UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2002 was 24,771,325 shares.
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
- ------ -----------
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 39
Item 4 Controls and Procedures 40
PART II
- -------
Item 1 Legal Proceedings 46
Item 6 Exhibits and Reports on Form 8-K 47
Signatures 48
Certifications 49
Exhibit Index 51
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
==============================================================================================================================
(in thousands, except share data)
Assets Cash and cash equivalents..................................................... $143,846 $134,244
Interest earning deposits in banks............................................ 3,315 3,087
Federal funds sold and other short-term investments........................... 2,800 300
Securities available for sale................................................. 1,200,374 1,087,702
Loans and leases held for sale................................................ 83,832 101,831
Gross loans and leases........................................................ 2,767,277 2,477,193
Allowance for loan and lease losses........................................... (34,177) (33,940)
-----------------------------
Net loans and leases...................................................... $2,733,100 $2,443,253
Company owned life insurance.................................................. 107,414 99,982
Premises and equipment, net .................................................. 51,507 49,337
Intangible assets, net........................................................ 15,821 15,927
Foreclosed real estate........................................................ 3,118 5,625
Other assets.................................................................. 77,359 80,559
-----------------------------
TOTAL ASSETS.............................................................. $4,422,486 $4,021,847
=============================
Liabilities LIABILITIES
And Deposits:
Stockholders' Demand deposits............................................................. $1,397,595 $1,302,497
Equity Savings deposits............................................................ 134,585 122,185
Other time deposits......................................................... 1,697,607 1,469,055
-----------------------------
Total deposits........................................................... $3,229,787 $2,893,737
Short-term borrowings......................................................... 568,213 475,716
Long-term borrowings ......................................................... 184,785 268,230
Other liabilities............................................................. 89,398 82,504
-----------------------------
TOTAL LIABILITIES........................................................ $4,072,183 $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;
September 30, December 31,
2002 2001
---- ----
Issued 29,777,426 29,739,393
Outstanding 24,762,000 24,602,505 6,613 6,605
Additional paid-in capital.................................................... 73,140 74,045
Retained earnings ............................................................ 342,953 323,615
Deferred compensation......................................................... (757) (2,107)
Treasury stock (9/30/02 - 5,015,426 shares; 12/31/01 - 5,136,888 shares)...... (97,445) (100,197)
Accumulated other comprehensive income (loss)................................. 25,799 (301)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY............................................... $350,303 $301,660
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $4,422,486 $4,021,847
=============================
See accompanying notes to consolidated financial statements (unaudited).
3
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
=================================================================================================================================
(in thousands, except per share data)
Interest Interest and fees on loans and leases.................................. $47,573 $50,166 $137,965 $157,289
Income Interest on securities:
Taxable.............................................................. 13,492 13,470 39,652 44,387
Tax-exempt........................................................... 2,906 3,335 8,794 10,407
---------------------------------------------
Total Income from Securities...................................... $16,398 $16,805 $48,446 $54,794
---------------------------------------------
Interest on federal funds sold and other short-term investments........ $16 $147 $119 $414
Interest and fees on loans and leases held for sale.................... 1,272 1,157 3,215 3,069
Interest on deposits in banks.......................................... 23 93 64 535
---------------------------------------------
Total Interest Income............................................. $65,282 $68,368 $189,809 $216,101
---------------------------------------------
Interest Interest on deposits................................................... $23,066 $28,840 $67,945 $95,728
Expense Interest on short-term borrowings...................................... 3,962 4,439 11,499 16,632
Interest on long-term borrowings....................................... 4,396 5,197 14,135 15,388
---------------------------------------------
Total Interest Expense............................................ $31,424 $38,476 $93,579 $127,748
---------------------------------------------
Net Interest Income............................................... $33,858 $29,892 $96,230 $88,353
Provision for loan and lease losses.................................... 3,360 4,656 8,653 14,369
---------------------------------------------
Net Interest Income After Provision for Loan
and Lease Losses.............................................. $30,498 $25,236 $87,577 $73,984
---------------------------------------------
Non- Trust and asset management income...................................... $5,929 $6,737 $18,808 $20,354
Interest Service charges on deposits............................................ 4,882 3,950 12,862 10,758
Income Mortgage revenues...................................................... 1,340 898 3,684 4,194
Company owned life insurance income.................................... 1,458 1,505 4,184 3,935
Gain on branch sales................................................... - 1,803 - 10,498
Other.................................................................. 2,943 3,603 8,777 9,039
---------------------------------------------
Non-Interest Income, Excluding Net
Security Gains (Losses)....................................... $16,552 $18,496 $48,315 $58,778
Net security gains (losses)............................................ 1,144 309 2,503 (1,220)
---------------------------------------------
Total Non-Interest Income......................................... $17,696 $18,805 $50,818 $57,558
Operating Compensation expense................................................... $15,795 $13,549 $44,576 $40,581
Expenses Employee benefits...................................................... 4,168 3,289 11,856 10,386
Net occupancy expense.................................................. 2,034 1,825 5,883 5,685
Equipment expense...................................................... 2,036 1,818 5,820 5,992
Data processing expense................................................ 1,624 1,516 4,885 4,518
Professional fees...................................................... 1,112 732 3,207 2,884
Communication expense.................................................. 999 929 3,058 2,976
Advertising and business development................................... 1,095 1,021 3,486 3,146
Amortization of intangible assets...................................... 35 510 106 1,595
Other.................................................................. 5,351 4,223 14,296 12,838
---------------------------------------------
Total Operating Expenses.......................................... $34,249 $29,412 $97,173 $90,601
---------------------------------------------
Income Before Income Taxes, Extraordinary Item and Accounting Change... $13,945 $14,629 $41,222 $40,941
Income taxes........................................................... 3,262 3,682 10,030 10,263
---------------------------------------------
Net Income Before Extraordinary Item and Accounting Change............. $10,683 $10,947 $31,192 $30,678
Extraordinary item: Early extinguishment of debt (net of tax).. - ($204) - (204)
Cumulative effect of accounting change (net of tax)............. - - - 225
---------------------------------------------
NET INCOME........................................................ $10,683 $10,743 $31,192 $30,699
=============================================
=================================================================================================================================
EARNINGS PER COMMON SHARE (EPS)
Basic EPS
Income Before Extraordinary Item and Accounting Change.......... $ 0.43 $ 0.43 $ 1.26 $ 1.19
Extraordinary item: Early extinguishment of debt............... 0.00 (0.01) 0.00 (0.01)
Cumulative effect of accounting change.......................... 0.00 0.00 0.00 0.01
---------------------------------------------
Basic net income................................................ $ 0.43 $ 0.42 $ 1.26 $ 1.19
=============================================
Diluted EPS
Income Before Extraordinary Item and Accounting Change.......... $ 0.43 $ 0.43 $ 1.25 $ 1.18
Extraordinary item: Early extinguishment of debt............... 0.00 (0.01) 0.00 (0.01)
Cumulative effect of accounting change.......................... 0.00 0.00 0.00 0.01
---------------------------------------------
Diluted net income.............................................. $ 0.43 $ 0.42 $ 1.25 $ 1.18
=============================================
DIVIDENDS PER COMMON SHARE.......................................................... $ 0.16 $ 0.16 $ 0.48 $ 0.48
AVERAGE COMMON SHARES OUTSTANDING
Basic.................................................................. 24,732 25,384 24,676 25,725
Diluted................................................................ 24,923 25,640 24,899 25,966
=================================================================================================================================
See accompanying notes to consolidated financial statements (unaudited).
4
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Common Paid-In Retained Deferred Treasury
Stock Capital Earnings Compensation Stock
--------- --------- --------- ------------ ---------
(in thousands, except share data)
Balance at December 31, 2000 ........................... $ 6,596 $ 74,900 $ 297,703 $ (1,651) $ (69,385)
--------- --------- --------- --------- ---------
Comprehensive Income:
Net Income before accounting change and
extinguishment of debt ............................... -- -- 30,678 -- --
Cumulative effect of extinguishment of debt, net of tax -- -- (204) -- --
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 ................................ -- -- 225 -- --
--------- --------- --------- --------- ---------
Cash dividends on common stock - $0.48
per share ............................................ -- -- (12,325) -- --
Purchase of 1,456,393 shares for the treasury ......... -- -- -- -- (31,263)
Reissuance of 3,022 treasury shares under
non-employee directors stock plan .................... -- 20 -- (80) 60
Deferred compensation expense ......................... -- -- -- 437 --
Reissuance of 397,059 treasury shares for
incentive plans ...................................... -- (1,151) -- (923) 8,497
Issuance of 32,439 common shares for
Employee Stock Plan ................................... 7 545 -- -- --
--------- --------- --------- --------- ---------
Balance at September 30, 2001 ......................... $ 6,603 $ 74,314 $ 316,077 $ (2,217) $ (92,091)
========= ========= ========= ========= =========
Balance at December 31, 2001 ........................... $ 6,605 $ 74,045 $ 323,615 $ (2,107) $(100,197)
--------- --------- --------- --------- ---------
Comprehensive Income:
Net Income ............................................ -- -- 31,192 -- --
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 ................................. -- -- 31,192 -- --
--------- --------- --------- --------- ---------
Cash dividends on common stock - $0.48
per share ............................................ -- -- (11,854) -- --
Purchase of 109,318 shares for the treasury ........... -- -- -- -- (2,410)
Reissuance of 1,635 treasury shares under
non-employee directors stock plan .................... -- 5 -- (47) 42
Deferred compensation expense and other ............... -- (389) -- 1,358 --
Reissuance of 229,145 treasury shares for
incentive plans ...................................... -- (1,200) -- 39 5,120
Issuance of 38,033 common shares for
Employee Stock Plan ................................... 8 679 -- -- --
--------- --------- --------- --------- ---------
Balance at September 30, 2002 ......................... $ 6,613 $ 73,140 $ 342,953 $ (757) $ (97,445)
========= ========= ========= ========= =========
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
------------- -------------
Balance at December 31, 2000 ........................... $ 334 $ 308,497
--------- ---------
Comprehensive Income:
Net Income before accounting change and
extinguishment of debt ............................... -- 30,678
Cumulative effect of extinguishment of debt, net of tax -- (204)
Cumulative effect of accounting change, net of tax ... (1,548) (1,323)
Current period SFAS No. 133 transactions, net of tax . (667) (667)
SFAS No. 133 reclassification to earnings, net of tax (1,231) (1,231)
--------- ---------
Net cumulative effect of SFAS No. 133 .................. (3,446) (3,221)
========= =========
Unrealized holding gains on securities
available for sale arising during the period ......... 21,218 21,218
Less reclassification adjustment for security
losses included in net income ........................ 1,220 1,220
Income tax effect related to items of other
comprehensive income ................................. (8,845) (8,845)
--------- ---------
Net unrealized gains on securities
available for sale ................................... 13,593 13,593
--------- ---------
Comprehensive Income ................................ 10,147 10,372
--------- ---------
Cash dividends on common stock - $0.48
per share ............................................ -- (12,325)
Purchase of 1,456,393 shares for the treasury ......... -- (31,263)
Reissuance of 3,022 treasury shares under
non-employee directors stock plan .................... -- --
Deferred compensation expense ......................... -- 437
Reissuance of 397,059 treasury shares for
incentive plans ...................................... -- 6,423
Issuance of 32,439 common shares for
Employee Stock Plan ................................... -- 552
--------- ---------
Balance at September 30, 2001 ......................... $ 10,481 $ 313,167
========= =========
Balance at December 31, 2001 ........................... $ (301) $ 301,660
--------- ---------
Comprehensive Income:
Net Income ............................................ -- 31,192
Current period SFAS No. 133 transactions, net of tax . 2,627 2,627
SFAS No. 133 reclassification to earnings, net of tax 2,294 2,294
--------- ---------
Net cumulative effect of SFAS No. 133 .................. 4,921 4,921
--------- ---------
Unrealized holding gains on securities
available for sale arising during the period ......... 37,260 37,260
Less reclassification adjustment for security
gains included in net income ......................... (2,503) (2,503)
Income tax effect related to items of other
comprehensive income ................................. (13,578) (13,578)
--------- ---------
Net unrealized gains on securities
available for sale ................................... 21,179 21,179
--------- ---------
Comprehensive Income ................................. 26,100 57,292
--------- ---------
Cash dividends on common stock - $0.48
per share ............................................ -- (11,854)
Purchase of 109,318 shares for the treasury ........... -- (2,410)
Reissuance of 1,635 treasury shares under
non-employee directors stock plan .................... -- --
Deferred compensation expense and other ............... -- 969
Reissuance of 229,145 treasury shares for
incentive plans ...................................... -- 3,959
Issuance of 38,033 common shares for
Employee Stock Plan ................................... -- 687
--------- ---------
Balance at September 30, 2002 ......................... $ 25,799 $ 350,303
========= =========
See accompanying notes to consolidated financial statements (unaudited).
5
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(in thousands) 2002 2001
==============================================================================================================================
Cash Flows Net income ....................................................................... $ 31,192 $ 30,678
From Extraordinary item: Early extinguishment of debt, net of tax...................... - (204)
Operating Cumulative effect of accounting change, net of tax................................ - 225
Activities Gain on branch sales.............................................................. - (10,498)
Adjustments to reconcile net income from operations to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment...................... 4,404 4,917
Amortization and accretion of securities, net................................ 4,721 2,145
Provision for loan and lease losses.......................................... 8,653 14,369
Amortization of intangible assets............................................ 106 1,595
Net securities (gains) losses................................................ (2,503) 1,220
Net gain on sale of loans held for sale...................................... (6,251) (5,774)
Deferred income tax expense.................................................. 1,136 1,891
Originations of loans held for sale.......................................... (417,223) (407,817)
Proceeds from sales of loans held for sale................................... 441,474 389,319
Tax benefit on exercise of stock options .................................... (914) (955)
Other, net................................................................... (1,798) (9,679)
---------------------------
Net cash provided by operating activities................................. $ 62,997 $11,432
---------------------------
Cash Flows Proceeds from maturities of securities available for sale......................... $ 244,885 $ 236,259
From Proceeds from sales of securities available for sale.............................. 61,568 197,446
Investing Purchase of securities available for sale......................................... (386,585) (333,150)
Activities Net (increase) decrease in federal funds sold and other short-term investments.... (2,500) 34,500
Net (increase) decrease in interest earning deposits in banks..................... (228) 16,301
Proceeds from the sale of loans and leases........................................ - 3,247
Net (increase) decrease in loans and leases....................................... (304,622) 64,444
Investment in company owned life insurance........................................ (3,248) (40,000)
Premises and equipment expenditures, net.......................................... (6,256) (2,596)
Proceeds from the sale of foreclosed real estate.................................. 7,193 3,478
---------------------------
Net cash (used for) provided by investing activities...................... $ (389,793) $ 179,929
---------------------------
Cash Flows Net increase in demand deposits and savings accounts.............................. $ 107,498 $ 82,781
From Net increase (decrease) in time deposits.......................................... 228,552 (155,085)
Financing Net increase in short-term borrowings............................................. 9,547 13,374
Activities Proceeds from long-term borrowings................................................ - 79,650
Payment of long-term borrowings................................................... (495) (51,495)
Early extinguishment of debt...................................................... - (15,000)
Net payments to settle branch sales............................................... - (93,100)
Dividends paid.................................................................... (11,854) (12,325)
Issuance of common shares for employee stock plan................................. 687 552
Reissuance of treasury shares for incentive plans................................. 4,873 7,378
Purchase of shares for treasury .................................................. (2,410) (31,263)
---------------------------
Net cash provided by (used for) financing activities...................... $ 336,398 $ (174,533)
---------------------------
Net change in cash and cash equivalents........................................... $ 9,602 $ 16,828
Cash and cash equivalents:
Beginning of year............................................................... 134,244 118,807
---------------------------
End of period................................................................... $ 143,846 $ 135,635
===========================
Supplemental Cash payments for:
Disclosures of Interest paid to depositors..................................................... $ 66,633 $ 103,750
Cash Flow Interest paid on borrowings..................................................... 24,105 32,872
Information Income tax payment.............................................................. 8,221 12,354
Non-Cash Foreclosed real estate - acquired in settlement of loans.......................... 5,071 4,143
Investing and Transfer current portion of long-term borrowings to short-term borrowings......... 82,950 10,750
Financing Transfer of held to maturity securities to available for sale..................... - 10,635
Activities
Balance changes resulting from branch sales are excluded from individual line
items such as deposits, loans, and fixed assets.
See accompanying notes to consolidated financial statements (unaudited).
6
AMCORE FINANCIAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial reporting and with instructions for Form 10-Q
and Rule 10-01 of Regulation S-X. 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 nine month periods ended September 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" (SFAS No. 147). SFAS No. 147 requires financial
institutions to evaluate their accounting for past acquisitions to determine
whether revisions are needed. SFAS No. 147 applies to all new and past
financial-institution acquisitions, including "branch acquisitions" that qualify
as acquisitions of a business, but excludes acquisitions between mutual
institutions. The Company does not have any acquisitions that qualify for this
new standard.
7
NOTE 2 - SECURITIES
A summary of securities at September 30, 2002 and December 31, 2001 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
(in thousands)
At September 30, 2002
- ---------------------
Securities Available for Sale:
U.S. Treasury ........................ $ 5,010 $ 43 $ -- $ 5,053
U.S. Government agencies ............. 4,902 29 (5) 4,926
Agency mortgage-backed securities .... 723,968 21,417 (11) 745,374
State and political subdivisions ..... 227,409 14,644 (50) 242,003
Corporate obligations and other ...... 199,872 3,177 (31) 203,018
-----------------------------------------------------
Total Securities Available for Sale $1,161,161 $ 39,310 $ (97) $1,200,374
=====================================================
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 $1.2 million and $424,000 for the three months ended September 30, 2002 and
2001, respectively, and $2.6 million and $1.3 million for the nine months ended
September 30, 2002 and 2001, respectively. Realized gross losses resulting from
the sale of securities available for sale were $90,000 and $115,000 for the
three months ended September 30, 2002 and 2001, respectively, and $90,000 and
$2.5 million for the nine months ended September 30, 2002 and 2001,
respectively. At September 30, 2002 and 2001, securities with a fair value of
$950.3 million and $777.9 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 September 30, 2002 and
December 31, 2001, was as follows:
September 30, 2002 December 31, 2001
--------------------------------------
(in thousands)
Commercial, financial and agricultural . $ 720,855 $ 705,486
Real estate-construction ............... 123,852 100,349
Real estate-commercial ................. 868,994 724,936
Real estate-residential ................ 476,314 500,053
Installment and consumer ............... 575,963 443,106
Direct lease financing ................. 1,299 3,263
----------- -----------
Gross loans and leases ............ $ 2,767,277 $ 2,477,193
Allowance for loan and lease losses (34,177) (33,940)
----------- -----------
NET LOANS AND LEASES .............. $ 2,733,100 $ 2,443,253
=========== ===========
8
NOTE 4 - SALE OF RECEIVABLES
There were no sales of indirect automobiles into securitization transactions
during the third quarters of 2002 and 2001 or year-to-date 2002. 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 $8.1 million. The Company receives monthly servicing fees
equal to 0.75 percent per annum of the outstanding beginning principal balance
of the loans serviced for the month and rights to future cash flows arising
after the investors in the securitization trust have received the returns for
which they have contracted. The investors and the securitization trust have no
other recourse to the Company's other assets for failure of debtors to pay when
due. The Company's retained interests are subordinate to investor's interests.
The value of the Interest Only Strip is subject to prepayment risk and the value
of the Overcollateralization Asset is subject to credit risk on the transferred
auto loans.
Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of September 30, 2002 including the sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows:
As Of September 30, 2002
Loans Sold Loans Sold 10% Adverse 20% Adverse
During 2001 During 2000 Actual Change Change
-----------------------------------------------------------------------
($ in thousands)
Prepayment speed assumptions
Prepayment speed ............................. 1.5% 1.5% 1.8% 1.9% 2.1%
Weighted average life (in months) ............ 22.0 22.4 15.4 15.0 14.5
Fair value of retained interests ............. $ 2,239 $ 6,070 $ 6,318 $ 6,282 $ 6,245
Change in fair value ......................... N/A N/A N/A $ (36) $ (73)
Expected credit loss assumptions
Expected credit losses (loss to liquidation) . 1.3% - 1.7% 1.3% - 1.7% 1.7% 1.8% 2.0%
Fair value of retained interests ............. $ 2,239 $ 6,070 $ 6,318 $ 6,245 $ 6,171
Change in fair value ......................... N/A N/A N/A $ (73) $ (147)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual) .... 7.4% - 7.5% 8.3% - 9.1% 4.5% 5.0% 5.4%
Fair value of retained interests ............. $ 2,239 $ 6,070 $ 6,318 $ 6,247 $ 6,177
Change in fair value ......................... N/A N/A N/A $ (71) $ (141)
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 $531,000 and $568,000 in the third quarter of 2002
and 2001, respectively. The following table summarizes the various cash flows
received from and paid to the securitization trust:
9
Proceeds From Servicing Fees Other
Cash flows received from (paid to) trust Securitizations Collected Cash Flows Fees Paid
- ------------------------------------------------------------------------------------------------------------
(in thousands)
Third quarter 2002........................ $ - $ 110 $ 421 $ -
Third quarter 2001........................ $ - $ 190 $ 380 $ (2)
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 September 30 During the Year
--------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(in thousands)
Held in Portfolio $475,198 $289,845 $ 4,510 $ 7,909 $ 2,361 $ 1,446
Securitized ..... 48,924 88,390 1,196 2,345 686 571
Held for Sale ... -- 18,423 -- -- -- --
-------- -------- -------- -------- -------- --------
Total ......... $524,122 $396,658 $ 5,706 $ 10,254 $ 3,047 $ 2,017
======== ======== ======== ======== ======== ========
Actual and projected static pool credit losses, as a percentage of indirect auto
loans securitized are 1.20%, 1.65% and 1.78% for the quarters ended September
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 each period presented.
10
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 September 30, 2002 are as
follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------------------------------------
(in thousands)
Amortized Intangible Assets
Core Deposits - Retail Banking.......... $683 $559 $ 124
- Commercial Banking...... 293 241 52
-------------------------------------------
Total Amortized Intangible Assets............. $976 $800 $ 176
===========================================
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)....................... $15,821
=========
The current and estimated amortization expense by segment is as follows:
Retail Commercial
Banking Banking Total
-------------------------------
(in thousands)
Aggregate Amortization Expense
For Quarter Ended 9/30/02................ $ 24 $11 $ 35
For Nine Months Ended 9/30/02............ 73 33 106
Estimated Amortization Expense
For Remainder of Year Ending 12/31/02.... $ 25 $10 $ 35
For Year Ending 12/31/03................. 99 42 141
-------
Total estimated amortization expense. $176
=======
There have been no changes in the carrying amount of goodwill for the quarter
ended September 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.
11
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 Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-----------------------------------------------
(in thousands, except per share amounts)
Net income as reported ............... $10,683 $ 10,743 $31,192 $ 30,699
Add back: Goodwill amortization ...... N/A 486 N/A 1,521
Adjust: Core Deposit amortization
(change in useful life) ....... N/A (12) N/A (36)
-----------------------------------------------
Adjusted net income .................. $10,683 $ 11,217 $31,192 $ 32,184
===============================================
Basic earnings per share as reported . $ 0.43 $ 0.42 $ 1.26 $ 1.19
Add back: Goodwill amortization ...... N/A 0.02 N/A 0.06
Adjust: Core Deposit amortization
(change in useful life) ....... N/A -- N/A --
-----------------------------------------------
Adjusted basic earnings per share .... $ 0.43 $ 0.44 $ 1.26 $ 1.25
===============================================
Diluted earnings per share as reported $ 0.43 $ 0.42 $ 1.25 $ 1.18
Add back: Goodwill amortization ...... N/A 0.02 N/A 0.06
Adjust: Core Deposit amortization
(change in useful life) ....... N/A -- N/A --
-----------------------------------------------
Adjusted diluted earnings per share .. $ 0.43 $ 0.44 $ 1.25 $ 1.24
===============================================
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 September 30, 2002 are as follows:
Gross
Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------------------------------
(in thousands)
Capitalized OMSR...................... $21,646 $11,299 $10,347
Less: OMSR Valuation Allowance........ (3,225)
--------
Net OMSR.............................. $ 7,122
========
12
The current and estimated OMSR amortization expense on the Company's OMSR asset
are as follows:
Mortgage Banking
----------------
Aggregate Amortization Expense (in thousands)
For Quarter Ended 9/30/02......................... $1,422
For Nine Months Ended 9/30/02..................... 2,742
Estimated Amortization Expense
For Remainder of Year Ending 12/31/02............. $2,423
For Year Ending 12/31/03.......................... 1,743
For Year Ending 12/31/04.......................... 1,360
For Year Ending 12/31/05.......................... 1,061
For Year Ending 12/31/06.......................... 827
For Year Ending 12/31/07.......................... 645
Thereafter........................................ 2,288
The weighted-average amortization period for OMSR retained during the third
quarter of 2002 was 11.3 years.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings at September 30, 2002 and December 31, 2001 consisted of
the following:
September 30, 2002 December 31, 2001
---------------------------------------
(in thousands)
Securities sold under agreements to repurchase $418,096 $388,533
Federal Home Loan Bank borrowings ............ 83,021 10,821
Federal funds purchased ...................... 35,350 33,075
U.S. Treasury tax and loan note accounts ..... 12,000 12,000
Commercial paper borrowings .................. 19,746 31,287
---------------------------------
Total short-term borrowings ............... $568,213 $475,716
=================================
NOTE 7 - LONG-TERM BORROWINGS
Long-term borrowings at September 30, 2002 and December 31, 2001 consisted of
the following:
September 30, 2002 December 31, 2001
---------------------------------------
(in thousands)
Federal Home Loan Bank borrowings ............ $159,785 $242,786
Capital Trust preferred securities ........... 25,000 25,000
Other long-term borrowings ................... -- 444
---------------------------------
Total long-term borrowings ...... $184,785 $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 September 30, 2002 is 5.04 years, with a
weighted average borrowing rate of 5.21%.
Reductions of FHLB borrowings with call features, assuming they are called at
the earliest call date, are as follows at September 30, 2002:
13
Total
---------
(in thousands)
2002............................................. $ 141,000
2003............................................. 29,000
---------
Total callable FHLB borrowings...... $ 170,000
=========
The Company has $25.0 million of capital securities outstanding through AMCORE
Capital Trust I ("Trust"), a statutory business trust. All of the common
securities of the Trust are owned by the Company. The capital securities pay
cumulative cash distributions semiannually at an annual rate of 9.35%. The
securities are redeemable from March 25, 2007 until March 25, 2017 at a
declining rate of 104.6750% to 100% of the principal amount. After March 25,
2017, they are redeemable at par until June 15, 2027 when redemption is
mandatory. Prior redemption is permitted under certain circumstances such as
changes in tax or regulatory capital rules. The proceeds of the capital
securities were invested by the Trust in junior subordinated debentures which
represents all of the assets of the Trust. The Company fully and unconditionally
guarantees the capital securities through the combined operation of the
debentures and other related documents. The Company's obligations under the
guarantee are unsecured and subordinate to senior and subordinated indebtedness
of the Company.
During the third quarter 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.
Total
---------
(in thousands)
2003............................................. $ 20
2004............................................. 25,042
2005............................................. 15,684
2006............................................. 11,711
2007............................................. 312
Thereafter....................................... 132,016
-----------
Total long-term borrowings............... $ 184,785
===========
14
NOTE 8 - EARNINGS PER SHARE
For the Three Months For the Nine Months
Earnings per share calculations are as follows: Ended September 30, Ended September 30,
2002 2001 2002 2001
---------------------------------------------
(in thousands, except per share data)
Net Income ........................................................ $10,683 $10,743 $31,192 $30,699
Basic earnings per share:
Average basic shares outstanding .......................... 24,732 25,384 24,676 25,725
---------------------------------------------
Earnings per share ........................................ $ 0.43 $ 0.42 $ 1.26 $ 1.19
=============================================
Diluted earnings per share:
Weighted average shares outstanding ....................... 24,732 25,384 24,676 25,725
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 ............... 191 254 223 241
Contingently issuable shares .............................. -- 2 -- --
---------------------------------------------
Average diluted shares outstanding ........................ 24,923 25,640 24,899 25,966
=============================================
Diluted Earnings per share ................................ $ 0.43 $ 0.42 $ 1.25 $ 1.18
=============================================
15
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 Segment profit percentage is
computed on earnings before the early extinguishment of debt and the cumulative
effect of accounting change (the "Operating Profit" or "Operating Loss"). In
addition, due to their unusual and non-recurring nature, the branch gains have
not been allocated to either the Commercial or Retail segments. They are
included in the Other column.
16
For the three months ended September 30, 2002 --------------------- Operating Segments --------------------
Commercial Retail Trust and Asset Mortgage
Banking Banking Management Banking
-------------------------------------------------------------
(dollars in thousands)
Net interest income ........................................ $ 16,659 $ 13,631 $ 28 $ 1,226
Non-interest income ........................................ 1,782 3,939 6,607 2,021
-------------------------------------------------------------
Total Revenue ......................................... 18,441 17,570 6,635 3,247
Provision for loan and lease losses ........................ 1,039 2,321 -- --
Depreciation and amortization .............................. 158 519 87 5
Other non-interest expense ................................. 7,972 11,436 5,145 3,212
-------------------------------------------------------------
Pretax earnings (loss) ................................ 9,272 3,294 1,403 30
Income taxes (benefits) .................................... 3,284 1,225 568 17
-------------------------------------------------------------
Earnings .............................................. $ 5,988 $ 2,069 $ 835 $ 13
=============================================================
Segment profit percentage .................................. 67.2% 23.2% 9.4% 0.2%
=============================================================
For the three months ended September 30, 2001
Net interest income ........................................ $ 12,911 $ 12,158 $ 42 $ 1,242
Non-interest income ........................................ 1,578 3,674 7,194 1,279
-------------------------------------------------------------
Total Revenue ......................................... 14,489 15,832 7,236 2,521
Provision for loan and lease losses ........................ 3,174 1,482 -- --
Depreciation and amortization .............................. 264 731 286 8
Other non-interest expense ................................. 6,218 11,008 5,283 2,167
-------------------------------------------------------------
Pretax earnings ....................................... 4,833 2,611 1,667 346
Income taxes (benefits) .................................... 1,562 920 768 138
-------------------------------------------------------------
Earnings before Extraordinary Item .................... $ 3,271 $ 1,691 $ 899 $ 208
Early Extinguishment of Debt (net of tax) .................. -- -- -- --
-------------------------------------------------------------
Earnings .............................................. $ 3,271 $ 1,691 $ 899 $ 208
=============================================================
Segment profit percentage .................................. 53.9% 27.9% 14.8% 3.4%
=============================================================
For the three months ended September 30, 2002
Other Consolidated
---------------------------
(dollars in thousands)
Net interest income ........................................ $ 2,314 $ 33,858
Non-interest income ........................................ 3,347 17,696
---------------------------
Total Revenue ......................................... 5,661 51,554
Provision for loan and lease losses ........................ -- 3,360
Depreciation and amortization .............................. 721 1,490
Other non-interest expense ................................. 4,994 32,759
---------------------------
Pretax earnings (loss) ................................ (54) 13,945
Income taxes (benefits) .................................... (1,832) 3,262
---------------------------
Earnings .............................................. $ 1,778 $ 10,683
===========================
Segment profit percentage .................................. N/M 100.0%
===========================
For the three months ended September 30, 2001
Net interest income ........................................ $ 3,539 $ 29,892
Non-interest income ........................................ 5,080 18,805
---------------------------
Total Revenue ......................................... 8,619 48,697
Provision for loan and lease losses ........................ -- 4,656
Depreciation and amortization .............................. 750 2,039
Other non-interest expense ................................. 2,697 27,373
---------------------------
Pretax earnings ....................................... 5,172 14,629
Income taxes (benefits) .................................... 294 3,682
---------------------------
Earnings before Extraordinary Item .................... $ 4,878 $ 10,947
Early Extinguishment of Debt (net of tax) .................. (204) (204)
---------------------------
Earnings .............................................. $ 4,674 $ 10,743
===========================
Segment profit percentage .................................. N/M 100.0%
===========================
For the nine months ended September 30, 2002 --------------------- Operating Segments ---------------------
Commercial Retail Trust and Asset Mortgage
Banking Banking Management Banking
--------------------------------------------------------------
(dollars in thousands)
Net interest income ........................................ $ 45,608 $ 39,354 $ 95 $ 3,143
Non-interest income ........................................ 5,197 10,737 20,690 5,335
--------------------------------------------------------------
Total Revenue ......................................... 50,805 50,091 20,785 8,478
Provision for loan and lease losses ........................ 3,706 4,947 -- --
Depreciation and amortization .............................. 439 1,644 257 20
Other non-interest expense ................................. 21,533 32,063 15,950 7,816
--------------------------------------------------------------
Pretax earnings (loss) ................................ 25,127 11,437 4,578 642
Income taxes (benefits) .................................... 8,682 4,195 1,845 265
--------------------------------------------------------------
Earnings .............................................. $ 16,445 $ 7,242 $ 2,733 $ 377
==============================================================
Segment profit percentage .................................. 61.4% 27.0% 10.2% 1.4%
==============================================================
Assets .................................................... $ 1,815,004 $ 1,164,339 $ 22,520 $ 95,538
==============================================================
For the nine months ended September 30, 2001
Net interest income ........................................ $ 39,425 $ 37,444 $ 168 $ 3,068
Non-interest income ........................................ 4,473 10,824 21,632 5,263
--------------------------------------------------------------
Total Revenue ......................................... 43,898 48,268 21,800 8,331
Provision for loan and lease losses ........................ 8,640 5,729 -- --
Depreciation and amortization .............................. 785 2,371 894 32
Other non-interest expense ................................. 18,461 32,407 15,940 6,280
--------------------------------------------------------------
Pretax earnings ....................................... 16,012 7,761 4,966 2,019
Income taxes (benefits) .................................... 5,182 2,858 2,240 805
--------------------------------------------------------------
Earnings before Extraordinary Item & Accounting Change $ 10,830 $ 4,903 $ 2,726 $ 1,214
Early Extinguishment of Debt (net of tax) .................. -- -- -- --
Cumulative effect of Accounting Change (net of tax) ........ -- -- -- 16
--------------------------------------------------------------
Earnings .............................................. $ 10,830 $ 4,903 $ 2,726 $ 1,230
==============================================================
Segment profit percentage .................................. 55.1% 24.9% 13.8% 6.2%
==============================================================
Assets .................................................... $ 1,604,051 $ 1,019,495 $ 20,395 $ 42,636
==============================================================
For the nine months ended September 30, 2002
Other Consolidated
---------------------------
(dollars in thousands)
Net interest income ........................................ $ 8,030 $ 96,230
Non-interest income ........................................ 8,859 50,818
---------------------------
Total Revenue ......................................... 16,889 147,048
Provision for loan and lease losses ........................ -- 8,653
Depreciation and amortization .............................. 2,154 4,514
Other non-interest expense ................................. 15,297 92,659
---------------------------
Pretax earnings (loss) ................................ (562) 41,222
Income taxes (benefits) .................................... (4,957) 10,030
---------------------------
Earnings .............................................. $ 4,395 $ 31,192
===========================
Segment profit percentage .................................. N/M 100.0%
===========================
Assets .................................................... $ 1,325,085 $ 4,422,486
===========================
For the nine months ended September 30, 2001
Net interest income ........................................ $ 8,248 $ 88,353
Non-interest income ........................................ 15,366 57,558
---------------------------
Total Revenue ......................................... 23,614 145,911
Provision for loan and lease losses ........................ -- 14,369
Depreciation and amortization .............................. 2,430 6,512
Other non-interest expense ................................. 11,001 84,089
---------------------------
Pretax earnings ....................................... 10,183 40,941
Income taxes (benefits) .................................... (822) 10,263
---------------------------
Earnings before Extraordinary Item & Accounting Change $ 11,005 $ 30,678
Early Extinguishment of Debt (net of tax) .................. (204) (204)
Cumulative effect of Accounting Change (net of tax) ........ 209 225
---------------------------
Earnings .............................................. $ 11,010 $ 30,699
===========================
Segment profit percentage .................................. N/M 100.0%
===========================
Assets .................................................... $ 1,348,469 $ 4,035,046
===========================
17
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"(pound) 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 500 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.
18
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 September 30, 2002 included the
following derivative related activity in other non-interest income: $6,000 loss
due to the decrease in the Time Value component of the market value of cash flow
hedges, $11,000 income related to the ineffective portion of the cash flow
hedges, $261,000 income related to Mortgage Loan Derivatives, and no income or
loss related to the S & P 500 Index embedded derivative. These items, net of
taxes of $104,000, totaled income of $162,000 recorded for the quarter ended
September 30, 2002.
The Income Statement for the nine months ended September 30, 2002 included the
following derivative related activity in other non-interest income: $43,000 loss
due to the decrease in the Time Value component of the market value of cash flow
hedges, $29,000 income related to the ineffective portion of the cash flow
hedges, $385,000 income related to Mortgage Loan Derivatives, and no income or
loss related to the S & P 500 Index embedded derivative. These items, net of
taxes of $145,000, totaled $226,000 in income recorded for the nine months ended
September 30, 2002.
The Income Statement for the three months ended September 30, 2001 included the
following derivative related activity in other non-interest income: $41,000 loss
due to the decrease in the Time Value component of the market value of cash flow
hedges, $47,000 loss related to the ineffective portion of the cash flow hedges,
$204,000 income related to Mortgage Loan Derivatives, and $4,000 income related
to the S & P 500 Index embedded derivative. These items, net of taxes of
$47,000, totaled $73,000 in income recorded for the quarter ended September 30,
2001.
In addition to the transition adjustment, the Income Statement for the nine
months ended September 30, 2001 included the following derivative related
activity in other non-interest income: $327,000 loss due to the decrease in the
Time Value component of the market value of cash flow hedges, $9,000 loss
related to the ineffective portion of the cash flow hedges, $164,000 income
related to Mortgage Loan Derivatives, and $8,000 income
19
related to the S & P 500 Index embedded derivative. These items, net of taxes of
$64,000, totaled a $100,000 loss recorded for the nine months ended September
30, 2001.
NOTE 11 - CONTINGENCIES
Management believes that no litigation is threatened or pending in which the
Company faces potential loss or exposure which will materially affect the
Company's financial position or results of operations, other than noted below.
Since the Company's subsidiaries act as depositories of funds, trustee and
escrow agents, they are named as defendants in lawsuits involving claims to the
ownership of funds in particular accounts. This and other litigation is
incidental to the Company's business.
The Company has reached a negotiated agreement with its insurance carrier and
Plaintiffs' counsel to settle the lawsuit and other potential claims outlined
below. The settlement agreement did not have a material 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. In addition, Plaintiffs' attorneys rejected the
Company's settlement offer. Plaintiffs' counsel also notified 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. During the third quarter of 2002 Plaintiffs and
Company entered into a settlement of all claims. All Plaintiffs and potential
claimants have executed full releases and the United States District Court for
the Northern District of Mississippi has dismissed the lawsuit on file with
prejudice.
20
ITEM 2. MANAGEMENT'S 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 September 30, 2002 compared to December 31, 2001 and the
results of operations for the three and nine months ended September 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", "should",
"may", "will" or similar expressions are forward looking statements.
Forward-looking statements speak only as of the date they are made, and AMCORE
undertakes no obligation to update publicly any of them in light of new
information or future events.
Contemplated, projected, forecasted or estimated results in such forward-looking
statements involve certain inherent risks and uncertainties. A number of factors
- - many of which are beyond the ability of the Company to control or predict -
could cause actual results to differ materially from those in its
forward-looking statements. These factors include, among others, the following
possibilities: (I) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
formation of new products by new or existing competitors; (II) adverse state,
local 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 $10.7 million for both of the three-month periods
ended September 30, 2002 and 2001. Net income for the nine months ended
September 30, 2002 was $31.2 million, an increase of $493,000 or 1.6% from the
$30.7 million reported for the same period in 2001.
Diluted earnings per share were $0.43 and $1.25 for the three and nine months
ended September 30, 2002, respectively, compared to $0.42 and $1.18 for the same
periods in 2001. This represents an increase of 2.4% and 5.9% for the three and
nine month periods, respectively. The percentage increases in earnings on a
diluted per share basis compares favorably to the respective changes on a dollar
basis, and reflects the accretive impact to per share earnings of AMCORE's
previously announced stock
21
repurchase programs. For the three and nine month periods, average diluted
shares outstanding declined 717,000 and 1.1 million, respectively.
AMCORE's annualized return on average realized equity for the third quarter and
year-to-date for 2002 was 13.15% and 13.31%, respectively. Annualized return on
average realized equity for the comparable periods in 2001 was 13.74% and
13.18%. Average realized equity excludes the impact of unrealized gains and
losses that are otherwise included in other comprehensive income. The annualized
return on average assets was 0.97% and 1.00% for the third quarter and
year-to-date of 2002, respectively. This compares to 1.10% for the third quarter
of 2001 and 1.01% for 2001 year-to-date.
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"). The Company's strategy is to move into a new market where business
density is greatest, with a seasoned commercial service staff in a leased
facility. Once a book of business is developed and the branch becomes
profitable, a more permanent site for a full service facility is sought.
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.
Year-to-date 2002, the BANK has opened three commercial loan offices and one
full-service branch. The commercial loan offices included two in the Chicago
suburbs of Schaumburg and Lincolnshire, Illinois and one on the east side of
Madison, Wisconsin. The full-service branch is located along the beltway in
Madison. Combined, these new locations have generated $164.2 million in loans
and $46.4 million in deposits as of September 30, 2002. During the fourth
quarter, the BANK will open offices in the Illinois cities of St. Charles,
McHenry and Des Plaines. In 2003 and early 2004, the Company plans to open an
additional nine branches in the Fox River Valley and the collar counties
surrounding Chicago in Illinois and Madison, Wisconsin. This will bring the
total number of BANK offices to 75, with 39 located along the I-90 corridor.
The nine branches planned for 2003 and early 2004, will require approximately
$28 million in incremental capital expenditures and is expected to have a
dilutive impact on 2003 earnings of 10 to 15 cents as start-up costs initially
outpace net revenues. Despite this dilutive impact, AMCORE expects
year-over-year growth in earnings per share from improvements in existing
business performance during 2003. For 2004 and thereafter, the Company expects
earnings accretion from its Branch Expansion efforts.
As a complement to its Branch Expansion, the BANK is adding 34 additional
automated teller machines (ATMs) in 15 communities in northern Illinois and
southern Wisconsin. The leased ATMs will be located in Kelley-Williamson Mobil
stations as part of a co-branding relationship. The BANK currently owns and
operates 77 ATMs throughout Wisconsin (24) and Illinois (53). Expansion of the
BANK's ATM network through this co-branded relationship will increase its
Wisconsin and Illinois ATM presence to 33 and 78, respectively, or 111 overall.
Organizational Changes
22
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").
Kenneth E. Edge was named President and Chief Executive Officer, effective July
1, 2002 and Chairman of the Board effective January 1, 2003. Mr. Edge, who most
recently served as AMCORE's 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 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"). The full amount was accrued
during the third quarter of 2002. Amounts due for consulting services subsequent
to retirement date will be expensed as earned.
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, that were
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 $486,000 and $1.5 million for the three and nine-month
23
periods ending September 30, 2001, respectively. Amortization of Core Deposit
Intangibles was $106,000 for the first nine months of 2002, compared to $74,000
for the same period in 2001. The increase reflects the reassessment of and
reduction in 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. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions" (SFAS No. 147). SFAS No. 147 requires financial
institutions to evaluate their accounting for past acquisitions to determine
whether revisions are needed. SFAS No. 147 applies to all new and past
financial-institution acquisitions, including "branch acquisitions" that qualify
as acquisitions of a business, but excludes acquisitions between mutual
institutions. The Company does not have any acquisitions affected by this new
standard. 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.
The Debt Extinguishment resulted in an after-tax extraordinary charge of
$204,000, or $0.01 per diluted share (the "Extraordinary Item"). 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 nine months of 2002, the Company
repurchased 82,000 shares at an average price of $22.20. As of September 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 nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
--------------------------------------------
Interest Income Book Basis $ 65,282 $ 68,368 $189,809 $216,101
FTE Adjustment 1,705 1,988 5,278 6,203
--------------------------------------------
24
Interest Income FTE Basis 66,987 70,356 195,087 222,304
Interest Expense 31,424 38,476 93,579 127,748
--------------------------------------------
Net Interest Income FTE Basis $ 35,563 $ 31,880 $101,508 $ 94,556
============================================
Net interest income on an FTE basis increased $3.7 million or 11.6% in the third
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 $7.0 million or 7.4%. The year-over-year
increases for both the three and nine months periods were driven by reductions
in total interest expense of 18.3% and 26.7%, 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 22 basis points to 3.18%
in the third quarter of 2002 from 2.96% in the third quarter of 2001. The
interest rate margin was 3.55% in the third quarter of 2002, an increase of 6
basis points from 3.49% in the third quarter of 2001.
As Table 2 indicates, the interest rate spread improved 35 basis points to 3.12%
for the first nine months of 2002 from 2.77% for the same period in 2001. The
interest rate margin was 3.52% for the first nine months of 2002, an increase of
17 basis points from 3.35% 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 third quarter of 2002, net interest income on an FTE basis increased due
to average volume by $2.7 million when compared to the third quarter of 2001.
This was comprised of a $6.3 million increase in interest income that was
partially offset by a $3.6 million increase in interest expense.
The $6.3 million increase in interest income was driven by a $247.5 million or
10.0% increase in average loans and a $114.5 million or 10.4% increase in
average investment securities. The increase in average loans was led by a $161.7
million average increase in consumer loans, principally indirect automobile
lending, and $155.6 million average in commercial lending driven by 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. Partially offsetting this growth was a $71.1 million average decline in
1-to-4 family real estate loans. 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
25
Restructuring, the 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
$308.3 million or 10.8% increase in average deposits and by a $42.3 million or
5.9% increase in average borrowings. The increase in average deposits was
attributable to a $168.5 million increase in core deposits and a $140.6 million
increase in brokered certificate of deposit (CD's). The increase in core
deposits included $38.7 million in average attributable to the Branch Expansion.
Not reflected in the increases in core deposits was the replacement of $14.3
million in average interest-bearing deposit balances that were transferred to
the buyers in the Branch Sales. Total average core deposit growth, including
replacement of deposits transferred in the Branch Sales, was $182.8 million or
7.1% when comparing the third quarter of 2002 to the third 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 nine months of 2002, net interest income increased due to average
volume by $1.4 million, when compared with the same period in 2001. This was
comprised of a $4.6 million increase in interest income that was partially
offset by a $3.2 increase in interest expense. Average loans over this period
increased $80.3 million or 3.2%, while average securities increased $9.6 million
or 0.8%. Average interest-bearing liabilities increased $86.9 million or 2.6%.
Changes Due to Rate
During the third quarter of 2002, net interest income on an FTE basis increased
due to average rates by $962,000 when compared with the same quarter of 2001.
This was comprised of an $10.7 million decline in interest expense that was
partly offset by a $9.7 million decrease in interest income.
The yield on earning assets declined 100 basis points during the quarter, when
compared to the same period a year ago. The yield on average loans fell by 112
basis points and was primarily attributable to commercial and commercial real
estate loans. Falling interest rates since the third 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 84 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 122 basis points during
the third quarter of 2002, compared to the third 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 due to reverse repurchase agreements that renewed at lower rates, also
due to the decline in short-term interest rates.
For the first nine months of 2002, net interest income increased due to average
rates by $5.5 million, when compared with the same period in 2001. This was
comprised of a $37.4 million decline in interest expense that was partially
offset by a $31.9 million decrease in interest income. The yield on earning
assets declined 111 basis points, while average rates paid on interest bearing
liabilities decreased by 146 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
26
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 $3.4 million in the third quarter of 2002, a decrease of $1.3
million or 27.8% from the $4.7 million in the third quarter of 2001. For the
first nine months of 2002, the Provision was $8.7 million, a decrease of $5.7
million from the $14.4 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 and the effects of September 11, 2001.
Comparable additions to the Allowance were not necessary during 2002.
AMCORE recorded net charge-offs of $3.2 million in the third quarter of 2002
compared to $3.4 million in the third quarter of 2001. Annualized net
charge-offs declined to 46 basis points of average loans in the third quarter of
2002 from an annualized rate of 54 basis points during the same quarter of last
year.
The Allowance, as a percent of total loans, was 1.24% and 1.38% at September 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, declines in used automobile collateral values, 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 $16.6 million in the
third quarter of 2002, a decrease of $1.9 million or 10.5% from the $18.5
million in third quarter of 2001. Excluding a $1.8 million Branch Gain and a
$1.0 million gain from cash received on the merger of an ATM service provider in
the third quarter of 2001, non-interest income increased $904,000 or 5.8%. On a
year-to-date basis, excluding $10.5 million in Branch Gains and the $1.0 million
ATM service provider merger gain, non-interest income increased $1.1 million or
2.3% to $48.3 million in 2002, compared to $47.2 million in 2001.
27
Trust and asset management income, the largest source of fee based revenues,
totaled $5.9 million in the third quarter of 2002, a decrease of $808,000 or
12.0% from $6.7 million in the third quarter of 2001. For the nine-month periods
ended September 30, 2002 and 2001, respectively, trust and asset management
revenues were $18.8 million and $20.4 million, a decline of $1.5 million or
7.6%. The declines in the equity market 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 $5.6 billion of
investments, inclusive of traditional assets as well as the management of the
BANK's diverse fixed income portfolio of approximately $1.2 billion. Assets in
the AMCORE Vintage Mutual Funds totaled $874 million at September 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 $4.9 million in the third quarter of 2002,
an increase of $932,000 or 23.6% from the $4.0 million in the third quarter of
2001. Year-to-date in 2002, service charges on deposits increased $2.1 million
or 19.6% to $12.9 million, from $10.8 million during the same period in 2001.
Deposit growth initiatives 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 $1.3 million in the third quarter of 2002, an increase of $442,000 or 49.2%
from $898,000 in the third quarter of 2001, despite an $816,000 increase in
mortgage servicing rights impairment charges due to increasing prepayment
speeds. Excluding a $1.7 million servicing right impairment charge in the third
quarter of 2002 and $906,000 in the third quarter of 2001, mortgage revenues
increased $1.3 million or 69.7%. Closing volumes increased 74.9% to $206.3
million in the third quarter of 2002, from $117.9 million in the third quarter
2001. For the first nine months of 2002, mortgage revenues were $3.7 million
compared to $4.2 million for the first nine months of 2001, for a decline of
$510,000 or 12.2%. Excluding impairment charges of $2.4 million and $1.1 million
year-to-date 2002 and 2001, respectively, mortgage revenues increased $829,000
or 15.6%. Closing volumes increased 12.8% to $417.2 million for the first nine
months of 2002, from $369.7 million over the same period in 2001.
Continued strong mortgage performance, fueled by an extended period of mortgage
interest rates declines and resulting refinancing activity, is expected
throughout the remainder of 2002. Full year volumes are on pace to exceed the
record levels achieved in 2001. As of September 30, 2002, AMCORE had $10.3
million of capitalized mortgage servicing rights, less a $3.2 impairment
valuation allowance, with a fair value of $7.1 million. The unpaid principal
balance of mortgage loans serviced for others, including mortgage loans held for
sale, was $1.0 billion as of September 30, 2002. This compares to $925.8 million
as of September 30, 2001.
COLI income totaled $1.5 million in the third quarter of 2002, a $47,000 or 3.1%
decrease from $1.5 million in the third quarter of 2001. Year-to-date, COLI
income increased $249,000 or 6.3% to $4.2 million, reflecting additional
investments and the impact of compounding. Declining interest rates, which have
been slower to impact COLI investment performance and yields, contributed to the
decline in the third quarter of 2002 compared to the same period in 2001. 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 September 30, 2002, the CSV
of COLI stood at $107.4 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 third quarter
of 2002, other non-interest income was $2.9 million, a
28
$660,000 or 18.3% decrease from $3.6 million in the third quarter of 2001. The
decline was primarily attributable to the $1.0 million third quarter 2001 ATM
service provider merger gain and was partly offset by increased brokerage
commissions and derivative mark-to-market gains. For the first nine-months of
2002 other non-interest income was $8.8 million, a decrease of $262,000 or 2.9%
from the same time period in 2001. The $1.0 million third quarter 2001 ATM
service provider merger gain and a $781,000 first quarter 2001 gain on Auto Loan
Sales, were nearly offset by a $365,000 second quarter 2002 gain on the sale of
excess land, a $309,000 first quarter 2002 excess retirement plan asset
reversion gain, increased derivative mark-to-market gains, higher brokerage
commissions and higher check-card interchange income.
Net realized securities gains were $1.1 million in the third quarter of 2002,
compared to $309,000 in the third quarter of 2001. For the full nine-month
periods, net realized security gains were $2.5 million in 2002 compared to a
$1.2 million loss in 2001. The loss in 2001 was attributable to the Security
Portfolio Restructuring. 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 $34.2 million in the third quarter of 2002, an
increase of $4.8 million or 16.4%, from $29.4 million in the third quarter of
2001. For the first nine months of 2002, operating expenses were $97.2 million,
an increase of $6.6 million or 7.3% from $90.6 million for the first nine 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 60.90% in the third quarter of 2002, compared
to 60.30% in the third quarter of 2001. On a year-to-date basis the efficiency
ratios were 62.41% and 61.86% for 2002 and 2001, respectively.
Personnel costs, which include compensation expense and employee benefits, are
the largest component of operating expenses. Personnel costs totaled $20.0
million in the third quarter of 2002, an increase of $3.1 million or 18.6% from
$16.8 million in the third quarter of 2001. In addition to normal cost-of-living
adjustments, the increase was primarily attributable to the $1.3 million
Retirement Obligation, increased employee benefit and incentive related costs,
Branch Expansion and higher commissions. Higher commissions were driven by
increased mortgage and brokerage activity. For the nine-month periods ended
September 30, 2002 and 2001, personnel costs were $56.4 million and $51.0
million, respectively, an increase of $5.5 million or 10.7%. The year-to-date
variance was impacted by the same items as for the quarter only, but was partly
offset by lower costs due to the Branch Sales and net severance costs. Severance
incurred in the second quarter of 2001 was partly offset by severance costs
incurred in the first quarter of 2002.
Net occupancy expense for the three and nine-month periods ended September 30,
2002 were $2.0 million and $5.9 million, respectively. This compares to $1.8
million and $5.7 million for the three and nine-month periods ended September
30, 2001, respectively. For the third quarter the increase was $209,000 or
11.5%, while the full nine-month period increased $198,000 or 3.5%. These
increases include higher costs associated with the Branch Expansion, net of the
cost savings from the Branch Sales.
Equipment expense increased $218,000 or 12.0% to $2.0 million in the third
quarter of 2002 but was down $172,000 or 2.9% to $5.8 million for the first
nine-months of 2002, when compared to the respective periods of 2001 where
expenses were $1.8 million and $6.0 million. Year-to-date, lower costs related
to data processing equipment more than offset increased software costs.
Equipment expense increased during the third quarter of 2002, compared to 2001,
due in large part to the Branch Expansion.
Professional fees for the three and nine-month periods ended September 30, 2002
were $1.1 million and $3.2 million, respectively. This was an increase of
$380,000 or 51.9% from $732,000 in the third quarter
29
of 2001, primarily due to higher consulting and legal expenses. For the full
nine-month period, there was an increase of $323,000 or 11.2% from $2.9 million
a year ago. The increase for the nine-month period was mainly due to higher
consulting and collection expenses.
Advertising and business development expenses were $1.1 million in the third
quarter of 2002, an increase of $74,000 or 7.2% from $1.0 million in the third
quarter of 2001. For the nine-month period ended September 30, 2002, advertising
and business development expenses increased $340,000 or 10.8% to $3.5 million
from $3.1 million in the same period in 2001. The increase primarily related to
the promotion of free checking accounts.
Intangibles amortization declined to $35,000 and $106,000 for the respective
three and nine-month periods ended September 30, 2002, compared to $510,000 and
$1.6 million for the same periods in 2001. The decrease relates to the
discontinuation of goodwill amortization pursuant to SFAS No. 142.
Other expenses were $5.4 million in the third quarter of 2002, an increase of
$1.1 million or 26.7% from $4.2 million in the third quarter of 2001. The
increase was mainly the result of higher loan processing costs associated with
increased mortgage volumes, increased foreclosed real estate costs and lower of
cost or market adjustments on mortgages held for sale, that were partly offset
by lower charitable contributions. Year-to-date, other expenses increased $1.5
million or 11.4% to $14.3 million in 2002 from $12.8 million in 2001.
Income Taxes
Income tax expense totaled $3.3 million in the third quarter of 2002, compared
with $3.7 million in the third quarter of 2001, a decrease of $420,000 or 11.4%.
Lower pre-tax earnings, adjustments related to favorable audit results 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, were the
primary reasons for the decline. Partly offsetting the decline was the impact of
decreased investments in tax-exempt municipal bonds. For the nine-month period
ended September 30, 2002, income tax expense decreased $233,000 or 2.3% to $10.0
million from $10.3 million in the same period in 2001. Year-to-date, the
favorable audit related adjustments, the discontinuation of goodwill
amortization, and the affect of increases in CSV on COLI more than offset
increased taxes due to higher pre-tax earnings and decreased investments in
tax-exempt municipal bonds.
The effective tax rates were 23.4% and 24.8% in the third quarter of 2002 and
2001, respectively. The effective tax rates for the full nine-month periods
ended September 30, 2002 and 2001 were 24.3% and 25.1%, respectively. The third
quarter of 2001 effective tax rate included $130,000 of tax benefit for the
Extraordinary Item. For the nine-month period ended September 30, 2001, the
effective tax rate included the $130,000 tax benefit and $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
30
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 eliminations, 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 Extraordinary Item
and 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 third quarter of 2002 was $6.0 million, an
increase of $2.7 million or 83.1% from the third quarter of 2001. Commercial
Operating Profit for the nine months ended September 30, 2002 was $16.4 million.
This was an increase of $5.6 million or 51.8% 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 nine-month periods.
Net interest income increased by $3.7 million in the third quarter of 2002 and
by $6.2 million for the nine-month period ended September 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
31
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 $204,000 in the third quarter of 2002, compared
to the same period in 2001. For year-to-date, the increase was $724,000. The
increase for both periods was primarily the result of increased commercial
deposit account analysis fees.
The Provision decreased by $2.1 million and $4.9 million, respectively, for the
three and nine-month periods ended September 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 and third quarters of 2001.
Comparable additions to the Allowance were not necessary during 2002.
Operating expenses increased $1.6 million in the third quarter and $2.7 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. Expenses
on foreclosed real estate increased for the quarter, but were down on a
year-to-date basis.
Income taxes increased $1.7 million for the third quarter and $3.5 million
year-to-date from the comparable periods in 2001 and were primarily the result
of higher income before taxes.
The Commercial Segment represented 67.2% and 53.9% of total segment Operating
Profit in the third quarters of 2002 and 2001, respectively, and 61.4% for 2002
year-to-date versus 55.1% 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 third quarter of 2002 was $2.1 million, an
increase of $378,000 or 22.4% from the third quarter of 2001. Improved net
interest income was partly offset by increased Provision and income taxes.
Year-to-date 2002 Retail Operating Profit was $7.2 million compared to $4.9
million for the same period in 2001. This was an increase of $2.3 million or
47.7%. Improved net interest income, lower Provision and operating expenses were
partly offset by increased income taxes.
Net interest income increased by $1.5 million in the third quarter of 2002, and
by $1.9 million 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 new loan volume from the Branch Expansion. 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 $265,000 in the third quarter of 2002, compared to
the same period in 2001. Increased deposit service charge income was partly
offset by decreased commissions from mortgage originations, due to the transfer
of mortgage originators to the Mortgage Segment. Year-to-date
32
non-interest income declined $87,000. Similar factors, plus a gain on the sale
of excess land in the second quarter of 2002, were offset by gains on Auto Loan
Sales that occurred in the first quarter of 2001.
The Provision increased by $839,000 in the third quarter of 2002, compared to
the third quarter of 2001. The increase was driven by an increasing indirect
automobile loan portfolio. For the nine-month period ended September 30, 2002,
the Provision decreased $782,000 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 and third quarters of 2001. Comparable additions to the
Allowance, other than for the growing indirect automobile loan portfolio, were
not necessary during 2002.
Operating expenses increased by $216,000 when comparing the third quarter of
2002 with the same quarter in 2001, but decreased by $1.1 million for the full
nine-month period. For the third quarter, increased personnel costs and
occupancy expense were partly offset by the discontinuation of goodwill
amortization pursuant to SFAS No. 142. Increased personnel costs and occupancy
expense both reflect the impact of the Branch Expansion. Year-to-date, the
decrease was largely due to the discontinuation of goodwill amortization and
lower home office allocations, which were partly offset by lower support costs.
Income taxes increased $305,000 quarter-over-quarter and $1.3 million
year-over-year, primarily the result of changes in income before taxes.
The Retail Segment represented 23.2% and 27.9% of total segment Operating Profit
in the third quarters of 2002 and 2001, respectively, and 27.0% for 2002
year-to-date versus 24.9% 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 third quarter of 2002 was $835,000, a
decrease of $64,000 or 7.1% from the same period in 2001. Year-to-date, TAM's
2002 Operating Profit was $2.7 million for both 2002 and 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 $601,000 and $1.0 million,
respectively, for the three and nine-month periods ended September 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 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 $337,000 in the third quarter of 2002 and $627,000
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 $200,000 for the third quarter of 2002 and $395,000
for the nine-months ended September 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.
33
The TAM Segment manages or administers $5.6 billion of investments, inclusive of
traditional assets as well as the management of the BANK's diverse fixed income
portfolio of approximately $1.2 billion. Assets in the AMCORE Vintage Mutual
Funds totaled $874 million at September 30, 2002.
The TAM Segment represented 9.4% and 14.8% of total segment Operating Profit in
the third quarter of 2002 and 2001, respectively, and 10.2% for 2002
year-to-date versus 13.8% 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 Profit was $13,000 in the third quarter of
2002, compared to $208,000 in the third quarter of 2001, a decline of $195,000
or 93.8%. For the first nine months of 2002, Operating Profit was $377,000, a
decline of $837,000 or 68.9% from $1.2 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 nine-month periods ended
September 30, 2002.
The Mortgage Segment revenues, which are net of servicing right amortization and
impairment and including net interest income, were $3.2 million in the third
quarter of 2002, an increase of $726,000 or 28.8% from $2.5 million in the third
quarter of 2001. Year-to-date, Mortgage Segment revenues in 2002 were up
$147,000 or 1.8% to $8.5 million from $8.3 million a year ago. The increases
were primarily attributable to increased closing volumes and trading gains, net
of increased servicing rights amortization and impairment. Closings were $417.2
million for the first nine months of 2002 compared to $369.7 million for the
first nine months of 2001.
Operating expenses were $3.2 million in the third quarter of 2002, compared to
$2.2 million in the same quarter of 2001, an increase of $1.0 million. For the
first nine months of 2002, operating expenses increased $1.5 million to $7.8
million, compared to $6.3 million for the same period in 2001. The increase was
primarily due to increased personnel costs, loan-processing costs and lower of
cost or market adjustments on mortgages held for sale 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 unpaid principal balance of mortgage loans serviced, including loans held
for sale and loans serviced for the BANK, was $1.32 billion at September 30,
2002 compared to $1.30 billion at September 30, 2001.
The Mortgage Segment represented 0.2% and 3.4% of total segment Operating Profit
in the third quarters of 2002 and 2001, respectively, and 1.4% for 2002
year-to-date compared to 6.2% for the same period in 2001.
BALANCE SHEET REVIEW
Total assets were $4.4 billion at September 30, 2002, an increase of $400.6
million or 10.0% from December 31, 2001. Total liabilities increased $352.0
million over the same period, while stockholders' equity increased $48.6
million.
Total earning assets, including COLI, increased $394.9 million from December 31,
2001. Non-earning assets increased $5.7 million over the same period. The
increase in earning assets was attributable to a
34
$290.1 million increase in loans and a $112.7 million increase in investment
securities. 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, as well as
an increase in fair value. 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 and commercial real estate loans. Included in these
increases was $129.7 million in loan growth attributable to the Branch
Expansion.
Total deposits increased $336.1 million from December 31, 2001, of which $150.2
million was attributable to brokered CD's incurred to partially fund the
rebuilding of the investment security portfolio noted above. The Branch
Expansion contributed $35.0 million to the increase in deposits, while existing
branches contributed $150.9 million. Short-term borrowings increased by $92.5
million over the same period, nearly offsetting a decline of $83.4 million in
long-term borrowings. These changes primarily reflect the reclassification of
Federal Home Loan Bank borrowings that are due to mature in less than one year.
The remainder of the increase in short-term borrowings is attributable to an
increase in repurchase agreements, 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
increased $6.9 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 nine 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 $34.2 million at September 30, 2002, compared to $33.9 million at
December 31, 2001, an increase of $237,000 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 September 30, 2002, the Allowance as a percent of total loans and of
non-performing loans was 1.24% and 124%, respectively. These compare to the same
ratios at December 31, 2001 of 1.37% and 128%. Net charge-offs were $8.4 million
for the first nine months of 2002 versus $8.5 million for the first nine months
of 2001. These represented 0.43% and 0.45% 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, other real estate owned and
other foreclosed assets. Non-performing assets totaled $32.0 million as of
September 30, 2002, a decline of $1.8 million or 5.3% from the $33.8 million at
December 31, 2001. Total non-performing assets represented 0.72% and 0.84% of
total assets at September 30, 2002 and December 31, 2001, respectively.
35
Loans 90 days or more past due and still accruing interest were $7.3 million at
September 30, 2002, compared to $14.0 million at December 31, 2001, a decline of
$6.7 million or 47.6%. A significant portion of the decrease reflects a change
in practice to discontinue interest accruals on credits whose delinquencies had
increased beyond what was considered a reasonable collection period, plus $3.5
million in loans that were restructured and returned to accrual status during
the third quarter of 2002.
On a combined basis, non-performing assets and loans 90 days or more past due
and still accruing declined $8.5 million since December 31, 2001. In comparison,
over this same time period, gross charge-offs were $8.4 million. This
improvement of overall loan quality, during a period of loan growth, reflects a
lending culture focused on improving asset quality and changes made to workout
strategy and management. Continued improvements in asset quality remain a high
priority for AMCORE.
An analysis of non-performing assets is shown in Table 5.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity Management
Liquidity management is the process by which the Company, through its Asset and
Liability Committee (ALCO) and treasury function, ensures that adequate liquid
funds are available to meet its financial commitments on a timely basis, at a
reasonable cost and within acceptable risk tolerances. These commitments include
funding credit obligations to borrowers, funding of mortgage originations
pending delivery to the secondary market, withdrawals by depositors, repayment
of debt when due or called, maintaining adequate collateral for public deposits,
paying dividends to shareholders, payment of operating expenses, funding capital
expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal
and interest payments on loans; principal and interest payments, sale, maturity
and prepayment of investment securities; net cash provided from operations; and
access to other funding sources. Other funding sources include brokered CD's,
federal funds purchased lines (FED funds), Federal Home Loan Bank (FHLB)
advances, repurchase agreements, commercial paper and back-up lines of credit,
the sale or securitization of loans, and access to other capital markets.
Funding of loans is the most significant liquidity need, representing 62.6% of
total assets as of September 30, 2002. Since December 31, 2001, loans from
existing branches increased $160.4 million while loans attributable to Branch
Expansion increased $129.7 million, for a total increase of $290.1 million.
During the same period of time core deposits, considered the most stable and
cost-effective source of liquidity, increased $185.9 million. Of this increase,
$150.9 million came from existing branches while $35.0 million was attributable
to the Branch Expansion. Thus, over this time period existing branch growth has
been self-funding, and is the result of aggressive Company-wide efforts to
attract and retain additional core deposits, particularly primary transaction
accounts. The Branch Expansion has required, and will continue to require, other
sources of liquidity to fund the loan growth and the estimated $28.0 million in
incremental capital investment. This reflects the Company's strategy to move
into new markets where business density is greatest and where revenues and a
profitable book of business can be developed over a shorter period of time. Once
this is accomplished, a more permanent full-service site is sought where deposit
generation should begin to catch up with loan growth and ease the initial
liquidity pressure inherent in the strategy.
The protracted period of low mortgage interest rates and high refinancings have
also increased the pressure on short-term liquidity. At September 31, 2002,
mortgage origination fundings awaiting delivery to the secondary market were
$83.8 million, double the average amount for the first nine months of 2002 and
the average amount for all of 2001. At the same time, this interest rate
environment has also increased the level of prepayment of mortgage-related
securities in the investment portfolio. Continued
36
refinancing activity is expected to generate substantial cash inflows that will
be redirected to temporarily fund the secondary market originations and, on a
more permanent basis, loan growth associated with the Branch Expansion.
Despite the challenges of an unprecedented period of high mortgage volumes and
the Branch Strategy, the Company is confident of its ability to meet and manage
its short and long-term liquidity needs. As of September 30, 2002, available
sources of liquidity included $153.4 million of FED funds lines, $49.0 million
of FHLB advances, $250.1 of unpledged investment securities and $30.3 million of
unused commercial paper and backup line of credit borrowings. The Company also
has capacity, over time, to place sufficient amounts of brokered CD's as a
source of mid to long-term liquidity. At September 30, 2002, potential uses of
liquidity included $601.7 million in commitments to extend credit, $113.5
million in residential mortgage commitments primarily for sale to the secondary
market, and $185.9 million in standby letters of credit. At December 31, 2001,
these amounts were $573.3 million, $43.9 million and $116.3 million,
respectively.
Capital Management
Total stockholders' equity at September 30, 2002, was $350.3 million, an
increase of $48.6 million or 16.1% 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, earnings for the
first nine months of 2002 less dividends paid to shareholders, and
mark-to-market adjustments on cash flow hedges that were included in other
comprehensive income. AMCORE paid dividends of $0.16 per share in the third
quarters of 2002 and 2001.
Since September 30, 2001, the Company has repurchased 520,000 of its own shares
at an average price of $22.21, completing the previously announced 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 10.92%, its Tier 1
capital at 9.90% and its leverage ratio of 7.73%, all significantly exceed the
regulatory minimums (as the following table indicates), as of September 30,
2002. The BANK, whose ratios are not presented below, is considered a
"well-capitalized" institution based on regulatory guidelines.
(dollars in thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital (to Risk Weighted Assets) $ 367,451 10.92% $ 344,318 11.68%
Total Capital Minimum 268,916 8.00% 235,742 8.00%
----------------------- -----------------------
Amount in Excess of Regulatory Minimum $ 98,535 2.92% $ 108,576 3.68%
======================= =======================
Tier 1 Capital (to Risk Weighted Assets) $ 333,114 9.90% $ 310,378 10.53%
37
Tier 1 Capital Minimum 134,458 4.00% 117,871 4.00%
----------------------- -----------------------
Amount in Excess of Regulatory Minimum $ 198,656 5.90% $ 192,507 6.53%
======================= =======================
Tier 1 Capital (to Average Assets) $ 333,114 7.73% $ 310,378 7.84%
Tier 1 Capital Minimum 172,352 4.00% 158,371 4.00%
----------------------- -----------------------
Amount in Excess of Regulatory Minimum $ 160,762 3.73% $ 152,007 3.84%
======================= =======================
Risk adjusted assets $3,363,445 $2,946,769
========== ==========
Average assets $4,308,804 $3,959,280
========== ==========
38
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 increase in net interest
income for the twelve-month period beginning October 1, 2002 would be
approximately $1.8 million or 1.18% of base forecasted income. 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 or 0.41%. Thus, AMCORE's exposure from a rising-rate scenario
has shifted from earnings at risk to an earnings opportunity 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 October 1, 2002 of
approximately $6.1 million or 3.99% of base forecasted income. The same
assumptions at the end of 2001 would have resulted in a potential decrease in
net interest income of $3.1 million or 2.24%. AMCORE's sensitivity to declining
interest rates has increased since the end of 2001.
The shift from exposure to opportunity in a rising rate scenario and increased
exposure in a declining interest rate scenario reflects the Company's
repositioning of its balance sheet in anticipation of economic recovery and
increased interest rates. A material factor in this repositioning is a
significant migration of fixed-rate commercial loan portfolios from fixed to
variable rate pricing, as well as accelerated cash flows from mortgage
refinancings. At December 31, 2001 variable-rate loans comprised 40% of the
commercial loan portfolio. At September 30, 2002, this percentage had increased
to 53%.
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.
39
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's December 31, 2001 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.
Changes in Internal Controls
Since the Evaluation Date, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
40
TABLE 1
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Quarter Ended Quarter Ended
September 30, 2002 September 30, 2001
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------- -----------------------------------
($ in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 974,690 $ 13,492 5.54% $ 834,924 $13,470 6.45%
Tax-exempt securities (1) 239,489 4,471 7.47% 264,719 5,131 7.75%
-------------------------------------------------------------------------
Total Securities (2) 1,214,179 17,963 5.92% 1,099,643 18,601 6.76%
Loans held for sale (3) 46,728 633 5.42% 43,017 752 6.97%
Loans (1) (4) 2,727,838 47,713 6.95% 2,480,371 50,358 8.07%
Other earning assets 10,506 39 1.47% 27,707 240 3.44%
Fees on loans held for sale (3) -- 639 -- -- 405 --
---------------------------------- ----------------------------------
Total Interest-Earning Assets $3,999,251 $ 66,987 6.67% $3,650,738 $70,356 7.67%
Non Interest-Earning Assets:
Cash and due from banks 105,433 98,041
Other assets 278,705 249,953
Allowance for loan and lease losses (34,643) (32,813)
---------- -----------
Total Assets $4,348,746 $3,965,919
========== ===========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $1,126,334 $ 3,600 1.27% $1,017,557 $ 6,592 2.57%
Time deposits 1,686,559 19,466 4.58% 1,508,754 22,248 5.85%
---------------------------------- ----------------------------------
Total interest-bearing deposits 2,812,893 23,066 3.25% 2,526,311 28,840 4.53%
Short-term borrowings 546,622 5,197 3.77% 423,805 5,251 4.92%
Long-term borrowings 210,996 3,161 5.94% 291,464 4,385 5.97%
---------------------------------- ----------------------------------
Total Interest-Bearing Liabilities $3,570,511 $ 31,424 3.49% $3,241,580 $38,476 4.71%
Noninterest-Bearing Liabilities:
Demand deposits 360,049 338,327
Other liabilities 79,926 70,974
---------- -----------
Total Liabilities $4,010,486 $3,650,881
Stockholders' Equity 338,260 315,038
---------- -----------
Total Liabilities and
Stockholders' Equity $4,348,746 $3,965,919
========== ==========
Net Interest Income (FTE) $ 35,563 $31,880
========== ========
Net Interest Spread (FTE) 3.18% 2.96%
==== ====
Interest Rate Margin (FTE) 3.55% 3.49%
==== ====
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 $626,000 and $1.1
million, respectively.
41
TABLE 2
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------ -----------------------------------
($ in thousands)
Assets
Interest-Earning Assets:
Taxable securities $ 934,409 $ 39,652 5.66% $ 887,045 $ 44,387 6.67%
Tax-exempt securities (1) 239,401 13,529 7.53% 277,135 16,011 7.70%
----------------------------------------------------------------------------
Total Securities (2) $1,173,810 $ 53,181 6.04% $1,164,180 $ 60,398 6.92%
Loans held for sale (3) 41,928 1,916 6.09% 39,882 2,059 6.89%
Loans (1) (4) 2,614,464 138,508 7.08% 2,534,131 157,888 8.32%
Other earning assets 15,802 183 1.55% 27,557 949 4.60%
Fees on loans held for sale (3) -- 1,299 -- -- 1,010 --
------------------------------------ -----------------------------------
Total Interest-Earning Assets $3,846,004 $ 195,087 6.77% $3,765,750 $222,304 7.88%
Non Interest-Earning Assets
Cash and due from banks 100,589 99,147
Other assets 267,776 240,715
Allowance for loan and lease losses (34,261) (30,583)
---------- ----------
Total Assets $4,180,108 $4,075,029
========== ==========
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand and savings deposits $1,076,254 $ 10,465 1.30% $1,014,221 $ 22,694 2.99%
Time deposits 1,607,545 57,480 4.78% 1,594,660 73,004 6.12%
------------------------------------ -----------------------------------
Total interest-bearing deposits $2,683,799 $ 67,945 3.38% $2,608,881 $ 95,698 4.90%
Short-term borrowings 526,039 15,755 4.00% 440,880 18,647 5.65%
Long-term borrowings 222,385 9,879 5.94% 295,568 13,403 6.06%
------------------------------------ -----------------------------------
Total Interest-Bearing Liabilities $3,432,223 $ 93,579 3.65% $3,345,329 $127,748 5.11%
Noninterest-Bearing Liabilities:
Demand deposits 355,474 342,988
Other liabilities 70,028 73,528
---------- ----------
Total Liabilities $3,857,725 $3,761,845
Stockholders' Equity 322,383 313,184
---------- ----------
Total Liabilities and
Stockholders' Equity $4,180,108 $4,075,029
========== ==========
Net Interest Income (FTE) $ 101,508 $ 94,556
========== ========
Net Interest Spread (FTE) 3.12% 2.77%
==== ====
Interest Rate Margin (FTE) 3.52% 3.35%
==== ====
Notes:
(1) The interest on tax-exempt securities and tax-exempt loans is calculated on
a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balances of the securities are based on amortized historical
cost.
(3) The yield-related fees recognized from the origination of loans held for
sale are in addition to the interest earned on the loans during the period
in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees of $2.2 million and $2.4
million, respectively.
42
TABLE 3
ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
Quarter Ended
September 2002/September 2001
------------------------------------------------------
Increase (Decrease) Due to Change In Total Net
------------------------------------ Increase
Average Volume Average Rate (Decrease)
------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ 2,080 $ (2,058) $ 22
Tax-exempt securities (1) (476) (184) (660)
----------------------------------------
Total Securities (2) 1,826 (2,464) (638)
Loans held for sale (3) 60 (179) (119)
Loans (1) (4) 4,739 (7,384) (2,645)
Other earning assets (108) (93) (201)
Fees on loans held for sale (3) -- 234 234
----------------------------------------
Total Interest-Earning Assets $ 6,348 $ (9,717) $(3,369)
========================================
Interest Expense:
Interest-bearing demand and savings deposits $ 593 $ (3,585) $(2,992)
Time deposits 2,304 (5,086) (2,782)
----------------------------------------
Total interest-bearing deposits 3,007 (8,781) (5,774)
Short-term borrowings 1,326 (1,380) (54)
Long-term borrowings (1,206) (18) (1,224)
----------------------------------------
Total Interest-Bearing Liabilities $ 3,627 $(10,679) $(7,052)
----------------------------------------
Net Interest Margin / Net Interest Income (FTE) $ 2,721 $ 962 $ 3,683
========================================
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.
43
TABLE 4
ANALYSIS OF YEAR-TO-DATE CHANGES IN NET INTEREST INCOME
Nine Months Ended
September 2002/September 2001
------------------------------------------------------
Increase (Decrease) Due to Change In Total Net
------------------------------------ Increase
Average Volume Average Rate (Decrease)
------------------------------------------------------
(in thousands)
Interest Income:
Taxable securities $ 2,277 $ (7,012) $ (4,735)
Tax-exempt securities (1) (2,139) (343) (2,482)
----------------------------------------
Total Securities (2) 496 (7,713) (7,217)
Loans held for sale (3) 103 (246) (143)
Loans (1) (4) 4,832 (24,212) (19,380)
Other earning assets (293) (473) (766)
Fees on loans held for sale (3) -- 289 289
----------------------------------------
Total Interest-Earning Assets $ 4,648 $(31,865) $(27,217)
========================================
Interest Expense:
Interest-bearing demand and savings deposits $ 871 $(13,100) $(12,229)
Time deposits 359 (15,883) (15,524)
----------------------------------------
Total interest-bearing deposits 2,676 (30,429) (27,753)
Short-term borrowings 3,183 (6,075) (2,892)
Long-term borrowings (3,256) (268) (3,524)
----------------------------------------
Total Interest-Bearing Liabilities $ 3,241 $(37,410) $(34,169)
----------------------------------------
Net Interest Margin / Net Interest Income (FTE) $ 1,407 $ 5,545 $ 6,952
========================================
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.
44
TABLE 5
ASSET QUALITY
The components of non-performing loans and leases at September 30, 2002 and
December 31, 2001 were as follows:
September 30, December 31,
2002 2001
---------------------------
Impaired loans: (in thousands)
Non-accrual loans and leases
Commercial ............................. $ 8,992 $ 8,624
Real estate ............................ 1,289 3,908
Other non-performing:
Non-accrual loans (1) .................. 17,220 13,925
----------------------
Total non-performing loans ............. $27,501 $26,457
======================
Foreclosed assets:
Real estate ............................ 3,118 5,625
Other .................................. 1,362 1,704
----------------------
Total foreclosed assets ................ $ 4,480 $ 7,329
======================
Total non-performing assets ............ $31,981 $33,786
======================
Loans 90 days or more past due and still accruing $ 7,337 $14,001
======================
Troubled debt restructurings .................... $ 3,509 $ --
======================
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
An anaylsis of the allowance for loan and lease losses for the periods
ended September 30, 2002 and 2001 is presented below:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
-------------------- -------------------
($ in thousands)
Balance at beginning of period .................... $33,986 $ 33,006 $33,940 $29,157
Charge-Offs:
Commercial, financial and agricultural ........ 1,536 1,215 2,822 3,946
Real estate ................................... 500 1,105 2,210 2,208
Installment and consumer ...................... 1,559 1,268 4,622 3,593
Direct leases ................................. 51 27 117 78
-------------------- -------------------
3,646 3,615 9,771 9,825
Recoveries:
Commercial, financial and agricultural ........ 185 71 341 281
Real estate ................................... 17 (91) 185 164
Installment and consumer ...................... 274 229 813 861
Direct leases ................................. 1 1 16 9
-------------------- -------------------
477 210 1,355 1,315
Net Charge-Offs ................................... 3,169 3,405 8,416 8,510
Provision charged to expense ...................... 3,360 4,656 8,653 14,369
Reductions due to sale of loans ................... -- 120 -- 879
-------------------- -------------------
Balance at end of period .......................... $34,177 $ 34,137 $34,177 $34,137
==================== ===================
Ratio of net-charge-offs during the period
to average loans outstanding during the period (1) 0.46% 0.54% 0.43% 0.45%
==================== ===================
(1) On an annualized basis.
45
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.
The Company has reached a negotiated agreement with its insurance carrier and
Plaintiffs' counsel to settle the lawsuit and other potential claims outlined
below. The settlement agreement did not have a material 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. In addition, Plaintiffs' attorneys rejected the
Company's settlement offer. Plaintiffs' counsel also notified 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. During the third quarter of 2002 Plaintiffs and
Company entered into a settlement of all claims. All Plaintiffs and potential
claimants have executed full releases and the United States District Court for
the Northern District of Mississippi has dismissed the lawsuit on file with
prejudice.
46
ITEM 6. Exhibits and Reports on Form 8-K
(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).
99.1 Press release of AMCORE Financial, Inc. dated October 22, 2002.
99.2 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 Certification of 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 third quarter of 2002.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCORE Financial, Inc.
(Registrant)
Date: November 14, 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)
48
Certifications
I, Kenneth E. Edge, the Chief Executive Officer of AMCORE Financial, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of AMCORE Financial,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based upon
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Kenneth E. Edge
- --------------------------
Kenneth E. Edge
Chief Executive Officer
November 14, 2002
49
Certifications
I, John R. Hecht, the Chief Financial Officer of AMCORE Financial, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of AMCORE Financial,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) resented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based upon
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ John R. Hecht
- --------------------------
John R. Hecht
Chief Financial Officer
November 14, 2002
50
EXHIBIT INDEX
(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).
99.1 Press release of AMCORE Financial, Inc. dated October 22, 2002.
99.2 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
51