, adjusted to exclude the Branch Gains, Security Portfolio
Restructuring and the Severance Charge, was 63.2% in the second quarter of 2001
compared to 60.3% in the second quarter of 2001. This reflects higher expenses
coupled with lower net interest income, that were only partially offset by
improved levels of non-interest income.
Personnel costs, which include compensation expense and employee benefits, are
the largest component of operating expenses. Personnel costs totaled $17.5
million in the second quarter of 2001, an increase of $500,000 or 2.9% from
$17.0 million in the second quarter of 2000. Excluding the Severance Charge,
personnel costs declined $260,000 or 1.5%, largely driven by lower health care
costs associated with structural changes in the plan and other cost containment
activities. Salaries, wages and incentives were essentially flat
quarter-to-quarter as annual merit and cost-of living increases were largely
offset by lower personnel costs attributable to completion of AMCORE's Customer
Focused Organizational restructuring.
Net occupancy expense was $1.8 million in the second quarter of 2001, an
increase of $83,000 or 4.8% from the second quarter of 2000.
Equipment expense decreased $167,000 or 7.7% to $2.0 million in the second
quarter of 2001, compared to $2.2 million for the same period in 2000. This was
primarily the result of lower depreciation expense on data processing equipment
and lower software expense.
Data processing expenses include expenses related to core bank data processing,
trust and other external processing systems. This category decreased $40,000 or
2.8% to $1.5 million in the second quarter of 2001 compared to $1.4 million for
the same quarter in 2000.
Professional fees and communication expense each totaled $1.0 million in the
second quarter of 2001. Professional fees posted a modest decrease of $25,000 or
2.4% from the second quarter of 2000, while communication expense showed a small
increase of $37,000 or 3.8%.
Advertising and business development expenses were $1.3 million in the second
quarter of 2001, an increase of $130,000 or 11.2% from $1.2 million in the
second quarter of 2000. The increase is primarily related to a free-checking
promotion.
Intangibles amortization was essentially flat quarter-to-quarter at $534,000 in
the second quarter of 2001, compared to $529,000 for the same quarter in 2000.
Other expenses were $4.7 million in second quarter of 2001, an increase of
$950,000 or 25.7%, from the second quarter of 2000. The increase is primarily
related to higher loan processing and collection expenses attributable to
heightened mortgage origination and refinancing volumes and increased credit
related losses from foreclosed real estate.
Income Taxes
Income tax expense totaled $3.1 million in the second quarter of 2001, compared
with $4.0 million in the second quarter of 2000, a decrease of $843,000 million
or 21.3%. The decrease is mainly the result of lower earnings before tax and
increased CSV of BOLI that is not subject to tax, partially offset by
25
non-deductible goodwill written-off in connection with the Branch Sales. The
effective tax rate for the second quarter of 2001 was 24.2% compared to 27.0%
for the same period in 2000.
EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process has focused on three business
segments: Banking, Trust and Asset Management, and Mortgage Banking. Note 9 of
the Notes to Consolidated Financial Statements (unaudited) 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 accounting principles generally accepted in the United
States of America. Therefore, the information provided is not necessarily
comparable with similar information from other financial institutions.
The financial results reflect direct revenue, expenses, assets and liabilities.
The accounting policies used are similar to those described in Note 1 of the
Notes to Consolidated Financial Statements (unaudited). In addition,
intersegment revenue and expenses are allocated based on an internal cost basis
or market price when available.
Banking Segment
The Banking segment provides commercial and personal banking services through
its 62 banking locations in northern Illinois and south central Wisconsin and
the 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 second quarter of 2001 was $9.6 million, a
decline of $702,000 or 6.8% from the same period in 2000. Declining net interest
income and increased provisions for loan and lease losses were largely offset by
increased non-interest income and lower income tax expense.
Net interest income declined by $3.0, or 9.6%, in the second quarter of 2001
compared to the same period in 2000. The decrease was primarily driven by
declines in average loans and average investment securities of 9.3% and 10.5%,
respectively, that were only partially offset by an 8.3% decrease in average
interest-bearing liabilities. Rates paid on interest-bearing liabilities
decreased 24 basis points more than offsetting declines in yields on securities
and loans of 17 and 16 basis points, respectively on average quarter-to-quarter.
Overall, net interest margin was up 1 basis point to 3.32% in the second quarter
of 2001, compared to 3.31% in the second quarter of 2000. Net interest margin
has improved by 18 basis points since the fourth quarter of 2000.
Non-interest income increased by $8.3 million, quarter-to-quarter. Excluding the
Branch Gain and the Security Portfolio Restructuring, non-interest income
increased $1.8 million or 28.2%. The increase is primarily the result of
increased CSV on BOLI, higher service charges on deposits, servicing income on
Auto Loan Sales and credit card and merchant fee income. These were partially
offset by decreased customer service charge income and net losses attributable
to derivative mark-to-market adjustments and hedge ineffectiveness.
The provision for loan and lease losses was $7.6 million in the second quarter
of 2001 versus $2.3 million in the same period a year ago. Increases in
non-performing loans, charge-offs and delinquencies, coupled with concerns over
the economy's impact, particularly on commercial borrowers, contributed to the
increased provisions. Future growth in the loan portfolio, further weakening in
economic conditions or specific credit deterioration, among other things, could
result in increases in the provision for loan and lease losses.
26
Operating expenses rose $1.3 million. Excluding the Severance Charge, operating
expenses increased $540,000 or 2.4%. Increased credit related losses from
foreclosed real estate and higher advertising costs primarily related to a
free-checking promotion were partially offset by lower health care costs.
Income taxes were lower as a result of lower segment earnings before tax and
increased CSV of BOLI that are not subject to tax, partially offset by
non-deductible goodwill written-off in connection with the Branch Sales.
The Banking segment represented 86.8% and 84.9% of total segment profit in the
second quarter of 2001 and 2000, respectively. The Banking segment represented
87.4% and 85.7% of total segment profit before Accounting Changes for the first
six months of 2001 and 2000, respectively.
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 for the second quarter of 2001
was $978,000, a decline of $445,000 or 31.3% from the same period in 2000.
Declining revenues were partially offset by lower income tax expense.
Trust and Asset Management segment revenues, including net interest income,
declined $801,000 or 9.9% in the second quarter of 2001, compared to the same
period in 2000. The overall decline in the stock market during the second
quarter of 2001, compared to the second quarter of 2000, impacted equity values
upon which fees are based. This, along with the loss of some employee benefit
accounts, were the primary factors leading to the decline in trust and asset
management revenues. The market decline also led to lower brokerage commissions
quarter-over-quarter.
Operating expenses decreased $35,000 or 0.6%. Lower advertising and business
development expenses more than offset increased goodwill amortization.
Income taxes were lower as a result of lower segment earnings before taxes.
As of June 30, 2001, assets under management totaled $4.3 billion, including
$1.2 billion in the AMCORE family of Vintage Mutual Funds. Total assets under
administration, which include managed and custodial assets, totaled $5.0
billion.
The Trust and Asset Management segment represented 8.8% and 11.7% of total
segment profit in the second quarter of 2001 and 2000, respectively. The Trust
and Asset Management segment represented 8.1% and 11.6% of total segment profit
before Accounting Change for the first six months of 2001 and 2000,
respectively.
Mortgage Banking Segment
The Mortgage Banking segment provides a variety of mortgage lending products to
meet its customer needs. It sells these loans to AMCORE's bank affiliate and the
secondary market and continues to service most of the loans sold.
27
The Mortgage Banking segment's profit for the second quarter of 2001 was
$492,000, an increase of $76,000 or 18.3% from the same period in 2000.
The Mortgage Banking segment revenues and net interest income for the second
quarter of 2001 were up $738,000 or 46.8% and $413,000 or 70.0%, respectively,
over the same period a year ago. A declining mortgage interest rate environment
during the second quarter of 2001, compared to an increasing interest rate
environment during the same quarter in 2000, resulted in increased volumes
quarter-over-quarter. Second quarter 2001 volume of $142 million, driven by
strong refinancing, was up from $52 million in the second quarter of 2000.
Second quarter 2001 revenues were net of $144,000 from derivative mark-to-market
adjustments. Partially offsetting the negative derivatives mark was a $94,000
servicing rights impairment charge reversal.
The increase in volume caused a corresponding increase in production related
commissions and variable loan processing and collection costs. These factors
contributed to a $1.0 million increase in operating expenses.
Income taxes were higher as a result of increased segment earnings before taxes.
The Mortgage Banking segment represented 4.4% and 3.4% of total segment profit
in the second quarter of 2001 and 2000, respectively. The Mortgage Banking
segment represented 4.5% and 2.7% of total segment profit before Accounting
Changes for the first six months of 2001 and 2000, respectively.
BALANCE SHEET REVIEW
Total assets were $4.0 billion at June 30, 2001, a decrease of $212.9 million or
5.0% from December 31, 2000. Total liabilities declined $217.8 million over the
same period, while stockholders' equity increased $4.9 million.
Total earning assets, including BOLI, decreased $192.0 million from December 31,
2000. Non-earning assets decreased $20.9 million over the same period. The
decrease in earning assets was primarily related to a $125.4 million decline in
loans, a $91.1 million decline in total securities, a $27.0 million decline in
federal funds sold and a $5.1 million decline in interest earning deposits in
banks. The decline in loans were mainly attributable to an $85.2 million
decrease in 1-4 family real estate loans due to higher prepayments and
refinancings and $50.7 million in loans sold in the Branch Sales. The decline in
average investment securities was the result of AMCORE's continuing strategy to
reduce and restructure its investment portfolio as well as prepayments driven by
falling interest rates. These declines were partially offset by a $42.4 million
increase in BOLI and a $14.2 million increase in loans held for sale. Mortgage
loans held for sale increased $16.8 million, as declining interest rates led to
increased volumes. The decrease in non-earning assets was mainly attributable to
reductions in cash of $6.9 million, a $6.9 million decline in other assets and a
$3.8 million increase in the allowance for loan and lease losses. The decrease
in other assets was primarily due to a decline in interest receivable.
Total deposits declined $267.4 million from December 31, 2000, of which $135.7
million were non-core brokered CDs and $152.1 million were assumed by the
purchasers in the Branch Sales. Short-term borrowings were essentially flat at
$460.5 million over the same period, while long-term borrowings were up $44.5
million. Other liabilities increased $5.3 million. The increase in long-term
borrowings related to Federal Home Loan Bank borrowings, which have a more
attractive rate than brokered CDs. The increase in other liabilities was largely
related to accounts payable, specifically $12.3 million, mostly related to
mortgage loan closings that have not yet cleared and $4.1 million attributable
to derivative mark-to-market adjustments net of hedge ineffectiveness.
28
The stockholders' equity increase related to $11.7 million of the first six
months of 2001 earnings in excess of dividends paid, plus $2.2 million in other
comprehensive income associated with improving fair values of the investment
portfolio and derivative mark-to-market adjustments. These were partially offset
by $8.0 million net increase in treasury stock balance related to the
acquisition of treasury shares in connection with AMCORE's announced share
repurchase program and reissuances pursuant to employee benefit plans.
ASSET QUALITY REVIEW
Allowance for Loan and Lease Losses
The determination by management of the appropriate level of the allowance
amounted to $33.0 million at June 30, 2001, compared to $29.2 million at
December 31, 2000, for an increase of $3.8 million or 13.2%. Since the allowance
for loan and lease losses is based on estimates that are subject to revisions as
more information becomes available, actual losses may vary from the current
estimates. Management makes an ongoing evaluation as to the adequacy of the
allowance for loan and lease losses on at least a quarterly basis. As
adjustments in the allowance become necessary, they are recorded in the earnings
of that period and serve as a self-correcting mechanism in reducing differences
in allocations and observed losses.
As of June 30, 2001, the allowance for loan losses as a percent of total loans
and of non-performing loans was 1.32% and 103%, respectively. These compare to
the same ratios at June 30, 2000 of 1.08% and 103%. Net charge-offs more than
doubled to $3.5 million in the second quarter of 2001 compared to $1.4 million
in the same period in 2000. Over two-thirds of the increase relates to six
medium-sized credits that were fully or partially charged-off during the second
quarter of 2001. Charge-offs for the second quarter of 2001 and 2000 represented
0.56% and 0.20% of average loans, respectively, on an annualized basis. AMCORE
believes that allowance coverage remains adequate.
An analysis of the allowance for loan losses is shown in Table 5.
Non-performing Assets
Non-performing assets consist of non-accrual loans, loans with restructured
terms, foreclosed real estate and other foreclosed assets. Non-performing assets
totaled $34.8 million as of June 30, 2001, an increase of $8.4 million or 31.6%
from the $26.4 million at December 31, 2000. Approximately $10.8 million of the
total increase in non-performing assets is due to three unrelated credits. These
diverse credits are not tied to any one industry. Two of the credits, an
automobile dealership floor plan loan and a hotel loan, were previously
disclosed in the Company's Form 10-K Annual Report for the year ended December
31, 2000. The third credit placed on non-accrual during the first quarter of
2001 is a hog containment facility and row crop concern.
Total non-performing assets represent 0.86% and 0.62% of total assets at June
30, 2001 and December 31, 2000, respectively. An analysis of non-performing
assets is shown in Table 5.
CAPITAL MANAGEMENT
Total stockholders' equity at June 30, 2001, was $313.4 million, an increase of
$4.9 million or 1.6% from December 31, 2000. The book value per share of AMCORE
common stock was $12.24 and $10.60 at June 30, 2001 and 2000, respectively.
AMCORE paid dividends of $0.16 per share in the second quarters of 2001 and
2000.
29
On April 23, 2001, AMCORE announced a stock repurchase program for up to five
percent of its common stock or 1.29 million shares. As of January 1, 2001,
AMCORE also had 338,000 shares remaining from the Company's August 8, 2000 stock
repurchase authorization. Shares repurchased pursuant to these authorizations
will become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option plan
and other employee benefit plans. As of June 30, 2001, 1.24 million shares
remained to be repurchased pursuant to the April 23, 2001 authorization, while
all authorized shares had been repurchased related to the August 8, 2000
authorization. For the six-month period ended June 30, 2001, the Company
repurchased 681,000 shares at an average price of $20.09.
AMCORE's total risk based capital ratio at 12.51%, its ratio of Tier 1 capital
at 11.38% and its leverage ratio of 8.18%, all significantly exceed the
regulatory minimums (as set forth in the table below), as of June 30, 2001. The
BANK is considered a "well-capitalized" institution based on regulatory
guidelines.
(Dollars in thousands) June 30, 2001 June 30, 2000
------------- -------------
Amount Ratio Amount Ratio
-------------- -------------- ------------- --------------
Total Capital (to Risk Weighted Assets) $366,296 12.51% $369,117 12.31%
Total Capital Minimum 234,260 8.00% 239,978 8.00%
-------------- -------------- ------------- --------------
Amount in Excess of Regulatory Minimum $132,036 4.51% $129,139 4.31%
============== ============== ============= ==============
Tier 1 Capital (to Risk Weighted Assets) $333,290 11.38% $338,985 11.30%
Tier 1 Capital Minimum 117,130 4.00% 119,989 4.00%
-------------- -------------- ------------- --------------
Amount in Excess of Minimum $216,160 7.38% $218,996 7.30%
============== ============== ============= ==============
Tier 1 Capital (to Average Assets) $333,290 8.18% $338,985 7.81%
Tier 1 Capital Minimum 162,906 4.00% 173,718 4.00%
-------------- -------------- ------------- --------------
Amount in Excess of Regulatory Minimum $170,384 4.18% $165,267 3.81%
============== ============== ============= ==============
Risk Adjusted Assets $2,928,252 $2,999,731
============== =============
Average Assets $4,072,654 $4,342,948
============== =============
30
Item 3. Quantitative and qualitative disclosures about market risk
As part of its normal operations, AMCORE is subject to interest-rate risk on the
interest-earning assets it invests in (primarily loans and securities) and the
interest-bearing liabilities it funds with (primarily customer deposits and
borrowed funds), as well as its ability to manage such risk. Fluctuations in
interest rates may result in changes in the fair market values of AMCORE's
financial instruments, cash flows and net interest income. Like most financial
institutions, AMCORE has an exposure to changes in both short-term and long-term
interest rates.
While AMCORE manages other risks in its normal course of operations, such as
credit and liquidity risk, it considers interest-rate risk to be its most
significant market risk. AMCORE's net interest income can be significantly
impacted by external factors. These factors include, but are not limited to:
overall economic conditions, policies and actions of regulatory authorities, the
amounts of and rates at which assets and liabilities re-price, variances in
prepayment of loans and securities other than those that are assumed, early
withdrawal of deposits, exercise of call options on borrowings, competition, a
general rise or decline in interest rates, changes in the slope of the
yield-curve and changes in basis.
AMCORE's asset and liability management process is utilized to manage market and
interest rate risk through structuring the balance sheet and off-balance sheet
portfolios to maximize net interest income while maintaining acceptable levels
of risk to changes in market interest rates. Interest rate sensitivity analysis
is performed quarterly using various simulations with an asset/liability
modeling system. These analyses are reviewed by the Asset and Liability
Committee (ALCO), whose actions attempt to minimize any sudden or sustained
negative impact that interest rate movements may have on net interest income.
ALCO also reviews the impact of liquidity, loan and deposit pricing, capital
adequacy and rate sensitivity, among other things, and determines appropriate
policy direction to maintain or meet established ALCO policies as established by
the Board of Directors.
Based upon an immediate increase in interest rates of 200 basis points and no
change in the slope of the yield curve, the potential decrease in net income
over a twelve-month period beginning July 1, 2001, would be approximately $4.6
million. At the end of 2000, comparable assumptions would have resulted in a
potential decrease in 2001 net income of $8.9 million. Thus, AMCORE's earnings
at risk from a rising rate scenario are less at the end of the second quarter of
2001 than they were at the end of 2000.
Conversely, an immediate decrease in interest rates of 200 basis points and no
change in the slope of the yield curve would result in a potential increase in
net income over a twelve-month period beginning July 1, 2001, of $795,000. The
same assumptions at the end of 2000 would have resulted in a potential increase
in net income of $582,000. Thus, AMCORE's earnings at risk from a declining rate
scenario are somewhat improved at the end of the second quarter of 2001 than
they were at the end of 2000.
The amounts and assumptions used in the rising and falling rate scenarios should
not be viewed as indicative of expected actual results. In addition to rising or
falling interest rates, AMCORE's net interest income can be significantly
impacted by a variety of external factors, such as those previously noted. In
addition, as interest rates move, the ALCO is likely to adjust interest rate
risk management strategies to limit, to the extent possible, the adverse impact
that such changes in interest rates might otherwise have on AMCORE's net
interest income, as well as maximize potential positive impacts such movements
might have.
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's December 31, 2000 Form 10-K.
31
TABLE 1
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Quarter Ended Quarter Ended
June 30, 2001 June 30, 2000
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------- -----------------------------------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 892,018 $ 14,890 6.68% $ 1,009,833 $ 17,445 6.91%
Tax-exempt securities (1) 281,810 5,412 7.68% 301,804 5,802 7.69%
-----------------------------------------------------------------------------
Total Securities (2) 1,173,828 20,302 6.92% 1,311,637 23,247 7.09%
Loans held for sale (3) 40,399 595 5.89% 18,925 407 8.62%
Loans (1) (4) 2,531,096 52,670 8.34% 2,790,074 59,038 8.50%
Other earning assets 23,538 258 4.40% 14,671 244 6.69%
Fees on loans held for sale (3) - 380 - - 148 -
----------------------------------- -----------------------------------
Total Interest-Earning Assets $ 3,768,861 $ 74,205 7.89% $ 4,135,307 $ 83,084 8.06%
Non Interest-Earning Assets:
Cash and due from banks 101,916 101,920
Other assets 249,052 153,156
Allowance for loan and lease losses (29,657) (29,739)
----------- -----------
Total Assets $ 4,090,172 $ 4,360,644
=========== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,002,395 $ 7,133 2.85% $ 1,006,361 $ 9,149 3.66%
Time deposits 1,589,174 24,510 6.19% 1,733,194 25,195 5.85%
----------------------------------- -----------------------------------
Total interest-bearing deposits 2,591,569 31,643 4.90% 2,739,555 34,344 5.04%
Short-term borrowings 455,285 6,638 5.85% 584,238 9,169 6.31%
Long-term borrowings 308,757 4,591 5.96% 336,150 5,285 6.32%
----------------------------------- -----------------------------------
Total Interest-Bearing Liabilities $ 3,355,611 $ 42,872 5.12% $ 3,659,943 $ 48,798 5.36%
Noninterest-Bearing Liabilities:
Demand deposits 345,543 362,948
Other liabilities 75,700 55,077
----------- -----------
Total Liabilities $ 3,776,854 $ 4,077,968
Stockholders' Equity 313,318 282,676
----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,090,172 $ 4,360,644
=========== ===========
Net Interest Income (FTE) $ 31,333 $ 34,286
======== ========
Net Interest Spread (FTE) 2.77% 2.70%
==== ====
Interest Rate Margin (FTE) 3.32% 3.31%
==== ====
Notes:
(1) The interest on tax-exempt 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 securities 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 of $664,000 and $712,000
for 2001 and 2000, respectively.
32
TABLE 2
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
--------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------- ----------------------------------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 913,538 $ 30,917 6.77% $ 1,009,408 $ 34,948 6.93%
Tax-exempt securities (1) 283,446 10,880 7.68% 302,973 11,642 7.69%
--------------------------------- ----------------------------------
Total Securities (2) 1,196,984 41,797 6.99% 1,312,381 46,590 7.10%
Loans held for sale (3) 38,289 1,307 6.84% 14,615 596 8.16%
Loans (1) (4) 2,561,457 107,530 8.45% 2,774,538 116,344 8.42%
Other earning assets 27,481 709 5.20% 16,868 511 6.11%
Fees on loans held for sale (3) - 605 - - 251 -
--------------------------------- ----------------------------------
Total Interest-Earning Assets $ 3,824,211 $ 151,948 7.98% $ 4,118,402 $ 164,292 8.00%
Non Interest-Earning Assets:
Cash and due from banks 99,710 103,177
Other assets 236,018 148,912
Allowance for loan and lease losses (29,451) (29,342)
----------- -----------
Total Assets $ 4,130,488 $ 4,341,149
=========== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,012,525 $ 16,102 3.21% $ 1,006,660 $ 17,883 3.57%
Time deposits 1,638,324 50,756 6.25% 1,713,370 48,810 5.73%
--------------------------------- ----------------------------------
Total interest-bearing deposits 2,650,849 66,858 5.09% 2,720,030 66,693 4.93%
Short-term borrowings 449,558 13,396 6.01% 601,985 18,268 6.10%
Long-term borrowings 297,654 9,018 6.11% 315,805 9,807 6.24%
--------------------------------- ----------------------------------
Total Interest-Bearing Liabilities $ 3,398,061 $ 89,272 5.30% $ 3,637,820 $ 94,768 5.24%
Noninterest-Bearing Liabilities:
Demand deposits 345,358 363,274
Other liabilities 74,827 56,053
----------- -----------
Total Liabilities $ 3,818,246 $ 4,057,147
Stockholders' Equity 312,242 284,002
----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,130,488 $ 4,341,149
=========== ===========
Net Interest Income (FTE) $ 62,676 $ 69,524
======== ========
Net Interest Spread (FTE) 2.68% 2.76%
==== ====
Interest Rate Margin (FTE) 3.27% 3.37%
==== ====
Notes:
(1) The interest on tax-exempt 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 securities 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 fee of $1.3 million and $1.4
million for 2001 and 2000, respectively.
33
TABLE 3
ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
Quarter Ended
June 2001/June 2000
--------------------------------------------------------
Total Net
Increase (Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
--------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ (1,979) $ (576) $ (2,555)
Tax-exempt securities (1) (384) (6) (390)
--------------------------------------------------------
Total Securities (2) (2,392) (553) (2,945)
Loans held for sale (3) 349 (161) 188
Loans (1) (4) (5,308) (1,060) (6,368)
Other earning assets 111 (97) 14
Fees on loans held for sale (3) 0 232 232
--------------------------------------------------------
Total Interest-Earning Assets $ (7,148) $ (1,731) $ (8,879)
========================================================
Interest Expense:
Interest-bearing demand and savings deposits $ 52 $ (2,068) $ (2,016)
Time deposits (2,165) 1,480 (685)
--------------------------------------------------------
Total interest-bearing deposits (1,764) (937) (2,701)
Short-term borrowings (1,898) (633) (2,531)
Long-term borrowings (409) (285) (694)
--------------------------------------------------------
Total Interest-Bearing Liabilities $ (3,838) $ (2,088) $ (5,926)
========================================================
Net Interest Margin / Net Interest Income (FTE) $ (3,310) $ 357 $ (2,953)
========================================================
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 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 securities 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.
34
TABLE 4
ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
Six Months Ended
June 2001/June 2000
--------------------------------------------------------
Total Net
Increase (Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
--------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ (3,258) $ (773) $ (4,031)
Tax-exempt securities (1) (750) (12) (762)
--------------------------------------------------------
Total Securities (2) (4,040) (753) (4,793)
Loans held for sale (3) 822 (111) 711
Loans (1) (4) (9,179) 365 (8,814)
Other earning assets 277 (79) 198
Fees on loans held for sale (3) 0 354 354
--------------------------------------------------------
Total Interest-Earning Assets $ (11,931) $ (413) $ (12,344)
========================================================
Interest Expense:
Interest-bearing demand and savings deposits $ 449 $ (2,230) $ (1,781)
Time deposits (2,315) 4,261 1,946
--------------------------------------------------------
Total interest-bearing deposits (1,798) 1,963 165
Short-term borrowings (4,594) (278) (4,872)
Long-term borrowings (573) (216) (789)
--------------------------------------------------------
Total Interest-Bearing Liabilities $ (6,527) $ 1,031 $ (5,496)
========================================================
Net Interest Margin / Net Interest Income (FTE) $ (5,404) $ (1,444) $ (6,848)
========================================================
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 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 securities 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.
35
TABLE 5
ASSET QUALITY
The components of non-performing loans and leases at June 30, 2001 and
December 31, 2000 were as follows:
June 30, December 31,
2001 2000
---------- ------------
Impaired loans: (in thousands)
Non-accrual loans and leases
Commercial...................................... 14,824 $ 9,396
Real estate..................................... 16,029 11,176
Other non-performing:
Non-accrual loans (1)........................... 1,263 1,497
-------- --------
Total non-performing loans...................... $32,116 $22,069
======== ========
Foreclosed assets:
Real estate..................................... 1,960 3,282
Other........................................... 736 1,092
-------- --------
Total foreclosed assets......................... $ 2,696 $ 4,374
======== ========
Total non-performing assets..................... $34,812 $26,443
======== ========
Loans 90 days or more past due and still accruing....... $16,182 $13,136
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
An anaylsis of the allowance for loan and lease losses for the periods ended
June 30, 2001 and 2000 is presented below:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
----------------------- ------------------------
(in thousands)
Balance at beginning of period.............................. $ 29,561 $ 29,166 $ 29,157 $ 28,377
Charge-Offs:
Commercial, financial and agricultural................... 2,214 440 2,731 946
Real estate.............................................. 712 309 1,103 826
Installment and consumer................................. 1,138 1,058 2,325 2,207
Direct leases............................................ 51 - 51 -
----------------------- ------------------------
4,115 1,807 6,210 3,979
Recoveries:
Commercial, financial and agricultural................... 85 62 210 431
Real estate.............................................. 192 14 255 52
Installment and consumer................................. 291 357 632 521
Direct leases............................................ - - 8 -
----------------------- ------------------------
568 433 1,105 1,004
Net Charge-Offs............................................. 3,547 1,374 5,105 2,975
Provision charged to expense................................ 7,557 2,340 9,713 4,730
Allowance for loan and lease losses acquired through merger. - - - -
Reductions due to sale of loans............................. 565 - 759 -
----------------------- ------------------------
Balance at end of period.................................... $ 33,006 $ 30,132 $ 33,006 $ 30,132
======================= ========================
Ratio of net-charge-offs during the period
to average loans outstanding during the period (1)......... 0.56% 0.20% 0.40% 0.22%
======================= ========================
(1) On an annualized basis.
36
PART II.
- --------
ITEM 1. Legal Proceedings
Management believes that no litigation is threatened or pending in which the
Company faces potential loss or exposure which will materially affect the
Company's financial position or results of operations, other than noted below.
Since the Company'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 the Company'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 the Company 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. The Company has denied the plaintiffs' allegations and removed the
case to the United States District Court for the Northern District of
Mississippi. Plaintiffs' filed a motion seeking to remand the case back to state
court.
During the second quarter of 2001, the Company made a settlement offer to
Plaintiff's counsel. The Company recorded an accrual reflecting the amount
offered. There were no other developments during the quarter. Subsequent to the
end of the second quarter of 2001, the Company was notified of the several
developments. First, the federal district court ordered the case to be sent to
the federal bankruptcy court to determine if it wants to pursue this case as an
asset of one of the plaintiffs who previously filed for bankruptcy relief and to
remand the case back to state court if the federal bankruptcy court did not keep
jurisdiction. The Company intends to file a motion to reconsider this order as
the federal district court failed to address the issue of diversity of the
parties. Second, plaintiffs' attorneys have rejected the Company's settlement
offer. In addition, they have notified the Company's counsel that they have
identified 17 more individuals with potential claims similar to those of the
named Plaintiffs'. No suits have yet been filed on their behalf. Company's
counsel is currently investigating these allegations and analyzing whether new
suits may be barred by the Mississippi statute of limitations. Plaintiff's
counsel has made a counter offer to settle the suits. The Company is reviewing
with counsel its response to the offer.
Although the ultimate disposition of the cases cannot be predicted with
certainty, based on information currently available, the Company believes that
the plaintiffs' damage claims are disproportionate and that the final outcome of
the cases will not have a materially adverse effect on the Company's
consolidated financial condition, though it could have a materially adverse
affect on the Company's consolidated results of operations in a given year. The
Company has not adjusted its accrual for payment of the damages in these cases
because, in management's opinion, an unfavorable outcome in this litigation
beyond the accrual is not probable.
37
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
(Incorporated by reference to Exhibit 3.1 of AMCORE's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).
4 Rights Agreement dated February 16, 2001, between AMCORE
Financial, Inc. and Wells Fargo Bank Minnesota, N.A.
(Incorporated by reference to AMCORE's Form 8-K as filed with the
Commission on February 27, 2001).
10 Amendment to Loan Agreement with M & I Marshall and Ilsley Bank
dated April 30, 2001.
10.1 Amendment dated June 18, 2001 to the Transitional Compensation
Agreement dated March 30, 2000 between AMCORE Financial, Inc.
and David W. Miles.
10.2 AMCORE Financial, Inc. Supplemental Incentive Plan effective
July 1, 2001.
99 Additional exhibits - Press release dated July 18, 2001
38
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: August 14, 2001
/s/ John R. Hecht
----------------------------------------------------
John R. Hecht
Executive Vice President and Chief Financial Officer
(Duly authorized officer of the registrant
and principal financial officer)