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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, 1999
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 15, 2000, 27,098,080 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 $456,740,000.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 2000 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
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 9
Item 3 Legal Proceedings........................................... 9
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......................................... 10
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........................................................ 26
Item 8 Financial Statements and Supplementary Data................. 35
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 71
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 71
Item 11 Executive Compensation...................................... 71
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 71
Item 13 Certain Relationships and Related Transactions.............. 71
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 71
SIGNATURES............................................................ 74
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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. The BANK conducts business
at 40 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 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, 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 Client Group offering
private banking services also markets Vintage 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 and governmental organizations. These services include, among others,
lending, deposits, letters of credit and cash management services.
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 four electronic banking services to commercial and
retail customers. AMCORE Data Bank 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. AMCORE Direct is a point-of-sale system for credit
card and debit transactions. The AMCORE TeleBank service gives retail 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, or
mortgage loans, all from a completely automated system. 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.
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TRUST AND ASSET MANAGEMENT SEGMENT
AMCORE Investment Group, N.A. (AIG) was converted from a trust company
charter to a nationally chartered non-depository bank in 1996 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, was incorporated under the laws of
the State of Illinois in October 1990 and in July 1991 became 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, bonds and AMCORE's Vintage Mutual Fund family. 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 was incorporated under the laws of the State of Illinois in December
1992 and is a wholly-owned subsidiary of AIG. IMGR manages the assets of
AMCORE's Vintage Mutual Fund family, which were introduced in December 1992, as
well as trust and other private investor assets.
IMG was incorporated under the laws of the State of Iowa in June 1992 and
became a wholly-owned subsidiary of AIG on February 17, 1998. IMG is an asset
management company whose primary clients include mutual funds, insurance
companies, banks, retirement plans, foundations, endowments, 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. (WCV) of Des Moines, Iowa. ACV provides complete
record-keeping and other administrative services to 401(k) and other
tax-qualified retirement plans. This enables AMCORE to bring plan administration
services in-house where it can enhance its record-keeping ability and strengthen
the relationship with plan sponsors.
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 provides the
BANK with a variety of mortgage lending products to meet its customer needs. All
fixed rate long-term loans originated by AMI are sold in 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.
INACTIVE
AMCORE Financial Life Insurance Company (AFLIC), a wholly-owned subsidiary,
was incorporated under the laws of the State of Arizona in 1984. Prior to 1998,
through AFLIC, AMCORE engaged in reinsuring credit life and accident and health
insurance in conjunction with the lending activities of the affiliate banks. In
January 1998, AFLIC ceded most of its re-insurance risk to an unaffiliated
company. Since January 1998, all new credit life and accidental and health
insurance has been written directly with unaffiliated companies. As such, AFLIC
is currently an inactive subsidiary of AMCORE.
AMCORE Investment Banking, Inc. (AIB) was incorporated under the laws of
the State of Illinois as a wholly-owned subsidiary in November 1993. AIB
obtained approval in July 1993 from the Board of Governors of the Federal
Reserve System (FRB) to perform financial advisory and private placement
services. In 1995, AIB withdrew its brokerage membership with the NASD and, as
such, is currently an inactive subsidiary of AMCORE.
See Note 16 of the Notes to Consolidated Financial Statements included
under Item 8 of this document for further information on AMCORE's segment
financial information.
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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 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.
EMPLOYMENT
AMCORE had 1,406 full-time equivalent employees as of March 1, 2000. AMCORE
provides a variety of benefit plans to its employees including health, dental,
group term life and disability insurance, childcare reimbursement, retirement,
profit sharing, 401(k) and flexible spending accounts, 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 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
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loss exposure to the depositors of such depository institutions and to the 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, establishes a comprehensive framework to
permit affiliations among commercial banks, insurance companies and securities
firms. Regulatory authorities have issued or will issue regulations implementing
the GLB Act.
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 to be referenced 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 Federal Deposit Insurance Corporation
(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. Under Arizona law, investments, capital levels and the level of claim
reserves, among other things, are subject to regulation. 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, 1999, approximately $40.3 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
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lend to AMCORE. At December 31, 1999, the maximum amount available to AMCORE in
the form of loans approximated $15.1 million.
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 section of Item 7 for a summary of
AMCORE's capital ratios as of December 31, 1999 and 1998.
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 will continue to do so in the
future. The general effect of such policies upon the future business and
earnings of each of the subsidiary banks cannot accurately be predicted.
Interest rate sensitivity has a major impact on the earnings of bank
affiliates. 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 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
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Robert J. Meuleman.............................. 60 President and Chief Executive Officer of AMCORE
since January 1996. Previously Executive Vice
President and Chief Operating
Officer -- Banking Subsidiaries of AMCORE until
December 1995.
Kenneth E. Edge................................. 54 Executive Vice President and Chief Operating
Officer of AMCORE since April 1997. Chairman of
the Board and Chief Executive Officer of the
BANK since October 1999. Previously Group Vice
President, Banking Subsidiaries from June 1995
to April 1997 and Executive Vice President of
AMCORE Bank N.A., Rockford until June 1995.
John R. Hecht................................... 41 Executive Vice President and Chief Financial
Officer of AMCORE since December 1997.
Previously Senior Vice President and Chief
Financial Officer of AMCORE until December
1997.
James S. Waddell................................ 54 Executive Vice President, Chief Administrative
Officer and Corporate Secretary of AMCORE.
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NAME AGE PRINCIPAL OCCUPATION WITHIN THE LAST FIVE YEARS
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Patricia M. Bonavia............................. 49 Executive Vice President and Chief Operating
Officer for AMCORE Investment Group, N.A. since
March, 2000. President of AMCORE Investment
Services, Inc. since February, 1998. Director
of Investors Management Group, Ltd., since
February, 1998. Vice President and Product
Manager of AMCORE Investors Management Group,
LTD. until February, 1998.
Charles E. Gagnier.............................. 65 Executive Vice President, Bank Mergers and
Acquisitions of AMCORE. Previously Chairman of
the Board of Directors of AMCORE Bank N.A.,
Rockford from January 1997 to October 1999, and
President and Chief Executive Officer of AMCORE
Bank N.A., Rockford until December 1996.
James M. Hansberry.............................. 37 Vice President and Retail Product Manager of
the BANK since July, 1999. Vice President and
Project Manager of the BANK from February, 1999
to December, 1999. Vice President of Affiliate
Banking of the BANK from November, 1997 to
February, 1999. Vice President and Branch
Administrator until November, 1997.
William T. Hippensteel.......................... 43 Senior Vice President and Corporate Marketing
Director of AMCORE.
Lewis R. Jones.................................. 55 Senior Vice President, AMCORE 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 of the BANK from October, 1997 to
March, 1999. Senior Vice
President -- Commercial Lending of the BANK
until October, 1997.
Joseph McGougan................................. 39 President and Chief Executive Officer of AMCORE
Mortgage, Inc.
David W. Miles.................................. 42 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 R. Sprawka.............................. 49 Senior Vice President 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.
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NAME AGE PRINCIPAL OCCUPATION WITHIN THE LAST FIVE YEARS
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James F. Warsaw................................. 49 President of the BANK since October 1999.
President and Chief Executive Officer of AMCORE
Bank N.A., Rockford from January 1997 to
October 1999. Previously Executive Vice
President and Chief Operating Officer of AMCORE
Bank N.A., Rockford from June 1995 to December
1996, and Executive Vice President and Senior
Credit Officer of AMCORE Bank N.A., Rockford
until May 1995.
ITEM 2. PROPERTIES
On December 31, 1999, AMCORE had 74 locations, of which 51 were owned and
23 were leased. The Banking segment had 71 locations, of which 51 were owned and
20 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.
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 at this early
date 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 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
See Item 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, 2000.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR:
Interest income........................................ $ 300,322 $ 290,861 $ 259,959 $ 233,679 $ 202,268
Interest expense....................................... 168,883 168,127 148,960 128,902 104,017
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Net interest income.................................... 131,439 122,734 110,999 104,777 98,251
Provision for loan and lease losses.................... 10,550 7,993 7,045 5,428 3,165
Non-interest income.................................... 57,976 58,748 48,601 43,428 36,874
Operating expense...................................... 123,610 119,594 114,973 98,740 101,730
---------- ---------- ---------- ---------- ----------
Income before income taxes............................. 55,255 53,895 37,582 44,037 30,230
Income taxes........................................... 15,106 14,314 8,918 12,161 7,205
---------- ---------- ---------- ---------- ----------
Net income............................................. $ 40,149 $ 39,581 $ 28,664 $ 31,876 $ 23,025
========== ========== ========== ========== ==========
Return on average assets (1)(2)(3)(4).................. 0.95% 0.99% 0.81% 1.00% 0.85%
Return on average equity (1)(2)(3)(4).................. 12.96 12.64 10.66 13.14 10.27
Net interest margin.................................... 3.55 3.53 3.61 3.81 4.12
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AVERAGE BALANCE SHEET:
Total assets........................................... $4,216,662 $3,983,600 $3,520,229 $3,181,646 $2,715,520
Loans and leases, net of unearned income............... 2,593,770 2,218,972 1,867,355 1,711,850 1,557,375
Earning assets......................................... 3,969,851 3,768,197 3,325,778 2,967,054 2,501,973
Deposits............................................... 2,953,023 2,730,173 2,399,423 2,274,191 2,182,327
Long-term borrowings................................... 300,490 278,603 132,533 159,504 34,367
Stockholders' equity................................... 309,723 313,056 268,996 242,657 224,219
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ENDING BALANCE SHEET:
Total assets........................................... $4,347,621 $4,147,833 $3,667,690 $3,331,995 $2,903,282
Loans and leases, net of unearned income............... 2,746,613 2,451,518 1,962,674 1,807,121 1,620,365
Earning assets......................................... 4,008,000 3,864,852 3,452,398 3,114,450 2,635,111
Deposits............................................... 3,016,408 2,947,724 2,527,043 2,351,490 2,208,838
Long-term borrowings................................... 285,270 330,361 159,125 131,612 115,752
Stockholders' equity................................... 293,728 316,083 287,476 257,420 242,096
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FINANCIAL CONDITION ANALYSIS:
Allowance for loan losses to year-end loans............ 1.03% 1.08% 1.01% 1.07% 1.06%
Allowance to non-performing loans...................... 154.06 145.24 100.20 156.84 123.06
Net charge-offs to average loans....................... 0.33 0.16 0.34 0.19 0.21
Non-performing loans to net loans...................... 0.67 0.74 1.01 0.68 0.86
Average long-term borrowings to average equity......... 97.02 88.99 49.27 65.73 15.33
Average equity to average assets....................... 7.35 7.86 7.64 7.63 8.26
---------- ---------- ---------- ---------- ----------
STOCKHOLDERS' DATA:
Basic earnings per share............................... $ 1.42 $ 1.39 $ 1.07 $ 1.20 $ 0.87
Diluted earnings per share............................. 1.40 1.36 1.05 1.18 0.86
Book value per share................................... 10.51 10.96 10.68 9.64 9.10
Dividends per share.................................... 0.56 0.54 0.45 0.38 0.33
Dividend payout ratio.................................. 39.49% 38.85% 42.06% 31.67% 37.93%
Average common shares outstanding...................... 28,304 28,515 26,862 26,649 26,504
Average diluted shares outstanding..................... 28,730 29,098 27,405 26,970 26,858
========== ========== ========== ========== ==========
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(1) 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%
(2) 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%
(3) 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%
(4) The 1995 ratios excluding the impact of the $3.5 million, or $.13 per share,
after-tax impairment and merger-related charges: return on average assets
0.98%; return on average equity 11.81%
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATION 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, 1999. The discussion should be read in conjunction with the
consolidated financial statements, accompanying notes, 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) inability to fully realize cost savings from the
new organizational structure within the expected time frame or additional or
unexpected costs are incurred; (XIV) unexpected outcomes on existing or new
litigation in which AMCORE, its subsidiaries, officers, directors or employees
are named defendants; (XV) higher than expected costs or other difficulties
associated with Year 2000 compliance solutions; (XVI) technological changes;
(XVII) changes in Generally Accepted Accounting Principles: and (XVIII)
inability of third-party vendors to perform critical services to the company.
OVERVIEW OF OPERATIONS
AMCORE (or the "Company") reported net income of $40.1 million for the year
ended December 31, 1999. This compares to $39.6 million and $28.7 million
reported for the years ended 1998 and 1997, respectively. Net income from
operations, which excludes $3.3 million of after-tax restructuring-related
charges (the "Restructuring Charge") in 1999, $3.3 million of after-tax
merger-related charges (the "Merger Charge") in 1998 and $6.4 million of
after-tax charges related to bank mergers and the outsourcing of core bank data
processing (the "Merger and Information Systems Charges") in 1997, was $43.4
million, $42.9 million and $35.1 million for the years ended December 31, 1999,
1998 and 1997, respectively. This represents an increase of $522,000 or 1.2% in
net income from operations, when comparing 1999 and 1998, and an increase of
$7.8 million or 22.2% when comparing 1998 and 1997. The primary factors
contributing to the improved operating earnings performance when comparing 1999
and 1998 included increases in net interest income resulting from average
earning asset growth of 6.1% and non-interest income growth mainly from trust
and asset management income.
Diluted earnings per share for 1999 were $1.40 compared to $1.36 in 1998
and $1.05 in 1997. Excluding the above mentioned charges of $0.11 per share in
1999, $0.11 per share in 1998 and $0.23 per share in 1997, diluted earnings per
share from operations were $1.51, $1.47 and $1.28 in 1999, 1998 and 1997,
respectively.
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This represents an increase of $0.04 per share or 2.7%, when comparing 1999 and
1998, and $0.19 per share or 14.8% in diluted earnings per share from
operations, when comparing 1998 and 1997.
This level of net income resulted in a return on average equity for 1999 of
12.96% versus 12.64% in 1998 and 10.66% in 1997. AMCORE's return on average
assets for 1999 was 0.95% compared to 0.99% in 1998 and 0.81% in 1997. If the
above mentioned charges are excluded, the return on average equity and return on
average assets would be 14.02% and 1.03% in 1999, 13.70% and 1.08% in 1998 and
13.05% and 1.00% in 1997.
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 17 of the Notes to Consolidated Financial Statements.
On March 31, 1999, AMCORE acquired Wellmark Capital Value, Inc. ("WCV") of
Des Moines, Iowa for $50,000 in cash. An additional $174,000 may be paid over
the next two years, contingent upon the level of customer assets under
management. WCV provides complete recordkeeping and other administrative
services to 401(k) and other tax-qualified retirement plans. The acquisition of
WCV will enable AMCORE to bring plan administration services in-house where it
can enhance its recordkeeping ability and strengthen the relationship with plan
sponsors. The transaction was accounted for using the purchase method of
accounting.
On August 27, 1999, AMCORE sold its insurance agency business. Sales
proceeds will be received in installments over three years, subject to reduction
if certain performance contingencies are not met. No gain has been recorded,
pending resolution of the contingencies. The impact of the disposition is not
material, with or without the contingencies.
On November 24, 1999, AMCORE announced a stock repurchase program for up to
five percent of its common stock or 1.41 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 and
other employee benefit plans. Through March 15, 2000, 952,241 shares have been
repurchased at an average price of $21.01.
During 1999, AMCORE introduced two new E-commerce products, available to
customers with internet access: AMCORE Online! and AMCORETrade.com. AMCORE
Online! provides retail customers with on line capability to access deposit and
loan account balances, transfer funds between accounts, make loan payments, and
pay bills. With AMCORETrade.com 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.
YEAR 2000
A critical issue that emerged in the banking industry and for the economy
overall regarded how existing application software programs, operating systems
and other systems would accommodate the date value for the year 2000 ("Year
2000"). The Year 2000 has been a pervasive issue, as almost all date-sensitive
systems could be affected to some degree by the rollover to the two-digit year
from 99 to 00. Potential risks of not addressing this issue have included
business interruption, financial loss, reputation loss and/or legal liability.
AMCORE undertook an enterprise-wide initiative to address the Year 2000
issue. The Company established a project team that reported directly to the
Board of Directors and developed a comprehensive plan to prepare, as
appropriate, its computer and other systems to recognize the date change on
January 1, 2000. An assessment of the readiness of third parties that AMCORE
interfaced with, such as vendors, counterparties, customers, payment systems,
and others, has also been ongoing to mitigate potential risks that Year 2000
posed. In addition, AMCORE has been assessing the readiness of companies that
have borrowed from AMCORE's subsidiaries to insure that incremental Year
2000-related credit risks have been addressed. AMCORE's objective has been to
try and insure that all aspects of the Year 2000 issue, including those related
to efforts of third parties, were fully resolved in time.
As of March 15, 2000, AMCORE has not experienced any significant
disruptions to its existing or continuing financial and operating activities
caused by a Year 2000 computerized systems related failure. The Company has no
information that it is aware of that would indicate that any material borrower
has
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experienced significant Year 2000 issues that would materially impact its
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 sell to
goods or provide services to the company as the result of a Year 2000 issue.
It is not possible, however, to be sure that all aspects of the Year 2000
issue that may affect AMCORE, including those related to the effects of
customers, suppliers, or other third parties with whom we conduct business, are
fully known or that they will not have a material impact on AMCORE's results of
operation or financial condition. AMCORE will continue to commit the necessary
human and financial resources to monitor its systems and take appropriate
actions if any Year 2000 systems failure should occur. These actions include
contingency plans that the Company has consistently maintained for mission
critical systems and business processes to protect assets against unplanned
events that would prevent normal operations. These plans have been modified to
address the unique risks of the millennium changeover in order to mitigate the
effect of potential impacts and insure continuity of operations throughout the
Year 2000 and beyond.
As of December 31, 1999, the costs associated with the Year 2000 issue
during 1998 and 1999 are estimated at approximately $2.6 million, of which $1.3
million is for replacement hardware and software. These items are not
anticipated to have a material impact on future results of operations. Through
December 31, 1999, $2.5 million of the $2.6 million total estimated costs have
been incurred or paid since the inception of the project. The remainder of the
costs are expected to be incurred by the end of the first quarter of 2000, as
AMCORE completes post Year 2000 rollover testing and monitoring. These costs do
not include an estimated $359,000 in foregone net interest income associated
with increased cash reserves that were intentionally carried in anticipation of
the potential for Year 2000 related withdrawals by depositors anxious about the
millennium changeover.
1999 RESTRUCTURING CHARGE
On April 27, 1999, AMCORE announced a new "Customer Focused Organizational
Structure" (the "CFOS"). Events giving rise to the announcement was a
recognition by AMCORE that its corporate structure of nine separate banking and
thrift charters was perpetuating operational inefficiencies, staffing
redundancies and burdensome regulatory reporting requirements while actually
impeding its customer focused commitment. The new CFOS is expected to improve
efficiency, enhance responsiveness to local markets and increase shareholder
value. It will increase the ability of market presidents, directors and
salespeople to focus on serving customers and their communities by centralizing
or regionalizing certain support functions.
To accomplish the new CFOS, AMCORE will operate under one charter, while
still preserving its super community banking philosophy. The merger of the nine
charters into one charter under AMCORE Bank, N.A., was completed on October 1.
The centralization of retail operations and corporate support functions,
including the conversion of data processing records into one bank, was
substantially completed during the fourth quarter of 1999.
During the second quarter of 1999, AMCORE accrued a Restructuring Charge
related to the new CFOS of $6.1 million pre-tax, or $3.8 million after tax. 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, $3.4 million of the pre-tax
Restructuring Charge had been paid and $1.3 million had either been incurred but
remained unpaid or related to the minor centralization and conversion issues
noted above that have not yet been completed. These activities are expected to
be completed and paid by the end of the second quarter in 2000.
The remaining excess Restructuring Charge of $1.4 million pre-tax ($857,000
after tax) was reversed during the fourth quarter of 1999. The excess related to
lower than expected severance and benefits due to unplanned employee attrition
in positions unaffected by the CFOS restructuring that permitted the retention
of some employees whose positions were otherwise being eliminated and by some
affected employees leaving for positions outside the company before their
severance became payable. In addition, systems and integration costs were
completed at a lower cost than expected.
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During the fourth quarter of 1999, in continuation of its CFOS
restructuring initiative, AMCORE adopted plans to centralize its commercial loan
operations and to streamline its Trust and Asset Management segment operations.
As a result, a new Restructuring Charge of $537,000 pre-tax, or $324,000
after-tax, was accrued. None of these costs had been incurred or paid as of
December 31, 1999. AMCORE expects to complete this phase of its CFOS
restructuring during 2000.
AMCORE expects $7.3 million in annual pre-tax savings from its new CFOS.
The primary savings are expected to come from reductions in staffing and
regulatory costs. Altogether, staff reductions of 187 employees are planned.
Through December 31, 1999, 55 employees had been terminated and paid severance
benefits. An additional 86 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, 1999, 46 employees remained to be
severed. Reduced corporate support expenses are also expected due to the simpler
structure. The savings will be reflected on the income statement through reduced
compensation expense, employee benefits and professional fees. The projected
cost savings are expected to be realized beginning in the first quarter of 2000.
See Note 15 to the Notes to Consolidated Financial Statements for a tabular
presentation of the Restructuring Charge by major component.
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 16 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 generally accepted accounting principles. 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, inter-segment
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 65 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, automated teller machines,
and other traditional banking services.
The Banking segment's operating profit for 1999 was $40.4 million before
the Restructuring Charge, a decrease of $344,000 or 0.8% from 1998, before the
Merger Charge. This followed an increase in 1998 of $5.5 million or 15.7% from
1997, before Merger and Information Systems Charges. The 1999 Banking segment
operating profit decreased despite an 6.6% increase in net interest income. The
increase in net interest income was more than offset by a 11.9% decrease in
non-interest income and by increases in provision for loan losses and operating
expenses of 32.0% and 6.6%, respectively.
Net interest income improved by $8.1 million in 1999, primarily the result
of a 6.1% increase in average earning assets and a 2 basis point improvement in
net interest margin. The growth in average earning assets can be attributed to
double-digit loan growth associated with a strong regional economy and sales
management initiatives. Average loans increased $374.8 million in 1999, or
16.9%. The strong loan growth was offset by decreased levels of investment
securities in 1999 related to the planned reduction of the investment portfolio
as a means of providing liquidity and reducing interest rate risk. Investment
securities declined $142.4 million on average in 1999, or 9.5%.
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Non-interest income decreased by $3.0 million in 1999. The decrease is
primarily the result of substantially lower gains from the sale of securities
and loans that were only partially offset by increased deposit service charges
and by a non-recurring gain in the third quarter of 1999 resulting from the
merger and reorganization of an ATM service provider in which AMCORE has an
equity interest.
The provision for loan and lease losses increased $2.6 million in 1999. The
increase relates to the growth in total loans noted above plus higher
charge-offs. Charge-offs in 1999 include a $3.2 million partial charge-off
related to a single agricultural credit.
Operating expenses increased $5.8 million in 1999. In addition to normal
increases, factors contributing to the increase include: increased data
processing costs associated with systems conversions for Midwest, upgrades of
internal local area networks ("LAN"), development of an on-line banking product,
outsourcing the mainframe processing to achieve a standard platform; and
expenses associated with the Year 2000 initiative. These increases were
partially offset by lower intangibles amortization.
The Banking segment represented 83.8%, 87.1% and 91.3% of total segment
profit before Restructuring, Merger and Merger and Information System Charges in
1999, 1998, and 1997, respectively.
TRUST AND ASSET MANAGEMENT
The Trust and Asset Management segment provides trust, investment
management 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 profit increased $1.4 million or
30.8% to $5.9 million in 1999. The segment's profits also increased $1.6 million
or 55.2% in 1998. The growth in 1999 was due to the February 17, 1998
acquisition of IMG, strong sales efforts, favorable investment performance and
revenues captured from bringing Vintage mutual fund administration in-house.
These increases were partially offset by higher costs associated with the
expansion of the trust and asset management staff resulting from the growth of
the segment, which includes a new program to provide asset management services
to high net worth individuals (the "Private Client Group"), increased goodwill
amortization associated with the IMG acquisition and the WCV acquisition
previously mentioned.
As of December 31, 1999, assets under management total $4.4 billion
including $1.5 billion in the AMCORE family of Vintage Mutual Funds. Total
assets under administration, which include managed assets and custody assets,
total $5.1 billion.
The Trust and Asset Management segment represented 12.1%, 9.5%, and 7.5% of
total segment profit before charges in 1999, 1998, and 1997, respectively.
MORTGAGE BANKING
The Mortgage Banking segment originates residential mortgage loans for sale
to AMCORE's banking affiliates and the secondary market, and provides servicing
of these mortgage loans.
The Mortgage Banking segment's profit was $2.0 million in 1999, an increase
of $389,000 or 24.7% over 1998. This segment's profits increased $1.1 million or
231.2% in 1998. As of December 31, 1999, the Mortgage segment serviced $774.5
million of residential mortgages.
The Mortgage Banking segment was able to realize increased profitability
for 1999 despite a 43.5% decline in mortgage originations, primarily
attributable to lower refinancings in the face of increasing mortgage rates in
1999. The resulting decrease of $3.6 million in mortgage revenues was more than
offset by decreases in variable production costs resulting from the decline in
origination volume, the elimination of expenses associated with a purchased
mortgage servicing right portfolio that was sold in 1998 and the reversal of
$1.2 million of mortgage servicing impairment reserves in 1999 compared to a
$1.1 million impairment charge in 1998.
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The Mortgage Banking segment represented 4.1%, 3.4%, and 1.2% of total
segment profit before charges in 1999, 1998, and 1997, respectively.
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,
1999, 1998 and 1997, 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):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
Interest Income Book Basis................... $300,322 $290,861 $259,959
Taxable Equivalent Adjustment................ 9,887 10,010 9,234
-------- -------- --------
Interest Income Taxable Equivalent Basis..... 310,209 300,871 269,193
Interest Expense............................. 168,883 168,127 148,960
-------- -------- --------
Net Interest Income Taxable Equivalent
Basis...................................... $141,326 $132,744 $120,233
======== ======== ========
Net interest income on a fully taxable equivalent basis increased $8.6
million or 6.5% in 1999 and $12.5 million or 10.4% in 1998. The improvement in
net interest income during 1999 was primarily the result of an increase in
average earning assets and an increase in net interest spread. In 1998, the
improvement resulted mainly from an increase in average earning assets that was
partially offset by a decrease in the net interest spread.
The growth in average earning assets was 6.1% and 13.0% in 1999 and 1998,
respectively. In 1999, the growth in average earning assets can be attributed to
double-digit loan growth associated with a strong regional economy and sales
management initiatives. The strong loan growth was offset by decreased levels of
investment securities related to the planned reduction of the investment
portfolio as a means of providing liquidity and reducing interest rate risk. In
1998, the growth in average earning assets was also the result of strong loan
growth and the Midwest Federal Financial Corporation ("Midwest") merger. In
addition, 1998 had increased levels of investment securities related to an
investment leveraging program, that began in 1996 and was designed to better
utilize capital. As noted above, the investment strategy was revised in 1999 to
emphasize liquidity and reduced interest rate risk as opposed to enhanced
capital utilization. Average loans increased $374.8 million or 16.9% in 1999 and
$351.6 million or 18.8% in 1998. Average investment securities declined $142.4
million or 9.5% in 1999 and increased $56.2 million or 3.9% in 1998.
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 improved 3 basis points to
2.92% in 1999 from 2.89% in 1998 which was a decline of 7 basis points from the
1997 level of 2.96%. The interest rate margin was 3.55% in 1999, an increase of
2 basis points from 3.53% in 1998. The 1998 level was a decline of 8 basis
points from 3.61% in 1997.
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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
The change in net interest income due to average volume in 1999 relates to
the 16.9% growth in average loans which was partially offset by a 9.5% decrease
in average investment securities, 7.3% growth in average interest-bearing
deposits and 1.4% increase in average borrowed funds. The 1998 increase in net
interest income due to the change in average volume is attributable to a 18.8%
growth in average loans and a 3.9% growth in average investment securities which
was partially offset by 14.9% growth in total interest-bearing deposits and 9.3%
growth in borrowed funds.
CHANGES DUE TO RATE
The yield on earning assets declined 21 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. As noted earlier, AMCORE has sought to reduce its investment
portfolio in 1999 as a means of funding loan growth, improving liquidity and
reducing interest-rate risk. Maturities of older securities, typically with
higher rates than more recent issues, have largely not been replaced. This has
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 recent trends of increased interest rates had more of an impact.
The rate on long-term debt decreased 22 basis points, still influenced by FHLB
renewals at favorable rates during 1998. During the fourth quarter, $64 million
in FHLB advances, bearing an average rate of 5.12%, were called and replaced at
an average rate of 5.81%. While not significantly affecting 1999, as a result of
the foregoing, rates on average long-term borrowings are expected to increase in
2000.
The yield on earning assets declined 9 basis points in 1998 as market rates
declined in general. The decline was less than the decline in the individual
components of investment securities and loans whose yields declined 16 and 11
basis points, respectively, as higher yielding loans represented a larger
proportion of earning assets in 1998. The rate paid on interest bearing
liabilities decreased 2 basis points. The rate paid on interest bearing demand
deposits increased due to growth in the AMDEX money market account, which is
indexed to Treasury yields. The rate on long-term debt decreased 73 basis points
as maturing FHLB borrowings were renewed for a longer term and made up a larger
proportion of the category.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is an amount added to the allowance
against which loan and lease losses are charged. Management determines an
appropriate provision for loan and lease losses based upon
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historical loss experience, regular evaluation of collectibility by lending
officers, credit administration and the corporate loan review staff, and the
size and nature of the loan portfolios. Other factors include the current
economic and industry environment, concentration characteristics of the loan
portfolio, and the composition of problem loans.
The provision for loan and lease losses was $10.6 million for 1999, an
increase of $2.6 million or 32.0% from the $8.0 million in 1998. The 1999
increase in provision is due to a 12% growth in loans and a $3.2 million partial
charge-off of a single agricultural credit. During 1998, the provision increased
$948,000 or 13.5% from the $7.0 million in 1997. The increase in the 1998
provision was due to a 24.9% growth in loans, decreased charge-offs and
relatively stable nonperforming assets.
AMCORE recorded net charge-offs of $8.6 million, $3.6 million and $6.4
million in 1999, 1998 and 1997, respectively. Future growth in the loan
portfolio, weakening economic conditions or specific credit deterioration could
result in increases in the provision for loan and lease losses. Net charge-offs
represented 33 basis points of average loans in 1999 versus 16 basis points in
1998 and 34 basis points in 1997. The increase in net charge-offs in 1999 is
principally the result of partial charge-off of the agricultural credit as it
was responsible for 12 basis points of the charge-offs for the year. In 1997, a
$2.7 million charge-off of satellite dish receivables accounted for 14 basis
points. Without these two items, net charge-offs have been relatively stable at
21 basis points in 1999, 16 basis points in 1998 and 20 basis points in 1997.
The allowance for loan and lease losses as a percent of total loans was
1.03%, 1.08%, and 1.01% in 1999, 1998, and 1997, respectively. The ratio of the
allowance for loan and lease losses to nonperforming loans was 154.1% at
year-end 1999, 145.2% at year-end 1998, and 100.2% at year-end 1997.
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 are also included in this category. Non-interest income
totaled $58.0 million in 1999, a decrease of $772,000 or 1.3%. Strong growth in
trust and asset management revenues and service charges on deposits nearly
eclipsed a $3.6 million decline in mortgage revenues and a $3.9 million decrease
in net security gains. Non-interest income also increased 20.9% or $10.1 million
in 1998.
Trust and asset management income, the largest source of fee based
revenues, totaled $28.9 million in 1999, an increase of $5.2 million or 21.7%.
The 1998 growth of trust and asset management fees was $7.3 million or 44.2%.
The growth in 1999 was due to a full year impact of the IMG acquisition, strong
sales efforts and favorable investment performance. 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 additional
fee income of $881,000. The growth in 1998 is attributable to the IMG
acquisition, favorable market performance of trust assets, growth in proprietary
Vintage Mutual Funds and new trust accounts. AMCORE anticipates continued growth
in trust and asset management revenues in 2000, but at a slower pace than in
1998 and 1999. 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 $10.2 million in 1999, an increase of
$1.3 million or 15.2% from the $8.8 million in 1998. During 1998, service
charges on deposits increased $994,000 or 12.7%. Both years' increases are
attributable to increased deposits and revised fee schedules. In 1998, the
acquisition of Midwest accounted for $610,000 of the increase.
Mortgage revenues include fees generated from underwriting, originating and
servicing of mortgage loans along with gains realized from the sale of these
loans. Mortgage revenues declined $3.6 million or 34.4% in 1999. Increasing
interest rates in 1999 resulted in lower originations of $270.4 million, down
$208.5 million or 43.5% from a record $478.9 million in 1998. In 1998, strong
production volume related to the expansion of markets and refinancing volume
related to the lower mortgage rates resulted in a $4.7 million or 81.2% increase
in mortgage revenues.
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Accounting standards require separate recognition of servicing rights on
originated mortgage loans at the time such loans are sold. This 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, 1999, AMCORE had $6.9 million of capitalized mortgage servicing
rights, with a fair value of $7.8 million, and a servicing portfolio of $774.5
million. See Note 7 of the Notes to Consolidated Financial Statements. There was
no impairment reserve as of December 31, 1999.
Insurance revenues totaled $1.7 million in 1999, a decrease of $140,000 or
7.5% from the $1.9 million in 1998. Continued increases in credit life
commissions were more than offset by decreased agency commissions that were
attributable to the sale of AMCORE's insurance agency in August of 1999. In
1998, insurance revenues increased $291,000 or 18.4% from 1997 levels due to
increased sales of credit life insurance resulting from product specific sales
training.
The sale of the collection agency on December 31, 1997 resulted in no
collection fee income being recognized in 1999 or 1998. Collection fee income
was $2.1 million in 1997.
Other non-interest income, which includes customer service charges, credit
card and merchant fees, ATM fees, brokerage commissions, gains on fixed asset
and loan sales and other miscellaneous income, was $9.7 million, a $399,000 or
4.3% increase over 1998. Increases in 1999 included a non-recurring gain of
$750,000 resulting from the merger and reorganization of an ATM service provider
in which AMCORE has an equity interest, 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 and a decline in ATM related fees of $387,000. In 1998, other
non-interest income was $9.3 million, a decrease of $1.3 million or 11.9% from
1997 levels. The 1997 amount included a $1.9 million gain on the sale of credit
card receivables.
Net securities gains totaled $530,000 in 1999 as compared to $4.4 million
in 1998 and $4.2 million in 1997. 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 $123.6 million in 1999, an increase of $4.0
million from $119.6 million in 1998, which was a $4.6 million increase from
$115.0 million in 1997. Operating expenses in 1999 included the Restructuring
Charge of $5.3 million. Operating expenses in 1998 included the Merger Charge of
$4.5 million. Operating expenses in 1997 included a $5.0 million impairment of
satellite receivables portfolio transferred to held for sale and the Merger and
Information Systems Charges of $8.9 million. Excluding these charges, operating
expenses from normal operations would have increased $3.2 million or 2.8% in
1999 and $14.0 million or 13.9% in 1998. The 1998 increase includes $8.4 million
of normal operating expenses of IMG and Midwest. The efficiency ratio, excluding
the above-mentioned charges, was 59% in 1999 versus 60% in 1998 and 1997.
Personnel costs, which include compensation expense and employee benefits,
are the largest component of operating expenses. Personnel costs totaled $69.0
million in 1999, an increase of $4.6 million or 7.1% from 1998. Excluding the
Restructuring Charge in 1999 and the Merger Charge in 1998, personnel costs
increased $2.9 million in 1999, an increase of 4.6%. 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 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. Personnel costs totaled
$64.4 million in 1998, an increase of $5.6 million or 9.5% from 1997. Excluding
the Merger Charge and $4.8 million of normal compensation
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expense of IMG and Midwest in 1998 and the Merger and Information Systems
Charges in 1997, the increase would have been $1.5 million or 2.7%. The higher
costs in 1998 were primarily caused by increased levels of performance driven
compensation, higher Performance Unit Award accruals and normal merit increases.
Net occupancy expense was $6.7 million in 1999, a decrease of $39,000 from
1998, after an increase of $260,000 from 1997 levels. A 1997 property tax refund
for prior years and an increase in the number of facilities were the primary
cause of the increase in 1998.
Equipment expense increased $1.1 million or 14.3% to $9.0 million in 1999.
This followed a $2.9 million or 27.0% decrease in 1998. Excluding $325,000 of
Merger Charges incurred in 1998, equipment expense increased $1.5 million or
19.2% in 1999. The 1999 increase is the result of higher EDP equipment
depreciation and software amortization and maintenance associated with the
upgrade of internal LAN networks and Year 2000 compliance solutions. The 1998
decrease is primarily due to a $2.4 million charge related to equipment and
software written off as part of the 1997 Information Systems Charge.
Data processing expenses include expenses related to core bank data
processing, trust and other external processing systems. This category increased
$1.8 million or 33.9% to $7.2 million in 1999. Excluding the Restructuring
Charge in 1999 and the Merger Charge in 1998, data processing expenses increased
$2.1 million in 1999, an increase of 54.1%. The 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 LAN networks, development of an on-line banking product and expenses
associated with the Year 2000 initiative. This category increased $2.7 million
or 101.2% in 1998 as a result of a partial year's expense from outsourcing
mainframe processing in the third quarter of 1998, the additional processing
expenses of Midwest and IMG, and contract termination costs for Midwest, that
were included as a Merger Charge.
Professional fees totaled $5.3 million in 1999, a decrease of $461,000. Of
this amount, $339,000 was attributable to lower level of professional fees in
the 1999 Restructuring Charge than in the 1998 Merger Charge. Decreased legal
fees accounted for the remaining decrease. Professional fees decreased $643,000
or 10.1% in 1998. The professional fees included in the 1998 Merger Charge were
$699,000 less than those included in the 1997 Merger Charge, accounting for all
of the decrease.
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 as the number of markets served by AMCORE stabilized
following acquisitions in 1997 and 1998. This category increased $944,000 or
33.4% in 1998 because of an increase in the number of markets served due to the
1997 and 1998 acquisitions.
Intangibles amortization decreased $545,000 in 1999 to $2.0 million, a
21.5% decrease. 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 and increased the purchase price allocable to goodwill. Intangibles
amortization expense totaled $2.5 million in 1998, an increase of $324,000 or
14.6% as a result of the IMG acquisition.
Other expenses were $20.8 million in 1999, a decrease of $2.3 million or
10.0%, following an increase of $3.4 million or 16.9% in 1998. The 1999 decrease
relates to the reversal of $1.2 million of mortgage servicing impairment
reserves in 1999, due to increasing interest rates, whereas 1998 included $1.1
million in impairment charges. The 1998 increase is primarily the result of
increased mortgage servicing expenses of $1.1 million and an impairment charge
of $1.1 million. The impairment charge was the result of a declining interest
rate environment. The remaining increase related to increased travel and
training expenses.
INCOME TAXES
Income tax expense totaled $15.1 million in 1999, compared with $14.3
million and $8.9 million in 1998 and 1997, respectively. The effective tax rates
were 27.3%, 26.6%, and 23.7% in 1999, 1998, and 1997, 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 and 1998 primarily resulted from a lower proportion of
tax-exempt income to pretax earnings relative to 1998 and 1997, respectively,
and a steady increase in state income taxes over the same period.
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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 subsidiaries in the form of dividends and fees for services. In 1999,
dividends and fees from subsidiaries amounted to $55.5 million, compared to
$51.0 million in 1998. 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 dividend it can pay, as of December 31, 1999,
approximately $40.3 million was available for payment to the parent in the form
of dividends without prior regulatory approval.
Cash and cash equivalents increased $34.9 million from December 31, 1998 to
December 31, 1999, as the net cash provided from operating activities of $85.8
million plus the net cash provided by financing activities of $185.3 million
exceeded the net cash used for investing activities of $236.2 million in 1999.
The amount of the cash increase primarily represents excess liquidity that was
intentionally increased in anticipation of the potential for Year 2000 related
withdrawals by depositors anxious about the millennium changeover. AMCORE
estimates that the foregone net interest income associated with this excess
liquidity amounted to approximately $359,000.
The net increase in cash provided by operating activities of $31.6 million
from December 31, 1998 to December 31, 1999 was primarily attributable to a
$208.5 million decline in originations of loans held for sale net of a $160.5
million decrease in proceeds from loans held for sale.
The net decrease in cash used for investing activities of $3.1 million from
December 31, 1998 to December 31, 1999 is the result of the decrease in net cash
provided by available for sale securities of $43.4 million. This decrease
results from the net decrease in proceeds from maturities and sales of $414.2
million and the net decrease in cash used for purchases of $370.8 million. This
decrease was more than offset by a net increase of $18.5 million in interest
earning deposits in bank, an $18.2 million net increase in federal funds sold
and other short-term investments and a $10.7 million decrease in net cash used
for investment in company owned life insurance.
The net cash provided by financing activities decreased by $38.8 million
from December 31, 1998 to December 31, 1999. Net cash provided by demand
deposits and savings accounts decreased $194.9 million. Proceeds from long-term
borrowings declined $78.3 million, while payments of long-term borrowings
increased $66.0 million. Net cash required for treasury stock purchases
increased $10.8 million. The sum of these items, $350.0 million, was largely
funded by a net increase in short-term borrowings of $305.0 million and by a net
increase in time deposits of $6.5 million.
SECURITIES
Total securities as of December 31, 1999 were $1.24 billion, a decrease of
$102.3 million or 7.6% over the prior year-end. At December 31, 1999 and 1998,
the total securities portfolio comprised 31.0% and 34.8%, 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
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significant source of liquidity. Approximately $71.7 million, or 5.8%, of the
securities portfolio will contractually mature in 2000. 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, 1999 totaled $800.7
million and represent 64.5% of total securities. The distribution of mortgage
and asset backed securities includes $481.1 million of U.S. government agency
mortgage-backed pass through securities, $235.2 million of agency collateralized
mortgage obligations and $84.4 million of private issue collateral mortgage
obligations, all of which are rated AAA except for $17.1 million of securities
rated between Aa1 and Baa1.
At December 31, 1999, securities held to maturity total $14.0 million,
while securities available for sale were $1.23 billion. There were no trading
securities at the end of 1999 or 1998. At December 31, 1999, the held to
maturity securities portfolio included $53,000 of gross unrealized gains and
$212,000 of gross unrealized losses. The securities available for sale portfolio
at the end of 1999 included gross unrealized gains of $2.8 million and gross
unrealized losses of $47.1 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, 1998, gross unrealized gains of $18.5
million and gross unrealized losses of $23.9 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 1999, total loans and leases, net of unearned discount, were $2.75
billion, an increase of $295.1 million or 12.0% as compared to 1998. Average
loans increased $374.8 million or 16.9% during 1999. Over 50%, or $153.0
million, of the growth in loans was attributable to real estate loans. This
included $106.1 million in commercial real estate loans, $31.3 million in
residential real estate loans and $15.6 million in real estate construction
loans. The remaining increase was primarily attributable to installment and
commercial loan categories. See Table 2 and Note 4 of the Notes to Consolidated
Financial Statements.
Commercial, financial and agricultural loan balances totaled $710.3 million
at year-end 1999, an increase of $50.4 million or 7.6% when compared to 1998.
This increase was primarily in commercial and industrial loans in the Rockford
and northwestern Chicago suburban markets.
Total real estate loans were $1.54 billion at year-end 1999, an increase of
$153.0 million, or 11.0%, over 1998. The growth from 1999 occurred mainly in the
commercial real estate category. The growth is attributable primarily to the
Rockford and northwestern Chicago suburban markets.
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 increased $91.3 million or 22.9% to end the
year at $489.6 million. The growth is primarily related to in-market indirect
automobile loans.
The scheduled repayments and maturities of loans represent a substantial
source of liquidity. Table 3 shows selected loan maturity data as of December
31, 1999.
DEPOSITS
Total deposits at December 31, 1999, were $3.02 billion, an increase of
$68.7 million or 2.3% when compared to 1998. Average total deposits increased
$222.9 million or 8.2%.
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
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$2.43 billion at the end of 1999, an $8.1 million or 0.3% decrease from the
prior year-end. This decrease is attributable to declines in non-interest
bearing demand and NOW accounts that were nearly offset by increased money
market deposits. Core deposits represent 80.9% and 82.9% of total deposits at
December 31, 1999 and 1998, respectively. Large certificates of deposit,
brokered deposits, and time deposits from governmental entities supplement these
core deposits. Brokered deposits were $349.8 million at year-end 1999, an
increase of $38.7 million over the prior year-end. Table 5 shows the maturity
distribution of time deposits $100,000 and over.
BORROWINGS
Borrowings totaled $984.7 million at year-end 1999 and were comprised of
$699.4 million of short-term and $285.3 million of long-term borrowings. The
increase in borrowings of $156.1 million was primarily used to fund the growth
in loans, provide additional Year 2000 liquidity and fund the 1998 and 1999
stock repurchase programs. Long-term borrowings declined principally due to FHLB
borrowings that will mature during the next twelve months which have been
reclassified to short-term borrowings.
In 1997, AMCORE 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 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 proceeds of
these securities were used to repay the parent company term loan, debt of
acquired companies, and other general corporate 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, 1999, totaled $2.75 billion, or 68.5%, 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 represents management's estimate of
identified and unidentified losses in the existing loan portfolio. To establish
the appropriate level of the allowance, all loans, commitments to extend credit,
and standby letters of credit, are reviewed.
The appropriate allowance for consumer, residential real estate and
residential real estate construction loans are evaluated as groups or pools,
since these loans tend to be smaller balance, homogenous loans. Loss allowances
are allocated based upon a five-year weighted average for actual losses for
these pools.
Similar pool allocations are determined, as a group, for commercial,
financial, agricultural, commercial real estate and commercial real estate
construction loans. In addition to the pool allocations for these groups of
loans, commercial, financial, agricultural and commercial real estate loans are
individually graded and specific allocations are made for loans that are
impaired. Loans are considered impaired, and loss factors are applied, when,
based on current information and events, it is probable that AMCORE will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. In making this determination, management analyzes the ultimate
collectibility of the loan portfolio, incorporating feedback provided by
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lending officers and supervisors, credit administration, the corporate loan
review staff, the grades assigned to the loan and examinations performed by
regulatory agencies.
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 $28.4 million at December 31, 1999, compared to $26.4 million at
December 31, 1998, for an increase of $2.0 million or 7.5%. However, since the
allowance for loan losses is based on estimates, ultimate losses may vary from
the current estimates. Management makes an ongoing evaluation as to the adequacy
of the allowance for loan 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 losses by category for the
past five years are shown in Table 2.
Allocations of the allowance for commercial, financial and agricultural
loans increased $1.0 million. The increase was attributable to greater
anticipated Year 2000 needs, as the date for the millennium roll-over
approached, and increased delinquencies and related concerns due to lending
staff turnover in two markets. These increases were partially offset by
decreased pool allocations for the category. Allocations of the allowance for
real estate loans increased $1.7 million to reflect increased concentrations in
the commercial real estate portfolio, including hotel and motel credits, more
aggressive lending practices driven by competitive factors and lending staff
turnover previously noted. Allocations of the allowance for installment and
consumer loans increased $3.0 million. This increase was attributable to higher
average historical loss factors in the pool calculation, as well as increased
delinquencies, foreclosures and bankruptcies in the fourth quarter of 1999 that
were not fully recognized in the pool calculation. Allocations for impaired
loans increased $615,000 as several medium-sized credits became impaired during
the year, that were not fully offset by reduced impairment on a single
agricultural credit due to partial charge-off of the credit. Unallocated loan
and lease losses declined $4.3 million. The decrease was primarily the result of
the partial charge-off of the agricultural credit in excess of the impairment
allocation and the increase in Year 2000 allocations.
As of December 31, 1999, the allowance for loan losses as a percent of
total loans and of non-performing loans was 1.03% and 154.06%, respectively.
These compare to the same ratios for the prior year of 1.08% and 145.24%. Net
charge-offs as a percent of average loans increased to 0.33% for 1999 versus
0.16% in 1998. Partial charge-offs related to a single agricultural credit
represented 36.8% of total net charge-offs in 1999, thus net charge-offs on all
other loans represented 0.21% of average loans in 1999.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans with restructured
terms, foreclosed real estate and other foreclosed assets. Non-performing assets
totaled $21.5 million as of year-end 1999, an increase of $921,000 or 4.5% from
the $20.5 million at year-end 1998. Total non-performing assets represent 0.49%
of total assets at both December 31, 1999 and December 31, 1998.
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 $240,000 or 1.3% to total $18.4 million at
December 31, 1999, when compared to the prior year-end. Non-performing loans
include one grain elevator credit, which represents $1.2 million or 6.5% of
total non-performing loans, whose collectibility is dependent solely on its
guarantors. As of December 31, 1999, non-performing loans to total loans were
0.67% compared to 0.74% at year-end 1998. Table 2 presents non-performing loans
for each of the past five years.
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Foreclosed real estate and other foreclosed assets increased $505,000, or
19.9%, to $3.0 million at December 31, 1999, when compared to year-end 1998.
This increase is concentrated in residential real estate loans, primarily in the
Rockford market.
Loans 90 days or more past due and still accruing interest were $10.2
million at December 31, 1999, an increase of $2.9 million from the $7.3 million
at December 31, 1998. These amounts represented 0.37% and 0.30% of loans
outstanding as of the end of 1999 and 1998, respectively. The increase over 1998
relates primarily to commercial and commercial real estate and includes the
effect of lending staff turnover in two markets.
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 $710.3 million at
December 31, 1999, and comprised approximately 25.9% of gross loans, of which
.73% were non-performing. Net charge-offs of commercial loans represent 0.65%
during 1999, and 0.11% during 1998, of the year-end balance of the category. The
increase in net charge-offs in 1999 is principally the result of partial
charge-off of the agricultural credit, as it was responsible for 0.45% of the
charge-offs for the category.
Construction, commercial real estate loans, and loans for farmland were
$853.7 million at December 31, 1999, comprising 31.1% of gross loans, of which
0.75% were classified as non-performing. Net charge-offs of this category of
loans represent 0.01% during 1999, and 0.02% during 1998, of the year-end
balance of the category.
Residential real estate loans, which includes home equity and permanent
residential financing, totaled $689.7 million at December 31, 1999, and
represent 25.1% of gross loans, of which 0.73% are non-performing. Net
charge-offs of residential real estate loans represent 0.15% of the category
total in 1999 and 0.05% of the year-end balance in 1998.
Installment and consumer loans were $489.6 million at December 31, 1999,
and comprised 17.8% of gross loans, of which 0.37% were non-performing. Net
charge-offs of consumer loans represented 0.57% and 0.63% of the year-end
category total for 1999 and 1998, respectively. Consumer loans are comprised
primarily of in-market indirect auto loans, credit card loans and direct
installment loans. Indirect auto loans total $363.5 million at December 31,
1999. 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, 1999, was $293.7 million, a
decrease of $22.4 million or 7.1%. The decline in stockholders' equity is due
principally to the acquisition of treasury shares in conjunction with announced
share repurchase programs, normal dividend distributions and unrealized losses
on available for sale securities. The decline was partially offset by earnings
for the year and by stock issued in conjunction with stock and stock option
plans. Stockholders' equity includes accumulated other comprehensive income
which is comprised primarily of an adjustment to fair market value for
securities classified as available for sale. The fair market value of securities
with this classification declined $23.6 million during 1999, to end the year at
a net adjustment of $26.9 million.
AMCORE paid $15.9 million of cash dividends, which represent $0.56 per
share, or a dividend payout ratio of 39.5%. This compares to $0.54 per share
paid in 1998, which represented a payout ratio of 38.9%. The book value per
share declined $0.45 per share to $10.51 at December 31, 1999, down from $10.96
at December 31, 1998.
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On November 24, 1999, AMCORE announced a stock repurchase program for up to
five percent of its common stock or 1.41 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 and
other employee benefit plans. Through March 15, 2000, 952,241 shares have been
repurchased at an average price of $21.01. As of December 31, 1999, the 1.45
million share repurchase program that was announced October 21, 1998 had been
completed at an average price of $23.59.
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 8.03% at December 31, 1999 exceeds the
regulatory guidelines of 5% for well-capitalized institutions. AMCORE's ratio of
Tier 1 capital at 11.58% and total risk based capital at 12.54% significantly
exceed the regulatory minimums (as the following table indicates), as of
December 31, 1999.
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Tier 1 Capital........................................ $ 343,458 11.58% $ 339,718 12.46%
Tier 1 Capital Minimum................................ 118,591 4.00% 109,039 4.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum................ $ 224,867 7.58% $ 230,679 8.46%
========== ===== ========== =====
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
Total Capital......................................... $ 371,835 12.54% $ 366,121 13.43%
Total Capital Minimum................................. 237,181 8.00% 218,078 8.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum................ $ 134,654 4.54% $ 148,043 5.43%
========== ===== ========== =====
Risk Adjusted Assets.................................. $2,964,768 $2,725,981
========== ==========
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 9 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 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 1999 there were no material changes in AMCORE's
primary market risk exposures. Interest-rate risk, as described above, continues
to be AMCORE's most
26
27
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, 1999. 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. In prior years, the above interest-rate risk
management processes were supplemented with re-pricing gap analysis. This was
discontinued during 1999, as it did not meaningfully assist in the risk
management process.
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 stand-alone
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 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 $100.0 million
and $220.0 million as of December 31, 1999 and 1998, respectively. As of the end
of 1999, swap contracts had an aggregate negative carrying value of $541,000 and
a negative fair value of $351,000, for a net unrealized gain of $190,000. The
total notional amount of collars outstanding was $100.0 million at December
31,1999, versus $125.0 million outstanding as of the end of 1998. As of the end
of 1999, these collars had an aggregate carrying value of $465,000 and a fair
value of $667,000 for a net unrealized gain of $202,000. The total notional
amount of caps outstanding was $60.0 million at December 31, 1999, with $20.0
million outstanding caps as of the end of 1998. As of the end of 1999, the caps
had an aggregate carrying value of $473,000 and a fair value of $1.0 million,
for a net unrealized gain of $572,000. The total notional amount of floors
outstanding was $20.0 million at December 31, 1999, versus $25.0 million
outstanding as of the end of 1998. The floor contracts had a net aggregate
carrying value of $67,000 and a fair value of $39,000, for a net unrealized loss
of $28,000 as of the end of 1999. For further discussion of derivative
contracts, see Notes 5 and 10 of the Notes to the Consolidated Financial
Statements.
27
28
Based upon a gradual increase in interest rates of 200 basis points over
the next twelve months and no change in the slope of the yield curve, the
potential decrease in net income for 2000 would be approximately $5.2 million.
At the end of 1998, comparable assumptions would have resulted in a potential
decrease in 1999 net income of $1.8 million. Thus, AMCORE's earnings at risk
from a rising rate scenario are greater at the end of 1999 than they were at the
end of 1998. A significant factor in this increased exposure is the reduced
level of swap contracts that hedge interest rate risk on fixed-rate loans. A
total notional amount of $95.0 million of the contracts in place at the
beginning of 1999, that effectively converted a like amount of fixed rate loans
to variable rate loans, were called during the year. The removal of the hedge is
detrimental in a rising-rate environment. In addition, 1999 saw significant
fixed-rate loan growth that was partially funded with variable rate deposits and
borrowings. While there have been interest rate increases during the last half
of 1999, and it is reasonably possible that there will be additional near-term
interest rate increases in 2000, AMCORE does not expect increases to such an
extent that they would approach the hypothetical loss in net interest income as
stated above.
Conversely, a gradual decrease in interest rates of 200 basis points over
the next twelve months and no change in the slope of the yield curve would
result in a potential increase in net income for 2000 of $3.2 million. The same
assumptions at the end of 1998 would have resulted in a potential decline in net
income of $4.8 million. AMCORE's position in a falling rate scenario has
improved from an earnings at risk potential at the end of 1998 to earnings
opportunities at the end of 1999. The factors noted above as harmful in a
falling rising-rate environment are beneficial when rates decline. An additional
factor for the improvement is decreased investments in interest only securities
coupled with actual interest rate increases from a year ago. Together, these
developments decreased the likelihood of impairment charges on these securities
associated with a decline in interest rates. Based upon recent interest rate
movements and current market expectations, AMCORE does not anticipate near-term
interest rate decreases.
AMCORE is shifting its rate sensitivity analysis from the "ramp" scenario
(gradual changes in interest rates over a twelve-month period) used above, to a
"shock" scenario (immediate changes in interest rates). AMCORE is making this
change to facilitate multi-year modeling and to enhance its ability to
understand, predict and manage the scenario that could result in the greatest
risk and opportunity to the Company -- an immediate and substantial change in
interest rates. Under a shock scenario, a 200 basis point increase in rates
would result in a potential decrease in net income for 2000 of $10.7 million. A
200 basis point decrease in rates would result in a potential increase in net
income for 2000 of $3.4 million. Apart from this, no material changes in how
AMCORE's primary market risk exposure (i.e. interest-rate risk) is managed are
anticipated.
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.
28
29
TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
TWELVE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(IN THOUSANDS)
ASSETS
Interest-Earning Assets:
Taxable securities........ $1,016,159 $ 65,331 6.43% $1,152,198 $ 76,786 6.66% $1,123,535 $ 77,076 6.86%
Tax-exempt
securities(1)........... 333,634 25,854 7.75% 339,965 26,845 7.90% 312,429 25,071 8.02%
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total Securities(2)..... $1,349,793 $ 91,185 6.76% $1,492,163 $103,631 6.95% $1,435,964 $102,147 7.11%
Mortgage loans held for
sale(3)................. 20,768 1,307 6.29% 30,837 1,886 6.12% 12,871 890 6.91%
Loans (1)(4).............. 2,593,770 216,011 8.33% 2,218,972 193,588 8.66% 1,867,355 164,979 8.77%
Other earning assets...... 22,193 1,100 4.96% 15,210 729 4.73% 10,156 538 5.22%
Fees on mortgage loans
held for sale(3)........ -- 606 -- -- 1,037 -- -- 639 --
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total Interest-Earning
Assets.............. $3,986,524 $310,209 7.76% $3,757,182 $300,871 7.97% $3,326,346 $269,193 8.06%
Non Interest-Earning
Assets:................. 230,138 226,418 193,883
---------- ---------- ----------
Total Assets........ $4,216,662 $3,983,600 $3,520,229
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-Bearing
Liabilities:
Interest-bearing demand
and savings deposits.... $ 968,111 $ 28,375 2.93% $ 872,063 $ 25,940 2.97% $ 727,184 $ 20,170 2.77%
Time deposits............. 1,624,495 89,007 5.48% 1,543,158 90,664 5.88% 1,374,796 80,905 5.88%
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total interest-bearing
deposits.............. $2,592,606 $117,382 4.53% $2,415,221 $116,604 4.83% $2,101,980 $101,075 4.81%
Short-term borrowings..... 597,044 34,200 5.73% 606,768 34,855 5.68% 677,205 38,998 5.69%
Long-term borrowings...... 300,490 17,301 5.76% 278,603 16,668 5.98% 132,533 8,887 6.71%
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total Interest-Bearing
Liabilities........... $3,490,140 $168,883 4.84% $3,300,592 $168,127 5.08% $2,911,718 $148,960 5.10%
Non Interest Bearing
Liabilities:
Demand deposits........... 360,417 314,952 297,443
Other liabilities......... 56,382 55,000 42,072
---------- ---------- ----------
Total Liabilities....... $3,906,939 $3,670,544 $3,251,233
Stockholders' Equity........ 309,723 313,056 268,996
---------- ---------- ----------
Total Liabilities and
Stockholders'
Equity............ $4,216,662 $3,983,600 $3,520,229
========== ========== ==========
Net Interest Income (FTE)... $141,326 $132,744 $120,233
======== ======== ========
Net Interest Spread (FTE)... 2.92% 2.89% 2.96%
===== ====== ======
Interest Rate Margin
(FTE)..................... 3.55% 3.53% 3.61%
===== ====== ======
29
30
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1999/ DECEMBER 31, 1998/
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------- -----------------------------------
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) (IN THOUSANDS)
Interest Income:
Taxable securities................ $(8,820) $(2,635) $(11,455) $ 1,075 $(1,365) $ (290)
Tax-exempt securities(1).......... (495) (496) (991) 3,609 (1,835) 1,774
------- ------- -------- ------- ------- -------
Total Securities(2)............. (9,678) (2,768) (12,446) 4,684 (3,200) 1,484
Mortgage loans held for sale...... (633) 54 (579) 1,109 (113) 996
Loans (1)(4)...................... 30,366 (7,943) 22,423 30,168 (1,558) 28,610
Other earning assets.............. 291 80 371 246 (56) 190
Fees on mortgage loans held for
sale(3)......................... -- (431) (431) 11 387 398
------- ------- -------- ------- ------- -------
Total Interest-Earning Assets..... $17,481 $(8,143) $ 9,338 $34,844 $(3,166) $31,678
======= ======= ======== ======= ======= =======
Interest Expense:
Interest-bearing demand and
savings deposits................ $ 4,402 $(1,967) $ 2,435 $ 4,232 $ 1,538 $ 5,770
Time deposits..................... 4,577 (6,234) (1,657) 9,892 (133) 9,759
------- ------- -------- ------- ------- -------
Total interest-bearing
deposits...................... 8,275 (7,497) 778 15,331 198 15,529
Short-term borrowings............. (801) 146 (655) (4,081) (62) (4,143)
Long-term borrowings.............. 1,276 (643) 633 8,833 (1,052) 7,781
------- ------- -------- ------- ------- -------
Total Interest-Bearing
Liabilities..................... $ 9,107 $(8,351) $ 756 $20,083 $ (916) $19,167
======= ======= ======== ======= ======= =======
Net Interest Margin/Net Interest
Income (FTE).................... $ 8,374 $ 208 $ 8,582 $14,761 $(2,250) $12,511
======= ======= ======== ======= ======= =======
- ---------------
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 mortgage loans
held for sale are in addition to the interest earned on the loans during the
period in which they are warehoused for sale as shown above.
(4) The balances of non-accrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
30
31
TABLE 2
ANALYSIS OF LOAN AND LEASE PORTFOLIO AND LOSS EXPERIENCE
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural................. $ 710,302 $ 659,946 $ 538,259 $ 483,300 $ 462,453
Real estate............................................ 1,422,149 1,284,764 1,059,830 930,602 833,544
Real estate-construction............................... 121,216 105,574 60,624 53,039 44,134
Installment and consumer............................... 489,586 398,318 301,163 339,319 283,426
Direct lease financing................................. 3,489 3,127 3,172 2,066 1,117
---------- ---------- ---------- ---------- ----------
Gross Loans.......................................... $2,746,742 $2,451,729 $1,963,048 $1,808,326 $1,624,674
Unearned income...................................... (129) (211) (374) (1,205) (4,309)
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income........................ $2,746,613 $2,451,518 $1,962,674 $1,807,121 $1,620,365
Allowance for loan and lease losses.................. (28,377) (26,403) (19,908) (19,295) (17,107)
---------- ---------- ---------- ---------- ----------
Net Loans.............................................. $2,718,236 $2,425,115 $1,942,766 $1,787,826 $1,603,258
========== ========== ========== ========== ==========
SUMMARY OF LOAN LOSS EXPERIENCE:
Allowance for loan and lease losses, beginning......... $ 26,403 $ 19,908 $ 19,295 $ 17,107 $ 17,246
Allowance for loan and lease losses acquired through
merger............................................... -- 2,146 -- -- --
Amounts charged-off:
Commercial, financial and agricultural............... 5,055 1,395 1,202 537 1,204
Real estate.......................................... 965 480 555 273 1,030
Installment and consumer............................. 4,289 3,189 6,020 3,831 2,329
---------- ---------- ---------- ---------- ----------
Total Charge-offs.................................. $ 10,309 $ 5,064 $ 7,777 $ 4,641 $ 4,563
---------- ---------- ---------- ---------- ----------
Recoveries on amounts previously charged off:
Commercial, financial and agricultural............... 424 678 356 301 533
Real estate.......................................... 48 47 63 281 15
Installment and consumer............................. 1,261 695 926 819 711
---------- ---------- ---------- ---------- ----------
Total Recoveries................................... $ 1,733 $ 1,420 $ 1,345 $ 1,401 $ 1,259
---------- ---------- ---------- ---------- ----------
Net Charge-offs.................................... $ 8,576 $ 3,644 $ 6,432 $ 3,240 $ 3,304
Provision charged to expense........................... 10,550 7,993 7,045 5,428 3,165
---------- ---------- ---------- ---------- ----------
Allowance for Loan and Lease Losses, Ending........ $ 28,377 $ 26,403 $ 19,908 $ 19,295 $ 17,107
========== ========== ========== ========== ==========
NON-PERFORMING LOANS AT YEAR-END:
Non-accrual............................................ $ 18,419 $ 18,179 $ 19,491 $ 12,019 $ 11,410
Restructured........................................... -- -- 377 283 2,491
---------- ---------- ---------- ---------- ----------
Total Non-performing Loans......................... $ 18,419 $ 18,179 $ 19,868 $ 12,302 $ 13,901
========== ========== ========== ========== ==========
Past due 90 days or more not included above............ $ 10,197 $ 7,272 $ 3,386 $ 3,692 $ 1,534
========== ========== ========== ========== ==========
RATIOS:
Allowance for loan and lease losses to year-end
loans................................................ 1.03% 1.08% 1.01% 1.07% 1.06%
Allowance to non-performing loans...................... 154.06% 145.24% 100.20% 156.84% 123.06%
Net charge-offs to average loans....................... 0.33% 0.16% 0.34% 0.19% 0.21%
Recoveries to charge-offs.............................. 16.81% 28.04% 17.29% 30.19% 27.59%
Non-performing loans to loans, net of unearned
income............................................... 0.67% 0.74% 1.01% 0.68% 0.86%
The allocation of the allowance for loan and lease losses at December 31,
was as follows:
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------- ---------- ------- ---------- ------- ---------- ------- ----------
(IN THOUSANDS)
Commercial, financial
and agricultural... $7,863 26.0% $6,845 27.1% $5,617 27.6% $5,293 26.9%
Real estate.......... 3,581 56.2 1,884 56.7 1,697 57.1 2,307 54.4
Installment and
consumer........... 7,471 17.8 4,512 16.2 4,207 15.3 4,019 18.7
Impaired loans....... 4,469 * 3,854 * 2,311 * 1,496 *
Unallocated.......... 4,993 * 9,308 * 6,076 * 6,180 *
------- ----- ------- ----- ------- ----- ------- -----
Total.............. $28,377 100.0% $26,403 100.0% $19,908 100.0% $19,295 100.0%
======= ===== ======= ===== ======= ===== ======= =====
1995
--------------------
PERCENT OF
LOANS IN
AMOUNT CATEGORY
------- ----------
(IN THOUSANDS)
Commercial, financial
and agricultural... $5,888 28.6%
Real estate.......... 2,079 54.2
Installment and
consumer........... 3,075 17.2
Impaired loans....... 1,185 *
Unallocated.......... 4,880 *
------- -----
Total.............. $17,107 100.0%
======= =====
- ---------------
* Not applicable
31
32
TABLE 3
MATURITY AND INTEREST SENSITIVITY OF LOANS
DECEMBER 31, 1999
-----------------------------------------------------------------
LOANS DUE AFTER
TIME REMAINING TO MATURITY ONE YEAR
------------------------------- -------------------
ONE AFTER FIXED FLOATING
DUE WITHIN TO FIVE FIVE INTEREST INTEREST
ONE YEAR YEARS YEARS TOTAL RATE RATE
---------- -------- ------- -------- -------- --------
(IN THOUSANDS)
Commercial, financial and agricultural............ $294,058 $336,015 $80,229 $710,302 $310,878 $105,366
Real estate-construction.......................... 36,935 53,300 9,590 99,825 59,842 3,048
-------- -------- ------- -------- -------- --------
Total........................................... $330,993 $389,315 $89,819 $810,127 $370,720 $108,414
======== ======== ======= ======== ======== ========
TABLE 4
MATURITY OF SECURITIES
DECEMBER 31, 1999
---------------------------------------------------------------------------------------------
U.S. STATES AND CORPORATE
GOVERNMENT POLITICAL OBLIGATIONS
U.S. TREASURY AGENCIES SUBDIVISIONS(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.................. $36,971 5.68% $ 4,465 5.74% $ 13,725 8.12% $ 14,703 5.26% $ 69,864 6.07%
After one through five years...... 24,408 5.96% 5,180 5.85% 72,823 7.57% 3,421 7.16% 105,832 7.10%
After five through ten years...... -- -- 1,003 8.06% 77,753 7.71% -- -- 78,756 7.71%
After ten years................... -- -- 20,898 7.16% 125,202 7.88% 26,175 6.42% 172,275 7.58%
Mortgage-backed and asset-backed
securities(3)................... -- -- 716,310 6.65% -- -- 84,359 6.89% 800,669 6.67%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL SECURITIES AVAILABLE FOR
SALE.......................... $61,379 5.79% $747,856 6.65% $289,503 7.77% $128,658 6.62% $1,227,396 6.87%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Securities Held to Maturity:
One year or less.................. $ 250 6.38% $ -- -- $ 1,566 7.35% $ 1 7.38% $ 1,817 7.22%
After one through five years...... 803 5.79% -- -- 7,815 7.42% -- -- 8,618 7.26%
After five through ten years...... -- -- -- -- 2,342 7.58% -- -- 2,342 7.58%
After ten years................... -- -- 25 8.25% 1,175 7.72% -- -- 1,200 7.73%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL SECURITIES HELD TO
MATURITY...................... $1,053 5.93% $ 25 8.25% $ 12,898 7.47% $ 1 7.38% $ 13,977 7.35%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL SECURITIES................ $62,432 5.80% $747,881 6.65% $302,401 7.76% $128,659 6.62% $1,241,373 6.88%
======= ==== ======== ==== ======== ==== ======== ==== ========== ====
- ---------------
(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.
TABLE 5
MATURITY OF TIME DEPOSITS $100,000 OR MORE
DECEMBER 31, 1999
-------------------------------------------------------------------
TIME REMAINING TO MATURITY
-------------------------------------------------------------------
DUE WITHIN THREE TO SIX TO TWELVE AFTER TWELVE
THREE MONTHS SIX MONTHS MONTHS MONTHS TOTAL
------------ ---------- ------------- ------------ --------
(IN THOUSANDS)
Certificates of deposit......................... $129,581 $158,906 $221,759 $204,567 $714,813
Other time deposits............................. 1,323 784 7,571 7,159 16,837
-------- -------- -------- -------- --------
Total......................................... $130,904 $159,690 $229,331 $211,726 $731,651
======== ======== ======== ======== ========
32
33
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 using published regulatory guidelines.
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.
Weighted-average variable rates are based on the implied forward rates in
the yield curve at the reporting date. See Note 5 for the fair value of the
financial instruments for 1998.
THERE- FAIR
AT DECEMBER 31, 1999: 2000 2001 2002 2003 2004 AFTER TOTAL 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%
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-reset
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
33
34
THERE- FAIR
AT DECEMBER 31, 1999: 2000 2001 2002 2003 2004 AFTER TOTAL VALUE
- --------------------- ---------- -------- -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS)
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS
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
THERE-
AT DECEMBER 31, 1998: 1999 2000 2001 2002 2003 AFTER TOTAL
- --------------------- ---------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
RATE SENSITIVE ASSETS:
Fixed interest rate loans.............. $ 588,990 $365,262 $342,241 $168,894 $181,485 $104,457 $1,751,329
Average interest rate................ 8.49% 8.42% 8.42% 8.33% 8.02% 8.18% 8.38%
Variable interest rate loans........... 331,862 72,287 41,460 26,780 16,979 210,821 700,189
Average interest rate................ 8.44% 7.80% 7.99% 7.98% 8.38% 7.95% 8.18%
Fixed interest rate securities......... 284,444 197,999 141,469 105,791 91,873 386,091 1,207,668
Average interest rate................ 6.05% 6.03% 6.06% 5.96% 5.96% 5.57% 5.88%
Variable interest rate securities...... 14,802 14,467 12,727 11,586 10,517 71,907 136,006
Average interest rate................ 6.48% 6.55% 6.58% 6.57% 6.63% 6.61% 6.59%
Other interest-bearing assets.......... 22,824 -- -- -- -- -- 22,824
Average interest rate................ 4.37% -- -- -- -- -- 4.37%
RATE SENSITIVE LIABILITIES:
Non interest-bearing checking.......... $ 34,600 $ -- $181,866 $ -- $ 96,103 $25,141 $ 337,710
Average interest rate................ -- -- -- -- -- -- --
Savings & interest-bearing checking.... 354,023 -- 484,616 -- 87,908 87,908 1,014,455
Average interest rate................ 3.65% -- 2.69% -- 1.73% 1.73% 2.86%
Time-deposits.......................... 1,024,813 325,310 124,243 34,470 45,963 40,760 1,595,559
Average interest rate................ 5.57% 5.75% 5.44% 5.87% 5.53% 7.37% 5.65%
Fixed interest rate borrowings......... 276,628 177,057 835 58,817 7,083 137,494 657,914
Average interest rate................ 5.43% 5.45% 7.26% 5.32% 5.20% 6.34% 5.61%
Variable interest rate borrowings...... 123,657 -- 5,000 -- -- 42,000 170,658
Average interest rate................ 4.93% -- 5.24% -- -- 5.13% 4.99%
RATE SENSITIVE DERIVATIVE FINANCIAL
INSTRUMENTS
Pay variable/received fixed swap....... $ 40,000 $ -- $ -- $ -- $ -- $ -- $ 40,000
Average pay rate..................... 5.15% -- -- -- -- -- 5.15%
Average receive rate................. 6.97% -- -- -- -- -- 6.97%
Pay fixed/received variable swap....... 25,000 25,000 130,000 -- -- -- 180,000
Average pay rate..................... 5.25% 8.52% 7.88% -- -- -- 7.60%
Average receive rate................. 5.59% 7.75% 7.11% -- -- -- 6.99%
Interest rate caps..................... 25,000 15,000 72,000 33,000 -- -- 145,000
Average strike rate.................. 6.31% 6.31% 6.02% 5.93% -- -- 6.08%
Forward rate......................... 5.10% 5.09% 5.16% 5.21% -- -- 5.15%
Interest rate floors................... 50,000 15,000 75,000 10,000 -- -- 150,000
Average strike rate.................. 5.31% 5.61% 5.54% 5.61% -- -- 5.47%
Forward rate......................... 5.10% 5.09% 5.16% 5.20% -- -- 5.14%
34
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents..................................................... $ 179,113 $ 144,199
Interest earning deposits in banks............................................ 6,039 13,397
Federal funds sold and other short-term investments........................... -- 9,427
Loans and leases held for sale................................................ 13,974 46,836
Securities available for sale................................................. 1,227,396 1,327,532
Securities held to maturity (fair value of $13,818 in 1999; $16,371 in
1998)....................................................................... 13,977 16,142
---------- ----------
Total Securities............................................................ $1,241,373 $1,343,674
Loans and leases, net of unearned income...................................... 2,746,613 2,451,518
Allowance for loan and lease losses........................................... (28,377) (26,403)
---------- ----------
Net Loans and Leases........................................................ $2,718,236 $2,425,115
Premises and equipment, net................................................... 55,618 58,763
Intangible assets, net........................................................ 17,102 19,028
Foreclosed real estate........................................................ 2,675 2,321
Other assets.................................................................. 113,491 85,073
---------- ----------
TOTAL ASSETS................................................................ $4,347,621 $4,147,833
========== ==========
LIABILITIES
Deposits:
Demand deposits............................................................. $1,202,632 $1,169,835
Savings deposits............................................................ 145,795 182,330
Other time deposits......................................................... 1,667,981 1,595,559
---------- ----------
Total Deposits............................................................ $3,016,408 $2,947,724
Short-term borrowings....................................................... 699,398 498,211
Long-term borrowings........................................................ 285,270 330,361
Other liabilities........................................................... 52,817 55,454
---------- ----------
TOTAL LIABILITIES........................................................... $4,053,893 $3,831,750
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000 shares; issued none...... $ -- $ --
Common stock, $.22 par value: authorized 45,000,000 shares;
1999
---------- 1998
------------------------------------------
Issued 29,648,571 29,593,495
Outstanding 27,949,431 28,837,698 6,585 6,572
Additional paid-in capital.................................................... 74,244 75,260
Retained earnings............................................................. 271,781 247,486
Deferred compensation non-employee directors.................................. (1,533) (1,706)
Treasury stock................................................................ (30,442) (8,263)
Accumulated other comprehensive loss.......................................... (26,907) (3,266)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................................. $ 293,728 $ 316,083
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $4,347,621 $4,147,833
========== ==========
See accompanying notes to consolidated financial statements.
35
36
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases..................... $215,173 $192,974 $164,520
Interest on securities:
Taxable................................................ 65,331 76,786 77,076
Tax-exempt............................................. 16,805 17,449 16,296
-------- -------- --------
Total Income from Securities......................... $ 82,136 $ 94,235 $ 93,372
Interest on federal funds sold and other short-term
investments............................................ 304 364 448
Interest and fees on loans and leases held for sale....... 1,913 2,923 1,529
Interest on deposits in banks............................. 796 365 90
-------- -------- --------
TOTAL INTEREST INCOME................................ $300,322 $290,861 $259,959
INTEREST EXPENSE
Interest on deposits...................................... $118,009 $116,604 $101,075
Interest on short-term borrowings......................... 32,573 34,855 38,998
Interest on long-term borrowings.......................... 18,301 16,668 8,887
-------- -------- --------
Total Interest Expense................................. $168,883 $168,127 $148,960
-------- -------- --------
NET INTEREST INCOME.................................... $131,439 $122,734 $110,999
Provision for loan and lease losses....................... 10,550 7,993 7,045
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES................................................. $120,889 $114,741 $103,954
NON-INTEREST INCOME
Trust and asset management income......................... $ 28,872 $ 23,721 $ 16,451
Service charges on deposits............................... 10,176 8,831 7,837
Mortgage revenues......................................... 6,930 10,560 5,827
Insurance revenues........................................ 1,735 1,875 1,584
Collection fee income..................................... -- -- 2,105
Other..................................................... 9,733 9,334 10,599
-------- -------- --------
TOTAL NON-INTEREST INCOME, EXCLUDING NET REALIZED
SECURITY GAINS....................................... $ 57,446 $ 54,321 $ 44,403
Net realized security gains............................... 530 4,427 4,198
-------- -------- --------
TOTAL NON-INTEREST INCOME.............................. $ 57,976 $ 58,748 $ 48,601
OPERATING EXPENSES
Compensation expense...................................... $ 55,598 $ 51,469 $ 47,199
Employee benefits......................................... 13,441 12,964 11,659
Net occupancy expense..................................... 6,711 6,750 6,490
Equipment expense......................................... 9,026 7,895 10,816
Data processing expense................................... 7,150 5,339 2,654
Professional fees......................................... 5,262 5,723 6,366
Advertising and business development...................... 3,597 3,771 2,827
Amortization of intangible assets......................... 1,991 2,536 2,212
Impairment on loans held for sale......................... -- -- 4,955
Other..................................................... 20,834 23,147 19,795
-------- -------- --------
TOTAL OPERATING EXPENSES............................... $123,610 $119,594 $114,973
-------- -------- --------
INCOME BEFORE INCOME TAXES................................ $ 55,255 $ 53,895 $ 37,582
Income taxes................................................ 15,106 14,314 8,918
-------- -------- --------
NET INCOME................................................ $ 40,149 $ 39,581 $ 28,664
======== ======== ========
Basic Earnings Per Common Share........................... $ 1.42 $ 1.39 $ 1.07
Diluted Earnings Per Common Share......................... 1.40 1.36 1.05
Dividends Per Common Share................................ 0.56 0.54 0.45
Average Common Shares Outstanding......................... 28,304 28,515 26,862
Average Diluted Shares Outstanding........................ 28,730 29,098 27,405
See accompanying notes to consolidated financial statements.
36
37
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
DEFERRED OTHER
ADDITIONAL COMPENSATION COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED NON-EMPLOYEE TREASURY INCOME STOCKHOLDERS'
STOCK CAPITAL EARNINGS DIRECTORS STOCK (LOSS) EQUITY
------ ---------- -------- ------------ -------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT DECEMBER 31, 1996........... $6,134 $68,047 $191,485 $(1,382) $ (4,908) $ (1,956) $257,420
------ ------- -------- ------- -------- -------- --------
Comprehensive Income:
Net Income............................ -- -- 28,664 -- -- -- 28,664
Unrealized holding gains on
securities available for sale
arising during the period......... -- -- -- -- -- 13,951 13,951
Less reclassification adjustment for
realized gains included in net
income............................ -- -- -- -- -- (4,198) (4,198)
Income tax expense related to items
of other comprehensive income..... -- -- -- -- -- 577 577
------ ------- -------- ------- -------- -------- --------
Net unrealized gains (losses) on
securities available for sale......... -- -- -- -- -- 10,330 10,330
------ ------- -------- ------- -------- -------- --------
Comprehensive Income................... -- -- 28,664 -- -- 10,330 38,994
------ ------- -------- ------- -------- -------- --------
Cash dividends on common stock-$.45
per share........................... -- -- (12,130) -- -- -- (12,130)
Purchase of AMCORE Bank Belleville
minority interest................... -- 1,768 (1,784) -- -- -- (16)
Purchase of 53,000 shares for the
treasury............................ -- -- -- -- (1,327) -- (1,327)
Three-for-two stock split fractional
share payments...................... -- (18) -- -- -- -- (18)
Reissuance of 18,486 treasury shares
for Non-Employee Directors stock
plan................................ -- 244 -- (356) 112 -- --
Issuance of 16,377 common shares for
directors stock plan................ 4 106 -- (110) -- -- --
Deferred compensation expense......... -- -- -- 370 -- -- 370
Reissuance of 267,057 treasury shares
for employee incentive plans........ -- 2,699 -- -- 1,054 -- 3,753
Issuance of 63,743 common shares for
employee incentive plan............. 14 416 -- -- -- -- 430
------ ------- -------- ------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997........... $6,152 $73,262 $206,235 $(1,478) $ (5,069) $ 8,374 $287,476
====== ======= ======== ======= ======== ======== ========
Comprehensive Income:
Net Income............................ -- -- 39,581 -- -- -- 39,581
Unrealized holding losses on
securities available for sale
arising during the period......... -- -- -- -- -- (5,441) (5,441)
Less reclassification adjustment for
realized gains included in net
income............................ -- -- -- -- -- (4,427) (4,427)
Income tax expense related to items
of other comprehensive income..... -- -- -- -- -- (1,950) (1,950)
------ ------- -------- ------- -------- -------- --------
Net unrealized gains (losses) on
securities available for sale......... -- -- -- -- -- (11,818) (11,818)
------ ------- -------- ------- -------- -------- --------
Comprehensive Income................... -- -- 39,581 -- -- (11,818) 27,763
------ ------- -------- ------- -------- -------- --------
Cash dividends on common stock-$.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...... -- 578 -- -- 7,944 -- 8,522
Purchase of 826,980 shares for the
treasury............................ -- -- -- -- (19,745) -- (19,745)
Reissuance of 27,174 treasury shares
for Non-Employee Directors stock
plan................................ -- 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) $316,083
====== ======= ======== ======= ======== ======== ========
37
38
ACCUMULATED
DEFERRED OTHER
ADDITIONAL COMPENSATION COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED NON-EMPLOYEE TREASURY INCOME STOCKHOLDERS'
STOCK CAPITAL EARNINGS DIRECTORS STOCK (LOSS) EQUITY
------ ---------- -------- ------------ -------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Comprehensive Income:
Net Income............................ -- -- 40,149 -- -- -- 40,149
Unrealized holding losses on
securities available for sale
arising during the period........... -- -- -- -- -- (44,289) (44,289)
Less reclassification adjustment for
realized gains included in net
income.............................. -- -- -- -- -- (530) (530)
Income tax expense related to items of
other comprehensive income.......... -- -- -- -- -- 21,178 21,178
------ ------- -------- ------- -------- -------- --------
Net unrealized gains (losses) on
securities available for sale......... -- -- -- -- -- (23,641) (23,641)
------ ------- -------- ------- -------- -------- --------
Comprehensive Income................... -- -- 40,149 -- -- (23,641) 16,508
------ ------- -------- ------- -------- -------- --------
Cash dividends on common stock-$.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
for Non-Employee Directors stock
plan................................ -- (9) -- (321) 330 -- --
Deferred compensation expense......... -- -- -- 494 -- -- 494
Reissuance of 356,817 treasury shares
under incentive stock option
plans............................... -- -- -- -- -- -- --
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
====== ======= ======== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
38
39
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 40,149 $ 39,581 $ 28,664
Adjustments to reconcile net income to net income to net
cash provided by operating activities:
Depreciation and amortization of premises and
equipment............................................. 7,165 6,854 5,391
Amortization and accretion of securities, net........... 9,033 10,252 2,081
Provision for loan and lease losses..................... 10,550 7,993 7,045
Amortization of intangible assets....................... 1,991 2,536 2,212
Net gain on sale of securities available for sale....... (530) (4,427) (4,198)
Impairment on loans held for sale....................... -- -- 4,955
Impairment of long-lived assets......................... -- -- 2,081
Deferred income taxes................................... (596) (1,154) (3,817)
Originations of loans held for sale..................... (270,404) (478,921) (217,020)
Proceeds from sales of loans held for sale.............. 303,266 463,811 208,896
Other, net.............................................. (14,810) 7,711 (397)
--------- --------- ---------
Net cash provided by operating activities............. $ 85,814 $ 54,236 $ 35,893
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale... $ 324,914 $ 487,143 $ 205,772
Proceeds from maturities of securities held to maturity..... 3,162 2,425 9,982
Proceeds from sales of securities available for sale........ 153,935 405,906 487,813
Purchase of securities held to maturity..................... (1,003) (4,411) (14,197)
Purchase of securities available for sale................... (406,745) (777,576) (857,278)
Net decrease (increase) in federal funds sold and other
short-term investments.................................... 9,427 (8,794) 24,398
Net decrease (increase) in interest earning deposits in
banks..................................................... 7,358 (11,186) (1,373)
Proceeds from the sale of credit card receivables........... -- 5,815 15,457
Proceeds from the sale of loans and leases.................. 22,756 6,047 1,798
Loans and leases made to customers and principal collection
of loans and leases, net.................................. (348,827) (335,458) (194,449)
Proceeds from sale of collection agency..................... -- -- 700
Premises and equipment expenditures, net.................... (4,010) (6,515) (6,164)
Investment in company owned life insurance.................. (127) (10,798) (1,816)
Proceeds from the sale of foreclosed real estate............ 2,931 2,294 1,259
Net cash and cash equivalents acquired through
acquisitions.............................................. -- 5,763 --
--------- --------- ---------
Net cash used for investing activities................ $(236,229) $(239,345) $(328,098)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits and savings
accounts.................................................. $ (3,738) $ 191,183 $ 53,143
Net increase in other time deposits......................... 72,422 65,897 122,410
Net increase (decrease) in short-term borrowings............ 126,037 (178,948) 29,175
Proceeds from long-term borrowings.......................... 96,500 174,800 111,872
Payment of long-term borrowings............................. (66,535) (533) (15,250)
Dividends paid.............................................. (15,854) (15,404) (12,130)
Issuance of common stock for employee incentive plans....... 973 -- 430
Issuance of treasury stock for employee benefit incentive
plans..................................................... 6,051 6,840 3,753
Purchase of treasury stock.................................. (30,527) (19,745) (1,327)
--------- --------- ---------
Net cash provided by financing activities............. $ 185,329 $ 224,090 $ 292,076
--------- --------- ---------
Net change in cash and cash equivalents..................... $ 34,914 $ 38,981 $ (129)
Cash and cash equivalents:
Beginning of year......................................... 144,199 105,218 105,347
--------- --------- ---------
End of year............................................... $ 179,113 $ 144,199 $ 105,218
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors............................... $ 116,685 $ 115,003 $ 99,002
Interest paid on borrowings............................... 50,808 52,517 46,282
Income taxes paid......................................... 14,516 14,425 11,616
NON-CASH INVESTING AND FINANCING
Foreclosed real estate -- acquired in settlement of loans... 3,394 3,308 2,147
Transfer of securities held to maturity to available for
sale...................................................... -- -- 31,018
Transfer of short-term investments to securities available
for sale.................................................. -- -- 1,230
Transfer of loans and leases to loans held for sale......... -- -- 14,970
Transfer of long-term borrowings to short-term borrowings... 75,150 28,150 69,253
Common stock issued for Midwest Federal Financial Corp...... -- 19,986 --
Common stock issued for Investors Management Group, Ltd..... -- 8,522 --
Non-cash transfer of loans to securities.................... 19,174 -- --
See accompanying notes to consolidated financial statements.
39
40
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of AMCORE Financial, Inc. and
subsidiaries (Company) conform to generally accepted accounting principles. 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
Mortgage 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 mortgage loans are included in other non-interest income.
The portfolio of satellite dish loans was transferred to loans held for
sale in 1997 in anticipation of the sale of these loans. The transfer of these
loans resulted in a $5.0 million impairment recorded in operating expenses for
1997. The loans were subsequently sold on January 28, 1998.
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
40
41
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 and 1998.
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 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 based on 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. See Note 4 for a breakdown of
impaired and non-accrual loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a provision
charged to expense. Loans and leases are charged against the allowance when
management believes the collectibility of principal is unlikely. The allowance
is an amount that management estimates will be adequate to absorb possible
losses on existing loans and leases. The evaluation of the allowance is
performed by management, credit administration, lending officers and the
corporate loan review staff and is based on past loan loss experience, overall
loan quality, the nature of and size of the portfolio, review of specific
problem loans, known and inherent risks in the portfolio, adverse situations
that may affect the borrowers' ability to repay, the estimated value of any
underlying
41
42
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateral, and current economic conditions. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary 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 is comprised of 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.
42
43
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. A review of these assets in
1997 resulted in an impairment charge of $2.1 million.
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, 1999 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 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 are used to hedge a similar asset or liability. Gains and
losses on sales or cancellation of derivative financial instruments which are
used to manage interest rate risk or which are considered cash flow 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.
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. Basic and diluted earnings per share are
presented on the Consolidated Statements of Income, and a reconciliation of the
calculations are found in Note 14.
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.
43
44
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
The FASB issued FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", in 1998, which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133" was issued in 1999, which delayed
implementation of FAS No. 133. Implementation of FAS No. 133 will be effective
for all fiscal years beginning after June 15, 2000. The Company has not yet
determined when it will implement the Statement nor has it completed the complex
analysis required to determine the impact on the financial statements.
NOTE 2 -- MERGERS AND ACQUISITIONS
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. An additional $174,000 may be paid over
the next two years, contingent upon the level of customer 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.
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 are contingent upon IMG's performance from 1998
through 2000. Based on the attainment of performance targets in 1999 and 1998,
shares valued at $1.6 million each year were earned (65,595 and 70,284 shares,
respectively). 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. Proforma net income and earnings per
share are not materially different from historical amounts. The excess of the
purchase price over the fair value of assets acquired was recorded as goodwill
in the amount of $7.2 million, and is being amortized over fifteen years using
the straight-line method.
On July 16, 1997, Country Bank Shares Corporation (Country), a five-bank
holding company, merged into the Company, which issued 2,469,417 common shares
in exchange for the 433,699 outstanding Country shares. At the date of the
merger, Country had total assets of approximately $310 million. This transaction
was account for as a pooling of interests and, accordingly, all financial
information of the Company has been restated to include Country.
On April 18, 1997, First National Bancorp, Inc. (FNB), a one-bank holding
company, merged into the Company, which issued 2,822,286 common shares in
exchange for the 249,539 outstanding FNB shares. At the date of the merger, FNB
had total assets of approximately $219 million. This transaction was account for
as a pooling of interests and, accordingly, all financial information of the
Company has been restated to include FNB.
44
45
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The results of operations of the separate companies for the periods prior
to the mergers are summarized as follows:
AMCORE COMBINED
FINANCIAL FNB COUNTRY TOTAL
--------- ------ ------- --------
(IN THOUSANDS)
Three months ended March 31, 1997:
Net interest income................................... $22,361 $1,935 * $24,296
Net income............................................ 6,857 664 * 7,521
Six months ended June 30, 1997:
Net interest income................................... $49,330 ** $5,828 $55,158
Net income............................................ 10,648 ** (378) 10,270
- ---------------
* Not required since the merger with Country took place after FNB merger.
** The six month results of AMCORE Financial include FNB as the merger was
completed on April 18, 1997.
In connection with these mergers, the Company recorded charges of $3.3
million in 1998 and $3.8 million in 1997 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. At December 31, 1998,
the remaining liability was approximately $2.0 million relating primarily to
data processing expenses and contract termination costs. At December 31, 1997,
the remaining liability was approximately $750,000 relating primarily to data
conversion expenses.
45
46
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- SECURITIES
A summary of securities at December 31, 1999, 1998, and 1997 were as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
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
========== ======= ======== ==========
AT DECEMBER 31, 1997:
Securities Available for Sale:
U.S. Treasury.............................. $ 104,132 $ 836 $ (84) $ 104,884
U.S. Government agencies................... 267,696 938 (833) 267,801
Agency mortgage-backed securities.......... 586,285 5,651 (1,948) 589,988
State and political subdivisions........... 316,028 10,069 (189) 325,908
Corporate obligations and other............ 153,501 458 (947) 153,012
---------- ------- -------- ----------
Total Securities Available for Sale...... $1,427,642 $17,952 $ (4,001) $1,441,593
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury.............................. $ 1,554 $ 7 $ -- $ 1,561
State and political subdivisions........... 13,866 207 (26) 14,047
Corporate obligations and other............ 3 -- -- 3
---------- ------- -------- ----------
Total Securities Held to Maturity........ $ 15,423 $ 214 $ (26) $ 15,611
---------- ------- -------- ----------
Total Securities...................... $1,443,065 $18,166 $ (4,027) $1,457,204
========== ======= ======== ==========
46
47
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Realized gross gains resulting from the sale of securities available for
sale were $1.3 million, $4.7 million and $4.3 million for 1999, 1998 and 1997,
respectively. Realized gross losses were $736,000, $234,000 and $141,000 for
1999, 1998 and 1997, respectively.
The amortized cost and fair value of both securities available for sale and
securities held to maturity as of December 31, 1999, 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.......................... $ 70,224 $ 69,864 $ 1,817 $ 1,821
Due after one year through five years............ 105,975 105,832 8,618 8,623
Due after five years through ten years........... 80,432 78,756 2,342 2,241
Due after ten years.............................. 181,125 172,275 1,200 1,133
Mortgage-backed securities (agency and
corporate)..................................... 833,929 800,669 -- --
---------- ---------- ------- -------
Total Securities............................ $1,271,685 $1,227,396 $13,977 $13,818
========== ========== ======= =======
At December 31, 1999, 1998, and 1997, securities with a fair value of
approximately $906.4 million, $826.8 million and $927.8 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, was as
follows:
1999 1998
---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural...................... $ 710,302 $ 659,946
Real estate-construction.................................... 121,216 105,574
Real estate-commercial...................................... 732,447 626,358
Real estate-residential..................................... 689,702 658,406
Installment and consumer.................................... 489,586 398,318
Direct lease financing...................................... 3,489 3,127
---------- ----------
Gross loans and leases.................................... $2,746,742 $2,451,729
Unearned income........................................... (129) (211)
---------- ----------
Loans and leases, net of unearned income.................. $2,746,613 $2,451,518
Allowance for loan and lease losses....................... (28,377) (26,403)
---------- ----------
Net Loans and Leases...................................... $2,718,236 $2,425,115
========== ==========
47
48
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:
1999 1998
------- -------
(IN THOUSANDS)
Impaired Loans:
Non-accrual Loans:
Commercial............................................. $12,632 $11,139
Real estate............................................ 3,278 1,963
Other Non-performing:
Non-accrual loans(1)...................................... 2,509 5,077
------- -------
Total Non-performing Loans.................................. $18,419 $18,179
======= =======
Loans 90 days or more past due and still accruing......... $10,197 $ 7,272
- ---------------
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
1999 1998
------- -------
(IN THOUSANDS)
Allowance provided for impaired loans, included in the
allowance for loan losses................................. $ 4,469 $ 3,854
Impaired loans with no specific allowance for loan losses
provided.................................................. 11,441 9,248
Average recorded investment in impaired loans............... 14,470 13,367
Interest income recognized from impaired loans.............. 796 493
An analysis of the allowance for loan and lease losses for the years ended
December 31, follows:
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
Balance at beginning of year................................ $ 26,403 $19,908 $19,295
Allowance for loan and lease losses acquired through
merger.................................................... -- 2,146 --
Provision charged to expense................................ 10,550 7,993 7,045
Loans charged off........................................... (10,309) (5,064) (7,777)
Recoveries on loans previously charged off.................. 1,733 1,420 1,345
-------- ------- -------
Balance at end of Year.................................... $ 28,377 $26,403 $19,908
======== ======= =======
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 1999 and 1998 were as follows:
1999 1998
-------- ---------
(IN THOUSANDS)
Balance at beginning of year................................ $ 44,269 $ 44,691
New loans................................................... 39,280 116,959
Repayments.................................................. (74,932) (117,381)
-------- ---------
Balance at end of Year.................................... $ 8,617 $ 44,269
======== =========
48
49
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- FAIR VALUES 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, 1999 and 1998 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:
1999 1998
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Cash and cash equivalents..................... $ 179,113 $ 179,113 $ 144,199 $ 144,199
Interest earning deposits in banks............ 6,039 6,039 13,397 13,397
Federal funds sold and other short-term
investments................................. -- -- 9,427 9,427
Loans and leases held for sale................ 13,974 14,533 46,836 48,455
Securities available for sale................. 1,227,396 1,227,396 1,327,532 1,327,532
Securities held to maturity................... 13,977 13,818 16,142 16,371
Mortgage servicing rights..................... 6,897 7,790 4,753 5,040
The carrying amounts and fair values of accruing loans and leases at
December 31, 1999 and 1998 were as follows:
1999 1998
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural....... $ 697,670 $ 715,802 $ 648,807 $ 665,386
Real estate.................................. 1,540,087 1,596,992 1,388,374 1,428,237
Installment and consumer, net................ 486,621 492,318 393,030 397,535
Direct lease financing....................... 3,489 4,221 3,127 3,226
---------- ---------- ---------- ----------
Total loans and leases..................... $2,727,867 $2,809,333 $2,433,338 $2,494,384
========== ========== ========== ==========
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 $18.4 million and $18.2 million in 1999 and 1998,
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, 1999 and 1998, interest receivable was $31.3
million and $30.8 million, respectively, and interest payable was $25.0 million
and $23.7 million, respectively.
49
50
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, 1999 and 1998:
1999 1998
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Demand deposits and savings.................. $1,348,427 $1,348,427 $1,352,165 $1,352,165
Time deposits................................ 1,667,981 1,665,665 1,595,559 1,620,382
Short-term borrowings........................ 699,398 698,681 498,211 499,917
Long-term borrowings......................... 285,270 293,251 330,361 332,418
Standby letters of credit.................... (375) (1,242) (366) (1,019)
Interest rate swap agreements................ (541) (351) (666) (2,483)
Interest rate collar agreements.............. 465 667 635 (1,408)
Interest rate floor agreements............... 67 39 1 5
Interest rate cap agreements................. 473 1,045 -- 110
Forward contracts............................ -- (69) -- (264)
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 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.
50
51
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, follows:
1999 1998
-------- --------
(IN THOUSANDS)
Land........................................................ $ 9,862 $ 10,345
Buildings and improvements.................................. 57,476 55,710
Furniture and equipment..................................... 52,465 47,975
Leasehold improvements...................................... 5,296 5,154
Construction in progress.................................... 1,359 1,300
-------- --------
Total premises and equipment................................ $126,458 $120,484
Accumulated depreciation and amortization................... (70,840) (61,721)
-------- --------
Premises and Equipment, net............................... $ 55,618 $ 58,763
======== ========
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 $774.5 million and
$735.9 million at December 31, 1999 and 1998, respectively. Of this amount, the
Company has recorded originated capitalized mortgage servicing rights, as shown
below, on mortgage loans serviced balances of $659.3 million and $567.1 million
at December 31, 1999 and 1998, 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, 1999 and 1998, respectively:
1999 1998
------ -------
(IN THOUSANDS)
Unamortized cost of mortgage servicing rights............... $6,897 $ 5,934
Valuation allowance......................................... -- (1,181)
------ -------
Carrying value of mortgage servicing rights................. $6,897 $ 4,753
====== =======
Fair value of mortgage servicing rights..................... $7,790 $ 5,040
====== =======
51
52
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 1999 and 1998:
1999 1998
------- -------
(IN THOUSANDS)
UNAMORTIZED COST OF MORTGAGE SERVICING RIGHTS
Balance at beginning of year................................ $ 5,934 $ 6,091
Additions of mortgage servicing rights...................... 2,286 3,915
Additions of mortgage servicing rights from acquisition..... -- 510
Sale of mortgage servicing rights........................... -- (2,146)
Amortization................................................ (1,323) (2,436)
------- -------
Balance at end of year.................................... $ 6,897 $ 5,934
======= =======
VALUATION ALLOWANCE
Balance at beginning of year................................ $ 1,181 $ 284
Addition of impairment allowance from acquisition........... -- 8
Impairment allowance charged to expense..................... -- 1,088
Reversal of impairment...................................... (1,181) (199)
------- -------
Balance at end of year.................................... $ -- $ 1,181
======= =======
NOTE 8 -- SHORT TERM BORROWINGS
At December 31, short-term borrowings consisted of:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Securities sold under agreements to repurchase.............. $456,227 $434,071 $528,607
Federal Home Loan Bank borrowings........................... 114,479 32,629 70,679
Federal funds purchased..................................... 118,000 29,200 44,550
U.S. Treasury tax and loan note accounts.................... 10,692 2,311 3,673
-------- -------- --------
Total Short-Term Borrowings............................... $699,398 $498,211 $647,509
======== ======== ========
Additional details on securities sold under agreements to repurchase are as
follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Average balance during the year............................. $465,343 $529,373 $559,344
Maximum month-end balance during the year................... 498,602 630,279 660,774
Weighted average rate during the year....................... 5.42% 5.73% 5.75%
Weighted average rate at December 31........................ 5.97% 5.38% 5.82%
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, 1999, the entire $50.0 million was available.
52
53
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at December 31, 1999 and
1998:
1999 1998
-------- --------
(IN THOUSANDS)
Federal Home Loan Bank borrowings........................... $244,018 $288,757
Capital Trust preferred securities.......................... 40,000 40,000
Other long-term borrowings.................................. 1,252 1,604
-------- --------
Total Long-Term Borrowings................................ $285,270 $330,361
======== ========
The BANK 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 ending balance of the borrowings was $244.0 million
and $288.8 million at December 31, 1999 and 1998, respectively. The average
maturity of these borrowings at December 31, 1999 is 6.38 years, with a weighted
average borrowing rate of 5.60%.
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)
2000........................................................ $111,000
2001........................................................ 75,000
2002........................................................ --
2003........................................................ 4,000
--------
Total..................................................... $190,000
========
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 104.6750% to 100% of the principal amount. After March 25,
2017, they are redeemable at par until June 15, 2027 when redemption is
mandatory. Prior redemption is permitted under certain circumstances such as
changes in tax or regulatory capital rules. The proceeds of the capital
securities were invested by the Trust in junior subordinated debentures which
represents all of the assets of the Trust. The Company fully and unconditionally
guarantees the capital securities through the combined operation of the
debentures and other related documents. The Company's obligations under the
guarantee are unsecured and subordinate to senior and subordinated indebtedness
of the company.
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%.
53
54
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled reductions of long-term borrowings are as follows:
TOTAL
--------------
(IN THOUSANDS)
2000........................................................ $ 470
2001........................................................ 2,020
2002........................................................ 41,785
2003........................................................ 2,092
2004........................................................ 65,327
Thereafter.................................................. 173,576
--------
Total..................................................... $285,270
========
NOTE 10 -- 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, 1999 and 1998, is as follows (in thousands):
1999 1998
-------- --------
Financial instruments whose contract amount represent credit
risk only:
Commitments to extend credit.............................. $598,414 $446,833
Standby letters of credit................................. 99,393 81,495
Financial instruments whose contract or notional amount
represent market risk only:
Interest rate swap agreements............................. 100,000 220,000
Interest rate collar agreements........................... 100,000 125,000
Stand-alone interest rate cap agreements.................. 60,000 20,000
Stand-alone interest rate floor agreements................ 20,000 25,000
Forward contracts......................................... 10,930 33,211
Call option outstanding................................... 19,500 --
54
55
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, 1999.
Following is a table outlining the nature and terms of each swap agreement
as of December 31, 1999:
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........... 15,000 Fixed (5.720%) 3 Month LIBOR 10/11/01
Fixed Rate........... 25,000 Fixed (8.520%) PRIME 12/23/00
Fixed
Fixed to Floating.... 25,000 3 Month LIBOR minus 15 BP (7.000%) 08/06/07
Fixed
Fixed to Floating.... 10,000 3 Month LIBOR minus 15 BP (7.000%) 08/27/07
Fixed
Fixed to Floating.... 5,000 3 Month LIBOR minus 8 BP (6.750%) 10/22/07
- ---------------
(BP=basis points)
The fixed rate swap agreements totaling $35.0 million where the Company
receives three month LIBOR, are used to hedge market risk associated with
repurchase agreements. The fixed rate swap agreement of $25.0 million where the
Company receives PRIME, is used to hedge market risk associated with fixed rate
loans. 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% and 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 $100.0 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 interest rate changes
of the originated mortgage servicing rights intangible asset. Interest rate caps
totaling $40.0 million provide the Company with a market risk hedge on the money
market deposit accounts while the remaining $20.0 million cap provides the
Company with a market risk hedge on repurchase agreements.
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
55
56
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 was a call
option agreement outstanding at December 31, 1999, on a principal of $19.5
million and a deferred premium of $75,000.
NOTE 11 -- 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, 1999, approximately $40.3 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, 1999, the maximum amount available for transfer
from the banking subsidiary to the Company in the form of loans approximated
$15.1 million.
NOTE 12 -- STOCK INCENTIVE AND EMPLOYEE BENEFIT PLANS
At December 31, 1999, 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 1995, stockholders approved the adoption of the
1995 Stock Incentive Plan (Plan). The Plan provides for the ability to grant
stock options, stock appreciation rights, performance units, and stock 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 525,000 in any year. Options to purchase shares of common
stock of the Company and performance units were granted to key employees
pursuant to both the Plan and previous stock incentive plans.
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
56
57
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant. The following table presents certain information with respect to stock
options issued pursuant to these incentive plans.
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- ------- --------- -------
Options outstanding at beginning
of year......................... 1,676,592 $15.58 1,405,423 $12.68 1,384,017 $11.04
Options granted................... 350,450 22.58 282,000 25.48 295,875 18.50
Options assumed in business
combinations.................... -- -- 349,422 8.58 -- --
Option reloads.................... 65,731 22.36 106,294 23.47 -- --
Options exercised................. (341,821) 11.55 (448,754) 10.25 (258,602) 10.42
Options lapsed.................... (58,838) 24.20 (17,793) 18.19 (15,867) 15.80
--------- ------ --------- ------ --------- ------
Options outstanding at end of
year............................ 1,692,114 $17.80 1,676,592 $15.58 1,405,423 $12.68
========= ====== ========= ====== ========= ======
Options exercisable at end of
year............................ 1,192,052 $15.37 1,394,592 $13.58 1,405,423 $12.68
========= ====== ========= ====== ========= ======
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, 1999, 1998 and 1997 was approximately $1.12
million, $457,000 and $60,000, respectively. The following table presents
certain information with respect to issuances pursuant to these plans.
1999 1998 1997
----------------- ----------------- ------------------
AVERAGE AVERAGE AVERAGE
UNITS PRICE UNITS PRICE UNITS PRICE
------- ------- ------- ------- -------- -------
Units outstanding at beginning of
year................................ 340,443 -- 282,386 -- 336,568 --
Units granted......................... 167,563 -- 150,116 -- 113,253 --
Units paid............................ (82,098) $4.75 -- -- (113,883) $4.81
Units forfeited....................... (32,690) -- (92,059) -- (53,552) --
------- ----- ------- ----- -------- -----
Units outstanding at end of year...... 393,218 -- 340,443 -- 282,386 --
======= ===== ======= ===== ======== =====
The following table presents a summary of issuances pursuant to these
incentive plans.
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
YEAR-END BALANCES SHARES PRICE SHARES PRICE SHARES PRICE
- ----------------- --------- ------- --------- ------- --------- -------
Options outstanding............... 1,692,114 $17.80 1,676,592 $15.58 1,405,423 $12.68
Units outstanding................. 393,218 -- 340,443 -- 282,386 --
Available to grant under Plan..... 40,490 -- 75,269 -- 53,814 --
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for stock option grants issued during 1999 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 grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1999, 1998 and 1997, respectively: dividend
57
58
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rates of 2.33%, 2.36% and 1.79%; price volatility of 25.81%, 30.99% and 69.95%;
risk-free interest rates of 5.77%, 5.73% and 6.64%; and expected lives of 6.5,
6.7 and 6.5 years.
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income:
As reported............................................... $40,149 $39,581 $28,664
Pro forma................................................. 38,327 37,350 26,690
Basic earnings per share:
As reported............................................... $ 1.42 $ 1.39 $ 1.07
Pro forma................................................. 1.35 1.31 0.99
Diluted earnings per share:
As reported............................................... $ 1.40 $ 1.36 $ 1.05
Pro forma................................................. 1.33 1.28 0.97
DIRECTORS' STOCK PLANS. In 1989, the Company adopted the Restricted Stock
Plan for Non-Employee Directors (Stock Plan). The Stock Plan 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. The expense related to the Stock Plan
for the years ended December 31, 1999, 1998 and 1997 was approximately $494,000,
$464,000 and $370,000, 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 1999, 1998 and 1997 related to this plan was $77,000, $73,000 and
$82,000, 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.
In 1994, stockholders approved the 1994 Stock Option Plan for Non-Employee
Directors (Option Plan). The Option Plan provides that each current eligible
non-employee director and each subsequently elected non-employee director
receive Options to purchase common stock of the Company. Each option granted
under the Option Plan has a ten-year term. All options were exercisable at year
end at an option price equal to the fair market value of the shares on the grant
date. The following table presents certain information with respect to stock
options issued pursuant to the Option Plan.
1999 1998 1997
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- ------- ------- ------- -------
Options outstanding at beginning of
year................................. 228,000 $17.40 192,750 $19.67 130,500 $13.11
Options granted........................ 49,000 21.84 56,500 25.50 69,000 18.50
Options exercised...................... (33,770) 14.64 (11,250) 14.44 (6,000) 13.06
Options lapsed......................... (2,750) 25.50 (10,000) 21.14 (750) 13.33
------- ------ ------- ------ ------- ------
Options outstanding at end of year..... 240,480 $18.56 228,000 $17.40 192,750 $19.67
======= ====== ======= ====== ======= ======
Options exercisable at end of year..... 240,480 $18.56 177,000 $15.06 123,750 $20.32
======= ====== ======= ====== ======= ======
Available to grant under Plan at year
end.................................. 8,500 -- 54,750 -- 101,250 --
======= ====== ======= ====== ======= ======
58
59
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS SUMMARY. The following table presents certain information 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-$10.00.................................... 108,980 3.0Years $ 5.53
10.00-12.50..................................... 108,855 3.8 10.51
12.50-14.00..................................... 491,183 5.0 13.10
14.00-19.00..................................... 392,208 7.0 17.24
19.00-23.50..................................... 467,444 8.5 22.41
23.50-25.50..................................... 363,924 7.3 25.18
--------- --- ------
Total Options Outstanding....................... 1,932,594 6.5 $17.90
========= === ======
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, 1999, 1998 and 1997 was approximately
$3.70 million, $3.56 million and $2.76 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 $341,000 $456,000, and $217,000 for 1999, 1998 and 1997,
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.
NOTE 13 -- INCOME TAXES
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Currently paid or payable................................... $15,702 $15,468 $12,735
Deferred.................................................... (596) (1,154) (3,817)
------- ------- -------
Total..................................................... $15,106 $14,314 $ 8,918
======= ======= =======
59
60
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective tax rates on income for 1999, 1998, and 1997 were 27.3%,
26.6% and 23.7%, 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,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Income tax at statutory rate................................ $19,339 $18,863 $13,154
Increase (decrease) resulting from:
Tax-exempt income......................................... (5,477) (5,479) (5,027)
State income taxes, net of federal benefit................ 278 24 (301)
Non-deductible expenses, net.............................. 1,061 1,395 1,581
Other, net................................................ (95) (489) (489)
------- ------- -------
Total.................................................. $15,106 $14,314 $ 8,918
======= ======= =======
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,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Deferred compensation..................................... $ 5,375 $ 4,807
Securities................................................ 17,249 2,277
Allowance for loan and lease losses....................... 11,182 9,630
Other..................................................... 1,830 643
------- -------
Total deferred tax assets.............................. $35,636 $17,357
------- -------
Deferred tax liabilities:
Premises and equipment.................................... 4,227 4,491
Other..................................................... 5,654 2,914
------- -------
Total deferred tax liabilities......................... $ 9,881 $ 7,405
------- -------
Net Deferred Tax Asset.................................... $25,755 $ 9,952
Less: Tax effect of net unrealized loss on securities
available for sale reflected in stockholders' equity...... 17,382 2,175
------- -------
Net Deferred Tax Asset Excluding Net Unrealized Loss on
Securities Available for Sale.......................... $ 8,373 $ 7,777
======= =======
Net operating loss carryforwards for state income tax purposes were
approximately $7.05 million at December 31, 1999. The associated deferred asset
is $528,000 ($343,000 net of federal). The carryforwards expire beginning
December 31, 2005 through December 31, 2011. A valuation allowance of $343,000
has been established at December 31, 1999 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 $798,000 as of December
31, 1998. The decrease in the valuation allowance is attributable to the
realization and expiration of state net operating loss carryforwards during
1999.
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
60
61
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 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 $1.74 million, $2.29 million, and $830,000 have been
credited directly to paid in capital for non-qualified stock options exercised
during the years ended December 31, 1999, 1998, and 1997, respectively.
NOTE 14 -- EARNINGS PER SHARE
Earnings per share calculations are as follows:
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income............................................. $40,149 $ 39,581 $28,664
Basic earnings per share:
Weighted average shares outstanding.................. 28,304 28,515 26,862
Shares related to IMG earned not issued.............. 19 -- --
------- -------- -------
Average basic shares outstanding..................... 28,323 28,515 26,862
======= ======== =======
Earnings per share................................... $ 1.42 $ 1.39 $ 1.07
======= ======== =======
Diluted earnings per share:
Weighted average shares outstanding.................. 28,304 28,515 26,862
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............................................. 340 583 543
Shares related to IMG earned not issued.............. 19 -- --
Contingently issuable shares under IMG purchase
agreement......................................... 67 -- --
------- -------- -------
Average diluted shares outstanding................... 28,730 29,098 27,405
======= ======== =======
Diluted Earnings per share........................... $ 1.40 $ 1.36 $ 1.05
======= ======== =======
NOTE 15 -- RESTRUCTURING CHARGE
The components and activity of the restructuring charge were as follows:
ORIGINAL ADDITIONAL TOTAL CASH ENDING
CHARGE(1) ADJUSTMENTS(2) CHARGE(3) REVERSAL(4) CHARGE PAYMENTS BALANCE
--------- -------------- ---------- ----------- ------ -------- -------
(IN THOUSANDS)
Compensation expense(5)......... $2,204 $ 0 $340 $ (609) $1,935 $ (963) $ 972
Employee benefits(6)............ 153 46 22 (34) 187 (104) 83
Data processing expense(7)...... 1,321 0 30 (227) 1,124 (665) 459
Professional fees(8)............ 1,441 0 145 (141) 1,445 (1,155) 290
Other(9)........................ 976 0 0 (380) 596 (521) 75
------ --- ---- ------- ------ ------- ------
Charge before income taxes...... $6,095 $46 $537 $(1,391) $5,287 $(3,408) $1,879
Income taxes.................... 2,328 19 213 (534) 2,026 (1,279) 747
------ --- ---- ------- ------ ------- ------
Charge after income taxes....... $3,767 $27 $324 $ (857) $3,261 $(2,129) $1,132
====== === ==== ======= ====== ======= ======
61
62
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Second quarter adoption of plan to merge nine separate bank and thrift
charters into one and to centralize retail operations and corporate support
functions.
(2) Items related to restructuring that were expensed as incurred.
(3) Fourth quarter adoption of plan to centralize commercial loan operations and
restructure Trust and Asset Management segment operations.
(4) Fourth quarter reversal of items included in the original charge that are no
longer expected to be paid.
(5) Amounts include severance benefits for planned termination of 187 employees
in operations and corporate support functions. Through December 31, 1999, 55
employees had terminated and been paid severance benefits. An additional 86
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, 1999, 46 employees remained to be severed.
Amount also includes incentives.
(6) Social security and medicare taxes on severance and incentives.
(7) Amounts represent costs to convert data processing records of nine separate
banks into one.
(8) Amounts represent legal fees for regulatory filings and advice as well as
consulting fees for process review, systems redesign and implementation.
(9) Amounts include outplacement services for terminated employees; replacement
of forms, checks and supplies; and customer notifications.
NOTE 16 -- 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 65 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 and brokerage services. It also acts as an advisor
and provides fund administration to the Vintage Mutual Fund. These products are
distributed nationally (i.e. Vintage Equity Fund is available through Charles
Schwab), regionally to institutional investors and corporations, and locally
through AMCORE's 65 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.
62
63
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRUST AND ASSET MORTGAGE TOTAL
BANKING MANAGEMENT BANKING SEGMENTS
---------- --------------- -------- ----------
(IN THOUSANDS)
BUSINESS SEGMENTS
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 8,525 61,928
Operating expenses........................... 93,099 21,193 7,404 121,696
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 merger related
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 11,472 62,929
Operating expenses........................... 87,324 18,293 11,396 117,013
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 and information
systems 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
========== ======= ======= ==========
1997
Net interest income.......................... $ 110,778 $ 64 $ 1,578 $ 112,420
Provision for loan and lease losses.......... 7,045 -- -- 7,045
Non-interest income.......................... 23,618 18,417 5,583 47,618
Operating expenses........................... 84,745 13,601 6,366 104,712
Depreciation and amortization................ 6,117 299 89 6,505
Income taxes................................. 10,211 1,999 320 12,530
Segment profit............................... $ 32,395 $ 2,881 $ 475 $ 35,751
After tax merger related and information
systems charges............................ 2,833 -- -- 2,833
---------- ------- ------- ----------
Segment profit before merger related
charges.................................... $ 35,228 $ 2,881 $ 475 $ 38,584
========== ======= ======= ==========
Segment assets............................... $3,738,080 $ 6,322 $28,298 $3,772,700
========== ======= ======= ==========
63
64
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
1999 1998 1997
---------- ---------- ----------
NET INTEREST INCOME AND NON-INTEREST INCOME
Total for segments....................................... $ 195,015 $ 188,153 $ 160,038
Unallocated revenues:
Holding company revenues............................... 24,687 20,931 19,919
Other.................................................. 50 55 3,309
Elimination of intersegment revenues..................... (30,337) (27,657) (23,666)
---------- ---------- ----------
Consolidated total revenues.............................. $ 189,415 $ 181,482 $ 159,600
========== ========== ==========
PROFIT
Total for segments....................................... $ 44,963 $ 45,555 $ 35,751
Unallocated profit:
Holding company loss................................... (4,630) (5,999) (6,234)
Other.................................................. (241) (219) (674)
Elimination of intersegment profit (loss)................ 57 244 (179)
---------- ---------- ----------
Consolidated net income.................................. $ 40,149 $ 39,581 $ 28,664
========== ========== ==========
ASSETS
Total for segments....................................... $4,401,175 $4,305,650 $3,772,700
Unallocated assets:
Holding company assets................................. 44,351 53,110 46,128
Other.................................................. 42,495 42,701 43,675
Elimination of intersegment assets....................... (140,400) (253,628) (194,813)
---------- ---------- ----------
Consolidated assets...................................... $4,347,621 $4,147,833 $3,667,690
========== ========== ==========
NOTE 17 -- 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,
1999, that the Regulated Companies meet all capital adequacy requirements to
which it is subject.
As of December 31, 1999, 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 company 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.
64
65
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
--------------------------------------
ACTUAL MINIMUM WELL CAPITALIZED
----------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ -------- -------
AS OF DECEMBER 31, 1999:
Total Capital (to Risk Weighted Assets):
CONSOLIDATED $371,835 12.54% $237,181 >8.00% N/A N/A
-
AMCORE Bank, N.A. 328,159 11.19% 234,564 >8.00% $293,205 >10.00%
- -
Tier 1 Capital (to Risk Weighted
Assets):
CONSOLIDATED $343,458 11.58% $118,591 >4.00% N/A N/A
-
AMCORE Bank, N.A. 300,361 10.24% 117,282 >4.00% $175,923 >6.00%
- -
Tier 1 Capital (to Average Assets):
CONSOLIDATED $343,458 8.03% $171,036 >4.00% N/A N/A
-
AMCORE Bank, N.A. 300,361 6.94% 173,222 >4.00% $216,528 >5.00%
- -
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets):
CONSOLIDATED $366,121 13.43% $218,078 >8.00% N/A N/A
-
AMCORE Bank, N.A. 315,540 11.40% 221,414 >8.00% $276,768 >10.00%
- -
Tier 1 Capital (to Risk Weighted
Assets):
CONSOLIDATED $339,718 12.46% $109,039 >4.00% N/A N/A
-
AMCORE Bank, N.A. 289,917 10.48% 110,707 >4.00% $166,061 >6.00%
Tier 1 Capital (to Average Assets): - -
CONSOLIDATED $339,718 8.31% $163,485 >4.00% N/A N/A
-
AMCORE Bank, N.A. 289,917 6.93% 167,330 >4.00% $209,163 >5.00%
- -
65
66
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED PARENT COMPANY BALANCE SHEETS
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 205 $ 1,343
Securities available for sale............................... 3,729 2,865
Short-term investments...................................... -- 3,000
Due from subsidiaries....................................... 925 1,020
Loans to subsidiaries....................................... 17,924 19,808
Investment in bank subsidiary............................... 295,712 307,322
Investment in financial services subsidiaries............... 3,648 5,783
Premises and equipment, net................................. 4,720 4,788
Other assets................................................ 16,848 17,747
-------- --------
TOTAL ASSETS.............................................. $343,711 $363,676
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long-term borrowings........................................ $ 42,490 $ 42,842
Other liabilities........................................... 7,493 4,751
-------- --------
TOTAL LIABILITIES......................................... $ 49,983 $ 47,593
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock............................................. $ -- $ --
Common stock................................................ 6,585 6,572
Additional paid-in capital.................................. 74,244 75,260
Retained earnings........................................... 271,781 247,486
Treasury stock and other.................................... (31,975) (9,969)
Accumulated other comprehensive loss........................ (26,907) (3,266)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................ $293,728 $316,083
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $343,711 $363,676
======== ========
66
67
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
INCOME:
Dividends from subsidiaries................................. $38,739 $37,923 $17,749
Interest income............................................. 1,694 2,064 2,284
Management fees and other................................... 27,405 23,372 21,436
------- ------- -------
TOTAL INCOME.............................................. $67,838 $63,359 $41,469
------- ------- -------
EXPENSES:
Interest expense............................................ $ 4,352 $ 4,204 $ 3,801
Compensation expense and employee benefits.................. 16,979 14,615 14,455
Professional fees........................................... 2,638 2,316 2,540
Other....................................................... 16,188 11,152 12,388
------- ------- -------
TOTAL EXPENSES............................................ $40,157 $32,287 $33,184
------- ------- -------
Income before income tax benefits and equity in
undistributed net income of subsidiaries.................. $27,681 $31,072 $ 8,285
Income tax benefits......................................... (4,191) (2,751) (3,231)
------- ------- -------
Income before equity in undistributed net income of
subsidiaries.............................................. $31,872 $33,823 $11,516
Equity in undistributed net income of subsidiaries.......... 8,277 5,758 17,148
------- ------- -------
NET INCOME................................................ $40,149 $39,581 $28,664
======= ======= =======
67
68
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 40,149 $ 39,581 $ 28,664
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,509 1,032 1,531
Non-employee directors compensation expense............... 494 464 370
Equity in undistributed net income of subsidiaries........ (8,277) (5,758) (17,148)
Decrease (increase) in due from subsidiaries.............. 95 (87) 255
Decrease (increase) in other assets....................... 1,073 2,503 (1,119)
Increase (decrease) in other liabilities.................. 2,742 (2,006) 2,011
Other, net................................................ 94 298 560
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. $ 37,879 $ 36,027 $ 15,124
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities...................................... $ (981) $ (2,428) $(14,071)
Proceeds from maturities of securities...................... -- -- 14,197
Net decrease (increase) in short term investments........... 3,000 7,000 (8,000)
Dissolution of less-active state banking charters........... -- -- 96
Proceeds from sale of collection agency..................... -- -- 700
Net investment made in subsidiaries......................... (1,550) (681) (10,788)
Loans to subsidiaries....................................... (38,850) (74,035) (13,470)
Payments received on loans to subsidiaries.................. 40,734 76,990 16,916
Transfer of premises and equipment to (from) affiliates..... 34 (23) (114)
Premises and equipment expenditures, net.................... (1,475) (2,909) (1,514)
Investment in company owned life insurance.................. (127) (10,798) (1,816)
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES...... $ 785 $ (6,884) $(17,864)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings............ $ -- $ -- $(14,455)
Proceeds from long-term borrowings.......................... -- -- 41,238
Payment of long-term borrowings............................. (445) (444) (14,044)
Dividends paid.............................................. (15,854) (15,406) (12,130)
Proceeds from the sale of common stock...................... 973 -- 430
Proceeds from exercise of incentive stock options........... 6,051 6,840 3,753
Purchase of treasury stock.................................. (30,527) (19,745) (1,327)
-------- -------- --------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES...... $(39,802) $(28,755) $ 3,465
-------- -------- --------
Net change in cash and cash equivalents..................... $ (1,138) $ 388 $ 725
Cash and cash equivalents:
Beginning of year......................................... 1,343 955 230
-------- -------- --------
End of year............................................... $ 205 $ 1,343 $ 955
======== ======== ========
68
69
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- CONTINGENCIES
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.
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 at this early
date 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.
CONDENSED QUARTERLY EARNINGS & STOCK PRICE SUMMARY (UNAUDITED)
1999 1998
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income........................ $72,892 $73,902 $75,670 $77,858 $68,315 $74,520 $74,979 $73,047
Interest expense....................... 41,109 41,240 42,232 44,302 39,362 43,302 43,593 41,870
------- ------- ------- ------- ------- ------- ------- -------
Net interest income.................... $31,783 $32,662 $33,438 $33,556 $28,953 $31,218 $31,386 $31,177
Provision for loan losses.............. 2,226 2,151 2,613 3,560 2,145 1,642 2,226 1,980
Other income........................... 13,762 15,074 14,725 14,415 12,939 13,898 14,586 17,325
Other expense.......................... 29,358 36,488 29,812 27,952 31,906 27,932 28,997 30,759
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes............. $13,961 $9,097 $15,738 $16,459 $7,841 $15,542 $14,749 $15,763
Income taxes........................... 3,925 1,971 4,501 4,709 1,742 4,306 3,871 4,395
------- ------- ------- ------- ------- ------- ------- -------
Net Income............................. $10,036 $7,126 $11,237 $11,750 $6,099 $11,236 $10,878 $11,368
======= ======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings......................... $ 0.35 $ 0.25 $ 0.40 $ 0.42 $ 0.23 $ 0.39 $ 0.37 $ 0.39
Diluted earnings....................... 0.35 0.25 0.39 0.41 0.22 0.38 0.37 0.39
Dividends.............................. 0.14 0.14 0.14 0.14 0.12 0.14 0.14 0.14
Stock price ranges -- high............. 23.56 23.06 24.25 25.25 27.50 27.75 26.25 24.50
-- low................. 20.69 19.50 19.75 19.88 21.75 23.38 20.38 19.13
-- close............... 20.69 23.06 21.88 24.00 27.00 24.00 22.75 22.89
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.
69
70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AMCORE Financial, Inc.
We have audited the accompanying consolidated balance sheets of AMCORE
Financial, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
January 19, 2000
Chicago, Illinois
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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 2000 Annual
Meeting dated March 24, 2000 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 2000 Annual Meeting dated March 24, 2000
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement and Notice of 2000 Annual Meeting dated March 24, 2000
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement and Notice of 2000 Annual Meeting dated March 24, 2000
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, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
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.
(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).
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(A)3. EXHIBITS
- ----- --------
3.1 By-laws of AMCORE Financial, Inc. as amended May 17, 1990
(Incorporated by reference to Exhibit 3.1 of AMCORE's Annual
Report on Form 10-K for the year ended December 31, 1994).
4 Rights Agreement dated February 21, 1996, between AMCORE
Financial, Inc. and Firstar Trust Company (Incorporated by
reference to AMCORE's Form 8-K as filed with the Commission
on February 28, 1996).
10.1 1995 Stock Incentive Plan (Incorporated by reference to
Exhibit 22 of AMCORE's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.2 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).
10.3 AMCORE Stock Option Advantage Plan (Incorporated by
reference to AMCORE's 1999 Proxy Statement, Attachment A,
filed as part of 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 Charles E. Gagnier.
(Incorporated by reference to Exhibit 10.3C of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.)
10.4C 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.)
10.4D 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).
10.4E Transitional Compensation Agreement dated January 1, 1999
between AMCORE Financial, Inc. and the following
individuals: Lewis R. Jones and Joseph McGougan
(Incorporated by reference to Exhibit 10.1 of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.)
10.4F 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.)
10.4G Transitional Compensation Agreement dated February 22, 2000
between AMCORE Financial, Inc. and James M. Hansberry.
10.4H Transitional Compensation Agreement dated March 6, 2000
between AMCORE Financial, Inc. and Patricia M. Bonavia.
10.4I Transitional Compensation Agreement dated March 15, 2000
between AMCORE Financial, Inc. and David W. Miles.
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 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).
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(A)3. EXHIBITS
- ----- --------
10.7 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).
10.8 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.)
10.9 Supplemental Executive Retirement Plan dated May 20, 1998
10.10 Loan Agreement with M & I Marshall and Ilsley Bank dated
December 31, 1999.
13 1999 Summary Annual Report to Stockholders
21 Subsidiaries of the Registrant
22 Proxy Statement and Notice of 2000 Annual Meeting
24 Powers of Attorney
27 Financial Data Schedule
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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 24th day of March 2000.
AMCORE FINANCIAL, INC.
JOHN R. HECHT
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 24th day of March, 2000 by the following persons on
behalf of the Registrant in the capacities indicated.
NAME TITLE
---- -----
ROBERT J. MEULEMAN President and Chief Executive Officer
- --------------------------------------------- (principal executive officer)
Robert J. Meuleman
JOHN R. HECHT Executive Vice President and Chief Financial
- --------------------------------------------- Officer (principal financial officer and principal
John R. Hecht accounting officer)
Directors: Paula A. Bauer, Milton R. Brown, Carl J. Dargene, Richard C. Dell,
Paul Donovan, 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
- ---------------------------------------------
Robert J. Meuleman*
JOHN R. HECHT
- ---------------------------------------------
John R. Hecht*
Attorney in Fact*
74