UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-13393
AMCORE FINANCIAL, INC.
NEVADA 36-3183870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Seventh Street, Rockford, Illinois 61104
Telephone number (815) 968-2241
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock, par value
$.22 per share, at July 31, 2002 was 24,728,702 shares.
Index of Exhibits on Page 45
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
- ------ -----------
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3 Quantitative and Qualitative Disclosures About Market Risk 38
PART II
Item 1 Legal Proceedings 44
Item 4 Submission of Matters to a Vote of Security Holders 45
Item 6 Exhibits and Reports on Form 10-Q 45
Signatures 46
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
Assets Cash and cash equivalents...................................................... $112,348 $134,244
Interest earning deposits in banks............................................. 11,287 3,087
Federal funds sold and other short-term investments............................ - 300
Securities available for sale.................................................. 1,250,597 1,087,702
Loans and leases held for sale................................................. 28,759 101,831
Gross loans and leases......................................................... 2,668,423 2,477,193
Allowance for loan and lease losses............................................ (33,986) (33,940)
---------------------------------
Net loans and leases....................................................... $2,634,437 $2,443,253
Company owned life insurance................................................... 105,957 99,982
Premises and equipment, net ................................................... 49,397 49,337
Intangible assets, net......................................................... 15,856 15,927
Foreclosed real estate......................................................... 3,844 5,625
Other assets................................................................... 74,444 80,559
---------------------------------
TOTAL ASSETS............................................................... $4,286,926 $4,021,847
=================================
Liabilities LIABILITIES
And Deposits:
Stockholders' Demand deposits.............................................................. $1,337,706 $1,302,497
Equity Savings deposits............................................................. 135,506 122,185
Other time deposits.......................................................... 1,644,914 1,469,055
---------------------------------
Total deposits............................................................ $3,118,126 $2,893,737
Short-term borrowings.......................................................... 548,348 475,716
Long-term borrowings .......................................................... 217,752 268,230
Other liabilities.............................................................. 71,983 82,504
---------------------------------
TOTAL LIABILITIES......................................................... $3,956,209 $3,720,187
---------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 10,000,000 shares; none issued...... $ - $ -
Common stock, $.22 par value; authorized 45,000,000 shares;
June 30, December 31,
2002 2001
---- ----
Issued 29,770,886 29,739,393
Outstanding 24,699,085 24,602,505 6,612 6,605
Additional paid-in capital..................................................... 73,332 74,045
Retained earnings ............................................................. 336,234 323,615
Deferred compensation.......................................................... (868) (2,107)
Treasury stock (6/30/02 - 5,071,801 shares; 12/31/01 - 5,136,888 shares)....... (98,689) (100,197)
Accumulated other comprehensive income (loss).................................. 14,096 (301)
---------------------------------
TOTAL STOCKHOLDERS' EQUITY................................................ $330,717 $301,660
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $4,286,926 $4,021,847
================================
See accompanying notes to consolidated financial statements (unaudited).
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Interest Interest and fees on loans and leases............................ $45,858 $52,466 $90,392 $107,123
Income Interest on securities:
Taxable........................................................ 14,156 14,890 26,160 30,917
Tax-exempt..................................................... 2,890 3,518 5,888 7,072
----------------------------------------------------
Total Income from Securities................................ $17,046 $18,408 $32,048 $37,989
----------------------------------------------------
Interest on federal funds sold and other short-term investments.. $61 $133 $103 $267
Interest and fees on loans and leases held for sale.............. 824 975 1,943 1,912
Interest on deposits in banks.................................... 27 125 41 442
----------------------------------------------------
Total Interest Income....................................... $63,816 $72,107 $124,527 $147,733
----------------------------------------------------
Interest Interest on deposits............................................. $23,036 $31,641 $44,879 $66,888
Expense Interest on short-term borrowings................................ 3,975 5,734 7,537 12,193
Interest on long-term borrowings................................. 4,612 5,497 9,739 10,191
----------------------------------------------------
Total Interest Expense...................................... $31,623 $42,872 $62,155 $89,272
----------------------------------------------------
Net Interest Income......................................... $32,193 $29,235 $62,372 $58,461
Provision for loan and lease losses.............................. 2,653 7,557 5,293 9,713
----------------------------------------------------
Net Interest Income After Provision for Loan
and Lease Losses........................................ $29,540 $21,678 $57,079 $48,748
----------------------------------------------------
Non- Trust and asset management income................................ $6,189 $6,835 $12,879 $13,617
Interest Service charges on deposits...................................... 4,113 3,734 7,980 6,808
Income Mortgage revenues................................................ 499 1,855 2,344 3,296
Company owned life insurance income.............................. 1,469 1,386 2,726 2,430
Gain on branch sales............................................. - 8,695 - 8,695
Other............................................................ 3,119 2,227 5,834 5,436
----------------------------------------------------
Non-Interest Income, Excluding Net
Security Gains (Losses)................................. $15,389 $24,732 $31,763 $40,282
Net security gains (losses)...................................... 625 (2,272) 1,359 (1,529)
----------------------------------------------------
Total Non-Interest Income................................... $16,014 $22,460 $33,122 $38,753
Operating Compensation expense............................................. $14,738 $14,319 $28,781 $27,032
Expenses Employee benefits................................................ 3,519 3,138 7,688 7,097
Net occupancy expense............................................ 1,948 1,798 3,849 3,860
Equipment expense................................................ 1,932 2,014 3,784 4,174
Data processing expense.......................................... 1,616 1,486 3,261 3,002
Professional fees................................................ 1,074 1,036 2,095 2,152
Communication expense............................................ 1,027 1,003 2,059 2,047
Advertising and business development............................. 1,145 1,289 2,391 2,125
Amortization of intangible assets................................ 36 534 71 1,085
Other............................................................ 4,458 4,650 8,945 8,615
----------------------------------------------------
Total Operating Expenses.................................... $31,493 $31,267 $62,924 $61,189
----------------------------------------------------
Income Before Income Taxes and Accounting Change................. $14,061 $12,871 $27,277 $26,312
Income taxes..................................................... 3,478 3,109 6,768 6,581
----------------------------------------------------
Net Income Before Accounting Change......................... $10,583 $9,762 $20,509 $19,731
Cumulative effect of accounting change (net of tax)....... - - - 225
----------------------------------------------------
NET INCOME.................................................. $10,583 $9,762 $20,509 $19,956
====================================================
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE (EPS)
Basic EPS
Income Before Accounting Change.......................... $ 0.43 $ 0.38 $ 0.83 $ 0.76
Cumulative effect of accounting change.................... - - - 0.01
----------------------------------------------------
Basic net income.......................................... $ 0.43 $ 0.38 $ 0.83 $ 0.77
====================================================
Diluted EPS
Income Before Accounting Change........................... $ 0.42 $ 0.38 $ 0.82 $ 0.75
Cumulative effect of accounting change.................... - - - 0.01
----------------------------------------------------
Diluted net income........................................ $ 0.42 $ 0.38 $ 0.82 $ 0.76
====================================================
DIVIDENDS PER COMMON SHARE.................................................... $ 0.16 $ 0.16 $ 0.32 $ 0.32
AVERAGE COMMON SHARES OUTSTANDING
Basic............................................................ 24,686 25,740 24,648 25,898
Diluted.......................................................... 24,926 25,967 24,890 26,138
See accompanying notes to consolidated financial statements (unaudited).
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Paid-in Retained Deferred
Stock Capital Earnings Compensation
--------- ---------- --------- ------------
(in thousands, except share data)
Balance at December 31, 2000 .............................. $ 6,596 $ 74,900 $ 297,703 $ (1,651)
--------- ---------- --------- ---------
Comprehensive Income:
Net Income before accounting change .................. -- -- 19,731 --
Cumulative effect of accounting change, net of tax ... -- -- 225 --
Current period SFAS No. 133 transactions, net of tax . -- -- -- --
SFAS No. 133 reclassification to earnings, net of tax -- -- -- --
--------- ---------- --------- ---------
Net cumulative effect of SFAS No. 133 ..................... -- -- 225 --
--------- ---------- --------- ---------
Unrealized holding gains on securities
available for sale arising during the period .... -- -- -- --
Less reclassification adjustment for security
losses included in net income ................... -- -- -- --
Income tax effect related to items of other
comprehensive income ............................ -- -- -- --
--------- ---------- --------- ---------
Net unrealized gains on securities
available for sale ................................... -- -- -- --
--------- ---------- --------- ---------
Comprehensive Income ............................ -- -- 19,956 --
--------- ---------- --------- ---------
Cash dividends on common stock-$0.32
per share ....................................... -- -- (8,287) --
Purchase of 711,730 shares for the treasury .......... -- -- -- --
Reissuance of 3,022 treasury shares under
non-employee directors stock plan ............... -- 18 -- (78)
Deferred compensation expense ........................ -- -- -- 297
Reissuance of 308,885 treasury shares for
employee incentive plans ........................ -- (638) -- (923)
Issuance of 23,931 common shares for
Employee Stock Plan ............................. 5 405 -- --
--------- ---------- --------- ---------
Balance at June 30, 2001 .................................. $ 6,601 $ 74,685 $ 309,372 $ (2,355)
========= ========== ========= =========
Balance at December 31, 2001 .............................. $ 6,605 $ 74,045 $ 323,615 $ (2,107)
--------- ---------- --------- ---------
Comprehensive Income:
Net Income ........................................... -- -- 20,509 --
Current period SFAS No. 133 transactions, net of tax . -- -- -- --
SFAS No. 133 reclassification to earnings, net of tax -- -- -- --
--------- ---------- --------- ---------
Net cumulative effect of SFAS No. 133 ..................... -- -- -- --
--------- ---------- --------- ---------
Unrealized holding gains on securities
available for sale arising during the period .... -- -- -- --
Less reclassification adjustment for security
gains included in net income .................... -- -- -- --
Income tax effect related to items of other
comprehensive income ............................ -- -- -- --
--------- ---------- --------- ---------
Net unrealized gains on securities
available for sale ................................... -- -- -- --
--------- ---------- --------- ---------
Comprehensive Income ............................ -- -- 20,509 --
--------- ---------- --------- ---------
Cash dividends on common stock-$0.32
per share ....................................... -- -- (7,890) --
Purchase of 97,700 shares for the treasury ........... -- -- -- --
Reissuance of 347 treasury shares under
non-employee directors stock plan ............... -- 4 -- (17)
Deferred compensation expense and other .............. -- (389) -- 1,221
Reissuance of 162,440 treasury shares for
employee incentive plans ........................ -- (888) -- 35
Issuance of 31,493 common shares for
Employee Stock Plan ............................. 7 560 -- --
--------- ---------- --------- ---------
Balance at June 30, 2002 .................................. $ 6,612 $ 73,332 $ 336,234 $ (868)
========= ========== ========= =========
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income (Loss) Equity
--------- ------------- -------------
(in thousands, except share data)
Balance at December 31, 2000 .............................. $ (69,385) $ 334 $ 308,497
--------- --------- ---------
Comprehensive Income:
Net Income before accounting change .................. -- -- 19,731
Cumulative effect of accounting change, net of tax ... -- (1,548) (1,323)
Current period SFAS No. 133 transactions, net of tax . -- (378) (378)
SFAS No. 133 reclassification to earnings, net of tax -- (663) (663)
--------- --------- ---------
Net cumulative effect of SFAS No. 133 ..................... -- (2,589) (2,364)
--------- --------- ---------
Unrealized holding gains on securities
available for sale arising during the period .... -- 6,535 6,535
Less reclassification adjustment for security
losses included in net income ................... -- 1,309 1,309
Income tax effect related to items of other
comprehensive income ............................ -- (3,088) (3,088)
--------- --------- ---------
Net unrealized gains on securities
available for sale ................................... -- 4,756 4,756
--------- --------- ---------
Comprehensive Income ............................ -- 2,167 22,123
--------- --------- ---------
Cash dividends on common stock-$0.32
per share ....................................... -- -- (8,287)
Purchase of 711,730 shares for the treasury .......... (14,387) -- (14,387)
Reissuance of 3,022 treasury shares under
non-employee directors stock plan ............... 60 -- --
Deferred compensation expense ........................ -- -- 297
Reissuance of 308,885 treasury shares for
employee incentive plans ........................ 6,292 -- 4,731
Issuance of 23,931 common shares for
Employee Stock Plan ............................. -- -- 410
--------- --------- ---------
Balance at June 30, 2001 .................................. $ (77,420) $ 2,501 $ 313,384
========= ========= =========
Balance at December 31, 2001 .............................. $(100,197) $ (301) $ 301,660
--------- --------- ---------
Comprehensive Income:
Net Income ........................................... -- -- 20,509
Current period SFAS No. 133 transactions, net of tax . -- 555 555
SFAS No. 133 reclassification to earnings, net of tax -- 1,744 1,744
--------- --------- ---------
Net cumulative effect of SFAS No. 133 ..................... -- 2,299 2,299
--------- --------- ---------
Unrealized holding gains on securities
available for sale arising during the period .... -- 21,283 21,283
Less reclassification adjustment for security
gains included in net income .................... -- (1,359) (1,359)
Income tax effect related to items of other
comprehensive income ............................ -- (7,826) (7,826)
--------- --------- ---------
Net unrealized gains on securities
available for sale ................................... -- 12,098 12,098
--------- --------- ---------
Comprehensive Income ............................ -- 14,397 34,906
--------- --------- ---------
Cash dividends on common stock-$0.32
per share ....................................... -- -- (7,890)
Purchase of 97,700 shares for the treasury ........... (2,173) -- (2,173)
Reissuance of 347 treasury shares under
non-employee directors stock plan ............... 13 -- --
Deferred compensation expense and other .............. -- -- 832
Reissuance of 162,440 treasury shares for
employee incentive plans ........................ 3,668 -- 2,815
Issuance of 31,493 common shares for
Employee Stock Plan ............................. -- -- 567
--------- --------- ---------
Balance at June 30, 2002 .................................. $ (98,689) $ 14,096 $ 330,717
========= ========= =========
See accompanying notes to consolidated financial statements.
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended
June 30,
(in thousands) 2002 2001
==================================================================================================================================
Cash Flows Net income ....................................................................... $ 20,509 $ 19,731
From Cumulative effect of accounting change, net of tax................................ - 225
Operating Gain on branch sales.............................................................. - (8,695)
Activities Adjustments to reconcile net income from operations to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment...................... 2,950 3,598
Amortization and accretion of securities, net................................ 3,043 1,027
Provision for loan and lease losses.......................................... 5,293 9,713
Amortization of intangible assets............................................ 71 1,085
Net securities (gains) losses................................................ (1,359) 1,529
Net gain on sale of loans held for sale...................................... (2,793) (4,158)
Deferred income tax (benefit) expense........................................ (362) 2,117
Originations of loans held for sale.......................................... (210,946) (279,076)
Proceeds from sales of loans held for sale................................... 284,018 264,830
Tax benefit on exercise of stock options .................................... (673) (635)
Other, net................................................................... (14,233) 1,235
----------------------------
Net cash provided by operating activities................................. $ 85,518 $ 12,526
----------------------------
Cash Flows Proceeds from maturities of securities available for sale......................... $ 172,682 $162,166
From Proceeds from sales of securities available for sale.............................. 38,737 114,926
Investing Purchase of securities available for sale......................................... (356,073) (180,666)
Activities Net decrease in federal funds sold and other short-term investments............... 300 27,000
Net (increase) decrease in interest earning deposits in banks..................... (8,200) 5,131
Proceeds from the sale of loans and leases........................................ - 2,991
Net (increase) decrease in loans and leases....................................... (194,890) 69,563
Investment in company owned life insurance........................................ (3,248) (40,000)
Premises and equipment expenditures, net.......................................... (2,692) (2,569)
Proceeds from the sale of foreclosed real estate.................................. 5,435 2,003
----------------------------
Net cash (used for) provided by investing activities...................... $(347,949) $160,545
----------------------------
Cash Flows Net increase in demand deposits and savings accounts.............................. $ 48,530 $ 20,769
From Net increase (decrease) in time deposits.......................................... 175,859 (137,978)
Financing Net increase (decrease) in short-term borrowings.................................. 22,632 (869)
Activities Proceeds from long-term borrowings................................................ - 46,700
Payment of long-term borrowings................................................... (478) (1,479)
Net payments to settle branch sales............................................... - (90,180)
Dividends paid.................................................................... (7,890) (8,287)
Issuance of common shares for employee stock plan................................. 567 410
Reissuance of treasury shares for employee benefit incentive plans................ 3,488 5,366
Purchase of shares for treasury .................................................. (2,173) (14,387)
----------------------------
Net cash provided by (used for) financing activities...................... $ 240,535 $(179,935)
----------------------------
Net change in cash and cash equivalents........................................... $ (21,896) $ (6,864)
Cash and cash equivalents:
Beginning of year............................................................... 134,244 118,807
----------------------------
End of period................................................................... $ 112,348 $111,943
=============================
Supplemental Cash payments for:
Disclosures of Interest paid to depositors..................................................... $ 44,078 $ 75,001
Cash Flow Interest paid on borrowings..................................................... 17,134 23,663
Information Income tax payment.............................................................. 5,070 5,934
Non-Cash Foreclosed real estate - acquired in settlement of loans.......................... 3,660 1,880
Investing and Transfer current portion of long-term borrowings to short-term borrowings......... 50,000 750
Financing Transfer of held to maturity securities to available for sale..................... - 10,635
Activities
For 2001, 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. These financial statements include 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. Certain prior year
amounts may be reclassified to conform with the current year presentation.
Operating results for the three and six month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2002. 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, 2001.
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. As required under SFAS No. 142, the Company discontinued the
amortization of goodwill with a 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. Other purchased intangible
assets with a net carrying value of $282,000 at January 1, 2002 continue to be
amortized over their remaining estimated useful life. The remaining goodwill
will be evaluated for impairment on an ongoing basis. The Company has completed
its evaluation of the effect including its assessment of whether there is an
indication that goodwill was impaired as of the date of adoption of SFAS No.
142. No transitional impairment charge is required.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). Under previous accounting
guidance, a company recognized a liability for an exit cost when it committed to
an exit plan. SFAS No. 146 will spread out the reporting of expenses related to
exit, disposal or restructuring activities initiated after December 31, 2002
because commitment to a plan to exit an activity, dispose of long-lived assets
or restructure will no longer be the determining factor of when to record a
liability for the anticipated costs. Instead, companies will record exit,
disposal or restructuring costs when they are incurred (obligated) and can be
measured at fair value, and they will subsequently adjust the recorded liability
for changes in estimated cash flows. Under SFAS No. 146, some of these costs
might qualify for immediate recognition, others might be spread over one or more
quarters, and still others might not be recorded until incurred in some much
later period. The future impact to the Company will be determined by any future
activities in these areas. The Company does not currently have plans in any of
these areas, but has occasionally conducted these types of activities in the
past.
NOTE 2 - SECURITIES
A summary of securities at June 30, 2002 and December 31, 2001 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
(in thousands)
At June 30, 2002
Securities Available for Sale:
U.S. Treasury ........................ $ 5,568 $ 72 $ -- $ 5,640
U.S. Government agencies ............. 4,962 44 (4) 5,002
Agency mortgage-backed securities .... 766,790 14,291 (227) 780,854
State and political subdivisions ..... 246,810 8,921 (105) 255,626
Corporate obligations and other ...... 202,087 1,965 (577) 203,475
--------------------------------------------------------
Total Securities Available for Sale $1,226,217 $ 25,293 $ (913) $1,250,597
========================================================
At December 31, 2001
Securities Available for Sale:
U.S. Treasury ........................ $ 18,984 $ 243 $ -- $ 19,227
U.S. Government agencies ............. 17,324 112 (9) 17,427
Agency mortgage-backed securities .... 710,485 3,528 (4,725) 709,288
State and political subdivisions ..... 256,886 6,004 (1,452) 261,438
Corporate obligations and other ...... 79,567 807 (52) 80,322
--------------------------------------------------------
Total Securities Available for Sale $1,083,246 $ 10,694 $ (6,238) $1,087,702
========================================================
Realized gross gains resulting from the sale of securities available for sale
were $625,000 and $141,000 for the three months ended June 30, 2002 and 2001,
respectively, and $1.4 million and $884,000 for the six months ended June 30,
2002 and 2001, respectively. Realized gross losses for the three and six month
periods ending June 30, 2002 were $0. Realized gross losses were $2.3 million
for the three and six month periods ended June 30, 2001. At June 30, 2002 and
2001, securities with a fair value of $954.9 million and $839.9 million,
respectively, were pledged to secure public deposits, securities under
agreements to repurchase and for other purposes required by law.
NOTE 3 - LOANS AND LEASES
The composition of the loan and lease portfolio at June 30, 2002 and December
31, 2001, was as follows:
June 30, 2002 December 31, 2001
--------------------------------
(in thousands)
Commercial, financial and agricultural . $ 742,894 $ 705,486
Real estate-construction ............... 105,658 100,349
Real estate-commercial ................. 798,681 724,936
Real estate-residential ................ 487,415 500,053
Installment and consumer ............... 532,244 443,106
Direct lease financing ................. 1,531 3,263
----------------------------
Gross loans and leases ............ $ 2,668,423 $ 2,477,193
Allowance for loan and lease losses (33,986) (33,940)
----------------------------
NET LOANS AND LEASES .............. $ 2,634,437 $ 2,443,253
============================
NOTE 4 - SALE OF RECEIVABLES
There were no sales of indirect automobiles into securitization transactions
during the second quarter of 2002. During the second quarter of 2001, the
Company sold $12.2 million of indirect automobile loans in securitization
transactions, recognizing pre-tax gains of $29,000. For the full years ended
December 31, 2001 and 2000, the Company sold $29.9 million and $100.3 million,
respectively, of indirect automobile loans into securitization transactions.
Upon securitization, the net carrying amount of the loans were removed from the
balance sheet, and certain retained residual interests were recorded. The
retained interests included rights to service the loans that were sold (the
"Servicing Rights"), the excess of interest collected on the loans over the
amount required to be paid to the investors and the securitization agent (the
"Interest Only Strip") and an interest in sales proceeds that were not remitted
by the securitization trust at the time of the initial sale of the loans to the
extent it exceeds projected credit losses (the "Credit Enhancement" or
"Overcollateralization Asset").
At the date of each securitization, these retained interests were allocated a
carrying value of $8.1 million. The Company receives monthly servicing fees
equal to 0.75 percent per annum of the outstanding beginning principal balance
of the loans serviced for the month and rights to future cash flows arising
after the investors in the securitization trust have received the returns for
which they have contracted. The investors and the securitization trust have no
other recourse to the Company's other assets for failure of debtors to pay when
due. The Company's retained interests are subordinate to investor's interests.
The value of the Interest Only Strip is subject to prepayment risk and the value
of the Overcollateralization Asset is subject to credit risk on the transferred
auto loans.
Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of June 30, 2002 including the sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows:
As Of June 30, 2002
Loans Sold Loans Sold 10% Adverse 20% Adverse
During 2001 During 2000 Actual Change Change
-----------------------------------------------------------------------
($ in thousands)
Prepayment speed assumptions
Prepayment speed.............................. 1.5% 1.5% 1.7% 1.9% 2.1%
Weighted average life (in months)............. 22.0 22.4 16.4 15.9 15.4
Fair value of retained interests.............. $2,239 $6,070 $6,583 $6,533 $6,483
Change in fair value.......................... N/A N/A N/A $(50) $(100)
Expected credit loss assumptions
Expected credit losses (loss to liquidation).. 1.3% - 1.7% 1.3% - 1.7% 1.6% 1.8% 2.0%
Fair value of retained interests.............. $2,239 $6,070 $6,583 $6,528 $6,423
Change in fair value.......................... N/A N/A N/A $(55) $(160)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual)..... 7.4% - 7.5% 8.3% - 9.1% 5.6% 6.2% 6.8%
Fair value of retained interests.............. $2,239 $6,070 $6,583 $6,489 $6,396
Change in fair value.......................... N/A N/A N/A $(94) $(187)
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 $603,000 and $12.2 million in the second quarter
of 2002 and 2001, respectively. The following table summarizes the various cash
flows received from and paid to the securitization trust:
Proceeds From Servicing Fees Other
Cash flows received from (paid to) trust Securitizations Collected Cash Flows Fees Paid
- ---------------------------------------- -----------------------------------------------------------
(in thousands)
Second quarter 2002 $ - $ 127 $ 476 $ -
Second quarter 2001 $ 11,624 $ 200 $ 407 $ (1)
Other retained interests represents net cash flows received from retained
interests by the transferor other than servicing fees. Other cash flows include,
for example, gross cash flows from interest-only strips net of reductions in
such cash flows for loan defaults.
The following table presents quantitative information about delinquencies (loans
30 or more 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.
Total Principal Principal Amount of
Amount of Loans Delinquent Loans Net Credit
---------------------- -------------------- Losses
As of June 30 During the Year
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(in thousands)
Held in Portfolio $426,851 $274,341 $ 5,363 $ 6,328 $ 1,281 $ 1,195
Securitized ..... 57,322 99,294 1,580 1,664 463 380
Held for Sale ... -- 7,628 -- -- -- --
-------- -------- -------- -------- -------- --------
Total ......... $484,173 $381,263 $ 6,943 $ 7,992 $ 1,744 $ 1,575
======== ======== ======== ======== ======== ========
Actual and projected static pool credit losses, as a percentage
of indirect auto loans securitized are 1.03%, 1.50% and 1.67% for the quarters
ended June 30, 2002, 2003 and 2004, 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 - GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets", with respect to
business combinations that were completed prior to July 1, 2001. These
statements require that the Company evaluate its existing intangible assets and
goodwill classifications. Goodwill and intangible assets with indefinite useful
lives may no longer be amortized, but instead must be tested for impairment at
least annually. The useful life and residual values of all other intangibles
must also be reassessed. As of the date of adoption, the Company had unamortized
goodwill in the amount of $15.6 million and unamortized identifiable intangible
assets (Core Deposit Intangibles) in the amount of $282,000, which are subject
to the transition provisions of SFAS Nos. 141 and 142.
The Company's intangible asset values by segment at June 30, 2002 are as
follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
---------------------------------------------------
(in thousands)
Amortized Intangible Assets
Core Deposits - Retail Banking........... $683 $535 $148
- Commercial Banking............ 293 230 63
---------------------------------------------------
Total Amortized Intangible Assets........... $976 $765 $211
---------------------------------------------------
Unamortized Intangible Assets
Goodwill - Trust and Asset Management.... $9,622
- Retail Banking................ 3,614
- Commercial Banking............ 2,409
----------
Total Unamortized Intangible Assets......... $15,645
==========
Total Intangibles (net)..................... $15,856
==========
The current and estimated amortization expense by segment is as follows:
Retail Commercial
Banking Banking Total
---------------------------------
(in thousands)
Aggregate Amortization Expense
For Quarter Ended 3/31/02.............. $24 $11 $35
For Quarter Ended 6/30/02.............. 25 11 36
---------------------------------
For Six Months Ended 6/30/02........... $49 $22 $71
----------
Estimated Amortization Expense
For Remainder of Year Ending 12/31/02.. $50 $20 $70
For Year Ending 12/31/03............... 99 42 141
----------
Total estimated amortization expense $211
==========
There have been no changes in the carrying amount of goodwill for the quarter
ended June 30, 2002. The Company has completed its transitional goodwill
impairment evaluation. Fair value exceeds carrying value for all reporting units
that have allocated goodwill. Thus, no transitional impairment loss will be
recognized and no cumulative effect of a change in accounting principle will be
recorded.
SFAS No. 142 requires disclosure of what reported income before extraordinary
items and net income would have been in all periods presented exclusive of
amortization expense recognized in those periods related to goodwill, intangible
assets that will no longer be amortized, any deferred credit related to an
excess over cost, equity method goodwill, and changes in amortization periods
for intangible assets that will continue to be amortized. The table below
reconciles net income as reported to the how the prior period would have been
reported had SFAS No. 142 been in effect.
For the Quarter For the Year
Ended June 30, Ended June 30,
2002 2001 2002 2001
-----------------------------------------
(in thousands, except per share amounts)
Net income as reported ............ $10,583 $ 9,762 $20,509 $19,956
Add back: Goodwill amortization ... N/A 509 N/A 1,035
Adjust: Core Deposit amortization
(change in useful life) .... N/A (12) N/A (24)
-----------------------------------------
Adjusted net income ............... $10,583 $10,259 $20,509 $20,967
=========================================
Basic earnings per share as
reported .................... $ .43 $ .38 $ .83 $ .77
Add back: Goodwill amortization ... N/A .02 N/A .04
Adjust: Core Deposit amortization
(change in useful life) .... N/A -- N/A --
-----------------------------------------
Adjusted basic earnings per share . $ .43 $ .40 $ .83 $ .81
=========================================
Diluted earnings per share as
reported ................... $ .42 $ .38 $ .82 $ .76
Add back: Goodwill amortization ... N/A .02 N/A .04
Adjust: Core Deposit amortization
(change in useful life) .... N/A -- N/A --
-----------------------------------------
Adjusted diluted earnings per share $ .42 $ .40 $ .82 $ .80
=========================================
The Company's Originated Mortgage Servicing Right asset ("OMSR") is subject to
disclosure under SFAS No. 142, but the assets are specifically exempted from the
standard's accounting requirements. The OMSR asset values, which are all
included in the Mortgage Banking Segment, at June 30, 2002 are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-----------------------------------------------
(in thousands)
Capitalized OMSR................ $19,881 $9,877 $10,004
Less: OMSR Valuation Allowance.. (1,503)
---------
Net OMSR........................ $8,501
=========
The current and estimated OMSR amortization expense on the Company's OMSR asset
are as follows:
Mortgage Banking
----------------
Aggregate Amortization Expense
For Quarter Ended 3/31/02............. $763
For Quarter Ended 6/30/02............. 557
--------
For Six Months Ended 6/30/02.......... $1,320
========
Estimated Amortization Expense
For Remainder of Year Ending 12/31/02.............. $1,382
For Year Ending 12/31/03........................... 2,088
For Year Ending 12/31/04........................... 1,582
For Year Ending 12/31/05........................... 1,199
For Year Ending 12/31/06........................... 909
For Year Ending 12/31/07........................... 689
Thereafter......................................... 2,155
The weighted-average amortization period for OMSR retained during the second
quarter of 2002 was 14.8 years.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings at June 30, 2002 and December 31, 2001 consisted of the
following:
June 30, 2002 December 31, 2001
---------------------------------
(in thousands)
Securities sold under agreements to repurchase $422,225 $388,533
Federal Home Loan Bank borrowings ............ 60,072 10,821
Federal funds purchased ...................... 49,050 33,075
U.S. Treasury tax and loan note accounts ..... 12,000 12,000
Commercial paper borrowings .................. 5,001 31,287
--------------------------
Total short-term borrowings ............... $548,348 $475,716
==========================
NOTE 7 - LONG-TERM BORROWINGS
Long-term borrowings at June 30, 2002 and December 31, 2001 consisted of the
following:
June 30, 2002 December 31, 2001
---------------------------------
(in thousands)
Federal Home Loan Bank borrowings ............ $192,752 $242,786
Capital Trust preferred securities ........... 25,000 25,000
Other long-term borrowings ................... -- 444
--------------------------
Total long-term borrowings $217,752 $268,230
==========================
AMCORE Bank, N.A. periodically borrows additional funds from the Federal Home
Loan Bank (FHLB) in connection with the purchase of mortgage-backed securities
and the financing of 1-4 family real estate loans. Certain FHLB borrowings have
prepayment penalties and call features associated with them. The average
maturity of these borrowings at June 30, 2002 is 4.59 years, with a weighted
average borrowing rate of 5.15%.
Reductions of FHLB borrowings with call features, assuming they are called at
the earliest call date, are as follows at June 30, 2002:
Total
---------------
(in thousands)
2002............................................. $ 141,000
2003............................................. 29,000
---------------
Total callable FHLB borrowings...... $ 170,000
===============
Under the current interest rate environment it is unlikely that the advances
will be called at this time. As interest rates rise, the likelihood of a call
increases.
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 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 resulted in an after tax
extraordinary charge of $204,000, or $0.01 per diluted share. The charge was
attributable to unamortized pro rata issuance costs and broker fees.
Scheduled reductions of long-term borrowings are as follows:
Total
---------------
(in thousands)
2003............................................. $ 32,987
2004............................................. 25,042
2005............................................. 15,684
2006............................................. 11,711
2007............................................. 312
Thereafter....................................... 132,016
---------------
Total long-term borrowings............... $ 217,752
===============
NOTE 8 - EARNINGS PER SHARE
For the Three Months For the Six Months
Earnings per share calculations are as follows: Ended June 30, Ended June 30,
2002 2001 2002 2001
---------------------------------------------
(in thousands, except per share data)
Net Income ........................................................ $10,583 $ 9,762 $20,509 $19,956
Basic earnings per share:
Average basic shares outstanding .......................... 24,686 25,740 24,648 25,898
---------------------------------------------
Earnings per share ........................................ $ 0.43 $ 0.38 $ 0.83 $ 0.77
=============================================
Diluted earnings per share:
Weighted average shares outstanding ....................... 24,686 25,740 24,648 25,898
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 ............... 238 227 240 240
Contingently issuable shares .............................. 2 -- 2 --
---------------------------------------------
Average diluted shares outstanding ........................ 24,926 25,967 24,890 26,138
=============================================
Diluted Earnings per share ................................ $ 0.42 $ 0.38 $ 0.82 $ 0.76
=============================================
NOTE 9 - SEGMENT INFORMATION
AMCORE's internal reporting and planning process focuses on four primary lines
of business or (Segment(s)): Commercial Banking, Retail Banking, Trust and Asset
Management, and Mortgage Banking. The financial information presented was
derived from the Company's internal profitability reporting system that is used
by management to monitor and manage the financial performance of the Company.
This information is based on internal management accounting policies which have
been developed to reflect the underlying economics of the Segments and, to the
extent practicable, to portray each Segment as if it operated on a stand-alone
basis. Thus, each Segment, in addition to its direct revenues, expenses, assets
and liabilities, includes an appropriate allocation of shared support function
expenses. The Commercial and Retail Banking Segments also include fund transfer
adjustments to appropriately reflect the cost of funds on loans made and funding
credits on deposits generated. Apart from these adjustments, the accounting
policies used are similar to those described in Note 1 of the Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2001.
Since there are no comprehensive authorities for management accounting
equivalent to accounting principles generally accepted in the United States of
America, the information presented is not necessarily comparable with similar
information from other financial institutions. In addition, methodologies used
to measure, assign and allocate certain items may change from time-to-time to
reflect, among other things, accounting refinements, changes in risk profiles,
changes in customers or product lines, and changes in management structure. The
presentation of Segments was changed in the first quarter of 2002 to reflect the
Company's shift to a line of business structure. The primary impact of this
change was to segregate the previous Banking Segment into its Retail and
Commercial components. However, due to allocation methodologies for shared
support costs, funds transfer adjustments and the exclusion of investment and
treasuries activities from the Retail and Commercial Banking Segments, the sum
of these two "new" Segments will not equal the total of the "old" Banking
Segment presentation. Prior period Segment results have been restated to reflect
the new line of business structure. The Trust and Asset Management Segment and
the Mortgage Banking Segment were not affected by the shift to a line of
business structure and have not been restated.
Total Segment results differ from consolidated results primarily due to
intersegment elimination, certain corporate administration costs, items not
otherwise allocated in the management accounting process and treasury and
investment activities. The impact of these items is aggregated to reconcile the
amounts presented for the Segments to the consolidated results and are included
in the "Other" column. For ease of comparison, the discussion of each Segment,
including the Segment profit percentage, focuses on earnings before the
Accounting Change (the "Operating Profit" or "Operating Loss"). In addition, due
to its unusual and non-recurring nature, the Branch Gain has not been allocated
to either the Commercial or Retail segments. It is included in the Other column.
For the three months ended June 30, 2002
----------------------- Operating Segments ------------------------
Commercial Retail Trust and Asset Mortgage
Banking Banking Management Banking
-------------------------------------------------------------------
(dollars in thousands)
Net interest income ............................... $ 15,026 $ 13,238 $ 33 $ 847
Non-interest income ............................... 1,655 3,647 6,861 1,103
-------------------------------------------------------------------
Total Revenue ................................ 16,681 16,885 6,894 1,950
Provision for loan and lease losses ............... 1,339 1,314 -- --
Depreciation and amortization ..................... 150 562 87 8
Other non-interest expense ........................ 6,721 10,368 5,260 2,236
-------------------------------------------------------------------
Pretax earnings (loss) ....................... 8,471 4,641 1,547 (294)
Income taxes (benefits) ........................... 2,905 1,713 620 (114)
-------------------------------------------------------------------
Earnings (Loss) .............................. $ 5,566 $ 2,928 $ 927 $ (180)
===================================================================
Segment profit percentage ......................... 60.2% 31.7% 10.0% -1.9%
===================================================================
For the three months ended June 30, 2001
Net interest income ............................... $ 13,436 $ 12,116 $ 50 $ 1,003
Non-interest income ............................... 1,515 3,576 7,240 2,094
-------------------------------------------------------------------
Total Revenue ................................ 14,951 15,692 7,290 3,097
Provision for loan and lease losses ............... 4,544 3,013 -- --
Depreciation and amortization ..................... 259 806 292 11
Other non-interest expense ........................ 6,230 10,478 5,260 2,267
-------------------------------------------------------------------
Pretax earnings .............................. 3,918 1,395 1,738 819
Income taxes (benefits) ........................... 1,191 540 760 327
-------------------------------------------------------------------
Earnings before accounting change ............ $ 2,727 $ 855 $ 978 $ 492
===================================================================
Segment profit percentage ......................... 54.0% 16.9% 19.4% 9.7%
===================================================================
For the six months ended June 30, 2002
----------------------- Operating Segments ------------------------
Commercial Retail Trust and Asset Mortgage
Banking Banking Management Banking
-------------------------------------------------------------------
(dollars in thousands)
Net interest income ............................... $ 28,949 $ 25,723 $ 67 $ 1,917
Non-interest income ............................... 3,415 6,798 14,083 3,314
-------------------------------------------------------------------
Total Revenue ................................ 32,364 32,521 14,150 5,231
Provision for loan and lease losses ............... 2,667 2,626 -- --
Depreciation and amortization ..................... 281 1,125 170 15
Other non-interest expense ........................ 13,561 20,627 10,805 4,604
-------------------------------------------------------------------
Pretax earnings (loss) ....................... 15,855 8,143 3,175 612
Income taxes (benefits) ........................... 5,398 2,970 1,277 248
-------------------------------------------------------------------
Earnings ..................................... $ 10,457 $ 5,173 $ 1,898 $ 364
===================================================================
Segment profit percentage ......................... 58.5% 28.9% 10.6% 2.0%
===================================================================
Assets ........................................... $ 1,657,262 $ 1,069,148 $ 21,737 $ 42,059
===================================================================
For the six months ended June 30, 2001
Net interest income ............................... $ 26,514 $ 25,286 $ 126 $ 1,826
Non-interest income ............................... 2,895 7,150 14,438 3,984
-------------------------------------------------------------------
Total Revenue ................................ 29,409 32,436 14,564 5,810
Provision for loan and lease losses ............... 5,466 4,247 -- --
Depreciation and amortization ..................... 521 1,640 608 24
Other non-interest expense ........................ 12,243 21,399 10,657 4,113
-------------------------------------------------------------------
Pretax earnings .............................. 11,179 5,150 3,299 1,673
Income taxes (benefits) ........................... 3,620 1,938 1,472 667
-------------------------------------------------------------------
Earnings before accounting change ............ $ 7,559 $ 3,212 $ 1,827 $ 1,006
Cumulative effect of accounting change (net of tax) -- -- -- 16
-------------------------------------------------------------------
Earnings ..................................... $ 7,559 $ 3,212 $ 1,827 $ 1,022
===================================================================
Segment profit percentage ......................... 55.6% 23.6% 13.4% 7.4%
===================================================================
Assets ........................................... $ 1,595,846 $ 1,078,826 $ 19,817 $ 47,848
===================================================================
For the three months ended June 30, 2002
Other Consolidated
-----------------------------
(dollars in thousands)
Net interest income ............................... $ 3,049 $ 32,193
Non-interest income ............................... 2,748 16,014
-----------------------------
Total Revenue ................................ 5,797 48,207
Provision for loan and lease losses ............... -- 2,653
Depreciation and amortization ..................... 719 1,526
Other non-interest expense ........................ 5,382 29,967
-----------------------------
Pretax earnings (loss) ....................... (304) 14,061
Income taxes (benefits) ........................... (1,646) 3,478
-----------------------------
Earnings (Loss) .............................. $ 1,342 $ 10,583
=============================
Segment profit percentage ......................... N/M 100.0%
=============================
For the three months ended June 30, 2001
Net interest income ............................... $ 2,630 $ 29,235
Non-interest income ............................... 8,035 22,460
-----------------------------
Total Revenue ................................ 10,665 51,695
Provision for loan and lease losses ............... -- 7,557
Depreciation and amortization ..................... 805 2,173
Other non-interest expense ........................ 4,859 29,094
-----------------------------
Pretax earnings .............................. 5,001 12,871
Income taxes (benefits) ........................... 291 3,109
-----------------------------
Earnings before accounting change ............ $ 4,710 $ 9,762
=============================
Segment profit percentage ......................... N/M 100.0%
=============================
For the six months ended June 30, 2002
Other Consolidated
-----------------------------
(dollars in thousands)
Net interest income ............................... $ 5,716 $ 62,372
Non-interest income ............................... 5,512 33,122
-----------------------------
Total Revenue ................................ 11,228 95,494
Provision for loan and lease losses ............... -- 5,293
Depreciation and amortization ..................... 1,433 3,024
Other non-interest expense ........................ 10,303 59,900
-----------------------------
Pretax earnings (loss) ....................... (508) 27,277
Income taxes (benefits) ........................... (3,125) 6,768
-----------------------------
Earnings ..................................... $ 2,617 $ 20,509
=============================
Segment profit percentage ......................... N/M 100.0%
=============================
Assets ........................................... $ 1,496,720 $ 4,286,926
=============================
For the six months ended June 30, 2001
Net interest income ............................... $ 4,709 $ 58,461
Non-interest income ............................... 10,286 38,753
-----------------------------
Total Revenue ................................ 14,995 97,214
Provision for loan and lease losses ............... -- 9,713
Depreciation and amortization ..................... 1,680 4,473
Other non-interest expense ........................ 8,304 56,716
-----------------------------
Pretax earnings .............................. 5,011 26,312
Income taxes (benefits) ........................... (1,116) 6,581
-----------------------------
Earnings before accounting change ............ $ 6,127 $ 19,731
Cumulative effect of accounting change (net of tax) 209 225
-----------------------------
Earnings ..................................... $ 6,336 $ 19,956
=============================
Segment profit percentage ......................... N/M 100.0%
=============================
Assets ........................................... $ 1,288,890 $ 4,031,227
=============================
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 certain financial instruments called derivatives to help manage
(Hedge) its risk or exposure to changes in interest rates and in conjunction
with its mortgage banking operations. The derivatives used most often are
interest rate swaps, caps, collars and floors (collectively, "Interest Rate
Derivatives"), mortgage loan commitments and forward contracts. Interest Rate
Derivatives are contracts with a third party (the "Counter-party") to exchange
interest payment streams based upon an assumed principal amount (the "Notional
Principal Amount"). The Notional Principal Amount is not advanced from the
Counter-party. It is used only as a reference point to calculate the exchange of
interest payment streams. 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 November of 2004.
Interest rate swaps are most commonly used by the Company to convert assets and
liabilities with variable-rate cash flows to assets and liabilities with
fixed-rate cash flows (the "Hedged Items"). Under this arrangement, the Company
receives payments from or makes payments to the Counter-party at a specified
floating-rate index that is applied to the Notional Principal Amount. This
periodic receipt or payment essentially offsets floating-rate interest payments
that the Company makes to its depositors or lenders or receives from its loan
customers. In exchange for the receipts from or payments to the Counter-party,
the Company makes payments to or receives a payment from the Counter-party at a
specified fixed-rate that is applied to the Notional Principal Amount. Thus,
what was a floating rate obligation or a floating rate asset before entering
into the derivative arrangement is transformed into a fixed rate obligation or
asset. These types of hedges are considered cash flow hedges. The Company also
uses interest rate swaps to convert fixed-rate liabilities to floating-rate
liabilities. This is typically done when a fixed rate liability has been
incurred to fund a variable-rate loan or investment. The interest rate swap has
the effect of matching the interest rate risk on the funding with the interest
rate risk on the loans or investment. This type of hedge is considered a fair
value hedge.
Interest rate caps and collars are derivative instruments that are variations of
an interest rate swap. They also involve an exchange of interest payment streams
with a Counter-party based upon a Notional Principal Amount. In the case of an
interest rate cap, the exchange of income streams does not take effect unless
the specified floating-rate index rises above a pre-determined level. In an
interest rate cap, the Company retains the risk of rising interest rates up to
the pre-determined level, while benefiting from declines in interest rates. In
the case of an interest rate collar, the exchange of income streams does not
take effect unless the specified floating-rate index rises above or below
pre-determined levels. In an interest rate collar, the Company retains the risk
and benefits of changes in interest rates within the pre-determined levels.
These hedges are also cash flow hedges. The Company has also used interest rate
floors to manage its exposure to declining mortgage interest rates of its
mortgage servicing rights asset. These floors were terminated during 2001. The
net amount payable or receivable from each Interest Rate Derivative contract is
recorded as an adjustment to interest income or interest expense.
Also considered derivatives under SFAS No. 133 are 1-4 family residential
mortgage loan commitments (the "Commitments") and forward mortgage loan sales
(the "Forward Contracts") to the secondary market (collectively "Mortgage Loan
Derivatives"). While historically Mortgage Loan Derivatives were accounted for
off-balance sheet, they are now reported at fair value on the balance sheet
pursuant to SFAS No. 133. Changes in the fair value of the Mortgage Loan
Derivatives are included in other income or expense as they occur. However,
since the Company's Forward Contracts qualify and have been designated as fair
value Hedges of its portfolio of loans held for sale (the "Warehouse Loans") as
well a Hedge of its Commitments, the Warehouse Loans are also adjusted to fair
value. The change in fair value of Warehouse Loans is recorded in other income
or expense as they occur. To the extent that the Company's Forward Contracts are
highly effective, the changes in the fair value of the Forward Contracts will
largely offset changes in the fair value of the Commitments and Warehouse Loans.
Under SFAS No. 133, all derivatives are recognized at fair value in the
Consolidated Balance Sheets. Changes in fair value for derivatives that are not
hedges are 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 are either 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. To the extent that fair value hedges are highly
effective, changes in the fair value of the derivatives will largely be offset
by changes in the fair values of the hedged items. 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. 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. All derivatives, with the
exception of the interest rate floors and the deposit product tied to the S&P
500 index, qualify and have been designated as hedges pursuant to SFAS No. 133.
The Company implemented SFAS No. 133 on January 1, 2001, and, as such, the
impact of the transition to this standard on the Company's earnings and
financial position was dependent on the composition of the hedging portfolio at
that date. The after-tax transition adjustment due to the adoption of FAS No.
133 resulted in an increase in consolidated assets of $2.1 million, an increase
in consolidated liabilities of $3.4 million, a reduction in OCI of $1.5 million,
and an increase in net income of $225,000. The increase in net income is mostly
attributable to the $353,000 favorable Time Value component of the market value
of the cash flow hedges. As part of the adoption of this standard, $10.7 million
of held to maturity securities were reclassified to available for sale resulting
in an unrealized loss of $15,000 recorded in OCI.
The Income Statement for the three months ended June 30, 2001 included the
following derivative related activity in other non-interest income: $11,000
income due to the increase in the Time Value component of the market value of
cash flow hedges, $78,000 loss related to the ineffective portion of the cash
flow hedges, $144,000 loss related to Mortgage Loan Derivatives, and $2,000
income related to the S & P 500 embedded derivative. These items, net of taxes
of $81,000, totaled a $128,000 loss recorded for the quarter ended June 30,
2001.
In addition to the transition adjustment, the Income Statement for the six
months ended June 30, 2001 included the following derivative related activity in
other non-interest income: $285,000 loss due to the decrease in the Time Value
component of the market value of cash flow hedges, $38,000 income related to the
ineffective portion of the cash flow hedges, $40,000 loss related to Mortgage
Loan Derivatives, and $4,000 income related to the S & P 500 embedded
derivative. These items, net of taxes of $111,000, totaled a $172,000 loss
recorded for the six months ended June 30, 2001.
The Income Statement for the three months ended June 30, 2002 included the
following derivative related activity in other non-interest income: $14,000 loss
due to the decrease in the Time Value component of the market value of cash flow
hedges, $5,000 income related to the ineffective portion of the cash flow
hedges, $187,000 income related to Mortgage Loan Derivatives, and $1,000 income
related to the S & P 500 embedded derivative. These items, net of taxes of
$70,000, totaled income of $109,000 recorded for the quarter ended June 30,
2002.
The Income Statement for the six months ended June 30, 2002 included the
following derivative related activity in other non-interest income: $37,000 loss
due to the decrease in the Time Value component of the market value of cash flow
hedges, $18,000 income related to the ineffective portion of the cash flow
hedges, $124,000 income related to Mortgage Loan Derivatives, and no income or
loss related to the S & P 500 embedded
derivative. These items, net of taxes of $41,000, totaled $64,000 in income
recorded for the six months ended June 30, 2002.
NOTE 11 - CONTINGENCIES
Legal Contingency
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.
Subsequent to the end of the second quarter of 2002, the Company reached a
negotiated agreement with its insurance carrier and Plaintiffs' counsel to
settle the lawsuit and other potential claims outlined below. The Company
expects to have all settlement agreements signed and lawsuits dismissed prior to
the end of the third quarter. The settlement agreement will be recorded in the
third quarter of 2002 and will have an immaterial effect on the Company's
consolidated financial condition and consolidated results of operations.
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 denied the plaintiffs' allegations and removed the case
to the United States District Court for the Northern District of Mississippi.
Plaintiff's filed a motion to remand the case back to state court.
During the second quarter of 2001, the Company made a settlement offer to
Plaintiffs' 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. On April 26, 2002 the Mississippi federal district court entered
an order which referred the case to the federal bankruptcy court for a decision
on pursuing the claim as an asset in one of the plaintiff's bankruptcy
proceedings, the case was then to be referred back to the federal court for all
further proceedings as requested by the Company. Plaintiffs' motion to remand to
state court was denied. Plaintiffs' attorneys rejected the Company's settlement
offer. In addition, they notified the Company's counsel that they had identified
20 more individuals with potential claims similar to those of the named
Plaintiffs'. No lawsuits were ever filed on their behalf. During the second
quarter of 2002, the Company's counsel submitted a new offer to Plaintiffs'
counsel to resolve all claims and the Company adjusted its accrual to reflect
the offer.
Termination Benefit Contingency
A Separation, Release and Consulting Agreement (the "Separation Agreement"), was
executed June 20, 2002 between AMCORE Financial, Inc. and Robert J. Meuleman
regarding his retirement from the Company effective December 31, 2002. The net
present value of early retirement obligations, including certain enhanced post
retirement benefits and continued participation in the Company's Long-Term
Incentive Plan, pursuant to the Separation Agreement are estimated at $784,000,
net of tax (the "Retirement Obligation"). No amount was accrued during the
second quarter of 2002. Certain amounts of the Retirement Obligation will be
accrued ratably over the third and fourth quarters as earned and certain amounts
will be accrued on the date of termination expected to be December 31, 2002.
Amounts due ($5,000 per month for up to 60 months) for consulting services
subsequent to retirement date will be expensed as earned.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion highlights the significant factors affecting AMCORE
Financial, Inc. and Subsidiaries ("AMCORE" or the "Company") Consolidated
Balance Sheets as of June 30, 2002 compared to December 31, 2001 and the results
of operations for the three and six months ended June 30, 2002 compared to the
same periods in 2001. The discussion should be read in conjunction with the
Consolidated Financial Statements, accompanying notes to the Consolidated
Financial Statements, and selected financial data appearing elsewhere within
this report.
FACTORS INFLUENCING FORWARD-LOOKING STATEMENTS
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 or 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) ability to attract and retain 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; (XVI)
changes in assumptions or conditions affecting the application of "critical
accounting policies"; (XVII) inability of third-party vendors to perform
critical services to the company or its customers; and (XVIII) the economic
impact of the terrorist attacks on the U.S. on September 11, 2001 and the U.S.
response to those attacks.
OVERVIEW OF OPERATIONS
AMCORE reported net income of $10.6 million for the three months ended June 30,
2002. This compares to $9.8 million for the same period in 2001, representing an
increase of $821,000 or 8.4%. Net income for the six months ended June 30, 2002
was $20.5 million, an increase of $553,000 or 2.8% from the $20.0 million
reported for the same period in 2001.
Diluted earnings per share were $0.42 and $0.82 for the three and six months
ended June 30, 2002, respectively, compared to $0.38 and $0.76 for the same
periods in 2001. This represents an increase of 10.5% and 7.9% for the three and
six month periods, respectively. The percentage increases in earnings on a
diluted per share basis compares favorably to the respective increases on a
dollar basis, and reflects
the accretive impact to per share earnings of AMCORE's previously announced
stock repurchase programs. For the three and six month periods, average diluted
shares outstanding declined 1.0 million and 1.2 million, respectively.
AMCORE's annualized return on average equity for the second quarter and
year-to-date for 2002 was 13.29% and 13.16%, respectively. Annualized return on
average equity for the comparable periods in 2001 was 12.50% and 12.74%. The
annualized return on average assets was 1.01% for both the second quarter and
year-to-date of 2002. This compares to 0.96% for both the second quarter and
year-to-date in 2001.
Branch Activity
During 2001, the Company launched a strategic initiative to reallocate capital
to higher growth Midwestern markets, particularly along the I-90 growth corridor
between Chicago's northwest suburbs and Madison, Wisconsin (the "Branch
Expansion"). During the second and third quarters of 2001, the Company's banking
subsidiary (the "BANK") sold seven branches (the "Branch Sales") and during the
first quarter of 2002 closed one additional branch. For the seven Branch Sales,
$65.1 million in loans, $170.8 million in deposits and $1.4 million in premises
and equipment were transferred to the respective buyers resulting in net
after-tax gains of $5.2 million and $1.1 million in the second and third
quarters of 2001, respectively (the "Branch Gains"). Loans and deposits for the
closed branch were transferred to nearby BANK branches.
Branch Expansion activities in 2001 included two new offices: one on Rockford's
fast-growing east side and one in Geneva, Illinois, an affluent Chicago suburb.
In January of 2002, a commercial loan facility servicing small-to-medium size
businesses was opened in the Chicago suburb of Schaumburg, Illinois while a
full-service facility was opened along the beltway in Madison, Wisconsin.
Combined, these four branches have generated $100.7 million in loans and $41.0
million in deposits since they were opened. Expansion of the Schaumburg office
to a full-service branch is planned for 2003. On August 5, 2002, the BANK opened
its fourth office in Madison, Wisconsin. Located a few blocks from I-90 on
Madison's east side, the office initially will serve primarily commercial and
mortgage customers. Over 1,700 businesses are located within a five-mile radius.
Construction is in process on branches in two additional Chicago suburbs: St.
Charles, Illinois, located between the Geneva and Elgin markets, and McHenry,
Illinois, located in one of the fastest growing counties in Illinois. Both are
full-service sites with over 1,800 and 1,400 businesses, respectively, located
within a three-mile radius. Each branch is expected to add to the BANK's
presence in the Fox River Valley and further improve the BANK's strategic
position along the I-90 corridor. The St. Charles branch is on schedule and is
expected to open this fall. The opening of the McHenry branch is scheduled for
December 2002. The Company continues to look at additional sites in the Chicago
suburbs as well as Madison and expects to continue its branch expansion efforts
along the I-90 corridor.
Organizational Changes
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 June 21, 2002, AMCORE announced that Kenneth E. Edge had been named President
and Chief Executive Officer, effective July 1, 2002. Mr. Edge, who most recently
served as President and Chief Operating Officer, replaced Robert J. Meuleman
following Meuleman's personal decision to retire early and devote more time to
his family. Mr. Meuleman will continue in his role as Chairman until his
retirement at the end of 2002. In connection with these changes, and in an
effort to gain efficiencies, the
position of Chief Operating Officer was not replaced. The net present value of
early retirement obligations, pursuant to Meuleman's Separation, Release and
Consulting Agreement, including certain enhanced post retirement benefits and
continued participation in the Company's Long-Term Incentive Plan (the
"Separation Agreement"), are estimated at $784,000, net of tax (the "Retirement
Obligation"). No amount was accrued during the second quarter of 2002. Certain
amounts of the Retirement Obligation will be accrued ratably over the third and
fourth quarters as earned and certain amounts will be accrued on the date of
termination expected to be December 31, 2002. Amounts due ($5,000 per month up
to 60 months) for consulting services subsequent to retirement date will be
expensed as earned. See also Note 11 of the Notes to Consolidated Financial
Statements.
Loan Securitizations and Securities Sales
During the first and second quarters of 2001, the BANK sold $29.9 million of
indirect automobile loans in securitization transactions (the "Auto Loan
Sales"). Upon securitization, the BANK retained Servicing Rights, an Interest
Only Strip and an Overcollateralization Asset. The Company's retained interests
are subordinate to investors' interests. The value of the Company's Interest
Only Strip is subject to prepayment risk and the value of the
Overcollateralization Asset is subject to credit risk on the transferred auto
loans. The investors and the securitization trust have no other recourse to the
Company's other assets for failure of debtors to pay when due. See Note 4 of the
Notes to Consolidated Financial Statements.
During the second and third quarters of 2001, AMCORE restructured its investment
portfolio (the "Security Portfolio Restructuring"), a strategy designed to
reduce interest rate risk. The restructuring plan focused on the disposal of
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 was intended to improve the stability and quality of future
earnings and values.
Accounting Changes
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138. This statement outlines accounting and
reporting standards for derivative instruments and hedging activities. Net
income for 2001 includes a cumulative effect of $225,000 net of tax, or $0.01
per diluted share, attributable to the adoption of the new accounting standard
(the "Accounting Change"). See Note 10 of the Notes to Consolidated Financial
Statements.
On January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets", with respect to
business combinations that were completed prior to July 1, 2001. These
statements require that the Company evaluate its existing intangible assets and
goodwill classifications. Goodwill and intangible assets with indefinite useful
lives may no longer be amortized, but instead must be tested for impairment at
least annually. The useful life and residual values of all other intangibles
must also be reassessed. As of the date of adoption, the Company had unamortized
goodwill in the amount of $15.6 million and unamortized identifiable intangible
assets (the "Core Deposit Intangibles") in the amount of $282,000, which are
subject to the transition provisions of SFAS Nos. 141 and 142. The Company had
no other intangible assets subject to these standards. Amortization expense
related to goodwill was $526,000 and $509,000 in the first and second quarters
of 2001, respectively. Amortization of Core Deposit Intangibles was $71,000 for
the first six months of 2002, compared to $49,000 for the same period in 2001.
The increase reflects the reassessment of useful life. The Company has completed
its transitional goodwill impairment evaluation. Fair value exceeds carrying
value for all reporting units that have allocated goodwill. Thus, no
transitional impairment loss will be recognized and no cumulative effect of a
change in accounting principle will be recorded. See Note 5 of the Notes to
Consolidated Financial Statements.
Extinguishment Of Debt
During the third quarter of 2001, AMCORE reacquired for its own portfolio at par
$15.0 million in capital trust preferred securities, which is accounted for as a
retirement (the "Debt Extinguishment"), with the coupon rate of 9.35 percent.
See Note 7 of the Notes to Consolidated Financial Statements.
Stock Repurchase Program
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 627,000 shares remaining from the Company's August 8, 2000 stock
repurchase authorization. During the first six months of 2002, the Company
repurchased 82,000 shares at an average price of $22.20. As of June 30, 2002, no
shares remained to be repurchased pursuant to either the April 23, 2001 or
August 8, 2000 authorizations. Shares repurchased pursuant to these
authorizations (the "Stock Repurchase Programs") became treasury shares
available for general corporate purposes, including the issuance of shares in
connection with AMCORE's stock option plan and other employee benefit plans.
EARNINGS REVIEW OF CONSOLIDATED INCOME STATEMENT
The following highlights a comparative discussion of the major components of net
income and their impact for the three and six months ended June 30, 2002 and
2001.
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 (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
===============================================================
Interest Income Book Basis $63,816 $72,107 $124,527 $147,733
FTE Adjustment 1,759 2,098 3,573 4,215
---------------------------------------------------------------
Interest Income FTE Basis 65,575 74,205 128,100 151,948
Interest Expense 31,623 42,872 62,155 89,272
---------------------------------------------------------------
Net Interest Income FTE Basis $33,952 $31,333 $65,945 $62,676
===============================================================
Net interest income on an FTE basis increased $2.6 million or 8.4% in the second
quarter of 2002 compared to the same period in 2001. On a year-to-date basis net
interest income on an FTE basis was up $3.3 million or 5.2%. The year-over-year
increases for both the three and six months periods were driven by reductions in
total interest expense of 26.2% and 30.4%, respectively.
The net interest spread is the difference between the average rates on
interest-earning assets and the average rates on interest-bearing liabilities.
The interest rate margin represents net interest income divided by average
earning assets. These ratios can also be used to analyze net interest income.
Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand
deposits, other liabilities 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 improved 36 basis points to 3.13%
in the second quarter of 2002 from 2.77% in the second quarter of 2001. The
interest rate margin was 3.51% in the second quarter of 2002, an increase of 19
basis points from 3.32% in the second quarter of 2001.
As Table 2 indicates, the interest rate spread improved 42 basis points to 3.10%
for the first six months of 2002 from 2.68% for the same period in 2001. The
interest rate margin was 3.51% for the first six months of 2002, an increase of
24 basis points from 3.27% for the same period in 2001.
The level of net interest income is the result of the relationship between the
total volume and mix of interest-earning assets and the rates earned and the
total volume and mix of interest-bearing liabilities and the rates paid. The
rate and volume components associated with interest earning assets and
interest-bearing liabilities can be segregated to analyze the quarter-to-quarter
changes in net interest income. Changes due to rate/volume variances have been
allocated between changes due to average volume and changes due to average rate
based on the absolute value of each to the total change of both categories.
Because of changes in the mix of the components of interest-earning assets and
interest-bearing liabilities, the computations for each of the components do not
equal the calculation for interest-earning assets as a total and
interest-bearing liabilities as a total. Tables 3 and 4 analyze the changes
attributable to the volume and rate components of net interest income.
Changes Due to Volume
In the second quarter of 2002, net interest income on an FTE basis increased due
to average volume by $608,000 when compared to the second quarter of 2001. This
was comprised of a $1.9 million increase in interest income that was partially
offset by a $1.3 million increase in interest expense.
The $1.9 million increase in interest income was driven by a $71.9 million or
2.8% increase in average loans and a $45.1 million or 3.8% increase in average
investment securities. The increase in average loans was led by a $148.4 million
average increase in indirect automobile loans and $89.2 million average increase
due to the Branch Expansion. The increase in indirect automobile loans was
fueled by strong loan demand and sales of loans under the Auto Loan Sales
program in 2001's second quarter. Offsetting these increases was a $125.6
million average decrease in 1-to-4 family real estate loans and $49.9 million in
average loan balances transferred in the Branch Sales. The decline in 1-to-4
family real estate was due to the impact of refinancing in the historically low
interest rate environment. The increase in average investment securities was
attributable to the Company's effort to rebuild its investment portfolio
following the Security Portfolio Restructuring, accelerated prepayment of
mortgage-related securities caused by falling mortgage interest rates, and
increased pledging requirements due to an increase in public fund deposits.
The increase in average loans and average investment securities was funded by a
$108.4 million or 3.2% increase in average interest-bearing liabilities,
resulting in the $1.3 million volume related increase in interest expense.
Average interest-bearing deposits increased $120.8 million while average
borrowings declined $12.4 million. The increase in average interest-bearing
deposits was attributable to a $68.7 million increase in brokered certificates
of deposit (CD's) and a $52.1 million increase in core deposits. Over half of
the increase in core deposits was attributable to the Branch Expansion. Not
reflected in the increases in core deposits was the replacement of $98.1 million
in average interest-bearing deposit balances that were transferred to the buyers
in the Branch Sales. Quarter-to-quarter, non-interest deposits grew an average
of $10.7 million. This does not include the replacement of $11.7 million in
average non-interest-bearing deposit balances transferred in the Branch Sales.
Total average core deposit growth, including replacement of deposits transferred
in the Branch Sales, was $172.5 million or 6.6% when comparing the second
quarter of 2002 to the second quarter of 2001. This growth reflects
aggressive company-wide efforts to attract additional core deposits, with an
emphasis on primary transaction account business.
For the first six months of 2002, net interest income declined due to average
volume by $1.3 million, when compared with the same period in 2001. This was
comprised of a $2.2 million decline in interest income that was partially offset
by a $940,000 decrease in interest expense. Average loans over this period
declined $4.6 million or 0.2%, while average securities decreased $43.7 million
or 3.7%. Average interest-bearing liabilities declined $36.1 million or 1.1%.
Changes Due to Rate
During the second quarter of 2002, net interest income on an FTE basis increased
due to average rates by $2.0 million when compared with the same quarter of
2001. This was comprised of an $12.6 million decline in interest expense that
was partly offset by a $10.6 million decrease in interest income.
The yield on earning assets declined 110 basis points during the quarter, when
compared to the same period a year ago. The yield on average loans fell by 125
basis points and was primarily attributable to commercial and commercial real
estate loans. Falling interest rates since the second quarter of 2001 impacted
pricing on new loan volume, variable priced loans and loans that refinanced
during the year. The yield on average securities decreased by 82 basis points,
also the result of declining interest rates. Yields on securities were also
affected by the sale of higher risk securities in the Security Portfolio
Restructuring as well as the prepayment of higher yielding mortgage-related
securities that increased as mortgage interest rates fell.
The rate paid on interest bearing liabilities declined 146 basis points during
the second quarter of 2002, compared to the second quarter of 2001. This was
primarily due to decreased rates paid on deposits and short-term borrowings.
Declining rates on CD's and on the Company's indexed money market deposit
accounts (AMDEX) largely drove the decrease in deposit costs. Average rates on
CD's have declined as older CD's bearing higher rates have matured and re-priced
during the period of declining interest rates. The AMDEX accounts re-price
monthly off the three-month Treasury bill discount rate, and have benefited from
the decline in short-term interest rates. The decrease in short-term borrowing
costs was mainly due to reverse repurchase agreements that renewed at lower
rates, also due to the decline in short-term interest rates.
For the first six months of 2002, net interest income increased due to average
rates by $4.5 million, when compared with the same period in 2001. This was
comprised of a $26.2 million decline in interest expense that was partly offset
by a $21.6 million decrease in interest income. The yield on earning assets
declined 115 basis points, while average rates paid on interest bearing
liabilities decreased by 157 basis points.
The Security Portfolio Restructuring and rebuilding, reductions in lower
yielding residential real estate loans, the Branch Sales and Branch Expansion,
the expiration of hedge derivatives that are presently in a net-pay position,
plus the continuation of initiatives to grow core transactional deposits ("Make
It Happen" and "Free Checking" initiatives) are expected to result in continued
improvement in the quality and stability of net interest income. Overall, these
events, coupled with the current and projected interest rate environment, are
expected to result in improved interest rate spreads and margins in 2002,
compared to 2001. Among those factors that could cause margins and spreads to
not improve as anticipated by the Company in 2002 include unexpected changes in
interest rates, changes in the slope of the yield curve, the effect of
prepayments or renegotiated rates, changes in the mix of earning assets and the
mix of liabilities, including greater than anticipated reliance on expensive
wholesale sources to fund the Branch Expansion and loan growth and greater than
expected delinquencies resulting in non-accrual status.
Provision for Loan and Lease Losses
The provision for loan and lease losses (Provision) is an amount added to the
allowance for loan and lease losses (Allowance) for loan losses that are
probable as of the respective reporting date. Actual loan and lease losses are
charged against (reduce) the Allowance when management believes that the
collection of principal will not occur. Subsequent recoveries of amounts
previously charged to the Allowance, if any, are credited to (increase) the
Allowance.
The Provision was $2.7 million in the second quarter of 2002, a decrease of $4.9
million or 64.9% from the $7.6 million in the second quarter of 2001. For the
first six months of 2002, the Provision was $5.3 million, a decrease of $4.4
million from the $9.7 million recorded during the same time period a year ago.
In 2001, Provision increases were a result of higher non-performing loans, net
charge-offs and delinquencies, coupled with concerns over the economy's impact,
particularly on commercial borrowers. Comparable additions to the Allowance were
not necessary during the second quarter of 2002 as asset quality and Allowance
coverage of non-performing loans showed improvement.
AMCORE recorded net charge-offs of $2.4 million in the second quarter of 2002
compared to $3.5 million in the second quarter of 2001. Annualized net
charge-offs declined to 37 basis points of average loans in the second quarter
of 2002 from an annualized rate of 56 basis points during the same quarter of
last year.
The Allowance, as a percent of total loans, was 1.27% and 1.33% at June 30, 2002
and 2001, respectively. The lower level of the Allowance, as a percent of loans,
reflects improved loan quality and growth in the loan portfolio.
Future growth in the loan portfolio, weakening economic conditions or specific
credit deterioration, among other things, could result in increased Provisions
during the remainder of 2002, compared to 2001.
Non-Interest Income
Total non-interest income is comprised primarily of fee-based revenues from
trust and asset management, bank-related service charges on deposits and
mortgage revenues. Net security gains or losses, gain on loan sales and
increases in cash surrender value (CSV) of bank and company owned life insurance
(COLI) are also included in this category.
Non-interest income, excluding net security gains, totaled $15.4 million in the
second quarter of 2002, a decrease of $9.3 million or 37.8% from the $24.7
million in second quarter of 2001. The decrease was mainly due to an $8.7
million pre-tax Branch Gain in the second quarter of 2001. Excluding the Branch
Gain, non-interest income declined only $648,000 due to lower trust and asset
management revenue and mortgage revenues. On a year-to-date basis, also
excluding the $8.7 million Branch Gain, non-interest income increased $176,000
or 0.6% to $31.8 million in 2002, compared to $31.6 million in 2001.
Trust and asset management income, the largest source of fee based revenues,
totaled $6.2 million in the second quarter of 2002, a decrease of $646,000 or
9.5% from $6.8 million in the second quarter of 2001. For the six-month periods
ended June 30, 2002 and 2001, respectively, trust and asset management revenues
were $12.9 million and $13.6 million, a decline of $738,000 or 5.4%. The
declines in the equity market, especially the S&P 500, have impacted the value
of AMCORE-administered assets, which in turn have caused a reduction in fee
revenue.
The trust and asset management segment manages or administers $5.8 billion of
investments, inclusive of traditional assets as well as the management of the
BANK's diverse fixed income portfolio of approximately $1.3 billion. Assets in
the AMCORE Vintage Mutual Funds totaled $1.0 billion at June 30, 2002. In
addition to overall market performance, trust and asset management revenues are
dependent
upon the Company's ability to attract and retain accounts, specific investment
performance, and other economic factors.
Service charges on deposits totaled $4.1 million in the second quarter of 2002,
an increase of $379,000 or 10.1% from the $3.7 million in the second quarter of
2001. Year-to-date in 2002, service charges on deposits increased $1.2 million
or 17.2% to $8.0 million, from $6.8 million during the same period in 2001.
Non-sufficient funds, stop payment and return check fees, primarily related to
personal accounts, and increased commercial account analysis fees contributed to
the increase.
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 right amortization and impairment. Mortgage revenues
were $499,000 in the second quarter of 2002 on closing volumes of $104.3
million. This was a decline of $1.4 million or 73.1% from $1.9 million in the
second quarter of 2001 on closing volumes of $142.4 million. The decline was
primarily due to a $1.3 million servicing right impairment charge versus a
servicing rights impairment reversal of $94,000 in the second quarter of 2001.
For the first six months of 2002, mortgage revenues were $2.3 million on
closings of $210.9 million. This compares to $3.3 million on closings of $251.8
million for the first six months of 2001. This represented a decline of $952,000
or 28.9%. The decline includes an increase in servicing right impairment charge
of $523,000 over 2001. The rest of the decline relates to lower production
volumes, partly offset by lower trading loss experience year-to-year.
Continued strong mortgage performance is expected throughout the remainder of
2002, although not at the record levels experienced in 2001 due to lower
refinancing activity. As of June 30, 2002, AMCORE had $10.0 million of
capitalized mortgage servicing rights, less a $1.5 impairment valuation
allowance, with a fair value of $10.6 million. The unpaid principal balance of
mortgage loans serviced for others, including mortgage loans held for sale, was
$999.6 million as of June 30, 2002. This compares to $902.1 million as of June
30, 2001.
COLI income totaled $1.5 million in the second quarter of 2002, an $83,000 or
6.0% increase over the $1.4 million in the second quarter of 2001. Year-to-date,
COLI income increased $296,000 or 12.2% to $2.7 million. The increases reflect
additional investments and the impact of compounding. AMCORE uses COLI as a
tax-advantaged means of financing its future obligations with respect to certain
non-qualified retirement and deferred compensation plans in addition to other
employee benefit programs. As of June 30, 2002, the CSV of COLI stood at $106.0
million.
Other non-interest income includes customer service charges, credit card and
merchant fees, ATM fees, brokerage commissions, insurance commissions, gains on
fixed asset and loan sales and other miscellaneous income. In the second quarter
of 2002, other non-interest income was $3.1 million, an $892,000 or 40.1%
increase from $2.2 million in the second quarter of 2001. The increase was
primarily attributable to market gains on derivative positions compared to
losses in 2001, gain from the sale of excess land in the second quarter of 2002
and improved brokerage commissions period-to-period. The amount of the gain on
the sale of excess land was $365,000. For the first six-months of 2002 other
non-interest income was $5.8 million, an increase of $398,000 or 7.3% from the
same time period in 2001. Similar factors contributed to the 2002 year-to-date
increase in other non-interest income, plus a $309,000 non-recurring gain on the
reversion of excess retirement plan assets that occurred in the first quarter of
2002. The year-to-date increase was partially offset, however, by $781,000 in
gains on the Auto Loan Sales in the first quarter of 2001. There have been no
Auto Loan Sales in 2002.
Net realized securities gains were $625,000 in the second quarter of 2002,
compared to a $2.3 million loss in the second quarter of 2001. The loss in the
second quarter of 2001 was attributable to the Security Portfolio Restructuring.
For the full six-month periods, net realized security gains were $1.4 million in
2002 compared to a $1.5 million loss in 2001. The level of security gains or
losses is dependent on the
size of the available for sale portfolio, interest rate levels, AMCORE's
liquidity needs, and balance sheet risk objectives.
Operating Expenses
Total operating expense was $31.5 million in the second quarter of 2002, an
increase of $226,000 or less than one-percent, from $31.3 million in the second
quarter of 2001. For the first six months of 2002, operating expenses were $62.9
million, an increase of $1.7 million or 2.8% from $61.2 million for the first
six months of 2001. The increases were primarily due to higher personnel costs
that were partly offset by the discontinuation of goodwill amortization pursuant
to SFAS No. 142. The efficiency ratio was 62.73% in the second quarter of 2002,
compared to 63.17% in the second quarter of 2001. On a year-to-date basis the
efficiency ratio were 63.23% and 62.66% for 2002 and 2001, respectively.
Personnel costs, which include compensation expense and employee benefits, are
the largest component of operating expenses. Personnel costs totaled $18.3
million in the second quarter of 2002, an increase of $800,000 or 4.6% from
$17.5 million in the second quarter of 2001. In addition to normal
cost-of-living adjustments, the increase was attributable to the Branch
Expansion and higher incentive related costs. Cost savings from the Branch Sales
and severance expenses incurred in the second quarter of 2001 partly offset the
increase. For the six-month periods ended June 30, 2002 and 2001, personnel
costs were $36.5 million and $34.1 million, respectively, an increase of $2.3
million or 6.9%. Cost-of-living increases, the impact of the Branch Expansion
and higher incentives were partially offset by lower costs due to the Branch
Sales and net severance costs. A variance for the second quarter caused by
severance incurred in the second quarter of 2001 was partly offset for the
six-month period by severance costs incurred in the first quarter of 2002.
Net occupancy expense for the three and six-month periods ended June 30, 2002
were $1.9 million and $3.8 million, respectively. This compares to $1.8 million
and $3.9 million for the three and six-month periods ended June 30, 2001,
respectively. For the second quarter the increase was $150,000 or 8.3%, while
the full six-month period declined $11,000 or less than one-percent. Lower
maintenance and heating costs experienced in the first quarter were virtually
offset by increased maintenance, building service and rental expenses in the
second quarter, in part due to the Branch Expansion.
Equipment expense decreased $82,000 or 4.1% to $1.9 million in the second
quarter of 2002 and $390,000 or 9.3% to $3.8 million for the first six-months of
2002, when compared to the respective periods of 2001 where expenses were $2.0
million and $4.2 million. For both the quarter and year-to-date, the declines
were primarily attributable to lower costs related to electronic data processing
equipment, net of increases in associated software costs.
Data processing expenses were up $130,000 or 8.7% to $1.6 million in the second
quarter of 2002 while increasing $259,000 or 8.6% to $3.3 million for the full
year, when compared to the respective periods in 2001. These reflect increased
charges from third party service providers related to core bank data processing,
trust and other external processing systems.
Professional fees for the three and six-month periods ended June 30, 2002 were
$1.1 million and $2.1 million, respectively. This was an increase of $38,000 or
3.7% from $1.0 million in the second quarter of 2001 and was mainly due to
increased consulting fees that were partly offset by lower legal fees. For the
full six-month period, there was a decrease of $57,000 or 2.6% from $2.2 million
a year ago. The decrease was primarily due to lower legal expenses that were
partly offset by increased consulting and collection expenses.
Communication expense was flat at $1.0 million and $2.0 million, respectively,
when comparing the three and six months periods ended June 30, 2002 with the
same periods in 2001. Recent increases in postage rates are expected to result
in higher communication expense for the full year when compared to 2001.
Advertising and business development expenses were $1.1 million in the second
quarter of 2002, a decrease of $144,000 or 11.2% from $1.3 million in the second
quarter of 2001. For the six month period ended June 30, 2002, advertising and
business development expenses increased $266,000 or 12.5% to $2.4 million from
$2.1 million in the same period in 2001. The increase primarily related to the
promotion of free checking accounts.
Intangibles amortization declined to $36,000 and $71,000 for the respective
three and six-month periods ended June 30, 2002, compared to $534,000 and $1.1
million for the same periods in 2001. The decrease relates to the
discontinuation of goodwill amortization pursuant to SFAS No. 142.
Other expenses were $4.5 million in the second quarter of 2002, a decrease of
$192,000 or 4.1% from $4.7 million in the second quarter of 2001. The decrease
was mainly the result of lower costs and expenses associated with foreclosed
real estate. Year-to-date, other expenses increased $330,000 or 3.8% to $8.9
million in 2002 from $8.6 million in 2001. The increase was due to higher loan
processing expenses and investment related impairment charges that were partly
offset by lower costs associated with foreclosed real estate.
Income Taxes
Income tax expense totaled $3.5 million in the second quarter of 2002, compared
with $3.1 million in the second quarter of 2001, an increase of $369,000 or
11.9%. For the six-month period ended June 30, 2002, income tax expense
increased $187,000 or 2.8% to $6.8 million from $6.6 million in the same period
in 2001. Increases in income tax expense for both the three and six-month
periods of 2002, over the same periods in 2001, were primarily the result of
increased earnings before income tax and decreased investments in tax-exempt
municipal bonds. The increases were partly offset by increases in CSV on COLI
and the impact of non-deductible goodwill amortization in 2001 that is no longer
being amortized following the adoption of SFAS No. 142 on January 1, 2002.
The effective tax rates were 24.7% and 24.2% in the second quarter of 2002 and
2001, respectively. The effective tax rates for the full six-month periods ended
June 30, 2002 and 2001 were 24.8% and 25.2%, respectively. For the six-month
period ended June 30, 2001, the effective tax rate included $143,000 of income
tax expense for the Accounting Change. Effective tax rates are less than the
statutory tax rates due primarily to investments in tax-exempt municipal bonds
and increases in CSV on COLI that are not taxable.
EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process focuses on four primary lines
of business or (Segments): Commercial Banking, Retail Banking, Trust and Asset
Management, and Mortgage Banking. Note 9 of the Notes to Consolidated Financial
Statements presents a condensed income statement and selected balance sheet
information for each Segment.
The financial information presented was derived from the Company's internal
profitability reporting system that is used by management to monitor and manage
the financial performance of the Company. This information is based on internal
management accounting policies which have been developed to reflect the
underlying economics of the Segments and, to the extent practicable, to portray
each Segment as if it operated on a stand-alone basis. Thus, each Segment, in
addition to its direct revenues, expenses, assets and liabilities, includes an
appropriate allocation of shared support function expenses. The Commercial and
Retail Banking Segments also include funds transfer adjustments to appropriately
reflect the cost of funds on loans made and funding credits on deposits
generated. Apart from these adjustments, the accounting policies used are
similar to those described in Note 1 of the Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2001.
Since there are no comprehensive authorities for management accounting
equivalent to accounting principles generally accepted in the United States of
America, the information presented is not necessarily comparable with similar
information from other financial institutions. In addition, methodologies used
to measure, assign and allocate certain items may change from time-to-time to
reflect, among other things, accounting refinements, changes in risk profiles,
changes in customers or product lines, and changes in management structure. The
presentation of Segments was changed in the first quarter of 2002 to reflect the
Company's shift to a line of business structure. The primary impact of this
change was to segregate the previous Banking Segment into its Retail and
Commercial components. However, due to allocation methodologies for shared
support costs, fund transfer pricing adjustments for loans (Cost of Funds
Allocations) and deposits (Funds Credit Allocations) and the exclusion of
investment and treasury activities from either the Retail or Commercial Banking
Segments, the sum of these two "new" Segments will not equal the total of the
"old" Banking Segment presentation. Prior period Segment results have been
restated to reflect the new line of business structure. The Trust and Asset
Management Segment and the Mortgage Banking Segment were not affected by the
shift to a line of business structure and have not been restated.
Total Segment results differ from consolidated results primarily due to
intersegment elimination, certain corporate administration costs, items not
otherwise allocated in the management accounting process and treasury and
investment activities. The impact of these items is aggregated to reconcile the
amounts presented for the Segments to the consolidated results and are included
in the "Other" column of Note 9 of the Notes to Consolidated Financial
Statements. For ease of comparison, the discussion of each Segment, including
the Segment profit percentage, focuses on earnings before the Accounting Change
(the "Operating Profit" or "Operating Loss"). In addition, due to its unusual
and non-recurring nature, the Branch Gain has not been allocated to either the
Commercial or Retail segments. It is included in the Other column.
Commercial Banking
The Commercial Banking Segment (Commercial) provides commercial banking services
to large and small business customers through the BANK's 63 banking locations in
northern Illinois and south central Wisconsin. The services provided by this
Segment include lending, business checking and deposits, cash management,
merchant card services and other traditional as well as e-commerce commercial
banking services.
Commercial Operating Profit for the second quarter of 2002 was $5.6 million, an
increase of $2.8 million or 104.1% from the second quarter of 2001. Commercial
Operating Profit for the six months ended June 30, 2002 was $10.5 million. This
was an increase of $2.9 million or 38.3% from the same period in 2001. Lower
Provisions and increased net interest income, partially offset by increased
operating expenses and income tax expense were the predominant factors leading
to the increases for both the three and six month periods.
Net interest income increased by $1.6 million in the second quarter of 2002 and
by $2.4 million for the six-month period ended June 30, 2002, compared to same
periods a year ago. Increased loan volumes lower-priced deposits and decreased
net Cost of Funds Allocations more than compensated for lower yields on loans.
Lower yields on loans, reduced rates on deposits and decreased net Cost of Funds
Allocations were all attributable to declining short-term interest rates over
the previous year. Loan demand has been strong, aided by the Branch Expansion,
and was more than sufficient to replace average loan balances transferred in the
Branch Sales.
Non-interest income increased by $140,000 in the second quarter of 2002,
compared to the same period in 2001. For year-to-date, the increase was
$520,000. The increase for both periods was primarily the result of increased
commercial account analysis fees.
The Provision decreased by $3.2 million and $2.8 million, respectively, for the
three and six-month periods ended June 30, 2002, compared to the same periods in
2001. Increases in non-performing loans, net charge-offs and delinquencies,
coupled with concerns over the economy's impact contributed to the increased
Provisions during the second quarter of 2001. Comparable additions to the
Allowance were not necessary during the second quarter of 2002 as asset quality
and Allowance coverage of non-performing loans showed improvement.
Operating expenses increased $382,000 in the second quarter and $1.1 million
year-to-date when compared to the respective periods in 2001. The increases were
largely due to higher personnel expenses, which includes the impact of the
Branch Expansion as well as increased incentives, which were partially offset by
the discontinuation of goodwill amortization pursuant to SFAS No. 142 and
decreased expenses on foreclosed real estate.
Income taxes increased $1.7 million and $1.8 million, respectively, for the
quarter and year-to-date from the comparable periods in 2001 and was primarily
the result of higher income before taxes.
The Commercial Segment represented 60.2% and 54.0% of total segment Operating
Profit in the second quarter of 2002 and 2001, respectively, and 58.5% for 2002
year-to-date versus 55.6% for the same period in 2001.
Retail Banking
The Retail Banking Segment (Retail) provides retail-banking services to
individual customers through the BANK's 63 banking locations in northern
Illinois and south central Wisconsin. The services provided by this Segment
include direct and indirect lending, checking, savings, money market and CD
accounts, safe deposit rental, automated teller machines, and other traditional
and e-commerce retail banking services.
The Retail Operating Profit for the second quarter of 2002 was $2.9 million, an
increase of $2.1 million or 242.5% from the second quarter of 2001. Year-to-date
2002 Retail Operating Profit was $5.2 million compared to $3.2 million for the
same period in 2001. This was an increase of $2.0 million or 66.1%. Lower
Provision and improved net interest income were the primary reasons for the
increase for both the second quarter and year-to-date periods.
Net interest income increased by $1.1 million in the second quarter of 2002, and
by $437,000 year-to-date when compared to the same periods in 2001. Lower
overall loan yields, declining volumes on residential and home equity loans and
reduced net Funds Credit Allocations were more than offset by lower-priced
deposits and increased installment loan balances, particularly indirect
automobile loan volume and Branch Expansion Loans. Lower yields on loans,
reduced rates on deposits and reduced net Cost of Funds Allocations were all
attributable to declining short-term interest rates over the previous year.
Declining volumes on residential real estate and home equity loans were driven
by accelerated prepayments due to falling mortgage interest rates and the Branch
Sales, and were only partially offset by new loan volume from the Branch
Expansion.
Non-interest income increased by $71,000 in the second quarter of 2002, compared
to the same period in 2001. Increased deposit service charge income and gain on
the sale of excess land were nearly offset by decreased commissions from
mortgage originations, due to the transfer of mortgage originators to the
Mortgage Segment. Year-to-date non-interest income declined $352,000. The
decline was primarily the result of gains on Auto Loan Sales that occurred in
the first quarter of 2001, compared to none in 2002.
The Provision decreased by $1.7 million in the second quarter of 2002, compared
to the second quarter of 2001. For the six-month period ended June 30, 2002, the
decrease was $1.6 million when compared to the same period in 2001. Increases in
non-performing loans, net charge-offs and delinquencies, coupled
with concerns over the economy's impact contributed to the increased Provisions
during the second quarter of 2001. Comparable additions to the Allowance were
not necessary during the second quarter of 2002 as asset quality and Allowance
coverage of non-performing loans showed improvement.
Operating expenses decreased by $325,000 when comparing the second quarter of
2002 with the same quarter in 2001 and by $1.3 million for the full six-month
period. For the second quarter, increased personnel costs were more than offset
by lower miscellaneous expenses. Year-to-date, the decrease was largely due to
lower personnel expenses, occupancy expenses, the discontinuation of goodwill
amortization pursuant to SFAS No. 142, lower expenses on foreclosed real estate
and miscellaneous expense. Lower personnel costs reflect the impact of the
Branch Sales and the transfer of mortgage originators to the mortgage banking
segment. Lower occupancy expenses also reflect the impact of the Branch Sales.
Income taxes increased $1.2 million quarter-over-quarter and $1.0 million
year-over-year, primarily the result of higher income before taxes.
The Retail Segment represented 31.7% and 16.9% of total segment Operating Profit
in the second quarter of 2002 and 2001, respectively, and 28.9% for 2002
year-to-date versus 23.6% for the same period in 2001.
Trust and Asset Management
The Trust and Asset Management Segment (TAM) 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 and various public fund programs. 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 TAM Segment's Operating Profit for the second quarter of 2002 was $927,000,
a decrease of $51,000 or 5.2% from the same period in 2001. Year-to-date, TAM's
2002 Operating Profit was $1.9 million, a $71,000 or 3.9% increase over 2001.
Both the quarter and year-to-date periods experienced revenue declines and
decreased operating expenses and income taxes when compared to the prior year.
TAM revenues, including net interest income, declined $396,000 and $414,000,
respectively, for the three and six-month periods ended June 30, 2002 when
compared to the same periods in 2001. Declines in fee-based revenue and net
interest income were partially offset by increased brokerage commission income.
The declines in the equity market, especially the S&P 500, have impacted the
value of AMCORE-administered assets, which in turn have caused a reduction in
fee-based revenue. Net brokerage commissions on the other hand have been
particularly strong and are primarily the result of increased fixed-annuity
sales. In addition, clearing costs associated with annuity sales, which are
netted against commissions, have declined as the TAM segment is now clearing its
own sales.
Operating expenses decreased $205,000 in the second quarter of 2002 and $290,000
for 2002 year-to-date when compared to the same periods in 2001 and is primarily
related to the discontinuation of goodwill amortization pursuant to SFAS No.
142. Income taxes declined $140,000 for the second quarter of 2002 and $195,000
for the six-months ended June 30, 2002 when compared to the same periods in
2001. The decrease in taxes is related to declines in pre-tax Operating Profit,
exclusive of the change related to the discontinuation of goodwill amortization,
which is not tax deductible.
The TAM Segment manages or administers $5.8 billion of investments, inclusive of
traditional assets as well as the management of the BANK's diverse fixed income
portfolio of approximately $1.3 billion. Assets in the AMCORE Vintage Mutual
Funds totaled $1.0 billion at June 30, 2002.
The TAM Segment represented 10.0% and 19.4% of total segment Operating Profit in
the second quarter of 2002 and 2001, respectively, and 10.6% for 2002
year-to-date versus 13.4% for the same period in 2001.
Mortgage Banking
The Mortgage Banking Segment (Mortgage) 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 Segment's Operating Loss was $180,000 in the second quarter of
2002, compared to an Operating Profit of $492,000 in the second quarter of 2001,
a decline of $672,000 or 136.6%. For the first six months of 2002, Operating
Profit was $364,000, a decline of $642,000 or 63.8% from $1.0 million in the
same period a year ago. Servicing rights impairment charges were the primary
factors contributing to the decrease in Operating Profit for both the three and
six-month periods ended June 30, 2002.
The Mortgage Segment revenues, which are net of servicing right amortization and
impairment and including net interest income, were $2.0 million in the second
quarter of 2002, a decrease of $1.1 million or 37.0% from $3.1 million in the
second quarter of 2001. The decline was primarily due to a $1.3 million
servicing right impairment charge versus a servicing rights impairment reversal
of $94,000 in the second quarter of 2001. Year-to-date, Mortgage Segment
revenues in 2002 were down $579,000 or 10.0% to $5.2 million from $5.8 million a
year ago. The decline includes a net servicing right impairment charge of
$523,000. The rest of the decline relates to lower production volumes, partly
offset by lower trading loss experience year-to-year. Closings were $210.9
million for the first six months of 2002 compared to $251.8 million for the
first six months of 2001.
Operating expenses were $2.2 million in the second quarter of 2002, compared to
$2.3 million in the same quarter of 2001, a decrease of $34,000. For the first
six months of 2002, operating expenses increased $482,000 to $4.6 million,
compared to $4.1 million for the same period in 2001. The increase was primarily
due to increased personnel costs and loan-processing costs that were partly
offset by the elimination of affiliate commissions due to the transfer of
mortgage originators previously employed by the Retail Segment. The higher
personnel costs, which included volume driven commissions, were also primarily
due to the transfer of the mortgage originators from the Retail Segment. The
decrease in affiliate commissions was also the result of the employee transfer.
The unpaid principal balance of mortgage loans serviced, including loans held
for sale and loans serviced for the BANK, was $1.33 billion at June 30, 2002
compared to $1.31 billion at June 30, 2001.
The Mortgage Segment represented a negative 1.9% and a positive 9.7% of total
segment Operating Profit in the second quarter of 2002 and 2001, respectively,
and a positive 2.0% for 2002 year-to-date versus a positive 7.4% for the same
period in 2001.
BALANCE SHEET REVIEW
Total assets were $4.3 billion at June 30, 2002, an increase of $265.1 million
or 6.6% from December 31, 2001. Total liabilities increased $236.0 million over
the same period, while stockholders' equity increased $29.1 million.
Total earning assets, including COLI, increased $295.6 million from December 31,
2001. Non-earning assets decreased $30.5 million over the same period. The
increase in earning assets was primarily related to a $191.2 million increase in
loans and a $162.9 million increase in investment securities. These increases
were partially offset by a $73.1 million decrease in loans held for sale. The
increase in
investment securities stems from actions taken to rebuild the Company's
portfolio following last year's Security Portfolio Restructuring and prepayment
activity on mortgage related securities. These actions are aimed at improving
the utilization of AMCORE's capital position. The increase in loans was mainly
attributable to increases in installment/consumer loans, specifically growth in
the indirect automobile loan portfolio, commercial real estate loans and
commercial and industrial loans. Included in these increases was $66.2 million
in loan growth attributable to the Branch Expansion. The decline in loans held
for sale reflect the return to more normal levels of mortgage activity following
the boom of the past year that left the Company with a sizeable pipeline of
loans awaiting sale to the secondary market at December 31, 2001. The reduction
in non-earning assets was primarily attributable to a decline in cash and cash
equivalents.
Total deposits increased $224.4 million from December 31, 2001, primarily the
result of a $123.9 million increase in brokered CD's incurred to partially fund
the rebuilding of the investment security portfolio noted above. The Branch
Expansion contributed $29.6 million to the increase in deposits, while existing
branches contributed $70.9 million. Short-term borrowings increased by $72.6
million over the same period and were partly offset by a decline of $50.5
million in long-term borrowings. These changes primarily reflect the
reclassification of Federal Home Loan Bank borrowings that are set to mature in
less than one year. The remainder of the increase in short-term borrowings is
attributable to an increase in repurchase agreements and fed funds purchased,
net of a decline in commercial paper borrowing. The net increase in borrowings,
along with the deposit growth noted above, was used to fund the increase in
loans and securities. Other liabilities decreased $10.5 million.
The stockholders' equity increase was primarily due to an increase in the net
unrealized gains in the Company's available for sale investment portfolio and
earnings for the first six months of 2002 less dividends paid to shareholders.
ASSET QUALITY REVIEW
Allowance for Loan and Lease Losses
The determination by management of the appropriate level of the Allowance
amounted to $34.0 million at June 30, 2002, compared to $33.9 million at
December 31, 2001, an increase of $46,000 or less than one percent. The
Allowance is a significant estimate that is regularly reviewed by management to
determine whether of not the amount is considered adequate to absorb probable
losses. If not, an additional Provision is made to increase the Allowance. This
evaluation includes specific loss estimates on certain individually reviewed
loans, statistical loss estimates for loan groups or pools that are based on
historical loss experience and general loss estimates that are based upon the
size, quality and concentration characteristics of the various loan portfolios,
adverse situations that may affect the borrower's ability to repay, and current
economic and industry conditions.
As of June 30, 2002, the Allowance as a percent of total loans and of
non-performing loans was 1.27% and 120%, respectively. These compare to the same
ratios at December 31, 2001 of 1.37% and 128%. Net charge-offs were $5.2 million
for the first six months of 2002 versus $5.1 million for the first six months of
2001. These represented 0.41% and 0.40% of average loans, respectively, on an
annualized basis. AMCORE's management believes that the Allowance coverage
remains adequate.
An analysis of the Allowance is shown in Table 5.
Non-performing Assets
Non-performing assets consist of non-accrual loans, loans with restructured
terms, other real estate owned and other foreclosed assets. Non-performing
assets totaled $34.6 million as of June 30, 2002, an
increase of $785,000 or 2.3% from the $33.8 million at December 31, 2001. Total
non-performing assets represented 0.81% and 0.84% of total assets at June 30,
2002 and December 31, 2001, respectively.
Loans 90 days or more past due and still accruing interest were $5.5 million at
June 30, 2002, compared to $14.0 million at December 31, 2001, a decline of $8.5
million or 60.9%. A significant portion of the decrease reflects the
discontinuation of interest accruals on credits whose delinquencies had
increased beyond what was considered a reasonable collection period.
On a net basis, non-performing assets and loans 90 days or more past due and
still accruing declined $6.6 million since December 31, 2001. In comparison,
over this same time period, gross charge-offs were $6.1 million. This
improvement of overall loan quality, during a period of loan growth, reflects
improvements made to the Company's centralized underwriting function coupled
with a lending culture focused on improving asset quality. Continued
improvements in asset quality remain a high priority for AMCORE.
An analysis of non-performing assets is shown in Table 5.
CAPITAL MANAGEMENT
Total stockholders' equity at June 30, 2002, was $330.7 million, an increase of
$29.1 million or 9.6% from December 31, 2001. The stockholders' equity increase
was largely the result of an increase in the net unrealized gains in the
Company's available for sale investment portfolio and earnings for the first
six-months of 2002 less dividends paid to shareholders. AMCORE paid dividends of
$0.16 per share in the second quarters of 2002 and 2001.
Since June 30, 2001, the Company has repurchased 1.2 million of its own shares
at an average price of $22.21 pursuant to the Stock Repurchase Programs.
AMCORE has outstanding $25.0 million of capital securities through AMCORE
Capital Trust I (Trust), a statutory business trust, of which all common
securities are owned by AMCORE. The capital securities qualify as Tier 1 capital
for regulatory capital purposes.
As presented below, AMCORE's ratio of risk-based capital at 11.25%, its Tier 1
capital at 10.18% and its leverage ratio of 7.79%, all significantly exceed the
regulatory minimums (as the following table indicates), as of June 30, 2002. The
BANK, whose ratios are not presented below, is considered a "well-capitalized"
institution based on regulatory guidelines.
(dollars in thousands) June 30, 2002 June 30, 2001
------------- -------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital (to Risk Weighted Assets) $359,222 11.25% $366,296 12.51%
Total Capital Minimum 255,501 8.00% 234,260 8.00%
----------------------------- -------------------------------
Amount in Excess of Regulatory Minimum $103,721 3.25% $132,036 4.51%
============================= ===============================
Tier 1 Capital (to Risk Weighted Assets) $325,105 10.18% $333,290 11.38%
Tier 1 Capital Minimum 127,750 4.00% 117,130 4.00%
----------------------------- -------------------------------
Amount in Excess of Regulatory Minimum $197,355 6.18% $216,160 7.38%
============================= ===============================
Tier 1 Capital (to Average Assets) $325,105 7.79% $333,290 8.18%
Tier 1 Capital Minimum 166,885 4.00% 162,906 4.00%
----------------------------- -------------------------------
Amount in Excess of Regulatory Minimum $158,220 3.79% $170,384 4.18%
============================= ===============================
Risk adjusted assets $3,193,759 $2,928,252
=============== ===============
Average assets $4,172,124 $4,072,654
=============== ===============
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 or changes in historical relationships between indices.
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
instruments to maximize net interest income while maintaining acceptable levels
of risk to changes in market interest rates. Interest rate sensitivity analysis
is performed monthly 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 reviews the impact
of liquidity, loan and deposit pricing compared to its competition, capital
adequacy and rate sensitivity, among other things, and determines appropriate
policy direction to maintain or meet established ALCO guidelines.
Based upon an immediate increase in interest rates of 100 basis points and no
change in the slope of the yield curve, the potential decrease in net interest
income for the twelve-month period beginning July 1, 2002 would be approximately
$3.3 million. This analysis assumes no growth in assets or liabilities and
replacement of maturing instruments with like-kind instruments. At the end of
2001, comparable assumptions would have resulted in a potential decrease in 2002
net interest income of $566,000. Thus, AMCORE's earnings at risk from a
rising-rate scenario have increased since the end of 2001.
Conversely, an immediate decrease in interest rates of 100 basis points and no
change in the slope of the yield curve would result in a potential decrease in
net interest income for the twelve-month period beginning July 1, 2002 of
approximately $24,000. The same assumptions at the end of 2001 would have
resulted in a potential decrease in net interest income of $3.1 million.
AMCORE's sensitivity to declining interest rates has decreased since the end of
2001.
The amounts and assumptions used in the rising and falling rate scenarios should
not be viewed as indicative of expected actual results. In addition to rising or
falling interest rates, AMCORE's net interest income can be significantly
impacted by a variety of external factors, such as those previously noted, and
by the impact of the growth of the Company. In addition, as interest rates move,
the ALCO is likely to adjust interest rate risk management strategies to limit,
to the extent possible, the adverse impact that such changes in interest rates
might otherwise have on AMCORE's net interest income, as well as maximize
potential positive impacts such movements might have.
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's December 31, 2001 Form 10-K.
TABLE 1
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Quarter Ended Quarter Ended
June 30, 2002 June 30, 2001
--------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------- -----------------------------------
($ in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 982,459 $ 14,156 5.76% $ 892,018 $ 14,890 6.68%
Tax-exempt securities (1) 236,433 4,446 7.52% 281,810 5,412 7.68%
----------------------------------------------------------------------
Total Securities (2) 1,218,892 18,602 6.10% 1,173,828 20,302 6.92%
Loans held for sale (3) 26,944 478 7.10% 40,399 595 5.89%
Loans (1) (4) 2,602,993 46,061 7.09% 2,531,096 52,670 8.34%
Other earning assets 21,319 88 1.66% 23,538 258 4.40%
Fees on loans held for sale (3) -- 346 -- -- 380 --
--------------------------------- -----------------------------------
Total Interest-Earning Assets $ 3,870,148 $ 65,575 6.79% $ 3,768,861 $ 74,205 7.89%
Non Interest-Earning Assets:
Cash and due from banks 98,406 101,916
Other assets 268,252 249,052
Allowance for loan and lease losses (34,096) (29,657)
----------- -----------
Total Assets $ 4,202,710 $ 4,090,172
=========== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,071,847 $ 3,547 1.33% $ 1,002,395 $ 7,133 2.85%
Time deposits 1,640,514 19,489 4.77% 1,589,174 24,510 6.19%
--------------------------------- -----------------------------------
Total interest-bearing deposits 2,712,361 23,036 3.41% 2,591,569 31,643 4.90%
Short-term borrowings 533,888 5,375 4.04% 455,285 6,638 5.85%
Long-term borrowings 217,766 3,212 5.92% 308,757 4,591 5.96%
--------------------------------- -----------------------------------
Total Interest-Bearing Liabilities $ 3,464,015 $ 31,623 3.66% $ 3,355,611 $ 42,872 5.12%
Noninterest-Bearing Liabilities:
Demand deposits 356,195 345,543
Other liabilities 63,169 75,700
----------- -----------
Total Liabilities $ 3,883,379 $ 3,776,854
Stockholders' Equity 319,331 313,318
----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,202,710 $ 4,090,172
=========== ===========
Net Interest Income (FTE) $ 33,952 $ 31,333
=========== ===========
Net Interest Spread (FTE) 3.13% 2.77%
==== ====
Interest Rate Margin (FTE) 3.51% 3.32%
==== ====
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 $867,000 and
$664,000, respectively.
TABLE 2
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
----------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------- --------------------------------
($ in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 913,937 $ 26,160 5.73% $ 913,538 $ 30,917 6.77%
Tax-exempt securities (1) 239,355 9,058 7.57% 283,446 10,880 7.68%
---------------------------------------------------------------------
Total Securities (2) $ 1,153,292 $ 35,218 6.11% $ 1,196,984 $ 41,797 6.99%
Loans held for sale (3) 39,487 1,283 6.50% 38,289 1,307 6.84%
Loans (1) (4) 2,556,837 90,795 7.15% 2,561,457 107,530 8.45%
Other earning assets 18,494 144 1.57% 27,481 709 5.20%
Fees on loans held for sale (3) -- 660 -- -- 605 --
----------------------------------- --------------------------------
Total Interest-Earning Assets $ 3,768,110 $ 128,100 6.83% $ 3,824,211 $ 151,948 7.98%
Non Interest-Earning Assets
Cash and due from banks 98,406 99,710
Other assets 261,942 236,018
Allowance for loan and lease losses (34,067) (29,451)
----------- -----------
Total Assets $ 4,094,391 $ 4,130,488
=========== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $ 1,050,799 $ 6,865 1.32% $ 1,012,525 $ 16,102 3.21%
Time deposits 1,567,383 38,014 4.89% 1,638,324 50,756 6.25%
----------------------------------- --------------------------------
Total interest-bearing deposits $ 2,618,182 $ 44,879 3.46% $ 2,650,849 $ 66,858 5.09%
Short-term borrowings 515,577 10,558 4.13% 449,558 13,396 6.01%
Long-term borrowings 228,173 6,718 5.94% 297,654 9,018 6.11%
----------------------------------- --------------------------------
Total Interest-Bearing Liabilities $ 3,361,932 $ 62,155 3.73% $ 3,398,061 $ 89,272 5.30%
Noninterest-Bearing Liabilities:
Demand deposits 353,150 345,358
Other liabilities 64,997 74,827
----------- -----------
Total Liabilities $ 3,780,079 $ 3,818,246
Stockholders' Equity 314,312 312,242
----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,094,391 $ 4,130,488
=========== ===========
Net Interest Income (FTE) $ 65,945 $ 62,676
=========== ===========
Net Interest Spread (FTE) 3.10% 2.68%
==== ====
Interest Rate Margin (FTE) 3.51% 3.27%
==== ====
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 $1.5 million and $1.3
million, respectively.
TABLE 3
ANALYSIS OF YEAR-TO-DATE CHANGES IN NET INTEREST INCOME
Quarter Ended
June 2002/June 2001
-------------------------------------------------
Total Net
Increase (Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
-------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ 1,422 $ (2,156) $ (734)
Tax-exempt securities (1) (855) (111) (966)
-------------------------------------------
Total Securities (2) 757 (2,457) (1,700)
Loans held for sale (3) (223) 106 (117)
Loans (1) (4) 1,459 (8,068) (6,609)
Other earning assets (14) (156) (170)
Fees on loans held for sale (3) -- (34) (34)
-------------------------------------------
Total Interest-Earning Assets $ 1,949 $(10,579) $ (8,630)
===========================================
Interest Expense:
Interest-bearing demand and savings deposits $ 401 $ (3,987) $ (3,586)
Time deposits 559 (5,580) (5,021)
-------------------------------------------
Total interest-bearing deposits 1,415 (10,022) (8,607)
Short-term borrowings 1,019 (2,282) (1,263)
Long-term borrowings (1,342) (37) (1,379)
-------------------------------------------
Total Interest-Bearing Liabilities $ 1,341 $(12,590) $(11,249)
-------------------------------------------
Net Interest Margin / Net Interest Income (FTE) $ 608 $ 2,011 $ 2,619
===========================================
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 QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
Six Months Ended
June 2002/June 2001
-------------------------------------------------
Total Net
Increase (Decrease) Due to Change In Increase
Average Volume Average Rate (Decrease)
-------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ 14 $ (4,771) $ (4,757)
Tax-exempt securities (1) (1,671) (151) (1,822)
--------------------------------------------
Total Securities (2) (1,482) (5,097) (6,579)
Loans held for sale (3) 41 (65) (24)
Loans (1) (4) (194) (16,541) (16,735)
Other earning assets (145) (420) (565)
Fees on loans held for sale (3) -- 55 55
--------------------------------------------
Total Interest-Earning Assets $ (2,216) $(21,632) $(23,848)
============================================
Interest Expense:
Interest-bearing demand and savings deposits $ 237 $ (9,474) $ (9,237)
Time deposits (2,244) (10,498) (12,742)
--------------------------------------------
Total interest-bearing deposits (814) (21,165) (21,979)
Short-term borrowings 1,771 (4,609) (2,838)
Long-term borrowings (2,052) (248) (2,300)
--------------------------------------------
Total Interest-Bearing Liabilities $ (940) $(26,177) $(27,117)
--------------------------------------------
Net Interest Margin / Net Interest Income (FTE) $ (1,276) $ 4,545 $ 3,269
============================================
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 June 30, 2002 and
December 31, 2001 were as follows:
June 30, December 31,
2002 2001
------------------------
Impaired loans: (in thousands)
Non-accrual loans and leases
Commercial ............................ $ 7,970 $ 8,624
Real estate ........................... 3,877 3,908
Other non-performing:
Non-accrual loans (1) ................. 16,522 13,925
---------------------
Total non-performing loans ............ $28,369 $26,457
=====================
Foreclosed assets:
Real estate ........................... 3,844 5,625
Other ................................. 2,358 1,704
---------------------
Total foreclosed assets ............... $ 6,202 $ 7,329
=====================
Total non-performing assets ........... $34,571 $33,786
=====================
Loans 90 days or more past due and still accruing $ 5,479 $14,001
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
An anaylsis of the allowance for loan and lease losses for the periods
ended June 30, 2002 and 2001 is presented below:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
-------------------- --------------------
(in thousands)
Balance at beginning of period .................... $33,710 $29,561 $33,940 $29,157
Charge-Offs:
Commercial, financial and agricultural ........ 584 2,214 1,286 2,731
Real estate ................................... 781 712 1,710 1,103
Installment and consumer ...................... 1,369 1,138 3,063 2,325
Direct leases ................................. 60 51 66 51
-------------------- --------------------
2,794 4,115 6,125 6,210
Recoveries:
Commercial, financial and agricultural ........ 51 85 156 210
Real estate ................................... 94 192 168 255
Installment and consumer ...................... 263 291 539 632
Direct leases ................................. 9 -- 15 8
-------------------- --------------------
417 568 878 1,105
Net Charge-Offs ................................... 2,377 3,547 5,247 5,105
Provision charged to expense ...................... 2,653 7,557 5,293 9,713
Reductions due to sale of loans ................... -- 565 -- 759
-------------------- --------------------
Balance at end of period .......................... $33,986 $33,006 $33,986 $33,006
==================== ====================
Ratio of net-charge-offs during the period
to average loans outstanding during the period (1) 0.37% 0.56% 0.41% 0.40%
==================== ====================
(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.
Subsequent to the end of the second quarter of 2002, the Company reached a
negotiated agreement with its insurance carrier and Plaintiffs' counsel to
settle the lawsuit and other potential claims outlined below. The Company
expects to have all settlement agreements signed and lawsuits dismissed prior to
the end of the third quarter. The settlement agreement will be recorded in the
third quarter of 2002 and will have an immaterial effect on the Company's
consolidated financial condition and consolidated results of operations.
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 denied the plaintiffs' allegations and removed the case
to the United States District Court for the Northern District of Mississippi.
Plaintiff's filed a motion to remand the case back to state court.
During the second quarter of 2001, the Company made a settlement offer to
Plaintiffs' 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. On April 26, 2002 the Mississippi federal district court entered
an order which referred the case to the federal bankruptcy court for a decision
on pursuing the claim as an asset in one of the plaintiff's bankruptcy
proceedings, the case was then to be referred back to the federal court for all
further proceedings as requested by the Company. Plaintiffs' motion to remand to
state court was denied. Plaintiffs' attorneys rejected the Company's settlement
offer. In addition, they notified the Company's counsel that they had identified
20 more individuals with potential claims similar to those of the named
Plaintiffs'. No lawsuits were ever filed on their behalf. During the second
quarter of 2002, the Company's counsel submitted a new offer to Plaintiffs'
counsel to resolve all claims and the Company adjusted its accrual to reflect
the offer.
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 April 8, 1986 (Incorporated by reference to
Exhibit 3 of AMCORE's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1986); as amended May 3, 1988 to Article 8
(Incorporated by reference to AMCORE's definitive 1988 Proxy
Statement dated March 18, 1988); and as amended May 1, 1990 to
Article 5 (Incorporated by reference to AMCORE's definitive 1990
Proxy Statement dated March 21, 1990).
3.1 By-laws of AMCORE Financial, Inc. as amended December 7, 2001
(Incorporated by reference to Exhibit 3.1 of AMCORE's Annual
Report on Form 10-K for the year ended December 31, 2001).
4 Rights Agreement dated February 16, 2001, between AMCORE
Financial, Inc. and Wells Fargo Bank Minnesota, N.A.
(Incorporated by reference to AMCORE's Form 8-K as filed with the
Commission on February 27, 2001).
10.1 Separation, Release and Consulting Agreement dated June 20, 2002
between AMCORE Financial, Inc. and Robert J. Meuleman.
10.2 Amendment to Loan Agreement with M & I Marshall and Ilsley Bank
dated April 30, 2002.
10.3 AMCORE Financial, Inc. Amended and Restated Deferred Compensation
Plan Effective January 10, 2002.
99.1 Additional exhibits - Press release dated July 18, 2002
99.2 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) No reports on Form 8-K were filed during the second quarter of 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCORE Financial, Inc.
(Registrant)
Date: August 14, 2002
/s/ John R. Hecht
----------------------------------------------------
John R. Hecht
Executive Vice President and Chief Financial Officer
(Duly authorized officer of the registrant
and principal financial officer)