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, 2005
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, 2005 was 24,795,255 shares.
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
- ------ -----------
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2005 and 2004 4
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 2005 and 2004 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 41
Item 4 Controls and Procedures 42
PART II
Item 1 Legal Proceedings 43
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 6 Exhibits 43
Signatures 44
Exhibit Index 45
2
PART I. ITEM 1: Financial Statements
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
-----------------------------
(in thousands, except share data)
ASSETS
Cash and cash equivalents $ 109,940 $ 117,072
Interest earning deposits in banks and fed funds sold 130 361
Loans held for sale 33,893 30,634
Securities available for sale, at fair value 1,224,730 1,249,250
Gross loans 3,350,372 3,278,800
Allowance for loan losses (40,954) (40,945)
-----------------------------
Net loans $ 3,309,418 $ 3,237,855
Company owned life insurance 127,965 123,743
Premises and equipment, net 84,105 85,320
Goodwill 15,575 15,575
Foreclosed real estate, net 4,129 4,940
Other assets 83,522 75,738
-----------------------------
TOTAL ASSETS $ 4,993,407 $ 4,940,488
=============================
LIABILITIES
Deposits:
Noninterest bearing deposits $ 482,377 $ 479,079
Interest bearing demand deposits 1,639,066 1,520,382
Time deposits 1,086,432 1,113,933
-----------------------------
Total bank issued deposits $ 3,207,875 $ 3,113,394
Wholesale deposits 628,899 621,297
-----------------------------
Total deposits $ 3,836,774 $ 3,734,691
Short-term borrowings 538,801 589,158
Long-term borrowings 170,859 165,018
Other liabilities 65,708 65,043
-----------------------------
TOTAL LIABILITIES $ 4,612,142 $ 4,553,910
-----------------------------
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,
2005 2004
------------------------
Issued 29,915,766 29,904,068
Outstanding 24,793,703 24,820,745 6,646 6,643
Treasury stock 5,122,063 5,083,323 (103,905) (102,832)
Additional paid-in capital 74,495 74,102
Retained earnings 414,877 407,045
Deferred compensation (287) (273)
Accumulated other comprehensive (loss) income (10,561) 1,893
-----------------------------
TOTAL STOCKHOLDERS' EQUITY $ 381,265 $ 386,578
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,993,407 $ 4,940,488
=============================
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,
2005 2004
-----------------------
INTEREST INCOME (in thousands, except per share data)
Interest and fees on loans $ 49,775 $ 43,003
Interest on securities:
Taxable $ 11,290 $ 10,917
Tax-exempt 1,905 1,702
-----------------------
Total Income on Securities $ 13,195 $ 12,619
-----------------------
Interest on federal funds sold and other short-term investments $ 25 $ 18
Interest and fees on loans held for sale 402 714
Interest on deposits in banks 6 1
-----------------------
Total Interest Income $ 63,403 $ 56,355
-----------------------
INTEREST EXPENSE
Interest on deposits $ 17,976 $ 13,944
Interest on short-term borrowings 3,526 2,728
Interest on long-term borrowings 2,420 2,395
-----------------------
Total Interest Expense $ 23,922 $ 19,067
-----------------------
Net Interest Income $ 39,481 $ 37,288
Provision for loan losses 2,500 4,675
-----------------------
Net Interest Income After Provision for Loan Losses $ 36,981 $ 32,613
NON-INTEREST INCOME
Trust and asset management income $ 5,136 $ 5,516
Service charges on deposits 5,163 4,403
Mortgage banking income (loss) 1,271 (385)
Company owned life insurance income 908 2,169
Brokerage commission income 733 858
Bankcard fee income 1,125 902
Gain on sale of loans 111 612
Other 2,072 1,540
-----------------------
Non-Interest Income, Excluding Net Security (Losses) Gains $ 16,519 $ 15,615
Net security (losses) gains (51) 1,914
-----------------------
Total Non-Interest Income $ 16,468 $ 17,529
OPERATING EXPENSES
Compensation expense $ 17,159 $ 17,298
Employee benefits 4,910 5,128
Net occupancy expense 2,757 2,514
Equipment expense 2,425 2,449
Data processing expense 707 584
Professional fees 1,020 990
Communication expense 1,097 1,126
Advertising and business development 1,755 1,514
Other 4,378 5,148
-----------------------
Total Operating Expenses $ 36,208 $ 38,618
-----------------------
Income Before Income Taxes $ 17,241 $ 11,524
Income taxes 5,191 3,373
-----------------------
Net Income $ 12,050 $ 8,151
=======================
EARNINGS PER COMMON SHARE
Basic $ 0.49 $ 0.40
Diluted $ 0.48 $ 0.39
DIVIDENDS PER COMMON SHARE $ 0.17 $ 0.17
AVERAGE COMMON SHARES OUTSTANDING
Basic 24,805 25,210
Diluted 25,061 25,500
See accompanying notes to consolidated financial statements.
4
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Treasury Paid-in Retained Deferred Comprehensive Stockholders'
Stock Stock Capital Earnings Compensation Income (Loss) Equity
--------- --------- --------- --------- ------------ ------------- -------------
(in thousands, except share data)
Balance at December 31, 2003 ..................... $ 6,625 ($ 91,812) $ 73,862 $ 378,305 ($ 353) $ 8,957 $ 375,584
========= ========= ========= ========= ========= ========= =========
Comprehensive Income:
Net Income ................................... -- -- -- 10,018 -- -- 10,018
Reclassification of gains on hedging
activites to earnings .................... -- -- -- -- -- (481) (481)
Income tax effect related to items of other
comprehensive income ..................... -- -- -- -- -- 188 188
--------- --------- --------- --------- --------- --------- ---------
Net effect of hedging activities ............. -- -- -- -- -- (293) (293)
--------- --------- --------- --------- --------- --------- ---------
Net unrealized holding gains on securities
available for sale arising during the
period .................................... -- -- -- -- -- 8,813 8,813
Less reclassification adjustment for net
security gains included in net income ..... -- -- -- -- -- (1,914) (1,914)
Income tax effect related to items of other
comprehensive income ...................... -- -- -- -- -- (2,069) (2,069)
--------- --------- --------- --------- --------- --------- ---------
Net unrealized gains on securities available
for sale .................................. -- -- -- -- -- 4,830 4,830
--------- --------- --------- --------- --------- --------- ---------
Comprehensive Income ............................. -- -- -- 10,018 -- 4,537 14,555
--------- --------- --------- --------- --------- --------- ---------
Cash dividends on common stock - $0.17
per share ................................. -- -- -- (4,292) -- -- (4,292)
Purchase of 245,164 shares for the treasury .. -- (7,156) -- -- -- -- (7,156)
Deferred compensation expense and other ...... 3 -- 93 -- 37 -- 133
Reissuance of 283,154 treasury shares for
incentive plans ........................... -- 6,644 (166) -- -- -- 6,478
Issuance of 44,180 common shares for Employee
Stock Plan ................................ 10 -- 838 -- -- -- 848
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2004 ........................ $ 6,638 ($ 92,324) $ 74,627 $ 384,031 ($ 316) $ 13,494 $ 386,150
========= ========= ========= ========= ========= ========= =========
Balance at December 31, 2004 ..................... $ 6,643 ($102,832) $ 74,102 $ 407,045 ($ 273) $ 1,893 $ 386,578
========= ========= ========= ========= ========= ========= =========
Comprehensive Income (Loss):
Net Income ................................... -- -- -- 12,050 -- -- 12,050
Net unrealized holding losses on securities
available for sale arising during the
period .................................... -- -- -- -- -- (20,155) (20,155)
Less reclassification adjustment for net
security losses included in net income .... -- -- -- -- -- 51 51
Income tax effect related to items of other
comprehensive income ...................... -- -- -- -- -- 7,650 7,650
--------- --------- --------- --------- --------- --------- ---------
Net unrealized losses on securities available
for sale .................................. -- -- -- -- -- (12,454) (12,454)
--------- --------- --------- --------- --------- --------- ---------
Comprehensive Income (Loss) .................... -- -- -- 12,050 -- (12,454) (404)
--------- --------- --------- --------- --------- --------- ---------
Cash dividends on common stock - $0.17
per share.................................. -- -- -- (4,218) -- -- (4,218)
Purchase of 68,521 shares for the treasury ... -- (1,949) -- -- -- -- (1,949)
Deferred compensation expense and other ...... -- -- 514 -- 35 -- 549
Reissuance of 29,781 treasury shares for
incentive plans ........................... -- 876 (399) -- (49) -- 428
Issuance of 11,698 common shares for Employee
Stock Plan ................................ 3 -- 278 -- -- -- 281
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2005 ........................ $ 6,646 ($103,905) $ 74,495 $ 414,877 ($ 287) ($ 10,561) $ 381,265
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------
2005 2004
-----------------------
(in thousands)
Cash Flows From Operating Activities
Net income $ 12,050 $ 10,018
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 2,054 1,992
Amortization and accretion of securities, net 374 973
Provision for loan losses 2,500 4,675
Company owned life insurance income, net of death benefits (908) (1,432)
Net securities losses (gains) 51 (1,914)
Net gain on sale of loans (111) (612)
Net gain on sale of mortgage loans held for sale (491) (810)
Originations of mortgage loans held for sale (66,671) (88,937)
Proceeds from sales of mortgage loans held for sale 64,229 83,870
Deferred income tax expense (benefit) 150 (869)
Tax benefit on exercise of stock options 115 777
Other, net 626 8,264
-----------------------
Net cash provided by operating activities $ 13,968 $ 15,995
-----------------------
Cash Flows From Investing Activities
Proceeds from maturities of securities available for sale $ 47,461 $ 52,206
Proceeds from sales of securities available for sale 8,812 47,258
Purchase of securities available for sale (52,283) (73,111)
Net decrease (increase) in federal funds sold and other short-term investments 250 (3,150)
Net increase in interest earning deposits in banks (19) (5,414)
Net increase in loans (77,809) (56,349)
Proceeds from the sale of loans 2,277 --
Investment in company owned life insurance (3,314) (2,265)
Premises and equipment expenditures, net (849) (4,562)
Proceeds from the sale of foreclosed real estate 1,225 1,279
-----------------------
Net cash used for investing activities $ (74,249) $ (44,108)
-----------------------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest bearing demand deposits $ 3,298 $ (1,741)
Net increase in interest bearing demand deposits 118,684 39,505
Net (decrease) increase in time deposits (27,501) 26,472
Net increase in wholesale deposits 7,602 23,164
Net decrease in short-term borrowings (50,361) (48,062)
Proceeds from long-term borrowings 7,000 --
Dividends paid (4,218) (4,292)
Issuance of common shares for employee stock plan 281 851
Reissuance of treasury shares for incentive plans 313 5,701
Purchase of shares for treasury (1,949) (7,156)
-----------------------
Net cash provided by financing activities $ 53,149 $ 34,442
-----------------------
Net change in cash and cash equivalents $ (7,132) $ 6,329
Cash and cash equivalents:
Beginning of year 117,072 107,965
-----------------------
End of period $ 109,940 $ 114,294
=======================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 18,867 $ 15,590
Interest paid on borrowings 4,790 4,358
Income tax receipts 30 --
Non-Cash Investing and Financing
Foreclosed real estate - acquired in settlement of loans 525 2,032
Transfer current portion of long-term borrowings to short-term borrowings 4 15,003
Capitalized interest 3 42
De-consolidation of AMCORE Capital Trust I - increases in assets and liabilities -- 16,238
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 U.S. generally accepted accounting principles for interim
financial reporting and with instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the balance sheet date and revenues and expenses
for the period. Actual results could differ from these estimates. These
financial statements include all adjustments (consisting of normal recurring
accruals) that 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 to the
current year presentation.
Operating results for the three month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2005. 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, 2004.
New Accounting Standards
In September 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. Emerging Issues Task Force (EITF) 03-1-1 which delayed the
effective date for the measurement recognition guidance contained in EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," which was effective for fiscal years ending after December
15, 2003. Until new guidance is issued, companies must continue to comply with
the disclosure requirements of EITF 03-1 and all relevant measurement and
recognition requirements of other accounting literature. EITF 03-1 requires
certain quantitative and qualitative disclosures for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. These disclosures are contained in Note 2 of the Notes to
Consolidated Financial Statements. The Company will complete its evaluation of
the impact upon issuance of final guidance from the FASB.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) (123R),
"Share-Based Payment"; an amendment of FASB Statements No. 123 and 95. SFAS No.
123R will require compensation cost relating to share-based payment transactions
be recognized in Consolidated Financial Statements. In April 2005, a new SEC
rule was issued which deferred the effective date for SFAS No. 123R from July 1,
2005 to January 1, 2006 for calendar year companies such as AMCORE. The Company
has not yet completed its evaluation of the standard, but anticipates that it
will result in a reduction in earnings and earnings per share beginning with the
first quarter of 2006.
Stock-Based Employee Compensation Plans
At March 31, 2005, the Company had various stock-based compensation plans that
are described more fully in Note 13 of the Notes to Consolidated Financial
Statements included in the Form 10-K Annual Report of the Company for the year
ended December 31, 2004. The Company accounts for these plans under the
recognition and measurement principles of the Accounting Principles Board
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 these plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. During the first three months of 2005, 141,000 stock options
were granted.
The Company's Stock Option Advantage Plan, an employee stock purchase plan
("ESPP") within the meaning of Section 423 of the Internal Revenue Code of 1986,
allows participating employees to purchase the Company'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 compensation expense in the amount of the 15%
discount between the stock price and the option exercise price. In 2004,
stockholders approved the adoption of the Amended and Restated AMCORE Stock
Option Advantage Plan that reserved 350,000 additional shares of common stock
for issuance under the ESPP. All remaining shares reserved under the original
plan were issued during the first quarter of 2004.
7
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", to all stock-based compensation.
The fair values were calculated using a Black-Scholes option pricing model.
For the Three Months
Ended March 31,
2005 2004
---------------------
(in thousands, except
per share data)
Net Income:
As reported $ 12,050 $ 10,018
Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards, net of related tax effects (457) (573)
---------------------
Pro forma $ 11,593 $ 9,445
=====================
Diluted Shares:
As reported 25,061 25,500
Deduct: Shares due to average unrecognized
compensation cost related to future services (79) (119)
---------------------
Pro forma 24,982 25,381
=====================
Basic earnings per share:
As reported $ 0.49 $ 0.40
Pro forma 0.47 0.37
Diluted earnings per share:
As reported $ 0.48 $ 0.39
Pro forma 0.46 0.37
8
NOTE 2 - SECURITIES
A summary of information for investment securities, categorized by security
type, at March 31, 2005 and December 31, 2004 is as follows. Fair values are
based upon available quoted market prices or are based on quoted prices for
similar financial instruments.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
(in thousands)
At March 31, 2005
- -----------------
Securities Available for Sale:
U.S. Treasury $ 5,012 $ -- $ (93) $ 4,919
U.S. Government agencies (1) 92,392 10 (1,525) 90,877
Agency mortgage-backed securities (1) 887,046 1,662 (20,325) 868,383
State and political subdivisions 181,689 4,375 (812) 185,252
Corporate and other debt obligations 31,308 115 (445) 30,978
Equity investments (2) 44,313 8 -- 44,321
------------------------------------------------------------
Total Securities Available for Sale $1,241,760 $ 6,170 $ (23,200) $1,224,730
============================================================
At December 31, 2004
- --------------------
Securities Available for Sale:
U.S. Treasury $ 5,013 $ -- $ (17) $ 4,996
U.S. Government agencies (1) 92,523 109 (390) 92,242
Agency mortgage-backed securities (1) 892,344 3,750 (7,366) 888,728
State and political subdivisions 169,658 6,390 (60) 175,988
Corporate and other debt obligations 33,797 489 (106) 34,180
Equity investments (2) 52,841 275 -- 53,116
------------------------------------------------------------
Total Securities Available for Sale $1,246,176 $ 11,013 $ (7,939) $1,249,250
============================================================
A summary of unrealized loss information for investment securities, categorized
by security type, at March 31, 2005 is as follows:
Less Than 12 Months 12 Months or Longer Total
------------------------------------------------------------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses (3) Fair Value Losses
------------------------------------------------------------------------------
Description of Securities (in thousands)
- -------------------------
Securities Available for Sale:
U.S. Treasury $ 4,919 $ (93) $ -- $ -- $ 4,919 $ (93)
U.S. Government agencies (1) 84,977 (1,525) -- -- 84,977 (1,525)
Agency mortgage-backed securities (1) 622,691 (13,428) 180,544 (6,897) 803,235 (20,325)
State and political subdivisions 46,600 (755) 1,541 (57) 48,141 (812)
Corporate and other debt obligations 16,006 (377) 1,827 (68) 17,833 (445)
Total Unrealized Losses on
------------------------------------------------------------------------------
Securities Available for Sale: $775,193 $(16,178) $183,912 $ (7,022) $959,105 $(23,200)
==============================================================================
(1) Primarily Government Sponsored Enterprises (GSE).
(2) At March 31, 2005, includes investments of $4 million, $25 million, and $0,
respectively, in stock of the Federal Reserve Bank (FRB), the Federal Home Loan
Bank (FHLB) and preferred stock of Freddie Mac. At December 31, 2004, these
amounts were $4 million, $24 million, and $9 million, respectively. These
investments are recorded at amortized historical cost or fair value, as
applicable. The FRB and FHLB are held to satisfy membership requirements and
investment objectives.
(3) The Company has the ability to hold and has no present intent to dispose of
these securities as of March 31, 2005. Of the $7 million total unrealized losses
12 months or longer, all except $125,000 was related to 25 mortgage-backed
securities issued by GSEs with an S&P quality rating of "AAA". Of the $125,000
in unrealized loss, $68,000 is related to a single asset-backed bond
collateralized by owner occupied first lien, conforming mortgage loans. At March
31, 2005, the S&P quality rating for this bond was "AAA," the security was
sufficiently collateralized such that credit loss was considered remote, and the
security has a average remaining life of 2.3 years. In the event of prepayment,
it is expected that the Company would recover substantially all of its recorded
investment. The remaining $57,000 is a single "AAA" rated municipal obligation
that matures in 2009.
9
A summary of realized gain and loss information is as follows:
Realized Realized Net Gains/
Gains Losses (Losses)
---------------------------------------
(in thousands)
For the three months ended:
March 31, 2005 $ -- $ (51) $ (51)
March 31, 2004 1,934 (20) 1,914
At March 31, 2005 and 2004, securities with a fair value of approximately $859
million and $825 million, respectively, were pledged to secure public deposits,
securities under agreements to repurchase, derivative credit exposure and for
other purposes required by law.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio at March 31, 2005 and December 31, 2004
was as follows:
March 31, 2005 December 31, 2004
---------------------------------
(in thousands)
Commercial, financial and agricultural $ 715,054 $ 764,339
Real estate-commercial 1,632,261 1,533,917
Real estate-residential 416,641 412,753
Real estate-construction 271,539 250,855
Installment and consumer 314,799 316,838
Direct lease financing 78 98
---------------------------------
Gross loans $ 3,350,372 $ 3,278,800
Allowance for loan losses (40,954) (40,945)
---------------------------------
Net Loans $ 3,309,418 $ 3,237,855
=================================
An analysis of the allowance for loan losses for the periods ended March 31,
2005 and March 31, 2004 is presented below:
For the Three Months Ended
March 31, 2005 December 31, 2004
---------------------------------
(in thousands)
Balance at beginning of year $ 40,945 $ 42,115
Provision charged to expense 2,500 4,675
Loans charged off (3,375) (4,862)
Recoveries on loans previously charged off 884 1,547
---------------------------------
Balance at end of period $ 40,954 $ 43,475
=================================
10
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's goodwill by segment (in thousands) at March 31, 2005 is as
follows:
Retail Banking $ 3,572
Commercial Banking 2,381
Trust and Asset Management 9,622
--------
Total Goodwill $15,575
========
There were no changes in the carrying amount of goodwill for the three months
ended March 31, 2005.
The Originated Mortgage Servicing Right (OMSR) asset values which are recorded
in Other Assets on the Consolidated Balance Sheets are included in the Mortgage
Banking Segment. The March 31, 2005 balances are in the table below. At December
31, 2004, the net carrying amount of OMSR was $12.5 million and there was a
$53,000 OMSR Valuation Allowance.
Unamortized Cost of Mortgage Servicing Rights
(in thousands)
Gross Carrying Amount $36,714
Less: Accumulated Amortization (23,932)
Less: OMSR Valuation Allowance --
--------
Net OMSR at end of period $12,782
========
OMSR Valuation Allowance
Balance at beginning of year $ 53
Impairment valuation credited to income (53)
--------
Balance at end of period $ --
========
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 3/31/05 $ 591
Estimated Amortization Expense
For Remainder of Year Ending 12/31/05 $ 2,013
For Year Ending 12/31/06 2,383
For Year Ending 12/31/07 1,971
For Year Ending 12/31/08 1,604
For Year Ending 12/31/09 1,275
For Year Ending 12/31/10 999
Thereafter 2,537
--------
Total $12,782
========
The weighted-average amortization period for OMSR retained during the first
quarter of 2005 was 11.2 years. The unpaid principal balance of mortgage loans
serviced for others, including mortgage loans held for sale, was $1.3 billion as
of March 31, 2005, $1.3 billion as of December 31, 2004 and $1.2 billion as of
March 31, 2004.
11
NOTE 5 - SALE OF RECEIVABLES
The Company periodically sells certain indirect automobile loans in
securitization transactions. Upon sale, the net carrying amount of the loans is
removed from the consolidated balance sheet in exchange for cash and certain
retained residual interests. The retained interests includes 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"). There were
no sales of indirect automobile loans during the first quarter 2005 or 2004.
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 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. The Company's risk of loss attribuable to prepayment
and credit risk is limited to its interest in the Interest-Only Strip. Neither
the investors nor the securization trust have any further recourse to the
Company's other assets. Interest rate risk could exceed the Company's interest
in the Excess Spread, but such a possibility is considered remote as of March
31, 2005.
Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of March 31, 2005, 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, 2005
---------------------------------------
Loans Sold 10% Adverse 20% Adverse
During 2004 Actual Change Change
----------- -------- -------- --------
(in thousands)
Prepayment speed assumptions
Prepayment speed 1.8% 2.1% 2.4% 2.6%
Weighted average life (in months) 18.9 15.9 15.1 14.4
Fair value of retained interests $ 11,495 $ 11,705 $ 11,693 $ 11,700
Change in fair value $ -- $ -- $ (12) $ (5)
Expected credit loss assumptions
Expected credit losses (loss to liquidation) 1.9% 1.9% 2.0% 2.2%
Fair value of retained interests $ 11,495 $ 11,705 $ 11,418 $ 11,135
Change in fair value $ -- $ -- $ (287) $ (570)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual) 22% 20.0% 22.0% 24.0%
Fair value of retained interests $ 11,495 $ 11,705 $ 11,424 $ 11,156
Change in fair value $ -- $ -- $ (281) ($ 549)
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 assumptions; 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 $4.3 million and $7.1 million for the first
quarters of 2005 and 2004, 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
--------------- --------- ----------
(in thousands)
Cash flows received from trust in first quarter 2005 $ -- $ 365 $ 3,974
Cash flows received from trust in first quarter 2004 $ -- $ 139 $ 6,933
Other cash flows include gross cash flows from the Interest-Only Strip, net of
reductions in such cash flows for loan defaults, and the release of excess
Overcollateralization funds.
12
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. Loan
amounts represent only the principal amount of the loan. Retained interests held
for securitized assets are excluded from this table because they are recognized
separately.
Total Principal Principal Amount of
Amount of Loans Delinquent Loans Net Credit
------------------------------------------------ Losses
As of March 31 Year-to-Date
------------------------------------------------ ---------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(in thousands)
Held in portfolio $245,819 $460,763 $ 2,686 $ 5,509 $ 536 $ 1,109
Securitized 171,411 79,873 2,365 1,160 616 426
-------- -------- -------- -------- -------- --------
Total $417,230 $540,636 $ 5,051 $ 6,669 $ 1,152 $ 1,535
======== ======== ======== ======== ======== ========
Actual and projected static pool credit losses, as a percentage of indirect
automobile loans securitized are 1.20%, 1.60% and 1.93% as of the quarters ended
March 31, 2005, 2006, and 2007, 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.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at March 31, 2005 and December
31, 2004:
March 31, December 31,
2005 2004
------------------------
(in thousands)
Securities sold under agreements to repurchase $458,870 $465,446
Federal Home Loan Bank borrowings 20,184 35,184
Federal funds purchased 56,700 78,990
U.S. Treasury tax and loan note accounts 3,044 9,535
Commercial paper and other short-term borrowings 3 3
-------- --------
Total Short-Term Borrowings $538,801 $589,158
======== ========
NOTE 7 - LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at March 31, 2005 and December
31, 2004:
March 31, December 31,
2005 2004
------------------------
(in thousands)
Federal Home Loan Bank borrowings $128,563 $122,721
AMCORE Capital Trust I borrowings 41,238 41,238
Capitalized Lease Obligation 1,058 1,059
-------- --------
Total Long-Term Borrowings $170,859 $165,018
======== ========
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 eligible family real estate loans. The average stated maturity
of these borrowings at March 31, 2005 is 3.4 years, with a weighted average
borrowing rate of 4.79%. Mortgage-related assets are required to be held as
collateral for FHLB borrowings according to specific collateral guidelines
established by the FHLB. Certain FHLB borrowings have prepayment penalties and
call features associated with them. FHLB borrowings with call features, assuming
they are called at the earliest call date, total $77.0 million in 2005.
Other long-term borrowings includes a capital lease with a net carrying amount
of $1.1 million on a branch facility leased by the Company. The Company is
amortizing the capitalized lease obligation and depreciating the facility over
the remaining non-cancelable term of the original lease, which expires or renews
in 2021.
The Company reclassifies borrowings to short-term borrowings when the remaining
maturity becomes less than one year. Scheduled reductions of long-term
borrowings are as follows:
13
Total
------------
(in thousands)
2006 $ 16,718
2007 28
2008 84,859
2009 35
2010 443
Thereafter 68,776
------------
Total Long-Term Borrowings $170,859
============
NOTE 8 - DERIVATIVE INSTRUMENTS
The Company uses derivatives to Hedge its risk or exposure to changes in
interest rates and in conjunction with its mortgage banking operations. The
derivatives currently used include interest rate swaps and mortgage loan
commitments and forward contracts. 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 (cash flow Hedges). The Company also uses
interest rate swaps to convert fixed-rate assets and liabilities to
floating-rate assets or liabilities (fair value Hedges).
The following derivative related activity is included in other non-interest
income in the Consolidated Statements of Income, for the three months ended:
March 31, March 31,
2005 2004
---------- ----------
Changes in Value:
Free-standing derivatives $(13) $ 2
Ineffective portion of fair value Hedges 44 24
Mortgage banking derivatives (63) 188
---------- ----------
Total $(32) $214
========== ==========
During 2002, swaps that were Hedging loan cash flows were sold, for which the
Company received $3.3 million plus accrued interest. The gain continued to be
classified in OCI and amortized into income over the original term of the swap.
For the three month period ended March 31, 2004, $481,000 of this pre-tax gain
was amortized (reclassified) from OCI into income. The pre-tax gain was fully
amortized at December 31, 2004 and there were no other cash flow Hedges included
in OCI during the three months ended March 31, 2005. The longest-term fair value
Hedge expires in December 2019.
NOTE 9 - 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 consolidated financial position or consolidated 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, as a provider of financial services, routinely enters into
commitments to extend credit to its bank customers, including financial and
performance standby letters of credit. 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.
14
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, 2005, the maximum remaining term for any
outstanding standby letters of credit expires on December 15, 2010.
A fee is normally charged to compensate the BANK for the value of the
commitments and guarantees that are granted to the customer. The fees are
deferred and are recognized as income over the term of the commitment or
guarantee. As of March 31, 2005, the carrying value of these deferrals was a
deferred credit of $920,000. This amount included a $424,000 guarantee liability
for financial and performance standby letters of credit recorded in accordance
with FIN 45. The remaining $496,000 represented deferred fees charged for
commitments and letters of credit exempted from the scope of FIN 45.
At March 31, 2005, the contractual amount of all financial and standby letters
of credit, including those exempted from FIN 45, was $159.3 million and $24.4
million, respectively. These represent the maximum potential amount of future
payments that the Company would be obligated to pay under the guarantees.
The issuance of either a financial or performance standby letter of credit is
generally 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 letter of credit.
NOTE 10 - EARNINGS PER SHARE
Earnings per share (EPS) calculations are as follows:
For the Three Months
Ended March 31,
2005 2004
-------------------
(in thousands, except per share data)
Net Income $12,050 $10,018
Basic EPS:
Average basic shares outstanding 24,805 25,210
===================
Basic EPS $ 0.49 $ 0.40
===================
Diluted EPS:
Weighted average shares outstanding 24,805 25,210
Dilutive shares 227 267
Contingently issuable shares 29 23
-------------------
Average diluted shares outstanding 25,061 25,500
-------------------
Diluted EPS $ 0.48 $ 0.39
===================
As prescribed by SFAS No.128, "Earnings Per Share", basic EPS is computed by
dividing net 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 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.
15
NOTE 11 - SEGMENT INFORMATION
AMCORE's internal reporting and planning process focuses on its four primary
lines of 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, 2004.
Since there are no comprehensive authorities for management accounting
equivalent to U.S. generally accepted accounting principles, 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.
Total Segment results differ from consolidated results primarily due to
inter-segment 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.
The Commercial Banking Segment provides commercial banking services including
lending, business checking and deposits, treasury management and other
traditional as well as electronic commerce commercial banking services to large
and small business customers through the BANK's full-service and limited branch
office (LBO) locations. The Retail Banking Segment provides retail banking
services including direct and indirect lending, checking, savings, money market
and certificate of deposit (CD) accounts, safe deposit rental, automated teller
machines and other traditional and electronic-commerce retail banking services
to individual customers through the BANK's branch locations. 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 BANK
locations. The Mortgage Banking segment provides a variety of mortgage lending
products to meet its customer needs. It sells a majority of the long-term
fixed-rate loans to the secondary market and continues to service most of the
loans sold.
16
For the three months ended March 31, 2005 --------------- Operating Segments ----------------
Commercial Retail Trust and Asset Mortgage
Banking Banking Management Banking Other Consolidated
--------------------------------------------------------------------------------
(dollars in thousands)
Net interest income $ 23,033 $ 11,049 $ 17 $ 1,400 $ 3,982 $ 39,481
Non-interest income 2,095 4,019 6,079 1,226 3,049 16,468
--------------------------------------------------------------------------------
Total revenue 25,128 15,068 6,096 2,626 7,031 55,949
Provision for loan losses 2,230 318 -- (48) -- 2,500
Depreciation and amortization 157 693 81 59 1,064 2,054
Other non-interest expense 11,192 11,131 5,381 2,464 3,986 34,154
--------------------------------------------------------------------------------
Pretax earnings 11,549 2,926 634 151 1,981 17,241
Income taxes (benefits) 4,504 1,141 283 59 (796) 5,191
--------------------------------------------------------------------------------
Earnings $ 7,045 $ 1,785 $ 351 $ 92 $ 2,777 $ 12,050
================================================================================
Segment profit percentage 76% 19% 4% 1% N/A 100%
================================================================================
Assets $2,578,696 $ 647,819 $ 16,907 $ 250,245 $1,499,740 $4,993,407
================================================================================
For the three months ended March 31, 2004
Net interest income $ 20,280 $ 10,492 $ 8 $ 2,408 $ 4,100 $ 37,288
Non-interest income 2,325 3,434 6,563 (169) 5,376 17,529
--------------------------------------------------------------------------------
Total revenue 22,605 13,926 6,571 2,239 9,476 54,817
Provision for loan losses 2,084 2,692 -- (101) -- 4,675
Depreciation and amortization 150 597 98 8 1,139 1,992
Other non-interest expense 10,166 10,253 5,502 2,778 6,060 34,759
--------------------------------------------------------------------------------
Pretax earnings (loss) 10,205 384 971 (446) 2,277 13,391
Income taxes (benefits) 3,916 150 398 (174) (917) 3,373
--------------------------------------------------------------------------------
Earnings (loss) $ 6,289 $ 234 $ 573 $ (272) $ 3,194 $ 10,018
================================================================================
Segment profit percentage 92% 4% 8% (4%) N/A 100%
================================================================================
Assets $2,104,049 $ 821,085 $ 17,885 $ 251,995 $1,424,022 $4,619,036
================================================================================
17
NOTE 12- BENEFIT PLANS
Employee Benefit Plans. All subsidiaries of the Company participate in the
AMCORE Financial Security Plan (Security Plan), a qualified profit sharing plan
under Section 401(a) of the Internal Revenue Code. The Security Plan offers
participants a personal retirement account, a cash profit sharing payment and a
personal savings account 401(k). The expense related to the Security Plan for
the three months ended March 31, 2005 and 2004 was $1.48 million and $1.49
million, respectively.
In addition to the Security Plan, certain health care and life insurance
benefits are made available to active employees. The Company's share of cost of
these benefits is expensed as incurred. Group health benefits are offered to
retirees with 100% of the cost borne by the retiree.
The Company provides a deferred compensation plan (entitled "AMCORE Financial,
Inc. Deferred Compensation Plan") for certain key employees and directors. This
plan provides the opportunity to defer salary, bonuses and non-employee director
fees. Participants may defer up to 90% of base compensation and up to 100% of
incentive compensation. The deferred compensation liability to participants is
recorded in other liabilities in the Consolidated Balance Sheets. The deferrals
and earnings grow tax deferred until withdrawn from the plan. The amount and
method of payment are pre-defined by participants each year of deferral.
Earnings to individual accounts are recorded as compensation expense when
earned. The total non-qualified deferred compensation plan liability totaled
$13.8 million and $13.5 million at March 31, 2005 and 2004, respectively.
Expense related to the deferred compensation plan was $201,000 and $358,000 for
the first three months of 2005 and 2004, respectively.
The Company provides additional retirement benefits to certain senior officers
through plans that are non-qualified, non-contributory and unfunded. Under one
such arrangement, the additional retirement benefits replace what would have
been provided under the Company's defined contribution qualified plan in the
absence of limits placed on qualified plan benefits by the Internal Revenue Code
of 1986. The expense related to this arrangement was $77,000 and $50,000 for the
three months ended March 31, 2005 and 2004, respectively.
Another arrangement, which is a defined benefit plan, provides supplemental
retirement benefits that are based upon three percent of final base salary,
times the number of years of service. Benefits under this plan may not exceed
70% or be less than 45% of a participant's final base salary less offsets for
social security and other employer retirement plan contributions. The
measurement date for obligations for this plan is as of December 1st. The
following table summarizes the net periodic benefit cost recognized for the
three-month periods ended March 31, 2005 and 2004:
For the Three Months
ended March 31,
-----------------------
2005 2004
-----------------------
(in thousands)
Components of net periodic benefit cost:
Service cost $ 3 $ 4
Interest cost 23 23
Actuarial losses and decrease in offsets -- 14
-----------------------
Net periodic cost $26 $41
=======================
Weighted-average assumptions: 2005 2004
-----------------------
Discount rate 5.75% 6.00%
Rate of compensation increase 3.00% 3.00%
During the first quarter of 2005, $134,109 was contributed to the plan to fund
distributions to plan participants. No additional contributions or distributions
are expected to be made during 2005.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion highlights the significant factors affecting AMCORE
Financial, Inc. and Subsidiaries ("AMCORE" or the "Company") consolidated
financial condition as of March 31, 2005 compared to December 31, 2004, and the
consolidated results of operations for the three months ended March 31, 2005
compared to the same period in 2004. 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 the 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 prepayments;
(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 U.S. generally accepted accounting principles; (XVI) changes in
assumptions or conditions affecting the application of "critical accounting
estimates"; (XVII) inability of third-party vendors to perform critical services
for the Company or its customers; (XVIII) disruption of operations caused by
upgrades and installation of data processing systems; and (XIX) zoning
restrictions or other limitations at the local level, which could prevent
limited branches from transitioning to full-service facilities.
OVERVIEW OF OPERATIONS
AMCORE reported net income of $12.1 million or $0.48 per diluted share for the
three months ended March 31, 2005. This compares to $10.0 million or $0.39 per
diluted share for the same period in 2004. This represents a $2.0 million or 20%
increase in the first quarter of 2005 over the same period a year ago. Diluted
earnings per share increased 23% or $0.09. AMCORE's annualized return on average
equity and on average assets for the first quarter 2005 was 12.61% and 0.99%,
respectively, compared to 10.50% and 0.88% for the comparable period in 2004.
19
The most significant factors affecting first quarter 2005 net income, compared
to the same period in 2004, were:
Net interest income - Increased $2.2 million due to increased loan and
investment volumes. Net interest margin was 3.59% in 2005 compared to 3.65% in
2004.
Provision for loan losses - Declined $2.2 million, reflecting lower specific
loss estimates on individually reviewed credits and lower net charge-offs.
Non-interest income - Decreased $1.1 million. The most significant decreases
were attributable to $1.9 million in net security gains in 2004 compared to a
$51,000 loss in 2005, and a decline of $1.3 million in company owned life
insurance income in 2005 compared to 2004. Partially offsetting these declines
were a $1.7 million increase in mortgage banking income and a $760,000 increase
in service charges on deposits.
Operating expenses - Declined $543,000 due to lower loan processing and
collection expenses and lower personnel costs.
Income taxes - Increased $1.8 million, due to higher earnings before income
taxes and a decrease in tax-exempt company owned life insurance income. The
effective tax rate was 30.1% in 2005 compared to 25.2% in 2004.
KEY INITIATIVES AND OTHER SIGNIFICANT EVENTS
Key Initiatives
Branch Expansion - During 2001, the Company's banking operations (BANK) launched
a branch expansion initiative targeting the high growth area bounded by
Interstates 94 in the north, 294 and 94 in the east, 80 in the south and 90 and
39 in the west (the "Branch Expansion"). The Branch Expansion strategy initially
targets markets where there are high concentrations of mid-size businesses, with
a seasoned commercial lending and treasury management service staff in a leased
facility (limited branch office or "LBO"). Once a book of business is developed
and the LBO becomes profitable, plans to develop a permanent site for a full
service facility in a nearby area that is surrounded by a high concentration of
homeowners with strong population and household income growth are initiated.
Increased capabilities in the markets served by these facilities is expected to
accelerate the Company's ability to generate deposits, which will better support
loan growth and decrease the use of wholesale funding.
Since the inception of the Branch Expansion strategy in April 2001, 23 new
branches, net of closed offices, have opened. The new locations have contributed
$1.13 billion in loans and $548 million in deposits outstanding as of March 31,
2005. Same store contributions, which include new branches that have been open
at least one year, were $1.08 billion in loans and $509 million in deposits
outstanding at March 31, 2005. During first quarter 2005, the Company opened
three limited branch offices in Libertyville and Orland Park, Illinois and
Wauwatosa, Wisconsin. As of the end of first quarter 2005, more than two-thirds
of the Company's 73 branch locations were concentrated in Rockford and Chicago,
Illinois, Milwaukee suburbs and Madison, Wisconsin.
During 2004, the Company announced that its Board of Directors had authorized an
incremental capital investment of $55 million to enhance the Company's
successful Branch Expansion program raising the total commitment to $120
million. As of March 31, 2005, $71 million of the total $120 million capital
commitment remained to be spent.
The Company plans to add a total of five LBOs in 2005. By the end of 2009,
AMCORE expects to have added 34 new offices, net of those closed, since the
beginning of the Branch Expansion initiative in 2001. Total offices by the end
of 2009 are expected to be 84, two-thirds of which will be located in markets
that the Company believes to exhibit strong growth characteristics.
20
The Branch Expansion activity was accretive to earnings by $0.06 per diluted
share during the first quarter of 2005, compared to dilution of $0.04 per
diluted share in the same period last year. AMCORE expects its Branch Expansion
program to be accretive to earnings by $0.10 to $0.15 per share in 2005.
As a complement to its Branch Expansion, the BANK has also expanded its
automated teller machine system ("ATMs"), which includes both owned and third
party operated, to 131 in Illinois and 37 in Wisconsin, or 168 overall, from 117
in Illinois and 35 in Wisconsin, or 152 overall, at March 31, 2004.
Deposit Growth - Average bank-issued deposits grew to $3.1 billion in the first
quarter of 2005, an increase of 8%, or $225 million, compared to the first
quarter of 2004. AMCORE's focus is to grow transactional deposits, such as
checking accounts, which helps lower funding costs, as well attracting new
households. Handling a customer's checking account enables the BANK to
cross-sell other products and increases the likelihood of retaining their
business over time. The Company's goal is to become the customer's primary bank,
meeting all of their banking, mortgage and investment needs. AMCORE is focusing
on continued bank-issued Deposit Growth because it provides a source of funding
for the Branch Expansion and the Quality Loan Growth initiatives, and is also a
means of reducing its reliance on wholesale funding sources.
Quality Loan Growth - Improving credit quality is part of AMCORE's Quality Loan
Growth initiative. As part of this initiative, the Company expanded its
commercial collection team, allowing it to intervene at a much earlier stage of
the credit process as individual credits begin to show signs of stress. Taking
early action helps the Company to limit erosion in value. Average loans rose
$288 million to $3.3 billion during the first quarter of 2005, a 10% increase
over the first quarter of 2004. Over the same period of time, total non-accrual
loans increased 1% or $286,000 to $29.5 million. Loans ninety-days past due and
still accruing decreased 57% or $2.5 million to $1.9 million.
Increasing Trust and Asset Management Income - Trust and asset management income
declined $380,000 or 7%, from $5.5 million in the first quarter of 2004 to $5.1
million in the first quarter of 2005. Assets under administration totaled $4.4
billion at March 31, 2005 compared to $4.3 billion at March 31, 2004. Challenges
facing this segment over the last several years include below benchmark equity
funds investment performance, a shift in asset mix from equity to fixed income
and money market, and the loss of two large retirement plans in 2004. The
Company continues to work on solutions to improve its managed equity funds
performance and to attract new business, which includes an open architecture
that allows greater customer access to non-proprietary products.
Other Significant Events
Accounting Changes - Following is a discussion of accounting standards that
materially affected the Company's Consolidated Financial Statements for the
periods and dates presented, along with recently issued accounting standards
that may impact future periods.
In the first quarter of 2004, the Company adopted Financial Accounting Standards
Board (FASB) Financial Interpretation No. 46 Revised (FIN 46R) "Consolidation of
Variable Interest Entities." Upon adoption of FIN 46R, the Company
de-consolidated its investment in AMCORE Capital Trust I (Trust) a statutory
business trust. See Note 7 of the Notes to the Consolidated Financial
Statements.
In September 2004, the FASB issued Staff Position No. EITF 03-1-1 which delayed
the effective date for the measurement recognition guidance contained in EITF
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," which was effective for fiscal years ending
after December 15, 2003. Until new guidance is issued, companies must continue
to comply with the disclosure requirements of EITF 03-1 and all relevant
measurement and recognition requirements of other accounting literature. EITF
03-1 requires certain quantitative and qualitative disclosures for debt and
marketable equity securities classified as available-for-sale or
held-to-maturity under Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities" that are
impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. These disclosures are contained in Note 2 of
the Notes to Consolidated Financial Statements. The Company will complete its
evaluation of the impact upon issuance of final guidance from the FASB.
21
SFAS No. 123 (Revised 2004) (123R), "Share-Based Payment" was issued in December
2004 and will require compensation cost relating to share-based payment
transactions be recognized in Consolidated Financial Statements. In April 2005,
the FASB delayed the effective date of the standard to periods beginning after
December 15, 2005. The Company has not yet completed its evaluation of the
standard, but anticipates that it will result in a reduction in earnings and
earnings per share beginning with the first quarter of 2006.
Regulatory Developments - On May 3, 2005, AMCORE Bank, N.A. (the "Bank"), a
subsidiary of the Company, received from the Office of the Comptroller of the
Currency ("OCC"), a draft of a compliance Report of Examination ("ROE"). The
Bank is periodically subjected to regulatory oversight and examination and has
historically complied and will continue to comply with any findings and
recommendations resulting from these reviews. The draft ROE was accompanied by a
proposed supervisory agreement with the OCC relating to the effectiveness of the
Bank's compliance management system. While the exact terms of the agreement have
not yet been finalized, the Bank expects that such agreement will outline a
series of steps to address and strengthen the Company's compliance management
system. The Bank has already begun to implement procedures addressing the
matters identified by the OCC. The Bank also expects that any final agreement
with the Comptroller will not limit the Bank 's ability to continue to expand
its business through new branches.
EARNINGS REVIEW OF CONSOLIDATED STATEMENTS OF INCOME
The following highlights a comparative discussion of the major components of net
income and their impact for the three months ended March 31, 2005 and 2004.
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%.
Overview - FTE adjusted interest income is as follows (in thousands):
For the Three Months Ended
March 31,
--------------------------
2005 2004
------- -------
Interest Income Book Basis ....................... $63,403 $56,355
FTE Adjustment ................................... 1,195 1,037
------- -------
Interest Income FTE Basis ........................ 64,598 57,392
Interest Expense ................................. 23,922 19,067
------- -------
Net Interest Income FTE Basis .................... $40,676 $38,325
======= =======
Net interest income on an FTE basis increased $2.4 million or 6% in the first
quarter of 2005 compared to the same period in 2004. The increase was driven by
increases in average loan and investment volumes of 10% and 7%, respectively.
Partially offsetting this increase was a 25% increase in interest expense.
22
Net interest spread is the difference between the average rates on
interest-earning assets and the average rates on interest-bearing liabilities.
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.
As Table 1 indicates, the net interest spread declined 10 basis points to 3.30%
in the first quarter of 2005 from 3.40% in the same period a year ago. The net
interest margin was 3.59% in the first quarter of 2005, a decrease of six basis
points from 3.65% in the first quarter of 2004.
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 period-to-period
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, or
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 2005, net interest income (FTE)
increased due to average volume by $3.1 million when compared to the same period
in 2004. This increase was comprised of a $4.8 million increase in interest
income that was partially offset by a $1.7 million increase in interest expense.
The $4.8 million increase in interest income was driven by a $288 million or 10%
increase in average loans and an $80 million or 7% increase in average
investment securities. The growth in average loans came from an increase of $467
million in commercial lending driven mostly by the Branch Expansion. Average
consumer loan balances declined $231 million compared to the prior year quarter,
due to lower volumes of indirect automobile lending and the securitization of
$159 million of indirect automobile loans in the second half of 2004, while
1-to-4 family real estate loans increased $51 million. The growth in average
investment securities was primarily attributable to mortgage-backed securities
as the Company continued to replace mortgage-related assets that prepaid during
the mortgage re-financing boom in 2003 and pre-funded expected cash flows from
mortgage-backed securities.
The increase in average loans and investment securities was funded by a $225
million or 8% increase in average bank-issued deposits and a $142 million or 12%
increase in average wholesale fundings, which included a $129 million increase
in wholesale deposits. The increase in average bank-issued deposits was
attributable to the Company's Deposit Growth and Branch Expansion initiatives.
Changes due to rate - During the first quarter of 2005, net interest income
(FTE) declined due to average rates by $752,000 when compared with the same
period in 2004. This was comprised of a $3.2 million increase in interest
expense that was reduced by a $2.4 million increase in interest income.
The rate paid for first quarter of 2005 on interest earning assets increased 24
basis points compared to the first quarter of 2004. This was comprised of a 38
basis point increase in the yield on average loans reduced by an 8 basis point
decline in the yield on average investment securities. The improved yields on
loans were due to increases in the prime rate and an increasing portion of
variable rate loans in the Company's portfolio.
The rate paid for the first quarter of 2005 on average interest bearing
liabilities increased 34 basis points, compared to first quarter of 2004, in
response to increases in the federal funds rate (FED Funds). The largest drivers
were increased rates paid on repurchase agreements, money market and savings
accounts.
The Company expects its net interest margin to remain within a narrow band over
the next few quarters. Among those factors that could cause margin and spread
not to perform as anticipated by the Company include: greater and more frequent
23
than anticipated changes in interest rates, including the impact of basis risk
between various interest rate indices, changes in the shape of the yield curve,
the effect of prepayments or renegotiated rates, increased price competition on
both deposits and loans, changes in the mix of earning assets and the mix of
liabilities, including greater than anticipated use of expensive wholesale
sources to fund the Branch Expansion and greater than expected loan
delinquencies resulting in non-accrual status. The Company is asset sensitive
over a one-year horizon, meaning that interest-earning assets are expected to
re-price more quickly than interest-bearing liabilities.
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 and 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 and increase the Allowance.
Loans, the Company's largest income earning asset category, are periodically
evaluated by management in order to establish an estimated Allowance that is
considered adequate to absorb probable losses. 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 other 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 $2.5 million in the first quarter of 2005, a decrease of $2.2
million or 47% from $4.7 million in the first quarter of 2004. The decrease was
primarily due to lower specific loss estimates on individually reviewed credits,
lower net charge-offs and reductions in statistical loss estimates for loan
pools due to lower indirect automobile loan volumes and the Auto Loan Sales. Net
charge-offs in first quarter of 2005 were $2.5 million or 31 basis points of
average loans on an annualized basis, compared to $3.3 million or 44 basis
points of average loans during the same period in 2004.
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 banking income. Net security gains or losses, gain on loan sales,
increases in cash surrender value (CSV) and death benefits on BANK and Company
owned life insurance (COLI), brokerage commission income and bankcard fee income
are also included in this category.
Overview - Non-interest income totaled $16.5 million in the first quarter of
2005, a decline of $1.1 million or 6% from $17.5 million in the first quarter of
2004. The decline was primarily attributable to a $2.0 million reduction in net
security gains and $1.3 million decline in COLI income. These declines were
partially offset by increases of $1.7 million and $760,000 in mortgage banking
income and service charges on deposits, respectively.
Trust and asset management income - Trust and asset management income includes
trust, investment management, employee benefit recordkeeping and administration
services. It also includes advisory and fund administration fees from the
Vintage Mutual Funds and various public fund programs. Trust and asset
management income has historically been the Company's largest source of
non-interest income and totaled $5.1 million in the first quarter of 2005, a
decrease of $380,000 or 7% from $5.5 million in the first quarter of 2004. The
decline was primarily attributable to changes in the mix of administered assets
associated with the below benchmark investment performance of the Vintage equity
funds, and a move to an open architecture platform. As noted above, Increasing
Trust and Asset Management Income is a key initiative of the Company that is
directed at reversing the declines. Trust and asset management revenues were
$5.1 million in the fourth quarter of 2004 and $5.0 million in the third quarter
of 2004. The first quarter of 2005 was the second consecutive quarter of
increased trust and asset management income.
24
As of March 31, 2005, total assets under administration were $4.4 billion, which
includes $637 million in the Vintage Mutual Funds, compared to $4.3 billion and
$794 million, respectively, as of March 31, 2004. 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.
Mortgage banking income - Mortgage banking income includes fees generated from
the underwriting, originating and servicing of mortgage loans along with gains
realized from the sale of these loans, net of origination costs, servicing
rights amortization and impairment.
Mortgage banking income was $1.3 million in the first quarter of 2005, an
increase of $1.7 million from the first quarter of 2004. The increase included a
$53,000 mortgage servicing rights impairment valuation reversal in the first
quarter of 2005, compared to a $1.7 million mortgage servicing impairment charge
for the same period in 2004. Excluding impairment reversals and charges,
mortgage banking income declined $136,000 driven by a 13% decline in closings to
$85 million in the first quarter of 2005, from $98 million in the first quarter
of 2004. Declines in closings were expected, as rising mortgage interest rates
led to decreased refinancing activity. However, the Company continues to focus
growth in new purchase mortgages as a result of additional mortgage originators,
primarily in the Branch Expansion markets. New purchase mortgages showed a
modest 2% increase in the first quarter of 2005 from the same period a year ago.
New purchase mortgage growth could be negatively affected by a number of factors
beyond the Company's control, including heightened competition, higher mortgage
interest rates, declines in new housing construction and adverse regulatory
developments. New purchase mortgage closings were $45 million or 53% of total
closings in the first quarter of 2005, compared to $44 million or 44% of total
closings in the same period a year ago.
As of March 31, 2005, the carrying value of AMCORE's capitalized mortgage
servicing rights was $12.8 million, with no impairment valuation allowance. The
unpaid principal balance of mortgage loans serviced for others was $1.3 billion
as of March 31, 2005. This compares to $1.2 billion as of March 31, 2004. The
net carrying value of the Company's capitalized mortgage servicing rights, as a
percentage of the unpaid principal balance of mortgage loans serviced for
others, was 0.98% and 0.80% as of March 31, 2005 and 2004, respectively.
COLI income - COLI income totaled $908,000 in the first quarter of 2005, a $1.3
million or 58% decline from $2.2 million in the first quarter of 2004. The first
quarter of 2004 included $737,000 received in death benefit payouts. The
remaining decrease was primarily due to declines in the value of underlying
variable return investments and lower yields as the policies annually reset the
general account crediting 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, 2005, the CSV of COLI was $128 million, compared to
$124 million at December 31, 2004.
Other non-interest income -Service charges on deposits, brokerage commission
income, bankcard fee income, gain on sale of loans, net security losses and
other non-interest income totaled $9.2 million, a $1.1 million or 11% decline
from the first quarter of 2004. The decrease was primarily attributable to lower
net security gains and gains on the sale of loans. These were partly offset by
increased deposit-related fees, such as service charges on deposit and bankcard
fee income, and a $280,000 gain included in other income from the merger of an
ATM network in which the BANK held an interest.
Since January 1, 2004, merchants have been permitted to refuse signature-based
debit card transactions. This could result in future reductions in interchange
income that AMCORE receives on the debit cards that it issues. For first quarter
2005, the Company's bankcard fee income increased $223,000 to $1.1 million from
$902,000 in first quarter 2004. The increase was primarily due to a larger
cardholder base, a benefit of both the Branch Expansion and Deposit Growth
initiatives, and greater card utilization that have more than offset the rate
reduction. While some merchants have altered their point-of-sale practices to
discourage signature-based debit card transactions, and many merchants have been
slow to refuse acceptance altogether, bankcard fee has remained relatively flat
at $1.1 million over the last three quarters.
25
Service charges on deposits, while up $760,000 in first quarter 2005, compared
to first quarter 2004, has registered declines of $95,000 and $130,000,
respectively, over the past two quarters. Among the factors contributing to
these recent trends are increased commercial customer crediting rates that
partially offset account analysis fees and are the result of increases in
short-term interest rates, increased saturation of free-checking campaigns and
the effects of an improving economy on customer overdraft behavior. The
Company's Branch Expansion and Deposit Growth initiatives are expected to at
least partially mitigate these factors.
Operating Expenses
Overview -Total operating expense was $36.2 million in the first quarter of
2005, a decline of $543,000 or 1%, from $36.8 million in the first quarter of
2004. The decrease was primarily due to an $851,000 reduction in loan processing
and collection expenses and a $357,000 decrease in personnel costs. These were
partially offset by increases of $241,000 in advertising and business
development expense, $219,000 in net occupancy and equipment expense and
$123,000 in data processing expense.
The efficiency ratio was 64.72% in the first quarter of 2005, compared to 67.04%
for the same period in 2004. The efficiency ratio is calculated by dividing
total operating expenses by revenues. Revenues are the sum of net interest
income and non-interest income.
Personnel expense - Personnel expense, which includes compensation expense and
employee benefits and is the largest component of operating expenses, was $22.1
million in the first quarter of 2005, a decline of $346,000 or 2% from first
quarter 2004. The decrease was primarily due to lower expense of a new long term
incentive plan in first quarter 2005 compared to the prior year expense for two,
now expired long term incentive plans and lower employee benefit expenses.
Facilities expense - Facilities expense, which includes net occupancy expense
and equipment expense, was $5.2 million in the first quarter of 2005, an
increase of $219,000 or 4% compared to the first quarter of 2004. Increases were
primarily the result of Branch Expansion.
Data processing expense - Data processing expenses include costs related to core
bank data processing, trust and other external processing systems. Data
processing expense was $707,000 in the first quarter of 2005 compared to
$584,000 in the first quarter of 2004, an increase of $123,000 or 21%. The
increase was due to higher costs over the prior year period related to external
processing costs for systems used by the trust and asset management segment and
internet banking.
Other operating expenses - Other operating expenses include professional fees,
communication expense, advertising and business development expenses and other
costs, and were $8.3 million in the first quarter of 2005, a decrease of
$528,000 or 6% from the first quarter of 2004. The decline was primarily due to
lower loan processing and collection costs associated with lower mortgage
volumes partly offset by higher advertising and business development expenses
due to the Branch Expansion.
Income Taxes - Income tax expense totaled $5.2 million in the first quarter of
2005, compared to $3.4 million in the first quarter of 2004, an increase of $1.8
million or 54%. The increase was due to a 29% increase in income before taxes
coupled with the $1.3 million decrease in tax-exempt COLI income. The effective
tax rates were 30.1%, and 25.2% in the first quarter of 2005 and 2004,
respectively. Effective tax rates are lower 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 tax-exempt.
EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process focuses on four primary lines
of business ("Segment(s)"): Commercial Banking, Retail Banking, Trust and Asset
Management, and Mortgage Banking. Note 11 of the Notes to Consolidated Financial
Statements presents a condensed income statement and total assets for each
Segment.
26
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
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 included in the Form 10-K Annual Report for the year ended December
31, 2004.
Since there is no comprehensive authorities for management accounting equivalent
to U.S. generally accepted accounting principles, 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.
Total Segment results differ from consolidated results primarily due to
inter-segment eliminations, certain corporate administration costs, and 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 11 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 full service
branch and LBO locations. The services provided by this Segment include lending,
business checking and deposits, treasury management and other traditional as
well as electronic commercial banking services.
Overview - The Commercial Segment represented 76% and 92% of total Segment
earnings in the first quarter of 2005 and 2004, respectively. Commercial Segment
total assets were $2.6 billion at March 31, 2005 and represented 52% of total
consolidated assets. This compares to $2.1 billion and 46% at March 31, 2004.
Commercial earnings for the first quarter of 2005 were $7.0 million, an increase
of $756,000 or 12% from the same period in 2004. The increase was due to a $2.8
million increase in net interest income that was partially offset by a $1.0
million increase in non-interest expense, a $588,000 increase in income taxes, a
$230,000 decline in non-interest income and an increase of $146,000 in
Provision.
The increase in net interest income was driven by higher average commercial real
estate loan volumes, due in large part to the Branch Expansion. Lower specific
loss estimates on individually reviewed credits were more than offset by
reductions in the first quarter 2004 Provision for reduced loan concentration
concerns, expanded workout/collection activities and improved economic
conditions that were less than similar reductions in the first quarter 2005
Provision and by an increase in unallocated loss estimates. The increase in
non-interest expense was primarily due to higher personnel expense as a result
of Branch Expansion. The decline in non-interest income was due to lower gains
on sales of SBA loans compared to the prior year. Income taxes were higher due
to higher earnings before taxes.
Retail Banking
The Retail Banking Segment ("Retail") provides retail-banking services to
individual customers through the BANK's branch locations in northern Illinois
and south central Wisconsin. The services provided by this Segment include
27
direct and indirect lending, checking, savings, money market and CD accounts,
safe deposit rental, ATMs, and other traditional and electronic retail banking
services.
Overview - The Retail Segment represented 19% and 4% of total segment earnings
in the first quarter of 2005 and 2004, respectively. Retail Segment total assets
were $648 million at March 31, 2005 and represented 13% of total consolidated
assets. This compares to $821 million and 18% at March 31, 2004.
Retail earnings for the first quarter of 2005 were $1.8 million, an increase of
$1.6 million from the first quarter of 2004. The increase was due to a $2.4
million decrease in Provision, a $585,000 increase in non-interest income and a
$557,000 increase in net interest income that were partially offset by a
$991,000 increase in income taxes and a $974,000 increase in non-interest
expense.
The decrease in Provision was mainly due to lower net charge-offs, reductions in
statistical loss estimates for loan pools due to lower indirect automobile loan
volumes and the Auto Loan Sales and a decrease in unallocated loss estimates.
Non-interest income increased over the prior year quarter due to an increase in
service charges on deposits. Net interest income increased primarily due to
funding credits on deposits generated by Deposit Growth net of lower income due
to declining indirect automobile loan volumes. The increase in income taxes was
due to higher earnings before taxes. The increase in non-interest expense was
largely due to higher personnel costs, which included the impact of the Branch
Expansion as LBOs transitioned to full service branches.
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.
Overview - The TAM Segment represented 4% and 8% of total segment earnings in
the first quarter of 2005 and 2004, respectively. TAM Segment total assets were
$17 million at March 31, 2005 and represented less than 1% of total consolidated
assets. At March 31, 2004 TAM total assets were $18 million, also less than 1%
of total consolidated assets.
TAM earnings for the first quarter of 2005 were $351,000, a $222,000 or 39%
decline from the first quarter of 2004 earnings of $573,000. A $484,000 decline
in non-interest income was partially offset by a $138,000 decrease in
non-interest expense and a decline in income tax expense of $115,000.
The decline in non-interest income was primarily due to changes in the mix of
administered assets associated with the below benchmark investment performance
of the Vintage equity funds and a move to an open architecture platform. A
recovery in the equity markets partially offset these factors. The decrease in
non-interest expense was primarily due to lower personnel costs. Income taxes
declined due to lower earnings before taxes.
Mortgage Banking
The Mortgage Banking Segment ("Mortgage") provides a variety of mortgage lending
products to meet its customers' 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.
Overview - The Mortgage Segment represented 1% of total segment earnings in the
first quarter of 2005, compared to a negative 4% in the first quarter of 2004.
Mortgage Segment total assets were $250 million at March 31, 2005 and
represented 5% of total consolidated assets. This compares to $252 million and
5% at March 31, 2004.
28
Mortgage earnings for the first quarter of 2005 were $92,000, an increase of
$364,000 from the loss of $272,000 in the first quarter of 2004. The increase
was due to a $1.4 million increase in non-interest income and a $263,000 decline
in non-interest expense that were partially offset by a $1.0 million decrease in
net interest income, and a $233,000 increase in income taxes due to higher
earnings before taxes.
Non-interest income includes fees generated from the underwriting, originating
and servicing of mortgage loans along with gains realized from the sale of these
loans, net of original costs, servicing right amortization and impairment. The
increase in non-interest income was due to a $53,000 mortgage servicing rights
impairment reversal in the first quarter of 2005 compared to a $1.7 million
mortgage servicing impairment charge in the first quarter of 2004. Non-interest
expense declined primarily due to lower loan processing expenses as mortgage
volumes declined from the prior year.
Net interest income declined due to lower volumes and yields, adjusted for net
cost of fund allocations. Volumes for held-for-sale loans in first quarter 2005,
compared to first quarter 2004, were negatively impacted by increases in
mortgage interest rates.
BALANCE SHEET REVIEW
Total assets were $5.0 billion at March 31, 2005, an increase of $53 million or
1% from December 31, 2004. Total liabilities increased $58 million over the same
period and stockholders' equity declined $5.3 million. The following discusses
changes in the major components of the Consolidated Balance Sheet since December
31, 2004.
Cash and Cash Equivalents - Cash and cash equivalents decreased $7 million from
December 31, 2004 to March 31, 2005, as the cash used for investing activities
of $74 million exceeded the cash provided by operating activities of $14 million
plus the cash provided by financing activities of $53 million.
Securities Available for Sale - Total securities available for sale as of March
31, 2005 were $1.2 billion, a decrease of $25 million or 2% from December 31,
2004. The decline was primarily due to changes in net unrealized gains. At March
31, 2005 and December 31, 2004, the total securities available for sale
portfolio comprised 26% and 27%, respectively, of total earning assets including
COLI. The decrease in securities available for sale was primarily attributable
to mortgage-backed securities and other equity securities. Among the factors
affecting the decision to purchase or sell securities are the current assessment
of economic and financial conditions, including the interest rate environment,
the liquidity needs of the Company and its pledging obligations.
Mortgage and asset backed securities, as of March 31, 2005 totaled $886 million
and represent 73% of total available for sale securities. The distribution of
mortgage and asset backed securities includes $409 million of U.S.
government-sponsored enterprise (GSE) mortgage-backed pass through securities,
$459 million of GSE collateralized mortgage obligations and $18 million of
private issue collateral mortgage obligations, all of which are rated AAA except
for $1 million of securities rated Aa2.
The $1.2 billion of total securities available for sale includes gross
unrealized gains of $6 million and gross unrealized losses of $23 million, of
which the combined effect, net of tax, is included as accumulated other
comprehensive income (OCI) in stockholders' equity. At December 31, 2004, gross
unrealized gains of $11 million and gross unrealized losses of $8 million were
included in the securities available for sale portfolio. For further analysis of
the securities available for sale portfolio, see Note 2 of the Notes to
Consolidated Financial Statements.
29
Loans Held for Sale - At March 31, 2005, mortgage origination fundings awaiting
delivery to the secondary market were $34 million, compared to $31 million at
December 31, 2004. Residential mortgage loans are originated by the BANK's
Mortgage Segment, of which non-conforming adjustable rate, fixed-rate and
balloon residential mortgages are normally retained by the BANK. The conforming
adjustable rate, fixed-rate and balloon residential mortgage loans are sold in
the secondary market to eliminate interest rate risk, as well as to generate
gains on the sale of these loans and servicing income. All loans held for sale
are recorded at the lower of cost or market value.
Loans - Loans represent the largest component of AMCORE's earning asset base. At
March 31, 2005, total loans were $3.4 billion, an increase of $72 million or 2%
from December 31, 2004, and represented 71% of total earning assets including
COLI. Loan growth included the impact of the Branch Expansion. See Note 3 of the
Notes to Consolidated Financial Statements.
Total commercial real estate loans, including real estate construction loans,
increased $119 million or 7%, partially offset by a reduction in commercial,
financial and agricultural loans of $49 million or 6%. The increases were driven
primarily by the Branch Expansion.
Deposits - Total deposits at March 31, 2005 were $3.8 billion, an increase of
$102 million or 3% when compared to December 31, 2004. The increase included $94
million in bank-issued deposits and $8 million in wholesale deposits. Total
bank-issued deposits were $3.2 billion at the end of first quarter of 2005. The
increase in bank-issued deposits is attributable to the Deposit Growth
initiative and Branch Expansion. Bank-issued deposits represents 84% and 83% of
total deposits at March 31, 2005 and December 31, 2004, respectively.
Borrowings - Borrowings totaled $710 million at March 31, 2005 and were
comprised of $539 million of short-term and $171 million of long-term
borrowings. Comparable amounts at December 31, 2004 were $589 million and $165
million, for a combined decrease in borrowings of $45 million or 6%. See Notes 6
and 7 of the Notes to Consolidated Financial Statements.
AMCORE has $40 million of Trust Preferred securities outstanding through the
Trust. These securities pay cumulative cash distributions semiannually at an
annual rate of 9.35% and are redeemable from March 25, 2007 until March 25,
2017, at a declining premium of 104.675% to 100.0% of the principal amount.
After March 25, 2017, they are redeemable at par until June 15, 2027, when
redemption is mandatory. The securities qualify as Tier 1 capital for regulatory
purposes.
The parent company has a commercial paper placement agreement with an unrelated
financial institution that provides for the issuance of non-rated short-term
unsecured debt obligations at negotiated rates and terms, not to exceed $50
million. In the event the agent is unable to place the parent company's
commercial paper on a particular day, the proceeds are provided by overnight
borrowings on a reciprocal line of credit with the same financial institution.
At March 31, 2005 and December 31, 2004 there were no outstanding balances of
commercial paper or overnight borrowings.
Stockholders' Equity - Total stockholders' equity at March 31, 2005 was $381
million, a decrease of $5 million or 1% from December 31, 2004. The decrease in
stockholders' equity was primarily due to a $13 million decline in OCI, partly
offset by an $8 million increase in retained earnings. The decline in OCI
relates to changes in net unrealized gains and losses on the investment
securities available for sale portfolio.
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 Sheets, 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 interest rate risk, liquidity and credit concentration risks,
30
optimization of capital utilization, meeting the financial needs of its
customers and fulfilling Community Reinvestment Act obligations in the markets
that it serves.
Auto loan sales - Structured as sales pursuant to SFAS 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
the securitization of indirect automobile loans (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.
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
FIN No. 46R, "Consolidation of Variable Interest Entities." As a result, the net
carrying amount of the loans is removed from the Company's Consolidated Balance
Sheets 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, 2005, the balance of automobile loans serviced and not included
on the Company's Consolidated Balance Sheets was $171 million and the carrying
value of retained interests was $12 million. The Company's risk of loss
attributable to credit and repayment is limited to carrying value of the
retained interests. Neither the investors nor the securitization trust have any
further recourse to the Company's other assets. Interest rate risk could exceed
the carrying value of the retained interests, but such a possibility is
considered remote as of March 31, 2005. See Note 5 of the Notes to Consolidated
Financial Statements.
Mortgage loan sales - 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, 2005, the unpaid principal balance of
mortgage loans serviced for others was $1.3 billion. These loans are not
recorded on the Company's Consolidated Balance Sheets. The Company, as of March
31, 2005 and in accordance with SFAS No 140, had recorded $13 million of
capitalized mortgage servicing rights. There was no impairment valuation as of
March 31, 2005 compared to $53,000 at December 31, 2004. See Note 4 of the Notes
to Consolidated Financial Statements.
Derivatives - The Company uses derivative contracts to help manage its 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 and is not
recorded on the Company's Consolidated Balance Sheets. AMCORE does not have any
derivatives that are held or issued for trading purposes. The only credit risk
exposure AMCORE has is in relation to the Counter-parties, which all have
investment grade credit ratings. All Counter-parties are expected to meet any
outstanding interest payment obligations.
The total notional amount of swap contracts outstanding was $228 million as of
March 31, 2005 compared to $219 million at December 31, 2004. As of March 31,
2005, swap contracts had an aggregate negative carrying and fair value of $2.9
million. This compares to a positive $286,000 carrying and fair value at
December 31, 2004. For further discussion of derivative contracts, see Note 8 of
the Notes to Consolidated Financial Statements.
Loan commitments and letters of credit - 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.
31
At March 31, 2005, liabilities in the amount of $424,000, representing the value
of the guarantee obligations associated with certain of the financial and
standby letters of credit, had been recorded in accordance with FIN 45. These
amounts are expected to be amortized into income over the lives of the
commitments. The contractual amount of all letters of credit, including those
exempted from the scope of FIN 45, was $184 million at March 31, 2005. See Note
10 of the Notes to Consolidated Financial Statements.
The carrying value of mortgage loan commitments recorded as an asset totaled
$16,000 at March 31, 2005 compared to $222,000 at December 31, 2004. This amount
represents the fair value of those commitments marked-to-market in accordance
with SFAS 138, "Accounting for Derivative Instruments and Hedging Activities"
and in accordance with Staff Accounting Bulletin No. 105. The total notional
amount of mortgage loan commitments was $40 million at March 31, 2005. This
compares to $28 million at December 31, 2004. See Note 8 of the Notes to
Consolidated Financial Statements.
At March 31, 2005, the Company had extended $809 million in loan commitments
other than the mortgage loan commitments and letters of credit described above,
compared to $817 million at December 31, 2004. This amount represented the
notional amount of the commitment. No asset or liability has been recorded.
Equity investments - The Company has a number of non-marketable equity
investments that have not been consolidated in its financial statements. At
March 31, 2005 these investments included $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 $1 million at some future date. The Company
also has recorded investments of $4 million and $25 million, respectively, in
stock of the Federal Reserve Bank and the Federal Home Loan Bank (FHLB). These
investments are recorded at amortized historical cost or fair value, as
applicable, with income recorded when dividends are declared.
During the first quarter of 2005, the Company decided to sell its holdings of
Freddie Mac preferred stock, recording a loss of $51,000. Other investments,
comprised of various affordable housing tax credit projects (AHTCP) and other
community reinvestment act investments, totaled approximately $464,000 at March
31, 2005. Losses are limited to the remaining investment and there are no
additional funding commitments on the AHTCPs. Those investments without
guaranteed yields were reported on the equity method, while those with
guaranteed yields were reported using the effective yield method. The maximum
exposure to loss for all non-marketable equity investments is the sum of the
carrying amounts plus additional commitments.
Other investments - The Company also holds $1 million in a common security
investment in the Trust, to which the Company has $41 million in long-term debt
outstanding. The Trust, in addition to the $1 million in common securities
issued to the Company, issued $40 million in preferred securities. The $40
million in preferred securities qualifies as Tier 1 capital for regulatory
purposes. The $40 million in preferred securities were issued to non-affiliated
investors in 1997 and are redeemable beginning in 2007. The BANK acquired $15
million in preferred securities from one of the investors in 2002.
Effective April 11, 2005, the Board of Governors of the Federal Reserve System
amended the risk-based capital standards for bank holding companies to allow the
continued inclusion of outstanding and prospective issuances of trust preferred
securities in the tier 1 capital of bank holding companies, subject to stricter
standards. The new regulations limit the amount of trust preferred securities
(combined with all other restricted core capital elements) that a bank holding
company may include as tier 1 capital to 25% of the sum of all core capital
elements, net of goodwill less any associated deferred tax liability. Amounts in
excess of the limits described above generally may be included in tier 2
capital. The regulations also provide a transition period for bank holding
companies to conform their capital structures to the revised quantitative
limits. These limits will first become applicable to bank holding companies
beginning on March 31, 2009. These rules issued by the Federal Reserve are not
expected to have a material impact on the Company's regulatory capital ratios.
Fiduciary and agency - 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. Total assets managed or
administered by the Company at March 31, 2005 and December 31, 2004 were $4.4
billion.
32
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 2005, the Company entered into two operating lease agreements. There
are no residual value guarantees on these leases and no lease termination
penalties or acceleration clauses. Other than these transactions, there were no
material changes in the Company's contractual obligations since the end of 2004.
Amounts as of December 31, 2004 are listed in the following table:
Payments due by period
--------------------------------------------------------------------------
Less More
Contractual Obligations Than 1 1-3 3-5 Than 5
- ----------------------- Total Year Years Years Years
--------------------------------------------------------------------------
(in thousands)
Time Deposits ............... $1,671,902 $ 852,438 $ 724,342 $ 63,603 $ 31,519
Long-Term Debt (1) .......... 163,959 -- 16,723 79,009 68,227
Capital Lease Obligations (2) 2,958 163 342 346 2,107
Operating Leases ............ 17,871 2,489 4,180 3,555 7,647
Purchase Obligations (3) .... 1,600 1,600 -- -- --
--------------------------------------------------------------------------
Total ....................... $1,858,290 $ 856,690 $ 745,587 $ 146,513 $ 109,500
==========================================================================
- ----------
(1) Excluding Capital Lease Obligations.
(2) Including related interest.
(3) Branch office for which a purchase contract was signed during 2004, but the
closing on the property took place in 2005.
See Notes 6 and 7 of the Notes to the Consolidated Financial Statements and Note
5 of the Notes to the Consolidated Financial Statements included in the Form
10-K Annual Report for the year ended December 31, 2004.
ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT
AMCORE's credit risk is centered in its loan portfolio, which on March 31, 2005
totaled $3.4 billion, or 71% of earning assets including COLI. 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 $128 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).
33
Allowance for Loan Losses - 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. Conversely, this review could result in a
decrease in 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.
The determination by management of the appropriate level of the Allowance
amounted to $41.0 million at March 31, 2005, compared to $40.9 million at
December 31, 2004. Increases of $1.5 million for statistical loss estimates on
loan groups or pools based upon historical loss experience and $403,000 in
unallocated loss estimates, were more than offset by decreases of $1.3 million
in specific loss estimates on certain individually reviewed loans and $642,000
for other 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. Improved credit quality is due to well-disciplined workout and
collection efforts, which has shorted the collection time and resolution of
non-performing assets. The decrease in other loss estimates was primarily
attributable to reduced loan concentration concerns primarily related to
improved credit quality and industry outlook for loans concentrated in the
nonresidential building operators, truck and general farm portfolios.
As March 31, 2005, the Allowance as a percent of total loans and of non-accrual
loans was 1.22% and 139%, respectively. These compare to the same ratios at
December 31, 2004 of 1.25% and 136%. Net charge-offs were $2.5 million for the
first three months of 2005, a decline of $824,000 from $3.3 million for the same
period in 2004. This was 0.31% of annualized average loans in the first quarter
of 2005 versus 0.44% in the first quarter of 2004. Declines in
consumer/installment and commercial net charge-offs of $766,000 and $86,000
respectively, were partially offset by increases in real estate net charge-offs
of $28,000. Improvements in overall credit quality and the improving economy led
to the declines in net charge-offs.
Non-performing Assets - Non-performing assets consist of non-accrual loans,
loans 90 days past due and still accruing, foreclosed real estate and other
repossessed assets. Non-performing assets totaled $36.4 million as of March 31,
2005, a decline of $1.5 million or 4% from $37.9 million at December 31, 2004
and declined $3.4 million or 8% from $39.8 million at March 31, 2004. The $1.5
million decrease since December 31, 2004 consisted of an $811,000 decrease in
foreclosed real estate, a $623,000 decrease in non-accrual loans and a $105,000
decrease in other foreclosed assets. The $3.4 million decrease since March 31,
2004 consisted of a $2.5 million decline in loans 90 days past due and a $1.1
decline in foreclosed real estate. Total non-performing assets represented
0.73%, 0.77% and 0.86% of total assets at March 31, 2005, December 31, 2004 and
March 31, 2004, respectively.
Non-accrual loan totals include a $10 million construction industry related
credit that was added to non-accrual loans during the fourth quarter of 2004.
The credit is in the process of workout and the Company has assigned a specific
allocation to reflect an estimated impairment loss as of March 31, 2005. While
the Company strives to reflect all known risk factors in its evaluation, the
ultimate loss could differ materially from the current estimate. The Company
expects to substantially complete the workout process in the calendar year 2005.
See Item 7, Management's Discussion And Analysis of Financial Condition And
Results Of Operation, "Critical Accounting Estimates," included in the Company's
Form 10-K Annual Report for the year ended December 31, 2004, for a discussion
of the judgments and assumptions that are most critical in determining the
adequacy of the Allowance.
In addition to the amount of non-accruing and delinquent loans over 90 days past
due, management is aware that other possible credit problems of borrowers may
exist. Credits are considered substandard assets due to either less than
satisfactory performance history, lack of borrower's sound worth or paying
capacity, or inadequate collateral. Loans classified as substandard are
monitored accordingly. As of March 31, 2005 and December 31, 2004, there were
$497,000 and $11.4 million, respectively, in this risk category that were 60 to
89 days delinquent and $3.3 million and $2.1 million, respectively, that were 30
to 59 days past due. In addition, as of March 31, 2005 and December 31, 2004,
respectively, there were $20.0 million and $18.2 million of loans that were
current, but had loss allocations of $3.7 million and $6.3 million.
Concentration of Credit Risks - As previously discussed, AMCORE strives to
maintain a diverse loan portfolio in an effort to minimize the effect of credit
risk. Summarized below are the characteristics of classifications that exceed
10% of total loans.
Commercial, financial, and agricultural loans were $715 million at March 31,
2005, and comprised 21% of gross loans, of which 0.89% were non-performing.
Annualized net charge-offs of commercial loans during the first quarter of 2005
represented 0.63% of the average balance of the category. There were no loan
concentrations within this category in excess of 10% of total loans.
34
Construction and commercial real estate loans were $1.9 billion at March 31,
2005, comprising 57% of gross loans, of which 1.05% were classified as
non-performing. Annualized net charge-offs of construction and commercial real
estate loans during the first quarter of 2005 represented 0.14% of the average
balance of the category. This category included $454 million of loans to
nonresidential building operators, which was 18% of total loans and $267 million
of loans to residential building operators, which was 10% of total loans. There
were no other loan concentrations within this category that exceeded of 10% of
total loans.
Residential real estate loans, which include home equity and permanent
residential financing, totaled $417 million at March 31, 2005, and represented
12% of gross loans, of which 0.92% were non-performing. Annualized net
charge-offs of residential real estate in the first quarter of 2005 loans
represented 0.0% of the average balance in this category.
Installment and consumer loans were $315 million at March 31, 2005, and
comprised 9% of gross loans, of which 0.36% were non-performing. Annualized net
charge-offs of consumer loans in the first quarter of 2005 represented 0.95% of
the average balance of the category. Consumer loans are comprised primarily of
in-market indirect auto loans and direct installment loans. Indirect auto loans
totaled $246 million at March 31, 2005. Both direct loans and indirect auto
loans are approved and funded through a centralized department utilizing the
same credit scoring system to provide a standard methodology for the extension
of consumer credit.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity Management
Overview - 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.
Liquidity is derived primarily from bank-issued 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 CDs, Fed Funds purchased lines, Federal Reserve Bank discount window
advances, FHLB advances, repurchase agreements, commercial paper and back-up
lines of credit, the sale or securitization of loans, balances maintained at
correspondent banks and access to other capital markets. Bank-issued deposits,
which exclude brokered CD's, are considered by management to be the primary,
most stable and most cost-effective source of funding and liquidity. The BANK
also has capacity, over time, to place additional brokered CD's as a source of
mid to long-term funds.
Uses of liquidity 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.
Overall liquidity increased during the first quarter of 2005, as non-core
funding declined $37 million, which includes a decrease in borrowings of $45
million partly offset by an increase of $8 million in wholesale deposits.
Non-core funding represented 27% of total assets as of March 31, 2005 compared
to 28% at December 31, 2004. The Company remains confident of its ability to
meet and manage its short and long-term liquidity needs.
Investment securities portfolio - Scheduled maturities of the Company's
investment securities portfolio and the prepayment of mortgage and asset backed
securities represent a significant source of liquidity. Approximately $9
million, or 1%, of the securities portfolio will contractually mature in the
remainder of 2005. This does not include mortgage and asset backed securities
since their payment streams may differ from contractual maturities because
borrowers may have the right to prepay obligations, typically without penalty.
35
Loans - Funding of loans is the most significant liquidity need, representing
67% of total assets as of March 31, 2005. Since December 31, 2004, loans
increased $72 million. Loans held for sale, which represents mortgage
origination funding awaiting delivery to the secondary market, increased $3
million since December 31, 2004. The scheduled repayments and maturities of
loans represent a substantial source of liquidity. Loan growth from same-store
and Branch Expansion continue to be the greatest liquidity need of the Company.
Bank-issued deposits - Bank-issued deposits are the most cost-effective and
reliable source of liquidity for the Company. During the first quarter of 2005,
bank-issued deposits increased $94 million. The increase in bank-issued deposits
was primarily due to the Branch Expansion and Deposit Growth initiative.
Branch expansion - 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 expected
loan growth net of expected deposit growth and the remaining $71 million capital
investment. Through March 31, 2005, Branch Expansion has required the funding of
$1.13 billion in loans while generating $548 million in deposits.
Parent company - In addition to the overall liquidity needs of the consolidated
Company, the parent company requires adequate liquidity to pay its expenses,
repay debt when due and pay stockholder dividends. Liquidity is primarily
provided to the parent through the BANK and other subsidiaries in the form of
dividends and through commercial paper borrowings. In the first quarter of 2005,
dividends from subsidiaries amounted to $9 million, compared to $5 million in
the same period a year ago.
Other sources of liquidity - As of March 31, 2005, other sources of readily
available liquidity totaled $913 million and included $164 million of Fed Funds
lines, unused collateral sufficient to support $385 million in Federal Reserve
Bank discount window advances, $275 million of unpledged debt investment
securities, $50 million of unused commercial paper and backup line of credit
borrowings and $39 million of FHLB advances. The Company also has capacity, over
time, to place sufficient amounts of brokered CDs as a source of mid- to
long-term liquidity. The BANK's indirect auto portfolio, which at March 31, 2005
was $246 million, is a potential source of liquidity through additional Auto
Loan Sales, but declining volumes and aging of the portfolio decreases the
likelihood that the remaining portfolio would meet the eligibility criteria
established by the securitization trust.
Other uses of liquidity - At March 31, 2005, other potential uses of liquidity
totaled $1.0 billion and included $809 million in commitments to extend credit,
$40 million in residential mortgage commitments primarily for sale to the
secondary market, and $184 million in letters of credit. At December 31, 2004,
these amounts totaled $1.0 billion.
Capital Management
Total stockholders' equity at March 31, 2005, was $381 million, a decrease of $5
million or 1% from December 31, 2004. The decrease in stockholders' equity was
primarily due to a $13 million decline in OCI, partly offset by an $8 million
increase in retained earnings. The decline in OCI relates to changes in net
unrealized losses on the investment securities available for sale portfolio.
AMCORE paid $4 million of cash dividends during the first quarter of 2005, which
represent $0.17 per share, or a dividend payout ratio of 35%. The book value per
share decreased $0.19 per share to $15.38 at March 31, 2005, down from $15.57 at
December 31, 2004.
The Company does not have a formally announced Repurchase Program in place at
this time, however, the Company does repurchase shares in open-market
transactions in accordance with Exchange Act Rule 10b-18 through a limited group
of brokers. These repurchases are used to replenish the Company's Treasury Stock
for re-issuances related to stock options and other employee benefit plans. Also
included in the repurchased shares are direct repurchases from participants
related to the administration of the Amended and Restated AMCORE Stock Option
Advantage Plan. During the first quarter of 2005, the Company purchased 47,100
shares in open-market transactions at an average price of $29.10 per share.
36
AMCORE has outstanding $41.2 million of capital securities through the Trust. Of
the $41.2 million, $25.0 million qualifies as Tier 1 capital for regulatory
capital purposes, which is the $41.2 million reduced by the $1.2 million of
common equity securities owned by the Company and the $15.0 million of preferred
securities that were acquired by the BANK in 2002. Pursuant to regulations
recently issued by the Federal Reserve Board, the capital securities are
expected to continue to qualify as Tier 1 Capital.
AMCORE's total risk-based capital at 11.42%, its Tier 1 capital at 10.36% and
its leverage ratio at 8.14%; all significantly exceed the regulatory minimums
(as the following table indicates), as of March 31, 2005. The BANK, whose ratios
are not presented below, is considered a "well-capitalized" institution based on
regulatory guidelines.
March 31, 2005 December 31, 2004 March 31, 2004
-------------- ----------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
Total Capital (to Risk Weighted Assets) $442,223 11.42% $434,207 11.39% $424,863 12.03%
Total Capital Minimum 309,753 8.00% 305,058 8.00% 282,534 8.00%
------------------------ ------------------------ ------------------------
Amount in Excess of Regulatory Minimum $132,470 3.42% $129,149 3.39% $142,329 4.03%
======================== ======================== ========================
Tier 1 Capital (to Risk Weighted Assets) $401,266 10.36% $393,138 10.31% $381,053 10.79%
Tier 1 Capital Minimum 154,877 4.00% 152,529 4.00% 141,267 4.00%
------------------------ ------------------------ ------------------------
Amount in Excess of Regulatory Minimum $246,389 6.36% $240,609 6.31% $239,786 6.79%
======================== ======================== ========================
Tier 1 Capital (to Average Assets) $401,266 8.14% $393,138 8.03% $381,053 8.40%
Tier 1 Capital Minimum 197,213 4.00% 195,908 4.00% 181,474 4.00%
------------------------ ------------------------ ------------------------
Amount in Excess of Regulatory Minimum $204,053 4.14% $197,230 4.03% $199,579 4.40%
======================== ======================== ========================
Risk adjusted assets $3,871,915 $3,813,223 $3,531,679
============ ============ ============
Average assets $4,930,334 $4,897,693 $4,536,856
============ ============ ============
37
TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
For the Three Months ended March 31,
-----------------------------------------------------------------------
2005 2004
--------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- ---- ---------- ---------- ----
(dollars in thousands)
Assets:
Investment securities (1) (2) $1,231,746 $ 14,220 4.62% $1,152,054 $ 13,535 4.70%
Short-term investments 4,871 31 2.58% 7,697 19 0.99%
Loans held for sale (3) 21,074 402 7.64% 25,969 714 11.00%
Commercial 719,194 10,731 6.05% 731,230 10,161 5.59%
Commercial real estate 1,848,867 27,969 6.14% 1,369,631 18,240 5.36%
Residential real estate 424,095 6,143 5.83% 372,602 5,327 5.73%
Consumer 319,705 5,102 6.47% 550,211 9,396 6.87%
---------- ---------- ---- ---------- ---------- ----
Total loans (1) (4) $3,311,861 $ 49,945 6.11% $3,023,674 $ 43,124 5.73%
---------- ---------- ---- ---------- ---------- ----
Total interest-earning assets $4,569,552 $ 64,598 5.71% $4,209,394 $ 57,392 5.47%
Allowance for loan losses (42,072) (43,397)
Non-interest-earning assets 416,449 399,012
---------- ----------
Total assets $4,943,929 $4,565,009
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing demand & savings deposits $1,563,000 $ 5,327 1.38% $1,392,536 $ 3,031 0.88%
Time deposits 1,101,194 7,313 2.69% 1,090,754 7,323 2.70%
---------- ---------- ---- ---------- ---------- ----
Total Bank issued interest-bearing deposits $2,664,194 $ 12,640 1.95% $2,483,290 $ 10,354 1.68%
Wholesale deposits 644,732 5,336 3.36% 515,530 3,590 2.80%
Short-term borrowings 553,176 3,526 2.59% 524,159 2,728 2.09%
Long-term borrowings 166,889 2,420 5.88% 183,515 2,395 5.25%
---------- ---------- ---- ---------- ---------- ----
Total interest-bearing liabilities $4,028,991 $ 23,922 2.41% $3,706,494 $ 19,067 2.07%
Non-interest bearing deposits 464,452 420,742
Other liabilities 62,899 53,995
Realized Stockholders' Equity 387,509 372,055
Other Comprehensive Income 78 11,723
---------- ----------
Total Liabilities & Stockholders' Equity $4,943,929 $4,565,009
========== ==========
---------- ----------
Net Interest Income (FTE) $ 40,676 $ 38,325
========== ==========
Net Interest Spread (FTE) 3.30% 3.40%
==== ====
Interest Rate Margin (FTE) 3.59% 3.65%
==== ====
(1) The interest on tax-exempt securities and tax-exempt loans is calculated on
a tax equivalent basis (FTE) assuming a federal tax rate of 35%. FTE
adjustments totaled $1.2 million in 2005 and $1.0 million in 2004.
(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 $603,000 and $679,000
for 2005 and 2004, respectively.
38
TABLE 2
ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME
For the Three Months ended March 31,
2005/2004
-----------------------------------------
Increase/(Decrease)
Due to Change in
------------------------ Total Net
Average Average Increase
Volume Rate (Decrease)
------ ---- ----------
(in thousands)
Interest Income:
Investment securities $ 923 $ (238) $ 685
Short-term investments (9) 21 12
Loans held for sale (119) (193) (312)
Commercial (182) 752 570
Commercial real estate 6,873 2,856 9,729
Residential real estate 723 93 816
Consumer (3,775) (519) (4,294)
------- ------- -------
Total loans 4,036 2,785 6,821
------- ------- -------
Total Interest-Earning Assets $ 4,784 $ 2,422 $ 7,206
======= ======= =======
Interest Expense:
Interest-bearing demand and savings deposits $ 401 $ 1,895 $ 2,296
Time deposits 22 (32) (10)
------- ------- -------
Total Bank issued interest-bearing deposits 709 1,577 2,286
Wholesale deposits 975 771 1,746
Short-term borrowings 152 646 798
Long-term borrowings (234) 259 25
------- ------- -------
Total Interest-Bearing Liabilities $ 1,681 $ 3,174 $ 4,855
======= ======= =======
Net Interest Income (FTE) $ 3,103 $ (752) $ 2,351
======= ======= =======
The above analysis 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 have been allocated
to volume and rate changes in proporation to the relationship of the absolute
dollar amounts of the change in each.
39
TABLE 3
ASSET QUALITY
The components of non-performing loans and foreclosed assets at March 31, 2005
and December 31, 2004 were as follows:
March 31, December 31,
2005 2004
-------------------------
Impaired loans: (in thousands)
Non-accrual loans
Commercial ...................................... $ 3,841 $ 1,816
Real estate ..................................... 18,382 20,380
Other non-performing:
Non-accrual loans (1) ........................... 7,302 7,952
Loans 90 days or more past due and still accruing 1,900 1,848
-----------------------
Total non-performing loans ...................... $31,425 $31,996
=======================
Foreclosed assets:
Real estate ..................................... 4,129 4,940
Other ........................................... 818 923
-----------------------
Total foreclosed assets ......................... $ 4,947 $ 5,863
=======================
Total non-performing assets ..................... $36,372 $37,859
=======================
Troubled debt restructurings ............................. $ 14 $ 14
=======================
(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, 2005 and 2004 is presented below:
For the Three Months
Ended March 31,
2005 2004
---------------------
($ in thousands)
Balance at beginning of period ........................ $40,945 $42,115
Charge-Offs:
Commercial, financial and agricultural ............ 1,422 2,191
Real estate ....................................... 806 623
Installment and consumer .......................... 1,147 2,044
Direct leases ..................................... -- 4
---------------------
3,375 4,862
Recoveries:
Commercial, financial and agricultural ............ 309 994
Real estate ....................................... 179 23
Installment and consumer .......................... 396 528
Direct leases ..................................... -- 2
---------------------
884 1,547
Net Charge-Offs ....................................... 2,491 3,315
Provision charged to expense .......................... 2,500 4,675
---------------------
Balance at end of period .............................. $40,954 $43,475
=====================
Ratio of net-charge-offs during the period
to average loans outstanding during the period (1) 0.31% 0.44%
=====================
(1) On an annualized basis.
40
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. In the near-term, AMCORE expects that
its interest-rate risk will be greater should interest rates decline.
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. Other types of market risk, such as foreign currency
exchange risk and commodity price risk, do not arise in the normal course of
AMCORE's business activities and operations. In addition, since AMCORE does not
hold a trading portfolio, it is not exposed to significant market risk from
trading activities. During the first quarter of 2005, there were no material
changes in AMCORE's primary market risk exposures. Based upon current
expectations, no material changes are anticipated in the future in the types of
market risks facing AMCORE.
Like most financial institutions, 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 or
securities, 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
positions to maximize net interest income while maintaining acceptable levels of
risk to changes in market interest rates. While achievement of this goal
requires a balance between earnings, liquidity and interest rate risk, there are
opportunities to enhance revenues through managed risk. 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, 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, 2005 would be
approximately $764,000 or 0.46% 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 2004, comparable
assumptions would have resulted in a potential decrease in 2005 net interest
income of $934,000 or 0.55%. Thus, AMCORE's earnings at risk for rising rates
has decreased since the end of 2004, as the Company moved from a slightly
liability sensitive position to a slightly asset sensitive position.
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 2005 of $4.9 million or 2.95% of base forecasted net
interest income. At the end of 2004, a similar decrease in rates would have
resulted in a potential decrease in net interest income of $3.2 million or
1.91%. AMCORE's sensitivity to declining interest rates has increased since the
end of 2004. AMCORE continues to have rate compression on non-maturity deposits.
Factors that contribute to the continued negative sensitivity to declining
interest rates include the negative convexity of the mortgage-backed products
and the larger volume of floating rate commercial loans.
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
41
impacted by a variety of external factors, such as those previously noted. In
addition, as interest rates move, the ALCO is likely to adjust interest rate
risk management strategies to limit, to the extent possible, the adverse impact
that such changes in interest rates might otherwise have on AMCORE's net
interest income, as well as maximize potential positive impacts such movements
might have.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
Changes in Internal Controls
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonable likely to materially affect, the
Company's internal control over financial reporting.
42
PART II -- Other Information
- -------
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) none
(b) none
(c) The following table presents information relating to all Company
repurchases of common stock during the first quarter of 2005:
- ------------------------------------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- ------------------------------------------------------------------------------------------------------------
(c) Total # of Shares (d) Maximum # (or Approx.
(a) Total # Purchased as Part of Dollar Value) of Shares
Period of Shares (b) Average Price Publicly Announced that May Yet Be Purchased
Purchased Paid per Share Plans or Programs Under the Plans or Programs
- ------------------------------------------------------------------------------------------------------------
January 1 - 31, 2005 28,236 $28.48 0 0
February 1 - 28, 2005 23,365 29.44 0 0
March 1 - 31, 2005 36,895 28.42 0 0
- ------------------------------------------------------------------------------------------------------------
Total 88,496 $28.71 0 0
============================================================================================================
The Company does not have a formally announced Repurchase Program in place at
this time, however, the Company does repurchase shares in open-market
transactions in accordance with Exchange Act Rule 10b-18 through a limited group
of brokers. These repurchases are used to replenish the Company's Treasury Stock
for re-issuances related to stock options and other employee benefit plans.
Included in the repurchased shares above are direct repurchases from
participants related to the administration of the Amended and Restated AMCORE
Stock Option Advantage Plan. Also included are 19,975 shares tendered to effect
stock option exercise transactions.
ITEM 6. Exhibits
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 February 11, 2004.
(Incorporated by reference to Exhibit 3.2 of AMCORE's Annual
Report on Form 10-K for the year ended December 31, 2003).
10.1 AMCORE Financial, Inc. 2005 Stock Award and Incentive Plan,
(Incorporated by reference to AMCORE's Form 8-K as filed with the
Commission on May 9, 2005).
10.2 Form of Non-Qualified Stock Option Agreement to be used in
connection with the grant of non-qualified stock options under
the AMCORE Financial, Inc. 2005 Stock Award and Incentive Plan,
(Incorporated by reference to AMCORE's Form 8-K as filed with the
Commission on May 9, 2005).
10.3 AMCORE Financial, Inc. Performance Share Program, (Incorporated
by reference to AMCORE's Form 8-K as filed with the Commission on
May 9, 2005).
10.4 AMCORE Financial, Inc. Annual Incentive Plan, (Incorporated by
reference to AMCORE's Form 8-K as filed with the Commission on
May 9, 2005).
31.1 Certification of CEO pursuant to Rule 13a-14 and Rule 15d-14 of
the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Rule 13a-14 and Rule 15d-14 of
the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
43
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 10, 2005
By: /s/ John R. Hecht
----------------------------
John R. Hecht
Executive Vice President and
Chief Financial Officer
44
EXHIBIT INDEX
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 February 11, 2004.
(Incorporated by reference to Exhibit 3.2 of AMCORE's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.1 AMCORE Financial, Inc. 2005 Stock Award and Incentive Plan,
(Incorporated by reference to AMCORE's Form 8-K as filed with the
Commission on May 9, 2005).
10.2 Form of Non-Qualified Stock Option Agreement to be used in connection
with the grant of non-qualified stock options under the AMCORE
Financial, Inc. 2005 Stock Award and Incentive Plan, (Incorporated by
reference to AMCORE's Form 8-K as filed with the Commission on May 9,
2005).
10.3 AMCORE Financial, Inc. Performance Share Program, (Incorporated by
reference to AMCORE's Form 8-K as filed with the Commission on May 9,
2005).
10.4 AMCORE Financial, Inc. Annual Incentive Plan, (Incorporated by
reference to AMCORE's Form 8-K as filed with the Commission on May 9,
2005).
31.1 Certification of CEO pursuant to Rule 13a-14 and Rule 15d-14 of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO pursuant to Rule 13a-14 and Rule 15d-14 of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
45