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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-13393
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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
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.22 par value
Common Stock Purchase Rights
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 1, 2001, 26,086,630 shares of common stock were outstanding and
the aggregate market value of the shares based upon the average of the bid and
asked price held by non-affiliates was approximately $470,473,000.
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Documents Incorporated by Reference:
Portions of the 2001 Notice of Annual Meeting and Proxy Statement are
incorporated by reference into Part III of the Form 10-K.
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AMCORE FINANCIAL, INC.
Form 10-K Table of Contents
Page
Number
------
PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 8
Item 3 Legal Proceedings........................................... 8
Item 4 Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 9
Item 6 Selected Financial Data..................................... 10
Item 7 Management's Discussion and Analysis of the Results of
Operations and Financial Condition.......................... 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk.. 27
Item 8 Financial Statements and Supplementary Data................. 38
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 76
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 76
Item 11 Executive Compensation...................................... 76
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 76
Item 13 Certain Relationships and Related Transactions.............. 76
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 76
Signatures............................................................ 79
2
PART I
ITEM 1. BUSINESS
General
AMCORE Financial, Inc. (AMCORE) is a registered bank holding company
incorporated under the laws of the State of Nevada in 1982. The corporate
headquarters are located at 501 Seventh Street in Rockford, Illinois. The
operations are divided into three business segments: Banking, Trust and Asset
Management, and Mortgage Banking. AMCORE owns directly or indirectly all of
the outstanding common stock of each of its subsidiaries. AMCORE provides the
subsidiaries with advice and counsel on policies and operating matters among
other things.
Banking Segment
AMCORE directly owns AMCORE Bank, N.A. (BANK), a nationally chartered bank.
During 1999, AMCORE combined its nine bank and thrift charters into one bank
charter to improve efficiency, enhance responsiveness to local markets, and
increase shareholder value. AMCORE also directly owns AMCORE Consumer Finance
Company, Inc. (FINANCE), a consumer finance company and indirectly owns
Property Exchange Company, a qualified intermediary, which is a subsidiary of
the BANK. The BANK conducts business at 39 locations throughout northern
Illinois, excluding Cook County and the far northwestern counties. The primary
service region includes the Illinois cities of Rockford, Elgin, Woodstock,
McHenry, Carpentersville, Crystal Lake, Huntley, Sterling, Dixon, Princeton,
Aledo, Rochelle, Ashton, South Beloit, Gridley, Mt. Morris, Mendota, Peru,
Sheffield and Wyanet and the surrounding communities. The BANK conducts
business at 25 locations throughout south central Wisconsin. The primary
service region includes the Wisconsin cities of Madison, Monroe, Clinton,
Argyle, Baraboo, Portage, Mt. Horeb, Montello and the surrounding communities.
Through its banking locations, AMCORE provides various personal banking,
commercial banking and related financial services. AMCORE also conducts
banking business through ten supermarket branches, which gives the customer
convenient access to bank services seven days a week.
Personal Banking--Personal banking services to individuals include demand,
savings and time deposit accounts. Loan services include installment loans,
mortgage loans, overdraft protection, personal credit lines and credit card
programs. AMCORE Vintage Funds, a proprietary family of mutual funds, are also
marketed through each banking location. The Private Banking Group also markets
Vintage Mutual Funds and meets other special needs of high net worth
individuals. Automated teller machines located throughout AMCORE's market area
make banking transactions available to customers when the bank facilities and
hours are not convenient.
Commercial Banking--A wide range of financial services are provided to
commercial, small business and governmental organizations. These services
include, among others, lending, deposits, letters of credit and cash
management services. AMCORE is a Small Business Administration ("SBA")
Preferred Lender in both Illinois and Wisconsin, and ranked number one in
Illinois for the second consecutive year in the number of loans made.
Other Financial Services--The BANK provides various services to consumers,
commercial customers and correspondent banks. Services available include safe
deposit box rental, securities safekeeping, foreign currency exchange, lock
box and other services.
The BANK also offers several electronic banking services to commercial and
retail customers. AMCORE Online! provides retail customers with online
capability to access deposit and loan account balances, transfer funds between
accounts, make loan payments, and pay bills. AMCORE Online! For Business
facilitates access to commercial customers' accounts via personal computers.
It also permits the transfer of funds between accounts and the initiation of
wire transfers and ACH activity to accounts at other financial institutions.
The AMCORE TeleBank service provides retail and commercial customers the
opportunity to use their telephone 24 hours a day to get balance and other
information on their checking and savings accounts, certificates of deposit,
personal installment loans, retail mortgage loans, and Vintage Funds; all from
a completely automated system.
3
In addition to the above mentioned services, a special section on the
AMCORE web site has been devoted to small business owners. The site contains
online business resources including a library of business articles and links
to other internet business sites, as well as AMCORE GoBizGo which allows
businesses to design their own business web site using the available features.
Trust and Asset Management Segment
AMCORE Investment Group, N.A. (AIG) is a nationally chartered non-
depository bank and owns AMCORE Investment Services, Inc. (AIS), Investors
Management Group-Rockford (IMGR) previously known as AMCORE Capital
Management, Inc., Investors Management Group-Des Moines (IMG), and AMCORE
Capital Value, Inc. (ACV). AIG provides trust services, employee benefit plan
and estate administration and various other services to corporations and
individuals.
AIS, a wholly-owned subsidiary of AIG, is incorporated under the laws of
the State of Illinois and is a member of the National Association of Security
Dealers (NASD). AIS is a full-service brokerage company that offers a full
range of investment alternatives including annuities, mutual funds, stocks and
bonds. AIS customers can get real time stock market quotes, investment account
information, and place trades for market hours execution 24 hours a day, 7
days a week through AMCORETrade.com.
IMGR is incorporated under the laws of the State of Illinois and is a
wholly-owned subsidiary of AIG. IMGR is an asset management company whose
primary customers include trust customers, retirement plans, foundations,
endowments and other private investors. IMGR was merged into IMG on January 1,
2001.
IMG is incorporated under the laws of the State of Iowa and is a wholly-
owned subsidiary of AIG. IMG is an asset management company whose primary
clients include AMCORE's Vintage Mutual Funds family, insurance companies,
banks, retirement plans, foundations, endowments, public entities and
individuals. IMG also provides the mutual fund administration for the AMCORE
Vintage Mutual Funds.
ACV became part of AIG through the March 31, 1999, acquisition of Wellmark
Capital Value, Inc. of Des Moines, Iowa. ACV provides complete record-keeping
and other administrative services to 401(k) and other tax-qualified retirement
plans.
Mortgage Segment
AMCORE Mortgage, Inc. (AMI), a wholly-owned subsidiary of the BANK, was
incorporated under the laws of the State of Nevada in 1987. AMI is a full
service mortgage banker providing a broad spectrum of mortgage products to
their customers in addition to providing the BANK with a variety of mortgage
lending products to meet its customer needs. The majority of fixed rate long-
term loans originated by AMI are sold to the secondary market. AMI also
originates adjustable rate and balloon loans for sale to the BANK and other
investors. AMI continues to service most of the loans that are sold.
See Note 17 of the Notes to Consolidated Financial Statements included
under Item 8 of this document for further financial information on AMCORE's
business segments.
Inactive
AMCORE Financial Life Insurance Company (AFLIC), a wholly-owned subsidiary,
is incorporated under the laws of the State of Arizona and is an inactive
subsidiary of AMCORE.
Competition
Active competition exists for all services offered by AMCORE's bank and
non-bank affiliates with other national and state banks, savings and loan
associations, credit unions, finance companies, personal loan companies,
brokerage and mutual fund companies, mortgage bankers, insurance agencies,
financial advisory
4
services, and other financial institutions serving the affiliates' respective
market areas. The principal competitive factors in the banking and financial
services industry are quality of services to customers, ease of access to
services and pricing of services, including interest rates paid on deposits,
interest rates charged on loans, and fees charged for fiduciary and other
professional services.
Since 1982, when Illinois multi-bank holding company legislation became
effective, there have been many bank mergers and acquisitions in Illinois.
These combinations have had the effect of increasing the assets and deposits
of bank holding companies involved in such activities. Illinois legislation,
effective December 1, 1990, permitted bank acquisitions in Illinois by
institutions headquartered in any other state which has reciprocal
legislation, further increasing competition. See "Supervision and Regulation".
On September 29, 1994, Congress passed laws allowing interstate banking and
interstate branching. A year later, nationwide interstate banking became
effective allowing institutions to make acquisitions in any state. Beginning
July 1, 1997, interstate branching became effective, and banks can merge with
affiliate banks or establish de novo branches in any state. Individual states,
however, have the right to opt out of interstate branching. Illinois and
Wisconsin have not opted out.
Employment
AMCORE had 1,333 full-time equivalent employees as of March 1, 2001. AMCORE
provides a variety of benefit plans to its employees including health, dental,
group term life and disability insurance, childcare reimbursement, flexible
spending accounts, retirement, profit sharing, 401(k), stock option, stock
purchase and dividend reinvestment plans. AMCORE believes that its
relationship with its employees is good.
Supervision and Regulation
AMCORE is subject to regulations under the Bank Holding Company Act of
1956, as amended (the Act), and is registered with the Federal Reserve Board
(FRB) under the Act. AMCORE is required by the Act to file quarterly and
annual reports of its operations and such additional information as the FRB
may require and is subject, along with its subsidiaries, to examination by the
FRB.
The acquisition of five percent or more of the voting shares or all or
substantially all of the assets of any bank by a bank holding company requires
the prior approval of the FRB and is subject to certain other federal and
state law limitations. The Act also prohibits, with certain exceptions, a
holding company from acquiring direct or indirect ownership or control of more
than five percent of the voting shares of any company which is not a bank and
from engaging in any business other than banking, managing and controlling
banks or furnishing services to banks and their subsidiaries, except that
holding companies may engage in, and may own shares of companies engaged in,
certain businesses found by the FRB to be "so closely related to banking as to
be a proper incident thereto". On August 31, 1993, the FRB approved an
amendment to add certain activities and to reduce the burden on bank holding
companies that desire to conduct these activities by simplifying the
regulatory review process.
Under current regulations of the FRB, a holding company and its non-bank
subsidiaries are permitted, among other activities, to engage in such banking-
related businesses as sales and consumer finance, equipment leasing, computer
service bureau and software operations, mortgage banking, brokerage and
financial advisory services. The Act does not place territorial restrictions
on the activities of non-bank subsidiaries of bank holding companies. In
addition, federal legislation prohibits acquisition of "control" of a bank or
bank holding company without prior notice to certain federal bank regulators.
"Control" is defined in certain cases as acquisition of ten percent or more of
the outstanding shares of a bank or bank holding company.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure
5
to the depositors of such depository institutions and to the Federal Deposit
Insurance Corporation (FDIC) insurance fund in the event the depository
institution becomes in danger of default or is in default. For example, under
a policy of the Federal Reserve with respect to bank holding company
operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and commit
resources to support such institutions in circumstances where it might not do
so absent such policy. In addition, the "cross-guarantee" provisions of
federal law require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated as a result
of the default of a commonly controlled insured depository institution or for
any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," " significantly undercapitalized" or "critically
undercapitalized" as such terms are defined under regulations issued by each
of the federal banking agencies.
In late 1992, Congress passed the Federal Deposit Insurance Corporation
Improvement Act of 1992 which included many provisions that have had
significant effects on the cost structure and operational and managerial
standards of commercial banks. In addition to provisions for recapitalization
of the Bank Insurance Fund, the Act contains provisions that revise bank
supervision and regulation, including, among many other things, the monitoring
of capital levels, outline additional management reporting and external audit
requirements, and add consumer provisions that include Truth-in-Savings
disclosures.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act
(GLB Act), which among other things, established a comprehensive framework to
permit affiliations among commercial banks, insurance companies and securities
firms. We do not believe that the GLB Act will have a material effect upon our
operations in the near term. However, to the extent the GLB Act permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that offer a wider variety of
financial services than we currently offer and that can aggressively compete
in the markets we currently serve.
The foregoing references to applicable statutes and regulations are brief
summaries thereof and do not purport to be complete and are qualified in their
entirety by reference to such statutes and regulations.
AMCORE is supervised and examined by the FRB. The BANK, AMI and AIG are
supervised and regularly examined by the Office of the Comptroller of the
Currency (OCC) and are subject to examination by the FRB. In addition, the
BANK is subject to periodic examination by the FDIC.
FINANCE is regulated by the Illinois Department of Financial Institutions.
AFLIC is supervised and examined by the Department of Insurance of the State
of Arizona. AIS, IMGR and IMG are supervised and examined by the NASD and are
regulated by the Securities and Exchange Commission (SEC).
Subsidiary Dividends and Capital
Legal limitations exist as to the extent to which the BANK can lend or pay
dividends to AMCORE. The payment of dividends by a national bank without prior
regulatory approval is limited to the current year's net income plus the
adjusted retained net income for the two preceding years. The payment of
dividends by any bank or bank holding company is affected by the requirement
to maintain adequate capital pursuant to the capital adequacy guidelines
issued by the FRB and regulations issued by the FDIC and the OCC (collectively
"Agencies"). As of December 31, 2000, approximately $21.8 million was
available for payment to AMCORE in the form of dividends without prior
regulatory approval. The BANK is also limited as to the amount it may lend to
AMCORE. At December 31, 2000, the maximum amount available to AMCORE in the
form of loans approximated $1.8 million. There were no loans outstanding at
year end.
6
In 1990, the FRB established risk-based capital guidelines for bank holding
companies. These capital rules require minimum capital levels as a percent of
risk-weighted assets. Banking organizations must have minimum capital ratios
of 4% and 8% for Tier 1 capital and total capital, respectively. The FRB also
established leverage capital requirements intended primarily to establish
minimum capital requirements for those banking organizations that have
historically invested a significant portion of their funds in low risk assets.
Federally supervised banks are required to maintain a minimum leverage ratio
of not less than 4%. Refer to the Capital Management section of Item 7 for a
summary of AMCORE's capital ratios as of December 31, 2000 and 1999.
Governmental Monetary Policies and Economic Conditions
The earnings of all subsidiaries are affected not only by general economic
conditions, but also by the policies of various regulatory authorities. In
particular, the FRB influences general economic conditions and interest rates
through various monetary policies and tools. It does so primarily through
open-market operations in U.S. Government securities, varying the discount
rate on member and non-member bank borrowings, and setting reserve
requirements against bank deposits. FRB monetary policies have had a
significant effect on the operating results of banks in the past and are
expected to do so in the future. The general effect of such policies upon the
future business and earnings of each of the subsidiary companies cannot
accurately be predicted.
Interest rate sensitivity has a major impact on the earnings of banks. As
market rates change, yields earned on assets may not necessarily move to the
same degree as rates paid on liabilities. For this reason, AMCORE attempts to
minimize earnings volatility related to fluctuations in interest rates through
the use of a formal asset/liability management program and certain off-balance
sheet derivative activities. See Item 7A and Note 10 of the Notes to
Consolidated Financial Statements included under Item 8 for additional
discussion of interest rate sensitivity and related derivative activities.
Executive Officers of the Registrant
The following table contains certain information about the executive
officers of AMCORE. There are no family relationships between any director or
executive officer of AMCORE.
Name Age Principal Occupation Within the Last Five Years
---- --- -----------------------------------------------
Robert J. Meuleman 61 Chairman of the Board and Chief Executive Officer of
AMCORE since May 2000. President and Chief Executive
Officer from January 1996 to May 2000.
Kenneth E. Edge 55 President, Chief Operating Officer, and Director of
AMCORE since May 2000. Executive Vice President and
Chief Operating Officer from April 1997 to May 2000.
Chairman of the Board and Chief Executive Officer of
the BANK since October 1999. Previously Group Vice
President, Banking Subsidiaries until April 1997.
John R. Hecht 42 Executive Vice President and Chief Financial Officer
of AMCORE since December 1997. Previously Senior Vice
President and Chief Financial Officer until December
1997.
James S. Waddell 55 Executive Vice President, Chief Administrative Officer
and Corporate Secretary of AMCORE.
Patricia M. Bonavia 50 President of AMCORE Investment Services, Inc. since
February 1998. Executive Vice President and Chief
Operating Officer for AMCORE Investment Group, N.A.
since March 2000. Director of Investors Management
Group, Ltd., since February 1998. Vice President and
Product Manager of AMCORE Investors Management Group,
Ltd. until February 1998.
7
Name Age Principal Occupation Within the Last Five Years
---- --- -----------------------------------------------
James M. Hansberry 38 Senior Vice President and Manager, Private Banking
Group of the BANK since February 2001. Senior Vice
President and Retail Product Manager from March
2000 to February 2001. Vice President and Retail
Product Manager from July 1999 to March 2000. Vice
President and Project Manager from February 1999 to
December 1999. Vice President of Affiliate Banking
from November 1997 to February 1999. Vice President
and Branch Administrator until November 1997.
William T. Hippensteel 44 Senior Vice President and Marketing Director of the
BANK.
Lewis R. Jones 56 Senior Vice President and Bank Investment and
Portfolio Manager of the BANK since May 1997.
Previously Vice President and Manager of Bank
Investments until May 1997.
Bruce W. Lammers 44 Executive Vice President and Commercial Product
Manager of the BANK since March, 1999. Executive
Vice President--Commercial Services Division from
October 1997 to March 1999. Senior Vice President--
Commercial Lending at Firstar Corporation until
October 1997.
Joseph B. McGougan 40 President and Chief Executive Officer of AMCORE
Mortgage, Inc.
David W. Miles 43 President and Chief Executive Officer of AMCORE
Investment Group, N.A. and Executive Vice President
of AMCORE since March 2000. Director of Vintage
Mutual Funds, Inc. since May 1999. Chief Operating
Officer of Investors Management Group, Ltd. from
February 1998 to March 2000. President of Investors
Management Group, Inc. until February 1998.
Gregory Sprawka 50 Senior Vice President and Director of Operations
and Technology of the BANK since April 1999.
Previously Vice President and Controller of AMCORE
and AMCORE Bank N.A., Rockford from December 1996
to April 1999. Executive Vice President and Chief
Financial Officer of Victoria BankShares, Inc.
until September 1996.
James F. Warsaw 50 President of the BANK since October 1999. President
and Chief Executive Officer of AMCORE Bank N.A.,
Rockford from January 1997 to October 1999 and
Executive Vice President and Chief Operating
Officer until December 1996.
ITEM 2. PROPERTIES
On December 31, 2000, AMCORE had 73 locations, of which 51 were owned and
22 were leased. The Banking segment had 70 locations, of which 51 were owned
and 19 were leased. The Trust and Asset Management segment had two leased
facilities and the Mortgage segment had one leased facility. All of these
offices are considered by management to be well maintained and adequate for
the purpose intended. See Item 1 and Note 6 of the Notes to Consolidated
Financial Statements included under Item 8 of this document for further
information on properties.
ITEM 3. LEGAL PROCEEDINGS
Management believes that no litigation is threatened or pending in which
AMCORE faces potential loss or exposure which will materially affect AMCORE's
financial position or results of operations, other than noted below. Since
AMCORE's subsidiaries act as depositories of funds, trustee and escrow agents,
they are named as defendants in lawsuits involving claims to the ownership of
funds in particular accounts. This and other litigation is incidental to
AMCORE's business.
8
On August 26, 1999, Willie Parker and five other plaintiffs filed a civil
action in the Circuit Court of Humphreys County, Mississippi against AMCORE
Consumer Finance Company, Inc., a subsidiary of AMCORE, and other defendants
containing twelve separate counts related to the sale and financing of
residential satellite dish systems. Though the actual purchase price for each
of these systems involves a principal amount of less than $3,000, the
complaint prays for economic loss and compensatory damages in the amount of $5
million for each plaintiff and punitive damages in the amount of $100 million
for each plaintiff. AMCORE has denied the plaintiffs' allegations and has
removed the case to the United States District Court for the Northern District
of Mississippi. The proceedings are currently stayed pending resolution of the
plaintiffs' motion to remand the case to the state court. Although the
ultimate disposition of the case cannot be predicted with certainty, based on
information currently available, AMCORE believes that the plaintiffs' damage
claims are disproportionate and that the final outcome of the case will not
have a materially adverse effect on AMCORE's consolidated financial condition,
though it could have a materially adverse affect on AMCORE's consolidated
results of operations in a given year. AMCORE has not recorded an accrual for
payment of the damages in this case because, in management's opinion, an
unfavorable outcome in this litigation is not probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
See Items 6 and 8 of this document for information on stock price ranges
and dividends. The principal market for the quotations of stock prices is the
NASDAQ National Market System. There are approximately 8,500 holders of record
of AMCORE's common stock as of March 1, 2001.
9
ITEM 6. SELECTED FINANCIAL DATA
Five Year Comparison of Selected Financial Data
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
FOR THE YEAR:
Interest income......... $ 320,874 $ 300,322 $ 290,861 $ 259,959 $ 233,679
Interest expense........ 195,821 168,883 168,127 148,960 128,902
---------- ---------- ---------- ---------- ----------
Net interest income..... 125,053 131,439 122,734 110,999 104,777
Provision for loan and
lease losses........... 9,710 10,550 7,993 7,045 5,428
Non-interest income..... 62,062 59,157 57,859 48,317 43,352
Operating expense....... 117,966 124,791 118,705 114,689 98,664
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 59,439 55,255 53,895 37,582 44,037
Income taxes............ 16,356 15,106 14,314 8,918 12,161
---------- ---------- ---------- ---------- ----------
Net income.............. $ 43,083 $ 40,149 $ 39,581 $ 28,664 $ 31,876
========== ========== ========== ========== ==========
Return on average assets
(1)(2)(3)(4)........... 1.00% 0.95% 0.99% 0.81% 1.00%
Return on average equity
(1)(2)(3)(4)........... 14.92 12.96 12.64 10.66 13.14
Net interest margin..... 3.29 3.55 3.53 3.61 3.81
---------- ---------- ---------- ---------- ----------
AVERAGE BALANCE SHEET:
Total assets............ $4,314,593 $4,216,662 $3,983,600 $3,520,229 $3,181,646
Loans and leases, net of
unearned income........ 2,736,482 2,593,770 2,218,972 1,867,355 1,711,850
Earning assets.......... 4,035,705 3,969,851 3,768,197 3,325,778 2,967,054
Deposits................ 3,079,212 2,953,023 2,730,173 2,399,423 2,274,191
Long-term borrowings.... 316,680 300,490 278,603 132,533 159,504
Stockholders' equity.... 288,820 309,723 313,056 268,996 242,657
---------- ---------- ---------- ---------- ----------
ENDING BALANCE SHEET:
Total assets............ $4,244,106 $4,347,621 $4,147,833 $3,667,690 $3,331,995
Loans and leases, net of
unearned income........ 2,627,157 2,746,613 2,451,518 1,962,674 1,807,121
Earning assets.......... 3,946,631 4,008,000 3,864,852 3,452,398 3,114,450
Deposits................ 3,143,561 3,016,408 2,947,724 2,527,043 2,351,490
Long-term borrowings.... 265,830 285,270 330,361 159,125 131,612
Stockholders' equity.... 308,497 293,728 316,083 287,476 257,420
---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION
ANALYSIS:
Allowance for loan
losses to year-end
loans.................. 1.11% 1.03% 1.08% 1.01% 1.07%
Allowance to non-
performing loans....... 132.12 159.16 145.24 100.20 156.84
Net charge-offs to
average loans.......... 0.29 0.33 0.16 0.34 0.19
Non-performing loans to
net loans.............. 0.84 0.65 0.74 1.01 0.68
Average long-term
borrowings to average
equity................. 109.65 97.02 88.99 49.27 65.73
Average equity to
average assets......... 6.69 7.35 7.86 7.64 7.63
---------- ---------- ---------- ---------- ----------
STOCKHOLDERS' DATA:
Basic earnings per
share.................. $ 1.60 $ 1.42 $ 1.39 $ 1.07 $ 1.20
Diluted earnings per
share.................. 1.58 1.40 1.36 1.05 1.18
Book value per share.... 11.87 10.51 10.96 10.68 9.64
Dividends per share..... 0.64 0.56 0.54 0.45 0.38
Dividend payout ratio... 40.00% 39.44% 38.85% 42.06% 31.67%
Average common shares
outstanding............ 26,930 28,304 28,515 26,862 26,649
Average diluted shares
outstanding............ 27,237 28,730 29,098 27,405 26,970
========== ========== ========== ========== ==========
- --------
(1) The 2000 ratios excluding the impact of the $258,000, or $.01 per share,
reversals of after-tax restructuring charges: return on average assets
0.99%; return on average equity 14.83%
(2) The 1999 ratios excluding the impact of the $3.3 million, or $.11 per
share, after-tax restructuring charges: return on average assets 1.03%;
return on average equity 14.02%
(3) The 1998 ratios excluding the impact of the $3.3 million, or $.11 per
share, after-tax merger related charges: return on average assets 1.08%;
return on average equity 13.70%
(4) The 1997 ratios excluding the impact of the $6.4 million, or $.23 per
share, after-tax merger related and information systems charges: return on
average assets 1.00%; return on average equity 13.05%
10
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion highlights the significant factors affecting the
results of operations and financial condition of AMCORE for the three years
ended December 31, 2000. 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.
This report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of AMCORE. Statements that are not historical facts,
including statements about beliefs and expectations, are forward-looking
statements. These statements are based upon beliefs and assumptions of
AMCORE'S management and on information currently available to such management.
The use of the words "believe", "expect", "anticipate", "plan", "estimate",
"may", "will" or similar expressions are forward looking statements. Forward-
looking statements speak only as of the date they are made, and AMCORE
undertakes no obligation to update publicly any of them in light of new
information or future events.
Contemplated, projected, forecasted or estimated results in such forward-
looking statements involve certain inherent risks and uncertainties. A number
of factors--many of which are beyond the ability of the company to control or
predict--could cause actual results to differ materially from those in its
forward-looking statements. These factors include, among others, the following
possibilities: (I) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
formation of new products by new 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 or personnel; (VI) changes in
interest rates including the effect of prepayment; (VII) general economic and
business conditions which are less favorable than expected; (VIII) equity and
fixed income market fluctuations; (IX) unanticipated changes in industry
trends; (X) unanticipated changes in credit quality and risk factors; (XI)
success in gaining regulatory approvals when required; (XII) changes in
Federal Reserve Board monetary policies; (XIII) unexpected outcomes on
existing or new litigation in which AMCORE, its subsidiaries, officers,
directors or employees are named defendants; (XIV) technological changes; (XV)
changes in accounting principles generally accepted in the United States of
America; and (XVI) inability of third-party vendors to perform critical
services to the company or its customers.
OVERVIEW OF OPERATIONS
AMCORE (or the "Company") reported net income of $43.1 million for the year
ended December 31, 2000. This compares to $40.1 million and $39.6 million
reported for the years ended 1999 and 1998, respectively. Net income from
operations, which excludes $258,000 in net after-tax reversals of excess
restructuring-related charges (the "Restructuring Reversal") in 2000, $3.3
million of after-tax restructuring-related charges (the "Restructuring
Charge") in 1999 and $3.3 million of after-tax merger-related charges (the
"Merger Charge") in 1998, was $ 42.8 million, $43.4 million and $42.9 million
for the years ended December 31, 2000, 1999 and 1998, respectively. This
represents a decrease of $585,000 or 1.3% in net income from operations, when
comparing 2000 and 1999, and an increase of $522,000 or 1.2% when comparing
1999 and 1998. The primary factor leading to the decline in operating earnings
performance when comparing 2000 and 1999 was an increase in interest expense
adversely impacted by rising interest rates and an inverted yield curve that
was characteristic of most of 2000. This more than offset increases in
interest and non-interest income and a decrease in operating expenses year-to-
year.
Diluted earnings per share for 2000 were $1.58 compared to $1.40 in 1999
and $1.36 in 1998. Excluding the above mentioned reversal and charges of $0.01
per share in 2000, $0.11 per share in 1999 and $0.11 per share in 1998,
diluted earnings per share from operations were $1.57, $1.51 and $1.47 in
2000, 1999 and 1998, respectively. This represents an increase of $0.06 per
share or 4.0%, when comparing 2000 and 1999, and $0.04
11
per share or 2.7% in diluted earnings per share from operations, when
comparing 1999 and 1998. The 4.0% increase in earnings from operations on a
diluted per share basis contrasts with a 1.3% decrease on a dollar basis,
reflecting a 1.5 million decrease in average diluted shares outstanding
attributable to AMCORE's previously announced stock repurchase programs.
AMCORE's return on average equity for 2000 was 14.92% versus 12.96% in 1999
and 12.64% in 1998. AMCORE's return on average assets for 2000 was 1.00%
compared to 0.95% in 1999 and 0.99% in 1998. If the above mentioned charges
are excluded, the return on average equity and return on average assets would
be 14.83% and 0.99% in 2000, 14.02% and 1.03% in 1999, and 13.70% and 1.08% in
1998.
Both AMCORE and the BANK continue to exceed the minimum capital
requirements established by regulators for banks and bank holding companies.
In addition, the BANK continues to be "well capitalized" as defined by
regulatory guidelines. See Note 18 of the Notes to Consolidated Financial
Statements.
On August 8, 2000, AMCORE announced a stock repurchase program for up to
five percent of its common stock or 1.35 million shares. 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 plan and other employee benefit plans. Through March 1, 2001, 734,644
shares have been repurchased at an average price of $19.49.
On October 11, 2000, AMCORE announced that it was considering the sale of
ten Illinois branches (the "Branch Sales") as part of its strategic objective
to invest in and reallocate capital to high growth Midwestern markets. The
branches included Aledo, Gridley, Mendota, Freeport, Mount Morris, Oregon,
Ashton, Rochelle, Wyanet and Sheffield. As of December 31, 2000, no firm
commitments had been made with respect to the sale of any of the branches. On
January 25, 2001, the Company announced that it had reached a definitive
agreement for the sale of its Ashton and Rochelle branch locations to First
National Bank of Rochelle. On February 15, 2001, AMCORE announced that it had
reached a definitive agreement for the sale of its Mt. Morris branch to UNION
Savings BANK, Freeport, Illinois. On March 5, 2001, AMCORE announced that it
had reached a definitive agreement for the sale of its Aledo branch to THE
National Bank, Bettendorf, Iowa. On March 8, 2001, AMCORE announced that it
had reached a definitive agreement for the sale of its Sheffield and Wyanet
locations to Peoples National Bank of Kewanee. See Note 2 of the Notes to
Consolidated Financial Statements. AMCORE continues to pursue the sale of the
Gridley branch and will only consider a sale if AMCORE believes that full
financial value will be realized. However, AMCORE has concluded that Mendota,
Oregon and Freeport no longer fit in its contemplated divestiture program and
are no longer being considered for sale. Combined the seven branches represent
approximately $74.6 million in loans and other assets and $191.7 million in
deposits. AMCORE expects the Branch Sales will result in gains individually
and in total.
On October 18, 2000, AMCORE announced the introduction of a new technology
fund. The Vintage Technology Fund is the eleventh fund in AMCORE's proprietary
Vintage Mutual Funds family. The Vintage Technology Fund will consist of an
actively managed investment portfolio of approximately 40 to 60 technology
sector stocks.
Year 2000
AMCORE did not experience any significant disruptions to its existing or
continuing financial and operating activities caused by a failure of its
application software programs, operating systems or other systems to
accommodate the date value for the year 2000 (Year 2000). The Company has no
information that would indicate that any material borrower has experienced
significant Year 2000 issues that would materially impact their ability to
service their loan or otherwise fulfill their borrowing agreement's terms
and/or covenants. In addition, AMCORE is not aware of any situation indicating
that a significant vendor or service provider may be unable to sell goods or
provide services to the company as the result of a Year 2000 issue.
12
1999 Restructuring Charge
In 1999, AMCORE announced a new "Customer Focused Organizational Structure"
(CFOS) designed to improve efficiency, enhance responsiveness to local markets
and increase shareholder value. During the second half of 1999 and throughout
2000, AMCORE merged its nine banks into one charter (AMCORE Bank, N.A. or the
"BANK"), centralized retail and commercial loan operations, streamlined
personal trust administration, centralized corporate support functions and
converted data processing records into one bank. As of December 31, 2000, the
CFOS restructuring was complete in all material respects.
During 1999, AMCORE recorded a $3.3 million net after-tax Restructuring
Charge related to the CFOS. The major components of the Restructuring Charge
included employee severance and benefits, systems and integration costs, legal
and professional fees and other related expenses. As of December 31, 1999,
$1.1 million of the Restructuring Charge remained unpaid. During 2000, the
Company recorded a $258,000 net after-tax Restructuring Reversal, reflecting
lower than expected costs to complete the restructuring. As of the end of
2000, the entire Restructuring Charge had been paid or reversed.
Total staff reductions of 187 employees were planned. Through December 31,
2000, 96 employees had been terminated and paid severance benefits. An
additional 91 employees had transferred to other open positions due to
attrition or had voluntarily left the Company prior to the time severance
benefits became payable. As of December 31, 2000, there were no further staff
reductions planned.
See Note 16 to the Notes to Consolidated Financial Statements for a tabular
presentation of the Restructuring Charge by major component.
EARNINGS REVIEW OF CONSOLIDATED INCOME STATEMENT
The following highlights a comparative discussion of the major components
of net income and their impact for the last two years.
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, at December 31,
2000, 1999 and 1998, 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 AMCORE's statutory Federal income
tax rate of 35%. Adjusted interest income is as follows (in thousands):
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Interest Income Book Basis.......................... $320,874 $300,322 $290,861
Taxable Equivalent Adjustment....................... 8,956 9,887 10,010
-------- -------- --------
Interest Income Taxable
Equivalent Basis.................................... 329,830 310,209 300,871
Interest Expense.................................... 195,821 168,883 168,127
-------- -------- --------
Net Interest Income Taxable
Equivalent Basis.................................... $134,009 $141,326 $132,744
======== ======== ========
Net interest income on a fully taxable equivalent basis declined $7.3
million or 5.2% in 2000 compared to an increase of $8.6 million or 6.5% in
1999. The decline in net interest income during 2000 was primarily the result
of a lower net interest spread as interest-bearing liabilities, driven by
rising short-term interest rates and a flat to inverted yield curve, repriced
more rapidly than interest-earning assets. In 1999, the improvement resulted
mainly from an increase in average earning assets and an increase in net
interest spread.
13
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 Table 1 indicates, the interest rate spread declined 28 basis points to
2.66% in 2000 from 2.94% in 1999 which was an improvement of 5 basis points
from the 1998 level of 2.89%. The interest rate margin was 3.29% in 2000, a
decline of 26 basis points from 3.55% in 1999. The 1999 level was an increase
of 2 basis points from 3.53% in 1998.
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 can be segregated to analyze the year-to-year
changes in net interest income. Changes due to rate/volume variances have been
allocated between changes due to average volume and changes due to average
rate based on the absolute value of each to the total change of both
categories. Because of changes in the mix of the components of interest-
earning assets and interest-bearing liabilities, the computations for each of
the components do not equal the calculation for interest-earning assets as a
total and interest-bearing liabilities as a total. Table 1 analyzes the
changes attributable to the rate and volume components of net interest income.
Changes Due to Volume
In 2000, net interest income increased due to average volume by $1.2
million. The increase relates to a $142.7 million or 5.5% growth in average
loans and a $10.2 million or 1.1% decrease in average borrowed funds, that
were partially offset by a $57.9 million or 4.3% decrease in average
investment securities and a $128.7 million or 5.0% growth in average interest-
bearing deposits. In 1999, net interest income increased due to the change in
average volume by $8.4 million. The increase was attributable to a $374.8
million or 16.9% growth in average loans that was partially offset by a $142.4
million or 9.5% decrease in average investment securities, a $177.4 million or
7.3% growth in average interest-bearing deposits and a $12.2 million or 1.4%
increase in average borrowed funds.
During 2000, the BANK sold $100.0 million in auto loans (the "Auto Loan
Sales") and securitized $51.5 million of 1-4 family mortgage loans (the
"Mortgage Securitization"). Excluding the impact of these two items, average
loans in 2000 would have increased $180.9 million or 7.0% and average
investment securities would have declined $72.2 million or 5.3%. In addition
to the Auto Loan Sales and the Mortgage Securitization, average loan growth in
2000 was negatively affected by increasing interest rates, a slowing economy
and low rate financing incentives offered by car manufacturers. The Company
also adopted a loan-pricing model that defines acceptable spreads and
profitability for commercial lending. In late 1999, the Company changed its
retail loan pricing to increase loan rates based on creditworthiness. These
two actions also served to reduce loan volumes versus the prior year. These
factors combined to result in the lower average loan growth in 2000, compared
to 1999 when strong regional economies and sales management incentives led to
solid double-digit average loan growth. Recent actions by the Federal Reserve
that have led to decreases in short-term interest rates are expected to have a
favorable impact on economic activity and future loan growth. The decline in
investment securities, for both 2000 and 1999, related to the planned
reduction of the investment portfolio as a means of providing liquidity,
reducing reliance on borrowed funds and reducing interest rate risk.
Changes Due to Rate
The yield on earning assets increased 31 basis points in 2000. The yield on
average loans improved by 25 basis points and was primarily attributable to
residential and commercial real estate loans and commercial loans. Rising
interest rates during the last half of 1999 and the first half of 2000
impacted pricing on new loan volume and loans that refinanced during the year,
increasing average yields for the year. The yield on average securities
increased by 30 basis points, also the beneficiary of increasing interest
rates.
14
The rate paid on interest bearing liabilities increased 59 basis points in
2000, which included increased rates on interest-bearing deposits, short-term
debt and long-term debt of 62 basis points, 53 basis points and 56 basis
points, respectively. Increased rates on interest-bearing deposits were most
pronounced on the Company's indexed money market accounts (AMDEX), as well as
regular and brokered certificates of deposits (CD's). AMDEX accounts, which
price off the three-month Treasury Bill discount rate, were adversely affected
by higher short-term rates due to the inversion of the Treasury yield curve.
CD accounts were adversely affected by maturities and increasing volumes
during a period of increasing interest rates. Rates paid on short-term debt
were driven by AMCORE's reverse repurchase agreements, which remained
relatively stable as a funding source, but reflected a 95 basis point increase
in rates in 2000. This increase essentially mirrored the increase in the fed
funds rate during 2000. The increase in rates paid on long-term debt was
primarily attributable to Federal Home Loan Bank (FHLB) advances, a
significant portion of which were called and had to be replaced at higher
rates during 2000 and the fourth quarter of 1999. Recent actions by the
Federal Reserve which have led to reductions in short-term rates are expected
to reduce pressure on funding costs in 2001, particularly with respect to the
AMDEX accounts which reprice monthly and short-term borrowings which reprice
quarterly.
The yield on earning assets declined 19 basis points in 1999. The yield on
average loans declined 33 basis points and was primarily attributable to
residential and commercial real estate loans and installment loans. This
occurred as the impact of refinancings and increasing volumes in 1998 and the
first half of 1999, in a decreasing interest rate environment, more than
offset the impact of continued volume increases in the second half of 1999
when interest rates were increasing. The yield on average securities declined
19 basis points. Reductions in the investment portfolio in 1999, largely
maturities of older securities with higher rates, caused the average yield of
the remaining portfolio to decline.
The rate paid on interest bearing liabilities declined 24 basis points in
1999. The decline was primarily driven by a 30 basis point reduction in rates
paid on interest bearing deposits. The reduction was generally across all
deposit accounts, but was led by decreased rates on regular CD's, brokered
CD's and savings/club deposits. New deposits and repricings of these accounts
in 1998 and the first half of 1999, when interest rates were declining, more
than offset the impact of repricings and new deposits in the second half of
1999 when interest rates were increasing. The rate on short-term borrowings
increased 5 basis points as increased interest rates had more of an impact.
The rate on long-term debt decreased 22 basis points, influenced by FHLB
renewals at favorable rates during 1998.
Provision for Loan and Lease Losses
The provision for loan and lease losses is an amount added to the allowance
for loan and lease losses to provide for the known and estimated amount of
loans that will not be collected. Loan and lease losses are charged against
the allowance when management believes the uncollectibility of a loan balance
is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management determines an appropriate provision for loan losses based upon
historical loss experience, regular evaluation of collectibility by lending
officers, credit administration and the corporate loan review staff, and the
size and nature of and other known factors about the loan portfolios. Other
factors include the current economic and industry environment, concentration
characteristics of the loan portfolio, adverse situations that may affect the
borrower's ability to repay and the estimated value of any underlying
collateral of impaired and potential problem loans.
The provision for loan and lease losses was $9.7 million for 2000, a
decrease of $840,000 or 8.0% from the $10.6 million in 1999. The 2000 decrease
in provision is due to lower charge-offs and loan growth compared to 1999.
During 1999, the provision increased $2.6 million or 32.0% from the $8.0
million in 1998. The increase in the 1999 provision was due to a 12% growth in
loans and a $3.2 million partial charge-off of a single agricultural credit.
AMCORE recorded net charge-offs of $7.9 million, $8.6 million and $3.6
million in 2000, 1999 and 1998, respectively. Future growth in the loan
portfolio, weakening economic conditions or specific credit deterioration
15
could result in increases in the provision for loan and lease losses. Net
charge-offs represented 29 basis points of average loans in 2000 versus 33
basis points in 1999 and 16 basis points in 1998. The decrease in net charge-
offs in 2000 is principally the result of partial charge-off of the
agricultural credit that was responsible for 4 basis points of the charge-offs
for 2000 compared to 12 basis points for 1999. Excluding the agricultural
credit, net charge-offs would have been relatively stable at 25 basis points
in 2000, 21 basis points in 1999 and 16 basis points in 1998.
The allowance for loan and lease losses as a percent of total loans was
1.11%, 1.03%, and 1.08% at December 31, 2000, 1999, and 1998, respectively.
The ratio of the allowance for loan and lease losses to non-performing loans
was 132.1% at year-end 2000, 159.2% at year-end 1999, and 145.2% at year-end
1998. The increase in the allowance for loan and lease losses is due in part
to the higher level of non-performing loans experienced in 2000.
Non-Interest Income
Total non-interest income is comprised primarily of fee based revenues from
mortgage, trust, brokerage, asset management and insurance services. Fees from
bank-related services, mainly on deposits and electronic banking, along with
net security gains or losses and gains from loan sales are also included in
this category. Non-interest income totaled $62.1 million in 2000, an increase
of $2.9 million or 4.9% from the $59.2 million in 1999. Growth in trust and
asset management revenues, increased service charges on deposits, higher
security gains, gains from the Auto Loan Sales and increases in cash surrender
values of bank-owned life insurance (BOLI) more than offset declines in
mortgage revenues and insurance commissions. Non-interest income in 1999 also
increased 2.2% or $1.3 million from $57.9 million in 1998.
Trust and asset management income, the largest source of fee based
revenues, totaled $30.1 million in 2000, an increase of $1.2 million or 4.2%
from $28.9 million in 1999. The growth in 1999 was $5.2 million or 21.7% from
$23.7 million in 1998. In 1999, the methodology for accruing trust and asset
management fees was refined to more accurately reflect the fees earned at any
given period end. The refinement resulted in an adjustment to fee income in
1999 of $881,000. Excluding this adjustment, revenue growth for 2000 and 1999
was 7.5% and 18.0%, respectively. Investment performance for 2000 was
consistent with comparable competitive benchmarks. A challenging investment
environment and volatile market conditions experienced throughout 2000
resulted in revenue growth that was less favorable when compared to recent
years. On average, total assets under administration and assets under
management were up for the year. Nevertheless, some account attrition during
the third and fourth quarters of the year, plus the investment environment and
market conditions previously mentioned, kept 2000 end-of-year balances
relatively flat at $5.0 billion and $4.4 billion, respectively, compared to
$5.1 billion and $4.4 billion at the end of 1999. These factors combined to
prevent 2000 revenue growth from matching the robust growth experienced in
1999. The growth in 1999 was due to a full year impact of the IMG acquisition,
strong sales efforts and favorable investment performance. Trust and asset
management revenues are dependent on market performance, plan terminations,
corporate profit sharing contributions, and other economic factors.
Service charges on deposits totaled $11.5 million in 2000, an increase of
$1.3 million or 12.8% from the $10.2 million in 1999. During 1999, service
charges on deposits increased $1.3 million or 15.2% from $8.8 million in 1998.
Higher average deposit balances and improved overdraft handling procedures
contributed to the increase in 2000. Higher average deposit balances and
revised fee schedules were primarily responsible for the 1999 increase.
Mortgage revenues include fees generated from underwriting, originating and
servicing of mortgage loans along with gains realized from the sale of these
loans. Mortgage revenues were $5.4 million in 2000, a decline of $2.7 million
or 33.3% from the $8.1 million in 1999. During 1999, mortgage revenues
declined $1.6 million or 16.1% from $9.7 million in 1998. Mortgage revenues
for 1999 included a $1.2 million servicing rights impairment reversal, whereas
1998 included an $889,000 net impairment charge. Excluding these two items,
16
2000 mortgage revenues declined $1.5 million or 21.9% and 1999 declined $3.6
million or 34.4%. Increasing interest rates resulted in lower originations and
refinancings in both 2000 and 1999 in contrast to record volumes in 1998.
Accounting standards require separate recognition of the cost allocated to
servicing rights on originated mortgage loans at the time such loans are sold.
This mortgage servicing asset is amortized over the remaining estimated lives
of the serviced loans. While this has a favorable impact on earnings at the
time of sale, additional earnings volatility may occur with changes in market
conditions, particularly with fluctuations in interest rates. For example, a
decline in interest rates could result in accelerated mortgage prepayments,
which may reduce the value of this asset and require a charge to earnings
through a valuation reserve. If subsequent valuations result in an increase of
value, recoveries can be recorded through the valuation allowance, to the
extent of the previous charge. As of December 31, 2000, AMCORE had $7.9
million of capitalized mortgage servicing rights, with a fair value of $8.3
million, and a servicing portfolio of $846.6 million. See Note 7 of the Notes
to Consolidated Financial Statements. There was no impairment reserve as of
December 31, 2000.
Other non-interest income, which includes customer service charges, credit
card and merchant fees, ATM fees, brokerage commissions, insurance
commissions, gains on fixed asset and loan sales and other miscellaneous
income, was $13.3 million, a $1.8 million or 15.9% increase over 1999.
Increases in 2000 included gains of $1.4 from the Auto Loan Sales and a $1.7
million increase in cash surrender values on BOLI. These increases were
partially offset by a $984,000 decrease in insurance commissions and a non-
recurring gain in 1999 of $750,000. The decrease in insurance commissions was
attributable to the August 1999 sale of AMCORE's insurance agency and lower
credit life commissions associated with lower loan growth and increased
rebates from early pay-offs and cancellations. The non-recurring gain resulted
from the merger and reorganization of an ATM service provider in which AMCORE
had an equity interest. Increases in 1999 included the non-recurring gain of
$750,000, increased customer service charges of $600,000, call option income
of $325,000 and gain on fixed asset sales of $125,000. These increases were
partially offset by lower gains on loan sales of $859,000, a decline in ATM
related fees of $387,000 and lower insurance commission income of $140,000.
Net securities gains totaled $1.8 million in 2000, compared to $530,000 in
1999 and $4.4 million in 1998. The level of security gains or losses is
dependent on the size of the available for sale portfolio, interest rate
levels, AMCORE's liquidity needs, and balance sheet risk objectives.
Operating Expenses
Total operating expense was $118.0 million in 2000, a decrease of $6.8
million from $124.8 million in 1999, which was a $6.1 million increase from
$118.7 million in 1998. Operating expenses in 2000 were reduced by the
Restructuring Reversal of $428,000. Operating expenses in 1999 included the
Restructuring Charge of $5.3 million. Operating expenses in 1998 included the
Merger Charge of $4.5 million. Excluding these charges, operating expenses
from operations declined $1.1 million or 0.9% in 2000 and increased $5.4
million or 4.6% in 1999. The efficiency ratio, excluding the above-mentioned
charges, was 60.1% in 2000, 59.4% in 1999 and 59.7% in 1998.
Personnel costs, which include compensation expense and employee benefits,
are the largest component of operating expenses. Personnel costs totaled $66.8
million in 2000, a decrease of $2.2 million or 3.2% from $69.0 million in
1999, which was a $4.6 million or 7.1% increase from $64.4 million in 1998.
Excluding the Restructuring Reversal in 2000, the Restructuring Charge in 1999
and the Merger Charge in 1998, personnel costs increased $30,000 or 0.04% in
2000, and increased $2.9 million or 4.6% in 1999. For 2000, cost savings from
AMCORE's new CFOS structure essentially offset normal merit increases, cost-
of-living adjustments, growth in the Trust and Asset Management segment that
included a full year of ACV and a $1.1 million or 34.9% increase in employee
health care costs. For 1999, normal merit increases, increased long-term
incentive accruals for certain executive officers (Performance Unit Awards),
increased employee health benefit costs, a full year of IMG personnel costs in
1999, the expansion of the Trust and Asset Management segment associated with
the
17
formation of the Private Client Group and the WCV acquisition represent the
major portion of the increase. The increase was partially offset by the sale
of the insurance agency and a full year cost savings from outsourcing core
bank data processing.
Net occupancy expense was $7.3 million in 2000, an increase of $560,000
from 1999, after a decrease of $39,000 from 1998 levels. The 2000 increase was
due in part to the expansion of the Crystal Lake, IL facility, rental expenses
associated with a new branch in Huntley, IL and rental expenses related to the
centralization of loan operations, partially offset by the elimination of one
branch.
Equipment expense decreased $545,000 or 6.0% to $8.5 million in 2000. This
followed a $1.1 million or 14.3% increase in 1999. Excluding $325,000 of
Merger Charges incurred in 1998, equipment expense increased $1.5 million or
19.2% in 1999. The 2000 decrease and the 1999 increase are the result of
higher electronic data processing equipment depreciation and software
amortization and maintenance in 1999 associated with the upgrade of internal
local area networks and Year 2000 compliance solutions.
Data processing expenses include expenses related to core bank data
processing, trust and other external processing systems. This category
decreased $1.3 million or 18.3% to $5.8 million in 2000. Expenses in 1999 were
$7.2 million, a $1.8 million or 33.9% increase from $5.3 million in 1998.
Excluding the Restructuring Reversal in 2000, the Restructuring Charge in 1999
and the Merger Charge in 1998, data processing expenses decreased $84,000 or
1.4% in 2000 and increased $2.2 million or 56.0% in 1999. Normal year-to-year
cost increases in 2000 were more than offset by lower processing and
programming costs associated with the more efficient CFOS structure, plus
prior year costs associated with the Midwest Federal Financial Corporation
(Midwest) systems conversion, development of the online banking product and
the Year 2000 initiative. The 1999 increase is attributable to outsourcing the
mainframe processing to achieve a standard platform, increased data processing
costs associated with systems conversions for Midwest, upgrades of internal
local area networks, development of an online banking product and expenses
associated with the Year 2000 initiative.
Professional fees totaled $3.8 million in 2000, a decrease of $1.5 million
or 28.4%. The decrease was primarily attributable to the 2000 Restructuring
Reversal and the 1999 Restructuring Charge. Professional fees were $5.3
million in 1999, a decrease of $461,000 or 8.1% from 1998. Of this amount,
$339,000 was attributable to the lower level of professional fees in the 1999
Restructuring Charge than in the 1998 Merger Charge. Decreased legal fees
accounted for the remaining decrease.
Communication expense was $4.0 million in 2000, a decrease of $111,000 or
2.7% from 1999. Communication expense was $4.1 million in 1999, an increase of
$494,000 or 13.7% from 1998. The 2000 decrease is due to lower postage costs
and lower internal communication costs. The 1999 increase is attributable to
higher postage, phone costs, courier expense and internal communication costs.
Advertising and business development expenses were $3.8 million in 2000, an
increase of $200,000 or 5.6%. Higher community public relations costs were the
primary reason for the increase. Advertising and business development expenses
were $3.6 million in 1999, a decrease of $174,000 or 4.6%. Excluding $116,000
of 1998 Merger Charges, the decrease was only $58,000.
Intangibles amortization increased $115,000 in 2000 to $2.1 million, a 5.8%
increase from 1999. The increase was associated with increased goodwill
resulting from the payment of contingent purchase price for the IMG
acquisition. Intangibles amortization decreased $545,000 in 1999 to $2.0
million, a 21.5% decrease from 1998. Core deposit intangibles associated with
a previous acquisition were fully amortized in 1998 and accounted for a
$721,000 decrease. This was partially offset by $176,000 in increased goodwill
amortization related to the IMG acquisition as 1999 included a full year and
as additional contingent shares were issued which increased the purchase price
allocable to goodwill.
Other expenses were $15.9 million in 2000, a decrease of $2.0 million or
11.3%, following a decrease of $737,000 or 3.9% in 1999. Excluding the
Restructuring Reversal, Restructuring Charge and Merger Charge, the
18
decreases were $1.4 million or 8.3% and $966,000 or 5.3% in 2000 and 1999,
respectively. The 2000 decrease relates to lower loan processing and
collection expenses including mortgage servicing rights amortization and
decreased recruiting and training costs. The 1999 decrease is primarily the
result of lower loan processing and collection expenses including mortgage
servicing rights amortization.
Income Taxes
Income tax expense totaled $16.4 million in 2000, compared with $15.1
million and $14.3 million in 1999 and 1998, respectively. The effective tax
rates were 27.5%, 27.3%, and 26.6% in 2000, 1999, and 1998, respectively. The
effective tax rate was less than the statutory tax rates due primarily to
investments in tax-exempt municipal bonds and loans. The increase in effective
tax rate in 1999 primarily resulted from a lower proportion of tax-exempt
income to pretax earnings, relative to 1998, and a steady increase in state
income taxes over the same period. See Note 14 of the Notes to Consolidated
Financial Statements.
EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process has focused on three
business segments: Banking, Trust and Asset Management, and Mortgage Banking.
Note 17 of the Notes to Consolidated Financial Statements presents a condensed
income statement for each segment.
The financial results of each segment are presented as if operated on a
stand-alone basis. There are no comprehensive authorities for management
accounting equivalent to accounting principles generally accepted in the
United States of America. Therefore, the information provided is not
necessarily comparable with similar information from other financial
institutions.
The financial results reflect direct revenue, expenses, assets and
liabilities. The accounting policies used are similar to those described in
Note 1 of the Notes to Consolidated Financial Statements. In addition,
intersegment revenue and expenses are allocated based on an internal cost
basis or market price when available.
Banking Segment
The Banking segment provides commercial and personal banking services
through its 64 banking locations in northern Illinois and south central
Wisconsin and the FINANCE subsidiary. The services provided by this segment
include lending, deposits, cash management, automated teller machines, and
other traditional banking services.
The Banking segment's operating profit for 2000 was $41.1 million before
the Restructuring Reversal, an increase of $678,000 or 1.7% from 1999, before
the Restructuring Charge. This followed a decrease in 1999 of $344,000 or 0.8%
from 1998, before the Merger Charge. The 2000 Banking segment operating profit
increased despite a 5.0% decline in net interest income. The decline in net
interest income was more than offset by increased non-interest income and by a
decrease in operating expenses.
Net interest income declined by $6.6 million in 2000, primarily the result
of a 59 basis point increase in rates paid on interest-bearing liabilities
that was driven by rising short-term rates and a flat to inverted yield curve.
The decline was partially offset as yields on interest-earning assets also
rose, but only by 31 basis points, and by an increase in average loan volume
of $142.7 million or 5.5%.
Non-interest income increased by $6.4 million in 2000. The increase is
primarily the result of higher service charges on deposits, increased gains
from the sale of securities, the Auto Loan Sales and an increase in cash
surrender value on BOLI. These were partially offset by decreased insurance
commissions attributable to lower credit life revenues associated with lower
direct retail loan growth and increased rebates from early pay-offs and
cancellations and by a non-recurring gain in 1999 resulting from the merger
and reorganization of an ATM service provider in which AMCORE had an equity
interest.
19
The provision for loan and lease losses was $9.7 million for 2000, a
decrease of $840,000 or 8.0% from $10.6 million in 1999. The 2000 decrease in
provision is due to lower charge-offs and loan growth compared to 1999.
Operating expenses decreased $5.2 million in 2000. Excluding Restructuring
Reversals and Restructuring Charges operating expenses increased $232,000.
Normal salary increases, higher employee health care costs and higher
occupancy costs associated with the expansion of the Crystal Lake, IL
facility, a new branch in Huntley, IL and the centralization of loan
operations were nearly offset by cost reductions resulting from the CFOS
restructuring.
The Banking segment represented 84.8%, 83.8% and 87.1% of total segment
profit before Restructuring Reversals, Restructuring Charges and Merger
Charges in 2000, 1999 and 1998, respectively.
Trust and Asset Management
The Trust and Asset Management segment 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. These products are distributed nationally (i.e. Vintage
Equity Fund is available through Charles Schwab, OneSource(TM)), regionally to
institutional investors and corporations, and locally through AMCORE's banking
locations.
The Trust and Asset Management segment's operating profit for 2000 was $5.9
million before the Restructuring Reversal, which was essentially flat with
1999, before the Restructuring Charge. Higher revenues in 2000 were offset by
increased operating expenses.
Trust and Asset Management segment revenues totaled $31.9 million in 2000,
an increase of $915,000 or 3.0% from $31.0 million in 1999. Investment
performance for 2000 was consistent with comparable competitive benchmarks. A
challenging investment environment and volatile market conditions experienced
throughout 2000 resulted in revenue growth that was less favorable when
compared to recent years. In addition, during 1999 the methodology for
accruing trust and asset management fees was refined to more accurately
reflect the fees earned at any given period end. The refinement resulted in
additional fee income in 1999 of $881,000. Finally, the August 1999 sale of
AMCORE's insurance agency resulted in a $488,000 reduction in insurance
commissions year-to-year. These factors combined to hold revenue growth down
from the double-digit growth experienced in 1999.
Operating expenses increased $851,000 or 4.0% to $22.0 million in 2000, up
from $21.2 million in 1999. Excluding the Restructuring Reversal and the
Restructuring Charge, the increase was $1.2 million, or 5.5%. The increase was
primarily attributable to increased personnel costs associated with growth of
the business that included a full year of the WCV acquisition. The increase
was partially offset by elimination of expenses necessary to operate the
insurance agency.
As of December 31, 2000, assets under management totaled $4.4 billion
including $1.3 billion in the AMCORE family of Vintage Mutual Funds. Total
assets under administration, which include managed assets and custody assets,
total $5.0 billion.
The Trust and Asset Management segment represented 12.1%, 12.1%, and 9.5%
of total segment profit before Restructuring Reversals, Restructuring Charges
and Merger Charges in 2000, 1999 and 1998, respectively.
Mortgage Banking
The Mortgage Banking segment provides a variety of mortgage lending
products to meet its customer needs. It sells these loans to AMCORE's bank
affiliate and the secondary market and continues to service most of the loans
sold.
20
The Mortgage Banking segment's operating profit was $1.5 million in 2000, a
decrease of $447,000 or 22.8% from 1999. This segment's profits increased
$389,000 or 24.7% in 1999. As of December 31, 2000, the Mortgage segment
serviced $846.6 million of residential mortgages.
The Mortgage Banking segment revenues were $9.4 million in 2000, a decline
of $2.5 million or 20.7% from $11.9 million in 1999. Origination and
refinancing volumes were negatively affected by higher mortgage lending rates.
In addition, mortgage revenues for 1999 included a $1.2 million servicing
rights impairment reserve reversal.
The decrease in origination volumes and refinancing activity caused a
corresponding reduction in variable production costs. Servicing right
amortization was also lower as increased interest rates led to slower
prepayments on the existing servicing portfolio. These factors resulted in a
$1.7 million decrease in operating expenses.
The Mortgage Banking segment represented 3.1%, 4.1% and 3.4% of total
segment profit before Restructuring Reversals, Restructuring Charges and
Merger Charges in 2000, 1999 and 1998, respectively.
BALANCE SHEET REVIEW AND LIQUIDITY RISK MANAGEMENT
Liquidity represents the availability of funding to meet the obligations to
depositors, borrowers, and creditors at a reasonable cost without adverse
consequences. Accordingly, the funding base and asset mix influences the
liquidity position.
The parent company requires adequate liquidity to pay its expenses, repay
debt when due and pay stockholder dividends. Liquidity is provided to the
parent through its subsidiaries in the form of dividends. In 2000, dividends
from subsidiaries amounted to $47.6 million, compared to $38.7 million in
1999. Other liquidity is provided by access to the capital markets, cash
balances in banks, liquidating short-term investments, commercial paper
borrowings and lines of credit with correspondent banks. While the BANK is
limited in the amount of dividends it can pay, as of December 31, 2000,
approximately $21.8 million was available for payment to the parent in the
form of dividends without prior regulatory approval.
Cash and cash equivalents declined $60.3 million from December 31, 1999 to
December 31, 2000, as the net cash provided from operating activities of $60.6
million plus the net cash provided by financing activities of $66.1 million
was more than offset by net cash used for investing activities of $187.0
million in 2000. A significant portion of the cash decrease relates to
increased liquidity at the end of 1999 in anticipation of the potential for
Year 2000-related withdrawals by depositors anxious about the millennium
changeover that was no longer needed at the end of 2000.
The net decrease in cash provided by operating activities of $23.5 million
from December 31, 1999 to December 31, 2000 was primarily attributable to a
$41.0 million increase in originations of loans held for sale.
The net increase in cash provided by investing activities of $302.4 million
from December 31, 1999 to December 31, 2000 is primarily the result of an
increase of $381.4 million in net cash provided by loans and leases. Principal
collections and sales proceeds exceeded new loans in 2000, which is opposite
to what occurred in 1999. An additional increase of $28.2 million resulted
from a $198.6 million net decrease in cash used for purchases of available for
sale securities, while proceeds from maturities and sales of available for
sale securities had a net decrease $170.5 million. These increases in cash
provided were partially offset by a $45.4 million net increase in federal
funds sold and other short-term investments, a $39.9 million increase in net
cash used for investment in BOLI, and a $22.9 million increase in interest
earning deposits in bank.
21
The net cash used for financing activities increased by $374.1 million from
December 31, 1999 to December 31, 2000. This was primarily the result of a
$364.9 million net decrease in short-term borrowings, a $31.5 million net
decline in proceeds from long-term borrowings, a $17.9 million net increase in
payments on long-term borrowings and a $16.8 million net increase in cash
required for treasury stock purchases. These were partially offset by a $51.3
million net increase in cash provided by demand deposits and savings accounts.
Securities
Total securities as of December 31, 2000 were $1.23 billion, a decrease of
$6.9 million or 0.6% over the prior year-end. At December 31, 2000 and 1999,
the total securities portfolio comprised 31.3% and 31.0%, respectively, of
total earning assets.
Substantially all securities are classified as available for sale. This
improves AMCORE's ability to manage interest rate and liquidity risk.
Fluctuations in the unrealized gain or loss component of total stockholders'
equity may result; however, federal banking regulations generally exclude this
component from regulatory risk-based capital calculations.
The securities portfolio serves an important role in the overall context of
balance sheet management in terms of balancing capital utilization and
liquidity needs. The decision to purchase or sell securities is based upon the
current assessment of economic and financial conditions, including the
interest rate environment. The portfolio's scheduled maturities and the
prepayment of mortgage and asset backed securities represent a significant
source of liquidity. Approximately $66.9 million, or 5.4%, of the securities
portfolio will contractually mature in 2001. This does not include mortgage
and asset backed securities. Mortgage and asset backed security maturities may
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without penalties.
Mortgage and asset backed securities as of December 31, 2000 totaled $797.8
million and represent 64.6% of total securities. The distribution of mortgage
and asset backed securities includes $504.2 million of U.S. government agency
mortgage-backed pass through securities, $221.7 million of agency
collateralized mortgage obligations and $71.9 million of private issue
collateral mortgage obligations, all of which are rated AAA except for $14.9
million of securities rated between Aa2 and Baa1.
At December 31, 2000, securities held to maturity totaled $10.7 million,
while securities available for sale were $1.22 billion. There were no trading
securities at the end of 2000 or 1999. At December 31, 2000, the held to
maturity securities portfolio included $51,000 of gross unrealized gains and
$77,000 of gross unrealized losses. The securities available for sale
portfolio at the end of 2000 included gross unrealized gains of $11.0 million
and gross unrealized losses of $10.6 million, of which the combined effect,
net of tax, is included as accumulated other comprehensive income in
stockholders' equity. For comparative purposes, at December 31, 1999, gross
unrealized gains of $2.8 million and gross unrealized losses of $47.1 million
were included in the securities available for sale portfolio. For further
analysis of the securities portfolio see Table 4 and Note 3 of the Notes to
Consolidated Financial Statements.
Loans and Leases
Loans represent the largest component of AMCORE's earning asset base. At
year-end 2000, total loans and leases, net of unearned discount, were $2.63
billion, a decrease of $119.5 million or 4.3% as compared to 1999. Average
loans increased $142.7 million or 5.5% during 2000. Over 80%, or $98.6
million, of the decrease in ending loans was attributable to installment and
consumer loans. The remaining decrease was primarily attributable to the
commercial loan category. See Table 2 and Note 4 of the Notes to Consolidated
Financial Statements.
Commercial, financial and agricultural loan balances totaled $697.1 million
at year-end 2000, a decrease of $13.2 million or 1.9% when compared to 1999. A
$26.8 million decline in agricultural loans was partially offset
22
by an increase in commercial and financial loans, most notably small business
loans. AMCORE is a Small Business Administration ("SBA") Preferred Lender in
both Illinois and Wisconsin, and ranked number one in Illinois for the second
consecutive year in the number of SBA loans made. SBA programs are a popular
loan vehicle for the Company due to their lower risk profile, since the SBA
guarantees 75 percent of each loan up to $1.0 million.
Total real estate loans were $1.54 billion, a decline of $7.1 million from
1999. Growth in commercial real estate loans of $29.9 million was offset by
declines in residential real estate loans and construction real estate loans
of $26.9 million and $10.1 million, respectively. The decrease in residential
real estate loans reflects the $51.5 million Mortgage Securitization in the
third quarter of 2000.
Residential mortgage loans are originated by AMCORE's mortgage affiliate,
of which conforming adjustable rate, 15-year fixed-rate and balloon
residential mortgages are normally sold to the BANK. The 30-year fixed-rate
residential mortgage loans are sold in the secondary market to eliminate
interest rate risk, generate gains on the sale of these loans, as well as
servicing income. All loans of the mortgage affiliate are considered held for
sale and are recorded at the lower of cost or market value.
Installment and consumer loans decreased $98.6 million or 20.1% to end the
year at $391.0 million. The decrease is attributable to the $100.0 million in
Auto Loan Sales and reclassification of an additional $10.2 million of
indirect auto loans as held for sale. There were no Auto Loan Sales in 1999
and none were classified as held for sale as of December 31, 1999. Absent
these items, which AMCORE continues to service and which together had a year-
end balance of $101.1 million, installment and consumer loans would have
increased $2.5 million.
The scheduled repayments and maturities of loans represent a substantial
source of liquidity. Table 3 shows selected loan maturity data as of December
31, 2000.
Deposits
Total deposits at December 31, 2000, were $3.14 billion, an increase of
$127.2 million or 4.2% when compared to 1999. Average total deposits increased
$126.2 million or 4.3% during 2000.
Core deposits, which include demand deposits, consumer time deposits, and
savings deposits are considered by management to be the primary and most
stable source of funding. Total core deposits were $2.46 billion at the end of
2000, a $27.6 million or 1.1% increase from the prior year-end. This increase
is attributable to higher balances in AMDEX and certificates of deposit which
were partially offset by decreased balances in NOW and money market accounts
and savings deposits. Core deposits represent 78.3% and 80.9% of total
deposits at December 31, 2000 and 1999, respectively. Large certificates of
deposit, brokered deposits, and time deposits from governmental entities
supplement these core deposits. Brokered deposits were $427.4 million at year-
end 2000, an increase of $77.6 million over the prior year-end. Table 5 shows
the maturity distribution of time deposits $100,000 and over.
Borrowings
Borrowings totaled $726.5 million at year-end 2000 and were comprised of
$460.6 million of short-term and $265.8 million of long-term borrowings. The
decrease in borrowings of $258.2 million was primarily the result of increased
deposits in combination with lower loan and investment securities balances and
proceeds from the Auto Loan Sales. See Notes 9 and 10 of the Notes to
Consolidated Financial Statements.
AMCORE has issued $40 million of capital securities through AMCORE Capital
Trust I (Trust), a statutory business trust, of which all common securities
are owned by AMCORE. The capital securities pay cumulative cash distributions
semiannually at an annual rate of 9.35%. The securities are redeemable from
March 25, 2007
23
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 capital 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 $50.0 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.
ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT
AMCORE's credit risk is centered in the loan and lease portfolio which on
December 31, 2000, totaled $2.63 billion, or 66.6%, of earning assets. The
objective in managing loan portfolio risk is to quantify and manage credit
risk on a portfolio basis as well as reduce the risk of a loss resulting from
a customer's failure to perform according to the terms of a transaction. To
achieve this objective, AMCORE strives to maintain a loan portfolio that is
diverse in terms of loan type, industry concentration, and borrower
concentration.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established, as losses are
estimated to have occurred, through a provision for loan and lease losses
charged to expense. Loan and lease losses are charged against the allowance
when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan and lease losses is evaluated on a regular basis by
management. This evaluation is based upon management's periodic review of the
collectibility of the loans and leases in light of historical experience, the
nature and volume of the loan and lease portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of underlying
collateral and current economic conditions.
Generally, commercial, financial and agricultural loans and commercial real
estate loans are individually analyzed and graded by lending officers,
supervisors and credit administration. The loans and their grades are then
independently reviewed by the corporate loan review staff and examinations are
performed by regulatory agencies. This process and related feedback is used by
management to establish an appropriate allocation of the allowance for loan
and lease losses to individually evaluated loans.
The allowance for loan and lease losses allocated to consumer, residential
real estate and residential real estate construction is determined based upon
an evaluation of the homogenous categories of loans by groups or pools.
Allowances allocated to these categories of loans is based upon a five-year
weighted average for actual losses on a group or pool basis, adjusted for any
known trends not reflective of the five-year weighted average.
Similar pool allocations are determined, as a group, for commercial,
financial, agricultural, commercial real estate and commercial real estate
construction loans which are not impaired or do not otherwise receive a
specific allocation due to their status as classified or impaired.
An additional unallocated allowance is maintained based upon the size,
quality, and concentration characteristics of the remaining loan portfolio,
using both historical quantitative trends and management's evaluation of
qualitative factors including current economic conditions.
The determination by management of the appropriate level of the allowance
amounted to $29.2 million at December 31, 2000, compared to $28.4 million at
December 31, 1999, for an increase of $780,000 or 2.7%. Since the allowance
for loan and lease losses is based on estimates that are subject to revisions
as more
24
information becomes available, actual losses may vary from the current
estimates. Management makes an ongoing evaluation as to the adequacy of the
allowance for loan and lease losses on at least a quarterly basis. As
adjustments in the allowance become necessary, they are recorded in the
earnings of that period and serve as a self-correcting mechanism in reducing
differences in allocations and observed losses. A detailed analysis of the
allowance for loan losses and the allocation of the allowance for loan and
lease losses by category for the past five years are shown in Table 2.
Allocations of the allowance for commercial, financial and agricultural
loans increased $4.8 million. The increase was primarily attributable to
increased pool allocations, increasing delinquencies and increased
concentrations, particularly with respect to the Company's truck
transportation portfolio. These increases were partially offset by the
elimination of allocations for anticipated Year 2000 needs. Allocations of the
allowance for real estate loans decreased $218,000 to reflect decreased
concentrations, notably non-residential building operators, partially offset
by increased pool allocations. Allocations of the allowance for installment
and consumer loans decreased $1.1 million. This decrease was attributable to
lower average historical loss factors in the pool calculation that were
partially offset by increased allocations for economic concerns in some of the
local markets. Allocations for impaired loans were essentially flat with the
prior year as the final charge-off of a large agricultural credit offset
several small to medium-sized credits that became impaired during the year.
Unallocated loan and lease losses declined $2.6 million to match the loss
reserves with the specific loss factors within each loan category, as noted
above.
As of December 31, 2000, the allowance for loan losses as a percent of
total loans and of non-performing loans was 1.11% and 132.12%, respectively.
These compare to the same ratios for the prior year of 1.03% and 159.16%. Net
charge-offs as a percent of average loans decreased to 0.29% for 2000 versus
0.33% in 1999. The decrease in net charge-offs in 2000 is principally the
result of partial charge-off of the agricultural credit that was responsible
for 4 basis points of the charge-offs for 2000 compared to 12 basis points for
1999. Excluding the agricultural credit, net charge-offs would have been
relatively stable at 25 basis points in 2000 and 21 basis points in 1999.
Non-performing Assets
Non-performing assets consist of non-accrual loans, loans with restructured
terms, other real estate owned and other foreclosed assets. Non-performing
assets totaled $26.4 million as of year-end 2000, an increase of $5.0 million
or 23.2% from the $21.5 million at year-end 1999. Total non-performing assets
represent 0.62% and 0.49% of total assets at December 31, 2000 and December
31, 1999, respectively.
Loans are generally classified as non-accrual when there are reasonable
doubts as to the collectibility of principal and/or interest or when payment
becomes 90 days past due, except loans which are well secured and in the
process of collection. Any loans classified for regulatory purposes that have
not been included in non-performing loans are not expected to materially
impact future operating results, liquidity or capital. Interest collections on
non-accrual loans, for which the ultimate collectibility of principal is
uncertain, are applied as principal reductions. Otherwise, such collections
are applied to interest income when received.
Non-performing loans increased $4.2 million or 23.8% to total $22.1 million
at December 31, 2000, when compared to the prior year-end. As of December 31,
2000, non-performing loans to total loans were 0.84% compared to 0.65% at
year-end 1999. Table 2 presents non-performing loans for each of the past five
years. Subsequent to December 31, 2000, two large commercial credits, a $3.8
million automobile dealership floor plan loan and a $1.8 million hotel loan
were placed on non-accrual status. Had these credits been classified as non-
accrual as of December 31, 2000 the percentage of non-performing loans to
total loans would have increased to 1.05% and the allowance for loan and lease
losses as a percentage of non-performing loans would have decreased to 105.38%
Foreclosed real estate and other foreclosed assets increased $741,000, or
20.4%, to $4.4 million at December 31, 2000, when compared to year-end 1999.
This increase primarily reflects higher average real estate values on new
foreclosures during the year rather than an increase in number of foreclosed
properties.
25
Loans 90 days or more past due and still accruing interest were $13.1
million at December 31, 2000, an increase of $2.9 million from the $10.2
million at December 31, 1999. These amounts represented 0.50% and 0.37% of
loans outstanding as of the end of 2000 and 1999, respectively. The increase
over 1999 is concentrated in the commercial portfolio, particularly in markets
that have experienced lending staff turnover.
Concentration of Credit Risks
As previously discussed, AMCORE strives to maintain a diverse loan and
lease 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 $697.1 million at
December 31, 2000, and comprised approximately 26.5% of gross loans, of which
1.29% were non-performing. Net charge-offs of commercial loans represented
0.39% during 2000, and 0.65% during 1999, of the year-end balance of the
category. The charge-off of the agricultural credit, was responsible for 0.16%
and 0.45% of the charge-offs for the category in 2000 and 1999, respectively.
Construction, commercial real estate loans, and loans for farmland were
$873.5 million at December 31, 2000, comprising 33.2% of gross loans, of which
0.93% were classified as non-performing. Net charge-offs of this category of
loans represent 0.09% during 2000, and 0.01% during 1999, of the year-end
balance of the category.
Residential real estate loans, which includes home equity and permanent
residential financing, totaled $662.8 million at December 31, 2000, and
represent 25.2% of gross loans, of which 0.46% are non-performing. Net charge-
offs of residential real estate loans represent 0.12% of the category total in
2000 and 0.15% of the year-end balance in 1999.
Installment and consumer loans were $391.0 million at December 31, 2000,
and comprised 14.9% of gross loans, of which 0.38% were non-performing. Net
charge-offs of consumer loans represented 0.88% and 0.57% of the year-end
category total for 2000 and 1999, respectively. Consumer loans are comprised
primarily of in-market indirect auto loans and direct installment loans.
Indirect auto loans totaled $276.5 million at December 31, 2000. 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 credit.
CAPITAL MANAGEMENT
Total stockholders' equity at December 31, 2000, was $308.5 million, an
increase of $14.8 million or 5.0%. The increase in stockholders' equity is due
to net earnings for the year, unrealized gains on available for sale
securities and by common stock issued in conjunction with stock and stock
option plans. The increase was partially offset by the acquisition of treasury
shares in conjunction with announced share repurchase programs and normal
dividend distributions. Stockholders' equity includes accumulated other
comprehensive income which is comprised primarily of unrealized holding gains
and losses of securities classified as available for sale. The fair market
value of securities with this classification increased $27.2 million during
2000 to end the year at a net unrealized gain of $334,000.
AMCORE paid $17.2 million of cash dividends during 2000, which represent
$0.64 per share, or a dividend payout ratio of 39.4%. This compares to $0.56
per share paid in 1999, which represented a payout ratio of 40.0%. The book
value per share increased $1.36 per share to $11.87 at December 31, 2000, up
from $10.51 at December 31, 1999.
26
On November 24, 1999 and August 8, 2000, AMCORE announced stock repurchase
programs for up to five percent each of its common stock, or 1.41 million and
1.35 million shares, respectively. 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. Through December 31, 2000, all shares from the November 24, 1999
authorization have been repurchased at an average price of $19.80. Through
March 1, 2001, 734,644 shares from the August 8, 2000 authorization have been
repurchased at an average price of $19.49.
AMCORE has outstanding $40 million of capital securities through AMCORE
Capital Trust I (Trust), a statutory business trust, of which all common
securities are owned by AMCORE. The capital securities qualify as Tier 1
capital for regulatory capital purposes.
The BANK is considered a "well-capitalized" institution based on regulatory
guidelines. AMCORE's leverage ratio of 7.82% at December 31, 2000 exceeds the
regulatory guidelines of 5% for well-capitalized institutions. AMCORE's ratio
of Tier 1 capital at 11.27% and total risk based capital at 12.26%
significantly exceed the regulatory minimums (as the following table
indicates), as of December 31, 2000. See Note 18 of the Notes to Consolidated
Financial Statements.
December 31, December 31,
2000 1999
---------------- ----------------
Amount Ratio Amount Ratio
---------- ----- ---------- -----
(Dollars in thousands)
Tier 1 Capital.............................. $ 331,009 11.27% $ 343,458 11.58%
Tier 1 Capital Minimum...................... 117,494 4.00% 118,591 4.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum...... $ 213,515 7.27% $ 224,867 7.58%
========== ===== ========== =====
Amount Ratio Amount Ratio
---------- ----- ---------- -----
Total Capital............................... $ 360,166 12.26% $ 371,835 12.54%
Total Capital Minimum....................... 234,988 8.00% 237,181 8.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum...... $ 125,178 4.26% $ 134,654 4.54%
========== ===== ========== =====
Risk Adjusted Assets........................ $2,937,355 $2,964,768
========== ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its normal operations, AMCORE is subject to interest-rate risk
on the interest-earning assets it invests in (primarily loans and securities)
and the interest-bearing liabilities it funds with (primarily customer
deposits and borrowed funds), as well as its ability to manage such risk.
Fluctuations in interest rates may result in changes in the fair market values
of AMCORE's financial instruments, cash flows and net interest income. Like
most financial institutions, AMCORE has an exposure to changes in both short-
term and long-term interest rates.
AMCORE expects that its interest-rate risk will be greater during periods
of rising interest rates due to resulting slower prepayments on fixed-rate
loans and securities, relatively quicker repricing of variable rate deposits
and borrowings and the increased likelihood that the FHLB will exercise its
option to call certain of AMCORE's longer-term fixed-rate FHLB advances. See
Note 10 of the Notes to Consolidated Financial Statements. Currently, AMCORE
is most vulnerable to changes in reverse repurchase rates, a short-term rate
that generally re-prices every ninety days. Consequently, AMCORE has chosen to
hedge a portion of these variable rate borrowings through the use of interest
rate swaps and collars (see discussion of off-balance sheet derivative
contracts below).
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
27
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 2000, there were no material changes in AMCORE's primary
market risk exposures. Interest-rate risk, as described above, continues to be
AMCORE's most significant market risk. Based upon current expectations, no
material changes are anticipated in the future in the types of market risks
facing AMCORE.
Table 6 and Note 5 of the Notes to Consolidated Financial Statements
summarize AMCORE's market risk and interest sensitivity position as of
December 31, 2000. The amounts and assumptions should not be relied upon as
indicative of expected actual results since, 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, competition, a general rise
or decline in interest rates, changes in the slope of the yield-curve and
changes in basis.
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 portfolios 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 profitability, liquidity
and interest rate risk, there are opportunities to enhance revenues through
controlled 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, loan and deposit pricing compared to its competition, capital
adequacy and rate sensitivity, among other things, and determines appropriate
policy direction to maintain or meet established ALCO guidelines.
Management uses off-balance sheet derivative contracts to help manage its
exposure to interest rate risk by modifying the existing interest rate risk
characteristics of on-balance sheet assets and liabilities. AMCORE does not
have any derivatives that are held or issued for trading purposes. The
derivatives utilized in the asset/liability management program predominately
comprise interest rate swap and collar contracts. Most of these instruments
are designed to hedge exposure to floating rate liabilities where, as noted
above, AMCORE is most vulnerable to interest-rate risk. In addition, AMCORE
owns some interest rate caps and floors. The caps are also used to hedge
exposure to increasing costs of floating rate liabilities. The interest rate
floors are used to manage the exposure to falling interest rates of the
originated mortgage servicing rights intangible asset.
The interest rate swap contracts involve the exchange of fixed for variable
or variable for fixed interest rate payments and are based on the notional
amount of the contract. The cap, collar and floor contracts are also based on
the notional amount of the contract. The collar, cap and floor contracts are
purchased at a premium, which is amortized over the lives of the contracts.
The notional amount of the swap, collar, cap and floor contracts only identify
the size of the contracts and are used to calculate the interest payment
amounts. The only credit risk exposure AMCORE has is in relation to the
counterparties which all have investment grade credit ratings. All
counterparties are expected to meet any outstanding interest payment
obligations.
The total notional amount of swap contracts outstanding was $190.0 million
and $100.0 million as of December 31, 2000 and 1999, respectively. As of the
end of 2000, swap contracts had an aggregate negative carrying value of
$655,000 and a negative fair value of $1.6 million, for a net unrealized loss
of $960,000. The total notional amount of collars outstanding was $85.0
million at December 31, 2000, versus $100.0 million outstanding as of the end
of 1999. As of the end of 2000, these collars had an aggregate carrying value
of $286,000 and a negative fair value of $10,000 for a net unrealized loss of
$296,000. The total notional amount of caps outstanding was $160.0 million at
December 31, 2000, with $60.0 million outstanding caps as of the end of 1999.
As of the end of 2000, the caps had an aggregate carrying value of $427,000
and a fair value of $86,000, for a net unrealized loss of $341,000. The total
notional amount of floors outstanding was $20.0 million at
28
December 31, 2000 and at December 31, 1999. The floor contracts had a net
aggregate carrying value of $125,000 and a fair value of $129,000 for a net
unrealized gain of $4,000 as of the end of 2000. For further discussion of
derivative contracts, see Notes 5 and 11 of the Notes to the Consolidated
Financial Statements.
Based upon an immediate increase in interest rates of 200 basis points and
no change in the slope of the yield curve, the potential decrease in net
income for 2001 would be approximately $8.9 million. At the end of 1999,
comparable assumptions would have resulted in a potential decrease in 2000 net
income of $10.7 million. Thus, AMCORE's earnings at risk from a rising rate
scenario are less at the end of 2000 than they were at the end of 1999. A
significant factor in this decreased exposure is the increased level of swap
contracts that hedge interest rate risk on floating rate deposits. In
addition, 2000 saw a decline in ending loan balances resulting in decreased
fixed-rate loan exposure. While there were interest rate increases during the
first half of 2000, recent actions by the Federal Reserve have led to lower
short-term interest rates. As a result, AMCORE does not expect increases to
such an extent that they would approach the hypothetical loss in net interest
income as stated above.
Conversely, an immediate decrease in interest rates of 200 basis points and
no change in the slope of the yield curve would result in a potential decrease
in net income for 2001 of $582,000. The same assumptions at the end of 1999
would have resulted in a potential increase in net income of $3.4 million.
AMCORE's position in a falling rate scenario has changed from an earnings
opportunity potential at the end of 1999 to an earnings at risk potential at
the end of 2000. The increase in swap contracts, while improving downside risk
when rates increase, removes some upside potential when rates decline. An
additional factor is the impact an immediate 200 basis point decrease in rates
would have on prepayment assumptions on fixed rate loans and the resulting
decrease in interest income from repricing at the lower rates going forward.
Recent Federal Reserve action has led to two separate rate decreases of 50
basis points, and more may be forthcoming later in the year.
The amounts and assumptions used in the rising and falling rate scenarios
should not be viewed as indicative of expected actual results. In addition to
rising or falling interest rates, AMCORE's net interest income can be
significantly impacted by a variety of external factors, such as those
previously noted. 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.
29
TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(in thousands)
Assets
Interest-Earning Assets:
Taxable securities..... $ 993,098 $ 68,289 6.88% $1,016,159 $ 65,331 6.43% $1,152,198 $ 76,786 6.66%
Tax-exempt
securities(1)......... 298,845 22,974 7.69% 333,634 25,854 7.75% 339,965 26,845 7.90%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Securities(2).. $1,291,943 $ 91,263 7.06% $1,349,793 $ 91,185 6.76% $1,492,163 $103,631 6.95%
Loans held for
sale(3)............... 26,263 2,040 7.77% 20,768 1,307 6.29% 30,837 1,886 6.12%
Loans(1)(4)............ 2,736,482 234,677 8.58% 2,593,770 216,011 8.33% 2,218,972 193,588 8.66%
Other earning assets... 21,094 1,309 6.21% 22,193 1,100 4.96% 15,210 729 4.73%
Fees on loans held for
sale(3)............... -- 541 -- -- 606 -- -- 1,037 --
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest-
Earning Assets...... $4,075,782 $329,830 8.09% $3,986,524 $310,209 7.78% $3,757,182 $300,871 7.97%
Non Interest-Earning
Assets................ 238,811 230,138 226,418
---------- ---------- ----------
Total Assets......... $4,314,593 $4,216,662 $3,983,600
========== ========== ==========
Liabilities and
Stockholders' Equity
Interest-Bearing
Liabilities:
Interest-bearing
demand and savings
deposits.............. $1,004,156 $ 37,803 3.75% $ 968,111 $ 28,375 2.93% $ 872,063 $ 25,940 2.97%
Time deposits.......... 1,717,192 102,301 5.94% 1,624,495 89,007 5.48% 1,543,158 90,664 5.88%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-
bearing deposits.... $2,721,348 $140,104 5.15% $2,592,606 $117,382 4.53% $2,415,221 $116,604 4.83%
Short-term borrowings.. 570,663 35,703 6.26% 597,044 34,200 5.73% 606,768 34,855 5.68%
Long-term borrowings... 316,680 20,014 6.32% 300,490 17,301 5.76% 278,603 16,668 5.98%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest-
Bearing Liabilities. $3,608,691 $195,821 5.43% $3,490,140 $168,883 4.84% $3,300,592 $168,127 5.08%
Non Interest Bearing
Liabilities:
Demand deposits........ 357,864 360,417 314,952
Other liabilities...... 59,218 56,382 55,000
---------- ---------- ----------
Total Liabilities.... $4,025,773 $3,906,939 $3,670,544
Stockholders' Equity.... 288,820 309,723 313,056
---------- ---------- ----------
Total Liabilities and
Stockholders'
Equity.............. $4,314,593 $4,216,662 $3,983,600
========== ========== ==========
Net Interest Income
(FTE).................. $134,009 $141,326 $132,744
======== ======== ========
Net Interest Spread
(FTE).................. 2.66% 2.94% 2.89%
==== ==== ====
Interest Rate Margin
(FTE).................. 3.29% 3.55% 3.53%
==== ==== ====
30
Twelve Months Ended Twelve Months Ended
December 31, 2000/ December 31, 1999/
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Increase Due to Increase Due to
(Decrease) Change In Total Net (Decrease) Change In Total Net
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- --------- ---------- ---------- --------- ----------
(in thousands)
Interest Income:
Taxable securities.... $(1,508) $ 4,466 $ 2,958 $(8,820) $(2,635) $(11,455)
Tax-exempt securities
(1).................. (2,676) (204) (2,880) (495) (496) (991)
------- ------- ------- ------- ------- --------
Total Securities
(2)................ (3,995) 4,073 78 (9,678) (2,768) (12,446)
Loans held for sale
(3).................. 389 344 733 (633) 54 (579)
Loans (1) (4)......... 12,115 6,551 18,666 30,366 (7,943) 22,423
Other earning assets.. (44) 253 209 291 80 371
Fees on loans held for
sale (3)............. -- (65) (65) -- (431) (431)
------- ------- ------- ------- ------- --------
Total Interest-
Earning Assets..... $ 7,045 $12,576 $19,621 $17,481 $(8,143) $ 9,338
======= ======= ======= ======= ======= ========
Interest Expense:
Interest-bearing
demand and savings
deposits............. $ 3,196 $ 6,232 $ 9,428 $ 4,402 $(1,967) $ 2,435
Time deposits......... 5,609 7,685 13,294 4,577 (6,234) (1,657)
------- ------- ------- ------- ------- --------
Total interest-
bearing deposits... 6,041 16,681 22,722 8,275 (7,497) 778
Short-term borrowings. (1,556) 3,059 1,503 (801) 146 (655)
Long-term borrowings.. 964 1,749 2,713 1,276 (643) 633
------- ------- ------- ------- ------- --------
Total Interest-
Bearing
Liabilities........ $ 5,870 $21,068 $26,938 $ 9,107 $(8,351) $ 756
======= ======= ======= ======= ======= ========
Net Interest Margin /
Net Interest Income
(FTE)................ $ 1,175 $(8,492) $(7,317) $ 8,374 $ 208 $ 8,582
======= ======= ======= ======= ======= ========
- --------
The above table shows the changes in interest income (tax equivalent "FTE")
and interest expense attributable to volume and rate variances. The change in
interest income (tax equivalent) due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(1) The interest on tax-exempt 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 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 of $3.1
million, $4.1 million, and $4.0 million for 2000, 1999 and 1998,
respectively.
31
TABLE 2
ANALYSIS OF LOAN AND LEASE PORTFOLIO AND LOSS EXPERIENCE
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands)
Commercial, financial
and agricultural....... $ 697,056 $ 710,302 $ 659,946 $ 538,259 $ 483,300
Real estate............. 1,425,098 1,422,149 1,284,764 1,059,830 930,602
Real estate--
construction........... 111,156 121,216 105,574 60,624 53,039
Installment and
consumer............... 390,971 489,586 398,318 301,163 339,319
Direct lease financing.. 2,877 3,489 3,127 3,172 2,066
---------- ---------- ---------- ---------- ----------
Gross Loans............ $2,627,158 $2,746,742 $2,451,729 $1,963,048 $1,808,326
Unearned income........ (1) (129) (211) (374) (1,205)
---------- ---------- ---------- ---------- ----------
Loans, net of unearned
income................ $2,627,157 $2,746,613 $2,451,518 $1,962,674 $1,807,121
Allowance for loan and
lease losses.......... (29,157) (28,377) (26,403) (19,908) (19,295)
---------- ---------- ---------- ---------- ----------
Net Loans............... $2,598,000 $2,718,236 $2,425,115 $1,942,766 $1,787,826
========== ========== ========== ========== ==========
SUMMARY OF LOAN LOSS
EXPERIENCE:
Allowance for loan and
lease losses, beginning
of year................ $ 28,377 $ 26,403 $ 19,908 $ 19,295 $ 17,107
Allowance for loan and
lease losses acquired
through merger......... -- -- 2,146 -- --
Amounts charged-off:
Commercial, financial
and agricultural...... 3,401 5,055 1,395 1,202 537
Real estate............ 1,663 965 480 555 273
Installment and
consumer.............. 4,639 4,068 3,091 6,020 3,831
Direct lease financing. 148 221 98 -- --
---------- ---------- ---------- ---------- ----------
Total Charge-offs...... $ 9,851 $ 10,309 $ 5,064 $ 7,777 $ 4,641
---------- ---------- ---------- ---------- ----------
Recoveries on amounts
previously charged off:
Commercial, financial
and agricultural...... 691 424 678 356 301
Real estate............ 98 48 47 63 281
Installment and
consumer.............. 1,188 1,258 695 926 819
Direct lease financing. 12 3 -- -- --
---------- ---------- ---------- ---------- ----------
Total Recoveries....... $ 1,989 $ 1,733 $ 1,420 $ 1,345 $ 1,401
---------- ---------- ---------- ---------- ----------
Net Charge-offs........ $ 7,862 $ 8,576 $ 3,644 $ 6,432 $ 3,240
Provision charged to
expense................ 9,710 10,550 7,993 7,045 5,428
Reductions due to sale
of loans............... 1,068 -- -- -- --
---------- ---------- ---------- ---------- ----------
Allowance for Loan and
Lease Losses, end of
year.................. $ 29,157 $ 28,377 $ 26,403 $ 19,908 $ 19,295
========== ========== ========== ========== ==========
NON-PERFORMING LOANS AT
YEAR-END:
Non-accrual............. $ 22,069 $ 17,829 $ 18,179 $ 19,491 $ 12,019
Restructured............ -- -- -- 377 283
---------- ---------- ---------- ---------- ----------
Total Non-performing
Loans................. $ 22,069 $ 17,829 $ 18,179 $ 19,868 $ 12,302
========== ========== ========== ========== ==========
Past due 90 days or more
not included above..... $ 13,136 $ 10,197 $ 7,272 $ 3,386 $ 3,692
========== ========== ========== ========== ==========
RATIOS:
Allowance for loan and
lease losses to year-
end loans.............. 1.11% 1.03% 1.08% 1.01% 1.07%
Allowance to non-
performing loans....... 132.12% 159.16% 145.24% 100.20% 156.84%
Net charge-offs to
average loans.......... 0.29% 0.33% 0.16% 0.34% 0.19%
Recoveries to charge-
offs................... 20.19% 16.81% 28.04% 17.29% 30.19%
Non-performing loans to
loans, net of unearned
income................. 0.84% 0.65% 0.74% 1.01% 0.68%
The allocation of the allowance for loan and lease losses at December 31 was
as follows:
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Amount Category Amount Category Amount Category Amount Category Amount Category
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(in thousands)
Commercial, financial
and agricultural...... $12,625 26.6% $ 7,863 26.0% $ 6,845 27.1% $ 5,617 27.6% $ 5,293 26.9%
Real estate............ 3,363 58.5 3,581 56.2 1,884 56.7 1,697 57.1 2,307 54.4
Installment and
consumer.............. 6,322 14.9 7,471 17.8 4,512 16.2 4,207 15.3 4,019 18.7
Impaired loans......... 4,474 * 4,469 * 3,854 * 2,311 * 1,496 *
Unallocated............ 2,373 * 4,993 * 9,308 * 6,076 * 6,180 *
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total................. $29,157 100.0% $28,377 100.0% $26,403 100.0% $19,908 100.0% $19,295 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- -------
*Not applicable
32
TABLE 3
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31, 2000
----------------------------------------------------
Time Remaining to Loans Due After
Maturity One Year
------------------------- -----------------
One
Due To After Fixed Floating
Within Five Five Interest Interest
One Year Years Years Total Rate Rate
-------- -------- ------- -------- -------- --------
(in thousands)
Commercial, financial and
agricultural............. $306,347 $306,187 $84,522 $697,056 $286,323 $104,386
Real estate-construction.. 54,215 46,242 10,699 111,156 55,058 1,882
-------- -------- ------- -------- -------- --------
Total.................. $360,563 $352,428 $95,221 $808,212 $341,381 $106,268
======== ======== ======= ======== ======== ========
TABLE 4
MATURITY OF SECURITIES
December 31, 2000
-------------------------------------------------------------------------------
States and
U.S. Political Corporate
Government Subdivisions Obligations
U.S. Treasury Agencies (1) and Other Total
------------- -------------- -------------- -------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- -------- ----- -------- ----- -------- ----- ---------- -----
(in thousands)
Securities Available for
Sale (2):
One year or less........ $22,370 6.38% $ 11,037 6.38% $ 18,920 7.62% $ 10,746 6.07% $ 63,073 6.69%
After one through five
years.................. 13,562 5.70% 15,320 7.14% 68,749 7.58% 2,481 7.07% 100,112 7.25%
After five through ten
years.................. -- -- 3,128 8.10% 88,166 7.97% -- -- 91,294 7.97%
After ten years......... -- -- 21,730 7.11% 117,231 7.88% 32,558 6.75% 171,519 7.57%
Mortgage-backed and
asset-backed securities
(3).................... -- -- 725,885 6.74% -- -- 71,902 6.95% 797,787 6.76%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Total Securities
Available for Sale.. $35,932 6.12% $777,100 6.76% $293,066 7.82% $117,687 6.82% $1,223,785 7.00%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Securities Held to
Maturity:
One year or less........ $ 249 5.40% $ -- -- $ 3,556 7.34% $ -- -- $ 3,805 7.21%
After one through five
years.................. 553 5.97% -- -- 3,625 7.72% -- -- 4,178 7.49%
After five through ten
years.................. -- -- -- -- 1,944 7.37% -- -- 1,944 7.37%
After ten years......... -- -- 24 8.25% 710 7.92% -- -- 734 7.93%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Total Securities Held
to Maturity......... $ 802 5.79% $ 24 8.25% $ 9,835 7.53% $ -- -- % $ 10,661 7.40%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Total Securities..... $36,734 6.12% $777,124 6.76% $302,901 7.81% $117,687 6.82% $1,234,446 7.00%
======= ==== ======== ==== ======== ==== ======== ==== ========== ====
- -------
(1) Yields were calculated on a tax equivalent basis assuming a federal tax
rate of 35%.
(2) Yields were calculated based on amortized cost.
(3) Mortgage-backed and asset-backed security maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties. Therefore, these securities are not
included within the maturity categories above.
33
TABLE 5
MATURITY OF TIME DEPOSITS $100,000 OR MORE
December 31, 2000
------------------------------------------------------------
Time Remaining to Maturity
------------------------------------------------------------
Due Within Three to Six to After
Three Months Six Months Twelve Months Twelve Months Total
------------ ---------- ------------- ------------- --------
(in thousands)
Certificates of deposit. $192,076 $107,356 $139,463 $352,184 $791,079
Other time deposits..... 203 6,728 8,080 838 15,849
-------- -------- -------- -------- --------
Total............... $192,279 $114,084 $147,543 $353,022 $806,928
======== ======== ======== ======== ========
34
TABLE 6
INTEREST RATE SENSITIVITY
The following table provides information about the Company's derivative
financial instruments and other financial instruments used for purposes other
than trading that are sensitive to changes in interest rates. For loans,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by
contractual maturities as well as any anticipated prepayments.
For core deposits (demand deposit accounts, interest checking, savings, and
money market deposits) that have no contractual maturity, the table was
constructed based on historical Company data.
For interest rate swaps, caps, floors and collars, the table presents
notional amounts and, if applicable, weighted-average interest rates by
contractual maturity date or call date. Notional amounts are used to calculate
the contractual payments to be exchanged under the contracts.
There-
At December 31, 2000: 2001 2002 2003 2004 2005 after Total Fair Value
- --------------------- --------- -------- -------- -------- -------- -------- ---------- ----------
(in thousands)
Rate Sensitive Assets:
Fixed Interest Rate
Loans.................. $ 585,490 $391,505 $350,327 $257,353 $101,740 $129,319 $1,815,734 $1,955,747
Average Interest Rate.. 8.60% 8.43% 8.39% 8.06% 8.77% 7.96% 8.41%
Variable Interest Rate
Loans.................. 423,414 92,317 80,743 52,597 52,383 109,969 811,423 783,127
Average Interest Rate.. 9.72% 8.64% 8.73% 8.60% 8.95% 8.42% 9.20%
Fixed Interest Rate
Securities............. 170,108 125,982 91,455 75,833 73,190 531,765 1,068,333 1,068,307
Average Interest Rate.. 6.74% 6.60% 6.68% 6.58% 6.55% 6.25% 6.45%
Variable Interest Rate
Securities............. 29,320 11,130 12,689 8,906 7,508 96,560 166,113 166,113
Average Interest Rate.. 6.20% 6.10% 6.26% 6.33% 6.42% 5.99% 6.09%
Other Interest-Bearing
Assets................. 57,562 -- -- -- -- -- 57,562 57,562
Average Interest Rate.. 5.54% -- -- -- -- -- 5.54%
Rate Sensitive
Liabilities:
Non-Interest-bearing
checking............... $ 125,302 $ 31,132 $ 27,381 $ 24,101 $ 21,230 $164,964 $ 394,110 $ 294,923
Average Interest Rate.. -- -- -- -- -- -- --
Savings & Interest-
bearing checking....... 761,875 38,629 31,443 25,923 21,585 122,394 1,001,849 945,278
Average Interest Rate.. 4.62% 1.91% 1.75% 1.62% 1.54% 1.45% 3.89%
Time-deposits........... 1,125,858 282,746 268,556 22,809 46,782 851 1,747,602 1,759,197
Average Interest Rate.. 6.26% 6.54% 6.66% 5.91% 6.96% 6.85% 6.38%
Fixed Interest Rate
Borrowings............. 371,605 71,664 79,250 209 15,606 44,463 582,797 601,842
Average Interest Rate.. 6.32% 6.18% 6.28% 7.40% 6.50% 8.97% 6.50%
Variable Interest Rate
Borrowings............. 143,667 -- -- -- -- -- 143,667 143,667
Average Interest Rate.. 5.83% -- -- -- -- -- 5.83%
Rate Sensitive
Derivative Financial
Instruments:
Pay variable/received
fixed swap............. $ 35,000 $ -- $ -- $ -- $ -- $ -- $ 35,000 $ 621
Average pay rate....... 6.60% -- -- -- -- -- 6.60%
Average receive rate... 7.00% -- -- -- -- -- 7.00%
Index: 3 mo. libor-
resets quarterly
Callable semiannually
Pay variable/received
fixed swap............. 5,000 -- -- -- -- -- 5,000 (27)
Average pay rate....... 6.67% -- -- -- -- -- 6.67%
Average receive rate... 6.75% -- -- -- -- -- 6.75%
Index: 3 mo. libor-
resets quarterly
Callable semiannually
Pay fixed/received
variable swap.......... -- 100,000 -- -- -- -- 100,000 (1,415)
Average pay rate....... -- 5.96% -- -- -- -- 5.96%
Average receive rate... -- 6.21% -- -- -- -- 6.21%
Index: 90 day Treasury-
resets monthly
Pay fixed/received
variable swap.......... 20,000 -- -- -- -- -- 20,000 4
Average pay rate....... 6.46% -- -- -- -- -- 6.46%
Average receive rate... 6.76% -- -- -- -- -- 6.76%
Index: 3 mo. libor-
resets quarterly
Pay fixed/received
variable swap.......... -- 30,000 -- -- -- -- 30,000 (798)
Average pay rate....... -- 7.43% -- -- -- -- 7.43%
Average receive rate... -- 6.56% -- -- -- -- 6.56%
Index: 3 mo. libor-
resets quarterly
35
There-
At December 31, 2000: 2001 2002 2003 2004 2005 after Total Fair Value
- --------------------- --------- -------- -------- -------- -------- -------- ---------- ----------
(in thousands)
Rate Sensitive
Derivative Financial
Instruments:
Interest rate caps...... $ -- $ -- $ 20,000 $ -- $ -- $ -- $ 20,000 $ 78
Average strike rate.... -- -- 5.75% -- -- -- 5.75%
Index: 3 mo. Treasury-
resets monthly
Interest rate caps...... -- 20,000 -- -- -- -- 20,000 5
Average strike rate.... -- 6.75% -- -- -- -- 6.75%
Index: 3 mo. Treasury-
resets monthly
Interest rate caps...... 100,000 -- -- -- -- -- 100,000 --
Average strike rate.... 6.75% -- -- -- -- -- 6.75%
Index: 3 mo. libor-
resets monthly
Interest rate caps...... -- -- -- 20,000 -- -- 20,000 3
Average strike rate.... -- -- -- 8.00% -- -- 8.00%
Index: 3 mo. libor-
resets quarterly
Interest rate floors.... -- -- 10,000 -- -- -- 10,000 23
Average strike rate.... -- -- 4.75% -- -- -- 4.75%
Index: 3 mo. libor-
resets quarterly
Interest rate floors.... -- -- 10,000 -- -- -- 10,000 106
Average strike rate.... -- -- 5.25% -- -- -- 5.25%
Index: 10 year CMT-
resets quarterly
Interest rate collars... 50,000 -- -- -- -- -- 50,000 (7)
Floor rate............. 5.50% -- -- -- -- -- 5.50%
Cap rate............... 6.75% -- -- -- -- -- 6.75%
Index: 1 mo. libor-
resets monthly
Interest rate collars... 25,000 10,000 -- -- -- -- 35,000 (3)
Floor rate............. 5.61% 5.61% -- -- -- -- 5.61%
Cap rate............... 6.31% 6.31% -- -- -- -- 6.31%
Index: 3 mo. libor-
resets monthly
There-
At December 31, 1999: 2000 2001 2002 2003 2004 after Total Fair Value
- --------------------- --------- -------- -------- -------- -------- -------- ---------- ----------
(in thousands)
Rate Sensitive Assets:
Fixed Interest Rate
Loans.................. $ 654,615 $406,076 $360,668 $256,941 $218,150 $163,619 $2,060,069 $2,112,610
Average Interest Rate.. 7.87% 8.22% 8.14% 7.99% 7.90% 7.50% 7.98%
Variable Interest Rate
Loans.................. 353,864 86,177 69,691 45,094 39,107 92,611 686,544 696,723
Average Interest Rate.. 8.98% 8.30% 8.47% 8.52% 8.45% 8.56% 8.73%
Fixed Interest Rate
Securities............. 93,822 125,977 95,704 77,846 61,984 613,800 1,069,133 1,068,974
Average Interest Rate.. 6.26% 6.43% 6.26% 6.40% 6.27% 6.12% 6.21%
Variable Interest Rate
Securities............. 12,459 6,297 6,320 8,087 7,358 131,719 172,240 172,240
Average Interest Rate.. 7.91% 10.53% 9.74% 8.71% 8.22% 6.92% 7.37%
Other Interest-Bearing
Assets................. 6,039 -- -- -- -- -- 6,039 6,039
Average Interest Rate.. 5.43% -- -- -- -- -- 5.43%
Rate Sensitive
Liabilities:
Non-Interest-bearing
checking............... $ 127,017 $ -- $150,787 $ -- $ 75,666 $ 24,859 $ 378,329 $ 333,686
Average Interest Rate.. -- -- -- -- -- -- --
Savings & Interest-
bearing checking....... 310,792 -- 502,988 -- 78,159 78,159 970,098 937,303
Average Interest Rate.. 4.35% -- 3.24% -- 1.71% 1.71% 3.35%
Time-deposits........... 1,168,920 289,560 79,429 50,849 31,995 47,228 1,667,981 1,665,665
Average Interest Rate.. 5.47% 5.55% 5.86% 5.63% 5.86% 6.70% 5.55%
Fixed Interest Rate
Borrowings............. 515,952 59,201 42,543 3,000 40,270 78,997 739,963 747,407
Average Interest Rate.. 5.91% 5.34% 5.98% 5.25% 5.50% 7.36% 6.00%
Variable Interest Rate
Borrowings............. 194,705 50,000 -- -- -- -- 244,705 244,525
Average Interest Rate.. 5.27% 5.33% -- -- -- -- 5.28%
36
There- Fair
At December 31, 1999: 2000 2001 2002 2003 2004 after Total Value
- --------------------- ------ ------ ------ ------ ------ ------- ------- -----
(in thousands)
Rate Sensitive
Derivative Financial
Instruments:
Pay variable/received
fixed swap............. $ -- $ -- $ -- $ -- $ -- $40,000 $40,000 $(569)
Average pay rate....... -- -- -- -- -- 5.96% 5.96%
Average receive rate... -- -- -- -- -- 6.97% 6.97%
Index: 3 mo. libor-
resets quarterly
Callable semiannually
Pay fixed/received
variable swap.......... 25,000 -- -- -- -- -- 25,000 169
Average pay rate....... 8.52% -- -- -- -- -- 8.52%
Average receive rate... 8.75% -- -- -- -- -- 8.75%
Index: Prime-resets
monthly
Pay fixed/received
variable swap.......... -- 20,000 -- -- -- -- 20,000 27
Average pay rate....... -- 6.46% -- -- -- -- 6.46%
Average receive rate... -- 6.07% -- -- -- -- 6.07%
Index: 3 mo. libor-
resets quarterly
Pay fixed/received
variable swap.......... 15,000 -- -- -- -- -- 15,000 22
Average pay rate....... 5.72% -- -- -- -- -- 5.72%
Average receive rate... 6.17% -- -- -- -- -- 6.17%
Index: 3 mo. libor-
resets quarterly
Interest rate caps...... -- -- 20,000 20,000 -- -- 40,000 724
Average strike rate.... -- -- 5.75% 5.75% -- -- 5.75%
Index: 3 mo. Treasury-
resets quarterly
Interest rate caps...... -- -- -- -- 20,000 -- 20,000 321
Average strike rate.... -- -- -- -- 8.00% -- 8.00%
Index: 3 mo. libor-
resets quarterly
Interest rate floors.... -- -- -- 10,000 -- -- 10,000 14
Average strike rate.... -- -- -- 4.75% -- -- 4.75%
Index: 3 mo. libor-
resets quarterly
Interest rate floors.... -- -- -- 10,000 -- -- 10,000 25
Average strike rate.... -- -- -- 5.25% -- -- 5.25%
Index: 10 year CMT-
resets quarterly
Interest rate collars... -- 50,000 -- -- -- -- 50,000 397
Floor rate............. -- 5.50% -- -- -- -- 5.50%
Cap rate............... -- 5.90% -- -- -- -- 5.90%
Index: 1 mo. libor-
resets monthly
Interest rate collars... 15,000 25,000 10,000 -- -- -- 50,000 270
Floor rate............. 5.61% 5.61% 5.61% -- -- -- 5.61%
Cap rate............... 6.31% 6.31% 6.31% -- -- -- 6.31%
Index: 3 mo. libor-
resets monthly
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended
by Statement of Financial Accounting Standards No. 138, on January 1, 2001.
This Statement outlines accounting and reporting standards for derivative
instruments and hedging activities.
Under this standard, all derivatives will be recognized at fair value in
the consolidated balance sheets. Changes in fair value for derivatives that
are not hedges will be recognized in the Consolidated Statement of Income
(Income Statement) as they arise. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative will
either be offset in the Income Statement against the change in the fair value
of the hedged asset, liability or firm commitment or it will be recognized in
other comprehensive income until the hedged item is recognized in the Income
Statement. If the change in the fair value of the derivative is not completely
offset by the change in the value of the item it is hedging, the difference
will be recognized immediately in the Income Statement.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------
2000 1999
---------- ----------
(in thousands,
except share data)
ASSETS
Cash and cash equivalents............................ $ 118,807 $ 179,113
Interest earning deposits in banks................... 21,562 6,039
Federal funds sold and other short-term investments.. 36,000 --
Loans and leases held for sale....................... 27,466 13,974
Securities available for sale........................ 1,223,785 1,227,396
Securities held to maturity (fair value of $10,635 in
2000; $13,818 in 1999).............................. 10,661 13,977
---------- ----------
Total Securities................................. $1,234,446 $1,241,373
Loans and leases, net of unearned income............. 2,627,157 2,746,613
Allowance for loan and lease losses.................. (29,157) (28,377)
---------- ----------
Net Loans and Leases............................. $2,598,000 $2,718,236
Premises and equipment, net.......................... 52,554 55,618
Intangible assets, net............................... 16,683 17,102
Foreclosed real estate............................... 3,282 2,675
Other assets......................................... 135,306 113,491
---------- ----------
Total Assets..................................... $4,244,106 $4,347,621
========== ==========
LIABILITIES
Deposits:
Demand deposits.................................... $1,268,253 $1,202,632
Savings deposits................................... 127,706 145,795
Other time deposits................................ 1,747,602 1,667,981
---------- ----------
Total Deposits................................... $3,143,561 $3,016,408
Short-term borrowings.............................. 460,634 699,398
Long-term borrowings............................... 265,830 285,270
Other liabilities.................................. 65,584 52,817
---------- ----------
Total Liabilities................................ $3,935,609 $4,053,893
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000
shares; issued none................................. $ -- $ --
Common stock, $.22 par value: authorized 45,000,000
shares;
2000 1999
---------- ----------
Issued 29,700,201 29,648,571
Outstanding 25,985,432 27,949,431
6,596 6,585
Additional paid-in capital............................ 74,900 74,244
Retained earnings..................................... 297,703 271,781
Deferred compensation................................. (1,651) (1,533)
Treasury stock........................................ (69,385) (30,442)
Accumulated other comprehensive income (loss)......... 334 (26,907)
---------- ----------
Total Stockholders' Equity........................ $ 308,497 $ 293,728
---------- ----------
Total Liabilities and Stockholders' Equity........ $4,244,106 $4,347,621
========== ==========
See accompanying notes to consolidated financial statements.
38
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(in thousands, except per
share data)
INTEREST INCOME
Interest and fees on loans and leases............. $233,762 $215,173 $192,974
Interest on securities:
Taxable......................................... 68,289 65,331 76,786
Tax-exempt...................................... 14,933 16,805 17,449
-------- -------- --------
Total Income from Securities.................. $ 83,222 $ 82,136 $ 94,235
Interest on federal funds sold and other short-
term investments................................. 355 304 364
Interest and fees on loans and leases held for
sale............................................. 2,581 1,913 2,923
Interest on deposits in banks..................... 954 796 365
-------- -------- --------
Total Interest Income......................... $320,874 $300,322 $290,861
INTEREST EXPENSE
Interest on deposits.............................. $140,339 $118,009 $116,604
Interest on short-term borrowings................. 36,041 32,573 34,855
Interest on long-term borrowings.................. 19,441 18,301 16,668
-------- -------- --------
Total Interest Expense........................ $195,821 $168,883 $168,127
-------- -------- --------
Net Interest Income........................... $125,053 $131,439 $122,734
Provision for loan and lease losses............... 9,710 10,550 7,993
-------- -------- --------
Net Interest Income After Provision for Loan
and Lease Losses............................. $115,343 $120,889 $114,741
NON-INTEREST INCOME
Trust and asset management income................. $ 30,085 $ 28,872 $ 23,721
Service charges on deposits....................... 11,480 10,176 8,831
Mortgage revenues................................. 5,413 8,111 9,671
Other............................................. 13,291 11,468 11,209
-------- -------- --------
Total Non-Interest Income, Excluding Net
Realized Security Gains...................... $ 60,269 $ 58,627 $ 53,432
Net realized security gains....................... 1,793 530 4,427
-------- -------- --------
Total Non-Interest Income..................... $ 62,062 $ 59,157 $ 57,859
OPERATING EXPENSES
Compensation expense.............................. $ 53,174 $ 55,598 $ 51,469
Employee benefits................................. 13,641 13,441 12,964
Net occupancy expense............................. 7,271 6,711 6,750
Equipment expense................................. 8,481 9,026 7,895
Data processing expense........................... 5,844 7,150 5,339
Professional fees................................. 3,770 5,262 5,723
Communication expense............................. 3,981 4,092 3,598
Advertising and business development.............. 3,797 3,597 3,771
Amortization of intangible assets................. 2,106 1,991 2,536
Other............................................. 15,901 17,923 18,660
-------- -------- --------
Total Operating Expenses...................... $117,966 $124,791 $118,705
-------- -------- --------
Income Before Income Taxes.................... $ 59,439 $ 55,255 $ 53,895
Income taxes...................................... 16,356 15,106 14,314
-------- -------- --------
Net Income.................................... $ 43,083 $ 40,149 $ 39,581
======== ======== ========
Basic Earnings Per Common Share..................... $ 1.60 $ 1.42 $ 1.39
Diluted Earnings Per Common Share................... 1.58 1.40 1.36
Dividends Per Common Share.......................... 0.64 0.56 0.54
Average Common Shares Outstanding................... 26,930 28,304 28,515
Average Diluted Shares Outstanding.................. 27,237 28,730 29,098
See accompanying notes to consolidated financial statements.
39
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Deferred Treasury Comprehensive Stockholders'
Stock Capital Earnings Compensation Stock Income (Loss) Equity
------ ---------- -------- ------------ -------- ------------- -------------
(in thousands, except share data)
Balance at December 31,
1997................... $6,152 $73,262 $206,235 $(1,478) $ (5,069) $ 8,374 $287,476
------ ------- -------- ------- -------- -------- --------
Comprehensive Income:
Net Income............. -- -- 39,581 -- -- -- 39,581
Unrealized holding
losses on securities
available for sale
arising during the
period................ -- -- -- -- -- (15,143) (15,143)
Less reclassification
adjustment for
realized gains
included in net
income................ -- -- -- -- -- (4,427) (4,427)
Income tax effect
related to items of
other comprehensive
income................ -- -- -- -- -- 7,752 7,752
------ ------- -------- ------- -------- -------- --------
Net unrealized gains
(losses) on securities
available for sale..... -- -- -- -- -- (11,818) (11,818)
------ ------- -------- ------- -------- -------- --------
Comprehensive Income.... -- -- 39,581 -- -- (11,818) 27,763
------ ------- -------- ------- -------- -------- --------
Cash dividends on
common stock--$.54 per
share................. -- -- (15,404) -- -- -- (15,404)
Issuance of 1,912,357
common shares for
Midwest Federal
Financial Corp........ 420 2,314 17,074 -- -- 178 19,986
Reissuance of 340,471
treasury shares for
Investors Management
Group, Ltd............ -- 578 -- -- 7,944 -- 8,522
Purchase of 826,980
shares for the
treasury.............. -- -- -- -- (19,745) -- (19,745)
Reissuance of 27,174
treasury shares under
non-employee directors
stock plans........... -- 290 -- (692) 402 -- --
Deferred compensation
expense............... -- -- -- 464 -- -- 464
Reissuance of 462,109
treasury shares for
employee incentive
plans................. -- (1,366) -- -- 8,206 -- 6,840
Repayment of ESOP loan,
37 shares returned to
treasury.............. -- 182 -- -- (1) -- 181
------ ------- -------- ------- -------- -------- --------
Balance at December 31,
1998................... $6,572 $75,260 $247,486 $(1,706) $ (8,263) $ (3,266) $316,083
====== ======= ======== ======= ======== ======== ========
Comprehensive Income:
Net Income............. -- -- 40,149 -- -- -- 40,149
Unrealized holding
losses on securities
available for sale
arising during the
period................ -- -- -- -- -- (38,318) (38,318)
Less reclassification
adjustment for
realized gains
included in net
income................ -- -- -- -- -- (530) (530)
Income tax effect
related to items of
other comprehensive
income................ -- -- -- -- -- 15,207 15,207
------ ------- -------- ------- -------- -------- --------
Net unrealized gains
(losses) on securities
available for sale..... -- -- -- -- -- (23,641) (23,641)
------ ------- -------- ------- -------- -------- --------
Comprehensive Income.... -- -- 40,149 -- -- (23,641) 16,508
------ ------- -------- ------- -------- -------- --------
Cash dividends on
common stock--$.56 per
share................. -- -- (15,854) -- -- -- (15,854)
Purchase of 1,315,679
shares for the
treasury.............. -- -- -- -- (30,527) -- (30,527)
Reissuance of 14,393
treasury shares under
non-employee directors
stock plans........... -- (9) -- (321) 330 -- --
Deferred compensation
expense............... -- -- -- 494 -- -- 494
Reissuance of 357,967
treasury shares for
employee incentive
plans................. -- (1,967) -- -- 8,019 -- 6,052
Issuance of 55,076
common shares for
Employee Stock Plan... 13 960 -- -- -- -- 973
Repayment of ESOP loan,
24 shares returned to
treasury.............. -- -- -- -- (1) -- (1)
------ ------- -------- ------- -------- -------- --------
Balance at December 31,
1999................... $6,585 $74,244 $271,781 $(1,533) $(30,442) $(26,907) $293,728
====== ======= ======== ======= ======== ======== ========
Comprehensive Income:
Net Income............. -- -- 43,083 -- -- -- 43,083
Unrealized holding
gains on securities
available for sale
arising during the
period................ -- -- -- -- -- 46,549 46,549
Less reclassification
adjustment for
realized gains
included in net
income................ -- -- -- -- -- (1,793) (1,793)
Income tax effect
related to items of
other comprehensive
income................ -- -- -- -- -- (17,515) (17,515)
------ ------- -------- ------- -------- -------- --------
Net unrealized gains
(losses) on securities
available for sale..... -- -- -- -- -- 27,241 27,241
------ ------- -------- ------- -------- -------- --------
Comprehensive Income ... -- -- 43,083 -- -- 27,241 70,324
------ ------- -------- ------- -------- -------- --------
Cash dividends on
common stock--$.64 per
share ................ -- -- (17,161) -- -- -- (17,161)
Purchase of 2,208,164
shares for the
treasury.............. -- -- -- -- (42,882) -- (42,882)
Reissuance of 9,841
treasury shares under
non-employee directors
stock plan............ -- 4 -- (6) 147 -- 145
Deferred compensation
expense............... -- -- -- 524 -- -- 524
Reissuance of 182,694
treasury shares for
employee incentive
plans................. -- (120) -- (636) 3,792 -- 3,036
Issuance of 51,630
common shares for
Employee Stock Plan... 11 772 -- -- -- -- 783
------ ------- -------- ------- -------- -------- --------
Balance at December 31,
2000................... $6,596 $74,900 $297,703 $(1,651) $(69,385) $ 334 $308,497
====== ======= ======== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
40
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
Cash Flows From Operating Activities
Net income................................... $ 43,083 $ 40,149 $ 39,581
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of premises
and equipment.............................. 7,059 7,165 6,854
Amortization and accretion of securities,
net........................................ 1,718 9,033 10,252
Provision for loan and lease losses......... 9,710 10,550 7,993
Amortization of intangible assets........... 2,106 1,991 2,536
Net gain on sale of securities available
for sale................................... (1,793) (530) (4,427)
Net gain on sale of loans held for sale..... (1,439) -- --
Deferred income taxes....................... 1,372 (596) (1,154)
Originations of loans held for sale......... (311,393) (270,404) (478,921)
Proceeds from sales of loans held for sale.. 299,340 303,266 463,811
Tax benefit on exercise of stock options.... (320) (1,738) (2,292)
Other, net.................................. 11,133 (14,810) 7,711
--------- --------- ---------
Net cash provided by operating activities. $ 60,576 $ 84,076 $ 51,944
--------- --------- ---------
Cash Flows From Investing Activities
Proceeds from maturities of securities
available for sale.......................... $ 175,881 $ 324,914 $ 487,143
Proceeds from maturities of securities held
to maturity................................. 3,025 3,162 2,425
Proceeds from sales of securities available
for sale.................................... 132,501 153,935 405,906
Purchase of securities held to maturity...... -- (1,003) (4,411)
Purchase of securities available for sale.... (208,105) (406,745) (777,576)
Net (increase) decrease in federal funds sold
and other short-term investments............ (36,000) 9,427 (8,794)
Net (increase) decrease in interest earning
deposits in banks........................... (15,523) 7,358 (11,186)
Proceeds from the sale of credit card
receivables................................. -- -- 5,815
Proceeds from the sale of loans and leases... 5,130 22,756 6,047
Net decrease (increase) in loans and leases.. 50,187 (348,827) (335,458)
Premises and equipment expenditures, net..... (3,996) (4,010) (6,515)
Investment in bank owned life insurance...... (40,000) (127) (10,798)
Proceeds from the sale of foreclosed real
estate...................................... 3,037 2,931 2,294
Net cash and cash equivalents acquired
through acquisitions........................ -- -- 5,763
--------- --------- ---------
Net cash provided by (used for) investing
activities............................... $ 66,137 $(236,229) $(239,345)
--------- --------- ---------
Cash Flows From Financing Activities
Net increase (decrease) in demand deposits
and savings accounts........................ $ 47,532 $ (3,738) $ 191,183
Net increase in other time deposits.......... 79,621 72,422 65,897
Net (decrease) increase in short-term
borrowings.................................. (238,855) 126,037 (178,948)
Proceeds from long-term borrowings........... 65,000 96,500 174,800
Payment of long-term borrowings.............. (84,413) (66,535) (533)
Dividends paid............................... (17,161) (15,854) (15,404)
Issuance of common shares for employee stock
plan........................................ 783 973 --
Reissuance of treasury shares for employee
benefit incentive plans..................... 3,356 7,789 9,132
Purchase of shares for the treasury.......... (42,882) (30,527) (19,745)
--------- --------- ---------
Net cash (used for) provided by financing
activities............................... $(187,019) $ 187,067 $ 226,382
--------- --------- ---------
Net change in cash and cash equivalents...... $ (60,306) $ 34,914 $ 38,981
Cash and cash equivalents:
Beginning of year........................... 179,113 144,199 105,218
--------- --------- ---------
End of year................................. $ 118,807 $ 179,113 $ 144,199
========= ========= =========
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest paid to depositors................. $ 133,512 $ 116,685 $ 115,003
Interest paid on borrowings................. 55,389 50,808 52,517
Income taxes paid........................... 14,029 14,516 14,425
Non-Cash Investing and Financing
Non-cash transfer of loans to securities..... 51,548 19,174 --
Foreclosed real estate--acquired in
settlement of loans......................... 3,740 3,394 3,308
Transfer of long-term borrowings to short-
term borrowings............................. 91 75,150 28,150
Common stock issued for Midwest Federal
Financial Corp.............................. -- -- 19,986
Common stock issued for Investors Management
Group, Ltd.................................. -- -- 8,522
See accompanying notes to consolidated financial statements.
41
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of AMCORE Financial, Inc. and
subsidiaries (Company) conform to accounting principles generally accepted in
the United States of America. 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
those estimates. The following is a summary of the more significant accounting
policies of the Company.
Description of the Business
The Company is a bank holding company headquartered in Rockford, Illinois,
and conducts its principal business activities with businesses and individuals
located within northern Illinois, and south central Wisconsin. The primary
business of the Company is the extension of credit and the collection of
deposits with commercial and industrial, agricultural, real estate and
consumer loan customers throughout northern Illinois and south central
Wisconsin. Although the Company has a diversified loan portfolio, adverse
changes in the local economy would have a direct impact on the credit risk in
the portfolio.
The Company also offers a variety of financial services through its
financial services subsidiaries. These include mortgage banking, personal and
employee benefit trust administration for individuals, estates and
corporations, consumer finance, investment management, brokerage and the
reinsurance of credit life and accident and health insurance in conjunction
with the lending activities of the Company's bank subsidiary.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
amounts due from banks, and cash items in process of clearing to be cash and
cash equivalents. Cash flows for fed funds sold and other short-term
investments, interest earning deposits in banks, loans, demand deposits and
savings accounts, time deposits and short-term borrowings are reported net.
Loans and Leases Held for Sale
Loans originated and intended for sale in the secondary market are recorded
at the lower of cost or fair value in the aggregate. Gains and losses on the
sale of loans are included in other non-interest income.
Securities
Securities are classified into three categories: held to maturity,
available for sale and trading. Securities for which the Company has the
ability and the intent to hold to maturity are classified as held to maturity
and are reported at amortized cost. Securities held for resale are classified
as trading securities and are reported at fair value with unrealized gains and
losses recorded in earnings. Securities, which are neither held to maturity
nor trading, are classified as available for sale and are reported at fair
value. The level yield method is used for the amortization and accretion of
premiums and discounts. The cost of securities sold is determined on a
specific identification method. There were no trading securities outstanding
at December 31, 2000 and 1999.
42
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
When it is determined that securities are impaired and the impairment is
other than temporary, an impairment loss is recorded in earnings and a new cost
basis is established for the security.
Loans and Leases
Loans and leases that management has the ability and intent to hold for the
foreseeable future are carried at their principal amount outstanding plus any
unamortized net deferred origination costs or less any unamortized net deferred
origination fees less unearned income. Interest on commercial, real estate, and
certain installment and consumer loans is accrued and recognized as income
based upon the outstanding principal amount and the contractual interest rate
of each loan. Unearned interest on discounted installment loans has been
recognized as income using methods which approximate level rates of return over
the terms of the loans. Loan origination fees and certain direct origination
costs on loans retained in the portfolio are deferred and amortized over the
expected life of each loan as an adjustment of the related loan's yield.
Certain financing leases are originated and sold with limited recourse. A
liability is recorded for the estimated amount of recourse due to uncollectible
leases and is a component of the gain or loss recognized on sale.
Loans measured for impairment include commercial, financial, agricultural,
real estate commercial and commercial real estate construction loans. Loans are
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impairment is measured on a
loan by loan basis by either the present value of expected future cash flows,
or alternatively, the observable market price of the loans or the fair value of
the collateral. However, for those loans that are collateral-dependent, and for
which management has determined foreclosure is probable, the measure of
impairment is based on the fair value of the collateral.
The accrual of interest income for impaired loans is discontinued when
management believes, after considering collection efforts and other factors
that the borrower's financial condition is such that collection of interest is
doubtful. Cash collections on impaired loans reduce the principal balance, and
no interest income is recognized until the remaining principal balance is fully
collectible. An impaired loan is returned to accrual status when management
determines that the borrower's financial condition has improved such that both
the remaining principal and interest are deemed collectible. In the event that
it is determined that collection of an impaired loan is remote, the loan is
charged-off.
The Company considers consumer loans, residential real estate and
residential construction real estate loans to be smaller balance, homogeneous
loans which are exempt from impairment measurement. These types of loans,
except for credit card and consumer finance receivables, are placed on non-
accrual when payment becomes 90 to 120 days past due. In most instances, a
charge-off is recorded when a consumer loan becomes 120 to 150 days past due. A
charge-off is recorded on residential real estate loans, if appropriate, when
the Company receives clear title to the mortgaged property.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established as losses are
estimated to have occurred through a provision for loan and lease losses
charged to expense. Loan and lease losses are charged against the allowance
when management believes the uncollectibility of principal will occur.
Subsequent recoveries, if any, are credited to the allowance. The allowance for
loan and lease losses is evaluated on a regular basis by management and is
based upon management's periodic review of the collectibility of loans and
leases in light of historical loan and lease loss experience, overall loan
portfolio quality, the nature of and size of the portfolio, specific adverse
situations that may affect the borrowers' ability to repay, the estimated value
of any underlying collateral, and current economic conditions. While management
uses the best information available to make its evaluation,
43
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
future adjustments to the allowance may be necessary as more information
becomes available or if there are significant changes in economic conditions or
other factors.
Premises and Equipment
Premises and equipment including leasehold improvements are stated at cost
less accumulated depreciation and amortization. Depreciation is computed
principally on the straight-line method over the estimated useful life of the
assets. Leasehold improvements are being amortized using the straight-line
method over the terms of the respective leases or their useful lives, whichever
is shorter.
Intangible Assets
Certain intangible assets, such as core deposit intangibles and goodwill,
have arisen from the purchase of subsidiaries. Core deposit intangibles
represent a valuation of acquired deposit relationships and are being amortized
based on the present value of the future net income or cost savings derived
from the related deposits over an original period ranging from six to twelve
years. Goodwill represents the excess of the purchase price over the fair value
of the identifiable net assets acquired and is being amortized over a maximum
of fifteen years using the straight-line method.
Foreclosed Real Estate
Foreclosed real estate comprises real properties acquired in partial or full
satisfaction of loans. These properties are carried as other assets at the
lower of cost or fair value less estimated costs to sell the properties. When
the property is acquired through foreclosure, any excess of the related loan
balance over the fair value less expected sales costs, is charged against the
allowance for loan and lease losses. Subsequent write-downs or gains and losses
upon sale, if any, are charged to other operating expense.
Mortgage Servicing Rights
The value of mortgage servicing rights either attained through the
origination of mortgage loans or the purchase of a servicing rights portfolio
are recognized as separate capitalized assets. When the originated mortgage
loans are sold or securitized into the secondary market, the Company allocates
the total cost of the mortgage loans between mortgage servicing rights and
other retained interests, and the loans, based on their relative fair values.
The cost of mortgage servicing rights and other retained interests is amortized
in proportion to, and over the period of, estimated net servicing revenues.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, the servicing rights are stratified into
pools based on one or more predominant risk characteristics of the underlying
loans including loan type, interest rate, term and geographic location.
Impairment represents the excess of carrying value of a stratified pool over
its fair value, and is recognized through a valuation allowance. The fair value
of each servicing rights pool is evaluated based on the present value of
estimated future cash flows using a discount rate commensurate with the risk
associated with that pool, given current market conditions. Estimates of fair
value include assumptions about prepayment speeds, interest rates, and other
factors which are subject to change over time. Changes in these underlying
assumptions could cause the fair value of mortgage servicing rights, and the
related valuation allowance, to change significantly in the future.
Purchased mortgage servicing rights and deferred excess servicing rights are
periodically evaluated for impairment. A method similar to that used for
originated mortgage servicing rights is used for evaluation. Under this method,
the fair value is evaluated based on the present value of estimated future cash
flows using a discount rate commensurate with the associated risk.
44
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan Securitization and Sales of Receivables
When the Company sells receivables in securitizations of automobile loans,
it retains; interest-only strips, a subordinated credit enhancement tranche and
servicing rights, all of which are retained interests in the securitized
assets. Gain or loss on sale of the receivables is determined based upon the
proceeds from the sale and on the previous net carrying amount of the
automobile loan receivables involved in the transfer, allocated between the
assets sold and the retained interests based on their fair value at the date of
transfer. If available, quoted market prices are used to determine fair value.
As quoted market prices are generally not available for retained interests, the
Company generally estimates fair value based on the present value of future
cash flows expected. Key assumptions made by management include--credit losses,
prepayment speeds and discount rates commensurate with the risks involved.
Impairment of Long-Lived Assets
Long-lived assets including certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would be
recognized by a reduction to the carrying amount of the asset, thus
establishing a new cost basis, with an offsetting charge to expense.
Trust Assets
Assets that are held by subsidiaries in a fiduciary or agency capacity are
not included in the consolidated financial statements as they are not assets of
the Company. The total assets under management at December 31, 2000 were $4.4
billion.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to effectively manage its exposure to market risk. Interest rate derivative
financial instruments (swap, floor and cap agreements) are used to manage
interest rate exposure by hedging the cash flows or fair values of certain
assets and liabilities. Income and expense are accrued under the terms of the
agreements based on expected settlement payments, and are recorded as a
component of net interest income. Fees paid on these financial contracts are
amortized over their contractual life as a component of the interest reported
on the asset or liability hedged. If a hedged asset or liability settles before
maturity of the instruments used as a hedge, the derivatives can be
redesignated to hedge a similar asset or liability. Any hedge not qualifying as
a hedge for financial accounting purposes is marked to market through earnings.
Gains and losses on sales or cancellation of derivative financial instruments
which are used to manage interest rate risk or which are considered hedges are
deferred and amortized into income or expenses over the original maturity
period of the financial instrument.
Income Taxes
Deferred taxes are provided on a liability method whereby net operating
losses, tax credit carryforwards, and deferred tax assets are recognized for
deductible temporary differences and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
45
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per share is based on dividing net income by the weighted
average number of shares of common stock outstanding during the periods.
Diluted earnings per share reflects the potential dilution that could occur if
stock options granted pursuant to incentive stock option plans were exercised
or converted into common stock, and any shares contingently issuable, that then
shared in the earnings of the Company.
Segment Information
The Company discloses operating segments based on the "management" approach.
The management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. See Note 16 for further
information.
New Accounting Standards
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities--a replacement of FASB Statement No. 125". This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of SFAS No. 125's provisions without reconsideration.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement
is effective for recognition and reclassification of collateral and for
disclosures relative to securitization transactions and collateral for fiscal
years ending after December 15, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25". This Interpretation
clarifies the application of Opinion 25 for only certain issues. Among other
issues, this Interpretation clarifies (a) the definition of "employee" for
purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occurred
after either December 15, 1998, or January 12, 2000.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by Statement of Financial Accounting Standards No. 138, on January 1, 2001.
This Statement outlines accounting and reporting standards for derivative
instruments and hedging activities.
Under this standard, all derivatives will be recognized at fair value in the
consolidated balance sheets. Changes in fair value for derivatives that are not
hedges will be recognized in the Consolidated Statement of Income (Income
Statement) as they arise. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
in the Income Statement against the change in the fair value of the hedged
asset, liability or firm commitment or it will be recognized in other
comprehensive income until the hedged item is recognized in the Income
Statement. If the change in the fair value of the derivative is not completely
offset by the change in the value of the item it is hedging, the difference
will be recognized immediately in the Income Statement.
Because SFAS No. 133 was effective January 1, 2001, the impact of the
transition to this standard on the Company's earnings and financial position
was dependent on the composition of the hedging portfolio at that date. The
transition adjustments, net of tax, arising from its application increased
consolidated assets by $2.1
46
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million, increased consolidated liabilities by $3.4 million, decreased other
comprehensive income by $1.5 million, and increased net income by $225,000.
Included in these amounts are $10.7 million of held to maturity securities
which were reclassified to available for sale as part of the adoption of this
standard.
NOTE 2--MERGERS, ACQUISITIONS AND DIVESTITURES
Mergers occurred during the reported periods as follows:
On March 31, 1999, Wellmark Capital Value, Inc. (WCV) of Des Moines, Iowa
was acquired by the Company for $50,000. Additional cash payments of $174,000
were contingent upon WCV's performance from acquisition through March 31,
2001. Based on the attainment of performance targets in 2000, $87,000 was
earned and paid. An additional $87,000 may be paid in 2001, contingent upon
the level of assets under management. The transaction was accounted for as a
purchase.
On March 27, 1998, Midwest Federal Financial Corp. (Midwest), a one-bank
holding company, merged into the Company, which issued 1,912,357 common shares
in exchange for the 1,628,924 outstanding Midwest shares. At the date of the
merger, Midwest had total assets of approximately $211 million. This
transaction was accounted for as a pooling of interests, however, the size of
the transaction was not material to the Company's consolidated financial
statements. Therefore, results previous to the date of acquisition were not
restated. The results of Midwest's operations have been included in the
Company's operating results since March 27, 1998. In connection with this
merger, the Company recorded charges of $3.3 million in 1998 for merger-
related costs. The charges include costs for data conversion expenses,
professional fees, severance and personnel related costs, and other
miscellaneous costs. At December 31, 1999, there was no remaining liability
relating to the merger.
On February 17, 1998, Investors Management Group, LTD (IMG), an asset
management firm, was acquired by the Company. AMCORE issued 270,139 shares at
closing for an approximate value of $6.0 million. The issuance of additional
shares valued at $4.8 million were contingent upon IMG's performance from 1998
through 2000. Based on the attainment of performance targets in 2000, 1999 and
1998, shares valued at $1.6 million each year were earned (79,451, 65,595 and
70,284 shares, respectively) and increased the purchase price allocable to
goodwill. At the date of the acquisition, IMG had approximately $1.6 billion
in assets under management. This transaction was accounted for as a purchase.
The results of IMG's operations have been included in the Company's operating
results since February 17, 1998. The excess of the purchase price over the
fair value of assets acquired was recorded as goodwill in the amount of $12.0
million, and is being amortized over fifteen years using the straight-line
method.
Pending Divestitures:
On October 11, 2000, the Company announced that it was considering the sale
of ten branches (the "Branch Sales") as part of its strategic objective to
invest in and reallocate capital to high growth Midwestern markets. The
branches considered for sale included Aledo, Gridley, Mendota, Freeport, Mount
Morris, Oregon, Ashton, Rochelle, Wyanet and Sheffield. As of December 31,
2000, no firm commitments had been made with respect to the sale of any of the
branches. On January 25, 2001, the Company announced that it had reached a
definitive agreement for the sale of its Ashton and Rochelle branch locations
to First National Bank of Rochelle. On February 15, 2001, the Company
announced that it had reached a definitive agreement for the sale of its Mount
Morris branch to UNION Savings BANK, Freeport, Illinois. On March 5, 2001, the
Company announced that it had reached a definitive agreement for the sale of
its Aledo branch to THE National Bank, Bettendorf, Iowa. On March 8, 2001, the
Company announced that it had reached a definitive agreement for the sale of
its Sheffield and Wyanet locations to Peoples National Bank of Kewanee.
The Company continues to pursue the sale of the Gridley branch and will
only consider a sale if the Company believes that full financial value will be
realized. However, the Company has concluded that Mendota, Oregon and Freeport
no longer fit in its contemplated divestiture program and are no longer being
considered for sale. Combined the seven branches represent approximately $74.6
million in loans and other assets and $191.7 million in deposits. The Company
expects the Branch Sales will result in gains individually and in total.
47
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--SECURITIES
A summary of securities at December 31, 2000, 1999, and 1998 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(in thousands)
At December 31, 2000
Securities Available for Sale:
U.S. Treasury.................. $ 35,751 $ 215 $ (34) $ 35,932
U.S. Government agencies....... 51,091 142 (18) 51,215
Agency mortgage-backed
securities.................... 728,782 4,737 (7,634) 725,885
State and political
subdivisions.................. 289,496 5,630 (2,060) 293,066
Corporate obligations and
other......................... 118,201 296 (810) 117,687
---------- ------- -------- ----------
Total Securities Available
for Sale.................... $1,223,321 $11,020 $(10,556) $1,223,785
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury.................. $ 802 $ 4 $ -- $ 806
U.S. Government agencies....... 24 -- -- 24
State and political
subdivisions.................. 9,835 47 (77) 9,805
---------- ------- -------- ----------
Total Securities Held to
Maturity.................... $ 10,661 $ 51 $ (77) $ 10,635
---------- ------- -------- ----------
Total Securities............. $1,233,982 $11,071 $(10,633) $1,234,420
========== ======= ======== ==========
At December 31, 1999
Securities Available for Sale:
U.S. Treasury.................. $ 61,466 $ 171 $ (258) $ 61,379
U.S. Government agencies....... 32,390 3 (847) 31,546
Agency mortgage-backed
securities.................... 746,953 1,308 (31,951) 716,310
State and political
subdivisions.................. 299,304 1,254 (11,055) 289,503
Corporate obligations and
other......................... 131,572 85 (2,999) 128,658
---------- ------- -------- ----------
Total Securities Available
for Sale.................... $1,271,685 $ 2,821 $(47,110) $1,227,396
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury.................. $ 1,053 $ -- $ (8) $ 1,045
U.S. Government agencies....... 25 -- -- 25
State and political
subdivisions.................. 12,898 53 (204) 12,747
Corporate obligations and
other......................... 1 -- -- 1
---------- ------- -------- ----------
Total Securities Held to
Maturity.................... $ 13,977 $ 53 $ (212) $ 13,818
---------- ------- -------- ----------
Total Securities............. $1,285,662 $ 2,874 $(47,322) $1,241,214
========== ======= ======== ==========
At December 31, 1998
Securities Available for Sale:
U.S. Treasury.................. $ 66,431 $ 1,047 $ (19) $ 67,459
U.S. Government agencies....... 82,814 701 (2) 83,513
Agency mortgage-backed
securities.................... 727,506 4,645 (22,308) 709,843
State and political
subdivisions.................. 312,116 11,489 (374) 323,231
Corporate obligations and
other......................... 144,106 586 (1,206) 143,486
---------- ------- -------- ----------
Total Securities Available
for Sale.................... $1,332,973 $18,468 $(23,909) $1,327,532
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury.................. $ 1,053 $ 15 $ -- $ 1,068
U.S. Government agencies....... 27 -- -- 27
State and political
subdivisions.................. 15,061 261 (47) 15,275
Corporate obligations and
other......................... 1 -- -- 1
---------- ------- -------- ----------
Total Securities Held to
Maturity.................... $ 16,142 $ 276 $ (47) $ 16,371
---------- ------- -------- ----------
Total Securities............. $1,349,115 $18,744 $(23,956) $1,343,903
========== ======= ======== ==========
48
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realized gross gains resulting from the sale of securities available for
sale were $1.8 million, $1.3 million and $4.7 million for 2000, 1999 and 1998,
respectively. Realized gross losses were $3,000, $736,000 and $234,000 for
2000, 1999 and 1998, respectively.
The amortized cost and fair value of both securities available for sale and
securities held to maturity as of December 31, 2000, by contractual maturity
are shown below. Mortgage-backed security maturities may differ from
contractual maturities because the underlying mortgages may be called or
prepaid without any penalties. Therefore, these securities are not included in
the maturity categories in the following maturity summary.
Available for Sale Held to Maturity
--------------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- --------- -------
(in thousands)
Due in one year or less................ $ 63,228 $ 63,073 $ 3,805 $ 3,811
Due after one year through five years.. 99,224 100,112 4,178 4,201
Due after five years through ten years. 89,310 91,294 1,944 1,893
Due after ten years.................... 170,678 171,519 734 730
Mortgage-backed securities (agency and
corporate)............................ 800,881 797,787 -- --
---------- ---------- ------- -------
Total Securities................... $1,223,321 $1,223,785 $10,661 $10,635
========== ========== ======= =======
At December 31, 2000, 1999, and 1998, securities with a fair value of
approximately $911.0 million, $906.4 million and $826.8 million, respectively,
were pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes required by law.
NOTE 4--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The composition of the loan and lease portfolio at December 31, 2000 and
1999 was as follows:
2000 1999
---------- ----------
(in thousands)
Commercial, financial and agricultural............ $ 697,056 $ 710,302
Real estate-construction.......................... 111,156 121,216
Real estate-commercial............................ 762,320 732,447
Real estate-residential........................... 662,778 689,702
Installment and consumer.......................... 390,971 489,586
Direct lease financing............................ 2,877 3,489
---------- ----------
Gross loans and leases.......................... $2,627,158 $2,746,742
Unearned income................................. (1) (129)
---------- ----------
Loans and leases, net of unearned income........ $2,627,157 $2,746,613
Allowance for loan and lease losses............. (29,157) (28,377)
---------- ----------
Net Loans and Leases............................ $2,598,000 $2,718,236
========== ==========
49
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-performing loan information as of and for the years ended December 31,
was as follows:
2000 1999
------- -------
(in thousands)
Impaired Loans:
Non-accrual Loans:
Commercial........................................... $ 9,396 $ 5,192
Real estate.......................................... 11,176 11,412
Other Non-performing:
Non-accrual loans (1).................................. 1,497 1,225
------- -------
Total Non-performing Loans............................... $22,069 $17,829
======= =======
Loans 90 days or more past due and still accruing........ $13,136 $10,197
- --------
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
2000 1999
------- -------
(in thousands)
Impaired loans without an allowance allocation........... $ 100 $ 1,516
Impaired loans with an allowance allocation.............. 20,472 15,088
Allowance provided for impaired loans.................... 4,474 4,469
Average recorded investment in impaired loans............ 21,483 14,470
Interest income recognized from impaired loans........... 806 796
An analysis of the allowance for loan and lease losses for the years ended
December 31, follows:
2000 1999 1998
------- -------- -------
(in thousands)
Balance at beginning of year................. $28,377 $ 26,403 $19,908
Provision charged to expense................. 9,710 10,550 7,993
Loans charged off............................ (9,851) (10,309) (5,064)
Recoveries on loans previously charged off... 1,989 1,733 1,420
Reductions due to sale of loans.............. (1,068) -- --
Allowance for loan and lease losses acquired
through merger.............................. -- -- 2,146
------- -------- -------
Balance at end of year..................... $29,157 $ 28,377 $26,403
======= ======== =======
The Company's subsidiaries have had, and are expected to have in the
future, banking transactions with directors, executive officers, their
immediate families and affiliated companies in which they are a principal
stockholder (commonly referred to as related parties). These transactions were
made in the ordinary course of business on substantially the same terms as
comparable transactions with other borrowers.
Related party loan transactions during 2000 and 1999 were as follows:
2000 1999
-------- --------
(in thousands)
Balance at beginning of year.......................... $ 8,617 $ 44,269
New loans............................................. 22,792 39,280
Repayments............................................ (21,174) (74,932)
-------- --------
Balance at end of year.............................. $ 10,235 $ 8,617
======== ========
50
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts have been estimated by the Company using available
market information and appropriate valuation methodologies as discussed below.
Considerable judgement was required, however, to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented below
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.
The following table shows the carrying amounts and fair values of financial
instruments at December 31, 2000 and 1999 that have liquid markets in which
fair value is assumed to be equal to the carrying amount, or have readily
available quoted market prices, or are based on quoted prices for similar
financial instruments:
2000 1999
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(in thousands)
Cash and cash equivalents.......... $ 118,807 $ 118,807 $ 179,113 $ 179,113
Interest earning deposits in banks. 21,562 21,562 6,039 6,039
Federal funds sold and other short-
term investments.................. 36,000 36,000 -- --
Loans and leases held for sale..... 27,466 28,013 13,974 14,533
Securities available for sale...... 1,223,785 1,223,785 1,227,396 1,227,396
Securities held to maturity........ 10,661 10,635 13,977 13,818
Mortgage servicing rights.......... 7,854 8,340 6,897 7,790
The carrying amounts and fair values of accruing loans and leases at
December 31, 2000 and 1999 were as follows:
2000 1999
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(in thousands)
Commercial, financial and
agricultural...................... $ 679,900 $ 723,812 $ 697,670 $ 715,802
Real estate........................ 1,533,626 1,607,759 1,540,087 1,596,992
Installment and consumer, net...... 389,074 404,208 487,538 492,318
Direct lease financing............. 2,488 3,095 3,489 4,221
---------- ---------- ---------- ----------
Total loans and leases......... $2,605,088 $2,738,874 $2,728,784 $2,809,333
========== ========== ========== ==========
Fair values of loans were estimated for portfolios with similar
characteristics. The fair value of loans, excluding residential real-estate
loans, was calculated by discounting contractual cash flows using estimated
market discount rates which reflect the interest rate risk inherent in the
loan. The cash flows were further reduced by estimated prepayment assumptions.
Fair value for residential real-estate loans was estimated by discounting
estimated future cash flows, adjusted for prepayment estimates, using market
discount rates based on secondary market sources. The fair value of non-accrual
loans with a recorded book value of $22.1 million and $17.8 million in 2000 and
1999, respectively, was included at carrying value because it was not
practicable to reasonably assess the credit risk adjustment that would be
applied in the marketplace for such loans. (See Note 4)
The carrying value of interest receivable and payable approximates fair
value due to the relatively short period of time between accrual and expected
realization. At December 31, 2000 and 1999, interest receivable was $32.8
million and $31.3 million, respectively, and interest payable was $31.8 million
and $25.0 million, respectively.
51
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the carrying amounts and fair values of financial
instrument liabilities and other off-balance sheet financial instruments at
December 31, 2000 and 1999:
2000 1999
---------------------- ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(in thousands)
Demand deposits and savings.... $1,395,959 $1,395,959 $1,348,427 $1,348,427
Time deposits.................. 1,747,602 1,759,197 1,667,981 1,665,665
Short-term borrowings.......... 460,634 461,067 699,398 698,681
Long-term borrowings........... 265,830 284,442 285,270 293,251
Standby letters of credit...... (467) (1,426) (375) (1,242)
Interest rate swap agreements.. (655) (1,615) (541) (351)
Interest rate collar
agreements.................... 286 (10) 465 667
Interest rate floor agreements. 125 129 67 39
Interest rate cap agreements... 427 86 473 1,045
Forward contracts.............. -- (151) -- (69)
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, NOW and money market accounts, is equal to
the carrying amount in accordance with FASB No. 107. There is, however,
considerable additional value to the core deposits of the Company, a
significant portion of which has not been recognized in the financial
statements. This value results from the cost savings of these core funding
sources versus obtaining higher-rate funding in the market. The fair value of
time deposits was determined by discounting contractual cash flows using
currently offered rates for deposits with similar remaining maturities. The
estimated fair value of both accrued interest receivable and accrued interest
payable was considered to be equal to the carrying value.
The fair value of off-balance sheet instruments was estimated based on the
amount the Company would pay or would be paid to terminate the contracts or
agreements, using current rates and, when appropriate, the current
creditworthiness of the counterparty. The off-balance sheet carrying amounts
shown above represent accruals or deferred fees arising from those
unrecognized financial instruments. The fair value of commitments to fund
mortgage loans at December 31, 2000 was $114,000.
The above fair value estimates were made at a discrete point in time based
on relevant market information and other assumptions about the financial
instruments. As no active market exists for a significant portion of the
Company's financial instruments, fair value estimates were based on judgements
regarding current economic conditions, future expected cash flows and loss
experience, risk characteristics and other factors. These estimates are
subjective in nature and involve uncertainties and therefore cannot be
calculated with precision. There may be inherent weaknesses in calculation
technique, and changes in the underlying assumptions used, including discount
rates and estimates of future cash flows could significantly affect the
results. In addition, the fair value estimates are based on existing on and
off-balance sheet financial instruments without attempting to assess the value
of anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant investments in
subsidiaries, specifically the trust, mortgage and brokerage operations, are
not considered financial instruments and the franchise values have not been
included in the fair value estimates. Similarly, premises and equipment and
intangible assets have not been considered.
52
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2000 and 1999 follows:
2000 1999
-------- --------
(in thousands)
Land.................................................. $ 9,969 $ 9,862
Buildings and improvements............................ 59,245 57,476
Furniture and equipment............................... 54,105 52,465
Leasehold improvements................................ 5,608 5,296
Construction in progress.............................. 323 1,359
-------- --------
Total premises and equipment...................... $129,250 $126,458
Accumulated depreciation and amortization............. (76,696) (70,840)
-------- --------
Premises and Equipment, net....................... $ 52,554 $ 55,618
======== ========
NOTE 7--MORTGAGE SERVICING RIGHTS
The unpaid principal balance of mortgage loans serviced for others, which
are not included on the consolidated balance sheets, was $846.6 million and
$774.5 million at December 31, 2000 and 1999, respectively. Of this amount, the
Company has recorded originated capitalized mortgage servicing rights, as shown
below, on mortgage loans serviced balances of $758.4 million and $659.3 million
at December 31, 2000 and 1999, respectively. The remaining balance of
originated loans sold and serviced for others also have servicing rights
associated with them; however, these servicing rights arose prior to the
adoption of FAS No. 122, as amended by FAS No. 125, and accordingly, have not
been capitalized.
The carrying value and fair value of capitalized mortgage servicing rights
consisted of the following as of December 31, 2000 and 1999, respectively.
2000 1999
------ ------
(in
thousands)
Unamortized cost of mortgage servicing rights.............. $7,854 $6,897
Valuation allowance........................................ -- --
------ ------
Carrying value of mortgage servicing rights................ $7,854 $6,897
====== ======
Fair value of mortgage servicing rights.................... $8,340 $7,790
====== ======
The following is a disclosure of the key assumptions used in estimating the
fair value of originated capitalized mortgage servicing rights.
Estimated fair market value of servicing is the present value of the
expected future cash flows over the projected life of the loan. Assumptions
used in the present value calculation are based on actual performance of the
underlying servicing along with general market consensus. The expected cash
flow is the net amount of all mortgage servicing income and expense items. The
expected cash flow is discounted at an interest rate appropriate for the
associated risk given current market conditions. Significant assumptions
include:
Prepayment Speed (5 year average): 14.17%
Discount Rate: 10.77%
Servicing Cost per Loan: $47.00
Escrow Float Rate: 6.00%
53
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is an analysis of the mortgage servicing rights activity and
the related valuation allowance for 2000 and 1999. For the purpose of
measuring impairment, loans are stratified and evaluated based on loan type
and investor as determined by materiality and reasonableness.
2000 1999
------- -------
(in thousands)
Unamortized Cost of Mortgage Servicing Rights
Balance at beginning of year............................ $ 6,897 $ 5,934
Additions of mortgage servicing rights.................. 2,011 2,286
Amortization............................................ (1,054) (1,323)
------- -------
Balance at end of year.................................. $ 7,854 $ 6,897
======= =======
Valuation Allowance
Balance at beginning of year............................ $ -- $ 1,181
Reversal of impairment.................................. -- (1,181)
------- -------
Balance at end of year.................................. $ -- $ --
======= =======
NOTE 8--SALE OF RECEIVABLES
During 2000 the Company sold $100.0 million of indirect automobile loans in
securitization transactions, recognizing pre-tax gains of $1.4 million. Upon
securitization, the Company retained servicing responsibilities, interest only
strips and subordinated credit enhancement tranches. At the date of each
securitization these retained interests were allocated a carrying value of
$5.9 million. The Company receives monthly servicing fees equal to 0.75
percent per annum of the outstanding beginning principal balance of the loans
serviced for the month and rights to future cash flows arising after the
investors in the securitization trust have received the returns for which they
have contracted. The investors and the securitization trust have no other
recourse to the Company's other assets for failure of debtors to pay when due.
The Company's retained interests are subordinate to investor's interests.
Their value is subject to credit and prepayment risk on the transferred auto
loans.
Key economic assumptions used in measuring the retained interests at the
date of the securitization and as of December 31, 2000 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 December 31, 2000
-------------------------------
Date Of 10% Adverse 20% Adverse
Securitization Actual Change Change
-------------- ------ ----------- -----------
(dollars in thousands)
Prepayment speed assumptions
Prepayment speed.............. 1.5% 1.5% 1.7% 1.8%
Weighted average life (in
months)...................... 22.4 21.5 20.7 19.8
Fair value of retained
interests.................... $ 6,070 $6,249 $6,143 $6,037
Change in fair value.......... $ -- $ -- $ (106) $ (212)
Expected credit loss assumptions
Expected credit losses (loss
to liquidation).............. 1.3%-1.7% 1.3% 1.4% 1.5%
Fair value of retained
interests.................... $ 6,070 $6,249 $6,146 $6,043
Change in fair value.......... $ -- $ -- $ (103) $ (206)
Residual cash flow discount rate
assumptions
Residual cash flow discount
rate (annual)................ 8.3%-9.1% 7.9% 8.7% 9.4%
Fair value of retained
interests.................... $ 6,070 $6,249 $6,095 $5,947
Change in fair value.......... $ -- $ -- $ (154) $ (302)
54
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent variation should not be
extrapolated because the relationship of the change in assumption to the
change in fair value may not always be linear. Also, in this table, the effect
of a variation in a particular assumption on the fair value of the retained
interests is calculated without changing any other assumption; in reality,
changes in one factor may result in changes in another (for example, increases
in market interest rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.
Total cash flows attributable to the indirect auto loan securitization
transactions was an inflow of $95.4 million in 2000. The following table
summarizes the various cash flows received from (paid to) the securitization
trust:
Proceeds From Servicing Fees Other
Securitizations Collected Cash Flows Fees Paid
--------------- -------------- ---------- ---------
(in thousands)
Cash flows received from
(paid to) the trust....... $95,186 $108 $128 $(17)
Other retained interests represents net cash flows received from retained
interests by the transferor other than servicing fees. Other cash flows
include, for example, gross cash flows from interest-only strips net of
reductions in such cash flows for loan defaults.
The following table presents quantitative information about delinquencies,
net credit losses, and components of securitized indirect auto loans and other
assets managed together with them. Loan amounts represent the principal amount
of the loan only. Retained interests held for securitized assets are excluded
from this table because they are recognized separately.
Indirect Installment Loans
----------------------------------------------------
Held In Portfolio Securitized Held For Sale Total
----------------- ----------- ------------- --------
(in thousands)
Total principal amount of
loans at December 31,
2000..................... $266,279 $90,915 $10,173 $367,367
Delinqencies based on end
of period loans.......... $ 5,251 $ 770 $ -- $ 6,021
Net credit losses for the
year..................... $ 2,800 $ 9 $ -- $ 2,809
Actual and projected static pool credit losses, as a percentage of indirect
auto loans securitized in 2000, are 0.1%, 0.31% and 0.68% as of the years
ended December 31, 2000, December 31, 2001 and December 31, 2002,
respectively. Static pool losses are calculated by summing the actual and
projected future credit losses and dividing them by the original balance of
each pool of assets. The amount shown here for each year is a weighted average
for all securitizations during the period.
NOTE 9--SHORT TERM BORROWINGS
At December 31, 2000, 1999 and 1998 short-term borrowings consisted of:
2000 1999 1998
-------- -------- --------
(in thousands)
Securities sold under agreements to
repurchase.................................. $439,367 $456,227 $434,071
Federal Home Loan Bank borrowings............ 70 114,479 32,629
Federal funds purchased...................... 9,990 118,000 29,200
U.S. Treasury tax and loan note accounts..... 11,207 10,692 2,311
-------- -------- --------
Total Short-Term Borrowings.............. $460,634 $699,398 $498,211
======== ======== ========
55
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional details on securities sold under agreements to repurchase are as
follows:
2000 1999 1998
-------- -------- --------
(in thousands)
Average balance during the year............. $463,835 $465,343 $529,373
Maximum month-end balance during the year... 490,885 498,602 630,279
Weighted average rate during the year....... 6.37% 5.42% 5.73%
Weighted average rate at December 31........ 6.33% 5.97% 5.38%
The Company has a commercial paper agreement with an unrelated financial
institution (Issuer) that provides for the Company to issue non-rated short-
term unsecured debt obligations at negotiated rates and terms, not to exceed
$50.0 million. In the event the agent is unable to place the Company's
commercial paper on a particular day, the proceeds are provided by overnight
borrowings on a line of credit with the same financial institution. This
agreement may be terminated at any time by written notice of either the Issuer
or the Company. As of December 31, 2000, the entire $50.0 million was
available.
NOTE 10--LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at December 31, 2000 and
1999:
2000 1999
-------- --------
(in thousands)
Federal Home Loan Bank borrowings...................... $224,957 $244,018
Capital Trust preferred securities..................... 40,000 40,000
Other long-term borrowings............................. 873 1,252
-------- --------
Total Long-Term Borrowings......................... $265,830 $285,270
======== ========
The Company periodically borrows additional funds from the Federal Home Loan
Bank in connection with the purchase of mortgage-backed securities. Certain
Federal Home Loan Bank borrowings have prepayment penalties and call features
associated with them. The average maturity of these borrowings at December 31,
2000 is 5.64 years, with a weighted average borrowing rate of 5.68%.
Reductions of Federal Home Loan Bank borrowings with call features, assuming
they are called at the earliest call date, are as follows:
Total
--------------
(in thousands)
2001....................................................... $177,000
2002....................................................... 15,000
2003....................................................... 4,000
--------
Total.................................................. $196,000
========
On March 25, 1997, the Company issued $40.0 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 104.675% to 100% of the principal amount. After March
25, 2017, they are redeemable at par until June 15, 2027 when redemption is
mandatory. Prior redemption is permitted under certain circumstances such as
changes in tax or regulatory capital rules. The proceeds of the capital
securities were invested by the Trust in junior subordinated debentures which
represents all of the assets of the Trust. The Company fully and
unconditionally guarantees the capital securities through the combined
operation of the debentures and other related documents. The Company's
obligations under the guarantee are unsecured and subordinate to senior and
subordinated indebtedness of the Company.
56
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Total
--------------
(in thousands)
2001....................................................... $ 444
2002....................................................... 1,249
2003....................................................... 50,072
2004....................................................... 25,042
2005....................................................... 15,684
Thereafter................................................. 173,339
--------
Total.................................................. $265,830
========
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to effectively manage its exposure to market risk.
Credit risk is the possibility that the Company will incur a loss due to the
other party's failure to perform under its contractual obligations. The
Company's exposure to credit loss in the event of non-performance by the other
party with regard to commitments to extend credit and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as
it does for actual extensions of credit. The credit risk involved for
commitments to extend credit and in issuing standby letters of credit is
essentially the same as that involved in extending loans to customers. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies, but may include accounts receivable,
securities, inventory, property and equipment and income-producing commercial
properties.
Market risk is the possibility that, due to changes in interest rates or
other economic conditions, the Company's net interest income will be adversely
affected. The financial instruments utilized by the Company to manage this risk
include interest rate swaps, collars, floors and caps, and forward contracts.
The contract or notional amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The
contract or notional amount of interest rate swap, collar, floor and cap
agreements and forward contracts represent only limited exposure to credit
risk.
A summary of the contract amount of the Company's exposure to off-balance
sheet risk as of December 31, 2000 and 1999, is as follows:
2000 1999
-------- --------
(in thousands)
Financial instruments whose contract amount represent
credit risk only:
Commitments to extend credit........................ $510,901 $598,414
Standby letters of credit........................... 114,067 99,393
Financial instruments whose contract or notional
amount represent market risk only:
Interest rate swap agreements....................... 190,000 100,000
Interest rate collar agreements..................... 85,000 100,000
Stand-alone interest rate cap agreements............ 160,000 60,000
Stand-alone interest rate floor agreements.......... 20,000 20,000
Forward contracts................................... 19,158 10,930
Call option outstanding............................. -- 19,500
57
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments to extend credit are contractual agreements entered into with
customers as long as there is no violation of any condition established on the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions.
The Company has no derivative financial instruments held or issued for
trading purposes. The derivative financial instruments with which the Company
is involved are utilized for purposes of asset/liability management to modify
the existing market risk characteristics of certain hedged assets and
liabilities and are predominately comprised of interest rate swap and collar
contracts. Most of these instruments are designed to hedge exposure to
floating rate liabilities. An interest rate swap agreement is one financial
instrument used for these purposes and involves the exchange of fixed and
floating rate interest payment obligations based on the underlying notional
principal amounts. The amounts potentially subject to market and credit risks
are the streams of interest payments under the agreements and not the notional
principal amounts used only to express the volume of the transactions. The
Company's credit risk on a swap agreement is limited to nonperformance of the
counterparty's obligations under the terms of the swap agreement. The Company
deals exclusively with counterparties that have high credit ratings, and based
on management's assessments, all counterparties were expected to meet any
outstanding obligations as of December 31, 2000.
Following is a table outlining the nature and terms of each swap agreement
as of December 31, 2000:
Notional Maturity
Type of Swap Amount (000's) Pay Receive Date
- ------------ -------------- --- ------- --------
Fixed Rate.............. $ 20,000 Fixed (6.458%) 3 Month LIBOR 05/15/01
Fixed Rate.............. 30,000 Fixed (7.430%) 1 Month LIBOR 09/30/02
Fixed Rate.............. 100,000 Fixed (5.960%) 90 Day T-Bill 12/02/02
Fixed to Floating....... 25,000 3 Month LIBOR minus 15 BP Fixed (7.000%) 08/06/07
Fixed to Floating....... 10,000 3 Month LIBOR minus 15 BP Fixed (7.000%) 08/27/07
Fixed to Floating....... 5,000 3 Month LIBOR minus 8 BP Fixed (6.750%) 10/22/07
- --------
(BP=basis points)
The fixed rate swap agreement for $20.0 million and $30.0 million where the
Company receives three month LIBOR and one month LIBOR, respectively, are used
to hedge market risk associated with repurchase agreements. The fixed rate
swap agreement of $100.0 million where the Company receives three month T-
Bill, the fixed to floating swap agreements totaling $35.0 million where the
Company receives 7.000%, and the fixed to floating rate swap for $5.0 million
where the Company receives 6.750% are used to lower the Company's cost of
deposits.
The Company is also party to various collar, floor and cap contracts.
Interest rate collar agreements totaling $85.0 million provide the Company
with an interest rate risk hedge on floating rate debt. Interest rate floor
contracts totaling $20.0 million are used to manage the exposure to the fair
value changes of the originated mortgage servicing rights intangible asset.
Interest rate caps totaling $120.0 million provide the Company with a market
risk hedge on repurchase agreements while the remaining $40.0 million in caps
provides the Company with a market risk hedge on the money market deposit
accounts.
58
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each of the interest rate swap agreements require a quarterly cash
settlement of the net difference between the calculated pay and receive amounts
on each transaction. The net difference between the calculated pay and receive
amounts is accrued on a monthly basis and recorded as an adjustment of the
interest income or expense of the asset or liability being hedged. Premiums
paid for the purchase of interest rate floor contracts are amortized over the
respective lives of the contracts. Each floor rate reprices quarterly and a
cash settlement is received from the counterparty and recorded as an adjustment
to interest income, if the indexed rate falls below the floor rate. Floors and
caps are similarly tied to the three month LIBOR or three month T-Bill.
Forward contracts provide for future delivery or purchase of securities or
interest rate instruments. The Company's affiliates enter into forward
contracts in connection with specific customer transactions and to minimize the
market risk exposure of mortgage banking activities.
The Company periodically will sell options for the right to purchase certain
securities held in its investment portfolio to a bank or dealer. These call
option transactions are designed to reduce the total return volatility
associated with holding these assets and to yield additional fee income. The
type of risk associated with these transactions is opportunity cost risk. Any
option premium income generated by these transactions is deferred and recorded
upon either the expiration or exercise date of the option. If the option is
exercised by the purchaser, the premium income is recognized as a component of
the gain or loss on the underlying security. If the option expires unexercised,
the premium income is recognized as other non-interest income. There were no
outstanding call option agreements at December 31, 2000.
NOTE 12--RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Under current banking law, the banking subsidiary of the Company is limited
in the amount of dividends it can pay without obtaining prior approval from
bank regulatory agencies. As of December 31, 2000, approximately $21.8 million
was available for payment to the Company without prior regulatory approval.
The banking subsidiary is also limited as to the amount it may loan to the
Company unless such loans are collateralized by U.S. Treasury or agency
securities, a segregated deposit with the subsidiary or other specified
obligations. At December 31, 2000, the maximum amount available for transfer
from the banking subsidiary to the Company in the form of loans approximated
$1.8 million.
NOTE 13--STOCK INCENTIVE AND EMPLOYEE BENEFIT PLANS
At December 31, 2000, the Company has three stock-based compensation plans,
which are described below. Grants under those plans are accounted for following
APB Opinion No. 25 and related interpretations.
Stock Incentive Plans. In 2000, stockholders approved the adoption of the
AFI 2000 Stock Incentive Plan (Plan). The Plan provides for the grant of stock
options, reload options, stock appreciation rights, performance units,
restricted stock awards and stock bonus awards to key employees. The total
number of shares approved and available for grant under the Plan in its first
year were 2.5% of the total shares of stock outstanding as of the effective
date and 1.5% of outstanding shares in each subsequent Plan year not to exceed
425,000 in any such year. Options to purchase shares of common stock of the
Company and restricted stock awards were granted to key employees pursuant to
both the Plan and previous stock incentive plans.
59
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options. Non-Qualified Stock Options are issued at an option price
equal to the fair market value of the shares on the grant date and become
exercisable at 25% annually beginning one year from the date of grant. The
following table presents certain information with respect to stock options
issued pursuant to these incentive plans.
2000 1999 1998
------------------ ------------------ ------------------
Average Average Average
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Options outstanding at
beginning of year...... 1,692,114 $17.80 1,676,592 $15.58 1,405,423 $12.68
Options granted......... 377,750 19.28 350,450 22.58 282,000 25.48
Options assumed in
business combinations.. -- -- -- -- 349,422 8.58
Option reloads.......... 23,988 19.79 65,731 22.36 106,294 23.47
Options exercised....... (113,031) 10.82 (341,821) 11.55 (448,754) 10.25
Options lapsed.......... (85,191) 21.79 (58,838) 24.20 (17,793) 18.19
--------- ------ --------- ------ --------- ------
Options outstanding at
end of year............ 1,895,630 $18.36 1,692,114 $17.80 1,676,592 $15.58
--------- ------ --------- ------ --------- ------
Options exercisable at
end of year............ 1,194,012 $16.64 1,192,052 $15.37 1,394,592 $13.58
--------- ------ --------- ------ --------- ------
Performance Units. Performance Units (Units) granted entitle holders to
cash or stock payments if certain long term performance targets are met. The
payout range on all Units granted is $4.45 to $11.11 per unit. In addition, a
dividend is paid on each Unit at a rate equivalent to the rate of dividends
paid on each share of the Company's common stock. The expense related to these
Units for the years ended December 31, 2000, 1999 and 1998 was approximately
$666,000, $1.12 million and $457,000, respectively. The following table
presents certain information with respect to issuances pursuant to these
incentive plans.
2000 1999 1998
----------------- ---------------- ----------------
Average Average Average
Units Price Units Price Units Price
-------- ------- ------- ------- ------- -------
Units outstanding at
beginning of year......... 393,218 -- 340,443 -- 282,386 --
Units granted.............. -- -- 167,563 -- 150,116 --
Units paid................. (100,535) $5.34 (82,098) $4.75 -- --
Units forfeited............ (24,502) -- (32,690) -- (92,059) --
-------- ----- ------- ----- ------- ---
Units outstanding at end of
year...................... 275,606 -- 393,218 -- 340,443 --
-------- ----- ------- ----- ------- ---
Restricted Stock Awards. Pursuant to the Plan, the Company issued common
stock to certain key employees. The shares are restricted as to transfer, but
are not restricted as to dividend payment and voting rights. Transfer
restrictions lapse at the end of three years contingent upon earnings and
return on equity performance goals being met for each of the three years and
contingent upon continued employment. If performance goals are not met, the
restrictions lapse or vest in nine years. The Company amortizes the expense
over the performance period or, if the goals are not met, the vesting period.
The expense related to these awards for the year ended December 31, 2000 was
approximately $61,000. The following table presents certain information with
respect to restricted stock awards granted pursuant to these incentive plans.
2000
---------------
Average
Shares Price
------ -------
Restricted stock awards outstanding at beginning of
year................................................... -- $ --
Restricted stock awards granted......................... 26,353 22.58
Restricted stock awards forfeited....................... (2,189) 22.84
------ ------
Restricted stock awards outstanding at end of year...... 24,164 $22.56
====== ======
60
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of issuances pursuant to these
incentive plans.
2000 1999 1998
----------------- ----------------- -----------------
Average Average Average
Year-end Balances Shares Price Shares Price Shares Price
- ----------------- --------- ------- --------- ------- --------- -------
Options outstanding...... 1,895,630 $18.36 1,692,114 $17.80 1,676,592 $15.58
Units outstanding........ 275,606 -- 393,218 -- 340,443 --
Restricted stock awards
outstanding............. 24,164 22.56 -- -- -- --
Available to grant under
Plan.................... 377,109 -- 40,490 -- 75,269 --
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for stock option grants issued during 2000 pursuant to all option
plans. Had compensation cost for these grants been determined based on the
grant date fair values of awards (the method described in FAS No. 123,
"Accounting for Stock-Based Compensation"), reported net income and earnings
per common share would have been reduced to the pro forma amounts shown below:
The fair value of each option grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 2000, 1999 and 1998, respectively: dividend rates of
3.09%, 2.33% and 2.36%; price volatility of 38.10%, 25.81% and 30.99%; risk-
free interest rates of 6.79%, 5.77% and 5.73%; and expected lives of 6.1, 6.5
and 6.7 years. The average fair value of each option was $6.97.
2000 1999 1998
------------ ------------ ------------
(in thousands, except per share data)
Net Income:
As reported..................... $ 43,083 $ 40,149 $ 39,581
Pro forma....................... 41,368 38,327 37,350
Basic earnings per share:
As reported..................... $ 1.60 $ 1.42 $ 1.39
Pro forma....................... 1.54 1.35 1.31
Diluted earnings per share:
As reported..................... $ 1.58 $ 1.40 $ 1.36
Pro forma....................... 1.52 1.33 1.28
Directors' Stock Plans. The Restricted Stock Plan for Non-Employee Directors
provides that each current eligible non-employee director and each subsequently
elected non-employee director receive, in lieu of a cash retainer, shares of
common stock of the Company, the fair value of which is equal to three times
the annual retainer. The shares vest annually over a three-year period based
upon the anniversary date of the original award and continued service as a
director. The expense related to the Stock Plan for the years ended December
31, 2000, 1999 and 1998 was approximately $463,000, $494,000 and $464,000,
respectively.
In addition, the Company pays a lifetime annual retainer to certain retired
directors. Effective January 1, 1993, the Company adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" to
account for these benefits. This statement requires employers to recognize
postretirement benefits on an accrual basis rather than on a cash basis. The
expense in 2000, 1999 and 1998 related to this plan was $71,000, $77,000 and
$73,000, respectively. The transition obligation, representing the present
value of future payments upon adoption of accrual basis accounting was
approximately $842,000 and is being amortized over a twenty year period.
The 1994 Stock Option Plan for Non-Employee Directors (Option Plan) provides
that each current eligible non-employee director and each subsequently elected
non-employee director receive Options to purchase
61
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock of the Company. Each option granted under the Option Plan is
issued with an option price equal to the fair market value of the shares on the
grant date and has a ten-year term. Options granted are exercisable one year
after date of grant. The following table presents certain information with
respect to stock options issued pursuant to the Option Plan.
2000 1999 1998
---------------- ---------------- ----------------
Average Average Average
Shares Price Shares Price Shares Price
------- ------- ------- ------- ------- -------
Options outstanding at
beginning of year.......... 240,480 $18.56 228,000 $17.40 192,750 $19.67
Options granted............. 8,250 19.28 49,000 21.84 56,500 25.50
Options exercised........... (1,500) 13.33 (33,770) 14.64 (11,250) 14.44
Options lapsed.............. (1,500) 13.04 (2,750) 25.50 (10,000) 21.14
------- ------ ------- ------ ------- ------
Options outstanding at end
of year.................... 245,730 $18.65 240,480 $18.56 228,000 $17.40
======= ====== ======= ====== ======= ======
Options exercisable at end
of year.................... 237,480 $18.63 240,480 $18.56 177,000 $15.06
======= ====== ======= ====== ======= ======
Available to grant under
Plan at year end........... 1,750 -- 8,500 -- 54,750 --
======= ====== ======= ====== ======= ======
Options Summary. The following table presents certain information as of
December 31, 2000 with respect to issuances of stock options pursuant to all
plans discussed above.
Weighted-Avg
Number Remaining Weighted-Avg
Range of Exercise Prices Outstanding Contractual Life Exercise Price
------------------------ ----------- ---------------- --------------
$2.00-$12.50.................. 166,989 2.5 Years $ 8.39
12.51-13.50................... 420,250 3.9 13.08
13.51-19.00................... 392,129 5.6 17.15
19.00-21.00................... 414,484 8.9 19.38
21.00-23.50................... 413,033 7.3 22.53
23.51-25.50................... 334,475 6.0 25.19
--------- --------- ------
Total Options Outstanding..... 2,141,360 6.1 $18.39
========= ========= ======
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, profit sharing payment and personal
savings account [401(k)]. In 1998, the Security Plan was amended to provide for
a higher match percent to employee contributions and the profit sharing portion
converted to a cash payment rather than contributed to employee accounts. The
expense related to the Security Plan and other similar plans from acquired
companies for the years ended December 31, 2000, 1999 and 1998 was
approximately $3.36 million, $3.70 million and $3.56 million, respectively.
The Company maintains non-qualified non-contributory pension plans that
cover senior executive management. One non-qualified plan provides pension
benefits that would have been provided under the qualified plans in the absence
of limits placed on qualified plan benefits by the Internal Revenue Service.
Another plan provides defined pension benefits to a select group of management
or highly compensated employees. The benefits payable under the plan are based
upon three percent of final base salary times number of years of service and
shall not exceed 70% nor be less than 45% of a participant's final base salary
less offsets for social security and other employer paid qualified plan
benefits. Benefits are funded as they are paid. The expense related to these
plans was approximately $289,000, $341,000 and $456,000 for 2000, 1999 and
1998, respectively.
In addition to the Security Plan, certain health care and life insurance
benefits are made available to active employees. The cost of these benefits is
expensed as incurred. Group health benefits are offered to retirees with 100%
of the cost borne by the retiree.
62
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--INCOME TAXES
The components of income tax expense were as follows:
Years ended December 31,
-------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
Currently paid or payable:
Federal...................................... $ 14,720 $15,068 $15,086
State and local.............................. 264 634 382
-------- ------- -------
$ 14,984 $15,702 $15,468
-------- ------- -------
Deferred:
Federal...................................... $ 1,287 $ (390) $ (809)
State and local.............................. 85 (206) (345)
-------- ------- -------
$ 1,372 $ (596) $(1,154)
-------- ------- -------
Total...................................... $ 16,356 $15,106 $14,314
======== ======= =======
The effective tax rates on income for 2000, 1999, and 1998 were 27.5%, 27.3%
and 26.6%, respectively. Income tax expense was less than the amounts computed
by applying the federal statutory rate of 35% due to the following:
Years ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
(in thousands)
Income tax at statutory rate................... $20,804 $19,339 $18,863
Increase (decrease) resulting from:
Tax-exempt income............................ (4,665) (5,477) (5,479)
State income taxes, net of federal benefit... 227 278 24
Non-deductible expenses, net................. 1,100 1,061 1,395
Other, net................................... (1,110) (95) (489)
------- ------- -------
Total...................................... $16,356 $15,106 $14,314
======= ======= =======
63
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are as follows:
At December 31,
----------------
2000 1999
------- -------
(in thousands)
Deferred tax assets:
Deferred compensation................................. $ 5,821 $ 5,375
Securities............................................ -- 17,249
Allowance for loan and lease losses................... 11,485 11,182
Other, net of valuation allowance..................... 398 1,830
------- -------
Total deferred tax assets........................... $17,704 $35,636
------- -------
Deferred tax liabilities:
Premises and equipment................................ $ 3,468 $ 4,227
Mortgage servicing rights............................. 3,229 2,735
Securities............................................ 236 --
Other................................................. 3,903 2,919
------- -------
Total deferred tax liabilities...................... $10,836 $ 9,881
------- -------
Net Deferred Tax Asset................................ $ 6,868 $25,755
Less: Tax effect of net unrealized (gain) loss on
securities available for sale reflected in
stockholders' equity................................... (133) 17,382
------- -------
Net Deferred Tax Asset Excluding Net Unrealized (Gain)
Loss on Securities Available for Sale................ $ 7,001 $ 8,373
======= =======
Net operating loss carryforwards for state income tax purposes were
approximately $7.75 million at December 31, 2000. The associated deferred
asset is $613,000 ($398,000 net of federal). The carryforwards expire
beginning December 31, 2005 through December 31, 2011. A valuation allowance
of $398,000 has been established at December 31, 2000 against the deferred tax
asset, due to the uncertainty surrounding the utilization of state net
operating loss carryforwards. This compares to a valuation allowance of
$343,000 as of December 31, 1999. The increase in the valuation allowance is
attributable to higher state net operating losses and lower utilization of
loss carryforwards in 1999 than expected.
Realization of the deferred tax asset over time is dependent upon the
existence of taxable income in carryback periods or the Company generating
sufficient taxable earnings in future periods. In determining that realization
of the deferred tax asset was more likely than not, the Company gave
consideration to a number of factors including its taxable income during
carryback periods, its recent earnings history, its expectations for earnings
in the future, and, where applicable, the expiration dates associated with tax
carryforwards.
Retained earnings at December 31, 2000 include $3.18 million for which no
provision for income tax has been made. This amount represents allocations of
income to thrift bad debt deductions for tax purposes only. This amount will
only be taxable upon the occurrence of certain events. At this time,
management does not foresee the occurrence of any of these events.
Tax benefits of $320,000, $1.74 million, and $2.29 million have been
credited directly to paid in capital for non-qualified stock options exercised
during the years ended December 31, 2000, 1999, and 1998, respectively.
64
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--EARNINGS PER SHARE
Earnings per share calculations are as follows:
2000 1999 1998
------- ------- -------
(in thousands, except
per share data)
Net Income...................................... $43,083 $40,149 $39,581
Basic earnings per share:
Weighted average shares outstanding........... 26,930 28,304 28,515
Shares related to IMG earned not issued....... 36 19 --
------- ------- -------
Average basic shares outstanding.............. 26,966 28,323 28,515
======= ======= =======
Earnings per share............................ $ 1.60 $ 1.42 $ 1.39
======= ======= =======
Diluted earnings per share:
Weighted average shares outstanding........... 26,930 28,304 28,515
Net effect of the assumed purchase of stock
under the stock option and stock purchase
plans--based on the treasury stock method
using average market price................... 193 340 583
Shares related to IMG earned not issued....... 36 19 --
Contingently issuable shares under IMG
purchase agreement........................... 78 67 --
------- ------- -------
Average diluted shares outstanding............ 27,237 28,730 29,098
======= ======= =======
Diluted Earnings per share.................... $ 1.58 $ 1.40 $ 1.36
======= ======= =======
65
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--RESTRUCTURING CHARGE
The components and activity of the restructuring charges for the years
ended December 31, 2000 and 1999 were as follows:
Ending balance Ending balance
For the year ended December 31, Cash December 31,
December 31, 2000 1999 Adjustments (1) Reversal (2) Payments 2000
- ------------------ -------------- --------------- ------------ -------- --------------
(in thousands)
Compensation expense
(3).................... $ 972 $-- $(188) $ (784) $--
Employee benefits (4)... 83 102 (46) (139) --
Data processing expense
(5).................... 459 -- (98) (361) --
Professional fees (6)... 290 -- (139) (151) --
Other (7)............... 75 -- (59) (16) --
------ ---- ----- ------- ----
Charge before income
taxes.................. $1,879 $102 $(530) $(1,451) $--
Income taxes............ 747 41 (211) (577) --
------ ---- ----- ------- ----
Charge after income
taxes.................. $1,132 $ 61 $(319) $ (874) $--
====== ==== ===== ======= ====
Ending balance
For the year ended Original Additional Cash December 31,
December 31, 1999 Charge (8) Adjustments (1) Charge (9) Reversal (2) Payments 1999
- ------------------ ---------- --------------- ---------- ------------ -------- --------------
(in thousands)
Compensation expense
(3).................... $2,204 $-- $340 $ (609) $ (963) $ 972
Employee benefits (4)... 153 46 22 (34) (104) 83
Data processing expense
(5).................... 1,321 -- 30 (227) (665) 459
Professional fees (6)... 1,441 -- 145 (141) (1,155) 290
Other (7)............... 976 -- -- (380) (521) 75
------ ---- ---- ------- ------- ------
Charge before income
taxes.................. $6,095 $ 46 $537 $(1,391) $(3,408) $1,879
Income taxes............ 2,328 19 213 (534) (1,279) 747
------ ---- ---- ------- ------- ------
Charge after income
taxes.................. $3,767 $ 27 $324 $ (857) $(2,129) $1,132
====== ==== ==== ======= ======= ======
- --------
(1) Items related to restructuring that were expensed as incurred and were not
included in the original restructuring charge.
(2) Reversal of items included in the original charge that are no longer
expected to be paid.
(3) Amounts include severance benefits for planned staff reductions totaling
187 employees. Through December 31, 2000, 96 employees had been terminated
and paid severance benefits. An additional 91 employees had transferred to
other open positions due to attrition, or had voluntarily left the company
prior to the time severance benefits became payable. As of December 31,
2000, there were no further staff reductions planned.
(4) Amounts represent social security and medicare taxes on severance and
incentives.
(5) Amounts represent costs to convert data processing records of nine
separate banks into one.
(6) Amounts represent legal fees for regulatory filings and advice as well as
consulting fees for process review, systems redesign and implementation.
(7) Amounts include outplacement services for terminated employees;
replacement of forms, checks and supplies; and customer notifications.
(8) Second quarter 1999 adoption of plan to merge nine separate bank and
thrift charters into one and to centralize retail operations and corporate
support functions.
(9) Fourth quarter 1999 adoption of plan to centralize commercial loan
operations and restructure Trust and Asset Management segment operations.
66
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--SEGMENT INFORMATION
The Company's operations include three business segments: Banking, Trust and
Asset Management, and Mortgage Banking. The Banking segment provides commercial
and personal banking services through its 64 banking locations in northern
Illinois and south-central Wisconsin, and the Consumer Finance subsidiary. The
services provided by this segment include lending, deposits, cash management,
safe deposit box rental, automated teller machines, and other traditional
banking services. The Trust and Asset Management segment provides trust,
investment management, employee benefits recordkeeping and administration, and
brokerage services. It also acts as an advisor and provides fund administration
to the Vintage Mutual Funds. These products are distributed nationally and
regionally to institutional investors and corporations, and locally through
AMCORE's 64 banking locations. The Mortgage Banking segment originates
residential mortgage loans for sale to AMCORE's banking affiliate and the
secondary market, as well as providing servicing of these mortgage loans.
The Company's three reportable segments are strategic business units that
are separately managed as they offer different products and services. The
Company evaluates financial performance based on several factors, of which the
primary financial measure is segment profit before remittances to the banking
affiliates. The accounting policies of the three segments are the same as those
described in the summary of significant accounting policies (Note 1). The
Company accounts for intersegment revenue, expenses and transfers at current
market prices.
67
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trust and
Asset Mortgage Total
Banking Management Banking Segments
---------- ---------- -------- ----------
(in thousands)
BUSINESS SEGMENTS
2000
Net interest income................ $ 124,099 $ 359 $ 2,234 $ 126,692
Provision for loan and lease
losses............................ 9,710 -- -- 9,710
Non-interest income................ 28,846 31,916 7,166 67,928
Operating expenses................. 87,916 22,044 6,889 116,849
Depreciation and amortization...... 7,822 1,050 88 8,960
Income taxes....................... 13,944 4,402 996 19,342
---------- ------- ------- ----------
Segment profit..................... $ 41,375 $ 5,829 $ 1,515 $ 48,719
After tax restructuring charges
(reversals)....................... (286) 28 -- (258)
---------- ------- ------- ----------
Segment profit before restructuring
charges (reversals)............... $ 41,089 $ 5,857 $ 1,515 $ 48,461
========== ======= ======= ==========
Segment assets..................... $4,209,431 $20,308 $28,346 $4,258,085
========== ======= ======= ==========
1999
Net interest income................ $ 130,684 $ 248 $ 2,155 $ 133,087
Provision for loan and lease
losses............................ 10,550 -- -- 10,550
Non-interest income................ 22,402 31,001 9,706 63,109
Operating expenses................. 93,099 21,193 8,585 122,877
Depreciation and amortization...... 6,652 951 106 7,709
Income taxes....................... 12,079 4,413 1,314 17,806
---------- ------- ------- ----------
Segment profit..................... $ 37,358 $ 5,643 $ 1,962 $ 44,963
After tax restructuring charges.... 3,053 208 -- 3,261
---------- ------- ------- ----------
Segment profit before restructuring
charges........................... $ 40,411 $ 5,851 $ 1,962 $ 48,224
========== ======= ======= ==========
Segment assets..................... $4,357,237 $19,722 $24,216 $4,401,175
========== ======= ======= ==========
1998
Net interest income................ $ 122,542 $ 131 $ 2,551 $ 125,224
Provision for loan and lease
losses............................ 7,993 -- -- 7,993
Non-interest income................ 25,435 26,022 10,583 62,040
Operating expenses................. 87,324 18,293 10,507 116,124
Depreciation and amortization...... 7,285 811 89 8,185
Income taxes....................... 13,150 3,388 1,054 17,592
---------- ------- ------- ----------
Segment profit..................... $ 39,510 $ 4,472 $ 1,573 $ 45,555
After tax merger related charges... 1,245 -- -- 1,245
---------- ------- ------- ----------
Segment profit before merger
related charges................... $ 40,755 $ 4,472 $ 1,573 $ 46,800
========== ======= ======= ==========
Segment assets..................... $4,227,050 $23,944 $54,656 $4,305,650
========== ======= ======= ==========
68
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconcilement of Segment Information to Financial Statements
2000 1999 1998
---------- ---------- ----------
(in thousands)
Net interest income and non-
interest income
Total for segments................. $ 194,620 $ 196,196 $ 187,264
Unallocated revenues:
Holding company revenues......... (4,011) 24,687 20,931
Other............................ 61 50 55
Elimination of intersegment
revenues.......................... (3,555) (30,337) (27,657)
---------- ---------- ----------
Consolidated total revenues........ $ 187,115 $ 190,596 $ 180,593
========== ========== ==========
Profit
Total for segments................. $ 48,719 $ 44,963 $ 45,555
Unallocated profit:
Holding company loss............. (5,712) (4,630) (5,999)
Other............................ (129) (241) (219)
Elimination of intersegment profit. 205 57 244
---------- ---------- ----------
Consolidated net income............ $ 43,083 $ 40,149 $ 39,581
========== ========== ==========
Assets
Total for segments................. $4,258,085 $4,401,175 $4,305,650
Unallocated assets:
Holding company assets........... 26,262 44,351 53,110
Other............................ 42,313 42,495 42,701
Elimination of intersegment assets. (82,554) (140,400) (253,628)
---------- ---------- ----------
Consolidated assets................ $4,244,106 $4,347,621 $4,147,833
========== ========== ==========
NOTE 18--CAPITAL REQUIREMENTS
The Company and its banking subsidiary (Regulated Companies) are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that,
if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Regulated Companies
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Their capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Regulated Companies to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital to risk-weighted assets,
and of Tier I capital to average assets. Management believes, as of December
31, 2000, that the Regulated Companies meet all capital adequacy requirements
to which it is subject.
As of December 31, 2000, the most recent notification from the Company's
regulators categorized the Regulated Companies as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized a bank must maintain minimum total risk-based, Tier I risk based
and Tier I leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
Regulated Companies category.
69
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's and its banking subsidiary's actual capital amounts and
ratios are presented in the table.
For Capital Adequacy Purposes
---------------------------------------------------------------------------------
Well
Actual Minimum Capitalized
--------------- ---------------------------------------- ----------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------------------------------- -------- -------------------------------
As of December 31, 2000:
Total Capital (to Risk
Weighted Assets):
Consolidated $360,166 12.26% $234,988 (greater than or equal to)8.00% n/a n/a
AMCORE Bank, N.A. 333,426 11.42% 233,646 (greater than or equal to)8.00% $292,057 (greater than or equal to)10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $331,009 11.27% $117,494 (greater than or equal to)4.00% n/a n/a
AMCORE Bank, N.A. 304,838 10.44% 116,823 (greater than or equal to)4.00% $175,234 (greater than or equal to)6.00%
Tier 1 Capital (to Average
Assets):
Consolidated $331,009 7.82% $169,415 (greater than or equal to)4.00% n/a n/a
AMCORE Bank, N.A. 304,838 7.21% 169,097 (greater than or equal to)4.00% $211,372 (greater than or equal to)5.00%
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $371,835 12.54% $237,181 (greater than or equal to)8.00% n/a n/a
AMCORE Bank, N.A. 328,159 11.19% 234,564 (greater than or equal to)8.00% $293,205 (greater than or equal to)10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $343,458 11.58% $118,591 (greater than or equal to)4.00% n/a n/a
AMCORE Bank, N.A. 300,361 10.24% 117,282 (greater than or equal to)4.00% $175,923 (greater than or equal to)6.00%
Tier 1 Capital (to Average
Assets):
Consolidated $343,458 8.03% $171,036 (greater than or equal to)4.00% n/a n/a
AMCORE Bank, N.A. 300,361 6.94% 173,222 (greater than or equal to)4.00% $216,528 (greater than or equal to)5.00%
70
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Parent Company Balance Sheets
December 31,
------------------
2000 1999
-------- --------
(in thousands)
ASSETS
Cash and cash equivalents................................... $ 491 $ 205
Securities available for sale............................... 5,729 3,729
Due from subsidiaries....................................... 242 925
Loans to subsidiaries....................................... 1,600 17,924
Investment in bank subsidiary............................... 325,863 295,712
Investment in financial services subsidiaries............... 3,238 3,648
Premises and equipment, net................................. 3,097 4,720
Other assets................................................ 15,104 16,848
-------- --------
Total Assets............................................ $355,364 $343,711
======== ========
LIABILITIES
Long-term borrowings........................................ $ 42,111 $ 42,490
Other liabilities........................................... 4,756 7,493
-------- --------
Total Liabilities....................................... $ 46,867 $ 49,983
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock............................................. $ -- $ --
Common stock................................................ 6,596 6,585
Additional paid-in capital.................................. 74,900 74,244
Retained earnings........................................... 297,703 271,781
Treasury stock and other.................................... (71,036) (31,975)
Accumulated other comprehensive income (loss)............... 334 (26,907)
-------- --------
Total Stockholders' Equity.............................. $308,497 $293,728
-------- --------
Total Liabilities and Stockholders' Equity.............. $355,364 $343,711
======== ========
71
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Parent Company Statements of Income
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
INCOME:
Dividends from subsidiaries............................ $47,600 $38,739 $37,923
Interest income........................................ 1,122 1,694 2,064
Management fees and other.............................. 342 27,405 23,372
------- ------- -------
Total Income....................................... $49,064 $67,838 $63,359
------- ------- -------
EXPENSES:
Interest expense....................................... $ 4,665 $ 4,352 $ 4,204
Compensation expense and employee benefits............. 2,662 16,979 14,615
Professional fees...................................... 568 2,638 2,316
Other.................................................. 1,999 16,188 11,152
------- ------- -------
Total Expenses..................................... $ 9,894 $40,157 $32,287
------- ------- -------
Income before income tax benefits and equity in
undistributed net income of subsidiaries.............. $39,170 $27,681 $31,072
Income tax benefits.................................... 2,976 4,191 2,751
------- ------- -------
Income before equity in undistributed net income of
subsidiaries.......................................... $42,146 $31,872 $33,823
Equity in undistributed net income of subsidiaries..... 937 8,277 5,758
------- ------- -------
Net Income......................................... $43,083 $40,149 $39,581
======= ======= =======
72
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Parent Company Statements of Cash Flows
Years ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
( in thousands)
Cash Flows from Operating Activities
Net income...................................... $ 43,083 $ 40,149 $ 39,581
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,550 1,509 1,032
Non-employee directors compensation expense... 524 494 464
Equity in undistributed net income of
subsidiaries................................. (937) (8,277) (5,758)
Decrease (increase) in due from subsidiaries.. 683 95 (87)
Decrease in other assets...................... 1,775 1,073 2,503
(Decrease) increase in other liabilities...... (2,737) 2,742 (2,006)
Other, net.................................... 211 94 298
-------- -------- --------
Net cash provided by operating activities... $ 44,152 $ 37,879 $ 36,027
-------- -------- --------
Cash Flows from Investing Activities
Purchase of securities.......................... $ (2,078) $ (981) $ (2,428)
Net decrease in short term investments.......... -- 3,000 7,000
Net investment made in subsidiaries............. (1,517) (1,550) (681)
Loans to subsidiaries........................... (350) (38,850) (74,035)
Payments received on loans to subsidiaries...... 16,674 40,734 76,990
Transfer of premises and equipment to (from)
affiliates..................................... 151 34 (23)
Premises and equipment expenditures, net........ (78) (1,475) (2,909)
Investment in company owned life insurance...... -- (127) (10,798)
-------- -------- --------
Net cash provided by (used for) investing
activities................................. $ 12,802 $ 785 $ (6,884)
-------- -------- --------
Cash Flows from Financing Activities
Payment of long-term borrowings................. $ (444) $ (445) $ (444)
Dividends paid.................................. (17,161) (15,854) (15,406)
Proceeds from the sale of common stock.......... 783 973 --
Proceeds from exercise of incentive stock
options........................................ 3,036 6,051 6,840
Purchase of treasury stock...................... (42,882) (30,527) (19,745)
-------- -------- --------
Net cash used for financing activities...... $(56,668) $(39,802) $(28,755)
-------- -------- --------
Net change in cash and cash equivalents......... $ 286 $ (1,138) $ 388
Cash and cash equivalents:
Beginning of year............................. 205 1,343 955
-------- -------- --------
End of year................................... $ 491 $ 205 $ 1,343
======== ======== ========
NOTE 20--CONTINGENCIES
Management believes that no litigation is threatened or pending in which the
Company faces potential loss or exposure which will materially affect the
Company's financial position or results of operations, other than noted below.
Since the Company's subsidiaries act as depositories of funds, trustee and
escrow agents, they are named as defendants in lawsuits involving claims to the
ownership of funds in particular accounts. This and other litigation is
incidental to the Company's business.
73
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 26, 1999, Willie Parker and five other plaintiffs filed a civil
action in the Circuit Court of Humphreys County, Mississippi against AMCORE
Consumer Finance Company, Inc., a subsidiary of the Company, and other
defendants containing twelve separate counts related to the sale and financing
of residential satellite dish systems. Though the actual purchase price for
each of these systems involves a principal amount of less than $3,000, the
complaint prays for economic loss and compensatory damages in the amount of $5
million for each plaintiff and punitive damages in the amount of $100 million
for each plaintiff. The Company has denied the plaintiffs' allegations and has
removed the case to the United States District Court for the Northern District
of Mississippi. The proceedings are currently stayed pending resolution of the
plaintiffs' motion to remand the case to the state court. Although the
ultimate disposition of the case cannot be predicted with certainty, based on
information currently available, the Company believes that the plaintiffs'
damage claims are disproportionate and that the final outcome of the case will
not have a materially adverse effect on the Company's consolidated financial
condition, though it could have a materially adverse affect on the Company's
consolidated results of operations in a given year. The Company has not
recorded an accrual for payment of the damages in this case because, in
management's opinion, an unfavorable outcome in this litigation is not
probable.
Condensed Quarterly Earnings & Stock Price Summary (unaudited)
2000 1999
------------------------------- -------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
Interest income......... $78,932 $80,823 $81,448 $79,671 $72,892 $73,902 $75,670 $77,858
Interest expense........ 45,970 48,798 50,494 50,559 41,109 41,240 42,232 44,302
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... $32,962 $32,025 $30,954 $29,112 $31,783 $32,662 $33,438 $33,556
Provision for loan
losses................. 2,390 2,340 2,640 2,340 2,226 2,151 2,613 3,560
Other income............ 14,737 14,828 15,951 16,546 14,208 15,227 14,725 14,997
Other expense........... 29,670 29,880 29,241 29,175 29,804 36,641 29,812 28,534
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. $15,639 $14,633 $15,024 $14,143 $13,961 $ 9,097 $15,738 $16,459
Income taxes............ 4,552 3,952 4,220 3,632 3,925 1,971 4,501 4,709
------- ------- ------- ------- ------- ------- ------- -------
Net Income.............. $11,087 $10,681 $10,804 $10,511 $10,036 $ 7,126 $11,237 $11,750
======= ======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings.......... $ 0.40 $ 0.39 $ 0.40 $ 0.40 $ 0.35 $ 0.25 $ 0.40 $ 0.42
Diluted earnings........ 0.40 0.39 0.40 0.40 0.35 0.25 0.39 0.41
Dividends............... 0.16 0.16 0.16 0.16 0.14 0.14 0.14 0.14
Stock price ranges--
high................... 23.94 20.25 20.00 21.50 23.56 23.06 24.25 25.25
- --low................... 17.56 16.88 15.63 17.56 20.69 19.50 19.75 19.88
- --close................. 17.88 18.31 19.63 20.69 20.69 23.06 21.88 24.00
The financial information contains all normal and recurring
reclassifications for a fair and consistent presentation.
Quotes have been obtained from the National Association of Security
Dealers. These quotes do not reflect retail mark-ups, mark-downs or
commissions nor are they necessarily representative of actual transactions.
74
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AMCORE Financial, Inc.:
We have audited the accompanying consolidated balance sheets of AMCORE
Financial, Inc. and subsidiaries (the Company) as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 2000. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMCORE
Financial, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
[KPMG LOGO]
Chicago, Illinois
January 17, 2001, except as to the fourth and fifth paragraphs of Note 2,
which are as of March 9, 2001.
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant. The Proxy Statement and Notice of 2001
Annual Meeting dated March 16, 2001 is incorporated herein by
reference.
(b) Executive Officers of the Registrant. The information is presented in
Item 1 of this document.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement and Notice of 2001 Annual Meeting dated March 16, 2001
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement and Notice of 2001 Annual Meeting dated March 16, 2001
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement and Notice of 2001 Annual Meeting dated March 16, 2001
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of AMCORE are filed as a
part of this document under Item 8. Financial Statements and Supplementary
Data.
Consolidated Balance Sheets--December 31, 2000 and 1999
Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been included in the consolidated
financial statements or are either not applicable or not significant.
76
(a)3. EXHIBITS
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, 2000
(Incorporated by reference to Exhibit 3.1 of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).
4.1 Rights Agreement dated February 16, 2001, between AMCORE
Financial, Inc. and Wells Fargo Bank Minnesota, N.A.
(Incorporated by reference to AMCORE's Form 8-K as filed
with the Commission on February 27, 2001).
4.2 Indenture, dated as of March 25, 1997, between the Company
and The First National Bank of Chicago (Incorporated
herein by reference to Exhibit 4.1 of the Company's
registration statement on Form S-4, Registration No. 333-
25375).
4.3 Form of New Guarantee between the Company and The First
National Bank of Chicago (Incorporated herein by reference
to Exhibit 4.7 of the Company's registration statement on
Form S-4, Registration No. 333-25375).
10.1 AMCORE Financial, Inc. 1994 Stock Option Plan for Non-
Employee Directors (Incorporated by reference to Exhibit
23 of AMCORE's Annual Report on Form 10-K for the year
ended December 31, 1993).
10.2 AMCORE Stock Option Advantage Plan (Incorporated by
reference to AMCORE's Proxy Statement, Appendix A, filed
as Exhibit 22 to AMCORE's Annual Report on Form 10-K for
year ended December 31, 1998).
10.3 AMCORE Financial, Inc. 2000 Stock Incentive Plan
(Incorporated by reference to AMCORE's Proxy Statement,
Appendix A, filed as Exhibit 22 to AMCORE's Annual Report
on Form 10-K for year ended December 31, 1999).
10.4A Amended and Restated Transitional Compensation Agreement
dated June 1, 1996 between AMCORE Financial, Inc. and
Robert J. Meuleman (Incorporated by reference to Exhibit
10.3A of AMCORE's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996.)
10.4B Transitional Compensation Agreement dated June 1, 1996
between AMCORE Financial, Inc. and the following
individuals: William J. Hippensteel and James F. Warsaw
(Incorporated by reference to Exhibit 10.3D of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1996.)
10.4C Transitional Compensation Agreement dated November 18,
1998 between AMCORE Financial, Inc. and the following
individuals: Kenneth E. Edge, John R. Hecht, and James S.
Waddell (Incorporated by reference to Exhibit 10.3E of
AMCORE's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.4D Transitional Compensation Agreement dated January 1, 1999
between AMCORE Financial, Inc. and the following
individuals: Lewis R. Jones and Joseph B. McGougan
(Incorporated by reference to Exhibit 10.1 of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.)
10.4E Transitional Compensation Agreement dated May 1, 1999
between AMCORE Financial, Inc. and the following
individuals: Gregory Sprawka and Bruce W. Lammers
(Incorporated by reference to Exhibit 10.1 of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.)
10.4F Transitional Compensation Agreement dated February 22,
2000 between AMCORE Financial, Inc. and James M. Hansberry
(Incorporated by reference to Exhibit 10.4G of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
77
10.4G Transitional Compensation Agreement dated March 6, 2000
between AMCORE Financial, Inc. and Patricia M. Bonavia
(Incorporated by reference to Exhibit 10.4H of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.4H Transitional Compensation Agreement dated March 15, 2000
between AMCORE Financial, Inc. and David W. Miles
(Incorporated by reference to Exhibit 10.4I of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.4I Transitional Compensation Agreement Amendment dated
October 2, 2000 between AMCORE Financial, Inc. and Bruce
W. Lammers (Incorporated by reference to Exhibit 10.1 of
AMCORE's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
10.5 Executive Insurance Agreement dated March 1, 1996 between
AFI and Robert J. Meuleman (Incorporated by reference to
Exhibit 10.6 of AMCORE's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996).
10.6 Executive Insurance Agreement dated August 10, 1998
between AMCORE Financial, Inc. and the following
executives: Kenneth E. Edge, John R. Hecht, and James S.
Waddell (Incorporated by reference to Exhibit 10.10 of
AMCORE's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.)
10.7 Supplemental Executive Retirement Plan dated May 20, 1998
(Incorporated by reference to Exhibit 10.9 of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.8 Loan Agreement with M & I Marshall and Ilsley Bank dated
December 31, 1999 (Incorporated by reference to Exhibit
10.10 of AMCORE's Annual Report on Form 10-K for the year
ended December 31, 1999).
13 2000 Summary Annual Report to Stockholders
21 Subsidiaries of the Registrant
22 Proxy Statement and Notice of 2001 Annual Meeting
23 Consent of KPMG LLP
24 Powers of Attorney
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Rockford, State
of Illinois, on this 16th day of March 2001.
AMCORE FINANCIAL, INC.
By: _________________________________
John R. Hecht
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below on the 16th day of March, 2001 by the following persons on
behalf of the Registrant in the capacities indicated.
Name Title
- ---- -----
Chairman and Chief Executive Officer
(principal executive officer)
_____________________________________
Robert J. Meuleman
Executive Vice President and Chief
_____________________________________ Financial Officer
John R. Hecht
(principal financial officer and
principal accounting officer)
Directors: Paula A. Bauer, Karen L. Branding, Milton R. Brown, Richard C.
Dell, Paul Donovan, Kenneth E. Edge, Lawrence E. Gloyd, John A.
Halbrook, Frederick D. Hay, William R. McManaman, Robert J. Meuleman,
Jack D. Ward and Gary L. Watson
_____________________________________
Robert J. Meuleman*
_____________________________________
John R. Hecht*
Attorney in Fact*
79