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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1997
COMMISSION FILE NUMBER 0--13393
AMCORE FINANCIAL, INC.
NEVADA 36-3183870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Seventh Street, Rockford, Illinois 61104
Telephone Number (815) 968-2241
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.22 par value
Common Stock Purchase Rights
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.
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As of March 16, 1998, 27,130,467 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 $705,392,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 1998 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.................................................. 8
Item 3 Legal Proceedings........................................... 8
Item 4 Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 9
Item 6 Selected Financial Data..................................... 9
Item 7 Management's Discussion and Analysis of the Results of
Operations and Financial Condition.......................... 10
Item 8 Financial Statements and Supplementary Data................. 27
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 58
Item 11 Executive Compensation...................................... 58
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13 Certain Relationships and Related Transactions.............. 58
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 59
SIGNATURES............................................................ 61
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PART I
ITEM 1. BUSINESS
GENERAL
AMCORE Financial, Inc. (AMCORE) is a registered multi-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. AMCORE
owns directly or indirectly all of the outstanding common stock of each of its
ten subsidiary banks, two subsidiary bank holding companies and seven financial
service subsidiaries. AMCORE provides the subsidiaries with advice and counsel
on policies and operating matters among other things.
BANK SUBSIDIARIES
AMCORE directly owns two second tier bank holding companies. First National
Bancorp, Inc. (FNB) is a one-bank holding company and owns AMCORE Bank N.A.,
South Central. Country Bank Shares Corporation (Country) is a four-bank holding
company and owns AMCORE Bank Mt. Horeb, AMCORE Bank Clinton, AMCORE Bank
Montello, and AMCORE Bank Argyle, all state-chartered banks. AMCORE also
directly owns AMCORE Bank N.A., Rockford (ROCKFORD), AMCORE Bank N.A., Rock
River Valley, AMCORE Bank N.A., North Central (NORTH CENTRAL), AMCORE Bank N.A.,
Northwest (NORTHWEST), and AMCORE Investment Group, N.A. (AIG), all nationally
chartered banks, and AMCORE Bank Aledo, a state chartered bank. The Illinois
affiliate banks conduct business at 41 locations throughout northern Illinois,
excluding Cook county and the far northwestern counties. The primary service
region includes the Illinois cities of Rockford, Elgin, Woodstock,
Carpentersville, Crystal Lake, Sterling, Dixon, Princeton, Aledo, Rochelle,
Ashton, South Beloit, Gridley, Mt. Morris, Mendota, Peru and the surrounding
communities. The Wisconsin affiliate banks conduct business at 22 locations
throughout south-central Wisconsin. The primary service region includes the
Wisconsin cities of Madison, Monroe, Clinton, Argyle, Mt. Horeb, Montello and
the surrounding communities.
Through its bank affiliates, AMCORE provides various personal banking,
commercial banking and related financial services. AMCORE also conducts banking
business through nine 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 including 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 affiliate location. The Pinnacle private banking division
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 affiliates provide 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.
AMCORE also offers three 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 loan, all from a completely automated system.
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In 1996, AMCORE realigned three financial service subsidiaries under a
non-depository bank charter. The former AMCORE Trust Company was converted from
a trust company charter to a nationally chartered non-depository bank called
AMCORE Investment Group, N.A. AMCORE Capital Management, Inc. and AMCORE
Investment Services, Inc. were sold by ROCKFORD, and became subsidiaries of AIG
on the same date. These companies provide trust, capital management, brokerage
services, and act as the investment advisor of the Vintage mutual funds.
FINANCIAL SERVICE SUBSIDIARIES
AMCORE Mortgage, Inc. (AMI), a wholly-owned subsidiary, was incorporated
under the laws of the State of Nevada in 1987. Through AMI, AMCORE provides each
bank affiliate with a variety of mortgage lending products to meet their
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 affiliate banks and other investors. AMI continues to service most of the
loans that are sold.
AMCORE Consumer Finance Company, Inc. (FINANCE), (f/k/a Mid-American
Financial Services Company), a wholly-owned consumer finance company, was
incorporated under the laws of the State of Nevada in September 1989 and was
acquired by AMCORE in February 1990. Through FINANCE, AMCORE provides
installment and real estate loans to a segment of the market not served by
AMCORE's affiliate banks. FINANCE has also focused its efforts with a "second
chance" lending program for loan applicants that have been rejected by the
mortgage and banking affiliates, as well as offering small ticket lease
financing and other direct financing programs.
AMCORE Financial Life Insurance Company (AFLIC), a wholly-owned subsidiary,
was incorporated under the laws of the State of Arizona in 1984. Through AFLIC,
AMCORE is engaged in reinsuring credit life and accident and health insurance in
conjunction with the lending activities of the affiliate banks.
AMCORE Investment Services, Inc. (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.
AMCORE Capital Management, Inc. (ACM) was incorporated under the laws of
the State of Illinois in December 1992 and is a wholly-owned subsidiary of AIG.
ACM 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.
Investors Management Group, LTD (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.
AMCORE Insurance Group, Inc. (AIGI) was incorporated under the laws of the
State of Illinois as a wholly-owned subsidiary of ROCKFORD in March 1994. AIGI's
main office is in South Beloit, Illinois. AIGI obtained approval from the Office
of the Comptroller of the Currency to engage in the insurance agency business,
and offers a complete line of commercial and individual insurance products
including life, homeowners and automobile insurance.
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.
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COMPETITION
Active competition exists in 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, collection agencies, 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 1,416 full-time equivalent employees as of December 31, 1997.
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, incentive
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 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 bound 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.
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Federal and state laws and regulations of general application to banks
regulate, among other things, the scope of business, investments, reserves
against deposits, capital levels relative to assets and risk, the nature and
amount of collateral for loans, the establishment of branches, mergers,
consolidations and the payment of dividends.
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.
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, FNB, and Country are supervised and examined by the FRB.
Nationally-chartered affiliate banks are supervised and regularly examined by
the Office of the Comptroller of the Currency (OCC) and are subject to
examination by the FRB. The state-chartered affiliate banks are supervised and
regularly examined by the Illinois Commissioner of Banks. In addition, all
affiliate banks are subject to periodic examination by the Federal Deposit
Insurance Corporation (FDIC).
AMI is supervised and examined by the FRB and is also licensed and
regulated by the Office of the Commissioner of Savings and Loan Associations of
the State of Illinois. 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 and ACM are supervised and examined by the NASD and are
regulated by the Securities and Exchange Commission (SEC). AIGI is supervised
and examined by the Department of Insurance of the State of Illinois, and is
regulated by the OCC.
SUBSIDIARY DIVIDENDS AND CAPITAL
Legal limitations exist as to the extent to which the bank subsidiaries can
lend or pay dividends to AMCORE. The payment of dividends by national banks
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, 1997, approximately $49.3 million was available
for payment to AMCORE in the form of dividends without prior regulatory
approval. The bank subsidiaries are also limited as to the amount they may lend
to AMCORE. At December 31, 1997, the maximum amount available to AMCORE in the
form of loans approximated $28.3 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, 1997 and 1996.
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
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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 7 and Note 11 included under
Item 8 for additional discussion of interest rate sensitivity and related
derivative activities.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains certain information about the executive
officers of AMCORE. There are no family relationships between any director or
executive officer of AMCORE.
NAME AGE PRINCIPAL OCCUPATION WITHIN THE LAST FIVE YEARS
---- --- -----------------------------------------------
Robert J. Meuleman........ 58 President and Chief Executive Officer of AMCORE since
January 1996. Previously Executive Vice President and
Chief Operating Officer--Banking Subsidiaries of AMCORE
from December 1991 to January 1996.
Kenneth E. Edge........... 52 Executive Vice President and Chief Operating Officer of
AMCORE since April, 1997. Previously Group Vice
President, Banking Subsidiaries from June 1995 to
April, 1997 and Executive Vice President of ROCKFORD
from July 1992 to June 1995.
Charles E. Gagnier........ 64 Executive Vice President, Bank Mergers and Acquisitions
of AMCORE and Chairman of the Board of Directors of
ROCKFORD since January 1997. Previously President and
Chief Executive Officer of ROCKFORD from January 1992
to December 1996.
John R. Hecht............. 39 Executive Vice President and Chief Financial Officer of
AMCORE since December, 1997. Previously Senior Vice
President and Chief Financial Officer of AMCORE from
July 1992 to December 1997.
James S. Waddell.......... 53 Executive Vice President, Chief Administrative Officer
and Corporate Secretary of AMCORE since January 1994.
Previously Senior Vice President of Administration of
AMCORE from July 1992 to January 1994.
Alan W. Kennebeck......... 52 Group Vice President, AMCORE. President and Chief
Executive Officer of AIG; and Chief Executive Officer
of AIS since July 1995. Previously President of AIS
from July 1995 to December, 1997; and Chief Operating
Officer of Piper Trust Co. from 1993 to July 1995.
Charie A. Zanck........... 45 Group Vice President, AMCORE, since May 1997.
Previously President and Chief Executive Officer of
Northwest from June 1993 to May 1997; and Chief
Operating Officer and Executive Vice President of
Northwest from June 1992 to June 1993.
William T. Hippensteel.... 41 Senior Vice President and Corporate Marketing Director
of AMCORE since January 1993.
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NAME AGE PRINCIPAL OCCUPATION WITHIN THE LAST FIVE YEARS
---- --- -----------------------------------------------
James F. Warsaw........... 47 President and Chief Executive Officer of ROCKFORD since
January 1997. Previously Executive Vice President and
Chief Operating Officer of ROCKFORD from June 1995 to
December 1996, and Executive Vice President and Senior
Credit Officer of ROCKFORD from December 1992 to May
1995.
ITEM 2. PROPERTIES
On December 31, 1997, AMCORE had 70 locations, of which 51 were owned and
19 were leased. All of these offices are considered by management to be well
maintained and adequate for the purpose intended. See Notes 6 and 7 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
stockholders' equity or financial position. 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.
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 1997.
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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 6,500 holders of record of
AMCORE's common stock.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR:
Interest income............................ $ 261,507 $ 235,036 $ 202,268 $ 172,279 $ 169,219
Interest expense........................... 148,960 128,902 104,017 76,761 74,609
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Net interest income........................ 112,547 106,134 98,251 95,518 94,610
Provision for loan and lease losses........ 7,045 5,428 3,165 1,751 2,762
Non-interest income........................ 47,708 42,270 36,874 33,891 32,693
Operating expense.......................... 115,628 98,939 101,730 92,604 89,640
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Income before income taxes................. 37,582 44,037 30,230 35,054 34,901
Income taxes............................... 8,918 12,161 7,205 9,321 9,195
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Net income................................. $ 28,664 $ 31,876 $ 23,025 $ 25,733 $ 25,706
========== ========== ========== ========== ==========
Return on average assets(1)(2)............. 0.81% 1.00% 0.85% 1.03% 1.08%
Return on average equity(1)(2)............. 10.66 13.14 10.27 12.30 13.39
Net interest margin........................ 3.64 3.81 4.12 4.48 4.60
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AVERAGE BALANCE SHEET:
Total assets............................... $3,520,229 $3,181,646 $2,715,520 $2,504,516 $2,387,674
Loans and leases, net of unearned income... 1,867,355 1,711,850 1,557,375 1,391,037 1,274,200
Earning assets............................. 3,325,778 2,967,054 2,501,973 2,294,262 2,186,609
Deposits................................... 2,399,423 2,274,191 2,182,327 2,102,098 2,032,189
Long-term borrowings....................... 132,533 159,504 34,367 29,004 34,568
Stockholders' equity....................... 268,996 242,657 224,219 209,161 191,953
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ENDING BALANCE SHEET:
Total assets............................... $3,667,690 $3,331,995 $2,903,282 $2,607,626 $2,421,104
Loans and leases, net of unearned income... 1,962,674 1,807,121 1,620,365 1,481,497 1,320,204
Earning assets............................. 3,452,398 3,114,450 2,635,111 2,366,480 2,148,414
Deposits................................... 2,527,043 2,351,490 2,208,838 2,119,063 2,033,741
Long-term borrowings....................... 159,125 131,612 115,752 30,157 35,204
Stockholders' equity....................... 287,476 257,420 242,096 212,571 202,589
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FINANCIAL CONDITION ANALYSIS:
Allowance for loan losses to year-end
loans.................................... 1.01% 1.07% 1.06% 1.16% 1.35%
Allowance to non-performing loans.......... 100.20 156.84 123.06 127.20 130.24
Net charge-offs to average loans........... 0.34 0.19 0.21 0.17 0.17
Non-performing loans to net loans.......... 1.01 0.68 0.86 0.92 1.04
Average long-term borrowings to average
equity................................... 49.27 65.73 15.33 13.87 18.01
Average equity to average assets........... 7.64 7.63 8.26 8.35 8.04
---------- ---------- ---------- ---------- ----------
STOCKHOLDERS' DATA:
Basic earnings per share................... $ 1.07 $ 1.20 $ 0.87 $ 0.97 $ 0.97
Diluted earnings per share................. 1.05 1.18 0.86 0.96 0.97
Book value per share....................... 10.68 9.64 9.10 8.03 7.65
Dividends per share........................ 0.45 0.38 0.33 0.31 0.23
Dividend payout ratio...................... 42.06% 31.67% 37.93% 31.96% 23.71%
Average common shares outstanding.......... 26,862 26,649 26,504 26,443 26,392
========== ========== ========== ========== ==========
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(1) The 1997 ratios excluding the impact of the $6.4 million, or $.24 per share,
after tax merger related and information systems charges: return on average
assets 1.00%; return on average equity 13.05%
(2) 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
operations and financial condition of AMCORE for the three years ended December
31, 1997. The discussion should be read in conjunction with the consolidated
financial statements, accompanying notes, and selected financial data appearing
elsewhere within this report. The financial statements and this discussion have
been restated to reflect the mergers with First National Bancorp, Inc. (FNB) and
Country Bank Shares Corporation (Country) and a three-for-two stock split.
This review contains certain forward-looking statements within the meaning
of the private securities litigation reform act of 1995 with respect to the
results of operations and businesses of AMCORE. These forward-looking statements
involve certain risks and uncertainties. Contemplated or projected, forecast or
estimated in such forward-looking statements 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; (VI) changes in interest rates
including effect of prepayment; (VII) general economic and business conditions
which are less favorable than expected; (VIII) unanticipated changes in industry
trends; (IX) changes in Federal Reserve Board monetary policies; (X) inability
to realize cost savings anticipated with mergers or data processing outsourcing;
and (XI) higher than expected costs or other difficulties associated with merger
integration or data processing conversion.
OVERVIEW OF OPERATIONS
AMCORE reported net income of $28.7 million for the year ended December 31,
1997. This compares to the $31.9 million and $23.0 million reported for the
years ended 1996 and 1995, respectively. Diluted earnings per share for 1997
were $1.05 compared to $1.18 in 1996 and $0.86 in 1995. Merger and core bank
data processing outsourcing charges of $6.4 million after tax or $0.24 per share
are the primary causes of the decline in earnings between 1997 and 1996.
Excluding these charges, net income from operations increased $3.2 million or
10.1% primarily from an increase in net interest income related to a 11.5%
increase in average earning assets.
This level of net income resulted in a return on average equity for 1997 of
10.66% versus 13.14% in 1996 and 10.27% in 1995. AMCORE's return on average
assets for 1997 was 0.81% compared to 1.00% in 1996 and 0.85% in 1995. If the
above mentioned merger and core bank data processing charge are excluded, the
return on average equity and return on average assets would be 13.05% and 1.00%,
respectively.
In March of 1997, AMCORE issued $40 million of capital securities through
AMCORE Capital Trust I ("Trust"), a statutory business trust. The capital
securities pay cumulative cash distributions semiannually at an annual rate of
9.35%. The capital securities qualify as Tier I capital for regulatory capital
purposes.
On April 18, 1997, AMCORE entered the interstate banking arena upon
completing its merger with FNB located in Monroe, Wisconsin. AMCORE issued
2,822,286 shares of common stock to the FNB shareholders to effect the merger.
FNB has approximately $219 million of assets and five locations. The transaction
was accounted for as a pooling of interests. Merger related charges of $1.4
million after-tax were recorded at closing.
On July 16, 1997, AMCORE expanded its presence in Wisconsin with the
completion of the merger with Country, Mt. Horeb, Wisconsin. AMCORE issued
2,469,417 shares of common stock to Country shareholders. Country has
approximately $310 million in assets and nine locations. The transaction was
accounted for as a pooling of interests. Merger expenses of $2.5 million
after-tax were recorded at closing.
During August of 1997, AMCORE signed an outsourcing agreement with ALLTEL
for its core bank data processing. The anticipated benefits of outsourcing
mainframe data processing include year 2000 compliant systems, a standardized
platform, current software release and operating systems, and an ability to
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assimilate acquisitions more quickly and less expensively. AMCORE recorded a
$2.6 million after tax charge related to write-offs of obsolete software and
equipment, severance for staff reductions and conversion costs. AMCORE
anticipates modest cost reductions initially with future costs dependent on
volume. AMCORE has established a project team to prepare for the year 2000.
AMCORE has taken an active approach toward addressing this issue, and is
currently in the process of assessing its information systems, testing and
validating in-house systems, and obtaining validation and certification of
outside systems in an effort to identify and correct potential problems in
advance of the year 2000. At this point the internal costs associated with the
year 2000 are not anticipated to have a material impact on future performance.
Uncertainties related to customers ability to repay loans may have the potential
to have a material impact, however, it is too early to estimate the financial
consequences.
As of September 17, 1997, AMCORE completed a three-for-two stock split to
shareholders of record on September 5, 1997. This split increased the shares
outstanding from 17,941,288 to 26,907,805.
On February 17, 1998, AMCORE completed it's merger with Investors
Management Group, LTD (IMG) of Des Moines, Iowa. AMCORE issued 270,139 shares at
closing with additional shares to be issued contingent upon IMG's future
performance. IMG is Iowa's largest independent asset management firm with more
than $1.6 billion of assets under management. IMG's expertise in fixed income
securities will complement AMCORE's equity management skills, including the
award winning Vintage family of mutual funds to bring total assets under
management to over $3.7 billion. The transaction was a stock exchange accounted
for using the purchase method of accounting.
On December 31, 1997 AMCORE transferred all of the satellite dish
receivables (approximately $15.0 million) to held for sale and recognized a $3.0
million after-tax fair value adjustment on this portfolio. This portfolio was
sold on January 28, 1998.
AMCORE is scheduled to complete the merger with Midwest Federal Financial
Corp. of Baraboo, Wisconsin (Midwest) on March 27, 1998. AMCORE will issue
approximately 1.9 million shares to the Midwest shareholders. Midwest has total
assets of $212 million and nine offices.
This merger will be a stock for stock exchange to be accounted for as
pooling of interests. Upon completing this acquisition AMCORE will have 22
offices and total assets of approximately $750 million in Wisconsin.
AMCORE views the above acquisitions as a means of expanding within its
geographic area and anticipates that they will contribute favorably to future
results. AMCORE anticipates, that in the future, it will have the opportunity to
acquire other financial institutions.
AMCORE continues to be "well capitalized" as defined by regulatory
guidelines. At December 31,1997, the company's total capital to risk weighted
assets was 14.38%.
EARNINGS SUMMARY
The following highlights 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,
1997, 1996 and 1995, the interest income and rates on these types of assets are
adjusted to a "fully taxable equivalent" basis, net of the
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effect of any interest expense disallowed. The fully taxable equivalent
adjustment was calculated using the Company's statutory Federal income tax rate
of 35%. Adjusted interest income is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
Interest Income Book Basis................... $261,507 $235,036 $202,268
Taxable Equivalent Adjustment................ 9,234 8,456 6,662
-------- -------- --------
Interest Income Taxable
Equivalent Basis............................. 270,741 243,492 208,930
Interest Expense............................. 148,960 128,902 104,017
-------- -------- --------
Net Interest Income Taxable
Equivalent Basis............................. $121,781 $114,590 $104,913
======== ======== ========
Net interest income on a fully taxable equivalent basis increased $7.2
million or 6.3% in 1997 and $9.7 million or 9.2% in 1996. The improvement in net
interest income during 1997 results mainly from a 11.5% increase in average
earning assets which was partially offset by a narrowing in the interest rate
spread. During 1996, the improvement in net interest income related to a 19.4%
growth in average earning assets, the majority of which was offset by a narrowed
interest rate spread.
The growth in average earning assets in both 1997 and 1996 can be
attributed to strong loan growth and increased levels of investment securities
related to the investment leveraging program. Average loans increased
approximately $155 million in both 1997 and 1996, which represented an increase
of 9.1% and 9.9%, respectively.
The investment leveraging program, which is designed to better utilize
capital, averaged $620 million in 1997, an increase of approximately $170
million in 1997 following a $295 million increase in 1996. This program
contributed approximately $9.1 million in 1997, $6.2 million in 1996 and $2.2
million in 1995 to net interest income. The program is funded through the use of
repurchase agreements, Federal Home Loan Bank ("FHLB") borrowings and a portion
of the brokered CD's. The proceeds of these borrowings are invested principally
in mortgage-backed and U.S. government agency securities.
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 total stockholders' equity,
the effective rate paid for all funding sources is lower than the rate paid on
interest-bearing liabilities alone.
As Table 1 indicates, the interest rate spread declined 22 basis points to
3.00% in 1997 from 3.22% in 1996 which was a decline of 27 basis points from the
1995 level of 3.49%. The interest rate margin was 3.64% in 1997, a decline of 17
basis points from 3.81% in 1996. The 1996 level was a decline of 31 basis points
from 4.12% in 1995.
The interest rate spread on the investment securities in the leveraging
program was 147 basis points in 1997, 137 basis points in 1996, and 141 basis
points in 1995. The interest rate spread on all other earning assets was 3.38%
in 1997, 3.57% in 1996, and 3.73% in 1995. As a result, the effect of this
program accounted for 10 basis points of the decline in the 1997 interest rate
spread and 23 and 8 basis points of the 1996 and 1995 decreases. The interest
rate margin was also negatively impacted by the investment leveraging program by
approximately 6 basis points in 1997, 29 basis points in 1996 and 12 basis
points in 1995. The core interest rate margin which excludes the effect of the
investment leveraging program was 4.14%, 4.25%, and 4.40% for 1997, 1996, and
1995, respectively.
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
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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 percentage 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 I 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 1997 relates to
the 9.1% growth in average loans and a 15.5% growth in average investment
securities which was partially offset by 7.8% growth in time deposits and 44.4%
growth in short-term borrowings.
The 1996 increase in net interest income due to the change in average
volume is attributable to the 9.9% growth in average loans and 36.1% growth in
average investment securities. This increase was partially offset by an increase
in borrowings of 124.7% used to fund the investment leveraging program.
Changes Due to Rate
The yield on earning assets declined 1 basis point in 1997 as a 20 basis
point increase in the yield on investment securities offset most of the decline
in yields on other earning assets. The rate paid on interest bearing liabilities
increased 21 basis points. The rate paid on interest bearing deposits increased
due to the new AMDEX money market account which indexed to Treasury yields. The
rate on short term borrowings increased as the current portion of longer term
FHLB borrowings rolled into this category. The rate on long term debt increased
65 basis points as the previously mentioned 9.35% capital trust securities,
which qualify as tier I capital, replaced lower rate FHLB borrowing and bank
lines.
The yield on earning assets declined 16 basis points in 1996. The decline
is mainly a result of average investment securities, which typically have a
lower yield, increasing at a faster rate than average loans. Average investment
securities represented 41.7% of average earning assets in 1996 versus 36.6% in
1995. The rate paid on average total interest-bearing liabilities increased 12
basis points in 1996 as average total borrowings, which had a higher cost than
other average total interest-bearing liabilities, increased to 24.0% of average
total interest-bearing liabilities in 1996 versus 12.9% in 1995.
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 losses based upon historical loss experience,
regular evaluation of collectibility by lending officers and the corporate loan
review staff, and the size and nature of the loan portfolios. Other factors
include economic and industry outlooks, concentration characteristics of the
loan portfolio and the composition of problem loans.
The provision for loan and lease losses was $7.0 million for 1997, an
increase of $1.6 million or 29.8% from the $5.4 million in 1996. The 1997
increase in provision is due to 8.6% growth in loans and charge-offs on
satellite dish receivables. During 1996, the provision increased $2.2 million
from the 1995 level of $3.2 million. The increase in the provision in 1996 was
primarily related to the growth in the loan portfolio of 11.5%, as both
non-performing loans and net charge-offs as a percent of loans declined in 1996.
During 1997, AMCORE recorded net charge-offs of $6.4 million, an increase
of $3.2 million from the 1996 level of $3.2 million mainly as a result of $2.7
million of charge-offs on satellite dish receivables. The 1996 amount remained
level with the 1995 amount of $3.3 million. AMCORE anticipates that continued
growth in the loan portfolio or weakening economic conditions could cause
continued increases in the provision for loan and lease losses. The sale of the
satellite dish receivable portfolio is anticipated to stabilize the level of
charge-offs. The allowance for loan and lease losses as a percent of total loans
was 1.01%, 1.07%, and 1.06% in 1997, 1996, and 1995, respectively. The allowance
for loan and lease losses to non-performing loans was 100.2% at year end 1997,
156.8% at year end 1996, and 123.1% at year end 1995.
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NON-INTEREST INCOME
Total non-interest income is comprised primarily of fee based revenues from
mortgage, trust, brokerage, asset management, insurance and collection agency
services. Fees from bank-related services, mainly on deposits and credit cards,
along with net securities gains or losses are also included in this category.
Total non-interest income increased $5.4 million or 12.9% in 1997 and totaled
$47.7 million. This followed a 14.6% or $5.4 million increase in 1996.
Trust and asset management income, the largest source of fee based
revenues, totaled $16.5 million, an increase of $2.4 million or 16.7%. The 1996
growth of trust and asset management fees was $1.8 million or 14.3%. The growth
in both years is attributable to favorable market performance of trust accounts,
growth in proprietary Vintage mutual funds and new trust accounts. As of
December 31, 1997, the AMCORE family of Vintage mutual funds totaled $871
million and trust assets under administration totaled $2.9 billion. AMCORE
anticipates that the previously mentioned acquisition of IMG will cause an
increase in trust and asset management revenues. However, 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 $7.8 million in 1997, an increase of
$151,000 or 2.0% from the $7.7 million in 1996. During 1996, service charges on
deposits decreased $70,000 or 0.9%. Service charges on deposits are impacted
primarily by the level of deposits commercial customers maintain to compensate
for services.
Mortgage revenue includes fees generated from underwriting, originating and
servicing of mortgage loans along with gains realized from the sale of these
loans. Mortgage revenues declined $309,000 or 6.6% to total $4.3 million in
1997. This decline was caused by the January 1, 1997, adoption of FAS No. 125,
which requires purchased and deferred excess mortgage servicing rights to be
valued under similar methods as prescribed in FAS No. 122 for originated
mortgage servicing rights. Mortgage revenues increased $1.1 million or 29.7% in
1996. Both years were positively impacted by increased mortgage servicing
volume.
Effective January 1, 1995, the mortgage company adopted Financial
Accounting Standard (FAS) No. 122 "Accounting for Mortgage Servicing Rights",
which had a $1.1 million positive impact on mortgage revenues in 1995. The
accounting standard allows for the recognition of the value of servicing rights
on originated mortgage loans and results in an asset that is amortized over the
remaining estimated lives of serviced loans. While this has a favorable impact
on earnings at the time of origination, 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
write-down 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 write-downs. The adoption of these standards may
cause increased volatility in mortgage revenues as described above.
A reduction in long-term mortgage rates would create an upward trend in
origination volumes, particularly with refinancing activity. This has a positive
impact on mortgage revenues; and could be partially offset the possible
write-downs of existing mortgage service rights. As of December 31, 1997, AMCORE
had $5.8 million of capitalized mortgage servicing rights and a servicing
portfolio of nearly $1 billion. In order to reduce AMCORE's exposure to
valuation risk of mortgage servicing, an agreement has been reached to sell
approximately $200 million of out of market purchased mortgage servicing with a
capitalized value of $2.4 million, with an expected closing in the second
quarter of 1998.
Insurance revenues remained level at $2.2 million in 1997. The 1996
increase resulted from a combination of an increase in sales of credit life
insurance and a change to recording insurance revenue gross prior to deductions
for related expenses. The insurance agency was placed under the management of
the asset management group in late 1997 to increase cross selling opportunities.
Collection fee income totaled $2.1 million in 1997, remaining level with
1996 after an increase of $314,000 or 17.1% from the $1.8 million in 1995. The
collection agency was sold on December 31, 1997.
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Other non-interest income, mainly customer service fees and brokerage
commissions were $10.5 million in 1997, an increase of 9.8%. The 1996 level was
a $1.7 million increase over 1995. The 1997 amount included a $1.9 million gain
on the sale of credit card receivables and 1996 included a $1.4 million gain on
the sale of merchant bankcard.
Net securities gains totaled $4.2 million in 1997 as compared to $1.9
million in 1996 and $2.3 million in 1995. The level of security gains or losses
is dependent on the size of the available for sale portfolio, interest rate
levels, and the company's liquidity needs.
OPERATING EXPENSES
Total operating expense was $115.6 million in 1997 an increase of $16.7
million from $98.9 million in 1996 after a $2.8 million decrease from the $101.7
million in 1995. The 1997 increase was due to the $5.0 million adjustment to
fair value of satellite receivables transferred to held for sale, $4.9 million
of merger-related expenses and $4.3 million of expenses related to outsourcing
core bank data processing. Excluding these charges, operating expenses from
normal operations would have increased $2.8 million or 2.8%. The efficiency
ratio, excluding the above mentioned charges, improved to 60.0% as operating
revenues increased 8.0% during 1997. During 1995, AMCORE recorded $5.6 million
of impairment and merger related charges. Without these charges, total operating
expense would have increased $2.8 million or 2.9% in 1996. The impairment
charge, caused by the adoption of FAS No. 121, totaled $3.3 million and included
write-downs of intangibles from the acquisition of a collection agency, and
reductions of the carrying values assigned to bank facilities (See Note 7 of the
Notes to Consolidated Financial Statements). The remaining $2.3 million charge
was comprised primarily of merger-related costs from the mergers in 1995 and
1994.
Personnel costs, which includes compensation expense and employee benefits,
are the largest component of operating expenses. Personnel costs totaled $58.9
million in 1997 an increase of $2.8 million or 5.0%. Excluding the outsourcing
and merger related costs in 1997, the increase would have been $1.6 million or
2.8%. The higher costs in 1997 were primarily caused by normal merit increases.
Personnel costs increased $2.2 million in 1996, an increase of 4.2%. Excluding
the merger related costs in 1995, the increase would have been $3.1 million or
5.8%. The higher costs in 1996 were primarily caused by increased levels of
performance driven expenses, including incentive pay and profit sharing, as well
as higher medical insurance costs.
Net occupancy and equipment expenses were $15.2 million for 1997, an
increase of $175,000. This increase includes $1.3 million of expenses related to
merger. Excluding these expenses, these categories would have decreased as the
benefits of consolidating offices and outsourcing were realized. Net occupancy
and equipment expenses totaled $15.1 million for 1996, a decrease of $294,000
from 1995. If the $1.2 million of merger related charges in 1995 are excluded,
net occupancy and equipment related expenses would have increased $867,000 or
6.1%. The 1996 increase is attributable to the opening of supermarket branches
and the upgrade of information systems hardware and software, including a teller
automation product delivery system.
Professional fees increased $3.2 million to $6.4 million in 1997 primarily
as a result of $2.5 million of merger-related expenses. Professional fees
declined $258,000 or 7.6% to total $3.2 million in 1996 primarily due to merger
related expenses in 1995.
Impairment of long lived assets expense was $2.1 million in 1997 as
software and hardware related to mainframe data processing were written down to
fair value as a result of the decision to outsource. There were no impairment
charges in 1996 and the $3.3 million of charges in 1995, which were related to
customer list intangibles, goodwill and bank facilities as described in Footnote
7.
Intangibles amortization expense totaled $2.2 million in 1997 and 1996,
after a decline of $410,000 or 15.6% from 1995. This decline was due to the run
off of core deposit intangibles and the 1995 impairment charge. This category
will increase approximately $400,000 in 1998 as a result of the previously
mentioned purchase of IMG.
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Other expenses were $23.1 million in 1997, an increase of $3.3 million or
16.7%. This included $1.7 million of expenses related to the mergers and
outsourcing in 1997. Excluding these expenses, this category would have
increased $1.6 million or 8.0%. The primary cause of the remaining increase
related to increased communication expense and amortization of mortgage
servicing rights. The 1996 decrease of $750,000 or 3.7% was related to reduced
insurance expenses due to the reduction of FDIC insurance premiums.
INCOME TAXES
Income tax expense totaled $8.9 million in 1997 compared with $12.2 million
and $7.2 million in 1996 and 1995, respectively. The effective tax rates were
23.7%, 27.6%, and 23.8% in 1997, 1996 and 1995, respectively. The effective tax
rate was less than the statutory tax rates due primarily to investments in tax-
exempt municipal bonds and loans. Both the actual dollar decrease and the
decline in effective tax rate in 1997 are a result of lower income before tax
and higher levels of tax exempt income at both the federal and state levels. The
higher rate in 1996 was caused by a higher level of pre-tax earnings and
$300,000 of 1995 tax credits.
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 liquidity position is influenced by the funding
base and asset mix.
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 and access
to the capital markets. In 1997, dividends and fees from subsidiaries amounted
to $38.5 million, compared to $40.3 million in 1996. Other liquidity is provided
by cash balances in banks, liquidating short-term investments, commercial paper
borrowings and borrowings on a line of credit. While subsidiary banks are
limited in the amount of dividends they can pay, as of December 31, 1997,
approximately $49.3 million was available for payment to the parent in the form
of dividends which do not require prior regulatory approval.
Cash and cash equivalents decreased $129,000 million from December 31, 1996
to December 31, 1997, as the net cash used for investing activities of $327.0
million in 1997 exceeded the net cash provided from operating activities of
$34.1 million and the net cash provided by financing activities of $292.8
million.
The net decrease in cash provided by operating activities of $18.6 million
from December 31, 1996 to December 31, 1997 was primarily attributable to the
$12.7 million net increase in cash used in mortgage banking activities.
The net decrease in cash used for investing activities of $137.5 million
from December 31, 1996 to December 31, 1997 is the result of the decrease in net
cash used for available for sale securities. The net increase in proceeds of
sales of $296.5 million exceeds the net cash used for purchases of $203.9
million from year to year. The increase in net fed funds sold and other short
term investments of $28.5 million from 1996 to 1997 contributed to the decrease
in cash used for investing activities.
The net cash provided by financing activities decreased by $106.8 million
from December 31, 1996 to December 31, 1997. The decrease results mainly from
the decrease in net cash provided by short-term borrowings of $170.7 million
from 1996 to 1997. The increase in net cash provided by long-term borrowings of
$39.4 million from 1996 to 1997, mainly the issuance of the capital trust
securities, partially offset the decrease in net cash provided by short-term
borrowings.
SECURITIES
Total securities as of December 31, 1997 were $1.46 billion, an increase of
$188.5 million or 14.9% over the prior year-end. At December 31, 1997 and 1996,
the total securities portfolio comprised 42.2% and 40.7%, respectively, of total
earning assets.
Substantially all securities are classified 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'
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equity may result; however, federal banking regulations exclude this component
from regulatory risk-based capital calculations.
The securities portfolio serves a primary role in the overall context of
balance sheet management. 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-backed securities represent a significant source of
liquidity. Approximately $152.8 million or 10.5%, of the securities portfolio
will mature in 1998.
Mortgage-backed securities as of December 31, 1997 totaled $ 590.0 million
and represent 40.5% of total securities. The distribution of mortgage-backed
securities include $417.1 million of U.S. government agency mortgage-backed pass
through securities and $83.4 million of agency collateralized mortgage
obligations and $89.5 million of private issue collateral mortgage obligations,
all of which are rated AAA except for $19.9 million of securities rated between
Aa2 and Baa.
At December 31, 1997, securities held to maturity total $15.4 million,
while securities available for sale were $1.44 billion. There were no trading
securities at the end of 1997 or 1996. At December 31, 1997, the held to
maturity securities portfolio included $214,000 of gross unrealized gains and
$26,000 of gross unrealized losses. The securities available for sale portfolio
at the end of 1997 included gross unrealized gains of $18.0 million and gross
unrealized losses of $4.0 million, of which the combined effect, net of tax, is
included as an unrealized loss in stockholders' equity. For comparative
purposes, at December 31, 1996, gross unrealized gains of $8.3 million and gross
unrealized losses of $ 11.6 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 1997, total loans and leases, net of unearned discount, were $1.96
billion, an increase of $155.6 million or 8.6% as compared to 1996. Average
loans increased $155.5 million or 9.1% during 1997. Table 2 indicates the growth
in loans was mainly in the real estate and commercial loan categories.
Commercial, financial and agricultural loan balances totaled $632.4
million, an increase of $63.9 million or 11.2 % when compared to 1996. This
increase was primarily in commercial and industrial in the Rockford and
northwestern Chicago suburban markets and agricultural loans in rural markets.
Total real estate loans were $1.02 billion at year end 1997, an increase of
$121.0 million, or 13.4%, over 1996. The growth from 1996 is attributable to
commercial real estate loans, primarily in the Rockford and northwestern Chicago
suburban markets.
Residential mortgage loans are originated by AMCORE's mortgage affiliate,
of which conforming adjustable rate and balloon residential mortgages are
normally sold to affiliate banks. The fixed-rate residential mortgage loans are
sold in the secondary market to eliminate interest rate risk and generate gains
on the sale of these loans, as well as servicing income. All loans of the
mortgage affiliate are considered held for sale and are recorded at the lower of
cost or market value.
Installment and consumer loans decreased $31.3 million or 9.3 % to end the
year at $305.5 million. The decline in consumer loans was primarily attributable
to the transfer to held for sale of satellite dish receivables and the sale of
the credit card portfolio each of which totaled approximately $15 million.
The scheduled repayments and maturities of loans represent a substantial
source of liquidity. Table 3 shows selected loan maturity data as of December
31, 1997. Approximately 18.8% of the total loans had maturities of one year or
less.
DEPOSITS
Total deposits at December 31, 1997, were $2.53 billion, an increase of
$175.6 million or 7.5% when compared to 1996. Average total deposits increased
$125.2 million or 5.5%.
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Core deposits, which include demand deposits, consumer time deposits, and
savings deposits, are considered by management to be the primary and most stable
source of funding. Total core deposits were $2.11 billion at the end of 1997, an
$87.7 million or 4.3% increase over the prior year-end, this increase is
attributable to the new AMDEX money market accounts introduced in 1997. Core
deposits represent 83.74% and 86.22% of total deposits at December 31, 1997 and
1996, respectively. These core deposits are supplemented by large certificates
of deposit, brokered deposits, and time deposits from governmental entities.
Brokered deposits were $222.4 million at year-end 1997, an increase of $101.9
million over the prior year-end. Table 5 shows the maturity distribution of time
deposits over $100,000.
BORROWINGS
Short-term and long-term borrowings have provided the financing for the
investment leveraging program. Borrowings totaled $806.6 million at year-end
1997 and were comprised of $647.5 of short-term and $159.1 of long-term. The
increase in borrowings of $125.9 million was primarily in the short-term
category and was primarily used to fund the growth in securities.
Securities sold under agreements to repurchase of $528.6 million and
Federal Home Loan Bank borrowings of $187.9 million are used primarily to fund
the investment leveraging program previously mentioned. These two types of
borrowing represent 88.8% of total borrowings at December 31, 1997 versus 92.2%
at December 31, 1996.
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 rate of 104.6750% to 100.0%
of the principal amount. After March 25, 2017, they are redeemable at par until
June 15, 2027 when redemption is mandatory. The capital securities qualify as
Tier I capital for regulatory capital 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 $25,000,000. 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, 1997, totaled $1.96 billion, or 56.8%, of total 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
what amount is necessary to provide for possible losses incurred in the loan
portfolio. In making this determination, management analyzes the ultimate
collectibility of the loan portfolio, incorporating feedback provided by lending
officers, the corporate loan review staff and examinations performed by
regulatory agencies. Management makes an ongoing evaluation as to the adequacy
of the allowance for loan losses. To establish the appropriate level of the
allowance, all loans, commitments to extend credit and standby letters of credit
are reviewed and classified as to potential loss exposure. An additional
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
future economic and industry outlooks.
18
19
The determination by management of the appropriate level of the allowance
amounted to $19.9 million at December 31, 1997. However, since the allowance for
loan losses is based on estimates; ultimate losses may vary from the current
estimates. These estimates are reviewed regularly and as adjustments, become
necessary they are reported in earnings of that period. 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 is shown in Table 2.
As of December 31, 1997, the allowance for loan losses as a percent of
total loans and non-performing loans was 1.01% and 100.20%, respectively. These
compare to the same ratios for the prior year of 1.07% and 156.84%. Net
charge-offs as a percent of average loans increased to 0.34% for 1997 versus
0.19% in 1996. Net charge-offs on satellite receivables represent 41.1% of total
net charge-offs, thus net charge-offs on all other loans as a percent of average
loans declined to 0.20%.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans with restructured
terms and other real estate owned. Non-performing assets totaled $21.5 million
as of year-end 1997, an increase of $8.3 million or 62.9% from the $13.2 million
at year-end 1996. Total non-performing assets represent 0.59% of total assets at
December 31, 1997, compared to 0.40% at December 31, 1996.
Loans are generally classified as non-accrual when there are reasonable
doubts as to the collectibility of principal and interest or when payment
becomes 90 days past due, except loans which are well secured and in the process
of payment. 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 collection 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 when received.
Non-performing loans increased $7.6 million or 61.5% to total $19.9 million
at December 31, 1997 when compared to the prior year-end. This increase included
one large agricultural credit of $3.6 million. As of December 31, 1997,
non-performing loans to total loans were 1.01% compared to 0.68% at year-end
1996. Table 2 presents non-performing loans for each of the past five years.
Loans 90 days or more past due were $3.4 million at December 31, 1997, a
decline of $306,000 from the prior year end. This decrease is primarily
attributable to the satellite dish receivable loans being transferred to held
for sale.
Other real estate owned increased $748,000, or 81.3%, to $1.7 million at
December 31, 1997 when compared to year-end 1996.
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 which exceed 10 percent of
total loans.
Commercial, financial, and agricultural loans were $632.4 million at
December 31, 1997, and comprised approximately 32.2% of gross loans, of which
1.65% were non-performing. Net charge-offs of commercial loans represent 0.13%
during 1997 and 0.04% during 1996 of the year-end balance of the category.
Construction, commercial real estate loans, and loans for farmland were
$564.9 million at December 31, 1997, comprising 28.8% of gross loans, of which
0.79% were classified as non-performing. Net charge-offs of this category of
loans represents .04% of the year end balance during 1997 and 1996.
Residential real estate loans, which includes home equity and permanent
residential financing, totaled $457.1 million at December 31, 1997, and
represent 23.3% of gross loans of which 0.78% are non-performing. Net
charge-offs of residential real estate loans represent 0.07% of the category
total in 1997 and .02% of the year-end balance in 1996.
19
20
Installment and consumer loans were $305.5 million at December 31, 1997,
and comprised 15.6% of gross loans, of which 0.45% were non-performing. Net
charge-offs of consumer loans represented 1.67% and 0.89% of the year-end
category total for 1997 and 1996, respectively. Consumer loans are comprised of
direct loans, credit card loans, indirect auto loans, and consumer finance
company loans. Indirect auto loans total $180.5 million at December 31, 1997.
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.
MARKET AND INTEREST RATE RISK MANAGEMENT
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, as well as
repricing gap reports, are reviewed by Asset and Liability Committees (ALCO) at
affiliate banks and at the corporate level, whose actions attempt to minimize
any negative impact interest rate movements may have on net interest income.
Each ALCO committee 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 periods of changing interest rates, net interest income is not only
impacted by the amounts of repricing assets and liabilities, but also impacted
by the rate at which repricings occur. Net interest income may also be impacted
by variances in prepayment of loans and securities. Table 6 and Footnote 5
summarize AMCORE's market risk and interest sensitivity position as of December
31, 1997.
Management uses off-balance sheet derivative contracts to 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 floor contracts. The swap contracts are primarily
utilized to hedge the spread between deposit rates and earning assets with
floating rate characteristics. The floor contracts are utilized to provide
protection in the event of a decline in interest rates, and prepayment of
mortgage related assets.
The swap contracts involve the exchange of fixed and floating interest rate
payments and are based on the notional amount of the contract. The floor
contracts are also based on the notional amount of the contract. These floor
contracts are purchased at a premium, which is amortized over the lives of the
contracts. The notional amount of the swap 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 high credit ratings. All counterparties were expected to meet any
outstanding interest payment obligations.
The total notional amount of swap contracts outstanding was $270.0 million
and $145.0 million as of December 31, 1997 and 1996, respectively. As of the end
of 1997, these contracts had an aggregate negative fair value of $1,075,000. The
total notional amount of floor contracts outstanding was $145.0 million at
December 31,1997, with $50.0 million outstanding floor contracts as of the end
of 1996. These contracts had a net positive fair value of $183,000 as of the end
of 1997. For further discussion of derivative contracts, see Notes 5 and 11 to
the Consolidated Financial Statements.
CAPITAL MANAGEMENT
Total stockholders' equity at December 31, 1997 was $287.5 million, an
increase of $30.1 million or 11.7%. Stockholders' equity includes an adjustment
to fair market value for securities classified as available for
20
21
sale. The fair market value of these securities increased $10.3 million during
1997. Without the impact of this increase, stockholders' equity would have
increased $19.7 million or 7.6%.
AMCORE paid $12.1 million of cash dividends which represent $0.45 per share
or a dividend payout ratio of 42.1%. This compares to $0.38 per share paid in
1996 which represented a payout ratio of 31.7%. The book value per share
increased $1.04 per share to $10.68 at December 31, 1997 from $9.64 at December
31, 1996.
As previously mentioned 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 qualify as
Tier I capital for regulatory capital purposes.
AMCORE is considered a "well capitalized" institution based on regulatory
guidelines. AMCORE's leverage ratio of 8.31% at December 31, 1997 exceeds the
regulatory guidelines of 5% for well capitalized institutions. AMCORE's ratio of
tier 1 capital at 13.50% and total risk based capital at 14.38% significantly
exceed the regulatory minimums as the table below indicates as of December 31:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Tier 1 Capital............................... $ 306,364 13.50% $ 246,250 12.09%
Tier Capital Minimum......................... 90,755 4.00% 81,459 4.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum $ 215,589 9.50% $ 164,791 8.09%
========== ===== ========== =====
Total Capital................................ $ 326,271 14.38% $ 265,565 13.04%
Total Capital Minimum........................ 181,550 8.00% 162,917 8.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum....... $ 144,721 6.38% $ 102,648 5.04%
========== ===== ========== =====
Risk Adjusted Assets $2,269,380 $2,036,468
========== ==========
21
22
TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- -------
ASSETS
Interest-Earning Assets:
Taxable securities........................... $1,123,535 $ 77,076 6.86% $ 961,721 $ 62,780 6.53%
Tax-exempt securities(1)..................... 312,429 25,071 8.02 281,798 23,166 8.22
---------- -------- ---- ---------- -------- ----
Total Securities(2)........................ 1,435,964 102,147 7.11 1,243,519 85,946 6.91
Mortgage loans held for sale(3).............. 12,871 890 6.91 9,830 809 8.23
Loans(1)(4).................................. 1,867,355 164,979 8.77 1,711,850 153,322 8.88
Other earning assets......................... 10,156 538 5.22 19,332 1,545 7.86
Fees on mortgage loans held for sale(3)...... -- 2,187 -- -- 1,870 --
---------- -------- ---- ---------- -------- ----
Total Interest-Earning Assets.............. $3,326,346 $270,741 8.10% $2,984,531 $243,492 8.11%
Non Interest-Earning Assets.................. 193,883 197,115
---------- ----------
Total Assets.......................... $3,520,229 $3,181,646
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand and savings
deposits................................... $ 727,184 $ 20,170 2.77% $ 717,878 $ 18,407 2.56%
Time deposits................................ 1,374,796 80,905 5.88 1,275,457 74,790 5.86
---------- -------- ---- ---------- -------- ----
Total interest-bearing deposits............ 2,101,980 101,075 4.81 1,993,335 93,197 4.66
Short-term borrowings........................ 677,205 38,998 5.69 468,894 26,044 5.47
Long-term borrowings......................... 132,533 8,887 6.71 159,504 9,661 6.06
---------- -------- ---- ---------- -------- ----
Total Interest-Bearing Liabilities......... $2,911,718 $148,960 5.10% $2,621,733 $128,902 4.89%
Non Interest Bearing Liabilities:
Demand deposits.............................. 297,443 280,856
Other liabilities............................ 42,072 36,400
---------- ----------
Total Liabilities..................... $3,251,233 $2,938,989
Stockholders' Equity 268,996 242,657
---------- ----------
Total Liabilities and Stockholders'
Equity.............................. $3,520,229 $3,181,646
========== ==========
Net Interest Income (FTE)...................... $121,781 $114,590
======== ========
Net Interest Spread (FTE)...................... 3.00% 3.22%
==== ====
Interest Rate Margin (FTE)..................... 3.64% 3.81%
==== ====
TWELVE MONTHS ENDED
DECEMBER 31, 1995
-------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
------- -------- -------
ASSETS
Interest-Earning Assets:
Taxable securities........................... $ 662,260 $ 44,242 6.68%
Tax-exempt securities(1)..................... 251,485 19,699 7.83
---------- -------- ----
Total Securities(2)........................ 913,745 63,941 7.00
Mortgage loans held for sale(3).............. 11,478 941 8.20
Loans(1)(4).................................. 1,557,375 141,019 8.91
Other earning assets......................... 16,441 953 5.70
Fees on mortgage loans held for sale(3)...... -- 2,076 --
---------- -------- ----
Total Interest-Earning Assets.............. $2,499,039 $208,930 8.27%
Non Interest-Earning Assets.................. 216,481
----------
Total Assets.......................... $2,715,520
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand and savings
deposits................................... $ 710,232 $ 19,182 2.70%
Time deposits................................ 1,182,916 67,105 5.67
---------- -------- ----
Total interest-bearing deposits............ 1,893,148 86,287 4.55
Short-term borrowings........................ 245,277 15,397 6.26
Long-term borrowings......................... 34,367 2,333 6.79
---------- -------- ----
Total Interest-Bearing Liabilities......... $2,172,792 $104,017 4.77%
Non Interest Bearing Liabilities:
Demand deposits.............................. 289,179
Other liabilities............................ 37,544
----------
Total Liabilities..................... $2,499,515
Stockholders' Equity 224,219
----------
Total Liabilities and Stockholders'
Equity.............................. $2,715,520
==========
Net Interest Income (FTE)...................... $104,913
========
Net Interest Spread (FTE)...................... 3.49%
====
Interest Rate Margin (FTE)..................... 4.12%
====
22
23
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997/DECEMBER 31, 1996 DECEMBER 31, 1996/DECEMBER 31, 1995
-------------------------------------------- --------------------------------------------
INCREASE DUE TO TOTAL NET INCREASE DUE TO TOTAL NET
(DECREASE) CHANGE IN INCREASE (DECREASE) CHANGE IN INCREASE
AVERAGE VOLUME AVERAGE RATE (DECREASE) AVERAGE VOLUME AVERAGE RATE (DECREASE)
-------------- ------------ ---------- -------------- ------------ ----------
(IN THOUSANDS)
Interest Income:
Taxable securities............ $11,542 $ 2,754 $14,296 $19,570 $(1,032) $18,538
Tax-exempt securities(1)...... 2,478 (573) 1,905 2,458 1,009 3,467
------- ------- ------- ------- ------- -------
Total Securities(2)......... 14,020 2,181 16,201 22,028 (23) 22,005
Mortgage loans held for
sale........................ 224 (143) 81 (136) 4 (132)
Loans(1)(4)................... 13,587 (1,930) 11,657 13,843 (1,540) 12,303
Other earning assets.......... (587) (420) (1,007) 187 405 592
Fees on mortgage loans held
for sale(3)................. 33 284 317 35 (241) (206)
------- ------- ------- ------- ------- -------
Total Interest-Earning
Assets............... $28,086 $ (837) $27,249 $39,897 $(5,335) $34,562
======= ======= ======= ======= ======= =======
Interest Expense:
Interest-bearing demand and
savings deposits............ $ 242 $ 1,521 $ 1,763 $ 205 $ (980) $ (775)
Time deposits................. 5,845 270 6,115 5,374 2,311 7,685
------- ------- ------- ------- ------- -------
Total interest-bearing
deposits................. 5,238 2,640 7,878 4,703 2,207 6,910
Short-term borrowings......... 11,968 986 12,954 12,601 (1,954) 10,647
Long-term borrowings.......... (1,741) 967 (774) 7,606 (278) 7,328
------- ------- ------- ------- ------- -------
Total Interest-Bearing
Liabilities.......... $15,465 $ 4,593 $20,058 $24,940 $ (55) $24,885
======= ======= ======= ======= ======= =======
Net Interest Margin/Net Interest
Income (FTE).................. $12,621 $(5,430) $ 7,191 $14,957 $(5,280) $ 9,677
======= ======= ======= ======= ======= =======
The above table shows the changes in interest income (tax equivalent) and
interest expense attributable to volume and rate variances. The change in
interest income (tax equivalent) due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
- ---------------
(1) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balance has been adjusted to exclude the effect of Statement of
Financial Accounting Standards No. 115.
(3) The yield-related fees recognized from the origination of mortgage loans
held for sale are in addition to the interest earned on the loans during the
period in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
23
24
TABLE 2
ANALYSIS OF LOAN AND LEASE PORTFOLIO AND LOSS EXPERIENCE
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
Commercial, financial and agricultural............ $ 632,378 $ 568,451 $ 487,738 $ 450,246 $ 414,696
Real estate....................................... 961,361 847,993 806,192 714,881 607,966
Real estate-construction.......................... 60,624 53,039 44,134 34,265 19,385
Installment and consumer.......................... 305,491 336,741 285,450 290,710 293,500
Direct lease financing............................ 3,194 2,066 1,117 760 1,211
---------- ---------- ---------- ---------- ----------
Gross Loans..................................... $1,963,048 $1,808,290 $1,624,631 $1,490,862 $1,336,758
Unearned income................................. (374) (1,169) (4,266) (9,365) (16,554)
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income................... $1,962,674 $1,807,121 $1,620,365 $1,481,497 $1,320,204
---------- ---------- ---------- ---------- ----------
Allowance for loan and lease losses............. (19,908) (19,295) (17,107) (17,246) (17,870)
---------- ---------- ---------- ---------- ----------
NET LOANS......................................... $1,942,766 $1,787,826 $1,603,258 $1,464,251 $1,302,334
========== ========== ========== ========== ==========
SUMMARY OF LOAN LOSS EXPERIENCE:
Allowance for loan and lease losses, beginning.... $ 19,295 $ 17,107 $ 17,246 $ 17,870 $ 17,286
Amounts charged-off:
Commercial, financial and agricultural.......... 1,202 537 1,204 1,231 1,492
Real estate..................................... 555 273 1,030 283 278
Installment and consumer........................ 6,020 3,831 2,329 2,146 1,698
Direct lease financing.......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Charge-offs............................. $ 7,777 $ 4,641 $ 4,563 $ 3,660 $ 3,468
---------- ---------- ---------- ---------- ----------
Recoveries on amounts previously charged off:
Commercial, financial and agricultural.......... 356 301 533 543 476
Real estate..................................... 63 281 15 60 154
Installment and consumer........................ 926 819 711 682 660
Direct lease financing.......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Recoveries.............................. $ 1,345 $ 1,401 $ 1,259 $ 1,285 $ 1,290
========== ========== ========== ========== ==========
Net Charge-offs.......................... $ 6,432 $ 3,240 $ 3,304 $ 2,375 $ 2,178
Provision charged to expense...................... 7,045 5,428 3,165 1,751 2,762
---------- ---------- ---------- ---------- ----------
ALLOWANCE FOR LOAN AND LEASE LOSSES, ENDING... $ 19,908 $ 19,295 $ 17,107 $ 17,246 $ 17,870
========== ========== ========== ========== ==========
NON-PERFORMING LOANS AT YEAR-END:
Non-accrual....................................... $ 19,491 $ 12,019 $ 11,410 $ 11,262 $ 12,350
Restructured...................................... 377 283 2,491 2,296 1,371
---------- ---------- ---------- ---------- ----------
TOTAL NON-PERFORMING LOANS.................... $ 19,868 $ 12,302 $ 13,901 $ 13,558 $ 13,721
========== ========== ========== ========== ==========
Past due 90 days or more not included above....... $ 3,386 $ 3,692 $ 1,534 1,088 1,932
========== ========== ========== ========== ==========
RATIOS:
Allowance for loan and lease losses to year-end
loans........................................... 1.01% 1.07% 1.06% 1.16% 1.35%
Allowance to non-performing loans................. 100.20% 156.84% 123.06% 127.20% 130.24%
Net charge-offs to average loans.................. 0.34% 0.19% 0.21% 0.17% 0.10%
Recoveries to charge-offs......................... 17.29% 30.19% 27.59% 35.11% 37.20%
Non-performing loans to loans, net of unearned
income.......................................... 1.01% 0.68% 0.86% 0.92% 1.04%
The allocation of the allowance for loan and lease losses at December 31,
1997, 1996, 1995, 1994, and 1993 was as follows:
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- -------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
LOANS IN LOANS IN LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT
------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial, financial
and agricultural... $ 5,617 32.4 $ 5,293 31.5 $ 5,888 30.0 $ 4,912 30.2 $ 5,737
Real estate.......... 1,697 52.1 2,307 49.9 2,079 52.4 2,214 50.3 1,513
Installment and
consumer........... 4,207 15.5 4,019 18.6 3,075 17.6 3,275 19.5 2,939
Impaired loans....... 2,311 * 1,496 * 1,185 * * * *
Unallocated.......... 6,076 * 6,180 * 4,880 * 6,845 * 7,681
------- ----- ------- ----- ------- ----- ------- ----- -------
TOTAL............ $19,908 100.0 $19,295 100.0 $17,107 100.0 $17,246 100.0 $17,870
======= ===== ======= ===== ======= ===== ======= ===== =======
1993
----------
PERCENT
OF
LOANS IN
CATEGORY
--------
Commercial, financial
and agricultural... 31.0
Real estate.......... 47.0
Installment and
consumer........... 22.0
Impaired loans....... *
Unallocated.......... *
-----
TOTAL............ 100.0
=====
- ---------------
*Not applicable
24
25
TABLE 3
MATURITY AND INTEREST SENSITIVITY OF LOANS
DECEMBER 31, 1997
---------------------------------------------------------------------
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...................... $337,974 $255,129 $39,275 $632,378 $215,778 $78,626
Real estate-construction............ 30,616 29,403 605 60,624 22,882 7,126
-------- -------- ------- -------- -------- -------
TOTAL.......................... $368,590 $284,532 $39,880 $693,002 $238,660 $85,752
======== ======== ======= ======== ======== =======
TABLE 4
MATURITY OF SECURITIES
DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------
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(3):
One year or less........... $ 47,198 5.55% $ 50,618 6.88% 17,932 8.69% $ 34,516 5.77% $ 150,264 6.42%
After one through five
years.................... 57,686 6.30 50,720 6.30 77,535 7.78 4,414 6.73 190,355 6.91
After five through ten
years.................... -- -- 142,977 6.78 101,660 7.94 -- -- 244,637 7.25
After ten years............ -- -- 23,486 6.89 128,781 8.32 24,577 6.60 176,844 7.88
Mortgage-backed
securities(2)............ -- -- 589,988 7.85 -- -- 89,505 7.23 679,493 7.77
-------- ---- -------- ---- -------- ----- -------- ---- ---------- -----
Total Securities
Available for Sale... $104,884 5.96% $857,789 7.49% $325,908 8.09% $153,012 6.79% $1,441,593 7.44%
-------- ---- -------- ---- -------- ----- -------- ---- ---------- -----
Securities Held to Maturity:
One year or less........... $ 750 6.09% -- -- $ 1,787 7.61% $ -- -- $ 2,537 7.16%
After one through five
years.................... 804 6.02 -- -- 10,009 7.25 1 7.37% 10,814 7.16
After five through ten
years.................... -- -- -- -- 1,920 8.14 -- -- 1,920 8.14
After ten years............ -- -- -- -- 150 10.23 2 -- 152 10.10
-------- ---- -------- ---- -------- ----- -------- ---- ---------- -----
Total Securities Held
to Maturity.......... $ 1,554 6.06% -- -- $ 13,866 7.45% $ 3 2.73% $ 15,423 7.31%
-------- ---- -------- ---- -------- ----- -------- ---- ---------- -----
Total Securities....... $106,438 5.96% $857,789 7.49% $339,774 8.07% $153,015 6.79% $1,457,016 7.44%
======== ==== ======== ==== ======== ===== ======== ==== ========== =====
- ---------------
(1) Yields were calculated on a tax equivalent basis assuming a federal tax rate
of 35%.
(2) 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 within the maturity
categories above.
(3) Yields were calculated excluding the effects of FAS No. 115.
TABLE 5
MATURITY OF TIME DEPOSITS $100,000 OR MORE
DECEMBER 31, 1997
------------------------------------------------------------------------
TIME REMAINING TO MATURITY
------------------------------------------------------------------------
DUE WITHIN THREE TO SIX TO AFTER
THREE MONTHS SIX MONTHS TWELVE MONTHS TWELVE MONTHS TOTAL
------------ ---------- ------------- ------------- -----
(IN THOUSANDS)
Certificates of deposit.............. $ 98,835 $90,957 $108,117 $199,011 $496,920
Other time deposits.................. 12,929 100 300 838 14,167
-------- ------- -------- -------- --------
TOTAL...................... $111,764 $91,057 $108,417 $199,849 $511,087
======== ======= ======== ======== ========
25
26
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 the Company's historical experience of the impact of
interest-rate fluctuations on the pre-payment of residential and home equity
loans and mortgage-backed securities.
For core deposits (DDA, interest checking, savings, and money market
deposits) that have no contractual maturity, the table presents principal cash
flows and, as applicable, related weighted-average interest rates based on the
Company's historical experience, management's judgment, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
For interest rate swaps, caps and floors, 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.
THERE-
1998 1999 2000 2001 2002 AFTER TOTAL
---- ---- ---- ---- ---- ------ -----
(DOLLARS IN THOUSANDS)
RATE SENSITIVE ASSETS:
Fixed Interest Rate Loans........ $434,967 $307,976 $255,384 $114,198 $121,098 $ 92,702 $1,326,324
Average Interest Rate.......... 8.76% 8.60% 8.68% 8.54% 8.61% 8.08% 8.63%
Variable Interest Rate Loans..... 338,456 76,069 64,133 46,503 55,429 55,762 636,350
Average Interest Rate.......... 9.02% 8.48% 8.45% 8.53% 8.26% 8.79% 8.77%
Fixed Interest Rate Securities... 319,217 165,616 150,868 118,303 92,543 531,512 1,378,060
Average Interest Rate.......... 6.75% 6.92% 6.78% 6.72% 6.65% 6.47% 6.66%
Variable Interest Rate
Securities..................... 28,564 3,488 3,934 3,824 4,341 34,805 78,956
Average Interest Rate.......... 7.21% 7.80% 7.64% 7.58% 7.46% 7.44% 7.39%
Other Interest-Bearing Assets.... 2,839 -- -- -- -- -- 2,839
Average Interest Rate.......... 5.73% -- -- -- -- -- 5.73%
RATE SENSITIVE LIABILITIES:
Non-Interest-bearing checking.... $111,194 $ -- $140,039 $ -- $ 74,561 $ 18,800 $ 344,594
Average Interest Rate.......... -- -- -- -- -- -- --
Savings & Interest-bearing
checking....................... 216,095 -- 374,513 -- 75,817 75,817 742,242
Average Interest Rate.......... 3.66% -- 2.78% -- 1.93% 1.93% 2.84%
Time-deposits.................... 809,088 422,164 138,527 13,321 17,021 40,087 1,440,207
Average Interest Rate.......... 5.70% 6.05% 6.33% 6.01% 6.11% 6.96% 5.91%
Fixed Interest Rate Borrowings... 356,830 91,272 87,501 530 55,003 43,145 634,281
Average Interest Rate.......... 5.89% 6.01% 5.83% 7.78% 5.26% 9.15% 6.07%
Variable Interest Rate
Borrowings..................... 124,352 48,000 -- -- -- -- 172,353
Average Interest Rate.......... 5.87% 5.86% -- -- -- -- 5.86%
RATE SENSITIVE DERIVATIVES:
Pay variable/received fixed
swap........................... $ -- $ 40,000 $ -- $ -- $ -- $ -- $ 40,000
Average pay rate............... -- 5.64% -- -- -- -- 5.64%
Average receive rate........... -- 6.97% -- -- -- -- 6.97%
Pay fixed/received variable...... 50,000 30,000 25,000 125,000 -- -- 230,000
Average pay rate............... 5.96% 5.80% 8.52% 7.51% -- -- 7.06%
Average receive rate........... 5.74% 6.18% 8.50% 7.72% -- -- 7.17%
Interest rate caps............... -- 25,000 15,000 25,000 10,000 -- 75,000
Average strike rate............ -- 6.31% 6.31% 6.31% 6.31% -- 6.31%
Forward rate................... -- 5.98% 6.04% 6.07% 6.11% -- 6.04%
Interest rate floors............. -- 50,000 40,000 25,000 30,000 -- 145,000
Average strike rate............ -- 5.43% 5.13% 5.61% 5.20% -- 5.33%
Forward rate................... -- 5.98% 6.04% 6.07% 6.11% -- 6.04%
26
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
------------------------
1997 1996
---- ----
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents................................... $ 105,218 $ 105,347
Interest earning deposits in banks.......................... 2,206 833
Federal funds sold and other short-term investments......... 633 26,261
Loans held for sale......................................... 29,869 11,730
Securities available for sale............................... 1,441,593 1,213,957
Securities held to maturity (fair value $15,611 in 1997;
$55,242 of in 1996)....................................... 15,423 54,548
---------- ----------
Total securities.................................. $1,457,016 $1,268,505
Loans and leases, net of unearned income.................... 1,962,674 1,807,121
Allowance for loan and lease losses......................... (19,908) (19,295)
---------- ----------
Net loans and leases.............................. $1,942,766 $1,787,826
Premises and equipment, net................................. 54,774 56,567
Intangible assets, net...................................... 12,168 13,881
Other real estate owned..................................... 1,668 920
Other assets................................................ 61,372 60,125
---------- ----------
TOTAL ASSETS...................................... $3,667,690 $3,331,995
========== ==========
LIABILITIES
Deposits:
Demand deposits........................................... $ 915,954 $ 841,085
Savings deposits.......................................... 170,882 192,608
Other time deposits....................................... 1,440,207 1,317,797
---------- ----------
Total deposits.................................... $2,527,043 $2,351,490
Short-term borrowings....................................... 647,509 549,081
Long-term borrowings........................................ 159,125 131,612
Other liabilities........................................... 46,537 42,392
---------- ----------
TOTAL LIABILITIES................................. $3,380,214 $3,074,575
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000 shares;
issued none............................................... $ -- $ --
Common stock, $.22 par value: authorized 45,000,000 shares;
1997 1996
---- ----
Issued 27,681,138 27,627,740
Outstanding 26,922,604 26,706,883 ........... 6,152 6,134
Additional paid-in capital.................................. 73,262 68,047
Retained earnings........................................... 206,235 191,485
Deferred Compensation Non-Employee Directors................ (1,478) (1,382)
Treasury stock.............................................. (5,069) (4,908)
Net unrealized gain (loss) on securities available for sale,
net of taxes.............................................. 8,374 (1,956)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................ $ 287,476 $ 257,420
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $3,667,690 $3,331,995
========== ==========
See accompanying notes to consolidated financial statements.
27
28
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases....................... $164,520 $152,974 $140,810
Interest on securities:
Taxable................................................... 77,076 62,780 44,242
Tax-exempt................................................ 16,296 15,058 13,246
-------- -------- --------
Total Income from Securities...................... $ 93,372 $ 77,838 $ 57,488
Interest on federal funds sold and other short-term
investments............................................... 448 1,477 921
Interest and fees on mortgage loans held for sale........... 3,077 2,679 3,017
Interest on deposits in banks............................... 90 68 32
-------- -------- --------
TOTAL INTEREST INCOME............................. $261,507 $235,036 $202,268
INTEREST EXPENSE
Interest on deposits........................................ $101,075 $ 93,197 $ 86,287
Interest on short-term borrowings........................... 38,998 26,044 15,397
Interest on long-term borrowings............................ 8,887 9,661 2,333
-------- -------- --------
TOTAL INTEREST EXPENSE............................ $148,960 $128,902 $104,017
-------- -------- --------
NET INTEREST INCOME............................... $112,547 $106,134 $ 98,251
Provision for loan and lease losses......................... 7,045 5,428 3,165
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES.................................................... $105,502 $100,706 $ 95,086
NON-INTEREST INCOME
Trust and asset management income........................... $ 16,451 $ 14,100 $ 12,331
Service charges on deposits................................. 7,837 7,686 7,756
Mortgage revenues........................................... 4,340 4,649 3,584
Insurance revenues.......................................... 2,239 2,224 1,188
Collection fee income....................................... 2,105 2,145 1,831
Other....................................................... 10,538 9,595 7,886
-------- -------- --------
TOTAL NON-INTEREST INCOME, EXCLUDING NET REALIZED
SECURITY GAINS.................................. $ 43,510 $ 40,399 $ 34,576
Net realized security gains................................. 4,198 1,871 2,298
-------- -------- --------
TOTAL NON-INTEREST INCOME......................... $ 47,708 $ 42,270 $ 36,874
OPERATING EXPENSES
Compensation expense........................................ $ 47,199 $ 43,715 $ 43,050
Employee benefits........................................... 11,659 12,346 10,765
Net occupancy expense....................................... 6,490 6,596 6,060
Equipment expense........................................... 8,735 8,454 9,284
Professional fees........................................... 6,366 3,150 3,408
Advertising and business development........................ 2,827 2,662 2,718
Amortization of intangible assets........................... 2,212 2,219 2,629
Impairment of long-lived assets............................. 2,081 -- 3,269
Fair value adjustment on loans held for sale................ 4,955 -- --
Other....................................................... 23,104 19,797 20,547
-------- -------- --------
TOTAL OPERATING EXPENSES.......................... $115,628 $ 98,939 $101,730
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. $ 37,582 $ 44,037 $ 30,230
Income taxes................................................ 8,918 12,161 7,205
-------- -------- --------
NET INCOME.................................................. $ 28,664 $ 31,876 $ 23,025
======== ======== ========
BASIC EARNINGS PER COMMON SHARE............................. $ 1.07 $ 1.20 $ 0.87
DILUTED EARNINGS PER COMMON SHARE........................... 1.05 1.18 0.86
DIVIDENDS PER COMMON SHARE.................................. 0.45 0.38 0.33
AVERAGE COMMON SHARES OUTSTANDING........................... 26,862 26,649 26,504
See accompanying notes to consolidated financial statements.
28
29
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED NET UNREALIZED
ADDITIONAL COMPENSATION GAIN (LOSS) TOTAL
COMMON PAID-IN RETAINED NON-EMPLOYEE TREASURY ON SECURITIES STOCKHOLDERS'
STOCK CAPITAL EARNINGS DIRECTORS STOCK AFS(1) EQUITY
------ ---------- -------- ------------ -------- -------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1994.......... $6,127 $67,473 $156,042 $ (926) $(8,422) $(7,699) $212,595
Net Income.......................... -- -- 23,025 -- -- -- 23,025
Cash dividends on common stock--$.33
per share......................... -- -- (8,750) -- -- -- (8,750)
Transfer from retained earnings to
additional paid-in-capital........ -- 667 (667) -- -- -- --
Purchase of 38,590 shares for the
treasury.......................... -- -- -- -- (256) -- (256)
Reissuance of 54,933 treasury shares
for Non-Employee Directors stock
plan.............................. -- 120 -- (661) 541 -- --
Deferred compensation expense....... -- (72) -- 280 -- -- 208
Reissuance of 58,461 treasury shares
for employee incentive plan....... -- 3 -- -- 240 -- 243
Reissuance of 146,822 treasury
shares under incentive stock
option plans...................... -- (241) (2) -- 1,477 -- 1,234
Net change in unrealized gains
(losses) on securities available
for sale, net of tax.............. -- -- -- -- -- 13,825 13,825
------ ------- -------- ------- ------- ------- --------
Balance at December 31, 1995.......... $6,127 $67,950 $169,648 $(1,307) $(6,420) $ 6,126 $242,124
------ ------- -------- ------- ------- ------- --------
Net Income.......................... -- -- 31,876 -- -- -- 31,876
Cash dividends on common stock--$.38
per share......................... -- -- (10,039) -- -- -- (10,039)
Reissuance of 39,556 treasury shares
for Non-Employee Directors stock
plan.............................. -- 205 -- (542) 337 -- --
Deferred compensation expense....... -- (331) -- 467 -- -- 136
Reissuance of 61,436 treasury shares
for employee incentive plan....... -- (30) -- -- 401 -- 371
Issuance of 31,159 common shares for
employee incentive plan........... 7 183 -- -- -- -- 190
Reissuance of 98,135 treasury shares
under incentive stock option
plans............................. -- 70 -- -- 774 -- 844
Net change in unrealized gains
(losses) on securities available
for sale, net of tax.............. -- -- -- -- -- (8,082) (8,082)
------ ------- -------- ------- ------- ------- --------
Balance at December 31, 1996.......... $6,134 $68,047 $191,485 $(1,382) $(4,908) $(1,956) $257,420
------ ------- -------- ------- ------- ------- --------
Net Income.......................... -- -- 28,664 -- -- -- 28,664
Cash dividends on common stock--$.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 264,600 treasury
shares under incentive stock
option plans...................... -- 2,678 -- -- 1,035 -- 3,713
Reissuance of 2,457 treasury shares
for employee incentive plans...... -- 21 -- -- 19 -- 40
Issuance of 63,743 common shares for
employee incentive plan........... 14 416 -- -- -- -- 430
Net change in unrealized gains
(losses) on securities available
for sale, net of tax.............. -- -- -- -- -- 10,330 10,330
------ ------- -------- ------- ------- ------- --------
Balance at December 31, 1997.......... $6,152 $73,262 $206,235 $(1,478) $(5,069) $ 8,374 $287,476
====== ======= ======== ======= ======= ======= ========
- ---------------
(1) Net unrealized gain (loss) on AFS (securities available for sale), net of
taxes.
See accompanying notes to consolidated financial statements.
29
30
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 28,664 $ 31,876 $ 23,025
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment... 5,391 6,100 6,245
Amortization and accretion of securities, net............. 2,081 3,397 791
Provision for loan and lease losses....................... 7,045 5,428 3,165
Amortization of intangible assets......................... 2,212 2,219 2,629
Net gain on sale of securities available for sale......... (4,198) (1,871) (2,302)
Fair value adjustment on loans held for sale.............. 4,955 -- --
Impairment of long-lived assets........................... 2,081 -- 3,269
Deferred income taxes..................................... (3,817) (132) (1,742)
Originations of mortgage loans held for sale.............. (217,020) (196,798) (198,537)
Proceeds from sales of mortgage loans held for sale....... 208,896 201,391 193,171
Other, net................................................ (2,213) 1,060 (482)
--------- --------- ---------
Net cash provided by operating activities........... $ 34,077 $ 52,670 $ 29,232
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale... $ 205,772 $ 199,496 $ 177,636
Proceeds from maturities of securities held to maturity..... 9,982 7,874 9,099
Proceeds from sales of securities available for sale........ 487,813 191,289 253,570
Purchase of securities held to maturity..................... (14,197) (13,967) (73,392)
Purchase of securities available for sale................... (857,278) (653,333) (473,060)
Net decrease (increase) in federal funds sold and other
short-term investments.................................... 24,398 (4,100) (7,286)
Net (increase) decrease in interest earning deposits in
banks..................................................... (1,373) (429) 248
Proceeds from the sale of credit card receivables........... 15,457 -- --
Proceeds from the sale of merchant bankcard processing...... -- 1,400 --
Proceeds from the sale of consumer finance loans and
leases.................................................... 1,798 5,997 --
Loans made to customers and principal collection of loans,
net....................................................... (194,449) (197,165) (144,787)
Proceeds from sale of collection agency..................... 700 -- --
Premises and equipment expenditures, net.................... (6,164) (3,374) (7,586)
Proceeds from the sale of other real estate................. 1,259 2,529 1,559
--------- --------- ---------
Net cash required for investing activities.......... $(326,282) $(463,783) $(263,999)
========= ========= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits and savings accounts........ $ 53,143 $ 25,858 $ 52
Net increase in time deposits............................... 122,410 116,794 89,724
Net increase in short-term borrowings....................... 29,175 199,836 87,111
Proceeds from long-term borrowings.......................... 111,872 72,500 90,176
Payment of long-term borrowings............................. (15,250) (7,335) (9,350)
Dividends paid.............................................. (12,130) (10,039) (8,750)
Issuance of common stock for employee incentive plans....... 430 -- --
Issuance of treasury stock for employee incentive plans..... 3,753 1,239 1,477
Purchase of treasury stock.................................. (1,327) -- (256)
--------- --------- ---------
Net cash provided by financing activities........... $ 292,076 $ 398,853 $ 250,184
--------- --------- ---------
Net change in cash and cash equivalents..................... $ (129) $ (12,260) $ 15,417
Cash and cash equivalents:
Beginning of year......................................... 105,347 117,607 102,190
--------- --------- ---------
End of period............................................. $ 105,218 $ 105,347 $ 117,607
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors............................... $ 99,002 $ 90,448 $ 74,272
Interest paid on borrowings............................... 46,282 33,663 24,695
Income taxes paid......................................... 11,616 12,865 8,223
NON-CASH INVESTING AND FINANCING
Other real estate acquired in settlement of loans........... 2,147 1,192 2,615
Transfer of securities held to maturity to available for
sale...................................................... 31,018 -- 401,315
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... 69,253 -- --
See accompanying notes to consolidated financial statements.
30
31
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 multi-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 financial, 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, insurance, debt collection
services and the reinsurance of credit life and accident and health insurance in
conjunction with the lending activities of the Company's bank subsidiaries.
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. All prior year financial information has
been restated to reflect the mergers that took place during 1997 as explained in
Note 2.
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, demand deposits and savings
accounts, time deposits and short-term borrowings are reported net.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
recorded at the lower of cost or estimated fair value in the aggregate. Gains
and losses on the sale of mortgage loans are included in other non-interest
income.
Satellite dish loans were transferred to loans held for sale in
anticipation of the sale of these loans. These loans were recorded at the
estimated fair value, which resulted in a $5 million fair value write-down on
this portfolio recorded in operating expenses. 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 held to maturity are reported at
amortized historical cost. Securities classified as available for sale are
recorded at fair value with unrealized gains and losses recorded as a component
of stockholders' equity, net of the related income tax effect. The level yield
method is used for the amortization and accretion of premiums and
31
32
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discounts. Trading securities are recorded at fair value with unrealized gains
and losses recorded in earnings. There were no trading securities outstanding at
December 31, 1997 and 1996.
Realized gains and losses on all securities are recognized by the specific
identification method upon sale or when values are deemed to be permanently
impaired.
Upon completion of the merger of First National Bancorp, Inc. (FNB) on
April 18, 1997, approximately $31,018,000 of FNB's securities classified as held
to maturity were reclassified into the available for sale category. This
transfer was done as permitted by FAS 115, "Accounting for Certain Investments
in Debt and Equity Securities" in order to maintain the Company's existing
interest rate risk position. In December 1995, approximately $401,315,000 of
securities classified as held to maturity were reclassified into the available
for sale category. This transfer was done in response to the FASB's decision to
allow companies a one-time opportunity to reclassify their security portfolios.
This reclassification will significantly improve the flexibility in managing
interest and liquidity risks. While this may cause additional fluctuations in
the unrealized gain or loss component of total stockholders' equity, it has no
impact on regulatory risk-based capital calculations.
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.
Loans measured for impairment as described in FAS No. 114 include
commercial, financial, agricultural, real estate commercial and 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 and residential real estate loans to
be smaller balance, homogeneous loans which are exempt from impairment
measurement per FAS No. 114. These types of loans, except for credit card and
consumer finance receivables, are placed on non-accrual when payment becomes 90
days past due. In most instances, a charge-off is recorded when a consumer or
residential real estate loan becomes 180 days past due. 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.
32
33
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allowance is an amount that management estimates will be adequate to absorb
possible future losses on existing loans and leases. The evaluation of the
allowance is based on past loan loss experience, regular evaluation of the
collectibility by management, lending officers and corporate loan review staff,
overall loan quality, the nature of and size of the portfolio, review of
specific problem loans, and current and anticipated economic conditions that may
affect the borrower's ability to pay. 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.
OTHER REAL ESTATE OWNED
Other real estate owned 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 market value less estimated costs to sell the
properties. When the property is acquired through foreclosure, any excess of the
related loan balance over the adjusted fair market 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 the
loans, based on their relative fair values. The cost of mortgage servicing
rights 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.
33
34
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company retains the servicing rights on certain loans sold for which
the stated servicing income exceeds a normal servicing income. Mortgage loans
sales which result in an average contractual interest rate, adjusted for normal
servicing fees, that differs from the agreed yield to the purchaser, gains or
losses are recognized equal to the present value of such differential over the
estimated life of such loans. The resulting difference, or excess servicing, is
capitalized and amortized over the estimated life using a method approximating
the interest method. The unamortized balance is periodically evaluated in
relation to estimated future net servicing revenues, taking into consideration
changes in interest rates, current prepayment speeds and expected future cash
flows.
The Company adopted FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", in January 1997. As a
result of this statement, the Company changed its method of evaluating for
impairment of purchase mortgage servicing rights and deferred excess servicing
rights, previously on an undiscounted basis, to a method similar to that used
for originated mortgage servicing rights. 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. During January 1997, the
Company reduced the carrying value of deferred excess servicing rights by
$742,000.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and 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 and 1995 resulted in an impairment charge of $2,081,000 and $3,269,000,
respectively, as explained in Note 7.
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.
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.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards 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.
34
35
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share is based on dividing net income by the weighted
average number of shares of common stock outstanding during the periods. Diluted
earnings per share reflects the potential dilution that could occur if stock
options granted pursuant to incentive stock option plans were exercised or
converted into common stock that then shared in the earnings of the Company.
Earnings per share amounts have been restated to give effect to mergers
accounted for as a pooling of interests and the three-for-two stock split on
September 17, 1997. Basic and diluted earnings per share are presented on the
Consolidated Statements of Income, and a reconciliation of the calculations are
found in Note 15.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued FAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The component of
comprehensive income is the net change in unrealized gains and losses on
securities available for sale and is disclosed in the Consolidated Statements of
Stockholders Equity. FAS No. 130 is effective for fiscal years beginning after
December 15, 1997.
The Financial Accounting Standards Board has issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes standards for reporting financial and descriptive information about
operating segments in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to stockholders. Operating segments are components of a business about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in determining allocation of resources and in
assessing performance. AMCORE anticipates it will disclose the following
segments: Banking, Investment Management and Insurance, Mortgage Banking, and
Other. FAS No. 131 is effective for fiscal years beginning after December 15,
1997.
NOTE 2--MERGERS AND ACQUISITIONS
Mergers occurred during the reported periods as follows:
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.
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.
On May 24, 1995, NBM Bancorp, Inc. (NBM), a two-bank holding company,
merged into the Company, which issued 2,458,440 common shares in exchange for
the 240,000 outstanding NBM shares. At the date of the merger, NBM had total
assets of approximately $166 million.
Each of these mergers was accounted for as a pooling of interests and,
accordingly, all financial statements and related financial information of the
Company have been restated to include Country, FNB and NBM.
35
36
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)
Year ended December 31, 1995:
Net interest income........................... $79,800 $7,683 $10,768 $ 98,251
Net income.................................... 18,271 2,446 2,308 23,025
Year ended December 31, 1996:
Net interest income........................... $87,034 $7,927 $11,173 $106,134
Net income.................................... 26,383 2,817 2,676 31,876
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.
COMPLETED AND PENDING MERGERS
On February 17, 1998, the Company acquired Investors Management Group, LTD
(IMG) of Des Moines, Iowa. IMG is an asset management firm with approximately
$1.6 billion in assets under management. The Company issued 270,139 shares at
closing with additional shares to be issued contingent upon IMG's future
performance. This transaction was accounted for as a purchase.
On November 11, 1997, the Company signed a definitive agreement to merge
with Midwest Federal Financial Corp. (Midwest), a one-bank holding company with
assets of approximately $212 million. Midwest, headquartered in Baraboo,
Wisconsin, has nine locations in Central Wisconsin. The transaction has received
regulatory approval and must be approved by Midwest shareholders. The terms of
the transaction require the Company to exchange 1.174 shares of common stock in
exchange for each of the 1,627,674 outstanding shares of Midwest stock for a
total of 1,910,889 shares. The transaction is expected to close March 27, 1998
and will be accounted for as a pooling of interests.
36
37
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--SECURITIES
A summary of securities at December 31, 1997, 1996 and 1995 were as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN THOUSANDS)
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
========== ======= ======== ==========
At December 31, 1996:
Securities Available for Sale:
U.S. Treasury............................... $ 132,377 $ 650 $ (544) $ 132,483
U.S. Government agencies.................... 165,557 216 (3,855) 161,918
Agency mortgage-backed securities........... 553,472 2,659 (5,203) 550,928
State and political subdivisions............ 263,341 4,545 (1,330) 266,556
Corporate obligations and other............. 102,504 223 (655) 102,072
---------- ------- -------- ----------
Total Securities Available for Sale....... $1,217,251 $ 8,293 $(11,587) $1,213,957
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury.................................. $ 1,647 $ 5 $ (4) $ 1,648
U.S. Government agencies....................... 5,684 61 -- 5,745
Agency mortgage-backed securities.............. 11,413 103 (115) 11,401
State and political subdivisions............... 31,587 703 (86) 32,204
Corporate obligations and other................ 4,217 27 -- 4,244
---------- ------- -------- ----------
Total Securities Held to Maturity........... $ 54,548 $ 899 $ (205) $ 55,242
---------- ------- -------- ----------
Total Securities.......................... $1,271,799 $ 9,192 $(11,792) $1,269,199
========== ======= ======== ==========
At December 31, 1995:
Securities Available for Sale:
U.S. Treasury............................... $ 144,553 $ 1,719 $ (314) $ 145,958
U.S. Government agencies.................... 73,659 694 (195) 74,158
Agency mortgage-backed securities........... 418,449 4,293 (639) 422,103
State and political subdivisions............ 218,273 5,418 (1,064) 222,627
Corporate obligations and other............. 80,130 562 (401) 80,291
---------- ------- -------- ----------
Total Securities Available for Sale....... $ 935,064 $12,686 $ (2,613) $ 945,137
========== ======= ======== ==========
At December 31, 1995:
Securities Held to Maturity:
U.S. Treasury............................... $ 28,591 $ 258 $ (176) $ 28,673
U.S. Government agencies.................... -- -- -- --
Agency mortgage-backed securities........... 1,000 41 -- 1,041
State and political subdivisions............ 32,226 918 (77) 33,067
Corporate obligations and other............. 7,791 25 -- 7,816
---------- ------- -------- ----------
Total Securities Held to Maturity......... $ 69,608 $ 1,242 $ (253) $ 70,597
---------- ------- -------- ----------
Total Securities....................... $1,004,672 $13,928 $ (2,866) $1,015,734
========== ======= ======== ==========
37
38
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of both securities available for sale and
securities held to maturity as of December 31, 1997, 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............................ $ 150,029 $ 150,264 $ 2,537 $ 2,541
Due after one year through five years.............. 187,846 190,355 10,814 10,914
Due after five years through ten years............. 241,829 244,637 1,920 1,984
Due after ten years................................ 171,511 176,844 152 172
Mortgage-backed securities (agency and
corporate)....................................... 676,427 679,493 -- --
---------- ---------- ------- -------
Total Securities................................. $1,427,642 $1,441,593 $15,423 $15,611
========== ========== ======= =======
At December 31, 1997, 1996, and 1995, securities with a fair value of
approximately $927,772,000, $755,611,000 and $551,075,000, 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, 1997 and
1996, was as follows:
1997 1996
---- ----
(IN THOUSANDS)
Commercial, financial and agricultural...................... $ 632,378 $ 568,451
Real estate-construction.................................... 60,624 53,039
Real estate-commercial...................................... 504,275 413,870
Real estate-residential..................................... 457,086 434,123
Installment and consumer.................................... 305,491 336,741
Direct lease financing...................................... 3,194 2,066
---------- ----------
Gross loans and leases.................................... $1,963,048 $1,808,290
Unearned income........................................... (374) (1,169)
---------- ----------
Loans and leases, net of unearned income.................. $1,962,674 $1,807,121
Allowance for loan and lease losses....................... (19,908) (19,295)
---------- ----------
NET LOANS AND LEASES.............................. $1,942,766 $1,787,826
========== ==========
38
39
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-performing loan information as of and for the years ended December 31,
1997 and 1996 was as follows:
1997 1996
---- ----
(IN THOUSANDS)
Impaired Loans:
Non-accrual Loans:
Commercial............................................. $10,060 $ 4,907
Real estate............................................ 4,484 4,450
Troubled debt restructurings.............................. 377 283
Other Non-performing:
Non-accrual loans(1)...................................... 4,947 2,662
------- -------
Total Non-performing Loans.................................. $19,868 $12,302
======= =======
Loans 90 days or more past due and still accruing......... $ 3,386 $ 3,692
- ---------------
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio which are exempt from FAS 114.
1997 1996
---- ----
(IN THOUSANDS)
Allowance provided for impaired loans, included in the
allowance for loan losses................................. $ 2,311 $ 1,496
Average recorded investment in impaired loans............... 15,874 11,287
Interest income recognized from impaired loans.............. 717 504
An analysis of the allowance for loan and lease losses for the years ended
December 31, 1997, 1996, and 1995 follows:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Balance at beginning of year........................... $19,295 $17,107 $17,246
Provision charged to expense........................... 7,045 5,428 3,165
Loans charged off...................................... (7,777) (4,641) (4,563)
Recoveries on loans previously charged off............. 1,345 1,401 1,259
------- ------- -------
BALANCE AT END OF YEAR....................... $19,908 $19,295 $17,107
======= ======= =======
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.
In the opinion of management, related party loan transactions during 1997
and 1996 were as follows:
1997 1996
---- ----
(IN THOUSANDS)
Balance at beginning of year................................ $ 44,074 $ 36,809
New loans................................................... 85,123 103,806
Repayments.................................................. (84,506) (96,541)
-------- --------
BALANCE AT END OF YEAR............................ $ 44,691 $ 44,074
======== ========
39
40
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated 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 estimated fair values of
financial instruments at December 31, 1997 and 1996 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:
1997 1996
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Cash and cash equivalents................ $ 105,218 $ 105,218 $ 105,347 $ 105,347
Interest earning deposits in banks....... 2,206 2,206 833 833
Federal funds sold and other short-term
investments............................ 633 633 26,261 26,261
Loans held for sale...................... 29,869 30,354 11,730 12,027
Securities available for sale............ 1,441,593 1,441,593 1,213,957 1,213,957
Securities held to maturity.............. 15,423 15,611 54,548 55,242
The carrying amounts and estimated fair values of accruing loans and leases
at December 31, 1997 and 1996 were as follows:
1997 1996
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural... $ 622,318 $ 630,730 $ 563,572 $ 567,998
Real estate.............................. 1,017,501 1,038,293 895,268 903,291
Installment and consumer, net............ 300,170 298,364 334,195 332,424
Direct lease financing................... 3,194 3,279 2,066 2,085
---------- ---------- ---------- ----------
Total loans.................... $1,943,183 $1,970,666 $1,795,101 $1,805,798
========== ========== ========== ==========
Fair values of loans were estimated for portfolios of loans with similar
characteristics. Loans were segregated by type as shown above and then each
category was further segmented into fixed and floating interest rate terms. The
fair value of fixed-rate loans, excluding residential real-estate loans, was
calculated by discounting contractual cash flows using estimated market discount
rates which reflect the credit and 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. Cash flow assumptions for credit card loans did not
include the value of new receivables generated from existing cardholders over
the remaining estimated life of the portfolio, thus understating the value of
the entire credit card relationship. The fair value of non-accrual loans with a
recorded book value of $19.5 million and $12.0 million in 1997 and 1996,
respectively, was not estimated because it was not practicable to reasonably
assess the credit adjustment that would be applied in the marketplace for such
loans.
40
41
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the carrying amounts and estimated fair values of
financial instrument liabilities and other off-balance sheet financial
instruments at December 31, 1997 and 1996:
1997 1996
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Demand deposits and savings.............. $1,086,836 $1,086,836 $1,033,693 $1,033,693
Time deposits............................ 1,440,207 1,452,360 1,317,797 1,332,432
Short-term borrowings.................... 647,509 649,771 549,081 550,319
Long-term borrowings..................... 159,125 161,323 131,612 131,614
Commitments to extend credit............. -- (11) -- (488)
Standby letters of credit................ (295) (681) (234) (595)
Interest rate swap agreements............ (459) (1,075) (20) (103)
Interest rate floor agreements........... 1,072 183 147 172
Interest rate cap agreements............. 941 13 -- --
Forward contracts........................ -- (172) -- (102)
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. 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 to terminate the contracts or agreements, using
current rates and, when appropriate, the current creditworthiness of the
customer. 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. Changes in these assumptions could significantly
affect these estimates. 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.
41
42
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, 1997 and 1996, follows:
1997 1996
---- ----
(IN THOUSANDS)
Land.................................................... $ 9,694 $ 9,450
Buildings and improvements.............................. 53,956 52,862
Furniture and equipment................................. 39,348 39,058
Leasehold improvements.................................. 5,520 5,250
Construction in progress................................ 1,269 286
-------- --------
Total premises and equipment............................ $109,787 $106,906
Accumulated depreciation and amortization............... (55,013) (50,339)
-------- --------
PREMISES AND EQUIPMENT, NET................... $ 54,774 $ 56,567
======== ========
NOTE 7--IMPAIRMENT OF LONG-LIVED ASSETS
The Company recognized an impairment charge of $2,081,000 in 1997 related
to the write-off of data processing hardware and software resulting from the
decision to outsource this function in the future, and a charge in 1995 totaling
$3,269,000 in conjunction with the adoption of FAS No. 121--"Accounting for the
Impairment of Long-Lived Assets". These charges resulted from changes in
circumstances that indicated the carrying values of assets noted below may not
be fully recoverable. The charges were comprised of the following:
1997 1995
AMOUNT AMOUNT
------ ------
(IN THOUSANDS)
EDP hardware/software....................................... $2,081 $ --
Customer list intangibles and goodwill...................... -- 1,674
Bank facilities............................................. -- 1,595
------ ------
Total impairment charge................................... $2,081 $3,269
====== ======
The 1997 write-off of data processing hardware and software was based on an
analysis of equipment and software that would not provide future value as a
result of the decision to outsource core bank data processing.
The 1995 write-down of the customer list intangible at the collection
agency was based on an analysis of net revenues from the original acquired
customer list. The fair value of the customer list intangible and related
goodwill was calculated by estimating future cash flows from the original
acquired customer list. This analysis demonstrated a reduction of profitability
from the original customer base, which was caused by a loss of customers and
reduced volumes from other customers. Accordingly, the remaining unamortized
balance of the customer list intangible was considered to be partially impaired
and was written-down by $669,000. The entire unamortized balance of goodwill
totaling $865,000 was written-off, as the goodwill was directly identified with
the impaired customer list. The collection agency was sold in December, 1997.
The remaining 1995 unamortized customer list intangible acquired from a
local insurance agency, with a balance of $140,000, was written-off. This
write-off was primarily caused by an analysis of the performance since the
August 1994 acquisition, which disclosed lower than anticipated renewal rates in
comparison to historical experience prior to the acquisition.
The write-down of bank facilities was based on the results of engineering
studies and appraisals conducted in 1995 that identified concerns regarding the
suitability of the buildings as income producing
42
43
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
properties. As a result, the Company vacated non-banking related tenants and
began activities to dispose of the buildings. The write-down was based on an
estimate of future benefits from the continuing use of the properties as bank
facilities.
NOTE 8--MORTGAGE SERVICING RIGHTS
The unpaid principal balance of mortgage loans serviced for others, which
are not included on the consolidated balance sheets, was $1,013,689,000 and
$1,024,920,000 at December 31, 1997 and 1996, respectively. Of this amount, the
Company has recorded both originated and purchased capitalized mortgage
servicing rights, as shown below, on mortgage loans serviced balance of
$553,869,000 as of December 31, 1997. 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 122, 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, 1997 and 1996, respectively:
1997 1996
---- ----
(IN THOUSANDS)
Unamortized cost of mortgage servicing rights.............. $6,091 $5,154
Valuation allowance........................................ (284) --
------ ------
Carrying value of mortgage servicing rights................ $5,807 $5,154
====== ======
Fair value of mortgage servicing rights.................... $6,798 $5,508
====== ======
The following is an analysis of the activity for mortgage servicing rights
and the related valuation allowance for 1997 and 1996:
1997 1996
---- ----
(IN THOUSANDS)
UNAMORTIZED COST OF MORTGAGE SERVICING RIGHTS
Balance at beginning of year............................... $5,154 $4,485
Additions of originated mortgage servicing rights.......... 1,706 1,362
Amortization............................................... (769) (693)
------ ------
Balance at end of year................................... $6,091 $5,154
====== ======
VALUATION ALLOWANCE
Balance at beginning of year............................... $ -- $ 147
Impairment allowance charged to expense.................... 284 76
Recoveries on impairments.................................. -- (223)
------ ------
Balance at end of year................................... $ 284 $ --
====== ======
43
44
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9--SHORT TERM BORROWINGS
At December 31, 1997, 1996 and 1995, short-term borrowings consisted of:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Securities sold under agreements to repurchase...... $528,607 $441,915 $244,300
Federal Home Loan Bank borrowings................... 70,679 74,168 32,146
Federal funds purchased............................. 44,550 14,800 12,759
U.S. Treasury tax and loan note accounts............ 3,673 3,743 4,894
Commercial paper borrowings......................... -- 14,455 3,150
Other short-term borrowings......................... -- -- 1,735
-------- -------- --------
TOTAL SHORT-TERM BORROWINGS....................... $647,509 $549,081 $298,984
======== ======== ========
Additional details on securities sold under agreements to repurchase are as
follows:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Average balance during the year..................... $559,344 $398,701 $202,833
Maximum month-end balance during the year........... 660,774 458,540 285,269
Weighted average rate during the year............... 5.75% 5.55% 6.04%
Weighted average rate at December 31................ 5.82% 5.37% 5.48%
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
$25,000,000. 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. The commercial paper
agreement was primarily established for the purpose of funding consumer finance
receivables and mortgage loans held for sale. This agreement may be terminated
at any time by written notice of either the Issuer or the Company.
NOTE 10--LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at December 31, 1997 and
1996:
1997 1996
---- ----
(IN THOUSANDS)
Term loan................................................... $ -- $ 13,600
Federal Home Loan Bank borrowings........................... 117,195 111,514
Capital Trust preferred securities.......................... 40,000 --
Other long-term borrowings.................................. 1,930 6,498
-------- --------
TOTAL LONG-TERM BORROWINGS........................ $159,125 $131,612
======== ========
Several of the Company's subsidiary banks periodically borrowed additional
funds from the Federal Home Loan Bank in connection with the purchase of
mortgage-backed securities. The ending balance of the borrowings was
$117,195,000 and $111,514,000 at December 31, 1997 and 1996, respectively. The
average maturity of these borrowings at December 31, 1997 is 3.6 years, with a
weighted average borrowing rate of 5.64%.
On March 31, 1997, the Company issued $40 million of capital securities
through AMCORE Capital Trust I ("Trust"), a statutory business trust. 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,
44
45
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 from the
January 1993 acquisition of a local collection agency, which had a balance of
$1,930,000 and $2,231,000 at December 31, 1997 and 1996, respectively. The note
requires annual principal payments of $444,000 through 2002. The note was
discounted at an interest rate of 8.0%.
Scheduled reductions of long-term borrowings are as follows:
TOTAL
-----
(IN THOUSANDS)
1998........................................... $ 392
1999........................................... 28,169
2000........................................... 31,948
2001........................................... 498
2002........................................... 55,013
Thereafter..................................... 43,105
--------
TOTAL................................ $159,125
========
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to effectively manage its exposure to market risk.
Credit risk is the possibility that the Company will incur a loss due to
the other party's failure to perform under its contractual obligations. The
Company's exposure to credit loss in the event of non-performance by the other
party with regard to commitments to extend credit and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it
does for actual extensions of credit. The credit risk involved for commitments
to extend credit and in issuing standby letters of credit is essentially the
same as that involved in extending loans to customers. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, securities, inventory, property and equipment
and income-producing commercial properties.
Market risk is the possibility that, due to changes in interest rates or
other economic conditions, the Company's net interest income will be adversely
affected. The financial instruments utilized by the Company to manage this risk
include interest rate swaps, 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, floor and cap agreements and
forward contracts represent only limited exposure to credit risk.
45
46
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the contract amount of the Company's exposure to off-balance
sheet risk as of December 31, 1997 and 1996, is as follows (in thousands):
1997 1996
---- ----
Financial instruments whose contract amount represent credit
risk only:
Commitments to extend credit.............................. $437,942 $437,000
Standby letters of credit................................. 54,494 46,247
Financial instruments whose contract or notional amount
represent market risk only:
Interest rate swap agreements............................. 270,000 145,000
Interest rate floor agreements............................ 145,000 50,000
Interest rate cap agreements.............................. 75,000 --
Forward contracts......................................... 23,664 14,267
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.
An interest rate swap agreement is the most common 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, 1997.
46
47
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a table outlining the nature and terms of each swap agreement
as of December 31, 1997:
NOTIONAL MATURITY
TYPE OF SWAP AMOUNT (000'S) PAY RECEIVE DATE
------------ -------------- --- ------- --------
Fixed Rate............ $40,000 Fixed (6.050%) 3 Month LIBOR 09/05/98
Fixed Rate............ 25,000 Fixed (5.255%) 3 Month LIBOR 03/08/99
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 Rate............ 70,000 Fixed (8.520%) PRIME 07/15/01
Fixed Rate............ 5,000 Fixed (8.410%) PRIME 08/06/01
Fixed Rate............ 20,000 Fixed (8.520%) PRIME 09/22/01
Indexed Amortizing.... 25,000 3 Month LIBOR minus 15 BP Fixed (7.000%) 08/06/07
Indexed Amortizing.... 15,000 3 Month LIBOR minus 15 BP Fixed (7.000%) 08/27/07
Commercial Paper...... 5,000 Fixed (5.980%) Commercial Paper 05/21/98
Commercial Paper...... 5,000 Fixed (5.825%) Commercial Paper 10/09/98
(BP = basis points)
The fixed rate swap agreements totaling $100,000,000 where the Company
receives 3 month LIBOR, are used to hedge market risk associated with the
repurchase agreements used in the investment leveraging program. The fixed rate
swap agreements totaling $120,000,000 where the Company receives PRIME, are used
to hedge market risk associated with fixed rate loans. The indexed amortizing
swap agreements totaling $40,000,000 where the Company receives 7.000%, are used
to lower the Company's cost of deposits. The $10,000,000 of commercial paper
swap agreements was originally entered into to hedge the interest rate risk
associated with commercial paper borrowings. This commercial paper borrowing
arrangement has no outstanding balances payable, and these agreements are now
used to hedge repurchase agreements.
The Company is also party to various interest rate floor contracts with a
notional amount totaling $145,000,000. Interest rate floor contracts totaling
$50,000,000 provides the Company with a market risk hedge on the mortgage-backed
security portfolio in the event of a significant decline in interest rates.
Interest rate floor contracts totaling $20,000,000 are used to hedge market risk
associated with mortgage servicing assets. The remaining $75,000,000 of interest
rate floor contracts and the corresponding $75,000,000 of interest rate caps
provide the Company with a market risk hedge on the Company's 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
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 3 month LIBOR. Any gains or losses on swap, floor, or
cap contracts closed out prior to the maturity date are recognized ratably over
the remaining life of the contract.
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
47
48
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred and recorded upon either the expiration or exercise date of the option.
If the option is exercised by the purchaser, the premium income is recognized as
a component of the gain or loss on the underlying security. If the option
expires unexercised, the premium income is recognized as other non-interest
income. There were no call option agreements outstanding at December 31, 1997.
NOTE 12--RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Under current banking law, the banking subsidiaries of the Company are
limited in the amount of dividends they can pay without obtaining prior approval
from bank regulatory agencies. As of December 31, 1997, approximately
$49,256,000 was available for payment to the Company without regulatory
approval.
The subsidiaries are also limited as to the amount they 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, 1997, the maximum amount available for transfer
from the subsidiaries to the Company in the form of loans approximated
$28,257,000.
NOTE 13--STOCK INCENTIVE AND EMPLOYEE BENEFIT PLANS
At December 31, 1997, 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 issuance
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 issued generally become
exercisable six months after the date of grant 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 these
incentive plans. All options outstanding at year end are exercisable.
1997 1996 1995
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
Options outstanding at beginning of
year.................................. 1,384,017 $11.04 1,139,776 $10.14 1,012,434 $ 9.33
Options granted......................... 295,875 18.50 350,625 13.33 274,164 12.03
Options exercised....................... (258,602) 10.42 (98,134) 8.60 (146,822) 8.01
Options lapsed.......................... (15,867) 15.80 (8,250) 13.01 -- --
--------- ------ --------- ------ --------- ------
Options outstanding at end of year...... 1,405,423 $12.68 1,384,017 $11.04 1,139,776 $10.14
========= ====== ========= ====== ========= ======
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,
48
49
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, 1996 and 1995 was approximately $60,000, $354,000 and $567,000,
respectively. The following table presents certain information with respect to
issuances pursuant to these plans.
1997 1996 1995
------------------ ----------------- -----------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
Units outstanding at beginning of year...... 336,568 -- 330,879 -- 315,612 --
Units granted............................... 113,253 -- 104,298 -- 122,163 --
Units paid.................................. (113,883) $4.81 (98,609) $4.45 (97,155) $4.45
Units forfeited............................. (53,552) -- 0 -- (9,741) --
-------- ----- ------- ----- ------- -----
Units outstanding at end of year............ 282,386 -- 336,568 -- 330,879 --
======== ===== ======= ===== ======= =====
The following table presents a summary of issuances pursuant to these
incentive plans.
1997 1996 1995
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
Options outstanding at end of year...... 1,405,423 $12.68 1,384,017 $11.04 1,139,776 $10.14
Units outstanding at end of year........ 282,386 -- 336,568 -- 330,879 --
Available to grant under Plan at year
end................................... 53,814 -- 60,446 -- 195,810 --
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for stock option grants to employees issued pursuant to the Plan. 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 1997, 1996 and 1995, respectively: dividend rates of
1.79%, 3.20% and 3.14%; price volatility of 69.95%, 21.71% and 33.96%; risk-free
interest rates of 6.64%, 6.34% and 6.22%; and expected lives of 6.5 for all
years.
1997 1996 1995
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net Income:
As reported.................................... $28,664 $31,876 $23,025
Pro forma...................................... 26,690 31,191 22,425
Basic earnings per share:
As reported.................................... $ 1.07 $ 1.20 $ 0.87
Pro forma...................................... 0.99 1.17 0.85
Diluted earnings per share:
As reported.................................... $ 1.05 $ 1.18 $ 0.86
Pro forma...................................... 0.97 1.16 0.84
DIRECTORS' STOCK PLANS. During 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, 1997, 1996 and 1995 was approximately $370,000,
$467,000 and $280,000, respectively.
49
50
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997, 1996 and 1995 related to this statement was $82,000, $107,000
and $86,000, respectively. The transition obligation, representing the present
value of future payments at the adoption of the statement, 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 will have a ten-year term and will generally become
exercisable twelve months after the grant date 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.
1997 1996 1995
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
Options outstanding at beginning of year.... 130,500 $13.11 63,750 $12.87 13,500 $13.42
Options granted............................. 69,000 18.50 75,000 13.33 51,750 $12.75
Options exercised........................... (6,000) 13.06 -- -- -- --
Options lapsed.............................. (750) 13.33 (8,250) 13.23 (1,500) 13.42
------- ------ ------- ------ ------- ------
Options outstanding at end of year.......... 192,750 $19.67 130,500 $13.11 63,750 $12.87
======= ====== ======= ====== ======= ======
Available to grant under Plan at year end... 101,250 -- 169,500 -- 236,250 --
======= ====== ======= ====== ======= ======
OPTIONS SUMMARY. The following table presents certain information with
respect to issuances of stock options pursuant to all plans discussed above:
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ ----------- ---------------- ----------------
$ 5.00 - 7.80 ...................................... 240,739 3.0years $ 6.88
9.75 - 11.70 ...................................... 199,525 4.8 10.11
11.70 - 13.65 ...................................... 806,300 6.9 13.07
17.55 - 19.50 ...................................... 351,609 9.2 18.52
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 account and personal
savings account [401(k)]. The expense related to the Security Plan and other
similar plans from FSB and NBA for the years ended December 31, 1997, 1996 and
1995 was approximately $2,763,000, $3,248,000 and $2,374,000, 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.
50
51
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14--INCOME TAXES
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Currently paid or payable................................... $12,735 $12,293 $ 8,947
Deferred.................................................... (3,817) (132) (1,742)
------- ------- -------
TOTAL............................................. $ 8,918 $12,161 $ 7,205
======= ======= =======
The effective tax rates on income for 1997, 1996, and 1995 were 23.7%,
27.6% and 23.8%, 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,
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Income tax at statutory rate................................ $13,154 $15,413 $10,581
Increase (decrease) resulting from:
Tax-exempt income......................................... (5,027) (4,718) (4,298)
State income taxes, net of federal benefit................ (301) 1,346 785
Non-deductible expenses, net.............................. 1,581 356 546
Other, net................................................ (489) (236) (409)
------- ------- -------
TOTAL............................................. $ 8,918 $12,161 $ 7,205
======= ======= =======
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax liabilities and deferred tax assets are
as follows:
AT DECEMBER 31,
---------------------
1997 1996
---- ----
(IN THOUSANDS)
Deferred tax assets:
Deferred compensation..................................... $ 4,094 $ 3,936
Securities................................................ -- 1,085
Allowance for loan and lease losses....................... 7,784 6,664
Other..................................................... 4,257 529
------- -------
Total deferred tax assets.............................. $16,135 $12,214
------- -------
Deferred tax liabilities:
Securities................................................ $ 5,895 --
Premises and equipment.................................... 4,946 5,571
Other..................................................... 4,167 2,458
------- -------
Total deferred tax liabilities......................... $15,008 $ 8,029
------- -------
TOTAL DEFERRED TAX ASSET............................... 1,127 4,185
Less: Tax effect of net unrealized (gain) loss on securities
available for sale reflected in stockholders' equity... (5,496) 1,379
------- -------
NET DEFERRED TAX ASSET................................. $ 6,623 $ 2,806
======= =======
No valuation allowance was considered necessary.
51
52
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15--EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" (FAS No. 128). FAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the FAS No. 128
requirements.
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of shares outstanding of 26,862,000, 26,649,000 and
26,504,000 for 1997, 1996 and 1995, respectively.
Diluted earnings per share is determined by dividing net income for the
year by the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents assume exercise of stock
options and use of proceeds to purchase treasury stock at the average market
price for the period. The weighted average shares outstanding were 27,405,000,
26,987,000 and 26,856,000 for 1997, 1996 and 1995, respectively.
NOTE 16--CAPITAL REQUIREMENTS
The Company and its banking subsidiaries (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,
1997, that the Regulated Companies meet all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency 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.
52
53
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's and each significant 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, 1997:
Total Capital (to Risk Weighted Assets):
CONSOLIDATED............................... $326,271 14.38% $181,574 >=8.00% $226,938 >=10.00%
AMCORE Bank N.A. Rockford.................. 118,710 11.11 85,493 >=8.00 106,866 >=10.00
AMCORE Bank N.A. Rock River Valley......... 55,270 14.61 30,267 >=8.00 37,834 >=10.00
Tier 1 Capital (to Risk Weighted Assets):
CONSOLIDATED............................... $306,364 13.50% $ 90,775 >=4.00% $136,163 >=6.00%
AMCORE Bank N.A. Rockford.................. 110,717 10.36 42,747 >=4.00 64,120 >=6.00
AMCORE Bank N.A. Rock River Valley......... 51,731 13.67 15,134 >=4.00 22,700 >=6.00
Tier 1 Capital (to Average Assets):
CONSOLIDATED............................... $306,364 8.31% $147,388 >=4.00% $184,235 >=5.00%
AMCORE Bank N.A. Rockford.................. 110,717 6.82 64,934 >=4.00 81,167 >=5.00
AMCORE Bank N.A. Rock River Valley......... 51,731 7.65 27,044 >=4.00 33,806 >=5.00
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
CONSOLIDATED............................... $265,565 13.04% $162,917 >=8.00% $203,647 >=10.00%
AMCORE Bank N.A. Rockford.................. 97,304 10.40 74,822 >=8.00 93,527 >=10.00
AMCORE Bank N.A. Rock River Valley......... 51,202 14.88 27,526 >=8.00 34,407 >=10.00
Tier 1 Capital (to Risk Weighted Assets):
CONSOLIDATED............................... $246,250 12.09% $ 81,459 >=4.00% $122,188 >=6.00%
AMCORE Bank N.A. Rockford.................. 89,966 9.62 37,411 >=4.00 56,116 >=6.00
AMCORE Bank N.A. Rock River Valley......... 47,968 13.94 13,763 >=4.00 20,644 >=6.00
Tier 1 Capital (to Average Assets):
CONSOLIDATED............................... $246,250 7.44% $132,425 >=4.00% $165,531 >=5.00%
AMCORE Bank N.A. Rockford.................. 89,966 6.14 58,649 >=4.00 73,311 >=5.00
AMCORE Bank N.A. Rock River Valley......... 47,968 8.52 22,519 >=4.00 28,149 >=5.00
53
54
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED PARENT COMPANY BALANCE SHEETS
DECEMBER 31,
--------------------
1997 1996
---- ----
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 955 $ 230
Securities available for sale............................... 431 269
Securities held to maturity................................. -- 107
Short-term investments...................................... 10,000 2,000
Due from subsidiaries....................................... 933 1,188
Loans to financial services subsidiaries.................... 22,763 26,209
Investment in bank subsidiaries............................. 285,374 246,034
Investment in financial services subsidiaries............... 6,049 8,551
Premises and equipment, net................................. 2,888 2,791
Other assets................................................ 8,008 5,073
-------- --------
TOTAL ASSETS.............................................. $337,401 $292,452
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term borrowings....................................... $ -- $ 14,455
Long-term borrowings........................................ 43,168 15,831
Other liabilities........................................... 6,757 4,746
-------- --------
TOTAL LIABILITIES......................................... $ 49,925 35,032
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock............................................. $ -- $ --
Common stock................................................ 6,152 6,152
Additional paid-in capital.................................. 73,262 67,363
Retained earnings........................................... 206,235 191,484
Treasury stock and other.................................... (6,547) (5,623)
Net unrealized gain (loss) on securities available for sale,
net of taxes.............................................. 8,374 (1,956)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................ $287,476 $257,420
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $337,401 $292,452
======== ========
54
55
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Income:
Dividends from subsidiaries............................... $17,749 $21,492 $14,740
Interest income........................................... 2,284 1,260 484
Management fees and other................................. 21,436 18,833 11,434
------- ------- -------
TOTAL INCOME........................................... $41,469 $41,585 $26,658
------- ------- -------
Expenses:
Interest expense.......................................... $ 3,801 $ 2,090 $ 1,909
Compensation expense and employee benefits................ 14,455 12,846 10,187
Professional fees......................................... 2,540 1,192 1,058
Other..................................................... 12,388 8,871 6,917
------- ------- -------
TOTAL EXPENSES......................................... $33,184 $24,999 $20,071
------- ------- -------
Income before income tax benefits and equity in
undistributed net income of subsidiaries.................. $ 8,285 $16,586 $ 6,587
Income tax benefits....................................... (3,231) (2,195) (3,592)
------- ------- -------
Income before equity in undistributed net income of
subsidiaries.............................................. $11,516 $18,781 $10,179
Equity in undistributed net income of subsidiaries.......... 17,148 13,095 12,846
------- ------- -------
NET INCOME............................................. $28,664 $31,876 $23,025
======= ======= =======
55
56
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 28,664 $ 31,876 $ 23,025
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,531 1,026 837
Non-employee directors compensation expense............ 370 467 280
Equity in undistributed net income of subsidiaries..... (17,148) (13,095) (12,846)
(Increase) decrease in due from subsidiaries........... 255 (831) 247
(Increase) decrease in other assets.................... (2,935) 184 (553)
Increase (decrease) in other liabilities............... 2,011 (1,089) 3,269
Other, net............................................. 560 471 393
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... $ 13,308 $ 19,009 $ 14,652
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities...................................... (14,071) (345) (101)
Proceeds from maturities of securities...................... 14,197 101 30
Net (increase) decrease in short term investments........... (8,000) (2,000) 1,000
Dissolution of less-active state banking charters........... 96 -- 2,000
Proceeds from sale of collection agency..................... 700 -- --
Net investment made in subsidiaries......................... (10,788) -- (1,000)
Loans to subsidiaries....................................... (13,470) (24,364) (5,748)
Payments received on loans to subsidiaries.................. 16,916 7,343 780
Transfer of premises and equipment to (from) affiliates..... (114) 1,218 --
Premises and equipment expenditures......................... (1,514) (1,234) (1,819)
-------- -------- --------
NET CASH REQUIRED FOR INVESTING ACTIVITIES........ $(16,048) $(19,281) $ (4,858)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings............ (14,455) 11,305 3,150
Proceeds from long-term borrowings.......................... 41,238 -- --
Payment of long-term borrowings............................. (14,044) (3,844) (5,444)
Dividends paid.............................................. (12,130) (9,096) (8,199)
Proceeds from the sale of common stock...................... 430 -- --
Proceeds from exercise of incentive stock options........... 3,753 844 1,234
Purchase of treasury stock.................................. (1,327) -- --
-------- -------- --------
NET CASH PROVIDED BY (REQUIRED FOR) FINANCING
ACTIVITIES...................................... $ 3,465 $ (791) $ (9,259)
-------- -------- --------
Net change in cash and cash equivalents..................... $ 725 $ (1,063) $ 535
Cash and cash equivalents:
Beginning of year......................................... 230 1,293 758
-------- -------- --------
End of period............................................. $ 955 $ 230 $ 1,293
======== ======== ========
56
57
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
AMCORE Financial, Inc.
Rockford, Illinois
We have the audited the accompanying consolidated balance sheets of AMCORE
Financial, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 from
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
[ LOGO ]
McGladrey & Pullen, LLP
Rockford, Illinois
January 19, 1998
57
58
CONDENSED QUARTERLY EARNINGS & STOCK PRICE SUMMARY (UNAUDITED)
1997 1996
---------------------------------------- ----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income............. $61,274 $63,333 $68,130 $68,770 $54,432 $58,413 $60,637 $61,554
Interest expense............ 33,926 35,523 39,666 39,845 29,102 32,051 33,517 34,232
------- ------- ------- ------- ------- ------- ------- -------
Net interest income......... $27,348 $27,810 $28,464 $28,925 $25,330 $26,362 $27,120 $27,322
Provision for loan losses... 1,915 1,936 2,673 521 993 1,066 2,296 1,073
Other income................ 11,989 10,290 11,074 14,355 9,821 9,888 12,023 10,538
Other expense............... 26,034 33,792 24,704 31,098 24,625 24,386 25,265 24,663
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes..................... $11,388 $ 2,372 $12,161 $11,661 $ 9,533 $10,798 $11,582 $12,124
Income taxes................ 3,149 340 3,114 2,315 2,635 3,038 3,257 3,231
------- ------- ------- ------- ------- ------- ------- -------
Net Income.................. $ 8,239 $ 2,032 $ 9,047 $ 9,346 $ 6,898 $ 7,760 $ 8,325 $ 8,893
======= ======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings.............. $ 0.31 $ 0.07 $ 0.34 $ 0.35 $ 0.26 $ 0.29 $ 0.31 $ 0.34
Diluted earnings............ $ 0.31 $ 0.07 $ 0.33 $ 0.34 $ 0.26 $ 0.29 $ 0.30 $ 0.33
Dividends................... 0.10 0.11 0.12 0.12 0.09 0.10 0.08 0.11
Stock price ranges-high..... 19.50 19.33 24.00 25.94 14.50 14.17 14.17 18.17
-low....... 15.33 17.17 18.50 22.00 13.50 13.00 12.58 13.58
-close..... 18.83 18.17 22.75 25.13 13.91 13.17 13.67 17.83
- ---------------
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.
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 1998
Annual Meeting dated March 26, 1998 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 1998 Annual Meeting dated March 26, 1998
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement and Notice of 1998 Annual Meeting dated March 26, 1998
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement and Notice of 1998 Annual Meeting dated March 26, 1998
is incorporated herein by reference.
58
59
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, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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).
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).
10.3A 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.)
10.3B Amended and Restated Transitional Compensation Agreement
dated June 1, 1996 between AMCORE Financial, Inc. and the
following individuals: John R. Hecht, and James S. Waddell.
(Incorporated by reference to Exhibit 10.3B of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.)
10.3C 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.)
59
60
10.3D Transitional Compensation Agreement dated June 1, 1996
between AMCORE Financial, Inc. and the following
individuals: William J. Hippensteel, Alan W. Kennebeck 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.)
10.3E Transitional Compensation Agreement dated May 21, 1997
between AMCORE Financial, Inc. and Kenneth E. Edge.
(Incorporated by reference to Exhibit 10.3E of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.)
10.3F Transitional compensation Agreement dated May 21, 1997
between AMCORE Financial, Inc. and Charlie A. Zanck.
(Incorporated by reference to Exhibit 10.3F of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.)
10.4 Commercial Paper Placement Agreement dated November 10, 1995
with M&I Marshall and Ilsley Bank (Incorporated by reference
to Exhibit 10.6 to AMCORE's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.5A Executive Insurance Agreement dated March 1, 1996 between
AFI and the following executives: Robert J. Meuleman and
James S. Waddell (Incorporated by reference to Exhibit 10.6
of AMCORE's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
10.5B Executive Insurance Agreement dated May 21, 1997 between AFI
and Kenneth E. Edge. (Incorporated by reference to Exhibit
10.5B of AMCORE's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
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).
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 First Amendment to Loan Agreement with M & I Marshall and
Ilsley Bank dated November 9, 1996. (Incorporated by
reference to Exhibit 10.8 of AMCORE's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.)
10.9 Second Amendment to Loan Agreement with M & I Marshall and
Ilsley Bank dated September 29, 1997. (Incorporated by
reference to Exhibit 10.9 of AMCORE's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.)
13 1997 Summary Annual Report to Stockholders.
21 Subsidiaries of the Registrant
22 Proxy Statement and Notice of 1998 Annual Meeting
24 Powers of Attorney
27 Financial Data Schedule
(b) One report on Form 8-K was filed with the Commission and dated March 4,
1998 announcing the acquisition of Investors Management Group, Ltd.
(Incorporated by reference to AMCORE's Form 8-K as filed with the Commission on
March 4, 1998.)
60
61
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 26th day of March 1998.
AMCORE FINANCIAL, INC.
By: John
Hecht
------------------------------------
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 26th day of March, 1998 by the following persons on
behalf of the Registrant in the capacities indicated.
NAME TITLE
---- -----
Robert Meuleman
- ----------------------------------------------------- President and Chief Executive Officer
Robert J. Meuleman (principal executive officer)
John Hecht
- ----------------------------------------------------- Executive Vice President and Chief Financial
John R. Hecht Officer
(principal financial officer and principal
accounting officer)
Directors: Milton R. Brown, Carl J. Dargene, Richard C. Dell, Robert A. Doyle,
Lawrence E. Gloyd, John A. Halbrook, Frederick D. Hay, William R.
McManaman, Robert J. Meuleman, Ted Ross, Robert J. Smuland, Jack D.
Ward and Gary L. Watson
61
Robert Meuleman
- -----------------------------------------------------
Robert J. Meuleman*
JOHN HECHT
- -----------------------------------------------------
John R. Hecht*
- ------------
* Attorney in Fact*
62