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UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-13393
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AMCORE FINANCIAL, INC.
NEVADA 36-3183870
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
501 Seventh Street, Rockford, Illinois 61104 Telephone Number (815) 968-2241
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.22 par value
Common Stock Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 1999, 28,262,466 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 $593,726,000.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 1999 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 1
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................. 30
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 63
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 63
Item 11 Executive Compensation...................................... 63
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 63
Item 13 Certain Relationships and Related Transactions.............. 63
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 64
SIGNATURES........................................................... 66
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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. The
operations are divided into three business segments: Banking, Trust and Asset
Management, and Mortgage Banking. AMCORE owns directly or indirectly all of the
outstanding common stock of each of its subsidiaries. AMCORE provides the
subsidiaries with advice and counsel on policies and operating matters among
other things.
BANKING SEGMENT
AMCORE directly owns two second tier bank holding companies. Country Bank
Shares Corporation (Country) is a three-bank holding company and owns AMCORE
Bank N.A., South Central, a nationally chartered bank, AMCORE Bank Clinton, and
AMCORE Bank Montello, both state-chartered banks. Midwest Federal Financial
Corp. (Midwest) is a one-bank holding company and owns AMCORE Bank Central
Wisconsin, a federal stock savings bank. AMCORE also directly owns AMCORE Bank
N.A., Rockford (ROCKFORD), AMCORE Bank N.A., Rock River Valley, AMCORE Bank
N.A., North Central, AMCORE Bank N.A., Northwest, all nationally chartered
banks, and AMCORE Bank Aledo (ALEDO), a state chartered bank. AMCORE also
directly owns AMCORE Consumer Finance Company, Inc. (FINANCE), a consumer
finance company. 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, McHenry, 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 25 locations throughout south-central Wisconsin. The primary service
region includes the Wisconsin cities of Madison, Monroe, Clinton, Argyle,
Baraboo, Mt. Horeb, Montello and the surrounding communities.
Through its bank affiliates, AMCORE provides various personal banking,
commercial banking and related financial services. AMCORE also conducts banking
business through ten supermarket branches, which gives the customer convenient
access to bank services seven days a week.
Personal Banking - Personal banking services to individuals include demand,
savings and time deposit accounts. Loan services include installment loans,
mortgage loans, overdraft protection, personal credit lines and credit card
programs. AMCORE Vintage Funds, a proprietary family of mutual funds, are also
marketed through each 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. FINANCE 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.
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
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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.
TRUST AND ASSET MANAGEMENT SEGMENT
AMCORE Investment Group, N.A. (AIG) was converted from a trust company
charter to a nationally chartered non-depository bank in 1996 and owns AMCORE
Investment Services, Inc. (AIS), Investors Management Group-Rockford (IMGR)
previously known as AMCORE Capital Management, Inc., and Investors Management
Group-Des Moines (IMG). AIG provides trust services, employee benefit plan and
estate administration and various other services to corporations and
individuals.
AIS, a wholly-owned subsidiary of AIG, was incorporated under the laws of
the State of Illinois in October 1990 and in July 1991 became a member of the
National Association of Security Dealers (NASD). AIS is a full-service brokerage
company that offers a full range of investment alternatives including annuities,
mutual funds, stocks, bonds and AMCORE's Vintage Mutual Fund family.
IMGR was incorporated under the laws of the State of Illinois in December
1992 and is a wholly-owned subsidiary of AIG. IMGR manages the assets of
AMCORE's Vintage Mutual Fund family, which were introduced in December 1992, as
well as trust and other private investor assets.
IMG was incorporated under the laws of the State of Iowa in June 1992 and
became a wholly-owned subsidiary of AIG on February 17, 1998. IMG is an asset
management company whose primary clients include mutual funds, insurance
companies, banks, retirement plans, foundations, endowments, and individuals.
IMG also provides the mutual fund administration for the AMCORE Vintage Mutual
Funds.
AMCORE Insurance Group, Inc. (AIGI) was incorporated under the laws of the
State of Illinois in March 1994 and is a wholly-owned subsidiary of ALEDO.
AIGI's main office is in South Beloit, Illinois. AIGI obtained approval from the
State of Illinois Office of Banks and Real Estate to engage in the insurance
agency business, and offers a complete line of commercial and individual
insurance products including life, homeowners and automobile insurance.
MORTGAGE SEGMENT
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.
INACTIVE
AMCORE Financial Life Insurance Company (AFLIC), a wholly-owned subsidiary,
was incorporated under the laws of the State of Arizona in 1984. Prior to 1998,
through AFLIC, AMCORE engaged in reinsuring credit life and accident and health
insurance in conjunction with the lending activities of the affiliate banks. In
January 1998, AFLIC ceded most of its re-insurance risk to an unaffiliated
company. Since January 1998, all new credit life and accidental and health
insurance has been written directly with the same unaffiliated company. As such,
AFLIC is currently an inactive subsidiary of AMCORE.
AMCORE Investment Banking, Inc. (AIB) was incorporated under the laws of
the State of Illinois as a wholly-owned subsidiary in November 1993. AIB
obtained approval in July 1993 from the Board of Governors of the Federal
Reserve System (FRB) to perform financial advisory and private placement
services. In 1995, AIB withdrew its brokerage membership with the NASD and, as
such, is currently an inactive subsidiary of AMCORE.
See Note 15 for AMCORE's segment financial information.
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COMPETITION
Active competition exists for all services offered by AMCORE's bank and
non-bank affiliates with other national and state banks, savings and loan
associations, credit unions, finance companies, personal loan companies,
brokerage and mutual fund companies, mortgage bankers, insurance agencies,
financial advisory services, and other financial institutions serving the
affiliates' respective market areas. The principal competitive factors in the
banking and financial services industry are quality of services to customers,
ease of access to services and pricing of services, including interest rates
paid on deposits, interest rates charged on loans, and fees charged for
fiduciary and other professional services.
Since 1982, when Illinois multi-bank holding company legislation became
effective, there have been many bank mergers and acquisitions in Illinois. These
combinations have had the effect of increasing the assets and deposits of bank
holding companies involved in such activities. Illinois legislation, effective
December 1, 1990, permitted bank acquisitions in Illinois by institutions
headquartered in any other state which has reciprocal legislation, further
increasing competition. See "Supervision and Regulation".
On September 29, 1994, Congress passed laws allowing interstate banking and
interstate branching. A year later, nationwide interstate banking became
effective allowing institutions to make acquisitions in any state. Beginning
July 1, 1997, interstate branching became effective, and banks can merge with
affiliate banks or establish de novo branches in any state. Individual states,
however, have the right to opt out of interstate branching.
EMPLOYMENT
AMCORE had 1,503 full-time equivalent employees as of March 1, 1999. AMCORE
provides a variety of benefit plans to its employees including health, dental,
group term life and disability insurance, childcare reimbursement, retirement,
profit sharing, 401(k) and flexible spending accounts, stock option, stock
purchase and dividend reinvestment plans. AMCORE believes that its relationship
with its employees is good.
SUPERVISION AND REGULATION
AMCORE is subject to regulations under the Bank Holding Company Act of
1956, as amended (the Act), and is registered with the FRB under the Act. AMCORE
is required by the Act to file quarterly and annual reports of its operations
and such additional information as the FRB may require and is subject, along
with its subsidiaries, to examination by the FRB.
The acquisition of five percent or more of the voting shares or all or
substantially all of the assets of any bank by a bank holding company requires
the prior approval of the FRB and is subject to certain other federal and state
law limitations. The Act also prohibits, with certain exceptions, a holding
company from acquiring direct or indirect ownership or control of more than five
percent of the voting shares of any company which is not a bank and from
engaging in any business other than banking, managing and controlling banks or
furnishing services to banks and their subsidiaries, except that holding
companies may engage in, and may own shares of companies engaged in, certain
businesses found by the FRB to be "so closely related to banking as to be a
proper incident thereto". On August 31, 1993, the FRB approved an amendment to
add certain activities and to reduce the burden on bank holding companies that
desire to conduct these activities by simplifying the regulatory review process.
Under current regulations of the FRB, a holding company and its non-bank
subsidiaries are permitted, among other activities, to engage in such
banking-related businesses as sales and consumer finance, equipment leasing,
computer service bureau and software operations, mortgage banking, brokerage and
financial advisory services. The Act does not place territorial restrictions on
the activities of non-bank subsidiaries of bank holding companies. In addition,
federal legislation prohibits acquisition of "control" of a bank or bank holding
company without prior notice to certain federal bank regulators. "Control" is
defined in certain cases as acquisition of ten percent or more of the
outstanding shares of a bank or bank holding company.
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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, Country and Midwest 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 their state's respective Commissioner of Banks. The
federal stock savings bank is supervised and regularly examined by the Office of
Thrift Supervision (OTS). 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 State of Illinois Office of Banks and Real Estate (OBR).
FINANCE is regulated by the Illinois Department of Financial Institutions. AFLIC
is supervised and examined by the Department of Insurance of the State of
Arizona. Under Arizona law, investments, capital levels and the level of claim
reserves, among other things, are subject to regulation. AIS, IMGR and IMG are
supervised and examined by the NASD and are regulated by the Securities and
Exchange Commission (SEC). AIGI is supervised and examined by the Department of
Insurance of the State of Illinois and is regulated by the OBR.
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, 1998, approximately $44.9 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, 1998, the maximum amount available to AMCORE in the
form of loans approximated $20.3 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, 1998 and 1997.
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
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borrowings, and setting reserve requirements against bank deposits. FRB monetary
policies have had a significant effect on the operating results of banks in the
past and will continue to do so in the future. The general effect of such
policies upon the future business and earnings of each of the subsidiary banks
cannot accurately be predicted.
Interest rate sensitivity has a major impact on the earnings of bank
affiliates. As market rates change, yields earned on assets may not necessarily
move to the same degree as rates paid on liabilities. For this reason, AMCORE
attempts to minimize earnings volatility related to fluctuations in interest
rates through the use of a formal asset/liability management program and certain
off-balance sheet derivative activities. See Item 7 and Note 10 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.............................. 59 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
December 1995.
Kenneth E. Edge................................. 53 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................................... 40 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. Also
President of AIS from July 1995 to December,
1997; and Chief Operating Officer of Piper
Trust Co. from 1993 to July 1995.
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NAME AGE PRINCIPAL OCCUPATION WITHIN THE LAST FIVE YEARS
---- --- -----------------------------------------------
Charie A. Zanck................................. 46 Group Vice President, AMCORE since May 1997.
Previously President and Chief Executive
Officer of Northwest from June 1993 to May
1997.
Lewis R. Jones.................................. 54 Senior Vice President, AMCORE since May 1997.
Previously Vice President and Manager of Bank
Investments from 1995 to May 1997, and Vice
President of IMGR from July 1994 to December
1994. Prior to July, 1994, Vice President and
Funds Manager at Georgia Federal Bank, FSB, in
Atlanta, Georgia.
William T. Hippensteel.......................... 42 Senior Vice President and Corporate Marketing
Director of AMCORE.
Joseph McGougan................................. 38 President and Chief Executive Officer of AMCORE
Mortgage, Inc.
James F. Warsaw................................. 48 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, 1998, AMCORE had 73 locations, of which 53 were owned and
20 were leased. The Banking segment had 71 locations, of which 53 were owned and
18 were leased. The Trust and Asset Management segment and the Mortgage segment
each had one leased facility. All of these offices are considered by management
to be well maintained and adequate for the purpose intended. See Note 6 of the
Notes to Consolidated Financial Statements included under Item 8 of this
document for further information on properties.
ITEM 3. LEGAL PROCEEDINGS
Management believes that no litigation is threatened or pending in which
AMCORE faces potential loss or exposure which will materially affect AMCORE's
financial position or results of operations. 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 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
See Item 6 and 8 of this document for information on stock price ranges and
dividends. The principal market for the quotations of stock prices is the NASDAQ
National Market System. There are approximately 8,200 holders of record of
AMCORE's common stock as of March 1, 1999.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR:
Interest income............................................. $ 290,861 $ 259,959 $ 233,679 $ 202,268 $ 172,279
Interest expense............................................ 168,127 148,960 128,902 104,017 76,761
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Net interest income......................................... 122,734 110,999 104,777 98,251 95,518
Provision for loan and lease losses......................... 7,993 7,045 5,428 3,165 1,751
Non-interest income......................................... 58,748 48,601 43,428 36,874 33,891
Operating expense........................................... 119,594 114,973 98,740 101,730 92,604
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Income before income taxes.................................. 53,895 37,582 44,037 30,230 35,054
Income taxes................................................ 14,314 8,918 12,161 7,205 9,321
---------- ---------- ---------- ---------- ----------
Net income.................................................. $ 39,581 $ 28,664 $ 31,876 $ 23,025 $ 25,733
========== ========== ========== ========== ==========
Return on average assets(1)(2)(3)........................... 0.99% 0.81% 1.00% 0.85% 1.03%
Return on average equity (1)(2)(3).......................... 12.64 10.66 13.14 10.27 12.30
Net interest margin......................................... 3.51 3.59 3.81 4.12 4.48
---------- ---------- ---------- ---------- ----------
AVERAGE BALANCE SHEET:
Total assets................................................ $3,983,600 $3,520,229 $3,181,646 $2,715,520 $2,504,516
Loans and leases, net of unearned income.................... 2,218,972 1,867,355 1,711,850 1,557,375 1,391,037
Earning assets.............................................. 3,768,197 3,325,778 2,967,054 2,501,973 2,294,262
Deposits.................................................... 2,730,173 2,399,423 2,274,191 2,182,327 2,102,098
Long-term borrowings........................................ 278,603 132,533 159,504 34,367 29,004
Stockholders' equity........................................ 313,056 268,996 242,657 224,219 209,161
---------- ---------- ---------- ---------- ----------
ENDING BALANCE SHEET:
Total assets................................................ $4,147,833 $3,667,690 $3,331,995 $2,903,282 $2,607,626
Loans and leases, net of unearned income.................... 2,451,518 1,962,674 1,807,121 1,620,365 1,481,497
Earning assets.............................................. 3,864,852 3,452,398 3,114,450 2,635,111 2,366,480
Deposits.................................................... 2,947,724 2,527,043 2,351,490 2,208,838 2,119,063
Long-term borrowings........................................ 330,361 159,125 131,612 115,752 30,157
Stockholders' equity........................................ 316,083 287,476 257,420 242,096 212,571
---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION ANALYSIS:
Allowance for loan losses to year-end loans................. 1.08% 1.01% 1.07% 1.06% 1.16%
Allowance to non-performing loans........................... 145.24 100.20 156.84 123.06 127.20
Net charge-offs to average loans............................ 0.16 0.34 0.19 0.21 0.17
Non-performing loans to net loans........................... 0.74 1.01 0.68 0.86 0.92
Average long-term borrowings to average equity.............. 88.99 49.27 65.73 15.33 13.87
Average equity to average assets............................ 7.86 7.64 7.63 8.26 8.35
---------- ---------- ---------- ---------- ----------
STOCKHOLDERS' DATA:
Basic earnings per share.................................... $ 1.39 $ 1.07 $ 1.20 $ 0.87 $ 0.97
Diluted earnings per share.................................. 1.36 1.05 1.18 0.86 0.96
Book value per share........................................ 10.96 10.68 9.64 9.10 8.03
Dividends per share......................................... 0.54 0.45 0.38 0.33 0.31
Dividend payout ratio....................................... 38.85% 42.06% 31.67% 37.93% 31.96%
Average common shares outstanding........................... 28,515 26,862 26,649 26,504 26,443
Average diluted shares outstanding.......................... 29,098 27,405 26,970 26,858 26,737
========== ========== ========== ========== ==========
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(1) The 1998 ratios excluding the impact of the $3.3 million, or $.11 per share,
after-tax merger related charges: return on average assets 1.08%; return on
average equity 13.70%
(2) The 1997 ratios excluding the impact of the $6.4 million, or $.23 per share,
after-tax merger related and information systems charges: return on average
assets 1.00%; return on average equity 13.05%
(3) The 1995 ratios excluding the impact of the $3.5 million, or $.13 per share,
after-tax impairment and merger-related charges: return on average assets
0.98%; return on average equity 11.81%
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATION AND
FINANCIAL CONDITION
The following discussion highlights the significant factors affecting the
results of operations and financial condition of AMCORE for the three years
ended December 31, 1998. The discussion should be read in conjunction with the
consolidated financial statements, accompanying notes, and selected financial
data appearing elsewhere within this report.
This review contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of AMCORE. Contemplated or projected,
forecasted or estimated results in such forward-looking statements involve
certain risks and uncertainties including, among others, the following
possibilities: (I) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
formation of new products by new and existing competitors; (II) adverse state
and federal legislation and regulation; (III) failure to obtain new customers
and retain existing customers; (IV) inability to carry out marketing and/or
expansion plans; (V) loss of key executives; (VI) changes in interest rates
including the effect of prepayment; (VII) general economic and business
conditions which are less favorable than expected; (VIII) unanticipated changes
in industry trends; (IX) changes in Federal Reserve Board monetary policies; (X)
inability to realize cost savings anticipated with mergers or data processing
outsourcing; and (XI) higher than expected costs or other difficulties
associated with merger integration, data processing conversion or Year 2000
compliance solutions.
OVERVIEW OF OPERATIONS
AMCORE reported net income of $39.6 million for the year ended December 31,
1998. This compares to $28.7 million and $31.9 million reported for the years
ended 1997 and 1996, respectively. Net income from operations, which excludes
$3.3 million of after-tax merger related charges in the first quarter of 1998
and $6.4 million of after-tax charges related to the Wisconsin bank mergers and
the outsourcing of core bank data processing in the second quarter of 1997, was
$42.9 million and $35.1 million for the years ending December 31, 1998 and 1997,
respectively. This represents an increase of $7.8 million or 22.2% in net income
from operations, when comparing 1998 and 1997. Excluding the 1997 charges, net
income from operations increased $3.2 million or 10.1% when comparing 1997 and
1996. The primary factors contributing to the improved operating earnings
performance when comparing 1998 and 1997 included increases in net interest
income resulting from average earning asset growth of 13.0% and non-interest
income growth mainly from mortgage revenues and trust and asset management
income.
Diluted earnings per share for 1998 were $1.36 compared to $1.05 in 1997
and $1.18 in 1996. Excluding the above mentioned charges of $0.11 per share in
1998 and $0.23 per share in 1997, diluted earnings per share from operations
were $1.47 and $1.28 in 1998 and 1997, respectively. This represents an increase
of $0.19 per share or 14.8% in diluted earnings per share from operations, when
comparing 1998 and 1997.
This level of net income resulted in a return on average equity for 1998 of
12.64% versus 10.66% in 1997 and 13.14% in 1996. AMCORE's return on average
assets for 1998 was 0.99% compared to 0.81% in 1997 and 1.00% in 1996. If the
above mentioned merger and core bank data processing charge are excluded in 1998
and 1997, the return on average equity and return on average assets would be
13.70% and 1.08% in 1998 and 13.05% and 1.00% in 1997.
AMCORE continues to be "well capitalized" as defined by regulatory
guidelines. At December 31, 1998, AMCORE's total capital to risk weighted assets
was 13.43%.
On February 17, 1998, AMCORE acquired Investors Management Group, LTD (IMG)
of Des Moines, Iowa. AMCORE issued 270,139 shares at closing for an approximate
value of $6.0 million. Additional shares valued at $4.8 million may be issued
contingent upon IMG's performance from 1998 through 2000. At December 31, 1998,
additional shares of 70,332 were earned and issued. 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 complements AMCORE's
equity management skills, including the Vintage family of
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mutual funds to bring total assets under management to $4.2 billion at December
31, 1998. The transaction was accounted for using the purchase method of
accounting.
On March 27, 1998, AMCORE completed its merger with Midwest Federal
Financial Corp. (Midwest) of Baraboo, Wisconsin. AMCORE issued 1,912,357 shares
of common stock to the Midwest shareholders to effect the merger. Midwest had
approximately $211 million of assets and nine locations. The transaction was
accounted for as a pooling of interests, however, the size of the transaction
was not material to AMCORE's consolidated financial statements. Therefore,
results previous to the date of acquisition were not restated.
On October 21, 1998, AMCORE announced a stock repurchase program for up to
five percent of its common stock or 1.4 million shares. The repurchased shares
will become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option and
other employee benefit plans. Through March 1, 1999, 1.1 million shares have
been repurchased at an average price of $23.32.
YEAR 2000
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs, operating systems
and other systems can accommodate the date value for the Year 2000. The Year
2000 issue is pervasive, as almost all date-sensitive systems will be affected
to some degree by the rollover of the two-digit year from 99 to 00. Potential
risks of not addressing this issue include business interruption, financial
loss, reputation loss and/or legal liability.
AMCORE has undertaken an enterprise-wide initiative to address the Year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer and other systems to recognize the date change on January 1, 2000.
An assessment of the readiness of third parties that AMCORE interfaces with,
such as vendors, counterparties, customers, payment systems, and others, is
ongoing to mitigate the potential risks that Year 2000 poses. In addition,
AMCORE is assessing the readiness of companies that have borrowed from AMCORE's
subsidiaries to insure that incremental Year 2000-related credit risks are
addressed as part of the existing credit risk management framework. AMCORE's
objective is to try to insure that all aspects of the Year 2000 issue, including
those related to the efforts of third parties, will be fully resolved in time.
However, it is not possible to be sure that all aspects of the Year 2000 issue
which may affect AMCORE, including those related to the effects of customers,
suppliers, or other third parties with whom we conduct business, will not have a
material impact on AMCORE's results of operations or financial condition. AMCORE
has consistently maintained contingency plans for mission critical systems and
business processes to protect assets against unplanned events that would prevent
normal operations. The millennium changeover presents unique risks, some of
which would not be effectively addressed by the existing plans. AMCORE is
examining these risks and developing additional plans to mitigate the effect of
potential impacts and insure continuity of operation throughout the Year 2000
and beyond. The use of the existing contingency planning infrastructure will
assist in providing optimum coverage and re-usability of existing arrangements
and responsibility assignments. AMCORE expects all Year 2000-specific
contingency plans to be completed by June 30, 1999 and related testing to
continue throughout the year.
AMCORE has established a project team to prepare for the Year 2000, which
reports regularly to executive management, the Crisis Management Committee and
the Board of Directors. AMCORE has taken an active approach toward addressing
this issue, and is currently in the process of assessing its information
systems, testing and validating in-house systems, and obtaining validation and
certification of outside systems in an effort to identify and correct potential
problems in advance of the Year 2000. The outsourcing of the core mainframe
system to ALLTEL during 1998 addresses the primary operating systems of AMCORE.
The testing of all mission critical systems is in process and is scheduled to be
substantially completed by March 31, 1999. At this point, the internal costs
associated with the Year 2000 during 1998 and 1999 are estimated at
approximately $2.3 million, of which $1.5 million is for replacement hardware
and software. These items are not anticipated to have a material impact on
future performance. A total of $786,000 has been expensed during 1998.
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EARNINGS REVIEW BY BUSINESS SEGMENT
AMCORE's internal reporting and planning process has identified three
business segments: Banking, Trust and Asset Management, and Mortgage Banking.
Footnote 15 presents a condensed income statement for each segment.
The financial results of each segment are presented as if operated on a
stand-alone basis. There are no comprehensive authorities for management
accounting equivalent to generally accepted accounting principles. Therefore,
the information provided is not necessarily comparable with similar information
from other financial institutions. Additionally, methodologies may change from
time to time as the process is enhanced.
The financial results reflect direct revenue, expenses, assets and
liabilities. The accounting policies used are similar to those described in Note
1 Summary of Significant Accounting Policies. In addition, inter-segment revenue
and expenses are allocated based on an internal cost basis or market price when
available.
BANKING SEGMENT
The Banking segment provides commercial and personal banking services
through its 66 banking locations in northern Illinois and south-central
Wisconsin, and the Consumer Finance subsidiary. The services provided by this
segment include lending, deposits, cash management, automated teller machines,
and other traditional banking services.
The Banking segment's operating profit before merger related charges for
1998 was $40.8 million, an increase of $5.5 million or 15.7% from 1997 levels.
This followed an increase in 1997 of $3.6 million or 11.3% from 1996. The 1998
increase in Banking segment operating profit is the result of net interest
income and non-interest income increasing at a 10.6% and 7.7% respective rate,
while operating expenses increased 3.0%. The growth in average loans and the
acquisition of Midwest were the primary contributors to these categories.
The Banking segment represented 87.1%, 91.3% and 92.6% of total segment
profit before charges in 1998, 1997, and 1996, respectively.
TRUST AND ASSET MANAGEMENT
The Trust and Asset Management segment provides trust, investment
management and brokerage services. It also acts as an advisor and provides fund
administration to the Vintage Mutual Fund and offers a complete line of
commercial and individual insurance products. These products are distributed
nationally (i.e. Vintage Equity Fund is available through Charles Schwab
OneSource(])), regionally to institutional investors and corporations, and
locally through AMCORE's 66 banking locations.
The Trust and Asset Management segment's profit increased $1.6 million or
55.2% to $4.5 million in 1998. This segment also increased $985,000 or 52.0% in
1997. The growth in 1998 was due to the acquisition of IMG, favorable investment
performance, growth in proprietary Vintage Mutual Funds and sales of new trust
and asset management accounts.
As of December 31, 1998, trust assets under administration total $4.2
billion including $1.2 billion in the AMCORE family of Vintage Mutual Funds.
The Trust and Asset Management segment represented 9.6%, 7.5%, and 5.5% of
total segment profit before charges in 1998, 1997, and 1996 respectively.
MORTGAGE BANKING
The Mortgage Banking segment originates residential mortgage loans for sale
to AMCORE's banking affiliates and the secondary market, and provides servicing
of these mortgage loans.
The Mortgage Banking segment's profit was $1.6 million in 1998, an increase
of $1.1 million or 231.2%. This segment's profits declined $167,000 or 26.0% in
1997. The increase in 1998 was the result of the 120.6% increase in mortgage
origination to a record level of $478.9 million.
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The increased originations were a result of expansion of markets and
refinancings related to the low level of mortgage rates during 1998. Refinancing
activity accounted for 74.3% and 48.5% of originations in 1998 and 1997,
respectively. As of December 31, 1998, the Mortgage segment serviced $736
million of residential mortgages.
The Mortgage Banking segment represented 3.4%, 1.2%, and 1.9% of total
segment profit before charges in 1998, 1997, and 1996, respectively.
EARNINGS REVIEW OF CONSOLIDATED INCOME STATEMENT
The following highlights a comparative discussion of the major components
of net income and their impact for the last two years.
NET INTEREST INCOME
Net interest income is the difference between income earned on
interest-earning assets and the interest expense incurred on interest-bearing
liabilities. The interest income on certain loans and investment securities is
not subject to Federal income tax. For analytical purposes, at December 31,
1998, 1997 and 1996, the interest income and rates on these types of assets are
adjusted to a "fully taxable equivalent" basis. The fully taxable equivalent
adjustment was calculated using AMCORE's statutory Federal income tax rate of
35%. Adjusted interest income is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Interest Income Book Basis.............. $290,861 $259,959 $233,679
Taxable Equivalent Adjustment........... 10,010 9,234 8,456
-------- -------- --------
Interest Income Taxable Equivalent
Basis................................. 300,871 269,193 242,135
Interest Expense........................ 168,127 148,960 128,902
-------- -------- --------
Net Interest Income Taxable Equivalent
Basis................................. $132,744 $120,233 $113,233
======== ======== ========
Net interest income on a fully taxable equivalent basis increased $12.5
million or 10.4% in 1998 and $7.0 million or 6.2% in 1997. The improvement in
net interest income during both 1998 and 1997 results mainly from an increase in
average earning assets which was partially offset by a narrowing in the interest
rate spread.
The growth in average earning assets was 13.0% and 11.5% in 1998 and 1997,
respectively. This growth can be attributed to strong loan growth and increased
levels of investment securities related to the investment leveraging program.
Average loans increased $351.6 million or 18.8% in 1998 and $155.5 million or
9.1% in 1997. The Midwest acquisition accounted for $133.1 million of the growth
in average loans. Excluding this acquisition, average loans increased 11.7%.
The investment leveraging program, which is designed to better utilize
capital, is funded through the use of repurchase agreements, Federal Home Loan
Bank (FHLB) borrowings and, to a lesser extent, brokered CDs. The proceeds of
these borrowings are invested principally in mortgage-backed and U.S. government
agency securities. This program averaged approximately $846 million in 1998, an
increase of approximately $94 million in 1998 following a $302 million increase
in 1997. This program contributed approximately $10.1 million in 1998, $11.2
million in 1997 and $6.2 million in 1996 to net interest income. The income from
this program declined $1.1 million in 1998 as the spread decreased due to
prepayments on mortgage-backed securities and a flat yield curve.
As Table 1 indicates, the interest rate spread declined 7 basis points to
2.89% in 1998 from 2.96% in 1997 which was a decline of 22 basis points from the
1996 level of 3.18%. The interest rate margin was 3.51% in 1998, a decline of 8
basis points from 3.59% in 1997. The 1997 level was a decline of 18 basis points
from 3.77% in 1996.
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The interest rate spread on the investment securities in the leveraging
program was 120 basis points in 1998, 149 basis points in 1997, and 137 basis
points in 1996. The interest rate spread on all other earning assets was 3.41%
in 1998, 3.42% in 1997, and 3.52% in 1996. As a result, the effect of this
program accounted for 6 basis points of the decline in the 1998 interest rate
spread and 12 basis points in 1997. The investment-leveraging program also
negatively impacted the interest rate margin. This program accounted for 5 basis
points of the decline in the 1998 interest rate margin and 16 basis points in
1997. The core interest rate margin, which excludes the effect of the
investment-leveraging program, was 4.18%, 4.21%, and 4.19% for 1998, 1997, and
1996, 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 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 1 analyzes the changes
attributable to the rate and volume components of net interest income.
CHANGES DUE TO VOLUME
The change in net interest income due to average volume in 1998 relates to
the 18.8% growth in average loans and a 3.9% growth in average investment
securities which was partially offset by 14.9% growth in total interest-bearing
deposits and 9.3% growth in borrowed funds. The 1997 increase in net interest
income due to the change in average volume is attributable to a 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.
CHANGES DUE TO RATE
The yield on earning assets declined 9 basis points in 1998 as market rates
declined in general. The decline was less than the decline in the individual
components of investment securities and loans whose yields declined 16 and 11
basis points, respectively, as higher yielding loans represented a larger
proportion of earning assets in 1998. The rate paid on interest bearing
liabilities decreased 2 basis points. The rate paid on interest bearing demand
deposits increased due to growth in the AMDEX money market account, which is
indexed to Treasury yields. The rate on long-term debt decreased 73 basis points
as maturing FHLB borrowings were renewed for a longer term and made up a larger
proportion of the category.
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. 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 9.35%
capital trust securities, which qualify as Tier 1 capital, replaced lower rate
FHLB borrowings and bank lines.
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 $8.0 million for 1998, an
increase of $948,000 or 13.5% from the $7.0 million in 1997. The 1998 increase
in provision is due to a 24.9% growth in loans, decreased
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charge-offs, and relatively stable non-performing assets. During 1997, the
provision increased $1.6 million or 29.8% from the $5.4 million in 1996. The
increase in the 1997 provision is due to an 8.6% growth in loans and the
charge-off of $2.7 million in satellite dish receivables.
AMCORE recorded net charge-offs of $3.6 million, $6.4 million and $3.2
million in 1998, 1997 and 1996, respectively. Future growth in the loan
portfolio or weakening economic conditions could result in continued increases
in the provision for loan and lease losses. Net charge-offs represented only 16
basis points of average loans in 1998 versus 34 basis points in 1997 and 19
basis points in 1996. The improvement in net charge-offs in 1998 is the direct
result of the sale of satellite receivables in January 1998, as well as the sale
of credit card receivables in 1998 and 1997. Both of these portfolios had higher
net charge-off expenses than historical averages. The allowance for loan and
lease losses as a percent of total loans was 1.08%, 1.01%, and 1.07% in 1998,
1997, and 1996, respectively. The allowance for loan and lease losses to
non-performing loans was 145.2% at year-end 1998, 100.2% at year-end 1997, and
156.8% at year-end 1996.
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 electronic
banking, along with net security gains or losses are also included in this
category. Non-interest income totaled $58.7 million in 1998, an increase of
$10.1 million or 20.9%. This increase occurred despite the revenue lost due to
the sale of the collection agency and a $1.9 million gain on the sale of credit
card receivables in 1997. Non-interest income also increased 11.9% or $5.2
million in 1997.
Trust and asset management income, the largest source of fee based
revenues, totaled $23.7 million, an increase of $7.3 million or 44.2%. The
previously mentioned acquisition of IMG accounted for $5.0 million of this
increase. Excluding the increase related to IMG, trust and asset management fees
grew $2.3 million or 14.1%. The 1997 growth of trust and asset management fees
was $2.4 million or 16.7%. The growth not related to IMG in both years is
attributable to favorable market performance of trust assets, growth in
proprietary Vintage Mutual Funds and new trust accounts. As of December 31,
1998, the AMCORE family of Vintage Mutual Funds totaled $1.2 billion and trust
assets under administration totaled $4.2 billion. AMCORE anticipates continued
growth 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 $8.8 million in 1998, an increase of
$994,000 or 12.7% from the $7.8 million in 1997. During 1997, service charges on
deposits increased $151,000 or 2.0%. The 1998 acquisition of Midwest accounted
for $610,000 of the 1998 increase. The remaining increase in both years resulted
from increased deposits and revised fee schedules.
Mortgage revenues includes fees generated from underwriting, originating
and servicing of mortgage loans along with gains realized from the sale of these
loans. Mortgage revenues increased $4.7 million or 81.2% in 1998. This was
primarily the result of strong production volume related to the expansion of
markets and refinancing volume related to the low level of mortgage rates in
1998. Mortgage originations were a record $478.9 million in 1998 versus $217.0
million in 1997. Refinancings accounted for 74.3% and 48.5% of the originations
in 1998 and 1997, respectively. In 1997, mortgage revenues declined $179,000 or
3.0% to total $5.8 million in 1997. This decline resulted from a charge of
$742,000 related to the valuation of purchased and excess mortgage servicing
rights in accordance with adoption of FAS 125.
Accounting standards require separate recognition of servicing rights on
originated mortgage loans at the time such loans are sold. This asset is
amortized over the remaining estimated lives of the serviced loans. While this
has a favorable impact on earnings at the time of sale, additional earnings
volatility may occur with changes in market conditions, particularly with
fluctuations in interest rates. For example, a decline in interest rates could
result in accelerated mortgage prepayments, which may reduce the value of this
asset and require a charge to earnings through a valuation reserve. If
subsequent valuations result in an increase of value, recoveries can be recorded
through the valuation allowance, to the extent of the previous charge. As of
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December 31, 1998, AMCORE had $5.0 million of capitalized mortgage servicing
rights and a servicing portfolio of $736.0 million (see Note 7).
Insurance revenues totaled $1.9 million in 1998, an increase of $291,000 or
18.3% from the $1.6 million in 1997. Increased sales of credit life insurance
resulting from product specific sales training is the primary reason for this
increase. Insurance revenues declined $441,000 or 21.8% from 1996 levels due to
reduced commissions on both commercial and credit life products.
The sale of the collection agency on December 31, 1997, resulted in no
collection fee income being recognized in 1998. Collection fee income remained
level at $2.1 million in 1997 and 1996.
Other non-interest income, mainly customer service fees and brokerage
commissions were $9.3 million in 1998, a decrease of $1.3 million or 11.9% from
1997 levels after a $1.0 million increase from 1996 levels. 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 processing.
Net securities gains totaled $4.4 million in 1998 as compared to $4.2
million in 1997 and $1.9 million in 1996. The level of security gains or losses
is dependent on the size of the available for sale portfolio, interest rate
levels, AMCORE's liquidity needs, and balance sheet risk objectives.
OPERATING EXPENSES
Total operating expense was $119.6 million in 1998, an increase of $4.6
million from $115.0 million in 1997, a $16.2 million increase from the $98.7
million in 1996. Operating expenses in 1998 included $4.5 million of charges
related to the Midwest merger. Operating expenses in 1997 included a $5.0
million impairment of satellite receivables portfolio transferred to held for
sale, $4.6 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 $14.0 million or
13.9% in 1998 and 2.3 million or 2.4% in 1997. The 1998 increase includes $8.4
million of normal operating expenses of IMG and Midwest. The efficiency ratio,
excluding the above-mentioned charges, was 60% in 1998 and 1997 versus 63% in
1996.
Personnel costs, which include compensation expense and employee benefits,
are the largest component of operating expenses. Personnel costs totaled $64.4
million in 1998, an increase of $5.6 million or 9.5%. Excluding the merger
related and outsourcing costs in 1998 and 1997 and $4.8 million of normal
compensation expense of IMG and Midwest, the increase would have been $2.0
million or 3.5%. The higher costs in 1998 were primarily caused by increased
levels of performance driven compensation and normal merit increases. Personnel
costs increased $2.8 million in 1997, an increase of 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.
Net occupancy expense was $6.8 million in 1998, an increase of $260,000 or
4.0% from 1997, after a decline of $106,000 from 1996 levels. A 1997 property
tax refund for prior years and an increase in the number of facilities were the
primary cause of the increase in 1998.
Equipment expense declined $2.9 million or 27.0% to $7.9 million in 1998.
This followed a $2.4 million or 27.9% increase in 1997. The 1998 decrease is due
to a $2.4 million charge related to equipment and software written off as part
of the 1997 outsourcing of core bank data processing.
Data processing expenses include expenses related to core bank data
processing, trust and other external processing systems. This category increased
$2.7 million or 101.2 % in 1998 as a result of outsourcing of core bank data
processing in the third quarter of 1998, the additional processing expenses of
Midwest and IMG, and contract termination costs for Midwest, which were included
as a merger-related charge. This category will increase in 1999 due to a full
year's expense related to core bank data processing. Data processing expenses
increased $1.5 million or 132.2% in 1997 as a result of merger-related charges
for conversion of 1997 acquisitions.
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Professional fees totaled $5.7 million in 1998 a decrease of $643,000 or
10.1%. This category included merger-related expenses of $1.8 million in 1998
and $2.5 million in 1997. Professional fees increased $3.2 million or 102.1% in
1997 primarily due to merger-related expenses.
Advertising and business development expenses were $3.8 million in 1998, an
increase of $944,000 or 33.4%, primarily due to the increase in the number of
markets served by AMCORE as a result of the 1997 and 1998 acquisitions. This
category increased $165,000 or 6.2% in 1997.
Intangibles amortization expense totaled $2.5 million in 1998, an increase
of $324,000 or 14.6% as a result of the IMG acquisition. Intangibles
amortization expense remained flat at $2.2 million in 1997 and 1996.
Other expenses were $23.1 million in 1998, an increase of $3.4 million or
16.9%, following an increase of $1.3 million or 7.3% in 1997. The 1998 increase
is primarily the result of increased mortgage servicing and impairment expenses
of $2.1 million. The increased impairment expenses were the result of a
declining interest rate environment. The remaining increase relates to increased
travel and training expenses. The 1997 increase is primarily related to
communications and amortization of mortgage servicing rights.
INCOME TAXES
Income tax expense totaled $14.3 million in 1998, compared with $8.9
million and $12.2 million in 1997 and 1996, respectively. The effective tax
rates were 26.6%, 23.7%, and 27.6% in 1998, 1997, and 1996, respectively. The
effective tax rate was less than the statutory tax rates due primarily to
investments in tax-exempt municipal bonds and loans. The increase in both the
actual expense and effective tax rate in 1998 are a result of higher income
before income taxes. 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.
BALANCE SHEET REVIEW AND LIQUIDITY RISK MANAGEMENT
Liquidity represents the availability of funding to meet the obligations to
depositors, borrowers, and creditors at a reasonable cost without adverse
consequences. Accordingly, the funding base and asset mix influences the
liquidity position.
The parent company requires adequate liquidity to pay its expenses, repay
debt when due and pay stockholder dividends. Liquidity is provided to the parent
through subsidiaries in the form of dividends and fees for services. In 1998,
dividends and fees from subsidiaries amounted to $51.0 million, compared to
$38.5 million in 1997. Other liquidity is provided by access to the capital
markets, cash balances in banks, liquidating short-term investments, commercial
paper borrowings and lines of credit with correspondent banks. While subsidiary
banks are limited in the amount of dividends they can pay, as of December 31,
1998, approximately $44.9 million was available for payment to the parent in the
form of dividends, which do not require prior regulatory approval.
Cash and cash equivalents increased $39.0 million from December 31, 1997 to
December 31, 1998, as the net cash provided from operating activities of $54.2
million plus the net cash provided by financing activities of $224.1 million
exceeded the net cash used for investing activities of $239.3 million in 1998.
The net increase in cash provided by operating activities of $18.3 million
from December 31, 1997 to December 31, 1998 was primarily attributable to the
$8.1 million net increase in amortization and accretion of securities and
amortization and impairment of mortgage servicing rights.
The net decrease in cash used for investing activities of $88.8 million
from December 31, 1997 to December 31, 1998 is the result of the increase in net
cash provided by available for sale securities of $279.2 million. This increase
results from the net increase in proceeds from maturities and sales of $199.5
million and the net decrease in cash used for purchases of $79.7 million from
year to year. This increase was partially offset by the net increase in cash
used for loans made to customers of $141.0 million from 1997 to 1998.
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The net cash provided by financing activities decreased by $68.0 million
from December 31, 1997 to December 31, 1998. The decrease results mainly from a
reduction in net cash provided by short-term borrowings of $208.1 million from
1997 to 1998. The decrease from 1997 to 1998 in net cash provided by short-term
borrowings was partially offset by the increase in net cash provided by demand
deposits and savings accounts of $138.0 million and proceeds from long-term
borrowings of $62.9 million.
SECURITIES
Total securities as of December 31, 1998 were $1.34 billion, a decrease of
$113.3 million or 7.8% over the prior year-end. At December 31, 1998 and 1997,
the total securities portfolio comprised 34.8% and 42.2%, 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'
equity may result; however, federal banking regulations generally 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 $65.0 million, or 4.8%, of the securities portfolio
will mature in 1999.
Mortgage-backed securities as of December 31, 1998 totaled $805.9 million
and represent 60.0% of total securities. The distribution of mortgage-backed
securities includes $397.4 million of U.S. government agency mortgage-backed
pass through securities, $312.4 million of agency collateralized mortgage
obligations and $96.0 million of private issue collateral mortgage obligations,
all of which are rated AAA except for $24.8 million of securities rated between
Aa1 and Baa1.
At December 31, 1998, securities held to maturity total $16.1 million,
while securities available for sale were $1.33 billion. There were no trading
securities at the end of 1998 or 1997. At December 31, 1998, the held to
maturity securities portfolio included $276,000 of gross unrealized gains and
$47,000 of gross unrealized losses. The securities available for sale portfolio
at the end of 1998 included gross unrealized gains of $18.5 million and gross
unrealized losses of $23.9 million, of which the combined effect, net of tax, is
included as accumulated other comprehensive income in stockholders' equity. For
comparative purposes, at December 31, 1997, gross unrealized gains of $18.0
million and gross unrealized losses of $4.0 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 1998, total loans and leases, net of unearned discount, were $2.45
billion, an increase of $488.8 million or 24.9% as compared to 1997. Average
loans increased $351.6 million or 18.8% during 1998. Growth in loans, due in
part to the Midwest merger, was mainly in the real estate and commercial loan
categories. (See Table 2)
Commercial, financial and agricultural loan balances totaled $659.9
million, an increase of $121.7 million or 22.6% when compared to 1997. This
increase was primarily in commercial and industrial in the Rockford, south
central Wisconsin and northwestern Chicago suburban markets.
Total real estate loans were $1.39 billion at year-end 1998, an increase of
$269.9 million, or 24.1%, over 1997. The growth from 1997 occurred mainly in the
commercial real estate and residential mortgage loan categories. The growth is
attributable primarily to the Rockford and northwestern Chicago suburban
markets.
Residential mortgage loans are originated by AMCORE's mortgage affiliate,
of which conforming adjustable rate, 15-year fixed-rate and balloon residential
mortgages are normally sold to affiliate banks. The 30-year fixed-rate
residential mortgage loans are sold in the secondary market to eliminate
interest rate risk,
18
19
generate gains on the sale of these loans, as well as servicing income. All
loans of the mortgage affiliate are considered held for sale and are recorded at
the lower of cost or market value.
Installment and consumer loans increased $97.2 million or 32.3% to end the
year at $398.3 million. The growth is primarily related to indirect automobile
loans.
The scheduled repayments and maturities of loans represent a substantial
source of liquidity. Table 3 shows selected loan maturity data as of December
31, 1998.
DEPOSITS
Total deposits at December 31, 1998, were $2.95 billion, an increase of
$420.7 million or 16.6% when compared to 1997. The increase includes $165.6
million of core deposits from Midwest. Average total deposits increased $330.8
million or 13.1%.
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 $2.44 billion at the end of 1998, an
$302.8 million or 14.1% increase over the prior year-end. This increase is
attributable to continued growth in the AMDEX money market account introduced in
1997. Core deposits represent 82.9% and 84.8% of total deposits at December 31,
1998 and 1997, respectively. Large certificates of deposit, brokered deposits,
and time deposits from governmental entities supplement these core deposits.
Brokered deposits were $311.1 million at year-end 1998, an increase of $88.7
million over the prior year-end. Table 5 shows the maturity distribution of time
deposits $100,000 and over.
BORROWINGS
Short-term and long-term borrowings have provided the financing for the
investment leveraging program. Borrowings totaled $828.6 million at year-end
1998 and were comprised of $498.2 million of short-term and $330.4 million of
long-term borrowings. The increase in borrowings of $21.9 million was primarily
used to fund the growth in loans. Long-term borrowings were increased as
short-term borrowings matured to better align the term of the borrowing with
assets in the investment-leveraging program.
Securities sold under agreements to repurchase of $434.1 million and
Federal Home Loan Bank borrowings of $321.4 million are used primarily to fund
the investment leveraging program. These two types of borrowing represent 91.2%
of total borrowings at December 31, 1998 versus 88.8% at December 31, 1997.
In 1997, AMCORE issued $40 million of capital securities through AMCORE
Capital Trust I (Trust), a statutory business trust, of which all common
securities are owned by AMCORE. The capital securities pay cumulative cash
distributions semiannually at an annual rate of 9.35%. The securities are
redeemable from March 25, 2007 until March 25, 2017, at a declining 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 1 capital for regulatory purposes. The proceeds of
these securities were used to repay the parent company term loan, debt of
acquired companies, and other general corporate purposes.
The parent company has a commercial paper placement agreement with an
unrelated financial institution that provides for the issuance of non-rated
short-term unsecured debt obligations at negotiated rates and terms, not to
exceed $50.0 million. In the event the agent is unable to place the parent
company's commercial paper on a particular day, the proceeds are provided by
overnight borrowings on a reciprocal line of credit with the same financial
institution.
ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT
AMCORE's credit risk is centered in the loan and lease portfolio which on
December 31, 1998, totaled $2.45 billion, or 63.4%, of earning assets. The
objective in managing loan portfolio risk is to quantify and manage credit risk
on a portfolio basis as well as reduce the risk of a loss resulting from a
customer's failure to perform according to the terms of a transaction. To
achieve this objective, AMCORE strives to maintain a loan portfolio that is
diverse in terms of loan type, industry concentration, and borrower
concentration.
19
20
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses represents management's estimate of
identified and unidentified losses in the existing loan portfolio. 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 economic and industry outlooks.
The determination by management of the appropriate level of the allowance
amounted to $26.4 million at December 31, 1998. 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, 1998, the allowance for loan losses as a percent of
total loans and non-performing loans was 1.08% and 145.24%, respectively. These
compare to the same ratios for the prior year of 1.01% and 100.20%. Net
charge-offs as a percent of average loans decreased to 0.16 % for 1998 versus
0.34% in 1997. Net charge-offs on satellite receivables represented 41.1% of
total net charge-offs in 1997, thus net charge-offs on all other loans
represented 0.20% of average loans in 1997.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans with restructured
terms and other real estate owned. Non-performing assets totaled $20.5 million
as of year-end 1998, a decrease of $1.0 million or 4.8% from the $21.5 million
at year-end 1997. Total non-performing assets represent 0.49% of total assets at
December 31, 1998, compared to 0.59% at December 31, 1997.
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 collections on non-accrual
loans, for which the ultimate collectibility of principal is uncertain, are
applied as principal reductions. Otherwise, such collections are applied to
interest income when received.
Non-performing loans decreased $1.7 million or 8.5% to total $18.2 million
at December 31, 1998, when compared to the prior year-end. Non-performing loans
include one grain elevator credit which represents 19.6% of total non-performing
loans, whose collectibility is dependent solely on its guarantors. As of
December 31, 1998, non-performing loans to total loans were 0.74% compared to
1.01% at year-end 1997. Table 2 presents non-performing loans for each of the
past five years.
Loans 90 days or more past due were $7.3 million at December 31, 1998, an
increase of $3.9 million from the prior year-end. This increase is concentrated
at the Wisconsin subsidiaries and is primarily attributable to the
implementation of the AMCORE loan policy.
Foreclosed real estate increased $653,000, or 39.1%, to $2.3 million at
December 31, 1998, when compared to year-end 1997. This increase consists of
multiple residential units primarily in the Rockford market.
CONCENTRATION OF CREDIT RISKS
As previously discussed, AMCORE strives to maintain a diverse loan and
lease portfolio in an effort to minimize the effect of credit risk. Summarized
below are the characteristics of classifications that exceed 10% of total loans.
20
21
Commercial, financial, and agricultural loans were $659.9 million at
December 31, 1998, and comprised approximately 26.9% of gross loans, of which
1.69% were non-performing. Net charge-offs of commercial loans represent 0.11%
during 1998, and 0.16% during 1997 of the year-end balance of the category.
Construction, commercial real estate loans, and loans for farmland were
$731.9 million at December 31, 1998, comprising 29.9% of gross loans, of which
0.27% were classified as non-performing. Net charge-offs of this category of
loans represents 0.02% during 1998 and 0.04% during 1997 of the year-end balance
of the category.
Residential real estate loans, which includes home equity and permanent
residential financing, totaled $658.4 million at December 31, 1998, and
represent 26.9% of gross loans of which 0.50% are non-performing. Net
charge-offs of residential real estate loans represent 0.05% of the category
total in 1998 and 0.07% of the year-end balance in 1997.
Installment and consumer loans were $398.3 million at December 31, 1998,
and comprised 16.2% of gross loans, of which 0.45% were non-performing. Net
charge-offs of consumer loans represented 0.63% and 1.67% of the year-end
category total for 1998 and 1997, respectively. Consumer loans are comprised of
direct loans, credit card loans, indirect auto loans, and consumer finance
company loans. Indirect auto loans total $241.1 million at December 31, 1998.
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
re-pricing 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 re-pricing assets and liabilities, but also impacted
by the rate at which re-pricings 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, 1998.
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.
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
21
22
which all have investment grade credit ratings. All counterparties were expected
to meet any outstanding interest payment obligations.
The total notional amount of swap contracts outstanding was $220.0 million
and $270.0 million as of December 31, 1998 and 1997, respectively. As of the end
of 1998, these contracts had an aggregate negative carrying value of $666,000
and a negative fair value of $2.5 million. The total notional amount of floor
contracts outstanding was $150.0 million at December 31,1998, with $145.0
million outstanding floor contracts as of the end of 1997. These contracts had a
net aggregate carrying value of $637,000 and negative fair value of $1.5 million
as of the end of 1998. The total notional amount of cap contracts outstanding
was $145.0 million and $75.0 million as of December 31, 1998 and 1997,
respectively. As of the end of 1998, these contracts had an aggregate carrying
value of $635,000 and a positive fair value of $247,000. For further discussion
of derivative contracts, see Notes 5 and 11 to the Consolidated Financial
Statements.
CAPITAL MANAGEMENT
Total stockholders' equity at December 31, 1998, was $316.1 million, an
increase of $28.6 million or 10.0%. The growth in stockholders' equity is due
principally to retained net earnings and stock issued in conjunction with
business combinations and stock option plans offset by the acquisition of
treasury shares and unrealized losses on available for sale securities.
Stockholders' equity includes accumulated other comprehensive income which is
comprised primarily of an adjustment to fair market value for securities
classified as available for sale. The fair market value of securities with this
classification declined $11.6 million during 1998, to end the year at a net loss
of $3.3 million.
AMCORE paid $15.4 million of cash dividends, which represent $0.54 per
share, or a dividend payout ratio of 38.9%. This compares to $0.45 per share
paid in 1997, which represented a payout ratio of 42.1%. The book value per
share increased $0.28 per share to $10.96 at December 31, 1998, from $10.68 at
December 31, 1997.
On October 21, 1998, AMCORE announced a stock repurchase program for up to
five percent of its common stock or 1.4 million shares. The repurchased shares
will become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option and
other employee benefit plans. Through March 1, 1999, 1.1 million shares have
been repurchased at an average price of $23.32.
AMCORE has outstanding $40 million of capital securities through AMCORE
Capital Trust I (Trust), a statutory business trust, of which all common
securities are owned by AMCORE. The capital securities qualify as Tier 1 capital
for regulatory capital purposes.
AMCORE is considered a "well-capitalized" institution based on regulatory
guidelines. AMCORE's leverage ratio of 8.31% at December 31, 1998 exceeds the
regulatory guidelines of 5% for well-capitalized institutions. AMCORE's ratio of
Tier 1 capital at 12.46% and total risk based capital at 13.43% significantly
exceed the regulatory minimums (as the following table indicates), as of
December 31, 1998.
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23
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -----------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Tier 1 Capital.................................... $339,718 12.46% $306,364 13.50%
Tier 1 Capital Minimum............................ 109,039 4.00% 90,775 4.00%
-------- ----- -------- -----
Amount in Excess of Regulatory Minimum............ $230,679 8.46% $215,589 9.50%
======== ===== ======== =====
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
Total Capital.................................... $ 366,121 13.43% $ 326,271 14.38%
Total Capital Minimum............................ 218,078 8.00% 181,574 8.00%
---------- ----- ---------- -----
Amount in Excess of Regulatory Minimum........... $ 148,043 5.43% $ 144,697 6.38%
========== ===== ========== =====
Risk Adjusted Assets............................. $2,725,981 $2,269,380
========== ==========
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TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- -------
(IN THOUSANDS)
ASSETS
Interest-Earning Assets:
Taxable securities......... $1,152,198 $ 76,786 6.66% $1,123,535 $ 77,076 6.86%
Tax-exempt securities(1)... 339,965 26,845 7.90% 312,429 25,071 8.02%
---------- -------- ----- ---------- -------- ------
Total Securities(2)...... $1,492,163 $103,631 6.95% $1,435,964 $102,147 7.11%
Mortgage loans held for
sale(3).................. 30,837 1,886 6.12% 12,871 890 6.91%
Loans(1)(4)................ 2,218,972 193,588 8.66% 1,867,355 164,979 8.77%
Other earnings assets...... 15,210 729 4.73% 10,156 538 5.22%
Fees on mortgage loans held
for sale(3).............. -- 1,037 -- -- 639 --
---------- -------- ----- ---------- -------- ------
Total Interest-Earning
Assets................. $3,757,182 $300,871 7.97% $3,326,346 $269,193 8.06%
Non Interest-Earning
Assets................... 226,418 193,883
---------- ----------
Total Assets........... $3,983,600 $3,520,229
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand and
savings deposits......... $ 872,063 $ 25,940 2.97% $ 727,184 $ 20,170 2.77%
Time deposits.............. 1,543,158 90,664 5.88% 1,374,796 80,905 5.88%
---------- -------- ----- ---------- -------- ------
Total interest-bearing
deposits............... $2,415,221 $116,604 4.83% $2,101,980 $101,075 4.81%
Short-term borrowings...... 606,768 34,855 5.68% 677,205 38,998 5.69%
Long-term borrowings....... 278,603 16,668 5.98% 132,533 8,887 6.71%
---------- -------- ----- ---------- -------- ------
Total Interest-Bearing
Liabilities............ $3,300,592 $168,127 5.08% $2,911,718 $148,960 5.10%
Non Interest-Bearing
Liabilities:
Demand deposits............ 314,952 297,443
Other liabilities.......... 55,000 42,072
---------- ----------
Total Liabilities...... $3,670,544 $3,251,233
Stockholders' Equity......... 313,056 268,996
---------- ----------
Total Liabilities and
Stockholders'
Equity............... $3,983,600 $3,520,229
========== ==========
Net Interest Income (FTE).... $132,744 $120,233
======== ========
Net Interest Spread (FTE).... 2.89% 2.96%
===== ======
Interest Rate Margin (FTE)... 3.51% 3.59%
===== ======
TWELVE MONTHS ENDED
DECEMBER 31, 1996
-------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
---------- -------- -------
ASSETS
Interest-Earning Assets:
Taxable securities......... $ 961,721 $ 62,780 6.53%
Tax-exempt securities(1)... 281,798 23,166 8.22%
---------- -------- -----
Total Securities(2)...... $1,243,519 $ 85,946 6.91%
Mortgage loans held for
sale(3).................. 9,830 809 8.23%
Loans(1)(4)................ 1,711,850 153,322 8.88%
Other earnings assets...... 19,332 1,545 7.86%
Fees on mortgage loans held
for sale(3).............. -- 513 --
---------- -------- -----
Total Interest-Earning
Assets................. $2,984,531 $242,135 8.07%
Non Interest-Earning
Assets................... 197,115
----------
Total Assets........... $3,181,646
==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand and
savings deposits......... $ 717,878 $ 18,407 2.56%
Time deposits.............. 1,275,457 74,790 5.86%
---------- -------- -----
Total interest-bearing
deposits............... $1,993,335 $ 93,197 4.66%
Short-term borrowings...... 468,894 26,044 5.47%
Long-term borrowings....... 159,504 9,661 6.06%
---------- -------- -----
Total Interest-Bearing
Liabilities............ $2,621,733 $128,902 4.89%
Non Interest-Bearing
Liabilities:
Demand deposits............ 280,856
Other liabilities.......... 36,400
----------
Total Liabilities...... $2,938,989
Stockholders' Equity......... 242,657
----------
Total Liabilities and
Stockholders'
Equity............... $3,181,646
==========
Net Interest Income (FTE).... $113,233
========
Net Interest Spread (FTE).... 3.18%
=====
Interest Rate Margin (FTE)... 3.77%
=====
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TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1998/ DECEMBER 31, 1997/
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- -----------------------------------
INCREASE DUE TO INCREASE DUE TO
(DECREASE) CHANGE IN TOTAL NET (DECREASE) CHANGE IN TOTAL NET
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Interest Income:
Taxable securities............. $ 1,075 $(1,365) $ (290) $11,542 $ 2,754 $14,296
Tax-exempt securities(1)....... 3,609 (1,835) 1,774 2,478 (573) 1,905
------- ------- ------- ------- ------- -------
Total Securities(2)......... 4,684 (3,200) 1,484 14,020 2,181 16,201
Mortgage loans held for sale... 1,109 (113) 996 224 (143) 81
Loans(1)(4).................... 30,168 (1,558) 28,610 13,587 (1,930) 11,657
Other earning assets........... 246 (56) 190 (587) (420) (1,007)
Fees on mortgage loans held for
sale(3)..................... 11 387 398 9 117 126
------- ------- ------- ------- ------- -------
Total Interest-Earning
Assets...................... $34,844 $(3,166) $31,678 $27,925 $ (867) $27,058
======= ======= ======= ======= ======= =======
Interest Expense:
Interest-bearing demand and
savings deposits............ $ 4,232 $ 1,538 $ 5,770 $ 242 $ 1,521 $ 1,763
Time deposits.................. 9,892 (133) 9,759 5,845 270 6,115
------- ------- ------- ------- ------- -------
Total interest-bearing
deposits.................. 15,331 198 15,529 5,238 2,640 7,878
Short-term borrowings.......... (4,081) (62) (4,143) 11,968 986 12,954
Long-term borrowings........... 8,833 (1,052) 7,781 (1,741) 967 (774)
------- ------- ------- ------- ------- -------
Total Interest-Bearing
Liabilities................. $20,083 $ (916) $19,167 $15,465 $ 4,593 $20,058
======= ======= ======= ======= ======= =======
Net Interest Margin/Net
Interest Income (FTE)....... $14,761 $(2,250) $12,511 $12,460 $(5,460) $ 7,000
======= ======= ======= ======= ======= =======
- ------------------
The above table shows the changes in interest income (tax equivalent) and
interest expense attributable to volume and rate variances. The change in
interest income (tax equivalent) due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(1) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a federal tax rate of 35%.
(2) The average balances of the investments are based on amortized historical
cost.
(3) The yield-related fees recognized from the origination of mortgage loans
held for sale are in addition to the interest earned on the loans during the
period in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees.
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TABLE 2
ANALYSIS OF LOAN AND LEASE PORTFOLIO AND LOSS EXPERIENCE
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural...................... $ 659,946 $ 538,259 $ 483,300 $ 462,453 $ 418,718
Real estate................................................. 1,284,764 1,059,830 930,602 833,544 749,169
Real estate-construction.................................... 105,574 60,624 53,039 44,134 34,265
Installment and consumer.................................... 398,318 301,163 339,319 283,426 288,016
Direct lease financing...................................... 3,127 3,172 2,066 1,117 760
---------- ---------- ---------- ---------- ----------
Gross Loans................................................ $2,451,729 $1,963,048 $1,808,326 $1,624,674 $1,490,928
Unearned income............................................ (211) (374) (1,205) (4,309) (9,431)
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income.............................. $2,451,518 $1,962,674 $1,807,121 $1,620,365 $1,481,497
Allowance for loan and lease losses........................ (26,403) (19,908) (19,295) (17,107) (17,246)
---------- ---------- ---------- ---------- ----------
NET LOANS................................................... $2,425,115 $1,942,766 $1,787,826 $1,603,258 $1,464,251
========== ========== ========== ========== ==========
SUMMARY OF LOAN LOSS EXPERIENCE:
Allowance for loan and lease losses, beginning.............. $ 19,908 $ 19,295 $ 17,107 $ 17,246 $ 17,870
Allowance for loan and lease losses acquired through
merger..................................................... 2,146 -- -- -- --
Amounts charged-off:
Commercial, financial and agricultural..................... 1,395 1,202 537 1,204 1,231
Real estate................................................ 480 555 273 1,030 283
Installment and consumer................................... 3,189 6,020 3,831 2,329 2,146
Direct lease financing..................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Charge-offs........................................ $ 5,064 $ 7,777 $ 4,641 $ 4,563 $ 3,660
---------- ---------- ---------- ---------- ----------
Recoveries on amounts previously charged off:
Commercial, financial and agricultural..................... 678 356 301 533 543
Real estate................................................ 47 63 281 15 60
Installment and consumer................................... 695 926 819 711 682
Direct lease financing..................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Recoveries......................................... $ 1,420 $ 1,345 $ 1,401 $ 1,259 $ 1,285
========== ========== ========== ========== ==========
Net Charge-offs............................................. $ 3,644 $ 6,432 $ 3,240 $ 3,304 $ 2,375
Provision charged to expense................................ 7,993 7,045 5,428 3,165 1,751
---------- ---------- ---------- ---------- ----------
ALLOWANCE FOR LOAN AND LEASE LOSSES, ENDING.............. $ 26,403 $ 19,908 $ 19,295 $ 17,107 $ 17,246
========== ========== ========== ========== ==========
NON-PERFORMING LOANS AT YEAR-END:
Non-accrual................................................. $ 18,179 $ 19,491 $ 12,019 $ 11,410 $ 11,262
Restructured................................................ -- 377 283 2,491 2,296
---------- ---------- ---------- ---------- ----------
TOTAL NON-PERFORMING LOANS............................... $ 18,179 $ 19,868 $ 12,302 $ 13,901 $ 13,558
========== ========== ========== ========== ==========
Past due 90 days or more not included above................. $ 7,272 $ 3,386 $ 3,692 $ 1,534 $ 1,088
========== ========== ========== ========== ==========
RATIOS:
Allowance for loan and lease losses to year-end loans....... 1.08% 1.01% 1.07% 1.06% 1.16%
Allowance to non-performing loans........................... 145.24% 100.20% 156.84% 123.06% 127.20%
Net charge-offs to average loans............................ 0.16% 0.34% 0.19% 0.21% 0.17%
Recoveries to charge-offs................................... 28.04% 17.29% 30.19% 27.59% 35.11%
Non-performing loans to loans, net of unearned income....... 0.74% 1.01% 0.68% 0.86% 0.92%
The allocation of the allowance for loan and lease losses at December 31,
1998, 1997, 1996, 1995, and 1994 was as follows:
1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------- ---------- ------- ---------- ------- ---------- ------- ----------
(IN THOUSANDS)
Commercial, financial
and agricultural..... $ 6,845 27.1 $ 5,617 27.6 $ 5,293 26.9 $ 5,888 28.6
Real estate............ 1,884 56.7 1,697 57.1 2,307 54.4 2,079 54.2
Installment and
consumer............. 4,512 16.2 4,207 15.3 4,019 18.7 3,075 17.2
Impaired loans......... 3,854 * 2,311 * 1,496 * 1,185 *
Unallocated............ 9,308 * 6,076 * 6,180 * 4,880 *
------- ----- ------- ----- ------- ----- ------- -----
TOTAL................ $26,403 100.0 $19,908 100.0 $19,295 100.0 $17,107 100.0
======= ===== ======= ===== ======= ===== ======= =====
1994
--------------------
PERCENT OF
LOANS IN
AMOUNT CATEGORY
------- ----------
(IN THOUSANDS)
Commercial, financial
and agricultural..... $ 4,912 28.3
Real estate............ 2,214 52.9
Installment and
consumer............. 3,275 18.8
Impaired loans......... * *
Unallocated............ 6,845 *
------- -----
TOTAL................ $17,246 100.0
======= =====
- ------------------
* Not applicable
26
27
TABLE 3
MATURITY AND INTEREST SENSITIVITY OF LOANS
DECEMBER 31, 1998
-----------------------------------------------------------------
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.................. $364,170 $248,542 $ 47,234 $659,946 $220,080 $ 75,696
Real estate-construction................................ 54,950 48,478 2,146 105,574 44,691 5,933
-------- -------- -------- -------- -------- --------
TOTAL................................................. $419,120 $297,020 $ 49,380 $765,520 $264,771 $ 81,629
======== ======== ======== ======== ======== ========
TABLE 4
MATURITY OF SECURITIES
DECEMBER 31, 1998
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.......... $19,114 6.01% $ 7,982 6.17% $ 16,573 8.50% $ 18,812 5.58% $ 62,481 6.55%
After one through five
years................... 48,345 5.94% 42,755 6.38% 76,403 7.59% 458 6.33% 167,961 6.80%
After five through ten
years................... -- -- 9,929 7.52% 86,283 7.82% -- -- 96,212 7.78%
After ten years........... -- -- 22,847 7.27% 143,972 8.07% 28,173 5.81% 194,992 7.64%
Mortgage-backed securities
(2)..................... -- -- 709,843 6.39% -- -- 96,043 7.04% 805,886 6.47%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL SECURITIES
AVAILABLE FOR SALE.... $67,459 5.96% $793,356 6.43% $323,231 7.91% $143,486 6.61% $1,327,532 6.77%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
Securities Held to
Maturity:
One year or less.......... $ 549 5.88% $ -- -- $ 1,951 7.48% $ -- -- $ 2,500 7.13%
After one through five
years................... 504 5.87% -- -- 9,306 7.34% 1 7.38% 9,811 7.26%
After five through ten
years................... -- -- -- -- 1,954 7.85% -- -- 1,954 7.85%
After ten years........... -- -- 27 8.25% 1,850 7.58% -- -- 1,877 7.59%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL SECURITIES HELD TO
MATURITY.............. $ 1,053 5.88% $ 27 8.25% $ 15,061 7.45% $ 1 7.38% $ 16,142 7.35%
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL SECURITIES........ $68,512 5.96% $793,383 6.43% $338,292 7.89% $143,487 6.61% $1,343,674 6.78%
======= ==== ======== ==== ======== ==== ======== ==== ========== ====
- ------------------
(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, 1998
TIME REMAINING TO MATURITY
--------------------------------------------------------------------
DUE WITHIN THREE TO SIX TO TWELVE AFTER TWELVE
THREE MONTHS SIX MONTHS MONTHS MONTHS TOTAL
------------ ---------- ------------- ------------- --------
(IN THOUSANDS)
Certificates of deposit.......................... $145,015 $140,301 $110,777 $220,449 $616,542
Other time deposits.............................. 551 3,381 5,400 7,318 16,650
-------- -------- -------- -------- --------
TOTAL.......................................... $145,566 $143,682 $116,177 $227,767 $633,192
======== ======== ======== ======== ========
27
28
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-
AT DECEMBER 31, 1998: 1999 2000 2001 2002 2003 AFTER TOTAL
- --------------------- ---------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
RATE SENSITIVE ASSETS:
Fixed Interest Rate Loans............. $ 588,990 $365,262 $342,241 $168,894 $181,485 $104,457 $1,751,329
Average Interest Rate............... 8.49% 8.42% 8.42% 8.33% 8.02% 8.18% 8.38%
Variable Interest Rate Loans.......... 331,862 72,287 41,460 26,780 16,979 210,821 700,189
Average Interest Rate............... 8.44% 7.80% 7.99% 7.98% 8.38% 7.95% 8.18%
Fixed Interest Rate Securities........ 284,444 197,999 141,469 105,791 91,873 386,091 1,207,668
Average Interest Rate............... 6.05% 6.03% 6.06% 5.96% 5.96% 5.57% 5.88%
Variable Interest Rate Securities..... 14,802 14,467 12,727 11,586 10,517 71,907 136,006
Average Interest Rate............... 6.48% 6.55% 6.58% 6.57% 6.63% 6.61% 6.59%
Other Interest-Bearing Assets......... 22,824 -- -- -- -- -- 22,824
Average Interest Rate............... 4.37% -- -- -- -- -- 4.37%
RATE SENSITIVE LIABILITIES:
Non-Interest-bearing checking......... $ 34,600 $ -- $181,866 $ -- $ 96,103 $ 25,141 $ 337,710
Average Interest Rate............... -- -- -- -- -- -- --
Savings & Interest-bearing checking... 354,023 -- 484,616 -- 87,908 87,908 1,014,455
Average Interest Rate............... 3.65% -- 2.69% -- 1.73% 1.73% 2.86%
Time-deposits......................... 1,024,813 325,310 124,243 34,470 45,963 40,760 1,595,559
Average Interest Rate............... 5.57% 5.75% 5.44% 5.87% 5.53% 7.37% 5.65%
Fixed Interest Rate Borrowings........ 276,628 177,057 835 58,817 7,083 137,494 657,914
Average Interest Rate............... 5.43% 5.45% 7.26% 5.32% 5.20% 6.34% 5.61%
Variable Interest Rate Borrowings..... 123,657 -- 5,000 -- -- 42,000 170,658
Average Interest Rate............... 4.93% -- 5.24% -- -- 5.13% 4.99%
RATE SENSITIVE DERIVATIVES:
Pay variable/received fixed swap...... $ 40,000 $ -- $ -- $ -- $ -- $ -- $ 40,000
Average pay rate.................... 5.15% -- -- -- -- -- 5.15%
Average receive rate................ 6.97% -- -- -- -- -- 6.97%
Pay fixed/received variable........... 25,000 25,000 130,000 -- -- -- 180,000
Average pay rate.................... 5.25% 8.52% 7.88% -- -- -- 7.60%
Average receive rate................ 5.59% 7.75% 7.11% -- -- -- 6.99%
Interest rate caps.................... 25,000 15,000 72,000 33,000 -- -- 145,000
Average strike rate................. 6.31% 6.31% 6.02% 5.93% -- -- 6.08%
Forward rate........................ 5.10% 5.09% 5.16% 5.21% -- -- 5.15%
Interest rate floors.................. 50,000 15,000 75,000 10,000 -- -- 150,000
Average strike rate................. 5.31% 5.61% 5.54% 5.61% -- -- 5.47%
Forward rate........................ 5.10% 5.09% 5.16% 5.20% -- -- 5.14%
28
29
THERE-
AT DECEMBER 31, 1997: 1998 1999 2000 2001 2002 AFTER TOTAL
- --------------------- ---------- -------- -------- -------- -------- -------- ----------
(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%
29
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents............................................. $ 144,199 $ 105,218
Interest earning deposits in banks.................................... 13,397 2,206
Federal funds sold and other short-term investments................... 9,427 633
Loans and leases held for sale........................................ 46,836 29,869
Securities available for sale......................................... 1,327,532 1,441,593
Securities held to maturity (fair value of $16,371 in 1998; $15,611 in
1997).............................................................. 16,142 15,423
---------- ----------
Total securities................................................... $1,343,674 $1,457,016
Loans and leases, net of unearned income.............................. 2,451,518 1,962,674
Allowance for loan and lease losses................................... (26,403) (19,908)
---------- ----------
Net loans and leases............................................... $2,425,115 $1,942,766
Premises and equipment, net........................................... 58,763 54,774
Intangible assets, net................................................ 19,028 12,168
Foreclosed real estate................................................ 2,321 1,668
Other assets.......................................................... 85,073 61,372
---------- ----------
TOTAL ASSETS....................................................... $4,147,833 $3,667,690
========== ==========
LIABILITIES
Deposits:
Demand deposits.................................................... $1,169,835 $ 915,954
Savings deposits................................................... 182,330 170,882
Other time deposits................................................ 1,595,559 1,440,207
---------- ----------
Total deposits................................................... $2,947,724 $2,527,043
Short-term borrowings.............................................. 498,211 647,509
Long-term borrowings............................................... 330,361 159,125
Other liabilities.................................................. 55,454 46,537
---------- ----------
TOTAL LIABILITIES.................................................. $3,831,750 $3,380,214
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value: authorized 10,000,000 shares: issued
none............................................................... $ -- $ --
Common stock, $.22 par value: authorized 45,000,000 shares:
1998 1997
---------- ----------------------------------
Issued 29,593,495 27,681,138
Outstanding 28,837,698 26,922,604 6,572 6,152
Additional paid-in capital............................................ 75,260 73,262
Retained earnings..................................................... 247,486 206,235
Deferred compensation non-employee directors.......................... (1,706) (1,478)
Treasury stock........................................................ (8,263) (5,069)
Accumulated other comprehensive income................................ (3,266) 8,374
---------- ----------
TOTAL STOCKHOLDERS' EQUITY......................................... $ 316,083 $ 287,476
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $4,147,833 $3,667,690
========== ==========
See accompanying notes to consolidated financial statements.
30
31
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases............... $192,974 $164,520 $152,974
Interest on securities:
Taxable.......................................... 76,786 77,076 62,780
Tax-exempt....................................... 17,449 16,296 15,058
-------- -------- --------
Total Income from Securities................... $ 94,235 $ 93,372 $ 77,838
Interest on federal funds sold and other short-term
investments...................................... 364 448 1,477
Interest and fees on loans held for sale............ 2,923 1,529 1,322
Interest on deposits in banks....................... 365 90 68
-------- -------- --------
TOTAL INTEREST INCOME.......................... $290,861 $259,959 $233,679
INTEREST EXPENSE
Interest on deposits................................ $116,604 $101,075 $ 93,197
Interest on short-term borrowings................... 34,855 38,998 26,044
Interest on long-term borrowings.................... 16,668 8,887 9,661
-------- -------- --------
Total Interest Expense........................... $168,127 $148,960 $128,902
-------- -------- --------
NET INTEREST INCOME.............................. $122,734 $110,999 $104,777
Provision for loan and lease losses................. 7,993 7,045 5,428
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND
LEASE LOSSES..................................... $114,741 $103,954 $ 99,349
NON-INTEREST INCOME
Trust and asset management income................... $ 23,721 $ 16,451 $ 14,100
Service charges on deposits......................... 8,831 7,837 7,686
Mortgage revenues................................... 10,560 5,827 6,006
Insurance revenues.................................. 1,875 1,584 2,025
Collection fee income............................... -- 2,105 2,145
Other............................................... 9,334 10,599 9,595
-------- -------- --------
TOTAL NON-INTEREST INCOME, EXCLUDING NET REALIZED
SECURITY GAINS................................. $ 54,321 $ 44,403 $ 41,557
Net realized security gains......................... 4,427 4,198 1,871
-------- -------- --------
TOTAL NON-INTEREST INCOME........................ $ 58,748 $ 48,601 $ 43,428
OPERATING EXPENSES
Compensation expense................................ $ 51,469 $ 47,199 $ 43,715
Employee benefits................................... 12,964 11,659 12,346
Net occupancy expense............................... 6,750 6,490 6,596
Equipment expense 7,895 10,816 8,454
Data processing expense............................. 5,339 2,654 1,143
Professional fees................................... 5,723 6,366 3,150
Advertising and business development................ 3,771 2,827 2,662
Amortization of intangible assets................... 2,536 2,212 2,219
Impairment on loans held for sale................... -- 4,955 --
Other............................................... 23,147 19,795 18,455
-------- -------- --------
TOTAL OPERATING EXPENSES......................... $119,594 $114,973 $ 98,740
-------- -------- --------
INCOME BEFORE INCOME TAXES.......................... $ 53,895 $ 37,582 $ 44,037
Income taxes.......................................... 14,314 8,918 12,161
-------- -------- --------
NET INCOME.......................................... $ 39,581 $ 28,664 $ 31,876
======== ======== ========
Basic Earnings Per Common Share..................... $ 1.39 $ 1.07 $ 1.20
Diluted Earnings Per Common Share................... 1.36 1.05 1.18
Dividends Per Common Share.......................... 0.54 0.45 0.38
Average Common Shares Outstanding................... 28,515 26,862 26,649
Average Diluted Shares Outstanding.................. 29,098 27,405 26,987
See accompanying notes to consolidated financial statements.
31
32
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED ACCUMULATED
ADDITIONAL COMPENSATION OTHER TOTAL
COMMON PAID-IN RETAINED NON-EMPLOYEE TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS DIRECTORS STOCK INCOME EQUITY
------ ---------- -------- ------------ -------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT DECEMBER 31, 1995........... $6,127 $67,950 $169,648 $(1,307) $(6,420) $ 6,126 $242,124
------ ------- -------- ------- ------- ------- --------
Comprehensive Income:
Net Income............................ -- -- 31,876 -- -- -- 31,876
Unrealized holding losses on
securities available for sale
arising during the period........... -- -- -- -- (6,959) (6,959)
Less reclassification adjustment for
realized gains included in net
income.............................. -- -- -- -- (1,123) (1,123)
------ ------- -------- ------- ------- ------- --------
Net unrealized gains (losses) on
securities available for sale......... -- -- -- -- -- (8,082) (8,082)
Comprehensive Income................... -- -- 31,876 -- -- (8,082) 23,794
------ ------- -------- ------- ------- ------- --------
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
------ ------- -------- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1996........... $6,134 $68,047 $191,485 $(1,382) $(4,908) $(1,956) $257,420
====== ======= ======== ======= ======= ======= ========
Comprehensive Income:
Net income............................ -- -- 28,664 -- -- -- 28,664
Unrealized holding gains on securities
available for sale arising during
the period.......................... -- -- -- -- -- 12,849 12,849
Less reclassification adjustment for
realized gains included in net
income.............................. -- -- -- -- (2,519) (2,519)
------ ------- -------- ------- ------- ------- --------
Net unrealized gains (losses) on
securities available for sale......... -- -- -- -- -- 10,330 10,330
------ ------- -------- ------- ------- ------- --------
Comprehensive Income................... -- -- 28,664 -- -- 10,330 38,994
------ ------- -------- ------- ------- ------- --------
Cash dividends on common stock -- $.45
per share........................... -- -- (12,130) -- -- -- (12,130)
Purchase of AMCORE Bank Belleville
minority interest................... -- 1,768 (1,784) -- -- -- (16)
Purchase of 53,000 shares for the
treasury............................ -- -- -- -- (1,327) -- (1,327)
Three-for-two stock split fractional
share payments...................... -- (18) -- -- -- -- (18)
Reissuance of 18,486 treasury shares
for Non-Employee Directors stock
plan................................ -- 244 -- (356) 112 -- --
Issuance of 16,377 common shares for
directors stock plan................ 4 106 (110) --
Deferred compensation expense......... -- -- -- 370 -- -- 370
Reissuance of 264,600 treasury shares
under incentive stock option
plans............................... -- 2,678 -- -- 1,035 -- 3,713
Reissuance of 2,457 treasury shares
for employee incentive plan......... -- 21 -- -- 19 -- 40
Issuance of 63,743 common shares for
employee incentive plan............. 14 416 -- -- -- -- 430
------ ------- -------- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997........... $6,152 $73,262 $206,235 $(1,478) $(5,069) $ 8,374 $287,476
====== ======= ======== ======= ======= ======= ========
32
33
DEFERRED ACCUMULATED
ADDITIONAL COMPENSATION OTHER TOTAL
COMMON PAID-IN RETAINED NON-EMPLOYEE TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS DIRECTORS STOCK INCOME EQUITY
------ ---------- -------- ------------ -------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Comprehensive Income:
Net income............................ -- -- 39,581 -- -- -- 39,581
Unrealized holding losses on
securities available for sale
arising during the period........... -- -- -- -- (9,162) (9,162)
Less reclassification adjustment for
realized gains included in net
income.............................. -- -- -- -- (2,656) (2,656)
------ ------- -------- ------- ------- ------- --------
Net unrealized gains (losses) on
securities available for sale......... -- -- -- -- -- (11,818) (11,818)
------ ------- -------- ------- ------- ------- --------
Comprehensive Income................... -- -- 39,581 -- -- (11,818) 27,763
------ ------- -------- ------- ------- ------- --------
Cash dividends on common stock -- $.54
per share........................... -- -- (15,404) -- -- -- (15,404)
Issuance of 1,912,357 common shares
for Midwest Federal Financial
Corp................................ 420 2,314 17,074 -- -- 178 19,986
Reissuance of 340,471 treasury shares
for Investors Management Group...... -- 578 -- -- 7,944 -- 8,522
Purchase of 826,980 shares for the
treasury............................ -- -- -- -- (19,745) -- (19,745)
Reissuance of 27,174 treasury shares
for Non-Employee Directors stock
plan................................ -- 290 -- (692) 402 -- --
Deferred compensation expense......... -- -- -- 464 -- -- 464
Reissuance of 460,004 treasury shares
under incentive stock option
plans............................... -- (1,366) -- -- 8,165 -- 6,799
Reissuance of 2,105 treasury shares for
employee incentive plans.............. -- -- -- -- 41 -- 41
Repayment of ESOP loan, 37 shares
returned to treasury.................. -- 182 -- -- (1) -- 181
------ ------- -------- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998........... $6,572 $75,260 $247,486 $(1,706) $(8,263) $(3,266) $316,083
====== ======= ======== ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
33
34
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 39,581 $ 28,664 $ 31,876
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment... 6,854 5,391 6,100
Amortization and accretion of securities, net............. 10,252 2,081 3,397
Provision for loan and lease losses....................... 7,993 7,045 5,428
Amortization of intangible assets......................... 2,536 2,212 2,219
Net gain on sale of securities available for sale......... (4,427) (4,198) (1,871)
Fair value adjustment on loans held for sale.............. -- 4,955 --
Impairment of long-lived assets........................... -- 2,081 --
Deferred income taxes..................................... (1,154) (3,817) (132)
Originations of loans held for sale....................... (478,921) (217,020) (196,798)
Proceeds from sales of loans held for sale................ 463,811 208,896 201,391
Other, net................................................ 7,711 (397) 1,060
--------- --------- ---------
Net cash provided by operating activities............. $ 54,236 $ 35,893 $ 52,670
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale... $ 487,143 $ 205,772 $ 199,496
Proceeds from maturities of securities held to maturity..... 2,425 9,982 7,874
Proceeds from sales of securities available for sale........ 405,906 487,813 191,289
Purchase of securities held to maturity..................... (4,411) (14,197) (13,967)
Purchase of securities available for sale................... (777,576) (857,278) (653,333)
Net (increase) decrease in federal funds sold and other
short-term investments.................................... (8,794) 24,398 (4,100)
Net increase in interest earning deposits in banks.......... (11,186) (1,373) (429)
Proceeds from the sale of credit card receivables........... 5,815 15,457 --
Proceeds from the sale of merchant bankcard processing...... -- -- 1,400
Proceeds from the sale of consumer finance loans and
leases.................................................... 6,047 1,798 5,997
Loans made to customers and principal collection of loans,
net....................................................... (335,458) (194,449) (197,165)
Proceeds from sale of collection agency..................... -- 700 --
Premises and equipment expenditures, net.................... (6,515) (6,164) (3,374)
Investment in company owned life insurance.................. (10,798) (1,816) --
Proceeds from the sale of other real estate................. 2,294 1,259 2,529
Net cash and cash equivalents acquired through
acquisitions.............................................. 5,763 -- --
--------- --------- ---------
Net cash used for investing activities................ $(239,345) $(328,098) $(463,783)
========= ========= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits and savings accounts........ $ 191,183 $ 53,143 $ 25,858
Net increase in time deposits............................... 65,897 122,410 116,794
Net (decrease) increase in short-term borrowings............ (178,948) 29,175 199,836
Proceeds from long-term borrowings.......................... 174,800 111,872 72,500
Payment of long-term borrowings............................. (533) (15,250) (7,335)
Dividends paid.............................................. (15,404) (12,130) (10,039)
Issuance of common stock for employee incentive plans....... -- 430 --
Issuance of treasury stock for employee incentive plans..... 6,840 3,753 1,239
Purchase of treasury stock.................................. (19,745) (1,327) --
--------- --------- ---------
Net cash provided by financing activities............. $ 224,090 $ 292,076 $ 398,853
--------- --------- ---------
Net change in cash and cash equivalents..................... $ 38,981 $ (129) $ (12,260)
Cash and cash equivalents:
Beginning of year......................................... 105,218 105,347 117,607
--------- --------- ---------
End of period............................................. $ 144,199 $ 105,218 $ 105,347
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors............................... $ 115,003 $ 99,002 $ 90,448
Interest paid on borrowings............................... 52,517 46,282 33,663
Income taxes paid......................................... 14,425 11,616 12,865
NON-CASH INVESTING AND FINANCING
Other real estate acquired in settlement of loans........... 3,308 2,147 1,192
Transfer of securities held to maturity to available for
sale...................................................... -- 31,018 --
Transfer of short-term investments to securities available
for sale.................................................. -- 1,230 --
Transfer of loans and leases to loans held for sale......... -- 14,970 --
Transfer of long-term borrowings to short-term borrowings... 28,150 69,253 --
Common stock issued for Midwest Federal Financial Corp...... 19,986 -- --
Common stock issued for Investors Management Group, Ltd..... 8,522 -- --
See accompanying notes to consolidated financial statements.
34
35
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. Financial information for 1996 has been
restated to reflect the pooling of interests 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, loans, demand deposits and
savings accounts, time deposits and short-term borrowings are reported net.
LOANS AND LEASES HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
recorded at the lower of cost or fair value in the aggregate. Gains and losses
on the sale of mortgage loans are included in other non-interest income.
The portfolio of satellite dish loans was transferred to loans held for
sale in 1997 in anticipation of the sale of these loans. The transfer of these
loans resulted in a $5 million impairment recorded in operating expenses for
1997. The loans were subsequently sold on January 28, 1998.
SECURITIES
Securities are classified into three categories: held to maturity,
available for sale and trading. Securities for which the Company has the ability
and the intent to hold to maturity are classified as held to maturity and are
reported at amortized cost. Securities held for resale are classified as trading
securities and are reported at fair value with unrealized gains and losses
recorded in earnings. Securities, which are neither held to maturity
35
36
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nor trading, are classified as available for sale and are reported at fair
value. The level yield method is used for the amortization and accretion of
premiums and discounts. The cost of securities sold is determined on a specific
identification method. There were no trading securities outstanding at December
31, 1998 and 1997.
When it is determined that securities are impaired and the impairment is
other than temporary, an impairment loss is recorded in earnings and a new cost
basis is established for the security.
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 in order to maintain the Company's existing interest rate
position.
LOANS AND LEASES
Loans and leases are carried at their principal amount outstanding plus any
unamortized net deferred origination costs or less any unamortized net deferred
origination fees less unearned income. Interest on commercial, real estate, and
certain installment and consumer loans is accrued and recognized as income based
upon the outstanding principal amount and the contractual interest rate of each
loan. Unearned interest on discounted installment loans has been recognized as
income using methods which approximate level rates of return over the terms of
the loans. Loan origination fees and certain direct origination costs on loans
retained in the portfolio are deferred and amortized over the expected life of
each loan as an adjustment of the related loan's yield. Certain financing leases
are originated and sold with limited recourse. A liability is recorded for the
estimated amount of recourse due to uncollectible leases and is a component of
the gain or loss recognized on sale.
Loans measured for impairment include commercial, financial, agricultural,
real estate commercial and 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. 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. The allowance
is an amount that management estimates will be adequate to absorb possible
losses on existing loans and leases. The evaluation of the allowance is
performed by management, lending officers and the corporate loan review staff
and is based on past loan loss experience, overall loan quality, the nature of
and size
36
37
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the portfolio, review of specific problem loans, known and inherent risks in
the portfolio, adverse situations that may affect the borrowers' ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions or other factors.
PREMISES AND EQUIPMENT
Premises and equipment including leasehold improvements are stated at cost
less accumulated depreciation and amortization. Depreciation is computed
principally on the straight-line method over the estimated useful life of the
assets. Leasehold improvements are being amortized using the straight-line
method over the terms of the respective leases or their useful lives, whichever
is shorter.
INTANGIBLE ASSETS
Certain intangible assets, such as core deposit intangibles and goodwill,
have arisen from the purchase of subsidiaries. Core deposit intangibles
represent a valuation of acquired deposit relationships and are being amortized
based on the present value of the future net income or cost savings derived from
the related deposits over an original period ranging from six to twelve years.
Goodwill represents the excess of the purchase price over the fair value of the
identifiable net assets acquired and is being amortized over a maximum of
fifteen years using the straight-line method.
FORECLOSED REAL ESTATE
Foreclosed real estate is comprised of real properties acquired in partial
or full satisfaction of loans. These properties are carried as other assets at
the lower of cost or fair value less estimated costs to sell the properties.
When the property is acquired through foreclosure, any excess of the related
loan balance over the fair value less expected sales costs, is charged against
the allowance for loan and lease losses. Subsequent write-downs or gains and
losses upon sale, if any, are charged to other operating expense.
MORTGAGE SERVICING RIGHTS
The value of mortgage servicing rights either attained through the
origination of mortgage loans or the purchase of a servicing rights portfolio
are recognized as separate capitalized assets. When the originated mortgage
loans are sold or securitized into the secondary market, the Company allocates
the total cost of the mortgage loans between mortgage servicing rights and other
retained interests, and the loans, based on their relative fair values. The cost
of mortgage servicing rights and other retained interests is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, the servicing rights are stratified into pools
based on one or more predominant risk characteristics of the underlying loans
including loan type, interest rate, term and geographic location. Impairment
represents the excess of carrying value of a stratified pool over its fair
value, and is recognized through a valuation allowance. The fair value of each
servicing rights pool is evaluated based on the present value of estimated
future cash flows using a discount rate commensurate with the risk associated
with that pool, given current market conditions. Estimates of fair value include
assumptions about prepayment speeds, interest rates, and other factors which are
subject to change over time. Changes in these underlying assumptions could cause
the fair value of mortgage servicing rights, and the related valuation
allowance, to change significantly in the future.
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
37
38
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 including certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. A review of these assets in
1997 resulted in an impairment charge of $2,081,000.
TRUST ASSETS
Assets that are held by subsidiaries in a fiduciary or agency capacity are
not included in the consolidated financial statements as they are not assets of
the Company. The total assets under management at December 31, 1998 was
$4,156,437,000.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to effectively manage its exposure to market risk. Interest rate derivative
financial instruments (swap, floor and cap agreements) are used to manage
interest rate exposure by hedging certain assets and liabilities. Income and
expense are accrued under the terms of the agreements based on expected
settlement payments, and are recorded as a component of net interest income.
Fees paid on these financial contracts are amortized over their contractual life
as a component of the interest reported on the asset or liability hedged. If a
hedged asset or liability settles before maturity of the instruments used as a
hedge, the derivatives are used to hedge a similar asset or liability. Gains and
losses on sales or cancellation of derivative financial instruments which are
used to manage interest rate risk or which are considered cash flow hedges are
deferred and amortized into income or expenses over the original maturity period
of the financial instrument.
INCOME TAXES
Deferred taxes are provided on a liability method whereby net operating
losses, tax credit carryforwards, and deferred tax assets are recognized for
deductible temporary differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE
Basic earnings per share is based on dividing net income by the weighted
average number of shares of common stock outstanding during the periods. Diluted
earnings per share reflects the potential dilution that could occur if stock
options granted pursuant to incentive stock option plans were exercised or
converted into common stock, and any shares contingently issuable, that then
shared in the earnings of the Company. Earnings per share amounts have been
restated to give effect to mergers accounted for as a pooling of interests
requiring restatement 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
14.
38
39
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 requires disclosure of operating segments based on the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. The
adoption of FAS 131 did not affect the Company's results of operations or
financial position. See Note 15 for further information.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board (FASB) issued FAS No.
130, "Reporting Comprehensive Income". This statement established standards for
the reporting and display of comprehensive income and its components and
requires presentation in a full set of general-purpose financial statements.
Comprehensive income is the change in an enterprise's equity that results from
transactions during the period with nonowner sources; it includes net income and
specific items that bypass net income and are reported as a separate component
of equity. The Company adopted this Statement in 1998 and it had no impact on
its financial position or results of operations.
In 1998, the FASB issued FAS No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefits", which revised disclosure for pension and
other postretirement benefit plans. The Company adopted this statement in 1998
and it did not have a material impact on the Company's financial position or
results of operation.
The FASB has issued FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", in 1998, which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
No. 133 is effective for fiscal quarters of all fiscal years beginning after
June 15, 1999. The Company is currently assessing the impact of this statement
on its financial position and results of operations.
The FASB has issued FAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," in 1998. The Statement requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on ability and intent to sell or hold those
investments. The Company currently does not securitize its mortgage loans held
for sale, therefore this statement is expected to have an immaterial impact on
the Company's financial position and results of operations. FAS No. 134 is
effective for the first fiscal quarter beginning after December 15, 1998.
NOTE 2 -- MERGERS AND ACQUISITIONS
Mergers occurred during the reported periods as follows:
On March 27, 1998, Midwest Federal Financial Corp. (Midwest), a one-bank
holding company, merged into the Company, which issued 1,912,357 common shares
in exchange for the 1,628,924 outstanding Midwest shares. At the date of the
merger, Midwest had total assets of approximately $211 million. This transaction
was accounted for as a pooling of interests, however, the size of the
transaction was not material to the Company's consolidated financial statements.
Therefore, results previous to the date of acquisition were not restated. The
results of Midwest's operations have been included in the Company's operating
results since March 27, 1998.
On February 17, 1998, Investors Management Group, LTD (IMG), an asset
management firm, was acquired by the Company. AMCORE issued 270,139 shares at
closing for an approximate value of
39
40
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$6.0 million. Additional shares valued at $4.8 million may be issued contingent
upon IMG's performance from 1998 through 2000. At December 31, 1998, additional
shares of 70,332 were earned and issued. At the date of the acquisition, IMG had
approximately $1.6 billion in assets under management. This transaction was
accounted for as a purchase. The results of IMG's operations have been included
in the Company's operating results since February 17, 1998. Proforma net income
and earnings per share are not materially different from historical amounts. The
excess of the purchase price over the fair value of assets acquired was recorded
as goodwill and is being amortized over fifteen years using the straight-line
method.
On July 16, 1997, Country Bank Shares Corporation (Country), a five-bank
holding company, merged into the Company, which issued 2,469,417 common shares
in exchange for the 433,699 outstanding Country shares. At the date of the
merger, Country had total assets of approximately $310 million. This transaction
was account for as a pooling of interests and, accordingly, all financial
information of the Company has been restated to include Country.
On April 18, 1997, First National Bancorp, Inc. (FNB), a one-bank holding
company, merged into the Company, which issued 2,822,286 common shares in
exchange for the 249,539 outstanding FNB shares. At the date of the merger, FNB
had total assets of approximately $219 million. This transaction was account for
as a pooling of interests and, accordingly, all financial information of the
Company has been restated to include FNB.
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, 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.
In connection with these mergers, the Company recorded charges of
$3,307,000 in 1998 and $3,845,000 in 1997 for merger-related costs. The charges
include costs for data conversion expenses, professional fees, severance and
personnel related costs, and other miscellaneous costs. At December 31, 1998,
the remaining liability was approximately $2,000,000 relating primarily to data
processing expenses and contract termination costs, which are scheduled to occur
in 1999. At December 31, 1997, the remaining liability was approximately
$750,000 relating primarily to data conversion expenses.
40
41
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- SECURITIES
A summary of securities at December 31, 1998, 1997, and 1996 were as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
AT DECEMBER 31, 1998
Securities Available for Sale:
U.S. Treasury......................... $ 66,431 $ 1,047 $ (19) $ 67,459
U.S. Government agencies.............. 82,814 701 (2) 83,513
Agency mortgage-backed securities..... 727,506 4,645 (22,308) 709,843
State and political subdivisions...... 312,116 11,489 (374) 323,231
Corporate obligations and other....... 144,106 586 (1,206) 143,486
---------- ------- -------- ----------
Total Securities Available for
Sale............................. $1,332,973 $18,468 $(23,909) $1,327,532
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury............................ $ 1,053 $ 15 $ -- $ 1,068
U.S. Government agencies................. 27 -- -- 27
State and political subdivisions......... 15,061 261 (47) 15,275
Corporate obligations and other.......... 1 -- -- 1
---------- ------- -------- ----------
Total Securities Held to Maturity..... $ 16,142 $ 276 $ (47) $ 16,371
---------- ------- -------- ----------
Total Securities.................... $1,349,115 $18,744 $(23,956) $1,343,903
========== ======= ======== ==========
AT DECEMBER 31, 1997:
Securities Available for Sale:
U.S. Treasury......................... $ 104,132 $ 836 $ (84) $ 104,884
U.S. Government agencies.............. 267,696 938 (833) 267,801
Agency mortgage-backed securities..... 586,285 5,651 (1,948) 589,988
State and political subdivisions...... 316,028 10,069 (189) 325,908
Corporate obligations and other....... 153,501 458 (947) 153,012
---------- ------- -------- ----------
Total Securities Available for
Sale............................. $1,427,642 $17,952 $ (4,001) $1,441,593
========== ======= ======== ==========
Securities Held to Maturity:
U.S. Treasury............................ $ 1,554 $ 7 $ -- $ 1,561
State and political subdivisions......... 13,866 207 (26) 14,047
Corporate obligations and other.......... 3 -- -- 3
---------- ------- -------- ----------
Total Securities Held to Maturity..... $ 15,423 $ 214 $ (26) $ 15,611
---------- ------- -------- ----------
Total Securities.................... $1,443,065 $18,166 $ (4,027) $1,457,204
========== ======= ======== ==========
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
========== ======= ======== ==========
41
42
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, 1998, 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..................... $ 62,449 $ 62,481 $ 2,500 $ 2,523
Due after one year through five years....... 164,805 167,961 9,811 9,979
Due after five years through ten years...... 92,792 96,212 1,954 1,986
Due after ten years......................... 188,907 194,992 1,877 1,883
Mortgage-backed securities (agency and
corporate)................................ 824,020 805,886 -- --
---------- ---------- ------- -------
Total Securities....................... $1,332,973 $1,327,532 $16,142 $16,371
========== ========== ======= =======
At December 31, 1998, 1997, and 1996, securities with a fair value of
approximately $826,822,000, $927,772,000 and $755,611,000, 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, 1998 and 1997,
was as follows:
1998 1997
---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural...................... $ 659,946 $ 538,259
Real estate-construction.................................... 105,574 60,624
Real estate-commercial...................................... 626,358 487,321
Real estate-residential..................................... 658,406 572,509
Installment and consumer.................................... 398,318 301,163
Direct lease financing...................................... 3,127 3,172
---------- ----------
Gross loans and leases.................................... $2,451,729 $1,963,048
Unearned income........................................... (211) (374)
---------- ----------
Loans and leases, net of unearned income.................. $2,451,518 $1,962,674
Allowance for loan and lease losses....................... (26,403) (19,908)
---------- ----------
NET LOANS AND LEASES...................................... $2,425,115 $1,942,766
========== ==========
42
43
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-performing loan information as of and for the years ended December 31,
1998 and 1997 was as follows:
1998 1997
------- -------
(IN THOUSANDS)
Impaired Loans:
Non-accrual Loans:
Commercial............................................. $11,139 $10,060
Real estate............................................ 1,963 4,484
Troubled debt restructurings.............................. -- 377
Other Non-performing:
Non-accrual loans(1)...................................... 5,077 4,947
------- -------
Total Non-performing Loans.................................. $18,179 $19,868
======= =======
Loans 90 days or more past due and still accruing......... $ 7,272 $ 3,386
- ------------------
(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.
1998 1997
------- -------
Allowance provided for impaired loans, included in the
allowance for loan losses................................. $ 3,854 $ 2,311
Impaired loans with no specific allowance for loan losses
provided.................................................. 3,782 8,111
Average recorded investment in impaired loans............... 13,367 15,874
Interest income recognized from impaired loans.............. 493 717
An analysis of the allowance for loan and lease losses for the years ended
December 31, 1998, 1997, and 1996 follows:
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year................................ $19,908 $19,295 $17,107
Allowance for loan and lease losses acquired through
merger.................................................... 2,146 -- --
Provision charged to expense................................ 7,993 7,045 5,428
Loans charged off........................................... (5,064) (7,777) (4,641)
Recoveries on loans previously charged off.................. 1,420 1,345 1,401
------- ------- -------
BALANCE AT END OF YEAR.................................... $26,403 $19,908 $19,295
======= ======= =======
The Company's subsidiaries have had, and are expected to have in the
future, banking transactions with directors, executive officers, their immediate
families and affiliated companies in which they are a principal stockholder
(commonly referred to as related parties). These transactions were made in the
ordinary course of business on substantially the same terms as comparable
transactions with other borrowers.
Related party loan transactions during 1998 and 1997 were as follows:
1998 1997
--------- --------
(IN THOUSANDS)
Balance at beginning of year................................ $ 44,691 $ 44,074
New loans................................................... 116,959 85,123
Repayments.................................................. (117,381) (84,506)
--------- --------
BALANCE AT END OF YEAR.................................... $ 44,269 $ 44,691
========= ========
43
44
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value amounts have been estimated by the Company using available
market information and appropriate valuation methodologies as discussed below.
Considerable judgement was required, however, to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented below
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.
The following table shows the carrying amounts and fair values of financial
instruments at December 31, 1996 and 1997 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:
1998 1997
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Cash and cash equivalents..................... $ 144,199 $ 144,199 $ 105,218 $ 105,218
Interest earning deposits in banks............ 13,397 13,397 2,206 2,206
Federal funds sold and other short-term
investments................................. 9,427 9,427 633 633
Loans and leases held for sale................ 46,836 48,455 29,869 30,354
Securities available for sale................. 1,327,532 1,327,532 1,441,593 1,441,593
Securities held to maturity................... 16,142 16,371 15,423 15,611
Mortgage servicing rights..................... 4,753 5,040 5,807 6,798
The carrying amounts and fair value of accruing loans and leases at
December 31, 1998 and 1997 were as follows:
1998 1997
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural........ $ 648,807 $ 665,386 $ 622,318 $ 630,730
Real estate................................... 1,388,374 1,428,237 1,017,501 1,038,293
Installment and consumer, net................. 393,030 397,535 300,170 298,364
Direct lease financing........................ 3,127 3,226 3,194 3,279
---------- ---------- ---------- ----------
Total loans and leases...................... $2,433,338 $2,494,384 $1,943,183 $1,970,666
========== ========== ========== ==========
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 and 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 $18.2 million and $19.5 million in 1998 and 1997,
respectively, was not estimated because it was not practicable to reasonably
assess the credit risk adjustment that would be applied in the marketplace for
such loans. (See Note 4).
The carrying value of interest receivable and payable approximates fair
value due to the relatively short period of time between accrual and expected
realization. At December 31, 1998 and 1997, interest receivable
44
45
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was $30.8 million and $28.3 million, respectively, and interest payable was
$23.7 million and $22.5 million, respectively.
The following table shows the carrying amounts and fair values of financial
instrument liabilities and other off-balance sheet financial instruments at
December 31, 1998 and 1997:
1998 1997
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Demand deposits and savings................... $1,352,165 $1,352,165 $1,088,836 $1,086,836
Time deposits................................. 1,595,559 1,620,382 1,440,207 1,452,360
Short-term borrowings......................... 498,211 499,917 647,509 649,771
Long-term borrowings.......................... 330,361 332,418 159,125 161,323
Commitments to extend credit.................. -- -- -- (11)
Standby letters of credit..................... (366) (1,019) (295) (681)
Interest rate swap agreements................. (666) (2,483) (459) (1,075)
Interest rate floor agreements................ 637 (1,540) 1,072 183
Interest rate cap agreements.................. 635 247 941 13
Forward contracts............................. -- (264) -- (172)
The fair value of deposits with no stated maturity, such as non-interest
bearing 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 rate.
The fair value of off-balance sheet instruments was 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.
45
46
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, 1998 and 1997, follows:
1998 1997
-------- --------
(IN THOUSANDS)
Land........................................................ $ 10,345 $ 9,694
Buildings and improvements.................................. 55,710 53,956
Furniture and equipment..................................... 47,975 39,348
Leasehold improvements...................................... 5,154 5,520
Construction in progress.................................... 1,300 1,269
-------- --------
Total premises and equipment................................ $120,484 $109,787
Accumulated depreciation and amortization................... (61,721) (55,013)
-------- --------
PREMISES AND EQUIPMENT, NET............................... $ 58,763 $ 54,774
======== ========
NOTE 7 -- MORTGAGE SERVING RIGHTS
The unpaid principal balance of mortgage loans serviced for others, which
are not included on the consolidated balance sheets, was $735,882,000 and
$721,803,000 at December 31, 1998 and 1997, respectively. Of this amount, the
Company has recorded both originated and purchased capitalized mortgage
servicing rights, as shown below, on mortgage loans serviced balances of
$567,129,000 and $533,869,000 at December 31, 1998 and 1997, respectively. The
remaining balance of originated loans sold and serviced for others also have
servicing rights associated with them; however, these servicing rights arose
prior to the adoption of FAS 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, 1998 and 1997, respectively:
1998 1997
------- -------
(IN THOUSANDS)
Unamortized cost of mortgage servicing rights............... $ 5,934 $ 6,091
Valuation allowance......................................... (1,181) (284)
------- -------
Carrying value of mortgage servicing rights................. $ 4,753 $ 5,807
======= =======
Fair value of mortgage servicing rights..................... $ 5,040 $ 6,798
======= =======
The following is an analysis of the mortgage servicing rights activity and
the related valuation allowance for 1998 and 1997:
1998 1997
------- -------
(IN THOUSANDS)
UNAMORTIZED COST OF MORTGAGE SERVICING RIGHTS
Balance at beginning of year................................ $ 6,091 $ 5,154
Additions of mortgage servicing rights...................... 3,915 1,706
Additions of mortgage servicing rights from acquisition..... 510 --
Sale of mortgage servicing rights........................... (2,146) --
Amortization................................................ (2,436) (769)
------- -------
Balance at end of year.................................... $ 5,934 $ 6,091
======= =======
46
47
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 1997
------- -------
(IN THOUSANDS)
VALUATION ALLOWANCE
Balance at beginning of year................................ $ 284 $ --
Addition of impairment allowance from acquisition........... 8 --
Impairment allowance charged to expense..................... 1,088 284
Recoveries on impairments................................... (199) --
------- -------
Balance at end of year.................................... $ 1,181 $ 284
======= =======
NOTE 8 -- SHORT TERM BORROWINGS
At December 31, 1998, 1997 and 1996, short-term borrowings consisted of:
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Securities sold under agreements to repurchase............. $434,071 $526,607 $441,915
Federal Home Loan Bank borrowings.......................... 32,629 70,679 74,168
Federal funds purchased.................................... 29,200 44,550 14,800
U.S. Treasury tax and loan note accounts................... 2,311 3,673 3,743
Commercial paper borrowings................................ -- -- 14,455
-------- -------- --------
TOTAL SHORT-TERM BORROWINGS.............................. $498,211 $647,509 $549,081
======== ======== ========
Additional details on securities sold under agreements to repurchase are as
follows:
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Average balance during the year............................ $529,373 $559,344 $398,701
Maximum month-end balance during the year.................. 630,279 660,774 458,540
Weighted average rate during the year...................... 5.73% 5.75% 5.55%
Weighted average rate at December 31....................... 5.38% 5.82% 5.37%
The Company has a commercial paper agreement with an unrelated financial
institution (Issuer) that provides for the Company to issue non-rated short-term
unsecured debt obligations at negotiated rates and terms, not to exceed
$50,000,000. 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 $50,000,000 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. As
of December 31, 1998, the entire $50,000,000 of commercial paper and $50,000,000
line of credit was available.
47
48
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at December 31, 1998 and
1997:
1998 1997
-------- --------
(IN THOUSANDS)
Federal Home Loan Bank borrowings........................... $288,757 $117,195
Capital Trust preferred securities.......................... 40,000 40,000
Other long-term borrowings.................................. 1,604 1,930
-------- --------
TOTAL LONG-TERM BORROWINGS................................ $330,361 $159,125
======== ========
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. Certain Federal Home Loan Bank borrowings have
prepayment penalties and call features associated with them. The ending balance
of the borrowings was $288,757,000 and $117,195,000 at December 31, 1998 and
1997, respectively. The average maturity of these borrowings at December 31,
1998 is 6.02 years, with a weighted average borrowing rate of 5.23%.
On March 25, 1997, the Company issued $40 million of capital securities
through AMCORE Capital Trust 1 ("Trust"), a statutory business trust. All of the
common securities of the Trust are owned by the Company. The capital securities
pay cumulative cash distributions semiannually at an average rate of 9.35%. The
securities are redeemable from March 25, 2007 until March 25, 2017 at a
declining rate of 104.6760% to 100% of the principal amount. After March 25,
2017, they are redeemable at par until June 15, 2027 when redemption is
mandatory. Prior redemption is permitted under certain circumstances such as
changes in tax or regulatory capital rules. The proceeds of the capital
securities were invested by the Trust in junior subordinated debentures which
represents all of the assets of the Trust. The Company fully and unconditionally
guarantees the capital securities through the combined operation of the
debentures and other related documents. The Company's obligations under the
guarantee are unsecured and subordinate to senior and subordinated indebtedness
of the company.
Other long-term borrowings include a non-interest bearing note requiring
annual payments of $444,000 through 2002. The note was discounted at an interest
rate of 8.0%.
Scheduled reductions of long-term borrowings are as follows:
TOTAL
--------------
(IN THOUSANDS)
1999........................................................ $ 419
2000........................................................ 75,598
2001........................................................ 498
2002........................................................ 65,762
2003........................................................ 2,070
Thereafter.................................................. 186,014
--------
TOTAL..................................................... $330,361
========
NOTE 10 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to effectively manage its exposure to market risk.
48
49
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
A summary of the contract amount of the Company's exposure to off-balance
sheet risk as of December 31, 1998 and 1997, is as follows (in thousands):
1998 1997
-------- --------
Financial instruments whose contract amount represent credit
risk only:
Commitments to extend credit.............................. $446,833 $437,942
Standby letters of credit................................. 81,495 54,494
Financial instruments whose contract or notional amount
represent market risk only:
Interest rate swap agreements............................. 220,000 270,000
Interest rate floor agreements............................ 150,000 145,000
Interest rate cap agreements.............................. 145,000 75,000
Forward contracts......................................... 33,211 23,664
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
49
50
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998.
Following is a table outlining the nature and terms of each swap agreement
as of December 31, 1998:
NOTIONAL MATURITY
TYPE OF SWAP AMOUNT (000'S) PAY RECEIVE DATE
- ------------ -------------- ------------------------- ------------- --------
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.............. 10,000 Fixed (8.520%) PRIME 09/22/01
Fixed Rate.............. 10,000 Fixed (8.530%) PRIME 09/22/01
Fixed Rate.............. 5,000 Fixed (5.940%) * Fixed 10/22/07
(6.750%)
Fixed to Floating....... 25,000 3 Month LIBOR minus 15 BP Fixed 08/06/07
(7.000%)
Fixed to Floating....... 10,000 3 Month LIBOR minus 15 BP Fixed 08/27/07
(7.000%)
- ------------------
(BP=basis points)
* This swap currently pays a fixed rate. The swap will pay 3 month LIBOR minus 8
basis points starting in October, 1999.
The fixed rate swap agreements totaling $60,000,000 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 fixed rate swap for
$5,000,000 where the Company receives 6.750% and the fixed to floating swap
agreements totaling $35,000,000 where the Company receives 7.000%, are used to
lower the Company's cost of deposits.
The Company is also party to various interest rate floor contracts with a
notional amount totaling $150,000,000. Interest rate floor contracts totaling
$25,000,000 provides the Company with a market risk hedge on the mortgage-backed
security portfolio in the event of a significant decline in interest rates. The
remaining $125,000,000 of interest rate floor contracts and corresponding
$125,000,000 of interest rate caps provide the Company with a market risk hedge
on the Company's repurchase agreements. The remaining interest rate cap totaling
$20,000,000 provides the Company with a market risk hedge on the money market
deposit accounts.
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.
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
50
51
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
volatility associated with holding these assets and to yield additional fee
income. The type of risk associated with these transactions is opportunity cost
risk. Any option premium income generated by these transactions is deferred and
recorded upon either the expiration or exercise date of the option. If the
option is exercised by the purchaser, the premium income is recognized as a
component of the gain or loss on the underlying security. If the option expires
unexercised, the premium income is recognized as other non-interest income.
There were no call option agreements outstanding at December 31, 1998.
NOTE 11 -- 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, 1998, approximately
$44,925,000 was available for payment to the Company without prior 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, 1998, the maximum amount available for transfer
from the subsidiaries to the Company in the form of loans approximated
$20,349,000.
NOTE 12 -- STOCK INCENTIVE AND EMPLOYEE BENEFIT PLANS
At December 31, 1998, the Company has three stock-based compensation plans
which are described below. Grants under those plans are accounted for following
APB Opinion No. 25 and related interpretations.
STOCK INCENTIVE PLANS. In 1995, stockholders approved the adoption of the
1995 Stock Incentive Plan (Plan). The Plan provides for the ability to grant
stock options, stock appreciation rights, performance units, and stock awards to
key employees. The total number of shares approved and available for grant under
the Plan in its first year were 2.5% of the total shares of stock outstanding as
of the effective date and 1.5% of outstanding shares in each subsequent Plan
year not to exceed 525,000 in any year. Options to purchase shares of common
stock of the Company and performance units were granted to key employees
pursuant to both the Plan and previous stock incentive plans.
Stock Options. Non-Qualified Stock Options are issued at an option price
equal to the fair market value of the shares on the grant date and become
exercisable at 25% annually beginning one year from the date of grant. The
following table presents certain information with respect to stock options
issued pursuant to these incentive plans.
1998 1997 1996
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- ------- --------- -------
Options outstanding at beginning
of year........................ 1,405,423 $12.68 1,384,017 $11.04 1,139,776 $10.14
Options granted.................. 282,000 25.48 295,875 18.50 350,625 13.33
Options assumed in business
combinations................... 349,422 8.58 -- -- -- --
Option reloads................... 106,294 23.47 -- -- -- --
Options exercised................ (448,754) 10.25 (258,602) 10.42 (98,134) 8.60
Options lapsed................... (17,793) 18.19 (15,867) 15.80 (8,250) 13.01
--------- ------ --------- ------ --------- ------
Options outstanding at end of
year........................... 1,678,592 $15.68 1,405,423 $12.68 1,384,017 $11.04
========= ====== ========= ====== ========= ======
Options exercisable at end of
year........................... 1,394,592 $13.58 1,405,423 $12.68 1,384,017 $11.04
========= ====== ========= ====== ========= ======
51
52
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, 1997 and 1996 was approximately $457,000,
$60,000 and $354,000, respectively. The following table presents certain
information with respect to issuances pursuant to these plans.
1998 1997 1996
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- ------- --------- -------
Units outstanding at beginning of
year........................... 282,386 -- 336,568 -- 330,879 --
Units granted.................... 150,116 -- 113,253 -- 104,298 --
Units paid....................... -- -- (113,883) $ 4.81 (98,609) $ 4.45
Units forfeited.................. (92,059) -- (53,552) -- -- --
--------- ------ --------- ------ --------- ------
Units outstanding at end of
year........................... 340,443 -- 282,386 -- 336,568 --
========= ====== ========= ====== ========= ======
The following table presents a summary of issuances pursuant to these
incentive plans.
1998 1997 1996
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
YEAR END BALANCES SHARES PRICE SHARES PRICE SHARES PRICE
- ----------------- --------- ------- --------- ------- --------- -------
Options outstanding.................... 1,676,592 $15.58 1,405,423 $12.68 1,384,017 $11.04
Units outstanding...................... 340,443 -- 282,386 -- 336,568 --
Available to grant under Plan.......... 75,269 -- 53,814 -- 60,446 --
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for stock option grants issued during 1998 pursuant to all option
plans. Had compensation cost for these grants been determined based on the grant
date fair values of awards (the method described in FAS No. 123, "Accounting for
Stock-Based Compensation"), reported net income and earnings per common share
would have been reduced to the pro forma amounts shown below:
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1998, 1997 and 1996, respectively: dividend rates of
2.36%, 1.79% and 3.20%; price volatility of 30.99%, 69.95% and 21.71%, risk-free
interest rates of 5.73%, 6.64% and 6.34%; and expected lives of 6.7, 6.5 and 6.5
years.
1998 1997 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income:
As reported....................................... $39,581 $28,664 $31,876
Pro forma......................................... 37,350 26,690 31,191
Basic earnings per share:
As reported....................................... $ 1.39 $ 1.07 $ 1.20
Pro forma......................................... 1.31 0.99 1.17
Diluted earnings per share:
As reported....................................... $ 1.36 $ 1.05 $ 1.18
Pro forma......................................... 1.28 0.97 1.16
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
52
53
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, 1997
and 1996 was approximately $514,000, $370,000 and $467,000, respectively.
In addition, the Company pays a lifetime annual retainer to certain retired
directors. Effective January 1, 1993, the Company adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" to
account for these benefits. This statement requires employers to recognize
postretirement benefits on an accrual basis rather than on a cash basis. The
expense in 1998, 1997 and 1996 related to this plan was $73,000, $82,000 and
$107,000, respective. The transition obligation, representing the present value
of future payments upon adoption of accrual basis accounting, was approximately
$842,000 and is being amortized over a twenty year period.
In 1994, stockholders approved the 1994 Stock Option Plan for Non-Employee
Directors (Option Plan). The Option Plan provides that each current eligible
non-employee director and each subsequently elected non-employee director
receive Options to purchase common stock of the Company. Each option granted
under the Option Plan 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 all of which were granted prior to December 15, 1998.
1998 1997 1996
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- ------- ------- ------- -------
Options outstanding at beginning of
year................................. 192,750 $19.67 130,500 $13.11 63,750 $12.87
Options granted........................ 56,500 25.50 69,000 18.50 75,000 13.33
Options exercised...................... (11,250) 14.44 (6,000) 13.06 -- --
Options lapsed......................... (10,000) 21.14 (750) 13.33 (8,250) 13.23
------- ------ ------- ------ ------- ------
Options outstanding at end of year..... 228,000 $17.40 192,750 $19.67 130,600 $13.11
======= ====== ======= ====== ======= ======
Options exercisable at end of year..... 177,000 $15.06 123,750 $20.32 55,500 $12.81
======= ====== ======= ====== ======= ======
Available to grant under Plan at year
end.................................. 54,750 -- 101,250 -- 169,500 --
======= ====== ======= ====== ======= ======
OPTIONS SUMMARY. The following table presents certain information with
respect to issuances of stock options pursuant to all plans discussed above.
WEIGHTED-AVG
NUMBER REMAINING WEIGHTED-AVG
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ ----------- ---------------- --------------
$2.60-7.80......................................... 202,987 3.5years $ 5.32
7.80-10.40........................................ 108,011 3.8 10.11
10.40-13.00........................................ 370,116 5.4 12.79
13.00-15.60........................................ 454,242 7.1 13.63
15.60-20.80........................................ 336,943 8.1 18.36
20.80-26.00........................................ 432,293 8.4 24.99
--------- --- ------
Total Options Outstanding.......................... 1,904,592 6.7 $15.80
========= === ======
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
53
54
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Code. The Security Plan offers participants a personal retirement account,
profit sharing payment and personal savings account [401(k)]. In 1998, the
Security Plan was amended to provide for a higher match percent to employee
contributions and the profit sharing portion converted to a cash payment rather
than contributed to employee accounts. The expense related to the Security Plan
and other similar plans from acquired companies for the years ended December 31,
1998, 1997 and 1996 was approximately $3,555,000, $2,763,000 and $3,248,000,
respectively.
The Company maintains non-qualified non-contributory pension plans that
cover senior executive management. One non-qualified plan provides pension
benefits that would have been provided under the qualified plans in the absence
of limits placed on qualified plan benefits by the Internal Revenue Service.
Another plan provides defined pension benefits to a select group of management
or highly compensated employees. The benefits payable under the plan are based
upon three percent of final base salary times number of years of service and
shall not exceed 70% nor be less than 45% of a participant's final base salary.
The Company's funding policy is to fund benefits as they are paid. The expense
related to these plans was approximately $456,000, $217,000, and $220,000 for
1998, 1997 and 1996, respectively.
In addition to the Security Plan, certain health care and life insurance
benefits are made available to active employees. The cost of these benefits is
expensed as incurred. Group health benefits are offered to retirees with 100% of
the cost borne by the retiree.
NOTE 13 -- INCOME TAXES
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Currently paid or payable................................... $15,468 $12,735 $12,293
Deferred.................................................... (1,154) (3,817) (132)
------- ------- -------
TOTAL..................................................... $14,314 $ 8,918 $12,161
======= ======= =======
The effective tax rates on income for 1998, 1997, and 1996 were 26.6%,
23.7% and 27.6%, respectively. Income tax expense was less than the amounts
computed by applying the federal statutory rate of 35% due to the following:
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Income tax at statutory rate................................ $18,863 $13,154 $15,413
Increase (decrease) resulting from:
Tax-exempt income......................................... (5,479) (5,027) (4,718)
State income taxes, net of federal benefit................ 24 (301) 1,346
Non-deductible expenses, net.............................. 1,395 1,581 356
Other, net................................................ (489) (489) (236)
------- ------- -------
TOTAL.................................................. $14,314 $ 8,918 $12,161
======= ======= =======
54
55
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
AT DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Deferred tax assets:
Deferred compensation..................................... $ 4,807 $ 4,094
Securities................................................ 2,277 --
Allowance for loan and lease losses....................... 9,630 7,784
Other..................................................... 643 4,257
------- -------
Total deferred tax assets.............................. 17,357 $16,135
------- -------
Deferred tax liabilities:
Securities................................................ $ -- $ 5,895
Premises and equipment.................................... 4,491 4,946
Other..................................................... 2,914 4,248
------- -------
Total deferred tax Liabilities......................... $ 7,405 $15,089
------- -------
NET DEFERRED TAX ASSET.................................... 9,952 1,046
Less: Tax effect of net unrealized (gain) loss on securities
available for sale reflected in stockholders' equity...... 2,175 (5,577)
------- -------
NET DEFERRED TAX ASSET EXCLUDING NET UNREALIZED (GAINS)
LOSS ON SECURITIES AVAILABLE FOR SALE.................. $ 7,777 $ 6,623
======= =======
Net operating loss carryforwards for state income tax purposes were
approximately $15,615,000 at December 31, 1998. The associated deferred asset is
$1,228,000 ($798,000 net of federal). The carryforwards expire beginning
December 31, 1999 through December 31, 2013. A valuation allowance of $798,000
has been established at December 31, 1998 against the deferred tax asset, due to
the uncertainty surrounding the utilization of state net operating loss
carryforwards.
Retained earnings at December 31, 1998 include $3,182,000 for which no
provision for income tax has been made. This amount represents allocations of
income to thrift bad debt deductions for tax purposes only. This amount will
only be taxable upon the occurrence of certain events. At this time management
does not foresee the occurrence of any of these events.
Tax benefits of $2,292,000 have been credited directly to paid in capital
for non-qualified stock options exercised during the year.
NOTE 14 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of common shares outstanding. The weighted average
common shares outstanding were 28,515,000, 26,862,000 and 26,649,000 for 1998,
1997 and 1996, respectively.
Diluted earnings per share reflects the potential dilution using the
treasury stock method that could occur if stock options granted pursuant to
incentive stock plans were exercised or converted into common stock, therefore
sharing in the earnings of the Company. The weighted average diluted shares
outstanding were 29,098,000, 27,405,000 and 26,987,000 for 1998, 1997 and 1996,
respectively.
Prior year's earnings per share amounts have been restated to give effect
to the 1997 mergers accounted for as a pooling of interests requiring
restatement and the three-for-two stock split on September 17, 1997.
55
56
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SEGMENT INFORMATION
The Company's operations include three business segments: Banking, Trust
and Asset Management, and Mortgage Banking. The Banking segment provides
commercial and personal banking services through its 66 banking locations in
northern Illinois and south-central Wisconsin, and the Consumer Finance
subsidiary. The services provided by this segment include lending, deposits,
cash management, safe deposit box rental, automated teller machines, and other
traditional banking services. The Trust and Asset Management segment provides
trust, investment management and brokerage services. It also acts as an advisor
and provides fund administration to the Vintage Mutual Fund and offers a
complete line of commercial and individual insurance products. These products
are distributed nationally (i.e. Vintage Equity Fund is available through
Charles Schwaab), regionally to institutional investors and corporations, and
locally through AMCORE's 66 banking locations. The Mortgage Banking segment
originates residential mortgage loans for sale to AMCORE's banking affiliates
and the secondary market, as well as providing servicing of these mortgage
loans.
The Company's three reportable segments are strategic business units that
are separately managed as they offer different products and services. The
Company evaluates financial performance based on several factors, of which the
primary financial measure is segment profit before remittances to the banking
affiliates. The accounting policies of the three segments are the same as those
described in the summary of significant accounting policies (Note 1). The
Company accounts for intersegment revenue, expenses and transfers at current
market prices.
TRUST AND ASSET MORTGAGE TOTAL
BANKING MANAGEMENT BANKING SEGMENTS
---------- --------------- -------- ----------
(IN THOUSANDS)
BUSINESS SEGMENTS
1998
Net interest income......................................... $ 122,542 $ 131 $ 2,551 $ 125,224
Provision for loan and lease losses......................... 7,993 -- -- 7,993
Non-interest income......................................... 25,435 26,022 11,472 62,929
Operating expenses.......................................... 87,324 18,293 11,396 117,013
Depreciation and amortization............................... 7,285 811 89 8,185
Income taxes................................................ 13,150 3,388 1,054 17,592
Segment profit.............................................. $ 39,510 $ 4,472 $ 1,573 $ 45,555
After tax merger related and information systems charges.... 1,245 -- -- 1,245
---------- ------- ------- ----------
Segment profit before merger related charges................ $ 40,755 $ 4,472 $ 1,573 $ 46,800
========== ======= ======= ==========
Segment assets.............................................. $4,227,050 $23,944 $54,656 $4,305,650
========== ======= ======= ==========
1997
Net interest income......................................... $ 110,778 $ 64 $ 1,578 $ 112,420
Provision for loan and lease losses......................... 7,045 -- -- 7,045
Non-interest income......................................... 23,618 18,417 5,583 47,618
Operating expenses.......................................... 84,745 13,601 6,366 104,712
Depreciation and amortization............................... 6,117 299 89 6,505
Income taxes................................................ 10,211 1,999 320 12,530
Segment profit.............................................. $ 32,395 $ 2,881 $ 475 $ 35,751
After tax merger related and information systems charges.... 2,833 -- -- 2,833
---------- ------- ------- ----------
Segment profit before merger related and information system
charges................................................... $ 35,228 $ 2,881 $ 475 $ 38,584
========== ======= ======= ==========
Segment assets.............................................. $3,738,080 $ 6,322 $28,298 $3,772,700
========== ======= ======= ==========
1996
Net interest income......................................... $ 104,048 $ 102 $ 1,381 $ 105,531
Provision for loan and lease losses......................... 5,428 -- -- 5,428
Non-interest income......................................... 21,966 12,792 5,288 40,046
Operating expenses.......................................... 76,545 9,694 5,595 91,834
Depreciation and amortization............................... 6,551 271 71 6,893
Income taxes................................................ 12,376 1,304 432 14,112
Segment profit.............................................. $ 31,665 $ 1,896 $ 642 $ 34,203
========== ======= ======= ==========
Segment assets.............................................. $3,367,594 $ 5,165 $18,945 $3,391,704
========== ======= ======= ==========
56
57
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
1998 1997 1996
---------- ---------- ----------
NET INTEREST INCOME AND NON-INTEREST INCOME
Total for segments................................... $ 188,153 $ 160,038 $ 145,577
Unallocated revenues:
Holding company revenues........................... 20,931 19,919 18,004
Other.............................................. 55 3,309 5,063
Elimination of intersegment revenues................. (27,657) (23,666) (20,439)
---------- ---------- ----------
Consolidated total revenues.......................... $ 181,482 $ 159,600 $ 148,205
========== ========== ==========
PROFIT
Total for segments................................... $ 45,555 $ 35,751 $ 34,203
Unallocated profit:
Holding company loss............................... (5,999) (6,234) (2,711)
Other.............................................. (219) (674) 914
Elimination of intersegment profit (loss)............ 244 (179) (530)
---------- ---------- ----------
Consolidated net income.............................. $ 39,581 $ 28,664 $ 31,876
========== ========== ==========
ASSETS
Total for segments................................... $4,305,650 $3,772,700 $3,391,704
Unallocated assets:
Holding company assets............................. 53,110 46,128 37,945
Other.............................................. 42,701 43,675 15,302
Elimination of intersegment assets................... (253,628) (194,813) (112,956)
---------- ---------- ----------
Consolidated assets.................................. $4,147,833 $3,667,690 $3,331,995
========== ========== ==========
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,
1998, that the Regulated Companies meet all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the Company's
regulators categorized the Regulated Companies as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized a company must maintain minimum total risk-based, Tier I risk based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Regulated Companies category.
57
58
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, 1998:
Total Capital (to Risk Weighted Assets):
CONSOLIDATED $366,121 13.43% $218,078 >8.00% N/A N/A
-
AMCORE Bank N.A. Rockford 137,712 11.11% 99,205 >8.00% 124,006 >10.00%
- -
AMCORE Bank N.A. Rock River Valley 48,559 12.20% 31,834 >8.00% 39,793 >10.00%
Tier 1 Capital (to Risk Weighted Assets): - -
CONSOLIDATED $339,718 12.46% $109,039 >4.00% N/A N/A
-
AMCORE Bank N.A. Rockford 126,920 10.23% 49,603 >4.00% 74,404 >6.00%
- -
AMCORE Bank N.A. Rock River Valley 44,456 11.17% 15,917 >4.00% 23,876 >6.00%
Tier 1 Capital (to Average Assets): - -
CONSOLIDATED $339,718 8.31% $163,485 >4.00% N/A N/A
-
AMCORE Bank N.A. Rockford 126,920 7.27% 69,837 >4.00% 87,296 >5.00%
- -
AMCORE Bank N.A. Rock River Valley 44,456 6.89% 25,804 >4.00% 32,255 >5.00%
AS OF DECEMBER 31, 1997: - -
Total Capital (to Risk Weighted Assets):
CONSOLIDATED $326,271 14.38% $181,574 >8.00% N/A N/A
-
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% N/A N/A
-
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% N/A N/A
-
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%
- -
58
59
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,
1998 1997
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 1,343 $ 955
Securities available for sale............................... 2,865 431
Short-term investments...................................... 3,000 10,000
Due from subsidiaries....................................... 1,020 933
Loans to subsidiaries....................................... 19,808 22,763
Investment in bank subsidiaries............................. 307,322 285,374
Investment in financial services subsidiaries............... 5,783 6,049
Premises and equipment,net.................................. 4,788 2,888
Other assets................................................ 17,747 8,008
-------- --------
TOTAL ASSETS.............................................. $363,676 $337,401
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long-term borrowings........................................ $ 42,842 $ 43,168
Other liabilities........................................... 4,751 6,757
-------- --------
TOTAL LIABILITIES........................................... $ 47,593 $ 49,925
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock............................................. $ -- $ --
Common stock................................................ 6,572 6,152
Additional paid-in capital.................................. 75,260 73,262
Retained earnings........................................... 247,486 206,235
Treasury stock and other.................................... (9,969) (6,547)
Accumulated other comprehensive income...................... (3,266) 8,374
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................ $316,083 $287,476
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $363,676 $337,401
======== ========
59
60
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
INCOME:
Dividends from subsidiaries.............................. $ 37,923 $ 17,749 $ 21,492
Interest income.......................................... 2,064 2,284 1,260
Management fees and other................................ 23,372 21,436 18,833
-------- -------- --------
TOTAL INCOME........................................... $ 63,359 $ 41,469 $ 41,585
-------- -------- --------
EXPENSES:
Interest expense......................................... $ 4,204 $ 3,801 $ 2,090
Compensation expense and employee benefits............... 14,615 14,455 12,846
Professional fees........................................ 2,316 2,540 1,192
Other.................................................... 11,152 12,388 8,871
-------- -------- --------
TOTAL EXPENSES......................................... $ 32,287 $ 33,184 $ 24,999
-------- -------- --------
Income before income tax benefits and equity in
undistributed net income of subsidiaries............... $ 31,072 $ 8,285 $ 16,586
Income tax benefits...................................... (2,751) (3,231) (2,195)
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries........................................... $ 33,823 $ 11,516 $ 18,781
-------- -------- --------
Equity in undistributed net income of subsidiaries....... 5,758 17,148 13,095
-------- -------- --------
NET INCOME............................................. $ 39,581 $ 28,664 $ 31,876
======== ======== ========
60
61
AMCORE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 39,581 $ 28,664 $ 31,876
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,032 1,531 1,026
Non-employee directors compensation expense............ 464 370 467
Equity in undistributed net income of subsidiaries..... (5,758) (17,148) (13,095)
(Increase) decrease in due from subsidiaries........... (87) 255 (831)
Decrease (increase) in other assets.................... 2,503 (1,119) 1,905
(Decrease) increase in other liabilities............... (2,006) 2,011 (1,089)
Other, net............................................. 298 560 (90)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... $ 36,027 $ 15,124 $ 20,169
======== ======== ========
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities................................... $ (2,428) $(14,071) $ (345)
Proceeds from maturities of securities................... -- 14,197 101
Net increase (decrease) in short term investments........ 7,000 (8,000) (2,000)
Dissolution of less-active state banking charters........ -- 96 --
Proceeds from sale of collection agency.................. -- 700 --
Net investment made in subsidiaries...................... (681) (10,788) --
Loans to subsidiaries.................................... (74,035) (13,470) (24,364)
Payments received on loans to subsidiaries............... 76,990 16,916 7,343
Transfer of premises and equipment (from) to
affiliates............................................. (23) (114) 1,218
Premises and equipment expenditures, net................. (2,909) (1,514) (1,234)
Investment in company owned life insurance............... (10,798) (1,816) (1,721)
-------- -------- --------
NET CASH PROVIDED BY (REQUIRED FOR) INVESTING
ACTIVITIES.......................................... $ (6,884) $(17,864) $(21,002)
======== ======== ========
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings......... $ -- $(14,455) $ 11,305
Proceeds from long-term borrowings....................... -- 41,238 --
Payment of long-term borrowings.......................... (444) (14,044) (3,844)
Dividends paid........................................... (15,406) (12,130) (9,096)
Proceeds from the sale of common stock................... -- 430 --
Proceeds from exercise of incentive stock options........ 6,840 3,753 1,405
Purchase of treasury stock............................... (19,745) (1,327) --
-------- -------- --------
NET CASH (REQUIRED FOR) PROVIDED BY FINANCING
ACTIVITIES.......................................... $(28,755) $ 3,465 $ (230)
-------- -------- --------
Net change in cash and cash equivalents.................. $ 388 $ 725 $ (1,063)
Cash and cash equivalents:
Beginning of year...................................... 955 230 1,293
-------- -------- --------
End of period.......................................... $ 1,343 $ 955 $ 230
======== ======== ========
61
62
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AMCORE FINANCIAL, INC.
We have audited the accompanying consolidated balance sheet of AMCORE
Financial, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
KPMG LLP
Chicago, Illinois
January 19, 1999
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
AMCORE FINANCIAL, INC.
Rockford, Illinois
We have audited the accompanying consolidated balance sheets of AMCORE
Financial, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the two 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 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 and the report of the other auditors
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 the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
McGLADREY & PULLEN, LLP
Rockford, Illinois
January 19, 1998
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CONDENSED QUARTERLY EARNINGS & STOCK PRICE SUMMARY (UNAUDITED)
1998 1997
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income......................... $68,315 $74,520 $74,979 $73,047 $61,035 $63,004 $67,708 $68,212
Interest expense........................ 39,362 43,302 43,593 41,870 33,926 35,523 39,666 39,845
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..................... $28,953 $31,218 $31,386 $31,177 $27,109 $27,481 $28,042 $28,367
Provision for loan losses............... 2,145 1,642 2,226 1,980 1,915 1,936 2,673 521
Other income............................ 12,939 13,898 14,586 17,325 12,160 10,575 11,161 14,705
Other expense........................... 31,906 27,932 28,997 30,759 25,966 33,747 24,369 30,891
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes.............. $ 7,841 $15,542 $14,749 $15,763 $11,388 $ 2,373 $12,161 $11,660
Income taxes............................ 1,742 4,306 3,871 4,395 3,149 341 3,114 2,314
------- ------- ------- ------- ------- ------- ------- -------
Net income.............................. $ 6,099 $11,236 $10,878 $11,368 $ 8,239 $ 2,032 $ 9,047 $ 9,346
======= ======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings:......................... $ 0.23 $ 0.39 $ 0.37 $ 0.39 $ 0.31 $ 0.07 $ 0.34 $ 0.35
Diluted earnings........................ $ 0.22 $ 0.38 $ 0.37 $ 0.39 $ 0.31 $ 0.07 $ 0.33 $ 0.34
Dividends............................... 0.12 0.14 0.14 0.14 0.10 0.11 0.12 0.12
Stock price ranges -- high.............. 27.50 27.75 26.25 24.50 19.50 19.33 24.00 25.94
-- low.................. 21.75 23.38 20.38 19.13 15.33 17.17 18.50 22.00
-- close................ 27.00 24.00 22.75 22.89 18.83 18.17 22.75 25.13
The financial information contains all normal and recurring
reclassification for a fair and consistent presentation.
Quotes have been obtained from the National Association of Security
Dealers. These quotes do not reflect retail mark-ups, mark-downs or commissions
nor are they necessarily representative of actual transactions.
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 1999 Annual
Meeting dated March 25, 1999 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 1999 Annual Meeting dated March 25, 1999
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement and Notice of 1999 Annual Meeting dated March 25, 1999
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement and Notice of 1999 Annual Meeting dated March 25, 1999
is incorporated herein by reference.
63
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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, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
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 Transitional Compensation Agreement dated June 1, 1996
between AMCORE Financial, Inc. and Charles E. Gagnier.
(Incorporated by reference to Exhibit 10.3C of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.)
10.3C 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.)
10.3D Transitional compensation Agreement dated May 21, 1997
between AMCORE Financial, Inc. and Charie 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.)
10.3E Transitional Compensation Agreement dated November 18, 1998
between AMCORE Financial, Inc. and the following
individuals: Kenneth E. Edge, John R. Hecht, and James S.
Waddell
64
65
(A)3. EXHIBITS
- ----- --------
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 Robert J. Meuleman (Incorporated by reference to
Exhibit 10.6 of AMCORE's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996).
10.6 Indenture, dated as of March 25, 1997, between the Company
and The First National Bank of Chicago (incorporated herein
by reference to Exhibit 4.1 of the Company's registration
statement on Form S-4, Registration No. 333-25375).
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.)
10.10 Third Amendment to Loan Agreement with M & I Marshall and
Ilsley Bank dated April 30, 1998. (Incorporated by reference
to Exhibit 10.10 of AMCORE's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.)
10.11 Executive Insurance Agreement dated August 10, 1998 between
AMCORE Financial, Inc. and the following executives: Kenneth
E. Edge, John R. Hecht, and James S. Waddell. (Incorporated
by reference to Exhibit 10.10 of AMCORE's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.)
10.12 Fourth Amendment to Loan Agreement with M & I Marshall and
Ilsley Bank dated November 2, 1998.
13 1998 Summary Annual Report to Stockholders.
21 Subsidiaries of the Registrant
22 Proxy Statement and Notice of 1999 Annual Meeting
24 Powers of Attorney
27 Financial Data Schedule
65
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Rockford, State of
Illinois, on this 25th day of March 1999.
AMCORE FINANCIAL, INC.
JOHN R. HECHT
By:
--------------------------------------
John R. Hecht
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below on the 25th day of March, 1999 by the following persons on
behalf of the Registrant in the capacities indicated.
NAME TITLE
---- -----
ROBERT J. MEULEMAN President and Chief Executive Officer
- --------------------------------------------- (principal executive officer)
Robert J. Meuleman
JOHN R. HECHT Executive Vice President and Chief Financial
- --------------------------------------------- Officer (principal financial officer and principal
John R. Hecht accounting officer)
Directors: Milton R. Brown, Carl J. Dargene, Richard C. Dell, Paul Donovan,
Lawrence E. Gloyd, John A. Halbrook, Frederick D. Hay, William R.
McManaman, Robert J. Meuleman, Ted Ross, Jack D. Ward and Gary L.
Watson
Robert J. Meuleman
- ---------------------------------------------
Robert J. Meuleman*
JOHN R. HECHT
- ---------------------------------------------
John R. Hecht*
Attorney in Fact*
66