UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2001 was 24,803,796 shares.
Index of Exhibits on Page 39
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
- ------ -----------
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2001 and 2000 4
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 31
PART II
Item 1 Legal Proceedings 38
Item 4 Submission of Matters to a Vote of Security Holders 39
Item 6 Exhibits and Reports on Form 10-Q 39
Signatures 45
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
( in thousands, except share data)
Assets Cash and cash equivalents.......................................................... $135,635 $118,807
Interest earning deposits in banks................................................. 5,261 21,562
Federal funds sold and other short-term investments................................ 1,500 36,000
Loans and leases held for sale..................................................... 50,880 27,466
Securities available for sale...................................................... 1,152,964 1,223,785
Securities held to maturity (12/31/00 fair value of $10,635 )...................... - 10,661
----------------------------
Total securities .............................................................. $1,152,964 $1,234,446
Gross loans and leases............................................................. 2,483,773 2,627,157
Allowance for loan and lease losses................................................ (34,137) (29,157)
----------------------------
Net loans and leases........................................................... $2,449,636 $2,598,000
Bank owned life insurance.......................................................... 98,669 54,733
Premises and equipment, net ....................................................... 48,686 52,554
Intangible assets, net............................................................. 16,435 16,683
Foreclosed real estate............................................................. 3,076 3,282
Other assets....................................................................... 72,304 80,573
----------------------------
TOTAL ASSETS................................................................... $4,035,046 $4,244,106
============================
Liabilities LIABILITIES
And Deposits:
Stockholders' Demand deposits.................................................................. $1,285,805 $1,268,253
Equity Savings deposits................................................................. 120,828 127,706
Other time deposits.............................................................. 1,494,722 1,747,602
----------------------------
Total deposits................................................................ $2,901,355 $3,143,561
Short-term borrowings.............................................................. 484,758 460,634
Long-term borrowings .............................................................. 268,247 265,830
Other liabilities.................................................................. 67,519 65,584
----------------------------
TOTAL LIABILITIES............................................................. $3,721,879 $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;
September 30, December 31,
2001 2000
---- ----
Issued 29,732,438 29,700,201
Outstanding 24,961,559 25,985,432 6,603 6,596
Additional paid-in capital......................................................... 74,314 74,900
Retained earnings ................................................................. 316,077 297,703
Deferred compensation.............................................................. (2,217) (1,651)
Treasury stock .................................................................... (92,091) (69,385)
Accumulated other comprehensive income............................................. 10,481 334
----------------------------
TOTAL STOCKHOLDERS' EQUITY.................................................... $313,167 $308,497
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $4,035,046 $4,244,106
============================
See accompanying notes to consolidated financial statements (unaudited).
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
===============================================================================================================================
(in thousands, except per share data)
Interest Interest and fees on loans and leases............................ $50,166 $59,517 $157,289 $175,399
Income Interest on securities:
Taxable........................................................ 13,470 16,666 44,387 51,614
Tax-exempt..................................................... 3,335 3,710 10,407 11,277
------------------------------------------------
Total Income from Securities................................ $16,805 $20,376 $54,794 $62,891
------------------------------------------------
Interest on federal funds sold and other short-term investments.. $147 $101 $414 $201
Interest and fees on loans and leases held for sale.............. 1,157 1,214 3,069 2,061
Interest on deposits in banks.................................... 93 240 535 651
------------------------------------------------
Total Interest Income....................................... $68,368 $81,448 $216,101 $241,203
------------------------------------------------
Interest Interest on deposits............................................. $28,840 $36,002 $95,728 $102,863
Expense Interest on short-term borrowings................................ 4,439 9,346 16,632 27,709
Interest on long-term borrowings................................. 5,197 5,146 15,388 14,690
------------------------------------------------
Total Interest Expense...................................... $38,476 $50,494 $127,748 $145,262
------------------------------------------------
Net Interest Income......................................... $29,892 $30,954 $88,353 $95,941
Provision for loan and lease losses.............................. 4,656 2,640 14,369 7,370
------------------------------------------------
Net Interest Income After Provision for Loan
and Lease Losses........................................ $25,236 $28,314 $73,984 $88,571
------------------------------------------------
Non- Trust and asset management income................................ $6,737 $7,491 $20,354 $22,666
Interest Service charges on deposits...................................... 3,950 2,932 10,758 8,327
Income Mortgage revenues................................................ 898 1,466 4,194 3,114
Bank owned life insurance income................................. 1,505 639 3,935 1,181
Gain on branch sales............................................. 1,803 - 10,498 -
Other............................................................ 3,603 3,150 9,039 8,487
------------------------------------------------
Non-Interest Income, Excluding Net
Security Gains (Losses)................................. $18,496 $15,678 $58,778 $43,775
Net security gains (losses)...................................... 309 39 (1,220) 1,135
------------------------------------------------
Total Non-Interest Income................................... $18,805 $15,717 $57,558 $44,910
Operating Compensation expense............................................. $13,549 $13,533 $40,581 $40,014
Expenses Employee benefits................................................ 3,289 3,258 10,386 9,997
Net occupancy expense............................................ 1,825 1,950 5,685 5,502
Equipment expense................................................ 1,818 1,988 5,992 6,452
Data processing expense.......................................... 1,516 1,428 4,518 4,466
Professional fees................................................ 732 918 2,884 2,987
Communication expense............................................ 929 951 2,976 2,993
Advertising and business development............................. 1,021 863 3,146 3,005
Amortization of intangible assets................................ 510 529 1,595 1,586
Other............................................................ 4,223 3,589 12,838 11,183
------------------------------------------------
Total Operating Expenses.................................... $29,412 $29,007 $90,601 $88,185
------------------------------------------------
Income Before Income Taxes....................................... $14,629 $15,024 $40,941 $45,296
Income taxes..................................................... 3,682 4,220 10,263 12,724
------------------------------------------------
Net Income Before Extraordinary Item and Accounting Change.. $10,947 $10,804 $30,678 $32,572
Extraordinary item: Early extinguishment of debt (net of tax) (204) - (204) -
Cumulative effect of accounting change (net of tax)....... - - 225 -
------------------------------------------------
NET INCOME.................................................. $10,743 $10,804 $30,699 $32,572
================================================
EARNINGS PER COMMON SHARE (EPS)
Basic EPS
Income Before Extraordinary Item and Accounting Change.... $ 0.43 $ 0.40 $ 1.19 $ 1.20
Extraordinary item: Early extinguishment of debt......... (0.01) 0.00 (0.01) 0.00
Cumulative effect of accounting change.................... 0.00 0.00 0.01 0.00
------------------------------------------------
Basic net income.......................................... $ 0.42 $ 0.40 $ 1.19 $ 1.20
================================================
Diluted EPS
Income Before Extraordinary Item and Accounting Change.... $ 0.43 $ 0.40 $ 1.18 $ 1.19
Extraordinary item: Early extinguishment of debt......... (0.01) 0.00 (0.01) 0.00
Cumulative effect of accounting change.................... 0.00 0.00 0.01 0.00
------------------------------------------------
Diluted net income........................................ $ 0.42 $ 0.40 $ 1.18 $ 1.19
================================================
DIVIDENDS PER COMMON SHARE................................................... $ 0.16 $ 0.16 $ 0.48 $ 0.48
AVERAGE COMMON SHARES OUTSTANDING
Basic............................................................ 25,384 26,921 25,725 27,189
Diluted.......................................................... 25,640 27,166 25,966 27,465
See accompanying notes to consolidated financial statements (unaudited).
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
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....................................... - - 32,572 - - - 32,572
Unrealized holding losses on securities
available for sale arising during the period. - - - - - 11,834 11,834
Less reclassification adjustment for security
gains included in net income................. - - - - - (1,135) (1,135)
Income tax effect related to items of other
comprehensive income......................... - - - - - (4,144) (4,144)
------- -------- --------- -------- --------- --------- ---------
Net unrealized gains (losses) on securities
available for sale................................. - - - - - 6,555 6,555
------- -------- --------- -------- --------- --------- ---------
Comprehensive Income......................... - - 32,572 - - 6,555 39,127
------- -------- --------- -------- --------- --------- ---------
Cash dividends on common stock-$0.48
per share.................................... - - (12,988) - - - (12,988)
Purchase of shares for the treasury................ - - - - (30,050) - (30,050)
Reissuance of treasury shares under
non-employee directors stock plan............ - (9) - (318) 377 - 50
Deferred compensation expense...................... - - 337 - - 337
Reissuance of treasury shares for
employee incentive plans..................... - 294 - - 2,876 - 3,170
Issuance of common shares for
Employee Stock Plan.......................... 7 548 - - - 555
------- -------- --------- -------- --------- --------- ---------
Balance at September 30, 2000......................... $ 6,592 $ 75,077 $ 291,365 $ (1,514) $ (57,239) $ (20,352) $ 293,929
======= ======== ========= ======== ========= ========= =========
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 and
extinguishment of debt............................. - - 30,678 - - - 30,678
Cumulative effect of extinguishment of debt,
net of tax.......................................... - - (204) - - - (204)
Cumulative effect of accounting change, net of tax. - - 225 - - (1,548) (1,323)
Current period transactions, net of tax............ - - - - - (667) (667)
Reclassification to earnings, net of tax........... - - - - - (1,231) (1,231)
------- -------- --------- -------- --------- --------- ---------
Net cumulative effect of FAS 133 - - 225 - - (3,446) (3,221)
------- -------- --------- -------- --------- --------- ---------
Unrealized holding gains on securities
available for sale arising during the period. - - - - - 21,218 21,218
Less reclassification adjustment for security
losses included in net income................ - - - - - 1,220 1,220
Income tax effect related to items of other
comprehensive income......................... - - - - - (8,845) (8,845)
------- -------- --------- -------- --------- --------- ---------
Net unrealized gains (losses) on securities
available for sale................................. - - - - - 13,593 13,593
------- -------- --------- -------- --------- --------- ---------
Comprehensive Income......................... - - 225 - - 10,147 10,372
------- -------- --------- -------- --------- --------- ---------
Cash dividends on common stock-$0.48
per share.................................... - - (12,325) - - - (12,325)
Purchase of shares for the treasury................ - - - - (31,263) - (31,263)
Reissuance of treasury shares under
non-employee directors stock plan............ - 20 - (80) 60 - -
Deferred compensation expense...................... - - - 437 - - 437
Reissuance of treasury shares for
incentive plans............................. - (1,151) - (923) 8,497 - 6,423
Issuance of common shares for
Employee Stock Plan.......................... 7 545 - - - - 552
------- -------- --------- -------- --------- --------- ---------
Balance at September 30, 2001......................... $ 6,603 $ 74,314 $ 316,077 $ (2,217) $ (92,091) $ 10,481 $ 313,167
======= ======== ========= ======== ========= ======== =========
See accompanying notes to consolidated financial statements (unaudited)
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months Ended
September 30,
(in thousands) 2001 2000
===========================================================================================================================
Cash Flows Net income before extraordinary item and accounting change.................... $ 30,678 $ 32,572
From Extraordinary item: Early extinguishment of debt, net of tax.................. (204) -
Operating Cumulative effect of accounting change, net of tax............................ 225 -
Activities Gain on branch sales.......................................................... (10,498) -
Adjustments to reconcile net income from operations to net
cash provided by operating activities:
Depreciation and amortization of premises and equipment.................. 4,917 5,343
Amortization and accretion of securities, net............................ 2,145 1,052
Provision for loan and lease losses...................................... 14,369 7,370
Amortization of intangible assets........................................ 1,595 1,586
Net securities losses (gains)............................................ 1,220 (1,135)
Net gain on sale of loans held for sale.................................. (858) (763)
Deferred income taxes (benefits)......................................... 1,891 (897)
Originations of loans held for sale...................................... (407,817) (216,115)
Proceeds from sales of loans held for sale............................... 384,403 199,485
Tax benefit on exercise of stock options ................................ (955) (162)
Other, net............................................................... (8,111) 6,950
-----------------------------
Net cash provided by operating activities............................. $ 13,000 $ 35,286
-----------------------------
Cash Flows Proceeds from maturities of securities available for sale..................... $ 236,259 $ 136,855
From Proceeds from maturities of securities held to maturity....................... - 2,680
Investing Proceeds from sales of securities available for sale.......................... 197,446 74,906
Activities Purchase of securities available for sale..................................... (333,150) (170,757)
Net decrease (increase) in federal funds sold and other short-term investments 34,500 (1,975)
Net decrease (increase) in interest earning deposits in banks................. 16,301 (4,854)
Proceeds from the sale of loans and leases.................................... 3,247 59,657
Net decrease (increase) in loans and leases................................... 62,876 (68,824)
Investment in bank owned life insurance....................................... (40,000) (40,000)
Premises and equipment expenditures, net...................................... (2,596) (3,568)
Proceeds from the sale of foreclosed real estate.............................. 3,478 2,324
-----------------------------
Net cash provided by (used for) investing activities.................. $ 178,361 $ (13,556)
-----------------------------
Cash Flows Net increase in demand deposits and savings accounts.......................... $ 82,781 $ 24,089
From Net (decrease) increase in time deposits...................................... (155,085) 37,093
Financing Net increase (decrease) in short-term borrowings.............................. 13,374 (147,147)
Activities Proceeds from long-term borrowings............................................ 79,650 65,000
Payment of long-term borrowings............................................... (51,495) (29,494)
Extinguishment of debt........................................................ (15,000) -
Net payments to settle branch sales........................................... (93,100) -
Dividends paid................................................................ (12,325) (12,988)
Issuance of common shares for employee stock plan............................. 552 555
Reissuance of treasury shares for employee benefit incentive plans............ 7,378 3,332
Purchase of shares for treasury .............................................. (31,263) (30,050)
-----------------------------
Net cash used for financing activities................................ $ (174,533) $ (89,610)
-----------------------------
Net change in cash and cash equivalents....................................... $ 16,828 $ (67,880)
Cash and cash equivalents:
Beginning of year........................................................... 118,807 179,113
-----------------------------
End of period............................................................... $ 135,635 $ 111,233
=============================
Supplemental Cash payments for:
Disclosures of Interest paid to depositors................................................. $ 103,750 $ 99,564
Cash Flow Interest paid on borrowings................................................. 32,872 41,267
Information Income tax payments......................................................... 12,354 5,816
Non-Cash Foreclosed real estate - acquired in settlement of loans...................... 4,143 2,275
Investing and Transfer of long-term borrowings to short-term borrowings..................... 10,750 91
Financing Transfer of held to maturity securities to available for sale................. 10,635 -
Activities
Balance changes resulting from branch sales are excluded from individual line
items such as deposits, loans, and fixed assets. See accompanying notes to
consolidated financial statements (unaudited).
AMCORE FINANCIAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with 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 nine month periods ended September 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 January 1, 2002 and
annual amortization of $1.9 million that resulted from business combinations
prior to the adoption of SFAS No. 141. The remaining goodwill will be evaluated
for impairment on an ongoing basis. 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 adoption of SFAS No. 140 is not expected to have a material affect on
the Company's Consolidated Financial Statements.
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.
Completed Divestitures:
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 seventh branch in Gridley was sold August 17, 2001
with a net after-tax gain of $1.1 million. For the seven branches sold, $65.1
million in loans, $170.8 million in deposits and $1.2 million in premises and
equipment were transferred to the respective buyers.
NOTE 2 - SECURITIES
A summary of securities at September 30, 2001 and December 31, 2000 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
(in thousands)
At September 30, 2001
- ---------------------
Securities Available for Sale:
U.S. Treasury $ 30,082 $ 387 $ - $ 30,469
U.S. Government agencies 27,504 313 (16) 27,801
Agency mortgage-backed securities 707,308 12,393 (260) 719,441
State and political subdivisions 268,914 9,450 (408) 277,956
Corporate obligations and other 96,254 1,268 (225) 97,297
---------------------------------------------------------------------
Total Securities Available for Sale $ 1,130,062 $ 23,811 $ (909) $ 1,152,964
=====================================================================
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 $424,000 and $39,000 for the three months ended September 30, 2001 and
2000, respectively, and $1.3 million and $1.1 million for the nine months ended
September 30, 2001 and 2000, respectively. Realized gross losses were $115,000
and $0 for the three months ended September 30, 2001 and 2000, respectively, and
$2.5 million and $1,000 for the nine months ending September 30, 2001 and 2000,
respectively. An impairment loss of $1.8 million was recorded during the second
quarter of 2001 related to specific securities for which a decision to sell had
been made. Most of these securities were disposed of during the third quarter.
Of those securities not yet sold, no additional impairment was required at
September 30, 2001. At September 30, 2001 and 2000, securities with a fair value
of $777.9 million and $930.4 million, respectively, were pledged to secure
public deposits, securities under agreements to repurchase and for other
purposes required or permitted by law.
NOTE 3 - LOANS AND LEASES
The composition of the loan and lease portfolio at September 30, 2001 and
December 31, 2000, was as follows:
September 30, 2001 December 31, 2000
---------------------------------------------
(in thousands)
Commercial, financial and agricultural.................. $ 704,657 $ 697,056
Real estate-construction................................ 100,437 111,156
Real estate-commercial.................................. 732,190 762,320
Real estate-residential................................. 540,759 662,778
Installment and consumer................................ 401,984 390,970
Direct lease financing.................................. 3,746 2,877
---------------------------------------------
Gross loans and leases............................. $ 2,483,773 $ 2,627,157
Allowance for loan and lease losses................ (34,137) (29,157)
---------------------------------------------
NET LOANS AND LEASES............................... $ 2,449,636 $ 2,598,000
=============================================
$48.3 million in installment and consumer loans were either sold or reclassified
to loans held for sale during the nine months ended September 30, 2001.
NOTE 4 - SALE OF RECEIVABLES
During 2001, the Company sold $29.9 million of indirect automobile loans in
securitization transactions. 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. During the
third quarter, there were no loans sold in securitization transactions.
Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of September 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 September 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 19.9 19.3 18.6
Fair value of retained interests $ 8,309 $ 8,124 $ 8,031 $ 7,937
Change in fair value $ - $ - $ (93) $ (187)
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 $ 8,124 $ 8,041 $ 7,957
Change in fair value $ - $ - $ (83) $ (167)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual) 7.4% - 9.1% 5.9% 6.5% 7.0%
Fair value of retained interests $ 8,309 $ 8,124 $ 7,981 $ 7,841
Change in fair value $ - $ - $ (143) $ (283)
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 $568,000 in the third quarter of 2001 and $30.0
million year to date. 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)
Third quarter cash flows received from and (paid to) trust $ - $ 190 $ 380 $ (2)
Year-to-date cash flows received from (paid to) trust $ 28,373 $ 570 $ 1,039 $ (8)
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 September 30, 2001 $ 289,845 $ 88,390 $ 18,423 $ 396,658
Delinqencies based on end of period loans $ 7,909 $ 2,345 $ - $ 10,254
Net credit losses year-to-date $ 1,804 $ 571 $ - $ 2,375
Actual and projected static pool credit losses, as a percentage of indirect auto
loans securitized in 2001, are 0.02%, 0.35% and 0.74% as of the quarters ended
September 30, 2001, September 30, 2002 and September 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.
NOTE 5 - Short-Term Borrowings
Short-term borrowings at September 30, 2001 and December 31, 2000 consisted of
the following:
September 30, 2001 December 31, 2000
------------------------------------------
(in thousands)
Securities sold under agreements to repurchase................ $ 355,450 $ 439,367
Federal Home Loan Bank borrowings............................. 10,821 70
Federal funds purchased....................................... 99,650 9,990
U.S. Treasury tax and loan note accounts...................... 10,286 11,207
Commercial paper borrowings................................... 8,551 -
-------------------------------------------
Total short-term borrowings................................ $ 484,758 $ 460,634
===========================================
NOTE 6 - Long-Term Borrowings
Long-term borrowings at September 30, 2001 and December 31, 2000 consisted of
the following:
September 30, 2001 December 31, 2000
------------------------------------------
(in thousands)
Federal Home Loan Bank borrowings............................ $ 242,806 $ 224,957
Capital Trust preferred securities........................... 25,000 40,000
Other long-term borrowings................................... 441 873
-------------------------------------------
Total long-term borrowings...................... $ 268,247 $ 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 September 30, 2001 is 4.52 years, with a
weighted average borrowing rate of 5.30%.
Reductions of FHLB borrowings with call features, assuming they are called at
the earliest call date, are as follows at September 30, 2001:
Total
---------------------
(in thousands)
2001.............................................................................. $ 126,000
2002.............................................................................. 15,000
2003.............................................................................. 29,000
---------------------
Total callable FHLB borrowings............................................ $ 170,000
=====================
The Company has $25.0 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.
During the third quarter, AMCORE retired, at par, $15.0 million in capital trust
preferred securities with the coupon rate of 9.35 percent. This early
extinguishment of long-term borrowings (the "Debt Extinguishment") resulted in
an after-tax extraordinary charge of $204,000, or $0.01 per diluted share (the
"Extraordinary Charge"). The Extraordinary Charge was attributable to
unamortized issuance costs and broker fees.
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.............................................................................. $ 460
2003.............................................................................. 83,022
2004.............................................................................. 25,042
2005.............................................................................. 15,684
2006.............................................................................. 11,711
Thereafter........................................................................ 132,328
---------------------
Total long-term borrowings................................................ $ 268,247
=====================
NOTE 7 - EARNINGS PER SHARE
For the Three Months For the Nine Months
Earnings per share calculations are as follows: Ended September 30, Ended September 30,
2001 2000 2001 2000
---------------------------------------------------------------------------
(in thousands, except per share data)
Net Income $ 10,743 $ 10,804 $ 30,699 $ 32,572
Basic earnings per share:
Average basic shares outstanding 25,384 26,921 25,725 27,189
---------------------------------------------------------------------------
Earnings per share $ 0.42 $ 0.40 $ 1.19 $ 1.20
===========================================================================
Diluted earnings per share:
Weighted average shares outstanding 25,384 26,885 25,725 27,153
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 254 199 241 230
Contingently issuable shares 2 82 - 82
---------------------------------------------------------------------------
Average diluted shares outstanding 25,640 27,166 25,966 27,465
===========================================================================
Diluted Earnings per share $ 0. 42 $ 0.40 $1.18 $ 1.19
===========================================================================
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 third quarter and year-to-date for 2000
were as follows:
June 30, 2000 Third Quarter Third Quarter September 30, 2000
Balance Cash Payments(1) Reversal(2) Balance
-------------------- -------------------- ------------------ -----------------------
(in thousands)
Compensation expense . . . . . . $ 231 $ (78) $ (9) $ 144
Employee benefits . . . . . . . (3) 17 (6) - 11
Data processing expense . . . . (4) 115 (31) (30) 54
Professional fees . . . . . . . (5) 75 - (5) 70
Other . . . . . . . . . . . . . (6) 23 (2) - 21
-------------------- -------------------- ------------------ -----------------------
Charge before income taxes . . . . 461 (117) (44) 300
Income taxes . . . . . . . . . . . 183 (46) (18) 119
-------------------- -------------------- ------------------ -----------------------
Charge after income taxes . . . . $ 278 $ (71) $ (26) $ 181
==================== ==================== ================== =======================
December 31, 1999 Year to Date Year to Date September 30, 2000
Balance Cash Payments(1) Reversal(2) Balance
-------------------- -------------------- ------------------ -----------------------
(in thousands)
Compensation expense . . . . . (7) $ 972 $ (692) $ (136) $ 144
Employee benefits . . . . . . . (3) 83 (30) (42) 11
Data processing expense . . . . (4) 459 (337) (68) 54
Professional fees . . . . . . . (5) 290 (151) (69) 70
Other . . . . . . . . . . . . . (6) 75 (16) (38) 21
-------------------- -------------------- ------------------ -----------------------
Charge before income taxes . . . . 1,879 (1,226) (353) 300
Income taxes . . . . . . . . . . . 747 (487) (141) 119
-------------------- -------------------- ------------------ -----------------------
Charge after income taxes . . . . $ 1,132 $ (739) $ (212) $ 181
==================== ==================== ================== =======================
- ----------------
(1) Includes items totaling $27,000 for the third quarter and $102,000 year to
date related to restructuring that were expensed as incurred and were not
included in the original restructuring charge.
(2) Reversal of items included in the original charge that are no longer
expected to be paid.
(3) Social security and medicare taxes on severance and incentives, and
relocation expenses.
(4) Amounts represent costs to convert data processing records of nine separate
banks into one.
(5) Amounts represent legal fees for regulatory filings and advice as well as
consulting fees for process review, systems redesign and implementation.
(6) Amounts include outplacement services for terminated employees and customer
notifications.
(7) Staff reductions totaling 187 employees are planned. Through September 30,
2000, 85 employees had been terminated and paid severance benefits. An
additional 91 employees had transferred to other open positions due to
attrition, or had voluntarily left the Company prior to the time severance
benefits became payable. As of September 30, 2000, 11 employees remained to
be severed. All were severed as of December 31, 2000.
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.
NOTE 9 - SEGMENT INFORMATION (Continued)
For the three months ended September 30, 2001 ---------- Operating Segments --------
Trust and Asset Mortgage Eliminations
Banking Management Banking And Other Consolidated
------------------------------------------------------------------------
(dollars in thousands)
Net interest income....................................... $ 29,169 $ 42 $ 1,242 $ (561) $ 29,892
Non-interest income....................................... 11,575 7,194 1,279 (1,243) 18,805
------------------------------------------------------------------------
Total Revenue........................................ 40,744 7,236 2,521 (1,804) 48,697
Provision for loan and lease losses....................... 4,656 - - - 4,656
Depreciation and amortization............................. 1,715 286 8 30 2,039
Other non-interest expense................................ 19,663 5,283 2,167 594 27,707
------------------------------------------------------------------------
Pretax earnings...................................... 14,710 1,667 346 (2,428) 14,295
Income taxes.............................................. 3,626 768 138 (980) 3,552
------------------------------------------------------------------------
Earnings............................................. $ 11,084 $ 899 $ 208 $ (1,448) $ 10,743
Extinguishment of debt (net of tax).................. - - - (204) (204)
------------------------------------------------------------------------
Earnings before extinguishment of debt............... $ 11,084 $ 899 $ 208 $ (1,244) $ 10,947
========================================================================
Segment profit percentage................................. 90.9% 7.4% 1.7% N/M 100.0%
========================================================================
For the three months ended September 30, 2000
Net interest income....................................... $ 30,662 $ 78 $ 625 $ (411) $ 30,954
Non-interest income....................................... 7,385 7,930 1,446 (1,044) 15,717
------------------------------------------------------------------------
Total Revenue........................................ 38,047 8,008 2,071 (1,455) 46,671
Provision for loan and lease losses....................... 2,640 - - - 2,640
Depreciation and amortization............................. 1,935 266 22 53 2,276
Other non-interest expense................................ 20,014 5,169 1,363 185 26,731
------------------------------------------------------------------------
Pretax earnings...................................... 13,458 2,573 686 (1,693) 15,024
Income taxes.............................................. 3,455 1,106 273 (614) 4,220
------------------------------------------------------------------------
Earnings............................................. $ 10,003 $ 1,467 $ 413 $ (1,079) $ 10,804
========================================================================
Segment profit percentage................................. 84.2% 12.3% 3.5% N/M 100.0%
========================================================================
For the nine months ended September 30, 2001 ----------- Operating Segments -----------
Trust and Asset Mortgage Eliminations
Banking Management Banking And Other Consolidated
------------------------------------------------------------------------
(dollars in thousands)
Net interest income....................................... $ 86,726 $ 168 $ 3,068 $ (1,609) $ 88,353
Non-interest income....................................... 35,330 21,632 5,289 (4,325) 57,926
------------------------------------------------------------------------
Total Revenue........................................ 122,056 21,800 8,357 (5,934) 146,279
Provision for loan and lease losses....................... 14,369 - - - 14,369
Depreciation and amortization............................. 5,425 894 32 161 6,512
Other non-interest expense................................ 61,535 15,940 6,280 668 84,423
------------------------------------------------------------------------
Pretax earnings...................................... 40,727 4,966 2,045 (6,763) 40,975
Income taxes.............................................. 9,846 2,240 815 (2,625) 10,276
------------------------------------------------------------------------
Earnings............................................. $ 30,881 $ 2,726 $ 1,230 $ (4,138) $ 30,699
Cumulative effect of accounting change (net of tax).. 209 - 16 - 225
Extinguishment of debt (net of tax).................. - - - (204) (204)
------------------------------------------------------------------------
Earnings before accounting change and extinguishment
of debt.............................................. $ 30,672 $ 2,726 $ 1,214 $ (3,934) $ 30,678
========================================================================
Segment profit percentage................................. 88.7% 7.8% 3.5% N/M 100.0%
========================================================================
Assets................................................... $ 4,001,171 $ 20,395 $ 42,636 $ (29,156) $ 4,035,046
========================================================================
For the nine months ended September 30, 2000
Net interest income....................................... $ 95,238 $ 270 $ 1,647 $ (1,214) $ 95,941
Non-interest income....................................... 20,379 24,117 4,164 (3,750) 44,910
------------------------------------------------------------------------
Total Revenue 115,617 24,387 5,811 (4,964) 140,851
Provision for loan and lease losses....................... 7,370 - - - 7,370
Depreciation and amortization............................. 5,918 783 69 161 6,931
Other non-interest expense................................ 60,190 15,983 3,946 1,135 81,254
------------------------------------------------------------------------
Pretax earnings 42,139 7,621 1,796 (6,260) 45,296
Income taxes.............................................. 11,055 3,286 711 (2,328) 12,724
------------------------------------------------------------------------
Earnings............................................. $ 31,084 $ 4,335 $ 1,085 $ (3,932) $ 32,572
========================================================================
Segment profit percentage................................. 85.1% 11.9% 3.0% N/M 100.0%
========================================================================
Assets................................................... $ 4,266,114 $ 19,625 $ 23,039 $ (7,061) $ 4,301,717
========================================================================
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 predominantly 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 exposed 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 September 30, 2001 included the
following derivative related activity in other non-interest income: $41,000 loss
due to the decrease in the Time Value component of the market value of cash flow
hedges, $47,000 loss related to the ineffective portion of the cash flow hedges,
$204,000 income related to Mortgage Loan Derivatives, and $4,000 income related
to the S & P 500 embedded derivative. These items, net of taxes of $47,000,
total $73,000 in income recorded for the quarter ended September 30, 2001.
In addition to the transition adjustment, the Income Statement for the nine
months ended September 30, 2001 included the following derivative related
activity in other non-interest income: $327,000 loss due to the decrease in the
Time Value component of the market value of cash flow hedges, $9,000 loss
related to the ineffective portion of the cash flow hedges, $164,000 income
related to Mortgage Loan Derivatives, and $8,000 income related to the S & P 500
embedded derivative. These items, net of taxes of $64,000, total a $100,000 loss
recorded for the nine months ended September 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 may also occur,
as yield adjustments in the same period the hedged items affect earnings, in the
event 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, $3.4 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 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 filed 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 material adverse effect on the Company's consolidated
financial condition, though it could have a material 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.
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 September 30, 2001 as compared to December 31, 2000 and the results
of operations for the three and nine months ended September 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 $10.7 million for the three
months ended September 30, 2001, a decrease of $61,000 or 0.6% from the $10.8
million reported for the comparable period in 2000. Net income for the nine
months ended September 30, 2001 was $30.7 million, a decrease of $1.9 million or
5.8% from the $32.6 million reported in 2000.
Diluted earnings per share were $0.42, a new record, and $1.18 for the three and
nine months ended September 30, 2001, respectively, compared to $0.40 and $1.19
for the same periods in 2000. Year-to-date this represents a 0.8% decrease in
earnings per share compared to the 5.8% 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 third quarter and
year-to-date for 2001 was 13.79% and 13.10%, respectively. Annualized return on
average equity for the comparable periods in
2000 was 14.72% and 15.18%. The annualized return on average assets for the
third quarter of 2001 was 1.10% compared to 0.99% for the same period in 2000.
For the first nine months of 2001 and 2000, the annualized return on average
assets was 1.01% and 1.00%, 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 was
sold August 17, 2001 with a net after-tax gain of $1.1 million. For the seven
branches sold, $65.1 million in loans, $170.8 million in deposits and $1.2
million in premises and equipment were transferred to the respective buyers.
During the second quarter of 2001, in furtherance of the Company's strategic
objective to invest in and reallocate capital to higher growth Midwestern
markets, its 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 (the "Branch
Expansion"). In addition, three additional branches are planned for 2002. One
site is in St. Charles, IL located between the Geneva and Elgin markets, one
site in McHenry, IL, and one site is in the Madison, WI. 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. The site in Madison is planned for a very visible site along the
beltway.
During the second quarter of 2001, 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 of 2001, 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").
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 September 30, 2001, 495,000 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 nine month period ended September 30, 2001, the Company
repurchased 1.4 million shares at an average price of $21.20.
During the third quarter of 2001, AMCORE retired, at par, $15.0 million in
capital trust preferred securities with the coupon rate of 9.35 percent. This
early extinguishment of long-term borrowings (the "Debt Extinguishment")
resulted in an after-tax extraordinary charge of $204,000, or $0.01 per diluted
share (the "Extraordinary Charge"). The Extraordinary Charge was attributable to
unamortized issuance costs and broker fees.
Net income, excluding the Accounting Change, the Branch Gains, the Security
Portfolio Restructuring, the Severance Charge, and the Extraordinary Charge was
$26.1 million or $1.00 per diluted share for the first nine months of 2001. Net
income for the first nine months of 2000, excluding a $151,000 net after-tax
reversal of excess restructuring-related charges (the "Restructuring Reversal),
was $32.4 million or $1.18 per diluted share. This was a $6.4 million decline,
when comparing the two periods, or $0.18 per diluted share. Lower net interest
income, increased provisions for loan and lease losses, lower trust and asset
management income and increased operating expenses 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), as well as
a decrease in income taxes partially offset these declines. Net income,
excluding the items noted above, is expected to range between $1.40 to $1.45 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 nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
==================================================================
(in thousands)
Interest Income Book Basis $68,368 $81,448 $216,101 $241,203
FTE Adjustment 1,988 2,227 6,203 6,763
------------------------------------------------------------------
Interest Income FTE Basis 70,356 83,675 222,304 247,966
Interest Expense 38,476 50,494 127,748 145,262
------------------------------------------------------------------
Net Interest Income FTE Basis $31,880 $33,181 $94,556 $102,704
================================-=================================
Net interest income on an FTE basis declined $1.3 million or 3.9% during the
third quarter of 2001 over the same period in 2000. Average earning assets
declined $422.5 million or 10.4%, 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 via securitizations and refinancings. Loans
sold in the Branch Sales also contributed to the decline. Yields on average
earning assets declined 52 basis points. The net impact was a $13.3 million or
15.9% decrease in interest income on an FTE basis.
Rates paid on interest-bearing liabilities declined 84 basis points on average
quarter-to-quarter. Over this same period, average balances of interest-bearing
liabilities declined $377.2 million, as the Company continued to decrease its
dependence on high-cost funding sources. The net impact was a $12.0 million or
23.8% 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 annualized net interest income 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 32 basis points to
2.96% in the third quarter of 2001 when compared to 2.64% during the same period
in 2000. Net interest margin increased 23 basis points to 3.49% in the third
quarter of 2001, compared to 3.26% for the same period a year ago.
As Table 2 indicates, the interest rate spread increased 4 basis points to 2.77%
for the first nine months of 2001 when compared to 2.73% during the same period
in 2000. Net interest margin increased 1 basis point to 3.35% for the first nine
months of 2001, compared to 3.34% for the same period a year ago.
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 both rate and 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 nine months ended September 30, 2001, respectively, as compared to the
same periods in 2000.
Changes Due to Volume
In the third quarter of 2001, net interest income declined due to average volume
by $3.4 million, when compared with the third quarter of 2000. This was
comprised of a $8.3 million decline in interest income that was partially offset
by a $4.9 million decrease in interest expense.
The $8.3 million decline in interest income was driven by a $260.3 million or
9.5% decline in average loans and a $166.7 million or 13.2% decrease in average
investment securities. The decrease in average loans was led by a decrease of
$163.3 million in 1-4 family real estate loans due to higher prepayments,
refinancing and securitization. Commercial loan volume decreased $50.1 million
due to stricter pricing policies, tighter credit standards and a slowdown in the
economy. Consumer loans declined $42.3 million, on average, as a result of the
Auto Loan Sales. These decreases included the transfer of $57.6 million in
average loans 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.
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 $377.2
million or 10.4% decrease in average interest-bearing liabilities and the
resulting $4.9 million volume related reduction in interest expense. This was
largely attributable to a $258.7 million average reduction in wholesale funding,
including brokered deposits, since the third quarter of 2000. This was a
deliberate strategy aimed at reducing the Company's reliance on these
higher-cost funding sources, which included the Debt Extinguishment, and to
reduce interest rate risk. Average interest-bearing deposits, excluding brokered
deposits, declined $98.4 million over this same period. Excluding an average
reduction of $160.8 million associated with the Branch Sales, average
interest-bearing deposits increased $62.4 million, reflecting AMCORE's primary
strategic initiative of expanding core deposits. Since the end of the third
quarter of 2000, core deposits have increased $95.2 million or 4.2%, excluding
the Branch Sales.
For the first nine months of 2001, net interest income declined due to average
volume by $8.8 million, when compared with the same period in 2000. This was
comprised of a $20.1 million decline in interest income that was partially
offset by a $11.3 million decrease in interest expense. Average loans over this
period declined $229.0 million or 8.3%, while average securities decreased
$132.8 million or 10.2%. This led to a decline in average interest-bearing
liabilities of $286.1 million or 7.9%.
Changes Due to Rate
In the third quarter of 2001, net interest income increased due to average rates
by $2.1 million, when compared with the third quarter of 2000. This was
comprised of a $5.0 million decline in interest income that was more than offset
by a $7.1 million decrease in interest expense.
The yield on earning assets declined 52 basis points during the third quarter of
2001, compared to the same period in 2000. The yield on average loans decreased
62 basis points and was primarily driven by commercial loans. The yield on
average investment securities decreased by 31 basis points, the result of
declining interest rates and the disposal of high-risk securities in the
Security Portfolio Restructuring.
The rate paid on interest bearing liabilities decreased 84 basis points during
the third quarter of 2001, compared to the third 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 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.
For the first nine months of 2001, net interest income increased due to average
rates by $650,000, when compared with the same period in 2000. This was
comprised of a $5.5 million decline in interest income, that was more than
offset by a $6.2 million decrease in interest expense. The yield on earning
assets declined 19 basis points, while average rates paid on interest bearing
liabilities decreased by 23 basis points.
The current and projected interest rate environment, significant reductions in
wholesale funding, the sale of lower margin assets in the Branch Sales, 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 and into early 2002. Higher cost wholesale
funding has decreased $258.7 million on average since the third quarter of 2000
while NOW (i.e., checking) accounts have increased $51.0 million, on average,
over the same period. In addition, average rates paid on regular CDs have
declined 35 basis points quarter-to-quarter. As a result of the foregoing,
continuing declines in rates paid as deposits and borrowings reprice and the
launch of a new core deposit gathering initiative, 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%.
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 $4.7 million in the third quarter of
2001, an increase of $2.0 million over the $2.7 million recorded in the same
period a year ago. For the first nine months of 2001, the provision for loan and
lease losses was $14.4 million, an increase of $7.0 million over the $7.4
million recorded during the same time period a year ago. Increases in
non-performing loans, net charge-offs and delinquencies compared to the third
quarter of 2000, coupled with concerns over the economy's impact, particularly
in light of the unprecedented events on and subsequent to September 11,
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 the comparable period of 2000.
AMCORE recorded net charge-offs of $3.4 million during the third quarter
compared to $3.2 million for the same period of 2000. Annualized net charge-offs
increased to 54 basis points of average loans in the third quarter of 2001
compared to 46 basis points in the same period in 2000.
The allowance for loan and lease losses as a percent of total loans was 1.37%
and 1.08% at September 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.
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 $2.8 million in the third quarter of 2001 compared
to the third quarter of 2000, primarily as a result of the Branch Gain.
Excluding the Branch Gain, which was $1.8 million on a pre-tax basis,
non-interest income increased $1.0 million, or 6.5%. The improvement was
attributable to increased service charges on deposits, gain from cash received
on the merger of an ATM service provider and increased net CSV on BOLI.
Trust and asset management income, the largest source of fee based revenues,
totaled $6.7 million in the third quarter of 2001, a decline of $754,000 or
10.1% from $7.5 million in the third quarter of 2000. The overall decline in the
stock market during the third quarter of 2001, compared to the third quarter of
2000, impacted equity values upon which fees are partially based. This, along
with several larger 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 management
mix, which is 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 indices were down nearly 28% and 59%, respectively, from September
30, 2000 to September 30, 2001, favorable outcomes in the fixed
income market helped the Company to limit the decrease in trust and asset
management revenue to 10.1%. As of September 30, 2001, assets under management
totaled $4.0 billion, including $1.1 billion in the AMCORE family of Vintage
Mutual Funds. Total assets under administration, which include managed and
custodial assets, totaled $4.6 billion. In addition to overall market
performance, trust and asset management revenues are dependent upon plan
terminations, corporate profit sharing contributions, specific investment
performance and other economic factors.
Service charges on deposits totaled $4.0 million in the third quarter of 2001,
an increase of $1.0 million or 34.7% from the $2.9 million in the third quarter
of 2000. Non-sufficient funds, stop payment and return check fees, primarily
personal accounts, and increased commercial account maintenance fees contributed
to the increase over the third 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, net of servicing rights amortization and impairment. A declining interest
rate environment during the third quarter of 2001, compared to the same quarter
in 2000, resulted in increased volumes quarter-over-quarter. Third quarter 2001
volume was $118 million, principally refinancings, up from $52 million in the
third quarter of 2000. Third quarter 2001 mortgage revenues, excluding a
$906,000 servicing right impairment charge, were $1.8 million. This represented
a $338,000 or 23.1% increase from $1.5 million in the third quarter of 2000. The
servicing right impairment charge was attributable to increasing pre-payment
speeds driven by declining interest rates.
Strong name recognition and scalable processing systems should enable AMCORE to
efficiently capture additional refinancing and origination volume that is
expected to remain strong through year end, as a result of the current interest
rate environment. As of September 30, 2001, AMCORE had $7.9 million of
capitalized mortgage servicing rights, net of a $1.1 million impairment reserve.
The portfolio of loans serviced for third-party investors was $925.8 million.
BOLI income totaled $1.5 million in the third quarter of 2001, compared to
$639,000 in the third quarter of 2000, reflecting an increase in average
investment of $50.1 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 $3.6 million for the third quarter of 2001, a $453,000
or 14.4% increase from the third quarter 2000. The increase was primarily
attributable to a $1.0 million gain from cash received on the merger of an ATM
service provider in the third quarter of 2001, that was partially offset by a
$697,000 gain on Auto Loan Sales that occurred during the third quarter of 2000.
Net security gains were $309,000 for the third quarter of 2001 compared to a
gain of $39,000 in the same period in 2000. 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.
Operating Expenses
Total operating expense was $29.4 million in the third quarter of 2001, an
increase of $405,000 or 1.4% from $29.0 million in the third quarter of 2000.
The increase was primarily due to increased loan processing and collection
expenses.
The efficiency ratio, adjusted to exclude the Branch Gains, was 60.3% in the
third quarter of 2001 compared to 59.1% in the third quarter of 2000. This
reflects higher expenses while net revenues remained essentially flat
quarter-to-quarter.
Personnel costs, which include compensation expense and employee benefits, are
the largest component of operating expenses. Personnel costs were flat at $16.8
million for each of the third quarters of 2001 and 2000. Annual merit, cost-of
living increases and staff additions for the Branch Expansion were offset by
lower personnel costs attributable to completion of AMCORE's Customer Focused
Organizational restructuring and the Branch Sales.
Net occupancy expense was $1.8 million in the third quarter of 2001, a decrease
of $125,000 or 6.4% from the third quarter of 2000, which includes the impact of
the Branch Sales net of the Branch Expansion.
Equipment expense decreased $170,000 or 8.6% to $1.8 million in the third
quarter of 2001, compared to $2.0 million for the same period in 2000. This was
primarily the result of lower depreciation expense on data processing equipment.
Data processing expenses include expenses related to core bank data processing,
trust and other external processing systems. This category increased $88,000 or
6.2% to $1.5 million in the third quarter of 2001 compared to $1.4 million for
the same quarter in 2000.
Professional fees decreased $186,000 or 20.3% from the third quarter of 2000,
primarily due to lower legal fees.
Advertising and business development expenses were $1.0 million in the third
quarter of 2001, an increase of $158,000 or 18.3% from $863,000 in the third
quarter of 2000. The increase is primarily related to a free-checking promotion.
Intangibles amortization and communication expense both posted modest declines
in the third quarter of 2001 compared to the third quarter of 2000 of $19,000,
or 3.6%, and $22,000, or 2.3%, respectively.
Other expenses were $4.2 million in third quarter of 2001, an increase of
$634,000 or 17.7%, from the third 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 charitable
contributions expense.
Income Taxes
Income tax expense totaled $3.7 million in the third quarter of 2001, compared
with $4.2 million in the third quarter of 2000, a decrease of $538,000 or 12.7%.
The decrease is mainly the result of lower earnings before tax and increased CSV
of BOLI that is not subject to tax. The effective tax rate for the third quarter
of 2001 was 25.2% compared to 28.1% 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 third quarter of 2001 was $11.1 million, an
increase of $1.1 million or 10.8% 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, lower operating expenses and lower
income tax expense.
Net interest income declined by $1.5, or 4.9%, in the third 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 9.5% and 13.2%,
respectively, that were only partially offset by a 10.4% decrease in average
interest-bearing liabilities. Rates paid on interest-bearing liabilities
decreased 84 basis points, more than offsetting declines in yields on loans and
securities of 62 and 31 basis points, respectively, on average
quarter-to-quarter. Overall, net interest margin was up 23 basis points to 3.49%
in the third quarter of 2001, compared to 3.26% in the third quarter of 2000.
Net interest margin has improved by 35 basis points since the fourth quarter of
2000.
Non-interest income increased by $4.2 million, quarter-to-quarter. Excluding the
Branch Gain, non-interest income increased $2.4 million or 32.3%. The increase
is primarily the result of a gain from cash received on the merger of an ATM
service provider, higher service charges on deposits and increased CSV on BOLI.
These were partially offset by gains on Auto Loan Sales that occurred during the
second quarter of 2000.
The provision for loan and lease losses was $4.7 million in the third quarter of
2001 versus $2.6 million in the same period a year ago. Increases in
non-performing loans, net charge-offs and delinquencies compared to the third
quarter of 2000, coupled with concerns over the economy's impact, particularly
in light of the unprecedented events on and subsequent to September 11,
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 the comparable period in 2000.
Operating expenses declined $571,000. This was primarily attributable to lower
personnel costs resulting from completion of AMCORE's Customer Focused
Organizational restructuring and the Branch Sales, net of annual merit, cost-of
living increases and staff additions for the Branch Expansion.
Income taxes increased as a result of higher segment earnings before tax. The
increase was partially offset by tax benefits associated with increased CSV of
BOLI that are not subject to tax.
The Banking segment represented 90.9% and 84.2% of total segment profit in the
third quarter of 2001 and 2000, respectively. The Banking segment represented
88.7% and 85.1% of total segment profit before the Accounting Change for the
first nine 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 third quarter of 2001
was $899,000, a decline of $568,000 or 38.7% from the same period in 2000.
Declining revenues and increased operating expenses were partially offset by
lower income tax expense.
Trust and Asset Management segment revenues, including net interest income,
declined $772,000 or 9.6% in the third quarter of 2001, compared to the same
period in 2000. The overall decline in the stock market during the third quarter
of 2001, compared to the third quarter of 2000, impacted equity values upon
which fees are partially based. This, along with the loss of several larger
employee benefit accounts, were the primary factors leading to the decline in
trust and asset management revenues. Despite poor market conditions and a
slowing economy, brokerage commissions posted a modest improvement
quarter-to-quarter.
Operating expenses increased $134,000 or 2.5%, primarily due to higher personnel
costs.
Income taxes were lower as a result of lower segment earnings before taxes.
As of September 30, 2001, assets under management totaled $4.0 billion,
including $1.1 billion in the AMCORE family of Vintage Mutual Funds. Total
assets under administration, which include managed and custodial assets, totaled
$4.6 billion.
The Trust and Asset Management segment represented 7.4% and 12.3% of total
segment profit in the third quarter of 2001 and 2000, respectively. The Trust
and Asset Management segment represented 7.8% and 11.9% of total segment profit
before the Accounting Change for the first nine 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 the BANK and the secondary
market and continues to service most of the loans sold.
The Mortgage Banking segment's profit for the third quarter of 2001 was
$208,000, a decrease of $205,000 or 49.6% from the same period in 2000.
Excluding a $906,000 servicing right impairment charge, segment profits
increased $701,000, or 169.7%, as declining interest rates during the third
quarter of 2001, compared to the same quarter in 2000, resulted in increased
volumes quarter-over-quarter.
Combined, Mortgage Banking segment revenues and net interest income for the
third quarter of 2001 were up $738,000 or 21.7% over the same period a year ago.
Excluding the $906,000 servicing right impairment charge, the increase was $1.6
million or 79.4%. The servicing right impairment charge was attributable to
increasing pre-payment speeds resulting from declining interest rates. Third
quarter 2001 volume of $118 million, driven by strong refinancing, was up from
$52 million in the third quarter of 2000.
The increase in volume caused a corresponding increase in production related
personnel, loan processing and BANK commission expenses. These factors
contributed to a $789,000 increase in operating expenses.
Income taxes were lower as a result of decreased segment earnings after the
impairment charge, but before taxes.
The Mortgage Banking segment represented 1.7% and 3.5% of total segment profit
in the third quarter of 2001 and 2000, respectively. The Mortgage Banking
segment represented 3.5% and 3.0% of total segment profit before the Accounting
Change for the first nine months of 2001 and 2000, respectively.
BALANCE SHEET REVIEW
Total assets were $4.0 billion at September 30, 2001, a decrease of $209.1
million or 4.9% from December 31, 2000. Total liabilities declined $213.7
million over the same period, while stockholders' equity increased $4.7 million.
Total earning assets, including BOLI, decreased $208.3 million from December 31,
2000. Non-earning assets decreased $743,000 over the same period. The decrease
in earning assets was primarily related to a $143.4 million decline in loans, a
$81.5 million decline in total securities, a $34.5 million decline in federal
funds sold and a $16.3 million decline in interest earning deposits in banks.
The decline in loans were mainly attributable to decreases in 1-4 family real
estate loans due to higher prepayments and refinancings and 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, partially offset by
increases in fair value that move inversely to interest rates. These declines
were partially offset by a $43.9 million increase in BOLI and a $23.4 million
increase in loans held for sale. The increase in loans held for sale was
primarily related to mortgage loans, as declining interest rates led to
increased refinancing volumes.
Total deposits declined $242.2 million from December 31, 2000, of which $169.5
million were non-core brokered CDs and $170.8 million were assumed by the
purchasers in the Branch Sales. Excluding these two items, total deposits
increased $98.1 million. Short-term borrowings increased $24.1 million over the
same period, while long-term borrowings increased $2.4 million. The $15.0
million Debt Extinguishment was replaced with lower cost Federal Home Loan Bank
borrowings
The stockholders' equity increase related to $18.4 million of the first nine
months of 2001 earnings in excess of dividends paid, plus $10.1 million in other
comprehensive income associated with improving fair values of the investment
portfolio net of derivative mark-to-market adjustments. These were partially
offset by $22.7 million net increase in treasury stock balance related to the
acquisition of treasury shares in connection with AMCORE's announced share
repurchase program reduced by reissuances pursuant to employee and director
benefit plans.
ASSET QUALITY REVIEW
Allowance for Loan and Lease Losses
Management determined that the appropriate level of the allowance amounted to
$34.1 million at September 30, 2001, compared to $29.2 million at December 31,
2000, an increase of $5.0 million or 17.1%. 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 September 30, 2001, the allowance for loan losses as a percent of total
loans and of non-performing loans was 1.37% and 129%, respectively. These
compare to the same ratios at September 30, 2000 of 1.08% and 119%. Net
charge-offs were $3.4 million in the third quarter of 2001 compared to $3.2
million in the same period in 2000. Charge-offs for the third quarter of 2001
and 2000 represented 0.54% and 0.46% 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 $30.9 million as of September 30, 2001, an increase of $4.5 million or
17.0% from the $26.4 million at December 31, 2000.
Total non-performing assets represent 0.77% and 0.62% of total assets at
September 30, 2001 and December 31, 2000, respectively. An analysis of
non-performing assets is shown in Table 5.
CAPITAL MANAGEMENT
Total stockholders' equity at September 30, 2001, was $313.2 million, an
increase of $4.7 million or 1.5% from December 31, 2000. The book value per
share of AMCORE common stock was $12.55 and $11.05 at September 30, 2001 and
2000, respectively. AMCORE paid dividends of $0.16 per share in the third
quarters of 2001 and 2000.
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 September 30, 2001, 495,000 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 nine-month period ended September 30, 2001, the Company
repurchased 1.4 million shares at an average price of $21.20.
AMCORE's total risk based capital ratio at 11.76%, its ratio of Tier 1 capital
at 10.60% and its leverage ratio of 7.86%, all significantly exceed the
regulatory minimums (as set forth in the table below), as of September 30, 2001.
The BANK is considered a "well-capitalized" institution based on regulatory
guidelines.
(Dollars in thousands) September 30, 2001 September 30, 2000
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital (to Risk Weighted Assets) $344,685 11.76% $365,917 12.35%
Total Capital Minimum 234,459 8.00% 237,124 8.00%
-------------- -------------- ------------- --------------
Amount in Excess of Regulatory Minimum $110,226 3.76% $128,793 4.35%
============== ============== ============= ==============
Tier 1 Capital (to Risk Weighted Assets) $310,548 10.60% $336,904 11.37%
Tier 1 Capital Minimum 117,230 4.00% 118,562 4.00%
-------------- -------------- ------------- --------------
Amount in Excess of Minimum $193,318 6.60% $218,342 7.37%
============== ============== ============= ==============
Tier 1 Capital (to Average Assets) $310,548 7.86% $336,904 7.82%
Tier 1 Capital Minimum 157,959 4.00% 172,284 4.00%
-------------- -------------- ------------- --------------
Amount in Excess of Regulatory Minimum $152,589 3.86% $164,620 3.82%
============== ============== ============= ==============
Risk Adjusted Assets $2,930,743 $2,964,051
============== =============
Average Assets $3,948,969 $4,307,100
============== =============
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 October 1, 2001, would be approximately
$1.4 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 third 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 decrease in
net income over a twelve-month period beginning October 1, 2001, of $4.9
million. 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 greater at the end of the third 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.
TABLE 1
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Quarter Ended Quarter Ended
September 30, 2001 September 30, 2000
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 834,924 $ 13,470 6.45% $ 969,184 $ 16,666 6.88%
Tax-exempt securities (1) 264,719 5,131 7.75% 297,188 5,708 7.68%
-------------------------------------------------------------------------------
Total Securities (2) 1,099,643 18,601 6.76% 1,266,372 22,374 7.07%
Loans held for sale (3) 43,017 752 6.97% 45,932 1,043 9.05%
Loans (1) (4) 2,480,371 50,358 8.07% 2,740,658 59,746 8.69%
Other earning assets 27,707 240 3.44% 20,239 341 6.70%
Fees on loans held for sale (3) - 405 - - 171 -
-------------------------------------------------------------------------------
Total Interest-Earning Assets $ 3,650,738 $ 70,356 7.67% $ 4,073,201 $ 83,675 8.19%
Non Interest-Earning Assets:
Cash and due from banks 98,041 99,958
Other assets 249,953 180,841
Allowance for loan and lease losses (32,813) (29,730)
-------------- ---------------
Total Assets $ 3,965,919 $ 4,324,270
============== ===============
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,017,557 $ 6,592 2.57% $ 1,003,999 $ 9,819 3.89%
Time deposits 1,508,754 22,248 5.85% 1,714,007 26,143 6.07%
-------------------------------------------------------------------------------
Total interest-bearing deposits 2,526,311 28,840 4.53% 2,718,006 35,962 5.26%
Short-term borrowings 423,805 5,251 4.92% 570,567 9,245 6.45%
Long-term borrowings 291,464 4,385 5.97% 330,196 5,287 6.37%
-------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 3,241,580 $ 38,476 4.71% $ 3,618,769 $ 50,494 5.55%
Noninterest-Bearing Liabilities:
Demand deposits 338,327 352,189
Other liabilities 70,974 61,256
-------------- ---------------
Total Liabilities $ 3,650,881 $ 4,032,214
Stockholders' Equity 315,038 292,056
-------------- ---------------
Total Liabilities and
Stockholders' Equity $ 3,965,919 $ 4,324,270
============== ===============
Net Interest Income (FTE) $ 31,880 $ 33,181
============ ============
Net Interest Spread (FTE) 2.96% 2.64%
========== ==========
Interest Rate Margin (FTE) 3.49% 3.26%
========== ==========
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 $1.1 million and
$891,000, respectively.
TABLE 2
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------------------------ --------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------ --------------------------------------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 887,045 $ 44,387 6.67% $ 995,903 $ 51,614 6.91%
Tax-exempt securities (1) 277,135 16,011 7.70% 301,030 17,349 7.68%
-------------------------------------------------------------------------------
Total Securities (2) 1,164,180 60,398 6.92% 1,296,933 68,963 7.09%
Loans held for sale (3) 39,882 2,059 6.89% 25,130 1,640 8.71%
Loans (1) (4) 2,534,131 157,888 8.32% 2,763,162 176,089 8.51%
Other earning assets 27,557 949 4.60% 18,000 853 6.33%
Fees on loans held for sale (3) - 1,010 - - 421 -
------------------------------------ ---------------------------------------
Total Interest-Earning Assets $ 3,765,750 $ 222,304 7.88% $ 4,103,225 $ 247,966 8.07%
Non Interest-Earning Assets:
Cash and due from banks 99,147 102,096
Other assets 240,715 159,633
Allowance for loan and lease losses (30,583) (29,473)
-------------- ---------------
Total Assets $ 4,075,029 $ 4,335,481
============== ===============
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,014,221 $ 22,694 2.99% $ 1,005,767 $ 27,702 3.68%
Time deposits 1,594,660 73,004 6.12% 1,713,583 74,953 5.84%
------------------------------------ ---------------------------------------
Total interest-bearing deposits 2,608,881 95,698 4.90% 2,719,350 102,655 5.04%
Short-term borrowings 440,880 18,647 5.65% 591,436 27,513 6.21%
Long-term borrowings 295,568 13,403 6.06% 320,637 15,094 6.29%
------------------------------------ ---------------------------------------
Total Interest-Bearing Liabilities $ 3,345,329 $ 127,748 5.11% $ 3,631,423 $ 145,262 5.34%
Noninterest-Bearing Liabilities:
Demand deposits 342,988 359,552
Other liabilities 73,528 57,800
-------------- ---------------
Total Liabilities $ 3,761,845 $ 4,048,775
Stockholders' Equity 313,184 286,706
-------------- ---------------
Total Liabilities and
Stockholders' Equity $ 4,075,029 $ 4,335,481
============== ===============
Net Interest Income (FTE) $ 94,556 $ 102,704
============ =============
Net Interest Spread (FTE) 2.77% 2.73%
========= ==========
Interest Rate Margin (FTE) 3.35% 3.34%
========= ==========
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 $2.4 million and $2.3
million, respectively.
TABLE 3
ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
Quarter Ended
September 2001/September 2000
----------------------------------------------------------
Total Net
Increase (Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
----------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ (2,209) $ (987) $ (3,196)
Tax-exempt securities (1) (629) 52 (577)
----------------------------------------------------------
Total Securities (2) (2,851) (922) (3,773)
Loans held for sale (3) (63) (228) (291)
Loans (1) (4) (5,379) (4,009) (9,388)
Other earning assets 70 (171) (101)
Fees on loans held for sale (3) 0 234 234
----------------------------------------------------------
Total Interest-Earning Assets $ (8,267) $ (5,052) $ (13,319)
Interest Expense:
Interest-bearing demand and savings deposits $ 36 $ (3,263) $ (3,227)
Time deposits (3,113) (782) (3,895)
----------------------------------------------------------
Total interest-bearing deposits (2,391) (4,731) (7,122)
Short-term borrowings (2,077) (1,917) (3,994)
Long-term borrowings (587) (315) (902)
----------------------------------------------------------
Total Interest-Bearing Liabilities $ (4,898) $ (7,120) $ (12,018)
----------------------------------------------------------
Net Interest Margin / Net Interest Income (FTE) $ (3,369) $ 2,068 $ (1,301)
==========================================================
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.
TABLE 4
ANALYSIS OF YEAR-TO-DATE CHANGES IN NET INTEREST INCOME
Nine Months Ended
September 2001/September 2000
-----------------------------------------------------------
Total Net
Increase (Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
-----------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ (5,494) $ (1,733) $ (7,227)
Tax-exempt securities (1) (1,380) 42 (1,338)
-----------------------------------------------------------
Total Securities (2) (6,920) (1,645) (8,565)
Loans held for sale (3) 815 (396) 419
Loans (1) (4) (14,435) (3,766) (18,201)
Other earning assets 347 (251) 96
Fees on loans held for sale (3) 0 589 589
-----------------------------------------------------------
Total Interest-Earning Assets $ (20,122) $ (5,540) $ (25,662)
-----------------------------------------------------------
Interest Expense:
Interest-bearing demand and savings deposits $ 554 $ (5,562) $ (5,008)
Time deposits (5,554) 3,605 (1,949)
-----------------------------------------------------------
Total interest-bearing deposits (4,155) (2,802) (6,957)
Short-term borrowings (6,551) (2,315) (8,866)
Long-term borrowings (1,160) (531) (1,691)
-----------------------------------------------------------
Total Interest-Bearing Liabilities $ (11,324) $ (6,190) $ (17,514)
-----------------------------------------------------------
Net Interest Margin / Net Interest Income (FTE) $ (8,798) $ 650 $ (8,148)
===========================================================
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.
TABLE 5
ASSET QUALITY
The components of non-performing loans and leases at September 30, 2001 and
December 31, 2000 were as follows:
September 30, December 31,
2001 2000
----------------- -----------------
Impaired loans: (in thousands)
Non-accrual loans and leases
Commercial.......................................................... 11,517 $ 9,396
Real estate......................................................... 14,068 11,176
Other non-performing:
Non-accrual loans (1)............................................... 952 1,497
----------------- -----------------
Total non-performing loans.......................................... $ 26,537 $ 22,069
================= =================
Foreclosed assets:
Real estate......................................................... 3,076 3,282
Other............................................................... 1,315 1,092
----------------- -----------------
Total foreclosed assets............................................. $ 4,391 $ 4,374
================= =================
Total non-performing assets......................................... $ 30,928 $ 26,443
================= =================
Loans 90 days or more past due and still accruing........................... $ 17,995 $ 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 September 30, 2001 and 2000 is presented below:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
--------------------------------- ---------------------------------
(in thousands)
Balance at beginning of period......................... $ 33,006 $ 30,132 $ 29,157 $ 28,377
Charge-Offs:
Commercial, financial and agricultural.............. 1,215 1,934 3,946 2,880
Real estate......................................... 1,105 278 2,208 1,104
Installment and consumer............................ 1,268 1,336 3,593 3,543
Direct leases....................................... 27 - 78 -
--------------------------------- ---------------------------------
3,615 3,548 9,825 7,527
Recoveries:
Commercial, financial and agricultural.............. 71 73 281 504
Real estate......................................... (91) 20 164 72
Installment and consumer............................ 229 282 861 803
Direct leases....................................... 1 - 9 -
--------------------------------- ---------------------------------
210 375 1,315 1,379
Net Charge-Offs........................................ 3,405 3,173 8,510 6,148
Provision charged to expense........................... 4,656 2,640 14,369 7,370
Reductions due to sale of loans........................ 120 586 879 586
--------------------------------- ---------------------------------
Balance at end of period............................... $ 34,137 $ 29,013 $ 34,137 $ 29,013
================================= =================================
Ratio of net-charge-offs during the period
to average loans outstanding during the period (1).... 0.54% 0.46% 0.45% 0.30%
================================= =================================
(1) On an annualized basis.
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 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 filed 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 material adverse effect on the Company's consolidated
financial condition, though it could have a material 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.
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).
99 Additional exhibits - Press release dated October 18, 2001.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCORE Financial, Inc.
(Registrant)
Date: November 14, 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)