UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 0-13393
AMCORE FINANCIAL, INC.
NEVADA 36-3183870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Seventh Street, Rockford, Illinois 61104
Telephone number (815) 968-2241
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's Common stock, par value
$.22 per share, at October 31, 1998 was 28,959,014 shares.
Index of Exhibits on Page 22
AMCORE FINANCIAL, INC.
Form 10-Q Table of Contents
PART I Page Number
-----------
ITEM 1 Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 . . . . . . . . . . . . . 2
Consolidated Statements of Stockholders' Equity for the periods ended
September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 5
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . 8
PART II
ITEM 4 Submission of Matters to a Vote of Security Holders . . . . . . . 22
ITEM 6 Exhibits and Reports on Form 10-Q . . . . . . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(in thousands, except per share data) 1998 1997
===================================================================================================================================
ASSETS Cash and cash equivalents.......................................................... $117,737 $105,218
Interest earning deposits in banks................................................. 12,849 2,206
Federal funds sold and other short-term investments................................ 2,907 633
Loans held for sale................................................................ 35,262 29,869
Securities available for sale...................................................... 1,391,186 1,441,593
Securities held to maturity (fair value of $ 17,021 in 1998; $ 15,611 in 1997)..... 16,775 15,423
---------------------------------
Total securities .............................................................. $1,407,961 $1,457,016
Loans and leases, net of unearned income........................................... 2,332,510 1,962,674
Allowance for loan and lease losses................................................ (25,935) (19,908)
---------------------------------
Net loans and leases........................................................... $2,306,575 $1,942,766
Premises and equipment, net ....................................................... 58,201 54,774
Intangible assets, net............................................................. 18,045 12,168
Other real estate owned............................................................ 1,715 1,668
Other assets....................................................................... 77,424 61,372
---------------------------------
TOTAL ASSETS................................................................... $4,038,676 $3,667,690
=================================
LIABILITIES LIABILITIES
AND Deposits:
STOCKHOLDERS' Demand deposits.................................................................. $1,038,289 $915,954
EQUITY Savings deposits................................................................. 181,945 170,882
Other time deposits.............................................................. 1,580,888 1,440,207
---------------------------------
Total deposits................................................................ $2,801,122 $2,527,043
Short-term borrowings.............................................................. 541,186 647,509
Long-term borrowings .............................................................. 315,620 159,125
Other liabilities.................................................................. 54,772 46,537
---------------------------------
TOTAL LIABILITIES............................................................. $3,712,700 $3,380,214
---------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000 shares; none issued......... $ - $ -
Common stock, $.22 par value: authorized 45,000,000 shares;
September 30, December 31,
1998 1997
---- ----
Issued 29,593,495 27,681,138
Outstanding 29,019,845 26,922,604 6,572 6,152
Additional paid-in capital......................................................... 76,977 73,262
Retained earnings ................................................................. 240,142 206,235
Deferred compensation for non-employee directors................................... (1,675) (1,478)
Treasury stock .................................................................... (3,642) (5,069)
Accumulated other comprehensive income............................................. 7,602 8,374
---------------------------------
TOTAL STOCKHOLDERS' EQUITY.................................................... $325,976 $287,476
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $4,038,676 $3,667,690
=================================
See accompanying notes to consolidated financial statements.
1
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(in thousands, except per share data) 1998 1997 1998 1997
===================================================================================================================================
INTEREST Interest and fees on loans and leases................................. $50,163 $42,297 $141,746 $121,899
INCOME Interest on securities:
Taxable............................................................. 19,410 20,637 60,221 56,312
Tax-exempt.......................................................... 4,417 4,239 13,183 12,050
---------------------- ----------------------
TOTAL INCOME FROM SECURITIES..................................... $23,827 $24,876 $73,404 $68,362
---------------------- ----------------------
Interest on federal funds sold and other short-term investments....... $176 $80 $308 $375
Interest and fees on loans held for sale.............................. 695 415 2,093 1,040
Interest on deposits in banks......................................... 118 40 263 71
---------------------- ----------------------
TOTAL INTEREST INCOME............................................ $74,979 $67,708 $217,814 $191,747
---------------------- ----------------------
INTEREST Interest on deposits.................................................. $30,354 $26,091 $86,839 $74,044
EXPENSE Interest on short-term borrowings..................................... 8,567 11,020 27,526 28,396
Interest on long-term borrowings...................................... 4,672 2,555 11,892 6,675
---------------------- ----------------------
TOTAL INTEREST EXPENSE........................................... $43,593 $39,666 $126,257 $109,115
---------------------- ----------------------
NET INTEREST INCOME.............................................. $31,386 $28,042 $91,557 $82,632
Provision for loan and lease losses................................... 2,226 2,673 6,013 6,524
---------------------- ----------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES.... $29,160 $25,369 $85,544 $76,108
---------------------- ----------------------
Trust and asset management income..................................... $6,280 $3,854 $17,534 $11,575
NON-INTEREST Service charges on deposits........................................... 2,447 2,011 6,496 5,942
INCOME Mortgage revenues..................................................... 2,553 1,762 7,628 4,040
Insurance revenues.................................................... 620 364 1,504 1,164
Other................................................................. 2,109 2,596 6,601 9,587
---------------------- ----------------------
NON-INTEREST INCOME, EXCLUDING NET REALIZED SECURITY GAINS....... $14,009 $10,587 $39,763 $32,308
Net realized security gains........................................... 577 574 1,660 1,588
---------------------- ----------------------
TOTAL NON-INTEREST INCOME........................................ $14,586 $11,161 $41,423 $33,896
Compensation expense.................................................. $13,236 $11,475 $38,639 $35,417
OPERATING Employee benefits..................................................... 3,086 2,743 9,888 8,948
EXPENSES Net occupancy expense................................................. 1,736 1,634 5,093 5,252
Equipment expense..................................................... 2,019 1,822 6,143 9,002
Professional fees..................................................... 1,243 699 4,662 5,029
Advertising and business development.................................. 849 675 2,643 2,124
Amortization of intangible assets..................................... 649 560 1,920 1,659
Other................................................................. 6,179 4,761 19,847 16,652
---------------------- ----------------------
TOTAL OPERATING EXPENSES......................................... $28,997 $24,369 $88,835 $84,083
---------------------- ----------------------
Income Before Income Taxes............................................ $14,749 $12,161 $38,132 $25,921
Income taxes.......................................................... 3,871 3,114 9,919 6,603
---------------------- ----------------------
NET INCOME....................................................... $10,878 $9,047 $28,213 $19,318
---------------------- ----------------------
BASIC EARNINGS PER COMMON SHARE....................................... $0.37 $0.34 $0.99 $0.72
DILUTED EARNINGS PER COMMON SHARE..................................... 0.37 0.33 0.98 0.71
DIVIDENDS PER COMMON SHARE............................................ 0.14 0.12 0.40 0.33
AVERAGE COMMON SHARES OUTSTANDING..................................... 29,028 26,882 28,398 26,836
AVERAGE DILUTED SHARES OUTSTANDING.................................... 29,560 27,503 28,930 27,389
See accompanying notes to consolidated financial statements.
2
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Paid-in Retained
(in thousands, except share data) Stock Capital Earnings
-------------------------------------
Balance at December 31, 1996............................................................... $6,134 $68,047 $191,485
-------------------------------------
Comprehensive Income:
Net income....................................................................... - - 28,664
Unrealized holding gains on securities available for sale arising
during the period.......................................................... - - -
Less reclassification adjustment for realized gains included in net income... - - -
-------------------------------------
Net unrealized gains (losses) on securities available for sale................... - - -
-------------------------------------
Comprehensive Income..................................................................... - - 28,664
-------------------------------------
Cash dividends on common stock-$.45 per share............................................ - - (12,130)
Purchase of AMCORE Bank Belleville minority interest..................................... - 1,768 (1,784)
Purchase of 53,000 shares for the treasury............................................... - - -
Three-for-two stock split fractional share payments ..................................... - (18) -
Reissuance of 18,486 treasury shares for Non-Employee
Directors stock plan................................................................... - 244 -
Issuance of 16,377 common shares for directors stock plan................................ 4 106 -
Deferred compensation expense............................................................ - - -
Reissuance of 264,600 treasury shares under stock option plans........................... - 2,678 -
Reissuance of 2,457 treasury shares for employee incentive plans......................... - 21 -
Issuance of 63,743 common shares for employee incentive plan............................. 14 416 -
-------------------------------------
Balance at December 31, 1997............................................................... $6,152 $73,262 $206,235
-------------------------------------
Comprehensive Income:
Net income....................................................................... - - 28,213
Unrealized holding gains on securities available for sale arising
during the period.......................................................... - - -
Less reclassification adjustment for realized gains included in net income... - - -
-------------------------------------
Net unrealized gains (losses) on securities available for sale................... - - -
-------------------------------------
Comprehensive Income..................................................................... - - 28,213
-------------------------------------
Cash dividends on common stock-$.40 per share............................................ - - (11,380)
Purchase of 349,475 shares for the treasury.............................................. - - -
Reissuance of 22,577 treasury shares for Non-Employee
Directors stock plan................................................................... - 283 -
Deferred compensation expense............................................................ - - -
Reissuance of 239,575 treasury shares under stock option plans........................... - 257 -
Reissuance of 2,105 treasury shares for employee incentive plans......................... - - -
Issuance of 1,912,357 common shares for Midwest Federal Financial Corp................... 420 2,314 17,074
Reissuance of 270,139 treasury shares for Investors Management Group Ltd................. - 680 -
Repayment of ESOP loan................................................................... - 181 -
-------------------------------------
Balance at September 30, 1998.............................................................. $6,572 $76,977 $240,142
=====================================
Deferred Accumulated
Compensation Other Total
Non-Employee Treasury Comprehensive Stockholders'
(in thousands, except share data) Directors Stock Income (1) Equity
-------------------------------------------------------
Balance at December 31, 1996............................................... ($1,382) ($4,908) ($1,956) $257,420
------------------------------------------------------
Comprehensive Income:
Net income....................................................... - - - 28,664
Unrealized holding gains on securities available for sale
arising during the period.................................. - - 14,528 14,528
Less reclassification adjustment for realized gains included
in net income.............................................. - - (4,198) (4,198)
------------------------------------------------------
Net unrealized gains (losses) on securities available for sale... - - 10,330 10,330
------------------------------------------------------
Comprehensive Income..................................................... - - 10,330 38,994
------------------------------------------------------
Cash dividends on common stock-$.45 per share............................ - - - (12,130)
Purchase of AMCORE Bank Belleville minority interest..................... (16)
Purchase of 53,000 shares for the treasury............................... - (1,327) - (1,327)
Three-for-two stock split fractional share payments ..................... - - - (18)
Reissuance of 18,486 treasury shares for Non-Employee
Directors stock plan................................................... (356) 112 - -
Issuance of 16,377 common shares for directors stock plan................ (110) - - -
Deferred compensation expense............................................ 370 - - 370
Reissuance of 264,600 treasury shares under stock option plans........... - 1,035 - 3,713
Reissuance of 2,457 treasury shares for employee incentive plans......... - 19 - 40
Issuance of 63,743 common shares for employee incentive plan............. - - - 430
------------------------------------------------------
Balance at December 31, 1997............................................... ($1,478) ($5,069) $18,704 $297,806
------------------------------------------------------
Comprehensive Income:
Net income....................................................... - - - 28,213
Unrealized holding gains on securities available for sale
arising during the period.................................. - - 710 710
Less reclassification adjustment for realized gains
included in net income..................................... - - (1,660) (1,660)
------------------------------------------------------
Net unrealized gains (losses) on securities available for sale... - - (950) (950)
------------------------------------------------------
Comprehensive Income..................................................... - - (950) 27,263
------------------------------------------------------
Cash dividends on common stock-$.40 per share............................ - - - (11,380)
Purchase of 349,475 shares for the treasury.............................. - (8,678) - (8,678)
Reissuance of 22,577 treasury shares for Non-Employee
Directors stock plan................................................... (586) 303 - -
Deferred compensation expense............................................ 389 - - 389
Reissuance of 239,575 treasury shares under stock option plans........... - 3,519 - 3,776
Reissuance of 2,105 treasury shares for employee incentive plans......... - 41 - 41
Issuance of 1,912,357 common shares for Midwest Federal Financial Corp... - - 178 19,986
Reissuance of 270,139 treasury shares for Investors Management Group Ltd. - 6,242 - 6,922
Repayment of ESOP loan................................................... - - - 181
------------------------------------------------------
Balance at September 30, 1998.............................................. ($1,675) ($3,642) $16,982 $335,356
======================================================
(1) Net unrealized gain (loss) on securities available for sale, net of taxes.
See accompanying notes to consolidated financial statements.
3
AMCORE Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
(in thousands) 1998 1997
============================================================================================================
CASH FLOWS Net income.......................................................... $28,213 $19,318
FROM Adjustments to reconcile net income to net
OPERATING cash provided by operating activities:
ACTIVITIES Depreciation and amortization of premises and equipment........ 5,118 6,027
Amortization and accretion of securities, net.................. 6,892 1,492
Provision for loan and lease losses............................ 6,013 6,524
Amortization of intangible assets.............................. 1,920 1,659
Net realized security gains.................................... (1,660) (1,588)
Deferred income taxes.......................................... 4,416 (2,716)
Originations of loans held for sale............................ (318,416) (148,957)
Proceeds from sales of loans held for sale..................... 314,880 141,332
Other, net..................................................... 1,511 2,279
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $48,887 $25,370
-------------------------
CASH FLOWS Proceeds from maturities of securities available for sale........... $340,163 $144,897
FROM Proceeds from maturities of securities held to maturity............. 1,275 8,262
INVESTING Proceeds from sales of securities available for sale................ 277,177 213,326
ACTIVITIES Purchase of securities held to maturity............................. (3,893) (14,197)
Purchase of securities available for sale........................... (546,923) (646,835)
Net (increase) decrease in federal funds sold
and other short-term investments................................. (2,274) 20,289
Proceeds from the sale of credit card receivables................... 5,756 15,457
Proceeds from the sale of consumer finance loans and leases......... 4,908 1,798
Net increase in interest earning deposits in banks.................. (10,638) (876)
Loans made to customers and principal collection of loans, net...... (212,859) (118,246)
Premises and equipment expenditures, net............................ (4,307) (4,221)
Investment in company owned life insurance.......................... (10,630) (1,816)
Proceeds from the sale of other real estate......................... 2,294 790
Net cash and cash equivalents acquired through acquisitions......... 5,763 -
-------------------------
NET CASH REQUIRED FOR INVESTING ACTIVITIES.................. ($154,188) ($381,372)
-------------------------
CASH FLOWS Net increase (decrease) in demand deposits and savings accounts..... $59,252 ($239)
FROM Net increase in time deposits....................................... 51,226 121,157
FINANCING Net (decrease) increase in short-term borrowings.................... (110,723) 198,619
ACTIVITIES Proceeds from long-term borrowings.................................. 134,800 59,571
Payment of long-term borrowings..................................... (494) (15,210)
Dividends paid...................................................... (11,380) (8,896)
Issuance of common stock for employee incentive plans............... - 430
Issuance of treasury stock for employee incentive plans............. 3,817 2,715
Purchase of treasury stock.......................................... (8,678) -
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... $117,820 $358,147
--------------------------
Net change in cash and cash equivalents............................. $12,519 $2,145
Cash and cash equivalents:
Beginning of year................................................. 105,218 105,347
--------------------------
End of period..................................................... $117,737 $107,492
==========================
SUPPLEMENTAL Cash payments for:
DISCLOSURES OF Interest paid to depositors....................................... $85,884 $73,699
CASH FLOW Interest paid on borrowings....................................... 39,866 32,986
INFORMATION Income taxes paid................................................. 8,517 8,503
NON-CASH Other real estate acquired in settlement of loans................... 2,291 1,437
ACTIVITIES Common stock issued for Midwest Federal Financial Corp.............. 19,986 -
Treasury stock issued for Investors Management Group, Ltd........... 6,922 -
Transfer of held to maturity securities to available for sale....... - 31,018
See accompanying notes to consolidated financial statements.
4
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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 generally accepted accounting principles for interim
financial reporting and with instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, these financial statements do not include all the
information and footnotes required by generally accepted accounting principles.
These financial statements include, however, all adjustments (consisting of
normal recurring accruals), which in the opinion of management, are considered
necessary for the fair presentation of the financial position and results of
operations for the periods shown.
The consolidated financial statements and the financial information have not
been restated to reflect the merger with Midwest Federal Financial Corp.
("Midwest") on March 27, 1998, which was accounted for using the pooling of
interests method. Prior period restatement is not required for Midwest because
of its size relative to AMCORE. Operating results for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1998. 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, 1997.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is based on dividing net income by the weighted average
number of shares of common stock outstanding. The weighted average common shares
outstanding were 29,028,000 and 26,882,000 for the three months ended September
30 1998 and 1997, respectively, and 28,398,000 and 26,836,000 for the nine
months ended September 30, 1998 and 1997, respectively. Diluted earnings per
share reflects the potential dilution using the treasury stock method that could
occur if stock options granted pursuant to incentive stock plans were exercised
or converted into common stock therefore sharing in the earnings of the Company.
The weighted average diluted shares outstanding were 29,560,000 and 27,503,000
for the three months ended September 30, 1998 and 1997 respectively, and
28,930,000 and 27,389,000 for the nine months ended September 30, 1998 and 1997,
respectively. Prior year's earnings per share amounts have been restated to give
effect to the 1997 mergers accounted for as a pooling of interests requiring
restatement and the three-for-two stock split on September 17, 1997.
5
NOTE 3 - SECURITIES
A summary of securities at September 30, 1998 and December 31, 1997 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
(in thousands)
At September 30, 1998
Securities Available for Sale:
U.S. Treasury $75,027 $1,436 ($1) $76,462
U.S. Government agencies 130,045 1,145 (2) 131,188
Agency mortgage-backed securities 697,122 9,094 (13,793) 692,423
State and political subdivisions 341,121 15,207 (64) 356,264
Corporate obligations and other 135,243 685 (1,079) 134,849
-----------------------------------------------------------
Total Securities Available for Sale $1,378,558 $27,567 ($14,939) $1,391,186
===========================================================
Securities Held to Maturity:
U.S. Treasury $1,554 $20 - $1,574
U.S. Government agencies 27 - - 27
State and political subdivisions 15,193 268 (42) 15,419
Corporate obligations and other 1 - - 1
-----------------------------------------------------------
Total Securities Held to Maturity $16,775 $288 ($42) $17,021
-----------------------------------------------------------
Total Securities $1,395,333 $27,855 ($14,981) $1,408,207
===========================================================
At December 31, 1997
Securities Available for Sale:
U.S. Treasury $104,132 $836 ($84) $104,884
U.S. Government agencies 267,696 938 (833) 267,801
Agency mortgage-backed securities 586,285 5,651 (1,948) 589,988
State and political subdivisions 316,028 10,069 (189) 325,908
Corporate obligations and other 153,501 458 (947) 153,012
-----------------------------------------------------------
Total Securities Available for Sale $1,427,642 $17,952 ($4,001) $1,441,593
===========================================================
Securities Held to Maturity:
U.S. Treasury $1,554 $7 - $1,561
State and political subdivisions 13,866 207 (26) 14,047
Corporate obligations and other 3 - - 3
-----------------------------------------------------------
Total Securities Held to Maturity $15,423 $214 ($26) $15,611
-----------------------------------------------------------
Total Securities $1,443,065 $18,166 ($4,027) $1,457,204
===========================================================
6
NOTE 4 - LONG-TERM BORROWINGS
On March 25, 1997, the Company issued $40 million of capital securities through
AMCORE Capital Trust I ("Trust"), a statutory business trust. All of the common
securities of the Trust are owned by the Company. The capital securities pay
cumulative cash distributions semiannually at an annual rate of 9.35%. The
securities are redeemable from March 25, 2007 until March 25, 2017 at a
declining rate of 104.6750% to 100.0% of the principal amount. After March 25,
2017, they are redeemable at par until June 15, 2027 when redemption is
mandatory. Prior redemption is permitted under certain circumstances, such as
changes in tax or regulatory capital rules. The proceeds of the capital
securities were invested by the Trust in junior subordinated debentures which
represents all of the assets of the Trust. The Company fully and unconditionally
guarantees the capital securities through the combined operation of the
debentures and other related documents. The Company's obligations under the
guarantee are unsecured and subordinate to senior and subordinated indebtedness
of the Company.
Several of the Company's subsidiary banks borrow from the Federal Home Loan Bank
(FHLB) in connection with the purchase of mortgage-backed securities. The
current balance of these borrowings is $302,346,000 with an average maturity of
6.4 years, and a weighted average borrowing rate of 5.36%.
Other long-term borrowings include a non-interest bearing note requiring annual
payments of $444,000 through 2002. The note was discounted at an interest rate
of 8.0%
Scheduled reductions of long-term borrowings are as follows:
==========================================================================
(in thousands) Total
- - --------------------------------------------------------------------------
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,987
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 28,969
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 35,598
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 498
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 65,763
Thereafter . . . . . . . . . . . . . . . . . . . . . . . 188,105
- - --------------------------------------------------------------------------
SUB-TOTAL . . . . . . . . . . . . . . . . . . . . . $343,920
Less current portion of FHLB borrowings . . . . . . . . (28,300)
- - --------------------------------------------------------------------------
TOTAL LONG-TERM BORROWINGS . . . . . . . . . . . . $315,620
==========================================================================
7
AMCORE FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis focuses on the significant factors which
affected AMCORE Financial, Inc. and subsidiaries ("AMCORE") Consolidated Balance
Sheet as of September 30, 1998 as compared to December 31, 1997 and the results
of operations for the three and nine months ended September 30, 1998 as compared
to the same periods in 1997. This discussion is intended to be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this report.
This review contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to the results
of operations and businesses of AMCORE. Contemplated or projected, forecasted or
estimated results in such forward-looking statements involve certain risks and
uncertainties including, among others, the following possibilities: (I)
heightened competition, including specifically the intensification of price
competition, the entry of new competitors and the formation of new products by
new and existing competitors; (II) adverse state and federal legislation and
regulation; (III) failure to obtain new customers and retain existing customers;
(IV) inability to carry out marketing and/or expansion plans; (V) loss of key
executives; (VI) changes in interest rates including the effect of prepayment;
(VII) general economic and business conditions which are less favorable than
expected; (VIII) unanticipated changes in industry trends; (IX) changes in
Federal Reserve Board monetary policies; (X) inability to realize cost savings
anticipated with mergers or data processing outsourcing; and (XI) higher than
expected costs or other difficulties associated with merger integration, data
processing conversion or year 2000 compliance solutions.
OVERVIEW OF OPERATIONS
AMCORE's net income for the three months ended September 30, 1998 was $10.9
million, an increase of $1.9 million or 20.2% from the $9.0 million in the 1997
comparable period. The earnings for the nine months ended September 30, 1998
were $28.2 million, an increase of $8.9 million or 46.0% from the $19.3 million
reported in 1997. Net income from operations, which excludes $3.3 million of
after-tax merger related charge in the first quarter of 1998 and $6.4 million of
after-tax charges related to the Wisconsin bank mergers and the outsourcing of
core bank data processing in the second quarter of 1997, was $31.5 million and
$25.8 million for the nine months ended September 30, 1998 and 1997,
respectively. This represents an increase of $5.7 million or 22.4% in net income
from operations, when comparing the first nine months of 1998 and 1997.
8
Diluted earnings per share were $0.37 and $0.98 for the three and nine month
periods ended September 30, 1998. Diluted earnings per share increased $0.04 or
12.1% when comparing the third quarter of 1998 and 1997, respectively. Diluted
earnings per share from operations for the nine months ended September 30, 1998
and 1997 were $1.09 and $0.94, respectively, an increase of $0.15 or 16.0%.
AMCORE's return on equity from operations increased to 13.44% in the third
quarter of 1998 when compared to 13.16% for the same period in 1997. The third
quarter return on assets from operations also increased to 1.06% in 1998 versus
0.99% in 1997.
The primary factors contributing to the improved operating earnings performance
in the third quarter included increases in net interest income resulting from
average earning asset growth of 11.7% and non-interest income growth mainly from
trust and asset management income.
On January 28, 1998, AMCORE completed the sale of the satellite dish receivables
(approximately $14.0 million) which were transferred to held for sale at
year-end 1997.
On February 17, 1998, AMCORE completed its merger with Investors Management
Group, LTD ("IMG") of Des Moines, Iowa. AMCORE issued 270,139 shares at closing
with additional shares to be issued contingent upon IMG's future performance.
IMG is Iowa's largest independent asset management firm with more than $1.6
billion of assets under management. IMG's expertise in fixed income securities
will complement AMCORE's equity management skills. Including the Vintage family
of mutual funds, assets under management now total over $4.3 billion. The
transaction was accounted for using the purchase method of accounting.
On March 27, 1998, AMCORE completed its acquisition of Midwest Federal Financial
Corp. ("Midwest") of Baraboo, Wisconsin. AMCORE issued 1,912,357 shares of
common stock to the Midwest shareholders to effect the merger. Midwest has
approximately $211 million of assets and nine locations. The transaction was
accounted for as a pooling of interests, however, the size of the transaction
does not require restatement of prior period amounts.
On October 21, 1998, AMCORE announced that the executive committee of the Board
of Directors has authorized the repurchase of up to five percent of its common
stock. The repurchased shares will become treasury shares and will be used for
general corporate purposes, including the issuance of shares in connection with
AMCORE's stock option and other employee benefit plans.
9
Year 2000 compliance involves significant business risks to AMCORE.
Non-compliance could result in systems failure or miscalculations causing
disruptions in operations including: a temporary inability to process
transactions, send invoices or statements, or engage in normal business
activities. Additionally, AMCORE is subject to risk that its customers,
particularly loan customers, and third parties with whom AMCORE has business
transactions may fail to be a Year 2000 compliant.
AMCORE has established a project team to prepare for the year 2000. The
outsourcing of the core mainframe system to ALLTEL during 1998 is expected to
address the primary operating systems of AMCORE. AMCORE has taken an active
approach toward addressing this issue, and is currently in the process of
assessing its information systems, testing and validating in-house systems, and
obtaining validation and certification of outside systems in an effort to
identify and correct potential problems in advance of the year 2000. The testing
of all mission critical system is in process and is scheduled to be completed by
December 31,1998. At this point, the internal costs associated with the year
2000 during 1998 and 1999 are estimated at approximately $2.5 million of which
$1.4 million is for replacement hardware and software. These items are not
anticipated to have a material impact on future performance. Approximately
$500,000 has been expensed during the first nine months of 1998. Contingency
plans for certain Year 2000 risks not within the Company's direct control are
being developed.
AMCORE continues to be "well capitalized" as defined by regulatory guidelines.
At September 30, 1998, the Company's total capital to risk weighted assets was
13.98%.
EARNINGS ANALYSIS
The analysis below discusses by major components the changes in net income when
comparing the three and nine months ended September 30, 1998 and 1997.
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 municipal 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" basis. The
fully taxable equivalent adjustment was calculated using the statutory federal
income tax rate of 35%. Adjusted interest income is as follows (in thousands):
For the Three Months For the Nine Months
Ended September 30 Ended September 30
------------------------------------------------------
1998 1997 1998 1997
======================================================
Interest Income Book Basis $74,979 $67,708 $217,814 $191,747
Taxable Equivalent Adjustment 2,570 2,392 7,527 6,807
------------------------------------------------------
Interest Income Taxable Equivalent Basis 77,549 70,100 225,341 198,554
Interest Expense 43,593 39,666 126,257 109,115
------------------------------------------------------
Net Interest Income Taxable Equivalent Basis
$33,956 $30,434 $99,084 $89,439
======================================================
Net interest income on a fully taxable equivalent basis increased $3.5 million
or 11.6% during the third quarter of 1998 over the same period in 1997. The
improvement in net interest income results mainly from a 11.7% increase in
average earning assets.
10
The growth in average earning assets can be attributed primarily to strong loan
growth. Average loans increased $393.8 million or 20.7% when comparing the third
quarters of 1998 and 1997. The Midwest acquisition accounted for $178.8 million
of the growth in average loans. Excluding this acquisition, average loans
increased 11.3%.
An investment leveraging program, which is designed to better utilize capital,
averaged approximately $872.5 million an increase of $25.1 million from the
third quarter of 1997. The program is funded primarily through the use of
repurchase agreements, Federal Home Loan Bank borrowings and wholesale deposits.
The proceeds of these borrowings are invested principally in mortgage-backed and
U.S. government agency securities. This program contributed approximately $2.8
million to net interest income during the third quarter of 1998, a decrease of
$547,000 when compared to the same period in 1997. The income from this program
declined as the spread decreased due to prepayments on mortgage-backed
securities while funding costs remained relatively flat. This trend is
anticipated to continue for the remainder of 1998. Prepayments on
mortgage-backed securities and the continuation of an interest rate environment
which is unfavorable for reinvestment is anticipated to cause a decline in the
size of this program as it relates to volume and interest income.
The net interest spread is the difference between the average rates on
interest-earning assets and the average rates on interest-bearing liabilities.
The interest rate margin represents net interest income divided by average
earning assets. These ratios can also be used to analyze net interest income.
Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and stockholders' equity, the
effective rate paid for all funding sources is lower than the rate paid on
interest-bearing liabilities alone.
As the table below indicates, the interest rate spread decreased 2 basis points
to 2.89% in the third quarter of 1998 when compared to the 2.91% during the same
period in 1997. The net interest margin was 3.52% during the third quarter of
both 1998 and 1997. The interest rate spread on the investment securities
included in the investment leveraging program was 126 and 155 basis points for
the quarters ended September 30, 1998 and 1997, respectively. The interest rate
spread on all other earning assets was 3.39% and 3.38% during the comparable
periods. As a result, the performance of the leveraging program accounted for
the decline in the interest rate spread.
The net interest margin spread and interest rate margin were 2.87% and 3.52% for
the first nine months of 1998, respectively. These represent a decrease of 12
and 10 basis points when compared to the same period in 1997.
11
Quarter Ended Quarter Ended
September 30, 1998 September 30, 1997
---------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Assets
- - ------
Interest-Earning Assets:
Taxable securities $1,146,254 $19,410 6.77% $1,204,672 $20,637 6.85%
Tax-exempt securities (1) 349,523 6,842 7.83% 308,275 6,543 8.49%
-------------------------------------------------------------------------------
Total Securities (2) 1,495,777 26,252 7.02% 1,512,947 27,180 7.19%
Loans held for sale (3) 25,892 398 6.15% 13,538 238 7.03%
Loans (1) (4) 2,291,383 50,309 8.67% 1,897,633 42,406 8.89%
Other earning assets 22,993 293 4.99% 9,633 99 4.07%
Fees on mortgage loans held for sale (3) - 297 - - 177 -
---------- ---------- ------ ---------- ---------- -----
Total Interest-Earning Assets $3,836,045 $77,549 8.02% $3,433,751 $70,100 8.14%
Noninterest-Earning Assets:
Cash and due from banks 86,354 88,550
Other assets 157,648 130,827
Allowance for loan losses (25,262) (20,411)
---------- ----------
Total Assets $4,054,785 $3,632,717
========== ==========
Liabilities and Stockholders' Equity
- - ------------------------------------
Interest-Bearing Liabilities:
Interest-bearing demand and savings
deposits $883,595 $7,010 3.15% $733,552 $4,192 2.29%
Time deposits 1,578,955 23,344 5.87% 1,402,316 21,899 6.26%
---------- ---------- ------ ---------- ---------- -----
Total interest-bearing deposits 2,462,550 30,354 4.89% 2,135,868 26,091 4.90%
Short-term borrowings 592,642 8,567 5.67% 755,351 11,020 5.78%
Long-term debt 307,038 4,672 6.04% 139,420 2,555 7.35%
---------- ---------- ------ ---------- ---------- -----
Total Interest-Bearing Liabilities $3,362,230 $43,593 5.13% $3,030,639 $39,666 5.23%
Noninterest-Bearing Liabilities:
Demand deposits 318,143 285,716
Other liabilities 53,388 43,541
---------- ----------
Total Liabilities $3,733,761 $3,359,896
Stockholders' Equity 321,024 272,821
---------- ----------
Total Liabilities and
Stockholders' Equity $4,054,785 $3,632,717
========== ==========
Net Interest Income $33,956 $30,434
======= =======
Net Interest Spread 2.89% 2.91%
==== ====
Interest Rate Margin 3.52% 3.52%
==== ====
Notes:
(1) The interest on tax-exempt investment securities and tax-exempt
loans is calculated on a tax equivalent basis assuming a federal
tax rate of 35%.
(2) The average balances of the investments are based on amortized
historical cost.
(3) The yield-related fees recognized from the origination of mortgage
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.
12
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
---------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Assets
- - ------
Interest-Earning Assets:
Taxable securities $1,182,795 $60,221 6.79% $1,122,400 $56,312 6.69%
Tax-exempt securities (1) 340,649 20,282 7.94% 284,412 18,538 8.69%
-------------------------------------------------------------------------------
Total Securities (2) 1,523,444 80,503 7.05% 1,406,812 74,850 7.10%
Loans held for sale (3) 27,470 1,334 6.47% 11,125 586 7.02%
Loans (1) (4) 2,158,692 142,174 8.74% 1,843,032 122,218 8.80%
Other earning assets 14,257 571 5.28% 11,217 446 5.24%
Fees on mortgage loans held for sale (3) - 759 - - 454 -
---------- ---------- ------ ---------- ---------- -----
Total Interest-Earning Assets $3,723,863 $225,341 8.04% $3,272,186 $198,554 8.07%
Noninterest-Earning Assets:
Cash and due from banks 91,290 87,901
Other assets 150,478 120,740
Allowance for loan losses (23,469) (19,975)
---------- ----------
Total Assets $3,942,162 $3,460,852
========== ==========
Liabilities and Stockholders' Equity
- - ------------------------------------
Interest-Bearing Liabilities:
Interest-bearing demand and savings
deposits $834,360 $19,354 3.10% $724,260 $14,790 2.73%
Time deposits 1,527,321 67,485 5.91% 1,350,422 59,254 5.87%
---------- ---------- ------ ---------- ---------- -----
Total interest-bearing deposits 2,361,681 86839 4.92% 2,074,682 74,044 4.77%
Short-term borrowings 637,758 27526 5.70% 658,692 28,396 5.70%
Long-term debt 259,956 11,892 6.12% 131,704 6,675 6.78%
---------- ---------- ------ ---------- ---------- -----
Total Interest-Bearing Liabilities $3,259,395 $126,257 5.17% $2,865,078 $109,115 5.08%
Noninterest-Bearing Liabilities:
Demand deposits 319,958 291,190
Other liabilities 52,754 40,805
---------- ----------
Total Liabilities $3,632,107 $3,197,073
Stockholders' Equity 310,055 263,779
---------- ----------
Total Liabilities and
Stockholders' Equity $3,942,162 $3,460,852
========== ==========
Net Interest Income $99,084 $89,439
======= =======
Net Interest Spread 2.87% 2.99%
==== ====
Interest Rate Margin 3.52% 3.62%
==== ====
Notes:
(1) The interest on tax-exempt investment securities and tax-exempt
loans is calculated on a tax equivalent basis assuming a federal
tax rate of 35%.
(2) The average balances of the investments are based on amortized
historical cost.
(3) The yield-related fees recognized from the origination of mortgage
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.
13
The level of net interest income is the result of the relationship between 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 are segregated in the table below to analyze the changes in net
interest income. Because of changes in the mix of the components of
interest-earning assets and interest-bearing liabilities, the computations for
each of the components do not equal the calculation for interest-earning assets
as a total and interest-bearing liabilities as a total. The table below presents
an analysis of the changes in net interest income.
Quarter Ended
September 30, 1998 / September 30, 1997
(in thousands)
--------------------------------------------------------------------
Increase (Decrease) Due to Change in Total Net
Average Volume Average Rate Increase (Decrease)
--------------------------------------------------------------------
Interest Income:
Taxable Securities $ (919) ($308) ($1,227)
Tax-Exempt Securities (1) 832 (533) 299
--------------------------------------------------------------------
Total Securities (2) (87) (841) (928)
Mortgage Loans Held for Sale 193 (33) 160
Loans (1) (4) 8,327 (425) 7,902
Other Earning Assets 166 28 194
Fees on Mortgage Loans Held for Sale (3) 102 18 120
--------------------------------------------------------------------
Total Interest-Earning Assets $8,256 ($807) $7,448
--------------------------------------------------------------------
Interest Expense:
Interest-Bearing Demand & Savings Deposits $982 $1,836 $2,818
Time Deposits 2,671 (1,226) 1,445
--------------------------------------------------------------------
Total Interest-Bearing Deposits 4,083 180 4,263
Short-Term Borrowings (2,361) (94) (2,454)
Long-Term Debt 2,623 (506) 2,117
--------------------------------------------------------------------
Total Interest-Bearing Liabilities $4,345 ($420) $3,926
--------------------------------------------------------------------
Net Interest Margin / Net Interest Income (FTE) $3,911 ($387) $3,522
====================================================================
The above table shows the changes in interest income (tax equivalent) and
interest expense attributable to volume and rate variances. The change in
interest income (tax equivalent) due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
1. The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
2. The average balances of the investments are based on amortized historical
cost.
3. The yield-related fees recognized from the origination of mortgage 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 non-accrual loans are included in average loans
outstanding. Interest on loans includes yield-related loan fees.
The change in net interest income due to change in average volume when comparing
the third quarter of 1998 and 1997 is the result of average loans increasing
20.7%. The positive effect of the growth in higher rate earning assets was
offset by a 15.3% increase in average interest bearing deposits.
14
The portion of the decrease in net interest income attributable to changes in
average rate between the third quarter of 1998 and 1997 is due to the yield on
earning assets declining 12 basis points while the rate on interest bearing
liabilities declined 10 basis points. This occurred as the decline in market
rates has had greater impact on earning assets due to repricing and prepayments.
For Nine Months Ended
September 30, 1998 / September 30, 1997
(in thousands)
--------------------------------------------------------------------
Increase (Decrease) Due to Change in Total Net
Average Volume Average Rate Increase (Decrease)
--------------------------------------------------------------------
Interest Income:
Taxable Securities $3,367 $542 $3,909
Tax-Exempt Securities (1) 3,445 (1,701) 1,744
--------------------------------------------------------------------
Total Securities (2) 6,812 (1,159) 5,653
Mortgage Loans Held for Sale 797 (49) 748
Loans (1) (4) 19,721 234 19,955
Other Earning Assets 122 3 125
Fees on Mortgage Loans Held for Sale (3) 8 297 305
--------------------------------------------------------------------
Total Interest-Earning Assets $27,546 $(760) $26,786
--------------------------------------------------------------------
Interest Expense:
Interest-Bearing Demand & Savings Deposits $2,410 $2,154 $4,564
Time Deposits 7,813 418 8,231
--------------------------------------------------------------------
Total Interest-Bearing Deposits 10,643 2,152 12,795
Short-Term Borrowings (906) 34 (871)
Long-Term Debt 5,925 (708) 5,217
--------------------------------------------------------------------
Total Interest-Bearing Liabilities $15,662 $1,478 $17,141
--------------------------------------------------------------------
Net Interest Margin / Net Interest Income (FTE) $11,884 ($2,238) $9,645
====================================================================
The above table shows the changes in interest income (tax equivalent) and
interest expense attributable to volume and rate variances. The change in
interest income (tax equivalent) due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
1. The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
2. The average balances of the investments are based on amortized historical
cost.
3. The yield-related fees recognized from the origination of mortgage 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 non-accrual loans are included in average loans
outstanding. Interest on loans includes yield-related loan fees.
The change in net interest income attributable to change in average volume
during the first nine months of 1998 is due to average earning assets increasing
13.8%. The growth in earning assets is due to a $315.7 million increase in
average loans and a $116.6 million increase in average investment securities.
This growth was funded primarily by a $128.3 million increase in average
long-term borrowed funds and a $287.0 million increase in average interest
bearing deposits.
15
The decrease in net interest income attributable to rate during the first nine
months of 1998 is a result of yield on earning assets decreasing 3 basis points
while the rate paid on interest bearing liabilities increased 9 basis points.
The 37 basis point increase in the rate paid on interest bearing demand and
savings deposits contributed to the increase in the rate paid on average total
interest-bearing liabilities. This increase is related to promotional pricing on
the new AMDEX money market account which is attractive for customers desiring
liquidity or as a FDIC-insured mutual fund alternatives.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $2.2 million during the third
quarter of 1998 a decrease of $447,000 or 16.7% from the same period in 1997.
The decrease is a result of lower net charge-offs as a percentage of average
loans, due primarily to high levels of charge-offs of satellite receivables in
1997. Annualized net charge-offs represented 0.15% of average loans in 1998
versus 0.30% in 1997.
The provision for loan losses for the first nine months of 1998 was $6.0 million
a decrease of $511,000 or 7.8% from the same period in 1997, also due to the
aforementioned charge-off levels of satellite receivables in 1997. Annualized
net charge-offs represented 0.13% of average loans in 1998 versus 0.32% in 1997.
The allowance for loan losses as a percent of total loans was 1.11%, 1.12% and
1.01% as of September 30, 1998 and 1997 and December 31, 1997, respectively. The
allowance for loan losses as a percent of non-performing loans was 134.57%,
110.84% and 100.20% as of September 30, 1998 and 1997 and December 31, 1997,
respectively.
NON-INTEREST INCOME
Total non-interest income was $14.6 million in the third quarter of 1998, an
increase of $3.4 million or 30.7% from the same period in 1997. Adjusting for
the previously mentioned first quarter of 1998 acquisitions of IMG and Midwest,
non-interest income would have increased $1.3 million or 11.3%. On a
year-to-date basis, the increase in non-interest income is $7.5 million or
22.2%. The first quarter of 1997 included a $1.9 million gain on the sale of
most of the company's credit card receivables less a $742,000 reduction in
mortgage revenue resulting from the write down of mortgage servicing rights as
required by FAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments in Liabilities" which was effective January 1, 1997.
Excluding these two 1997 items and the first quarter of 1998 acquisitions of IMG
and Midwest, non-interest income for the first nine months of 1998 increased
11.2% over the same period in 1997.
16
Trust and asset management income increased 62.9% or $2.4 million to total $6.3
million for the third quarter of 1998 versus the same period in 1997. The
previously mentioned acquisition of IMG accounted for $1.4 million of the
increase. The remaining $1.0 million or 26.1% of the increase is attributable to
strong sales efforts and the strength in the investment markets during the first
half of 1998. Trust and asset management income is dependent on the level of
assets under management and investment performance. The recent volatility in the
capital and equity markets could impact the future level of fees. The market
value of mutual fund assets increased to $1.1 billion in the Vintage family of
funds, an increase of 31.2% from September 30, 1997. A portion of the increase
reflects the addition of $146 million of IMG funds to the Vintage family.
Service charges on deposits increased $436,000 or 21.7% to $2.4 million during
the third quarter of 1998. Approximately one-half of the increase is
attributable to the previously mentioned Midwest acquisition.
Mortgage revenues continued to benefit from the lower level of long term rates
which resulted in increased refinancing activity. The third quarter of 1998
included a $791,000 or 44.9% increase in mortgage revenues as originations
remained above the $100 million level. Approximately 65% of third quarter
originations resulted from refinancing activity, which could be impacted if
mortgage rates rise.
Insurance revenues rose $256,000 or 70.3% to $620,000 when compared to the third
quarter of 1997. The increase results from higher sales of credit life
insurance.
Other income decreased $487,000 due to the sale of the collection agency at year
end 1997.
OPERATING EXPENSES
Operating expense totaled $29.0 million during the third quarter of 1998, an
increase of $4.6 million or 19.0% from the same period in 1997. Adjusting for
the previously mentioned first quarter of 1998 acquisitions of IMG and Midwest,
operating expense would have increased $1.9 million or 8.0%. Year-to-date
operating expenses increased $4.8 million or 5.7 % as the additional expenses of
Midwest and IMG were offset by the decrease in merger and data processing
outsourcing charges.
The major category changes for third quarter 1998 versus third quarter 1997
not primarily related to the above mentioned 1998 mergers are detailed below.
Compensation expenses increased $1.8 million or 15.3% when comparing the third
quarter of 1998 to the same period in 1997. Excluding the increase in
compensation expense related to the previously mentioned 1998 acquisitions of
Midwest and IMG compensation expenses increased $602,000 or 5.2%. The remaining
increase represents increased staff levels, merit increases, and increased sales
commissions.
17
Professional fees increased $544, 000 or 77.8% when comparing the third quarter
of 1998 to the same period in 1997. This increase relates primarily to fees paid
to outsourced internal auditors and timing of payments to the new external
auditors. A portion of this increase is offset in compensation expenses as a
result of reducing internal audit positions.
Other expenses increased $1.4 million or 29.8% when comparing the third quarter
of 1998 to the same period in 1997. This increase is the result of an increased
valuation allowance for the possible impairment of originated mortgage servicing
rights and the first payments to ALLTEL for outsourced Data Processing. If
mortgage rates continue to decline, the valuation allowance for possible
impairment of originated mortgage servicing rights could be impacted.
INCOME TAXES
Income tax expense for the third quarter of 1998 increased $757,000 to $3.9
million primarily as a result of the increased income before taxes including the
effect of the 1997 merger and core bank data processing outsourcing charges. The
third quarter of 1998 effective tax rate of 26.2% compares to a 25.6% effective
tax rate for the same period in 1997. This increase in effective tax rate is the
result of increased non-deductible expenses, primarily intangibles from the IMG
acquisition.
BALANCE SHEET REVIEW
Total assets were $4.0 billion at September 30, 1998, an increase of $371.0
million or 10.1% from December 31, 1997. The acquisition of Midwest accounted
for $211.0 million of the increase. Total loans and total deposits increased
$196.5 million or 13.3% annualized and $109.2 million or 5.8% annualized,
respectively, from December 31, 1997 excluding the impact of the Midwest
acquisition. Total investments decreased $74.5 million from December 31, 1997
excluding the impact of the Midwest acquisition. This decrease is primarily the
result of funding requirements due to the strong loan demand and the unfavorable
rate environment for the reinvestment of the mortgage-backed securities. The
increase in long term borrowings is the result of replacing maturing short term
borrowings.
18
ASSET QUALITY REVIEW
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses was $25.9 million at September 30, 1998,
an increase of $6.0 million from December 31, 1997. The portion of the allowance
for loan loss considered unallocated as of September 30, 1998 was $8.8 million.
This includes $2.1 million acquired with Midwest. The allowance represented
1.11% of total loans and 134.57% of non-performing loans at September 30, 1998.
The comparable ratios were 1.01% and 100.20% at December 31, 1997.
Net charge-offs were $879,000 during the third quarter of 1998 versus $1.4
million for the same quarter of 1997. For the nine months ended September 30,
1998 and 1997 net charge-offs were $2.1 million and $4.4 million, respectively.
The decrease of $552,000 for the third quarter and $2.3 million for the nine
month period relate primarily to charge-offs of satellite receivables at the
consumer finance subsidiary in 1997.
An analysis of the allowance for loan losses as of September 30, 1998 and 1997
is presented below:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------------------------------
1998 1997 1998 1997
=====================================================================
Balance at beginning of period $24,588 $20,173 $19,908 $19,295
Charge-Offs:
Commercial loans & leases 633 412 966 600
Real estate loans 64 132 262 426
Installment loans 430 1,103 1,626 3,837
Credit card loans 89 70 329 460
---------------------------------------------------------------------
1,216 1,717 3,183 5,323
Recoveries:
Commercial loans & leases 154 32 478 245
Real estate loans 10 19 37 33
Installment loans 133 219 456 584
Credit card loans 40 16 80 57
---------------------------------------------------------------------
337 286 1,051 919
Net Charge-Offs 879 1,431 2,132 4,404
Provision charged to expense 2,226 2,673 6,013 6,524
Allowance for loan and lease losses
acquired through merger - - 2,146 -
---------------------------------------------------------------------
Balance at end of period $25,935 $21,415 $25,935 $21,415
Ratio of net charge-offs during the period
to average loans outstanding during the
period (1) 0.15% 0.30% 0.13% 0.32%
=====================================================================
(1) On an annualized basis
19
NON-PERFORMING ASSETS
Non-performing assets declined $536,000 or 2.5% from December 31, 1997 to $21.0
million at September 30, 1998. One grain elevator credit represented 15.8% of
non-performing assets. Loans classified as non-performing assets as of September
30, 1998 and December 31, 1997 are presented below.
September 30, December 31,
1998 1997
------------------------------
Impaired Loans:
Non-accrual loans and leases
Commercial $12,275 $10,060
Real Estate 1,561 4,484
Troubled debt restructurings 0 377
Other Non-Performing:
Non-accrual loans (1) 5,437 4,947
---------------------------
Total non-performing loans and leases $19,273 $19,868
===========================
Other real estate owned 1,727 1,668
---------------------------
Total non-performing assets $21,000 $21,536
===========================
Loans 90 days or more past due and still accruing $5,123 $3,386
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio which are exempt from FAS 114.
CAPITAL MANAGEMENT
Total stockholders' equity was $326.0 million at September 30, 1998, an increase
of $38.5 million from December 31, 1997. This includes $17.4 million acquired
with Midwest. The book value per share of AMCORE common stock was $11.23 at
September 30, 1998. AMCORE declared and paid a dividend per share of $.14 in the
third quarter of 1998.
On October 21, 1998, AMCORE announced that the executive committee of the Board
of Directors has authorized the repurchase of up to five percent of its common
stock. The repurchased shares will become treasury shares and will be used for
general corporate purposes, including the issuance of shares in connection with
AMCORE's stock option plans and other employee benefit plans.
20
AMCORE is considered "well capitalized" based on regulatory guidelines. AMCORE's
leverage ratio was 8.42% at September 30, 1998. AMCORE's ratio of Tier I capital
at 12.98% and total risk based capital of 13.98% significantly exceed the
regulatory minimums as indicated in the table below.
September 30, 1998 September 30, 1997
------------------ ------------------
Amount Ratio Amount Ratio
======================================================
Tier 1 Capital $339,704 12.98% $300,027 13.61%
Tier 1 Capital Minimum 104,654 4.00% 88,114 4.00%
------------------------------------------------------
Amount in Excess of Minimum $235,050 8.98% $211,913 9.61%
======================================================
Total Capital $365,639 13.98% $321,442 14.58%
Total Capital Minimum 209,308 8.00% 176,253 8.00%
------------------------------------------------------
Amount in Excess of Minimum $156,331 5.98% $145,189 6.58%
======================================================
Risk Adjusted Assets $2,616,344 $2,204,780
============= ==============
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ITEM 4. Submission of Matters to a Vote of Security Holders
(a)-(c) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (File No. 0-13393).
ITEM 6. Exhibits and Reports on Form 10-Q
(a) 3 Amended and Restated Articles of Incorporation of AMCORE Financial,
Inc. dated May 1, 1990 (Incorporated by reference to Exhibit 23 of
AMCORE's Annual Report on Form 10-K for the year ended December 31,
1989).
3.1 By-laws of AMCORE Financial, Inc. as amended May 17, 1990 (Incorporated
by reference to Exhibit 3.1 of AMCORE's Annual Report of Form 10-K for
the year ended December 31, 1994).
10.1 Executive Insurance Agreement dated August 10, 1990 between AMCORE
Financial, Inc. and the following executives: Kenneth E. Edge, John R.
Hecht and James S. Waddell.
27 Financial Data Schedule
99 Additional exhibits - Press releases dated October 21, 1998.
(b) One report on Form 8-K was filed with the Commission on August 27,
1998, announcing the change in independent auditors to KPMG Peat
Marwick LLP on August 20, 1998 (Incorporated by reference to AMCORE's
Form 8-K as filed with the Commission on August 27, 1998).
One report on Form 8-K/A was filed with the Commission on September 2,
1998, clarifying the change in independent auditors by stating that
McGladrey & Pullen, LLP, resigned as independent accountants of AMCORE
Financial, Inc. on August 20, 1998 (Incorporated by reference to
AMCORE's Form 8-K as filed with the Commission on September 2, 1998).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMCORE Financial, Inc.
(Registrant)
Date: November 16, 1998
/s/ John R. Hecht
-------------------------------------------
John R. Hecht
Executive Vice President and Chief
Financial Officer
(Duly authorized officer of the registrant
and principal financial officer)
23