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 March 31, 2003
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.
X Yes No
- --- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
X Yes No
- --- ---
The number of shares outstanding of the registrant's common stock, par value
$0.22 per share, at April 30, 2003 was 24,849,209 shares.
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
- ------ -----------
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2003 and 2002 4
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 2003 and 2002 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 40
Item 4 Controls and Procedures 41
PART II
Item 1 Legal Proceedings 42
Item 4 Submission of Matters to a Vote of Security Holders 42
Item 6 Exhibits and Reports on Form 8-K 42
Signatures 43
Certifications 44
Exhibit Index 46
2
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
=============================================================================================
(in thousands, except share data)
ASSETS
Cash and cash equivalents ......................... $ 146,830 $ 145,224
Interest earning deposits in banks ................ 7,529 2,151
Federal funds sold and other short-term investments 4,300 4,200
Securities available for sale ..................... 1,102,826 1,173,461
Loans held for sale ............................... 63,828 79,893
Gross loans ....................................... 2,821,344 2,883,717
Allowance for loan losses ......................... (39,600) (35,214)
--------------------------
Net loans ..................................... $ 2,781,744 $ 2,848,503
Company owned life insurance ...................... 111,293 108,914
Premises and equipment, net ....................... 57,476 57,911
Goodwill .......................................... 15,575 15,645
Foreclosed real estate ............................ 3,248 3,415
Other assets ...................................... 73,649 81,397
--------------------------
TOTAL ASSETS .................................. $ 4,368,298 $ 4,520,714
==========================
LIABILITIES
Deposits:
Demand deposits ................................. $ 1,360,052 $ 1,372,446
Savings deposits ................................ 149,809 135,720
Other time deposits ............................. 1,761,405 1,786,496
--------------------------
Total deposits ............................... $ 3,271,266 $ 3,294,662
Short-term borrowings ............................. 452,578 595,513
Long-term borrowings .............................. 185,014 185,832
Other liabilities ................................. 98,056 89,026
--------------------------
TOTAL LIABILITIES ............................ $ 4,006,914 $ 4,165,033
--------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value;
authorized 10,000,000 shares; none issued.......... $ -- $ --
Common stock, $0.22 par value;
authorized 45,000,000 shares;
March 31, December 31,
2003 2002
---- ----
Issued 29,795,660 29,785,861
Outstanding 24,817,520 24,788,510 6,617 6,615
Additional paid-in capital ........................ 74,379 74,326
Retained earnings ................................. 358,001 351,247
Deferred compensation ............................. (422) (523)
Treasury stock (3/31/03 - 4,978,140 shares;
12/31/02 - 4,997,351 shares) ...................... (96,612) (97,043)
Accumulated other comprehensive income ............ 19,421 21,059
--------------------------
TOTAL STOCKHOLDERS' EQUITY ................... $ 361,384 $ 355,681
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $ 4,368,298 $ 4,520,714
==========================
See accompanying notes to consolidated financial statements.
3
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months
Ended March 31,
2003 2002
======================================================================================================
INTEREST INCOME (in thousands, except per share data)
Interest and fees on loans .................................... $45,327 $44,534
Interest on securities:
Taxable ..................................................... $10,711 $12,004
Tax-exempt .................................................. 2,520 2,998
-----------------
Total Income from Securities ............................. $13,231 $15,002
-----------------
Interest on federal funds sold and other short-term investments $ 15 $ 42
Interest and fees on loans held for sale ...................... 1,173 1,119
Interest on deposits in banks ................................. 7 14
-----------------
Total Interest Income .................................... $59,753 $60,711
-----------------
INTEREST EXPENSE
Interest on deposits .......................................... $19,283 $22,914
Interest on short-term borrowings ............................. 3,172 4,112
Interest on long-term borrowings .............................. 2,782 3,506
-----------------
Total Interest Expense ................................... $25,237 $30,532
-----------------
Net Interest Income ...................................... $34,516 $30,179
Provision for loan losses ..................................... 12,575 2,640
-----------------
Net Interest Income After Provision for Loan Losses ...... $21,941 $27,539
-----------------
NON-INTEREST INCOME
Trust and asset management income ............................. $ 5,738 $ 6,690
Service charges on deposits ................................... 4,398 3,867
Mortgage revenues ............................................. 3,998 1,845
Company owned life insurance income ........................... 1,783 1,257
Gain on sale of branches ...................................... 8,232 --
Gain on sale of loans ......................................... 2,491 --
Other ......................................................... 2,518 2,715
-----------------
Non-Interest Income, Excluding Net Security Gains ........ $29,158 $16,374
Net security gains ............................................ 273 734
-----------------
Total Non-Interest Income ................................ $29,431 $17,108
OPERATING EXPENSES
Compensation expense .......................................... $15,822 $14,043
Employee benefits ............................................. 4,669 4,169
Net occupancy expense ......................................... 2,131 1,901
Equipment expense ............................................. 2,457 1,852
Data processing expense ....................................... 1,790 1,645
Professional fees ............................................. 1,062 1,021
Communication expense ......................................... 1,201 1,032
Advertising and business development .......................... 1,045 1,246
Amortization of intangible assets ............................. 35 35
Other ......................................................... 6,791 4,487
-----------------
Total Operating Expenses ................................. $37,003 $31,431
-----------------
Income Before Income Taxes .................................... $14,369 $13,216
Income taxes .................................................. 3,648 3,290
-----------------
Net Income .................................................... $10,721 $ 9,926
=================
EARNINGS PER COMMON SHARE (EPS)
Basic.......................................................... $ 0.43 $ 0.40
Diluted........................................................ $ 0.43 $ 0.40
DIVIDENDS PER COMMON SHARE.............................................. $ 0.16 $ 0.16
AVERAGE COMMON SHARES OUTSTANDING
Basic.......................................................... 24,792 24,609
Diluted........................................................ 24,936 24,851
See accompanying notes to consolidated financial statements.
4
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Deferred Treasury Comprehensive Stockholders'
Stock Capital Earnings Compensation Stock Income (Loss) Equity
------ ---------- -------- ------------ -------- ------------- -------------
(in thousands, except share data)
Balance at December 31, 2001 ................... $ 6,605 $ 74,045 $ 323,615 $ (2,107) $(100,197) $ (301) $ 301,660
------- -------- --------- -------- --------- -------- ---------
Comprehensive Income:
Net Income ..................................... -- -- 9,926 -- -- -- 9,926
Current period SFAS No. 133 transactions ....... -- -- -- -- -- 246 246
SFAS No. 133 reclassification to earnings ...... -- -- -- -- -- 1,576 1,576
Income tax effect related to items of other
comprehensive income ......................... -- -- -- -- -- (711) (711)
------- -------- --------- -------- --------- -------- ---------
Net effect of SFAS No. 133 ..................... -- -- -- -- -- 1,111 1,111
------- -------- --------- -------- --------- -------- ---------
Unrealized holding losses on securities
available for sale arising during the period . -- -- -- -- -- (675) (675)
Less reclassification adjustment for security
gains included in net income ................. -- -- -- -- -- (734) (734)
Income tax effect related to items of other
comprehensive income ......................... -- -- -- -- -- 560 560
------- -------- --------- -------- --------- -------- ---------
Net unrealized losses on securities available
for sale ..................................... -- -- -- -- -- (849) (849)
------- -------- --------- -------- --------- -------- ---------
Comprehensive Income ........................... -- -- 9,926 -- -- 262 10,188
------- -------- --------- -------- --------- -------- ---------
Cash dividends on common stock - $0.16 per share -- -- (3,938) -- -- -- (3,938)
Purchase of 71,800 shares for the treasury ..... -- -- -- -- (1,595) -- (1,595)
Reissuance of 1,551 treasury shares under
non-employee directors stock plan ............ -- 1 -- 29 (30) -- --
Deferred compensation expense .................. -- -- -- 131 -- -- 131
Reissuance of 105,366 treasury shares for
incentive plans .............................. -- (660) -- 35 2,361 -- 1,736
Issuance of 11,374 common shares for Employee
Stock Plan ................................... 2 195 -- -- -- -- 197
------- -------- --------- -------- --------- -------- ---------
Balance at March 31, 2002 ...................... $ 6,607 $ 73,581 $ 329,603 $ (1,912) $ (99,461) $ (39) $ 308,379
======= ======== ========= ======== ========= ======== =========
Balance at December 31, 2002 ................... $ 6,615 $ 74,326 $ 351,247 $ (523) $ (97,043) $ 21,059 $ 355,681
------- -------- --------- -------- --------- -------- ---------
Comprehensive Income:
Net Income ..................................... -- -- 10,721 -- -- -- 10,721
Current period SFAS No. 133 transactions ....... -- -- -- -- -- -- --
SFAS No. 133 reclassification to earnings ...... -- -- -- -- -- (577) (577)
Income tax effect related to items of other
comprehensive income ......................... -- -- -- -- -- 225 225
------- -------- --------- -------- --------- -------- ---------
Net effect of SFAS No. 133 ..................... -- -- -- -- -- (352) (352)
------- -------- --------- -------- --------- -------- ---------
Unrealized holding losses on securities
available for sale arising during the period . -- -- -- -- -- (1,849) (1,849)
Less reclassification adjustment for security
gains included in net income ................. -- -- -- -- -- (273) (273)
Income tax effect related to items of
other comprehensive income ................... -- -- -- -- -- 836 836
------- -------- --------- -------- --------- -------- ---------
Net unrealized losses on securities available
for sale ..................................... -- -- -- -- -- (1,286) (1,286)
------- -------- --------- -------- --------- -------- ---------
Comprehensive Income ........................... -- -- 10,721 -- -- (1,638) 9,083
------- -------- --------- -------- --------- -------- ---------
Cash dividends on common stock - $0.16 per share -- -- (3,967) -- -- -- (3,967)
Purchase of 3,730 shares for the treasury ...... -- -- -- -- (77) -- (77)
Deferred compensation expense .................. -- 50 -- 101 -- -- 151
Reissuance of 22,941 treasury shares for
incentive plans .............................. -- (176) -- -- 508 -- 332
Issuance of 9,799 common shares for Employee
Stock Plan ................................... 2 179 -- -- -- -- 181
------- -------- --------- -------- --------- -------- ---------
Balance at March 31, 2003 ...................... $ 6,617 $ 74,379 $ 358,001 $ (422) $ (96,612) $ 19,421 $ 361,384
======= ======== ========= ======== ========= ======== =========
See accompanying notes to consolidated financial statements.
5
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months Ended
March 31,
2003 2002
=======================================================================================================
(in thousands)
Cash Flows From Operating Activities
Net income ................................................................... $ 10,721 $ 9,926
Adjustments to reconcile net income from operations to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment ................. 1,615 1,463
Amortization and accretion of securities, net ........................... 2,278 1,583
Provision for loan losses ............................................... 12,575 2,640
Amortization of intangible assets ....................................... 35 35
Gain on branch sales .................................................... (8,232) --
Net securities gains .................................................... (273) (734)
Net gain on sale of loans held for sale ................................. (4,230) (1,290)
Deferred income taxes (benefit) ......................................... (2,209) 602
Originations of loans held for sale ..................................... (205,126) (106,633)
Proceeds from sales of loans held for sale .............................. 225,421 175,090
Tax benefit on exercise of stock options ................................ (88) (456)
Other, net .............................................................. 14,963 (20,580)
----------------------
Net cash provided by operating activities ............................ $ 47,450 $ 61,646
----------------------
Cash Flows From Investing Activities
Proceeds from maturities of securities available for sale .................... $ 146,505 $ 96,567
Proceeds from sales of securities available for sale ......................... 51,591 14,511
Purchase of securities available for sale .................................... (131,589) (237,656)
Net (increase) decrease in federal funds sold and other short-term investments (100) 300
Net increase in interest earning deposits in banks ........................... (5,378) (392)
Proceeds from the sale of loans .............................................. 108,494 --
Net increase in loans ........................................................ (99,946) (70,795)
Investment in company owned life insurance ................................... (1,663) (3,248)
Premises and equipment expenditures, net ..................................... (3,605) (1,840)
Proceeds from the sale of foreclosed real estate ............................. 1,258 1,432
----------------------
Net cash provided by (used for) investing activities ................. $ 65,567 $(201,121)
----------------------
Cash Flows From Financing Activities
Net increase (decrease) in demand deposits and savings accounts .............. $ 66,146 $ (19,225)
Net increase in time deposits ................................................ 34,639 123,513
Net (decrease) increase in short-term borrowings ............................. (142,953) 2,992
Proceeds from long-term borrowings ........................................... 15,000 --
Payment of long-term borrowings .............................................. (15,800) (461)
Net payments to settle branch sales .......................................... (65,000) --
Dividends paid ............................................................... (3,967) (3,938)
Issuance of common shares for employee stock plan ............................ 181 197
Reissuance of treasury shares for incentive plans ............................ 420 2,187
Purchase of shares for treasury .............................................. (77) (1,595)
----------------------
Net cash (used for) provided by financing activities ................. $(111,411) $ 103,670
----------------------
Net change in cash and cash equivalents ...................................... $ 1,606 $ (35,805)
Cash and cash equivalents:
Beginning of year .......................................................... 145,224 134,244
----------------------
End of period .............................................................. $ 146,830 $ 98,439
======================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors ................................................ $ 21,924 $ 21,607
Interest paid on borrowings ................................................ 5,117 6,114
Income tax payments ........................................................ 2,618 151
Non-Cash Investing and Financing
Foreclosed real estate - acquired in settlement of loans ..................... 1,187 2,429
Transfer current portion of long-term borrowings to short-term borrowings .... 18 50,000
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.
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 month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2003. 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, 2002.
New Accounting Standards
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
(SFAS No. 148). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. See Note 9
of the Notes to the Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 expands the information required to be
disclosed by guarantors for obligations under certain types of guarantees. It
also requires initial recognition at fair value of a liability for such
guarantees. In addition, FIN 34, "Disclosure of Indirect Guarantees of Others,"
is rescinded, though the guidance contained therein has been carried forward
into FIN 45 without modification. The initial recognition and initial
measurement requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. Adoption of the Interpretation did
not have a material effect on the Company's Consolidated Financial Statements.
See Note 10 of the Notes to the Consolidated Financial Statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements" to certain variable interest entities
(VIEs) in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The recognition and measurement provisions of this
Interpretation are effective for newly created VIEs formed after January 31,
2003, and for existing VIEs on the first interim or annual reporting period
beginning after June 15, 2003. The Company has no newly formed VIEs subject to
the January 31, 2003 effective date. The Company will adopt the provisions of
FIN 46 for existing VIEs on July 1, 2003. The Company is in the process of
determining whether its pre-existing off-balance sheet structures are subject to
the provisions of FIN 46. At this time the Company does not believe that
adoption of FIN 46 will have a material effect on the Company's financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In addition, this Statement requires that contracts with comparable
characteristics be accounted for similarly. This Statement is effective for
contracts entered into or modified after June 30, 2003 (with certain exceptions)
and for hedging relationships designated after June 30, 2003.
Completed Divestitures
During the first quarter of 2003, the BANK sold six Wisconsin branches in
Clinton, Darien, Montello, Kingston, Dalton and Westfield, resulting in $5.0
million in after-tax gains, net of associated costs. For the six branches sold,
$48.2
7
million in loans, $124.6 in deposits and $2.1 million in premises and equipment
were transferred to the respective buyers.
NOTE 2 - SECURITIES
A summary of securities at March 31, 2003 and December 31, 2002 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
(in thousands)
At March 31, 2003
- -----------------
Securities Available for Sale:
U.S. Treasury ........................ $ 5,000 $ 13 $ -- $ 5,013
U.S. Government agencies ............. 4,252 7 (4) 4,255
Agency mortgage-backed securities .... 711,849 17,963 (456) 729,356
State and political subdivisions ..... 198,343 10,876 (3) 209,216
Corporate obligations and other ...... 154,253 1,914 (1,181) 154,986
--------------------------------------------------
Total Securities Available for Sale $1,073,697 $ 30,773 $ (1,644) $1,102,826
==================================================
At December 31, 2002
- --------------------
Securities Available for Sale:
U.S. Treasury ........................ $ 5,002 $ 15 $ -- $ 5,017
U.S. Government agencies ............. 3,841 17 (4) 3,854
Agency mortgage-backed securities .... 730,969 21,801 (421) 752,349
State and political subdivisions ..... 215,109 11,129 (4) 226,234
Corporate obligations and other ...... 187,289 2,304 (3,586) 186,007
--------------------------------------------------
Total Securities Available for Sale $1,142,210 $ 35,266 $ (4,015) $1,173,461
==================================================
Realized gross gains resulting from the sale of securities available for sale
were $631,000 and $734,000 for the three months ended March 31, 2003 and 2002,
respectively. Realized gross losses were $358,000 for the three months ended
March 31, 2003 and there were no realized gross losses for the three months
ended March 31, 2002. At March 31, 2003 and 2002, securities with a fair value
of $807.1 million and $915.9 million, respectively, were pledged to secure
public deposits, securities under agreements to repurchase and for other
purposes required by law.
NOTE 3 - LOANS
The composition of the loan portfolio at March 31, 2003 and December 31, 2002,
was as follows:
March 31, 2003 December 31, 2002
----------------------------------
(in thousands)
Commercial, financial and agricultural.. $ 760,622 $ 760,950
Real estate-construction ............... 143,229 142,844
Real estate-commercial ................. 981,390 925,003
Real estate-residential ................ 412,316 449,330
Installment and consumer ............... 523,179 604,663
Direct lease financing ................. 608 927
----------------------------------
Gross loans ....................... $ 2,821,344 $ 2,883,717
Allowance for loan losses ......... (39,600) (35,214)
----------------------------------
NET LOANS ......................... $ 2,781,744 $ 2,848,503
==================================
Total loans transferred and sold during the three months ended March 31, 2003 as
a result of branch sales and securitization was $154.2 million. A gain of $2.5
million was recognized on the securitization of $106.0 million in indirect
automobile loans. For further information on the securitization, see Note 5 of
the Notes to the Consolidated Financial Statements. Loans transferred in the
branch sales transactions totaled $48.2 million.
8
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's intangible asset values by segment at March 31, 2003 are as
follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------------------------------------
(in thousands)
Amortized Intangible Assets
Core Deposits - Retail Banking ...... $ 683 $ 608 $ 75
- Commercial Banking .. 293 262 31
------------------------------------------
Total Amortized Intangible Assets ...... $ 976 $ 870 $ 106
==========================================
Unamortized Intangible Assets
Goodwill - Trust and Asset Management $ 9,622
- Retail Banking ........... 3,572
- Commercial Banking ....... 2,381
---------
Total Unamortized Intangible Assets .... $15,575
=========
Total Intangibles (net) ................ $15,681
=========
The current and estimated amortization expense by segment is as follows:
Retail Commercial
Banking Banking Total
---------------------------
(in thousands)
Aggregate Amortization Expense
For Quarter Ended 3/31/03 ................. $ 24 $ 11 $ 35
===========================
Estimated Amortization Expense
For Remainder of Year Ending 12/31/03 ..... $ 75 $ 31 $106
------
Total estimated amortization expense .... $106
======
Changes in the carrying amount of goodwill for the quarter ended March 31, 2003
were related to the sale of six bank branches. The changes in the carrying
amount of goodwill for the quarter ended March 31, 2003 are as follows:
Retail Commercial
Banking Banking
-----------------------
(in thousands)
Balance as of January 1, 2003 ..... $3,614 $2,409
Goodwill related to branches sold.. 42 28
-----------------------
Balance as of March 31, 2003 ...... $3,572 $2,381
=======================
The Originated Mortgage Servicing Right ("OMSR") asset values, which are all
included in the Mortgage Banking Segment, at March 31, 2003 are in the table
below. The OMSR Valuation Allowance was $3.361 million at December 31, 2002. An
impairment reversal of $12,000 was recorded during the first quarter of 2003.
9
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
--------------------------------------------
(in thousands)
Capitalized OMSR ............. $ 26,145 $ 15,271 $ 10,874
Less: OMSR Valuation Allowance (3,349)
--------
Net OMSR ..................... $ 7,525
========
The current and estimated OMSR amortization expense on the Company's OMSR asset
are as follows:
Mortgage
Banking
--------
(in thousands)
Aggregate Amortization Expense
For Quarter Ended 3/31/03........................... $ 1,650
=========
Estimated Amortization Expense
For Remainder of Year Ending 12/31/03............... $ 4,609
For Year Ending 12/31/04............................ 1,566
For Year Ending 12/31/05............................ 1,175
For Year Ending 12/31/06............................ 881
For Year Ending 12/31/07............................ 529
For Year Ending 12/31/08............................ 423
Thereafter.......................................... 1,691
---------
Total............................................. $10,874
=========
The weighted-average amortization period for OMSR retained during the first
quarter of 2003 was 11.1 years. The unpaid principal balance of mortgage loans
serviced for others, including mortgage loans held for sale, was $1.1 billion as
of March 31, 2003. This compares to $974.7 million as of March 31, 2002.
10
NOTE 5 - SALE OF RECEIVABLES
During the first quarter 2003, the Company sold $106.0 million of indirect
automobile loans in a securitization transaction, reporting a net after-tax gain
of $1.5 million. There were no sales during the first quarter of 2002. Upon
securitization, the net carrying amount of the loans were removed from the
balance sheet in exchange for cash and certain retained interests. The retained
interests included rights to service the loans that were sold (the "Servicing
Rights") and an interest in residual cash flows (the "Interest-Only Strip"). The
Interest-Only Strip includes the excess of interest collected on the loans over
the amount required to be paid to the investors and the securitization agent
(the "Excess Spread") plus 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").
At the date of the 2003 securitization, these retained interests were allocated
a carrying value of $9.2 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 interest
rate risk on the Excess Spread and credit risk on the transferred automobile
loans on the Overcollateralization.
Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of March 31, 2003 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 March 31, 2003
------------------------------------
Loans Sold 10% Adverse 20% Adverse
During 2003 Actual Change Change
----------- -------- ----------- -----------
(in thousands)
Prepayment speed assumptions
Prepayment speed............................... 1.7% 2.4% 2.7% 2.9%
Weighted average life (in months).............. 19.5 16.9 16.1 15.2
Fair value of retained interests............... $ 9,418 $ 15,705 $ 15,597 $ 15,448
Change in fair value........................... $ -- $ -- $ (108) $ (257)
Expected credit loss assumptions
Expected credit losses (loss to liquidation)... 1.9% 1.7% 1.9% 2.1%
Fair value of retained interests............... $ 9,418 $ 15,705 $ 15,473 $ 15,243
Change in fair value........................... $ -- $ -- $ (232) $ (462)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual)...... 20% 17.0% 18.7% 20.4%
Fair value of retained interests............... $ 9,418 $ 15,705 $ 15,410 $ 15,127
Change in fair value........................... $ -- $ -- $ (295) $ (578)
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 automobile loan securitization
transactions was an inflow of $98.7 million and $673,000 for the first quarters
of 2003 and 2002, respectively. The following table summarizes the various cash
flows received from and paid to the securitization trust:
Proceeds From Servicing Fees Other
Securitizations Collected Cash Flows Fees Paid
--------------- --------- ---------- ---------
(in thousands)
Cash flows received from (paid to) trust in 2003...... $ 98,483 $ 79 $ 4 $ --
Cash flows received from (paid to) trust in 2002...... $ -- $ 143 $ 530 $ --
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 automobile 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.
11
Total Principal Principal Amount of
Amount of Loans Delinquent Loans Net Credit
------------------- -------------------- Losses
As of March 31 Year-to-Date
----------------------------------------- -------------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
(in thousands)
Held in portfolio $430,276 $375,551 $ 4,210 $ 4,809 $ 1,110 $ 707
Securitized ..... 137,790 66,109 1,207 1,368 257 222
-------- -------- -------- -------- -------- --------
Total ......... $568,066 $441,660 $ 5,417 $ 6,177 $ 1,367 $ 929
======== ======== ======== ======== ======== ========
Actual and projected static pool credit losses, as a percentage of indirect
automobile loans securitized are .90%, 1.34% and 1.74% as of the quarters ended
March 31, 2003, 2004, and 2005, 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 amounts shown here for each
year are a weighted average for all indirect automobile loan securitizations.
12
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings at March 31, 2003 and December 31, 2002 consisted
of the following:
March 31, December 31,
2003 2002
----------------------
(in thousands)
Securities sold under agreements to repurchase $376,874 $416,780
Federal Home Loan Bank borrowings ............ 33,021 83,022
Federal funds purchased ...................... 32,100 55,323
U.S. Treasury tax and loan note accounts ..... 2,643 28,408
Commercial paper borrowings .................. 7,940 12,000
--------------------
Total short-term borrowings .......... $452,578 $595,513
====================
NOTE 7 - LONG-TERM BORROWINGS
Long-term borrowings at March 31, 2003 and December 31, 2002 consisted of
the following:
March 31, December 31,
2003 2002
----------------------
(in thousands)
Federal Home Loan Bank borrowings ........... $158,947 $159,765
Capital Trust preferred securities .......... 25,000 25,000
Capitalized Lease Obligation and other....... 1,067 1,067
-------------------
Total Long-Term Borrowings $185,014 $185,832
===================
The Company 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 March 31, 2003 is
4.6 years, with a weighted average borrowing rate of 4.76%. The Company
reclassifies FHLB borrowings to short term borrowings when the remaining
maturity becomes less than one year.
Reductions of FHLB borrowings with call features, assuming they are
called at the earliest call date total $127.0 million in 2003.
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 104.675% to 100% of the principal
amount. After March 25, 2017, they are redeemable at par until June 15,
2027 when redemption is mandatory. Prior redemption is permitted under
certain circumstances such as changes in tax or regulatory capital rules.
The proceeds of the capital securities were invested by the Trust in
junior subordinated debentures which represents all of the assets of the
Trust. The Company fully and unconditionally guarantees the capital
securities through the combined operation of the debentures and other
related documents. The Company's obligations under the guarantee are
unsecured and subordinate to senior and subordinated indebtedness of the
Company.
Other long-term borrowings includes a capital lease on a branch facility
leased by the Company. The Company is amortizing the capitalized lease
obligation over the remaining life of the original lease, which expires
or renews in 2021.
13
Total
------------
Scheduled reductions of long-term borrowings
are as follows: (in thousands)
2004......................................... $ 25,028
2005......................................... 15,187
2006......................................... 11,722
2007......................................... 28
2008......................................... 80,032
Thereafter................................... 53,017
------------
Total................................... $185,014
============
During the first quarter of 2003, the Company extinguished $15.8 million
of high-cost FHLB debt early and replaced the debt with lower cost
funding. A prepayment penalty of $1.6 million on the early extinguishment
is recorded in the `other' line of operating expenses in the Consolidated
Statement of Income for the quarter ended March 31, 2003.
NOTE 8 - DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
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 September
2004.
Interest rate swaps are 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 falls 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. 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.
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
14
(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 or fair value of a hedged
item does not exactly offset the change in the future expected cash
flows or fair value of the derivative instrument, and is generally due
to differences in the interest rate indices or interest rate reset
dates. All derivatives, with the exception of the deposit product tied
to the S&P 500 Index, qualify and have been designated as hedges.
Also considered derivatives 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") which are reported at fair value on the balance sheet.
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
as 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 it occurs. 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.
The Income Statement for the three months ended March 31, 2003 included
the following derivative related activity in other non-interest income:
$2,000 loss due to the decrease in the Time Value component of the market
value of cash flow hedges, no income or loss related to the ineffective
portion of the cash flow hedges, $80,000 loss related to Mortgage Loan
Derivatives (net of the corresponding mark-to-market adjustment on hedged
mortgage loans held for sale), and no income or loss related to the S & P
500 Index embedded derivative. These items, net of taxes of $32,000,
totaled $50,000 in losses recorded for the quarter ended March 31, 2003.
The Income Statement for the three months ended March 31, 2002 included
the following derivative related activity in other non-interest income:
$23,000 loss due to the decrease in the Time Value component of the
market value of cash flow hedges, $13,000 income related to the
ineffective portion of the cash flow hedges, $63,000 loss related to
Mortgage Loan Derivatives (net of the corresponding mark-to-market
adjustment on hedged mortgage loans held for sale), and $1,000 loss
related to the S & P 500 Index embedded derivative. These items, net of
taxes of $29,000, totaled a $45,000 loss recorded for the quarter ended
March 31, 2002.
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 or are sold. During 2002,
swaps that were hedging prime based loan cash flows were sold, for which
the Company received $3.3 million plus accrued interest. For the quarter
ended March 31, 2003, $577,000 of this pre-tax gain was amortized
(reclassified) from OCI into income. During the three months ended March
31, 2002, $1.6 million (pre-tax) of the net derivative losses included in
OCI was reclassified to the Income Statement as additional interest
expense. The 2002 reclassifications occurred mostly through the normal
postings of cash receipts and cash payments related to the derivatives
and the hedged items.
NOTE 9 - STOCK INCENTIVE PLANS
At March 31, 2003, the Company had various stock-based compensation plans
that are described more fully in Note 13 included in the Form 10-K Annual
Report of the Company for the year ended December 31, 2002. The Company
accounts for these plans under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations. No stock-based compensation cost for option
grants under these plans is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant.
15
The Company's Employee Stock Purchase Plan (ESPP) allows participating
employees to purchase the Corporation's common stock at an exercise price
of 85% of the lower of the closing price of the Company's common stock on
the Nasdaq National Market on the first or last day of each offering
period. No charge to earnings is recorded with respect to the ESPP.
Accordingly, the Pro Forma table below includes fair value compensation
expense in the amount of the 15% discount between the stock price and the
option exercise price.
There were no option grants, other than the ESPP issuance of shares,
during the first quarter of 2003, therefore, no fair value calculation
was required for that period. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB No. 123, "Accounting for Stock-Based
Compensation", to all stock-based compensation. The fair values were
calculated using a Black Scholes option price model.
For the Three Months
Ended March 31,
2003 2002
------------------------
(in thousands,
except per share data)
Net Income:
As reported.................................................................... $10,721 $9,926
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects.. (610) (550)
----------------------
Pro forma...................................................................... $10,111 $9,376
======================
Basic earnings per share:
As reported.................................................................... $ 0.43 $ 0.40
Pro forma...................................................................... 0.41 0.38
Diluted earnings per share:
As reported.................................................................... $ 0.43 $ 0.40
Pro forma...................................................................... 0.41 0.38
NOTE 10 - CONTINGENCIES AND GUARANTEES
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. Since the
Company's subsidiaries act as depositories of funds, trustee and escrow
agents, they occasionally 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.
Guarantees:
The Company, in the normal course of its business, regularly offers
financial and performance standby letters of credit to its AMCORE Bank,
N.A. (BANK) customers. Financial and performance standby letters of
credit are a conditional but irrevocable form of guarantee. Under a
financial standby letter of credit, the Company guarantees payment to a
third party obligee upon the default of payment by the BANK customer, and
upon receipt of complying documentation from the obligee. Under a
performance standby letter of credit, the Company guarantees payment to a
third party obligee upon nonperformance by the BANK customer and upon
receipt of complying documentation from the obligee.
16
Both financial and performance standby letters of credit are typically
issued for a period of one year to five years, but can be extended
depending on the BANK customer's needs. As of March 31, 2003, the maximum
remaining term for any outstanding standby letters of credit was
approximately five and one-half years, expiring on October 16, 2008. A
fee of one to two percent of face value is normally charged to the BANK
customer and is recognized as income over the life of the standby letter
of credit. The carrying value of deferred fees as of March 31, 2003 was
$1.2 million.
At March 31, 2003, the contractual amount of these letters of credit,
which represents the maximum potential amount of future payments that the
Company would be obligated to pay under the guarantees, was $158.6
million, with $141.7 million in financial standby letters of credit and
$16.9 million in performance standby letters of credit.
The issuance of either a financial or performance standby letter of
credit is normally backed by collateral. The collateral can take various
forms including bank accounts, investments, fixed assets, inventory,
accounts receivable and real estate, among other things. At the time that
the letters of credit are issued, the value of the collateral is usually
in an amount that is considered sufficient to cover the contractual
amount of the standby letters of credit.
NOTE 11 - EARNINGS PER SHARE (EPS)
Earnings per share calculations are as follows: For the Three Months
Ended March 31,
2003 2002
------------------------
(in thousands,
except per share data)
Net Income...................................... $10,721 $ 9,926
Basic earnings per share:
Average basic shares outstanding....... 24,792 24,609
========================
Earnings per share..................... $ 0.43 $ 0.40
========================
Diluted earnings per share:
Weighted average shares outstanding..... 24,792 24,609
Dilutive shares......................... 140 241
Contingently issuable shares............ 4 1
------------------------
Average diluted shares outstanding...... 24,936 24,851
========================
Diluted earnings per share.............. $ 0.43 $ 0.40
========================
Basic EPS is computed by dividing income available to common stockholders
(numerator) by the weighted-average number of common shares outstanding
(denominator) during the period. Shares issued during the period and
shares reacquired during the period are weighted for the portion of the
period that they were outstanding.
The computation of diluted EPS is similar to the computation of basic EPS
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued and to include shares
contingently issuable pursuant to employee incentive plans. Securities
(e.g. options) that do not have a current right to participate fully in
earnings but that may do so in the future by virtue of their option
rights are potentially dilutive shares. The dilutive shares are
calculated based on the treasury stock method meaning that, for the
purposes of this calculation, all outstanding options are assumed to have
been exercised during the period and the resulting proceeds used to
repurchase Company stock at the average market price during the period.
In computing diluted EPS, only potential common shares that are
dilutive--those that reduce earnings per share or increase loss per
share--are included. Exercise of options is not assumed if the result
would be antidilutive.
17
NOTE 12 - SEGMENT INFORMATION
AMCORE's internal reporting and planning process focuses on its four
primary business 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, Retail and Mortgage 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, 2002.
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 estimate refinements, changes in risk profiles, changes in
customers or product lines, and changes in management structure. During
the first quarter of 2003, the Company also changed the classification of
mortgage loans not sold into the secondary market that are retained by
the BANK. All revenues from these loans, along with related Provisions
and expenses, are now reported as part of the Mortgage Banking Segment
instead of the Retail Banking Segment. Prior period Segment results have
been restated to reflect this change.
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.
The Company provides Commercial and Retail banking services through its
59 banking locations. The Commercial Banking Segment provides services
including lending, business checking and deposits, cash management,
merchant card services and other traditional as well as e-commerce
commercial banking services to large and small business customers. The
Retail Banking Segment provides services including 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 to individual customers. The Trust and Asset
Management segment provides trust, investment management, employee
benefit recordkeeping and administration and brokerage services. It also
acts as 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,
One Source(TM)), regionally to institutional investors and corporations,
and locally through AMCORE's banking locations. The Mortgage Banking
segment provides a variety of mortgage lending products to meet its
customer needs. It sells a majority of these loans to the secondary
market and continues to service most of the loans sold.
18
For the three months ended March 31, 2003 ------------------ Operating Segments ------------------
Commercial Retail Trust and Asset Mortgage
Banking Banking Management Banking Other Consolidated
--------------------------------------------------------------------------------------
(dollars in thousands)
Net interest income ..................... $ 18,435 $ 11,506 $ 12 $ 3,332 $ 1,231 $ 34,516
Non-interest income ..................... 3,997 11,897 6,527 3,922 3,088 29,431
--------------------------------------------------------------------------------------
Total revenue ...................... 22,432 23,403 6,539 7,254 4,319 63,947
Provision for loan losses ............... 10,161 2,023 -- 391 -- 12,575
Depreciation and amortization ........... 172 530 115 9 829 1,655
Other non-interest expense .............. 8,014 9,824 5,197 3,581 8,732 35,348
--------------------------------------------------------------------------------------
Pretax earnings (loss) ............. 4,085 11,026 1,227 3,273 (5,242) 14,369
Income taxes (benefits) ................. 1,325 4,064 498 1,195 (3,434) 3,648
--------------------------------------------------------------------------------------
Earnings ........................... $ 2,760 $ 6,962 $ 729 $ 2,078 $ (1,808) $ 10,721
======================================================================================
Segment profit percentage ............... 22.0% 55.6% 5.8% 16.6% N/A 100.0%
======================================================================================
Assets ................................. $ 1,909,228 $ 818,872 $ 18,906 $ 343,173 $ 1,278,119 $ 4,368,298
======================================================================================
For the three months ended March 31, 2002
Net interest income ..................... $ 13,923 $ 10,001 $ 34 $ 3,554 $ 2,667 $ 30,179
Non-interest income ..................... 1,760 2,927 7,222 1,801 3,398 17,108
--------------------------------------------------------------------------------------
Total revenue ...................... 15,683 12,928 7,256 5,355 6,065 47,287
Provision for loan losses ............... 1,583 981 -- 76 -- 2,640
Depreciation and amortization ........... 131 563 83 7 714 1,498
Other non-interest expense .............. 6,618 9,736 5,545 2,767 5,267 29,933
--------------------------------------------------------------------------------------
Pretax earnings .................... 7,351 1,648 1,628 2,505 84 13,216
Income taxes (benefits) ................. 2,479 611 657 919 (1,376) 3,290
--------------------------------------------------------------------------------------
Earnings ........................... $ 4,872 $ 1,037 $ 971 $ 1,586 $ 1,460 $ 9,926
======================================================================================
Segment profit percentage ............... 57.5% 12.2% 11.5% 18.8% N/A 100.0%
======================================================================================
Assets ................................. $ 1,628,028 $ 670,329 $ 21,416 $ 393,625 $ 1,403,183 $ 4,116,581
======================================================================================
19
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") financial condition
as of March 31, 2003 compared to December 31, 2002 and the results of operations
for the three months ended March 31, 2003 compared to the same period in 2002.
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 quarterly report on Form 10-Q contains, and our periodic filings with the
Securities and Exchange Commission and written or oral statements made by the
Company's officers and directors to press, potential investors, securities
analysts and others will contain, forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934, and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby with respect to, among other things,
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 identify forward-looking statements.
Forward-looking statements speak only as of the date they are made, and AMCORE
undertakes no obligation to update publicly any forward-looking statements 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"; and (XVII) inability of third-party vendors to
perform critical services for the Company or its customers.
OVERVIEW OF OPERATIONS
AMCORE reported net income of $10.7 million for the three-month period ended
March 31, 2003. This compares to $9.9 million for the same period in 2002.
Diluted earnings per share were $0.43 for the three months ended March 31, 2003,
compared to $0.40 for the same period in 2002. This represents an increase of
$0.03 per share or 7.5%.
AMCORE's annualized return on average equity for the first quarters of 2003 and
2002 was 12.01% and 13.02%, respectively. The annualized return on average
assets was 0.98% and 1.01% for the first quarters of 2003 and 2002,
respectively.
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Branch Strategy
During 2001, the Company launched the first phase of 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 there are strong demographic growth rates and high concentrations of
mid-size businesses, 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 retail facility is sought.
At the same time, AMCORE has exited certain markets that no longer fit its
growth objectives (the "Branch Sales").
During 2001, the Company's banking subsidiary (the "BANK") sold seven Illinois
branches and in 2002 closed one additional branch. For the seven Illinois 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 $6.3 million (the "Branch Gain(s)"). Loans and deposits
for the closed branch were transferred to nearby BANK branches. During the first
quarter of 2003, the BANK sold six Wisconsin branches in Clinton, Darien,
Montello, Kingston, Dalton and Westfield. Combined loans, deposits and premises
and equipment of $48.2 million, $124.6 million and $2.1 million, respectively,
were transferred to the respective buyers of the Wisconsin branches, resulting
in a pre-tax gain of $8.2 million or a net after-tax gain of $5.0 million (also
referred to as "Branch Gain(s)").
Branch Expansion activities in 2001 included two new offices: one on Rockford's
east side and one in Geneva, Illinois, an affluent Chicago suburb. During 2002,
the BANK opened four commercial loan offices and three full-service branches.
The commercial loan offices included three in the Chicago suburbs of Schaumburg,
Lincolnshire and Des Plaines, Illinois and one on the east side of Madison,
Wisconsin. The full-service branches included one each in St. Charles and
McHenry, Illinois and one along the beltway in Madison. As a result of the new
office openings, a limited branch office in Geneva, Illinois and a smaller
full-service branch in downtown McHenry, Illinois were closed. During the first
quarter of 2003, the BANK opened a limited branch office in Aurora, Illinois.
Combined, the new locations have generated $296.9 million in loans and $89.0
million in deposits as of March 31, 2003. The impact of the Branch Expansion was
a decrease of $0.02 and $0.01 per diluted share in the first quarters of 2003
and 2002, respectively.
During the remainder of 2003 the Company plans to open seven additional
locations in the Illinois communities of Rockford, Machesney Park, Algonquin,
Elgin and Oak Brook and in the two Wisconsin communities of Madison and
Waukesha. In connection with the opening of these locations, the Company will
close its North Main Hilander and Cubs Food in-store branches in Rockford and
Loves Park, Illinois. The Company also plans to convert three limited branch
offices to full service hubs in 2004. Total capital expenditures for these
locations, including the Aurora, Illinois limited branch office opened in the
first quarter of 2003, are estimated at approximately $28 million. The total
expected impact on 2003 earnings of all offices opened since April 2001 is a
decrease of 10 to 15 cents per share as start-up costs initially outpace net
revenues. The impact of any gains or loss of earnings on the Wisconsin Branch
Sales was not factored into the decrease in earnings per share expected in 2003
from the Branch Expansion strategy. Despite this dilutive impact, AMCORE expects
year-over-year growth in earnings per share from improvements in existing
business performance during 2003.
On May 12, 2003, the Company announced Phase II of its Branch Expansion program,
authorizing $30 million in incremental capital investment. These funds will be
used to upgrade several limited branch offices to full-service facilities and to
build satellite branches in selected high-growth Midwestern communities.
Increased capabilities in these markets will help the Company accelerate deposit
growth at a faster rate than loan growth, which in turn, helps improve financial
performance by lowering funding costs. Phase II calls for a total of 10
additional branches opening in 2004 through 2006. See Table 4 for a tabular
presentation of the Company's Branch Expansion plans. The addition of Phase II
is expected to dilute earnings by four to eight cents per share in 2004. By
2005, the combined Branch Expansion initiative is expected to be accretive in a
range of 10 to 15 cents per share.
During 2002, as a complement to its Branch Expansion, the BANK added 37
additional automated teller machines (ATMs) in 15 communities in northern
Illinois and southern Wisconsin. The ATMs are primarily
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located in Kelley-Williamson Mobil stations as part of a co-branding
relationship, and are owned and operated by an unaffiliated third party. The
BANK currently owns and operates 75 ATMs throughout Wisconsin (24) and Illinois
(51). The co-branded relationship increased the Wisconsin and Illinois ATM
presence to 34 and 78, respectively, or 112 overall.
Loan Securitizations
During the first quarter of 2003, the BANK sold $106.0 million of indirect
automobile loans in securitization transactions (the "Auto Loan Sales"),
reporting a pre-tax gain of $2.5 million or a net after-tax gain of $1.5 million
(the "Auto Loan Gain"). Upon securitization, the BANK retained certain residual
interests. The BANK's retained interests are subordinate to investors' interests
and are subject to prepayment risk, interest-rate risk and credit risk on the
transferred auto loans. The investors and the securitization trust have no other
recourse to the BANK's other assets for failure of debtors to pay when due. See
Note 5 of the Notes to Consolidated Financial Statements.
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 months ended March 31, 2003 and 2002.
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):
Quarters Ended
March 31, 2003 March 31, 2002
----------------- --------------------
Interest Income Book Basis $59,753 $60,711
FTE Adjustment 1,527 1,814
----------------- --------------------
Interest Income FTE Basis 61,280 62,525
Interest Expense 25,237 30,532
----------------- --------------------
Net Interest Income FTE Basis $36,043 $31,993
================= ====================
Net interest income on an FTE basis increased $4.1 million or 12.7% in the first
quarter of 2003 compared to the same period in 2002. The increase was driven by
a 15.6% increase in average loans and a 17.3% reduction in total interest
expense.
The net interest spread is the difference between the average rates on
interest-earning assets and the average rates on interest-bearing liabilities.
The net interest margin represents net interest income divided by average
earning assets. These ratios can also be used to analyze net interest income.
Since a 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.
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As Table 1 indicates, the interest rate spread improved 17 basis points to 3.25%
in the first quarter of 2003 from 3.08% in the first quarter of 2002. The net
interest margin was 3.56% in the first quarter of 2003, an increase of 6 basis
points from 3.50% in the first quarter of 2002.
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. Table 2 analyzes the changes
attributable to the volume and rate components of net interest income.
Changes Due to Volume
In the first quarter of 2003, net interest income on an FTE basis increased due
to average volume by $3.4 million when compared to the first quarter of 2002.
This was comprised of a $6.5 million increase in interest income that was
partially offset by a $3.2 million increase in interest expense.
The $6.5 million increase in interest income was primarily attributable to a
$391.6 million or 15.6% increase in average loans. The growth in average loans
came from increases of $326.6 million in commercial lending driven mostly by
Branch Expansion and $123.8 million in consumer loans, principally indirect
automobile lending. The growth in average loan balances occurred despite the
$106.0 million in Auto Loan Sales and the transfer of $48.2 million in loans
associated with the Wisconsin Branch Sales in early March 2003. Partially
offsetting these increases was a $58.7 million average decline in 1-to-4 family
real estate loans as mortgage interest rates reached 40-year lows.
The increase in average loans and other earning assets was funded by a $150.1
million or 5.8% increase in average bank-issued deposits and by a $271.4 million
increase in brokered certificate of deposits (CD's). The increase in average
bank-issued deposits was attributable to Company-wide efforts to attract
additional deposits and the Branch Expansion. This growth occurred despite the
transfer of $124.6 million of deposits with the Wisconsin Branch Sales. Growth
in bank-issued deposits was insufficient to fund loan growth, leading to the
increase in brokered CD's. AMCORE recognizes the importance of continued
bank-issued deposit growth, not only as a means of funding the Branch Expansion,
but also to continue the strategy of reducing its reliance on wholesale funding
sources. The transition to full-service branches in new growth markets as the
Branch Expansion develops, continued emphasis on attracting and retaining
primary transaction accounts, and Auto Loan Sales are all means by which the
Company expects to implement these strategies. To this end, the Company was able
to decrease average borrowings by $36.5 million when comparing the first quarter
of 2003 with the same period in 2002.
Changes Due to Rate
During the first quarter of 2003, net interest income on an FTE basis increased
due to average rates by $684,000 when compared with the same quarter of 2002.
This was comprised of an $8.5 million decline in interest expense that was
partly offset by a $7.8 million decrease in interest income.
The yield on earning assets declined 81 basis points during the quarter, when
compared to the same period a year ago. The yield on average loans fell by 86
basis points, as falling interest rates since the first quarter of 2002 impacted
pricing on new loan volume, variable priced loans, which represent an increasing
percentage of the Company's loan portfolio, and loans that refinanced during the
year. While all loan categories registered declines, the decrease was primarily
attributable to commercial and commercial real estate loans. The yield on
average securities decreased by 85 basis points, also the result of declining
interest rates. Yields on securities were also affected by the prepayment of
higher-
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yielding mortgage-related securities that increased as mortgage interest rates
fell. These securities were replaced by lower-yielding securities due to the
current interest rate environment.
The rate paid on interest bearing liabilities declined 98 basis points during
the first quarter of 2003, compared to the first quarter of 2002. This was
primarily due to decreased rates paid on deposits and short-term borrowings.
Average rates declined on virtually all deposit accounts, but was most
pronounced on CD's, as older CD's bearing higher rates matured and re-priced
during the period of declining interest rates. The Company also benefited from
an expired interest rate swap that had negatively impacted funding costs in the
first quarter of 2002, as well as new swaps entered into since the first quarter
of 2002 that lowered the cost of brokered CD's during the first quarter of 2003.
The decrease in short-term borrowing costs was due to reverse repurchase
agreements that renewed at lower rates, also due to the decline in net hedged
short-term interest rates.
The current and projected interest rate environments are expected to result in
modestly improved interest rate spreads and margins in 2003, compared to 2002.
Specifically, the Company expects continuing benefits from deposit re-pricing
during the coming year. It will also realize a full year's benefit from the
expired interest rate swap that negatively impacted funding costs in 2002. Among
those factors that could cause margins and spreads not to improve as anticipated
by the Company throughout the remainder of 2003 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 greater than expected
delinquencies resulting in non-accrual status.
Provision for Loan Losses
The provision for loan losses (Provision) is an amount added to the allowance
for loan losses (Allowance) for loan losses that are probable as of the
respective reporting date. Actual loan 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 Allowance is regularly reviewed by management to determine whether or 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 a borrower's ability to repay, and current economic and industry
conditions, among other things. The Allowance is also subject to periodic
examination by regulators whose review includes a determination as to its
adequacy to absorb probable losses.
The Provision was $12.6 million in the first quarter of 2003, an increase of
$9.9 million or 376.3% from the $2.6 million in the first quarter of 2002.
Increases in net non-performing loans, higher net charge-offs, increasing loan
balances, deteriorating collateral values, increased concentrations and
continued economic weakness were all among the factors leading to the increased
Provision.
Loans placed on non-accrual and loans 90-days past due and still accruing
increased by $1.4 million when comparing the first quarter of 2003 with the
first quarter of 2002. This, combined with deteriorating collateral values, led
to an increase of $2.1 million in specific loss estimates for individually
reviewed loans.
AMCORE recorded net charge-offs of $6.8 million in the first quarter of 2003
compared to $2.9 million in the first quarter of 2002, an increase of $3.9
million. Annualized net charge-offs were 95 basis points of average loans in the
first quarter of 2003 compared to an annualized rate of 46 basis points during
the same quarter of last year. Despite the increase in net charge-offs, as noted
above, non-accrual loans and loans 90-days past due and still accruing still
increased $1.4 million. The increase included one
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automobile dealership credit totaling $4.2 million that was placed on
non-accrual status late in the first quarter of 2003.
Increasing loan balances, 15.6% higher on average compared to the first quarter
of 2002, and increased historical loss experience, led to higher statistical
loss estimates on loan pools in an amount of $1.5 million. This amount included
loss estimates to address growth that has occurred in newer markets where our
knowledge of the customer base and local business conditions is not as strong as
existing markets. This action was also prompted by recent unexpected losses that
have occurred, primarily in the suburban markets.
Continued weakness in the overall economy, particularly the manufacturing
segment, uncertainties connected with the war in Iraq, deteriorating collateral
values, including used cars and loans that are secured by receivables, inventory
and specialized equipment, increased concentrations and other factors resulted
in additional increases for loss estimates of $2.4 million.
The Allowance, as a percent of total non-accrual loans, was 110.4% and 102.8% at
March 31, 2003 and March 31, 2002, respectively. The increased level of the
Allowance, as a percent of loans, reflects the impact of the factors discussed
above.
Future growth in the loan portfolio, weakening economic conditions, specific
credit deterioration, or declines in collateral values, among other things,
could result in increased Provisions during the remainder of 2003 compared to
2002.
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 Auto Loan Sales and
Branch Sales and increases in cash surrender value (CSV) and death benefits on
bank and company owned life insurance (COLI) are also included in this category.
Non-interest income, including net security gains, totaled $29.4 million in the
first quarter of 2003, an increase of $12.3 million or 72.0% from $17.1 million
in first quarter of 2002. First quarter 2003 included an $8.2 million Branch
Gain and a $2.5 million Auto Loan Gain. The remaining increase related primarily
to increased mortgage revenues.
Trust and asset management income, the Company's largest source of fee-based
revenues, totaled $5.7 million in the first quarter of 2003, a decrease of
$952,000 or 14.2% from $6.7 million in the first quarter of 2002. The overall
decline in the stock market since the first quarter of 2002 negatively impacted
the value of AMCORE-administered assets, upon which fees are partially based,
leading to the decrease in fee revenue.
The trust and asset management segment manages or administers $5.4 billion of
investments, inclusive of traditional assets as well as the management of the
BANK's fixed income portfolio of approximately $1.1 billion. Assets in the
AMCORE Vintage Mutual Funds totaled $845 million at March 31, 2003. 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. As witnessed over the last two years,
investor confidence and market performance can be affected by numerous
uncontrollable factors such as the September 11, 2001 attacks, uncertainties
surrounding the war on terrorism and Iraq, bankruptcies of high-profile public
companies and the proliferation of questionable accounting practices by a
variety of public companies that have been reported in the financial press from
time-to-time.
Service charges on deposits totaled $4.4 million in the first quarter of 2003,
an increase of $531,000 or 13.7% from $3.9 million in the first quarter of 2002.
Deposit growth initiatives, which primarily affected retail accounts, led to the
increase.
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Mortgage revenues include fees generated from the 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 $4.0 million in the first quarter of 2003, an increase of $2.2 million or
116.7% from $1.8 million in the first quarter of 2002. First quarter 2002
mortgage revenues included a $536,000 servicing rights impairment reversal.
Closing volumes increased 92.4% to $205.1 million in the first quarter of 2003,
from $106.6 million in the first quarter 2002.
Continued strong mortgage revenues, excluding impairment charges or reversals,
are expected through the second quarter of 2003. Expectations are lower for the
third and fourth quarters as refinancing activity is expected to decline. The
Company has, however, added eleven mortgage loan originators, primarily in the
Branch Expansion markets, to capitalize on growth opportunities in new purchase
home mortgages. During the first quarter of 2003, new purchase home mortgages
increased 38.5% compared to the same quarter in 2002.
As of March 31, 2003, AMCORE had $10.9 million of capitalized mortgage servicing
rights, less a $3.4 million impairment valuation allowance, with a fair value of
$7.5 million. The unpaid principal balance of mortgage loans serviced for
others, including mortgage loans held for sale, was $1.1 billion as of March 31,
2003. This compares to $974.7 million as of March 31, 2002.
COLI income totaled $1.8 million in the first quarter of 2003, a $526,000 or
41.8% increase from $1.3 million in the first quarter of 2002. This includes
$467,000 in net death benefits received. The remaining increase is due to
additional investments and the impact of compounding, which are partially offset
by lower yields due to declining interest rates. 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 March 31, 2003, the CSV of COLI stood at $111.3
million.
Other non-interest income includes customer service charges, debit card
interchange income, ATM fees, brokerage commissions, insurance commissions,
gains on fixed asset sales and other miscellaneous income. In the first quarter
of 2003, other non-interest income was $2.5 million, a $197,000 or 7.3% decrease
from $2.7 million in the first quarter of 2002. The decline was primarily
attributable to a $309,000 first quarter 2002 excess retirement plan asset
reversion gain, which was partially offset by increased annuity sales income.
Recent litigation involving MasterCard and VISA concerning the amount of fees
charged to process signature-based debit card transactions is expected to
reduce the amount of interchange income that AMCORE receives on the debit cards
that it issues. Rate reductions that are effective August 1, 2003 are estimated
to result in a decrease in 2003 earnings of less than $0.01 per diluted share.
Beginning January 1, 2004, merchants may also refuse to accept signature-based
debit card transactions. This is likely to result in additional reductions in
interchange income for 2004 that could be material. At this time it is not
possible to accurately predict the magnitude of this reduction since it will be
driven by the individual practices and policies of the point-of-sale merchant.
During the first quarter of 2003 and for all of 2002, AMCORE recorded $496,000
and $1.8 million, respectively, in debit card interchange fees.
Net realized securities gains were $273,000 in the first quarter of 2003,
compared to $734,000 in the first quarter of 2002. 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 $37.0 million in the first quarter of 2003, an
increase of $5.6 million or 17.7%, from $31.4 million in the first quarter of
2002. The increase included a $1.6 million charge for the early extinguishments
of debt that occurred in the first quarter of 2003. The efficiency ratio was
57.87% in the first quarter of 2003, compared to 66.47% in the first quarter of
2002. The efficiency ratio is calculated by dividing total operating expenses by
the sum of net interest income and non-interest income.
26
Compensation expense is the largest component of operating expenses, totaling
$15.8 million in the first quarter of 2003, an increase of $1.8 million or 12.7%
from $14.0 million in the first quarter of 2002. The increase included $786,000
in salaries and wages associated with the Branch Expansion strategy, $554,000 in
increased employee incentive costs and $356,000 in increased commissions mainly
driven by increased mortgage activity in the first quarter of 2003 compared to
the first quarter of 2002. The higher incentive costs were the result of better
performance year-to-date versus 2003 incentive targets relative to the same
period in 2002.
Employee benefit costs were $4.7 million in the first quarter of 2003 compared
to $4.2 million in the first quarter of 2002, representing a $500,000 or 12.0%
increase. The increase, on a percentage basis, is essentially pro-rata with the
increase in compensation expense and was primarily driven by the same factors.
The largest component of the increase was attributable to retirement costs.
Net occupancy expense for the first quarter of 2003 and 2002 were $2.1 million
and $1.9 million, respectively. This was an increase of $230,000 or 12.1%, and
included the impact of the Branch Expansion strategy.
Equipment expense increased $605,000 or 32.7% to $2.5 million in the first
quarter of 2003, compared to $1.9 million in the first quarter of 2002. The
increase was primarily due to personal computer replacements and the
acceleration of existing hardware and software depreciation and amortization,
both necessitated by a data processing conversion scheduled for July 2003.
Additional increases of approximately $600,000 in equipment expense are expected
in the second half of the year as a result of the data processing conversion due
to increased depreciation and amortization on new computer hardware and
software.
Data processing expense was $1.8 million in the first quarter of 2003, up
$145,000 or 8.8% from $1.6 million in the same period in 2002. The increase was
due in part to growth in the business as a result of Branch Expansion and
expenses incurred in connection with the conversion to a new data processing
system. Once the conversion is complete and fully operational, data processing
costs are expected to decline over comparable prior periods. The decline for the
full year 2003 is expected to be $1.5 million.
Professional fees were $1.1 million and $1.0 million for the first quarters of
2003 and 2002, respectively. This was an increase of $41,000 or 4.0%.
Communication expense was $1.2 million in the first quarter of 2003, an increase
of $169,000 or 16.4% from $1.0 million in the first quarter of 2003. Higher
telecommunication, postage and courier costs all contributed to the increase and
were due to Branch Expansion and rate increases.
Advertising and business development expenses were $1.0 million in the first
quarter of 2003, a decrease of $201,000 or 16.1% from $1.2 million in the first
quarter of 2002. The decrease is due to timing of advertising campaigns. For the
full year, expenses are expected to rise over 2002 levels as the Company
continues to grow, due in part to Branch Expansion into new markets and
totally-free checking promotions.
Other expenses were $6.8 million in the first quarter of 2003, an increase of
$2.3 million or 51.3% from $4.5 million in the first quarter of 2002. The
majority of the increase was due to $1.6 million in prepayment penalties related
to restructuring of Federal Home Loan Bank (FHLB) advances. The remaining
increase was due to higher loan processing costs associated with increased
mortgage activity, an impairment charge on internal use software that was
discontinued and higher foreclosed property expenses.
Income Taxes
Income tax expense totaled $3.6 million in the first quarter of 2003, compared
with $3.3 million in the first quarter of 2002, an increase of $358,000 or
10.9%. The increase was due to higher earnings before tax. The effective tax
rates were 25.4% and 24.9% in the first quarters of 2003 and 2002, respectively.
Effective tax rates are less than the statutory tax rates due primarily to
investments in tax-exempt municipal bonds and increases in CSV and death
benefits on COLI that are not taxable.
27
EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process focuses on four primary lines
of business (Segments): Commercial Banking, Retail Banking, Trust and Asset
Management, and Mortgage Banking. Note 12 of the Notes to Consolidated Financial
Statements presents a condensed income statement and selected balance sheet
information for each Segment.
The financial information presented was derived from the Company's internal
profitability reporting system that is used by management to monitor and manage
the financial performance of the Company. This information is based on internal
management accounting policies which have been developed to reflect the
underlying economics of the Segments and, to the extent practicable, to portray
each Segment as if it operated on a stand-alone basis. Thus, each Segment, in
addition to its direct revenues, expenses, assets and liabilities, includes an
appropriate allocation of shared support function expenses. The Commercial,
Retail and Mortgage 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 Annual Report on Form 10-K for the year ended
December 31, 2002.
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 estimate refinements, changes in risk
profiles, changes in customers or product lines, and changes in management
structure. During the first quarter of 2003, the Company also changed the
classification of mortgage loans not sold into the secondary market that are
retained by the BANK. All revenues from these loans, along with related
Provisions and expenses, are now reported as part of the Mortgage Banking
Segment instead of the Retail Banking Segment. Prior period Segment results have
been restated to reflect this change.
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 is included
in the "Other" column of Note 12 of the Notes to Consolidated Financial
Statements.
Commercial Banking
The Commercial Banking Segment (Commercial) provides commercial banking services
to large and small business customers through the BANK's 59 banking locations.
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 earnings for the first quarter of 2003 were $2.8 million, a decrease
of $2.1 million or 43.3% from the first quarter of 2002. The decrease was
primarily attributable to increased Provision and operating expenses. These were
partially offset by increased net interest and non-interest income, and by
decreased income taxes.
Net interest income increased $4.5 million in the first quarter of 2003 compared
to the same period in 2002. The increase was due to higher average loan volumes,
particularly commercial real estate loans, lower priced deposits and decreased
cost of funds allocations, which more than compensated for lower yields on
loans. The lower yields on loans, reduced rates on deposits and decreased cost
of funds allocations were all attributable to declining short-term interest
rates over the past two years, which have impacted new product (loans and
deposits) pricing as well as the re-pricing of variable priced products and
fixed-price product renewals. Strong loan demand, aided by the Branch Expansion,
was more than
28
sufficient to replace average loan balances transferred in the Branch Sales,
leading to the increased volumes.
Non-interest income increased $2.2 million in the first quarter of 2003 when
compared to the same period a year ago. The increase was attributable to
Commercial's allocable portion of the Branch Gain of $2.2 million.
The first quarter 2003 Provision increase from 2002 was $8.6 million. The
increase in the Provision was attributable to a $3.6 million increase in net
charge-offs, a $2.1 million increase in specific loss estimates, higher
statistical loss estimates on increasing loan pools of $1.3 million and general
loss estimates of $1.6 million. These estimates are based upon continued
weakness in the overall economy, particularly the manufacturing segment,
uncertainties connected with the war in Iraq, deteriorating collateral values,
including loans that are secured by receivables, inventory and specialized
equipment, increased concentrations and other factors.
Operating expenses increased $1.4 million in the first quarter of 2003 relative
to the same period in 2002. The increase was largely due to higher personnel
expenses, which included the impact of the Branch Expansion strategy.
Income taxes decreased $1.2 million, quarter-to-quarter, and were primarily the
result of lower income before taxes.
The Commercial Segment represented 22.0% and 57.5% of total segment earnings in
the first quarters of 2003 and 2002, respectively.
Retail Banking
The Retail Banking Segment (Retail) provides retail-banking services to
individual customers through the BANK's 59 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.
Retail earnings for the first quarter of 2003 were $7.0 million, an increase of
$5.9 million or 571.4% from the first quarter of 2002. Improved net interest
income and higher non-interest income was partially offset by increased income
taxes and Provision.
Net interest income increased by $1.5 million in the first quarter of 2003 when
compared to the same period in 2002. The increase was due to increased average
loan volumes, particularly indirect automobile loans, and lower priced deposits.
These factors more than offset lower yields on loans and reduced funds credit
allocations. The lower yields on loans, reduced rates on deposits and decreased
funds credit allocations were all attributable to declining rates over the past
two years, which have impacted new product (loans and deposits) pricing as well
as the re-pricing of variable priced products and fixed-price product renewals.
The growth in overall average loan balances occurred despite the Auto Loan
Sales, the transfer of loans associated with the Wisconsin Branch Sales, both of
which occurred in early March 2003.
Non-interest income increased $9.0 million in the first quarter of 2003,
compared to the same period in 2002. Of this increase, $6.0 million was
attributable to the Branch Gain and $2.5 million related to the Auto Loan Gain.
The remaining increase related to higher deposit service charge income.
The first quarter 2003 Provision increased by $1.0 million compared to the first
quarter of 2002. The increase in the Provision was attributable to a $475,000
increase in net charge-offs, $150,000 for higher statistical loss estimates on
increasing loan pools and general loss estimates of $413,000. These estimates
are based upon deteriorating used car values and other factors.
Operating expenses increased by $55,000 when comparing the first quarter of 2003
with the same quarter in 2002.
29
Income taxes increased $3.5 million quarter-over-quarter, primarily the result
of higher income before taxes.
The Retail Segment represented 55.6% and 12.2% of total segment earnings in the
first quarters of 2003 and 2002, respectively.
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 the BANK's locations.
TAM earnings for the first quarter of 2003 were $729,000, a decrease of $242,000
or 24.9% from the same period in 2002. The decrease was due to declines in
non-interest income net of lower operating expenses and income taxes.
TAM non-interest income declined $695,000 in the first quarter of 2003 compared
to the same period in 2002. Declines in fee-based revenue were partially offset
by increased brokerage commission income. 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, processing costs associated with annuity sales, which are
netted against commissions, have declined as the TAM segment is now processing
its own sales.
Operating expenses decreased $316,000 in the first quarter of 2003 when compared
to the same period in 2002. The decrease was primarily related to lower
personnel and advertising costs, partly offset by an impairment charge on
internal use software that was discontinued. Lower personnel costs were due to
open positions, while the decrease in advertising was due to timing of
advertising campaigns.
Income taxes declined $159,000 for the first quarter of 2003, when compared to
the same period in 2002. The decrease in taxes is related to the decline in
pre-tax earnings.
The TAM Segment represented 5.8% and 11.5% of total segment earnings in the
first quarters of 2003 and 2002, respectively.
Mortgage Banking
The Mortgage Banking Segment (Mortgage) provides a variety of mortgage lending
products to meet its customer needs. It sells the majority of the long-term,
fixed-rate loans to the secondary market and continues to service most of the
loans sold.
Mortgage earnings were $2.1 million in the first quarter of 2003, compared to
$1.6 million in the same period in 2002. An increase in non-interest income was
essentially offset by increased operating expenses, higher Provision and a
decline in net interest income.
Net interest income decreased $222,000 in the first quarter of 2003 compared to
the same quarter in 2002. This was primarily due to lower average residential
real estate loan balances in the first quarter of 2003 compared to 2002 and
declining mortgage interest rates over the same periods, net of lower cost of
funds allocations. Declining mortgage loans were the result of accelerated
prepayments, driven by falling mortgage interest rates, with refinancing
primarily into the secondary market.
Non-interest income for the first quarter of 2003, which is net of servicing
right amortization and impairment, increased $2.1 million from the first quarter
of 2002. First quarter 2002 mortgage revenues
30
included a $536,000 servicing rights impairment reversal. Closing volumes
increased 92.4% to $205.1 million in the first quarter of 2003, from $106.6
million in the first quarter of 2002.
Operating expenses increased $816,000 in the second quarter of 2003 compared to
same period in 2002. The increase was primarily due to higher commissions and
processing costs that were paid due to the increase in mortgage volumes.
The unpaid principal balance of mortgage loans serviced for others, including
mortgage loans held for sale, was $1.1 billion as of March 31, 2003. This
compares to $974.7 million as of March 31, 2002.
The Mortgage Segment represented 16.6% and 18.8% of total segment earnings in
the first quarters of 2003 and 2002, respectively.
BALANCE SHEET REVIEW
Total assets were $4.4 billion at March 31, 2003, a decrease of $152.4 million
or 3.4% from December 31, 2002. Total liabilities decreased $158.1 million over
the same period, while stockholders' equity increased $5.7 million.
Total earning assets, including COLI, decreased $141.2 million from December 31,
2002. Non-earning assets decreased $11.2 million over the same period. The
decrease in earning assets was primarily attributable to a $70.6 million
decrease in investment securities and a $62.4 million decrease in loans. The
decrease in investment securities includes reductions in corporate, municipal
and mortgage asset-backed securities and reflects mortgage market driven
prepayment activity as well as actions taken by AMCORE to improve liquidity and
yields. The decrease in loans was mainly attributable to the $106.0 million in
loans sold in the Auto Loan Sale and $48.2 million of loans transferred in the
Branch Sales offset by internal loan growth including the impact of the Branch
Expansion.
Total deposits decreased $23.4 million from December 31, 2002. A total of $124.6
million in deposits were transferred in the Branch Sales, but were largely
offset by a $53.0 million increase in BANK-issued deposits plus a $48.2 million
increase in brokered CD's. Short-term borrowings decreased by $142.9 million
over the same period, while long-term borrowings were relatively unchanged.
Proceeds from the Auto Loan Sales, the increase in brokered CD's and the decline
in investment securities, were used to fund the Branch Sales and pay down the
short-term borrowings. Other liabilities increased $9.0 million.
The stockholders' equity increase was due to earnings for the first quarter of
2003 less dividends paid to shareholders. Other comprehensive income also
declined due to changes in the unrealized value of investment securities
available for sale.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off-Balance Sheet Arrangements
During the ordinary course of its business, the Company engages in financial
transactions that are not recorded on its Consolidated Balance Sheet, are
recorded in amounts that are different than their full principal or notional
amount, or are recorded on an equity or cost basis rather than being
consolidated. Such transactions serve a variety of purposes including management
of the Company's liquidity and credit concentration risks, optimization of
capital utilization, meeting the financial needs of its customers and fulfilling
Community Reinvestment Act obligations in the markets that it serves.
The Company's largest off-balance sheet arrangement relates to Auto Loan Sales
that occurred during 2000, 2001 and the first quarter of 2003. Structured as
sales pursuant to Statement of Financial Accounting Standard (SFAS) 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," the Auto Loan Sales are a component of the Company's liquidity
and credit concentration risk management strategy. The Auto Loan Sales are also
helpful as a capital management tool.
31
In the Auto Loan Sales, indirect automobile loan receivables are transferred to
a multi-seller variable-interest entity (VIE). Since the Company is not the
primary beneficiary of the VIE, consolidation is not required under the terms of
Financial Accounting Standards Board Interpretation (FIN) 46 "Consolidation of
Variable Interest Entities." As a result, the net carrying amount of the loans
is removed from the balance sheet and certain retained residual interests are
recorded. The Company's retained interests are subordinate to the interests of
investors in the VIE and are subject to prepayment risk, interest-rate risk and
credit risk on the transferred auto loans. Neither the investors nor the VIE
have any other recourse to the Company's other assets for failure of automobile
loan debtors to pay when due. The Company also retains the rights to service the
loans that are sold.
As of March 31, 2003, the balance of automobile loans serviced and not included
on the Company's Consolidated Balance Sheet was $137.8 million. The carrying
value of retained interests was $15.7 million. The carrying value of the loans
is the maximum estimated exposure to loss of the retained residual interests.
See Note 5 of the Notes to Consolidated Financial Statements.
The Company also originates mortgage loans that it sells to the secondary
market. The Company typically retains the right to service the loans that are
sold. As of March 31, 2003, the unpaid principal balance of mortgage loans
serviced for others was $1.05 billion. These loans are not recorded on the
Company's books. The Company, as of March 31, 2003 and in accordance with SFAS
No 140, had recorded $10.9 million of capitalized mortgage servicing rights,
less a $3.4 million impairment valuation allowance. See Note 4 of the Notes to
Consolidated Financial Statements.
The Company, as a provider of financial services, routinely enters into
commitments to extend credit to its BANK customers, including performance and
standby letters of credit. While these represent a potential outlay by the
Company, a significant amount of the commitments may expire without being drawn
upon. Commitments and letters of credit are subject to the same credit policies,
underwriting standards and approval process as loans made by the Company.
At March 31, 2003, a liability in the amount of $1.2 million, representing the
value of the guarantee obligations associated with certain of the financial and
standby letters of credit, has been recorded in accordance with FIN 45. This
amount will be amortized into income over the life of the commitment. The
notional amount of all letters of credit, including those exempted from the
scope of FIN 45, was $158.6 million. See Note 10 of the Notes to Consolidated
Financial Statements.
The carrying value of mortgage loan commitments at March 31, 2003 was an asset
of $2.0 million. This amount represents the fair value of those commitments
marked-to-market in accordance with SFAS 138, "Accounting for Derivative
Instruments and Hedging Activities." The total notional amount of mortgage loan
commitments was $130.6 million at March 31, 2003. See Note 8 of the Notes to
Consolidated Financial Statements.
At March 31, 2003, the Company had extended $575.9 million in loan commitments
other than the mortgage loan commitments and letters of credit described above.
This amount represented the notional amount of the commitment. No asset or
liability has been recorded.
The Company has a number of non-marketable equity investments that have not been
consolidated in its financial statements. At March 31, 2003, these investments
included $5.5 million in private equity fund investments that were reported
under either the cost or equity method, depending on the percentage of
ownership. Not included in the carrying amount were commitments to fund an
additional $3.2 million at some future date. The Company also has recorded
investments of $4.4 million and $21.9 million, respectively, in stock of the
Federal Reserve Bank and the FHLB. These investments are recorded at historical
cost, with income recorded when dividends are declared. Other investments,
comprised of various affordable housing tax credit projects (AHTCP), totaled
approximately $891,000 at March 31, 2003. Those investments without guaranteed
yields were reported on the equity method, while those with guaranteed yields
were reported using the effective yield method. With the possible exception of
the AHTCPs, consolidation of these investments will not be required pursuant to
FIN 46 since the Company is
32
not the primary beneficiary in the investments. The Company is in the process of
determining whether consolidation of the AHTCPs will be necessary as of July 1,
2003. Consolidation of these entities is not expected to have a material effect
on the consolidated financial statements. The maximum exposure to loss for all
non-marketable equity investments is the sum of the carrying amounts plus
additional commitments.
The Company's subsidiaries also hold assets in a fiduciary or agency capacity
that are not included in the Consolidated Financial Statements because they are
not assets of the Company. The total assets managed and administered by the
Company at March 31, 2003, excluding the BANK's investment portfolio, were $4.4
billion.
Contractual Obligations
In the ordinary course of its business, the Company enters into certain
contractual arrangements. These obligations include issuance of debt to fund
operations, property leases and derivative transactions. During the first
quarter of 2003, the Company incurred $1.6 million in prepayment penalties to
restructure a portion of its FHLB advances. Also during the quarter, the Company
entered into two operating lease arrangements in connection with the Branch
Expansion. There were no residual value guarantees on these leases. Other than
these transactions, there were no material changes in the Company's contractual
obligations since December 31, 2002. See Notes 6, 7 and 8 of the Notes to
Consolidated Financial Statements and Note 5 to the Notes to the Consolidated
Financial Statements included in the Form 10-K Annual Report for the year ended
December 31, 2002.
ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT
AMCORE's credit risk is centered in its loan portfolio, which on March 31, 2003
totaled $2.82 billion, or 68.6% of earning assets. The objective in managing
loan portfolio risk is to quantify and manage credit risk on a portfolio basis
as well as reduce the risk of a loss resulting from a customer's failure to
perform according to the terms of a transaction. To achieve this objective,
AMCORE strives to maintain a loan portfolio that is diverse in terms of loan
type, industry concentration, and borrower concentration.
The Company is also exposed to credit risk with respect to its $111.3 million
investment in COLI. AMCORE manages this risk by diversifying its holdings among
various carriers and by periodic internal credit reviews. All carriers have
"Secure" ratings from A. M. Best that range from a low of "A" (Excellent) to
"A++" (Superior).
Allowance for Loan Losses
The determination by management of the appropriate level of the Allowance
amounted to $39.6 million at March 31, 2003, compared to $35.2 million at
December 31, 2002, an increase of $4.4 or 12.5%. The Allowance is a significant
estimate that is regularly reviewed by management to determine whether or 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 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 March 31, 2003, the Allowance as a percent of total loans and of
non-accrual loans was 1.40% and 110%, respectively. These compare to the same
ratios at December 31, 2002 of 1.22% and 108%. Net charge-offs were $6.8 million
for the first quarter of 2003 versus $2.9 million for the first quarter of 2002.
These represented 0.95% and 0.46% of average loans, respectively, on an
annualized basis. AMCORE's management believes that the Allowance coverage is
adequate.
An analysis of the Allowance is shown in Table 3.
33
Non-performing Assets
Non-performing assets consist of non-accrual loans, loans 90 days past due and
still accruing, other real estate owned and other foreclosed assets.
Non-performing assets totaled $47.2 million as of March 31, 2003, an increase of
$5.7 million or 13.6% from $41.5 million at December 31, 2002. The $5.6 million
increase consisted of a $3.3 million increase in non-accrual loans, a $2.8
million increase in loans 90 days past due and still accruing, a $167,000
decrease in other real estate owned and a $326,000 decrease in other foreclosed
assets. Total non-performing assets represented 1.08% and 0.92% of total assets
at March 31, 2003 and December 31, 2002, respectively.
An analysis of non-performing assets is shown in Table 3.
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), 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 64.6% of
total assets as of March 31, 2003. Since December 31, 2002, loans decreased
$62.4 million. Loans held for sale, which represents mortgage origination
fundings awaiting delivery to the secondary market, declined $16.1 million.
During this same time period, bank-issued deposits declined $71.6 million. The
decline in loans and bank-issued deposits were due to the Branch Sales and the
Auto Loan Sale, net of increases due to Branch Expansion and same-branch growth.
The decline in loans held for sale reflects some decline in the rate of mortgage
refinancing activity since the end of the previous year. Thus, for the first
quarter of 2003, the largest sources and uses of liquidity were essentially
balanced. Nevertheless, overall liquidity improved during the first quarter of
2003, as non-core funding, which includes borrowings and brokered CD's, declined
$95.5 million. This improvement was due to the proceeds from the Auto Loan Sales
and from the decline in investment securities that were not needed to fund the
Branch Sales.
The Company's Branch Expansion strategy poses the greatest challenge to short
and long-term liquidity. The Branch Expansion has required, and will continue to
require, other sources of liquidity to fund the loan growth and the total
estimated $58.0 million 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 the Company expects deposit generation to mitigate the liquidity pressure
inherent in the strategy.
Despite the challenges posed by the Branch Expansion, the Company is confident
of its ability to meet and manage its short and long-term liquidity needs. As of
March 31, 2002, available sources of liquidity included $168.2 million of FED
funds lines, $73.3 million of FHLB advances, $263.5 million from the FED in
connection with pledging of commercial loans, $241.3 of unpledged investment
securities and $42.1 million of unused commercial paper and backup line of
credit borrowings. The Company also has
34
capacity, over time, to place sufficient amounts of brokered CD's as a source of
mid to long-term liquidity. The BANK's indirect auto portfolio, which at March
31, 2003 was $430.3 million, also remains an attractive source of liquidity
through additional Auto Loan Sales. At March 31, 2003, potential uses of
liquidity included $575.9 million in commitments to extend credit, $130.6
million in residential mortgage commitments primarily for sale to the secondary
market, and $158.8 million in standby letters of credit. At December 31, 2002,
these amounts were $587.4 million, $99.8 million and $161.4 million,
respectively.
Capital Management
Total stockholders' equity at March 31, 2003, was $361.4 million, an increase of
$5.7 million or 1.6% from December 31, 2002. The stockholders' equity increase
was due to earnings for the first quarter of 2003 less dividends paid to
shareholders. Other comprehensive income also declined due to changes in the
unrealized value of investment securities available for sale and the first
quarter 2003 reclassification to earnings of deferred gains on cash flow hedge
derivatives that were sold during 2002. See Note 8 of the Notes to Consolidated
Financial Statements. AMCORE paid dividends of $0.16 per share in the first
quarters of 2003 and 2002.
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.
AMCORE's ratio of risk-based capital at 11.46%, its Tier 1 capital at 10.29% and
its leverage ratio at 7.97%, all significantly exceed the regulatory mmnimums
(as the following table indicates), as of March 31, 2003. The BANK, whose ratios
are not presented below, is considered a "well-capitalized" institution based on
regulatory guidelines.
(dollars in thousands) March 31, 2003 March 31, 2002
-------------- --------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital (to Risk Weighted Assets) $390,215 11.46% $350,520 11.52%
Total Capital Minimum 272,389 8.00% 243,356 8.00%
------------------------- --------------------------
Amount in Excess of Regulatory Minimum $117,826 3.46% $107,164 3.52%
========================= ==========================
Tier 1 Capital (to Risk Weighted Assets) $350,317 10.29% $316,810 10.41%
Tier 1 Capital Minimum 136,195 4.00% 121,678 4.00%
------------------------- --------------------------
Amount in Excess of Regulatory Minimum $214,122 6.29% $195,132 6.41%
========================= ==========================
Tier 1 Capital (to Average Assets) $350,317 7.97% $316,810 8.01%
Tier 1 Capital Minimum 175,846 4.00% 158,268 4.00%
------------------------- --------------------------
Amount in Excess of Regulatory Minimum $174,471 3.97% $158,542 4.01%
========================= ==========================
Risk adjusted assets $3,404,363 $3,041,950
============ ============
Average assets $4,396,572 $3,956,706
============ ============
35
TABLE 1
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Quarter Ended Quarter Ended
March 31, 2003 March 31, 2002
--------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------- ----------------------------------
(dollars in thousands)
Assets:
Investment securities (1) (2) $ 1,108,334 $ 14,588 5.27% $ 1,086,962 $ 16,616 6.12%
Short-term investments 8,415 22 1.06% 15,639 56 1.45%
Loans held for sale (3) 53,843 1,173 8.71% 52,171 1,119 8.58%
Commercial loans 759,934 10,971 5.85% 714,297 11,349 6.44%
Commercial real estate 1,115,425 16,421 5.97% 834,512 14,385 6.99%
Residential real estate 440,192 7,163 6.54% 498,873 9,388 7.56%
Consumer loans 586,261 10,942 7.57% 462,487 9,612 8.43%
--------------------------------- ----------------------------------
Total loans (1) (4) $ 2,901,812 $ 45,497 6.35% $ 2,510,169 $ 44,734 7.21%
--------------------------------- ----------------------------------
Total interest-earning assets $ 4,072,404 $ 61,280 6.07% $ 3,664,941 $ 62,525 6.88%
Allowance for loan losses (35,001) (34,037)
Non-interest-earning assets 403,172 353,965
----------- -----------
Total assets $ 4,440,575 $ 3,984,869
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing transaction accounts $ 1,124,422 $ 2,400 0.87% $ 1,029,517 $ 4,384 1.73%
Time deposits 1,246,212 11,749 3.82% 1,211,031 14,144 4.74%
--------------------------------- ----------------------------------
Total Bank issued interest-bearing deposits $ 2,370,634 $ 14,149 2.42% $ 2,240,548 $ 18,528 3.35%
Wholesale deposits 553,767 5,134 3.76% 282,408 4,386 6.30%
Short-term borrowings 514,470 3,172 2.50% 497,063 4,112 3.35%
Long-term borrowings 184,835 2,782 6.10% 238,696 3,506 5.96%
--------------------------------- ----------------------------------
Total interest-bearing liabilities $ 3,623,706 $ 25,237 2.82% $ 3,258,715 $ 30,532 3.80%
Non-interest bearing deposits 370,132 350,070
Other liabilities 84,715 66,845
Realized Stockholders' Equity 340,073 305,062
Other Comprehensive Income 21,949 4,177
----------- -----------
Total Liabilities & Stockholders' Equity $ 4,440,575 $ 3,984,869
=========== ===========
-------- --------
Net Interest Income (FTE) $ 36,043 $ 31,993
======== ========
Net Interest Spread (FTE) 3.25% 3.08%
==== ====
Interest Rate Margin (FTE) 3.56% 3.50%
==== ====
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
$687,000 and $657,000, respectively.
36
TABLE 2
ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
Quarter Ended
March 2003/March 2002
------------------------------------------------------
Increase (Decrease) Due to Change In Total Net
------------------------------------- Increase
Average Volume Average Rate (Decrease)
------------------------------------------------------
(in thousands)
Interest Income:
Investment securities (1) (2) ...................... $ 322 $(2,350) $(2,028)
Short-term investments ............................. (22) (12) (34)
Loans held for sale (3) ............................ 36 18 54
Commercial loans ............................... 702 (1,080) (378)
Commercial real estate ......................... 4,350 (2,314) 2,036
Residential real estate ........................ (1,037) (1,188) (2,225)
Consumer loans ................................. 2,382 (1,052) 1,330
---------------------------------------------------
Total loans (1) (4) ................................ 6,493 (5,730) 763
---------------------------------------------------
Total Interest-Earning Assets ................. $ 6,532 $(7,777) $(1,245)
===================================================
Interest Expense:
Interest-bearing transaction accounts .......... $ 373 $(2,357) $(1,984)
Time deposits .................................. 401 (2,796) (2,395)
---------------------------------------------------
Total Bank issued interest-bearing deposits ........ 1,024 (5,403) (4,379)
Wholesale deposits ................................. 3,018 (2,270) 748
Short-term borrowings .............................. 140 (1,080) (940)
Long-term borrowings ............................... (809) 85 (724)
---------------------------------------------------
Total Interest-Bearing Liabilities ............ $ 3,166 $(8,461) $(5,295)
===================================================
Net Interest Margin / Net Interest Income (FTE) $ 3,366 $ 684 $ 4,050
===================================================
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 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.
37
TABLE 3
ASSET QUALITY
The components of non-performing loans at March 31, 2003 and December 31,
2002 were as follows:
March 31, December 31,
2003 2002
------------------------
Impaired loans: (in thousands)
Non-accrual loans
Commercial ...................................... $13,249 $12,185
Real estate ..................................... 5,860 1,671
Other non-performing:
Non-accrual loans (1) ........................... 16,854 18,679
Loans 90 days or more past due and still accruing 6,362 3,555
----------------------
Total non-performing loans ...................... $42,325 $36,090
======================
Foreclosed assets:
Real estate ..................................... 3,248 3,415
Other ........................................... 1,614 2,024
----------------------
Total foreclosed assets ......................... $ 4,862 $ 5,439
======================
Total non-performing assets ..................... $47,187 $41,529
======================
Troubled debt restructurings ......................... $ -- $ 3,327
======================
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
An anaylsis of the allowance for loan losses for the periods ended March 31,
2003 and 2002 is presented below:
For the Three Months
Ended March 31,
2003 2002
----------------------
($ in thousands)
Balance at beginning of period .................... $ 35,214 $ 33,940
Charge-Offs:
Commercial, financial and agricultural ....... 4,576 702
Real estate .................................. 946 929
Installment and consumer ..................... 1,712 1,694
Direct leases ................................ 93 6
----------------------
7,327 3,331
Recoveries:
Commercial, financial and agricultural ....... 116 105
Real estate .................................. 181 74
Installment and consumer ..................... 248 276
Direct leases ................................ -- 6
----------------------
545 461
Net Charge-Offs ................................... 6,782 2,870
Provision charged to expense ...................... 12,575 2,640
Reductions due to sale of loans ................... (1,407) --
----------------------
Balance at end of period .......................... $ 39,600 $ 33,710
======================
Ratio of net-charge-offs during the period
to average loans outstanding during the period (1) 0.95% 0.46%
======================
(1) On an annualized basis.
38
TABLE 4
AMCORE Branch Expansion Plans
- ----------------------------------------------------------------------------------------------------
Strategy LBO* HUB** Satellite*** In-store Total
- ----------------------------------------------------------------------------------------------------
2001
+ New branches 1 0 1 0 2
- - Closed after move to new facility 0 0 0 0 0
Cumulative total 1 0 1 0 2
- ----------------------------------------------------------------------------------------------------
2002
+ New branches 4 3 0 0 7
- - Closed after move to new facility (1) (1) 0 0 (2)
Cumulative total 4 2 1 0 7
- ----------------------------------------------------------------------------------------------------
2003
+ New branches 3 1 6 0 10
- - Closed after move to new facility 0 0 0 (2) (2)
Cumulative total 7 3 7 (2) 15
- ----------------------------------------------------------------------------------------------------
2004
+ New branches 3 6 1 0 10
- - Closed after move to new facility (4) 0 0 0 (4)
Cumulative total 6 9 8 (2) 21
- ----------------------------------------------------------------------------------------------------
2005
+ New branches 0 7 1 0 8
- - Closed after move to new facility (3) 0 0 0 (3)
Cumulative total 3 16 9 (2) 26
- ----------------------------------------------------------------------------------------------------
2006
+ New branches 0 3 0 0 3
- - Closed after move to new facility (3) 0 0 0 (3)
Cumulative total 0 19 9 (2) 26
- ----------------------------------------------------------------------------------------------------
*LBO is a limited branch office.
**Hub is a full service facility.
***Satellite offers primarily retail and mortgage services.
39
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,
brokered 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, changes in historical relationships between indices and balance sheet
growth.
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 April 1, 2003 would be
approximately $4.0 million or 2.71% of base forecasted net interest income. This
analysis assumes no growth in assets or liabilities and replacement of maturing
instruments with like-kind instruments. At the end of 2002, comparable
assumptions would have resulted in a potential increase in 2003 net interest
income of $3.3 million or 2.12%. Thus, AMCORE's exposure from a rising-rate
scenario has improved since the end of 2002.
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 April 1, 2003 of
approximately $6.9 million or 4.66% of base forecasted net interest income. The
same assumptions at the end of 2002 would have resulted in a potential decrease
in net interest income of $7.7 million or 5.01%. AMCORE's sensitivity to
declining interest rates has also decreased since the end of 2002.
The amounts and assumptions used in the rising and falling rate scenarios should
not be viewed as indicative of expected actual results. In addition to rising or
falling interest rates, AMCORE's net interest income can be significantly
impacted by a variety of external factors, such as those previously noted, and
by the impact of the growth of the Company. In addition, as interest rates move,
the ALCO is likely to adjust interest rate risk management strategies to limit,
to the extent possible, the adverse impact that such changes in interest rates
might otherwise have on AMCORE's net interest income, as well as maximize
potential positive impacts such movements might have.
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's December 31, 2002 Form 10-K.
40
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.
41
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. Since the Company's
subsidiaries act as depositories of funds, trustee and escrow agents, they
occasionally 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
a) AMCORE Financial, Inc. 2003 Annual Meeting of Stockholders was held on
May 6, 2003.
(b) Proxies were solicited by AMCORE Financial, Inc. management for the
purpose of electing three Class II directors whose term will expire in
2006. The following individuals were elected as Class II directors:
---------------------------------------------------------------------
Name Votes For Votes Withheld
---------------------------------------------------------------------
Kenneth E. Edge 19,886,395 860,149
---------------------------------------------------------------------
John W. Gleeson 19,712,666 1,033,878
---------------------------------------------------------------------
William R. McManaman 19,626,601 1,119,943
---------------------------------------------------------------------
Other directors whose terms of office as a director continued after the
meeting included Paula A. Bauer, Karen L. Branding, Paul Donovan, John
A. Halbrook, Frederick D. Hay, Norman E. Johnson, Jack D. Ward and Gary
L. Watson.
(c) Proxies were solicited by AMCORE Financial, Inc. management to ratify
the appointment of KPMG LLP as independent auditors. The appointment of
KPMG LLP was ratified via 20,034,515 votes for, 446,285 votes against,
and 265,744 votes abstaining the ratification of the appointment.
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 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 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) A report on Form 8-K, dated January 22, 2003, was filed concerning
the Company's results of operations for the year ended December
31, 2002.
42
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.
Date: May 14, 2003
By: /s/ John R. Hecht
-----------------------------
John R. Hecht
Executive Vice President and
Chief Financial Officer
43
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 on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
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
May 14, 2003
44
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 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 on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
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
May 14, 2003
45
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 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
46