Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number 0–13393

AMCORE FINANCIAL, INC.

501 Seventh Street, Rockford, Illinois 61104

Telephone Number (815) 968–2241

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.22 par value

Common Stock Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days  X   Yes         No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.   X  

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   X  Yes       No

As of March 1, 2003, 24,789,513 shares of common stock were outstanding. The aggregate market value of the common equity held by non-affiliates, computed by reference to the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $510,433,000.

Documents Incorporated by Reference:

Portions of the 2003 Notice of Annual Meeting and Proxy Statement, dated March 17, 2003, are incorporated by reference into Part III of the Form 10-K for the fiscal year ended December 31, 2002.

Table of Contents

AMCORE FINANCIAL, INC.

Form 10–K Table of Contents

2

Table of Contents

PART I

ITEM 1.    BUSINESS

General

AMCORE Financial, Inc. (“AMCORE” or the “Company”)) is a registered bank holding company incorporated under the laws of the State of Nevada in 1982. The corporate headquarters is located at 501 Seventh Street in Rockford, Illinois. The operations are divided into four business segments: Commercial Banking, Retail 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 its subsidiaries with advice and counsel on policies and operating matters among other things.

AMCORE provides free of charge, through the Company’s Internet site at www.AMCORE.com/SEC, access to annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after electronically filing such material with the SEC. However, the information found on AMCORE’s website is not part of this or any other report.

Banking Segments

General – AMCORE directly owns AMCORE Bank, N.A. (BANK), a nationally chartered bank. AMCORE also directly owns AMCORE Consumer Finance Company, Inc. (FINANCE), a consumer finance company and indirectly owns Property Exchange Company, a qualified intermediary, which is a subsidiary of the BANK.

Geographic and Economic Information – The BANK conducts business at 64 locations throughout northern Illinois and south central Wisconsin (the “Service Area”). The Banking segments’ Service Area is dispersed among four basic economic areas: the Rockford, Illinois metropolitan area (Rockford), the Madison, Wisconsin metropolitan area (Madison), the northwestern and far-western Chicago suburbs (Chicagoland) and community banking branches (Community Banking) which are located in the more rural areas of the Service Area. Locations in the Chicagoland, Rockford and Madison Service Areas are concentrated along the “I-90 Corridor” where populations are the greatest and where the density and diversity of mid-sized businesses are highest. Recently, the Company’s growth strategy has focused on expansion along the I-90 Corridor Service Area where there are strong demographic growth rates and high concentrations of mid-size businesses. At the same time, AMCORE is exiting certain Community Banking markets that no longer fit its growth objectives. For additional information see “Branch Strategy” discussion under Item 7, Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.

The Service Areas along the I-90 Corridor have similar economic characteristics of population growth and business diversity among service, retail and manufacturing. Among the three Service Areas along the I-90 Corridor, the Rockford Service Area has the highest concentration of manufacturing activities. The Community Banking Service Areas, on the other hand, have limited growth potential and have a greater concentration of smaller-sized business and agricultural concentrations. At the end of 2002, economic conditions in the Madison Service Area were characterized as strong with low unemployment. In the Chicagoland Service Area, economic conditions were stable with strong development activity and loan growth. In the Rockford Service Area, economic conditions were characterized as declining to stable, primarily due to tightening of employment opportunities in the automobile industry with cutbacks and layoffs. The Rockford Service Area experienced the greatest increase in unemployment in the State of Illinois during the past year. Economic conditions in Community Banking Service Areas were relatively stable with the exception of the agricultural sector which was experiencing some weakness.

The BANK has 38 locations throughout northern Illinois, excluding the far northwestern counties, including the Illinois cities of Rockford, Elgin, Carpentersville, Crystal Lake, Des Plaines, Lincolnshire, McHenry, Schaumburg, St. Charles, Woodstock, Dixon, Mendota, Peru, Princeton, Sterling and the surrounding

3

Table of Contents

communities. The BANK conducts business at 26 locations throughout south central Wisconsin, including the Wisconsin cities of Madison, Monroe, Clinton, Argyle, Baraboo, Portage, Mt. Horeb, Montello and the surrounding communities.

Through its banking locations, AMCORE provides various personal banking, commercial banking and related financial services. AMCORE also conducts banking business through eight supermarket branches, which gives the customer convenient access to bank services seven days a week.

Investment Portfolio and Policies – As a complement to its Commercial and Retail Banking segments, the BANK also carries a securities investment portfolio. The level of assets that the company holds in securities is dependent upon a variety of factors. Chief among these factors is the optimal utilization of the Company’s capital. After consideration of loan demand, excess capital is available to allocate to high-quality investment activities that can generate additional income for the Company and its shareholders, while still maintaining strong capital ratios. In addition to producing additional interest spreads for the BANK, the investment portfolio is used as a source of liquidity, to manage interest rate risk and to meet pledging requirements of the BANK. The investment portfolio is governed by an investment policy designed to provide maximum flexibility in terms of liquidity and to contain risk from changes in interest rates. Individual holdings are diversified, maximum terms and durations are limited and minimum credit ratings are enforced and monitored. The BANK does not engage in trading activities. The amount of securities that the Company is permitted to invest in that have a higher degree of risk of loss are defined and limited by Company policy. The investment portfolio is managed on a day-to-day basis by a professional investment manager from AMCORE’s Trust and Asset Management segment. Portfolio performance and changing risk profiles are regularly monitored by an Investment Committee of AMCORE’s board of directors.

Sources of Fundings – Liquidity management is the process by which the Company, through its Asset and Liability Committee (ALCO) and treasury function, ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, repayment of debt when due or called, maintaining adequate collateral for secured deposits and borrowings, paying dividends to its parent company, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include brokered certificates of deposit (CD’s), federal funds purchased lines (FED funds), Federal Home Loan Bank (FHLB) advances, repurchase agreements, commercial paper and back-up lines of credit (via the BANK’s parent company), the sale or securitization of loans, and access to other capital markets. Core deposits from the BANK’s retail and commercial customers are considered by management to be the primary, most stable and most cost-effective source of funding and liquidity for the BANK.

Retail Banking Segment – Retail banking services to individuals include deposit (demand, savings and time deposit accounts) and lending activities. Principal lending types include installment loans (primarily direct and indirect automobile lending), mortgage and home equity loans, overdraft protection, personal credit lines and credit card programs.

Mortgage and home equity lending have the lowest risk profile due to the nature of the collateral. Installment loans have an intermediate risk due to the lower principal amounts and the depreciating nature of the collateral. Personal lines and overdraft have the highest degree of risk since the loans are unsecured. The credit card programs are a fee service for originating the relationship and no credit risk is retained by the BANK. The BANK manages its risk via a centralized credit administration process, risk scoring, loan-to-value and other underwriting standards and knowledge of its customers. As a general rule, the BANK does not actively engage in retail lending activities outside its geographic market areas.

4

Table of Contents

AMCORE Vintage Funds, a proprietary family of mutual funds, are also marketed through most banking locations. The Private Banking Group also markets Vintage Mutual Funds and meets other special needs of high net worth individuals. Automated teller machines located throughout AMCORE’s market area make banking transactions available to customers when the bank facilities and hours are not convenient.

Commercial Banking Segment – A wide range of financial services are provided to commercial, small business and governmental organizations. These services include, among others, lending, deposits, letters of credit and cash management services. While the BANK has a limited portfolio of equipment leases, it does not actively promote this type of financing with its commercial customers. The Commercial Banking Segment lending products are tailored to the specific customer needs (facilities acquisition and expansion, equipment purchases and working capital needs). Commercial lending has a higher risk profile than does retail lending due to the larger dollar amounts involved, the nature of the collateral and a greater variety of economic risks that could potentially affect the loan customer.

AMCORE manages its commercial lending risks by a centralized underwriting process, serial sign-off requirements as dollar amounts increase, lending limits, monitoring concentrations, regular loan review and grading of credits and an active work-out management process for troubled credits.

AMCORE earned Preferred Lender Status from the Small Business Administration in both Illinois and Wisconsin and has been ranked one of the top two Illinois banks in the SBA program for four consecutive years ending December 31, 2002.

Other Financial Services – The BANK provides various services to consumers, commercial customers and correspondent banks. Services available include safe deposit box rental, securities safekeeping, foreign currency exchange, lock box and other services.

The BANK also offers several electronic banking services to commercial and retail customers. AMCORE Online! provides retail customers with online capability to access deposit and loan account balances, transfer funds between accounts, make loan payments, view statements and pay bills. AMCORE Online! For Business facilitates access to commercial customers’ accounts via personal computers. It also permits the transfer of funds between accounts and the initiation of wire transfers and ACH activity to accounts at other financial institutions. The AMCORE TeleBank service provides retail and commercial customers the opportunity to use their telephone 24 hours a day to obtain balance and other information on their checking and savings accounts, certificates of deposit, personal installment loans, retail mortgage loans, and Vintage Funds; all from a completely automated system.

Trust and Asset Management Segment

AMCORE Investment Group, N.A. (AIG) is a nationally chartered non-depository bank and owns AMCORE Investment Services, Inc. (AIS) and Investors Management Group, Ltd. (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, is incorporated under the laws of the State of Illinois and is a member of the National Association of Security Dealers (NASD). AIS is a full–service brokerage company that offers a full range of investment alternatives including annuities, mutual funds, stocks and bonds. AIS customers can get real time stock market quotes, investment account information, and place trades for market hours execution 24 hours a day, 7 days a week through AMCORETrade.com.

IMG is incorporated under the laws of the State of Iowa and is a wholly-owned subsidiary of AIG. IMG is an asset management company whose primary customers include trust customers, retirement plans, foundations, endowments, private investors, AMCORE’s Vintage Mutual Funds family, insurance companies, banks, public entities and individuals. IMG also provides the mutual fund administration for the AMCORE Vintage Mutual Funds.

5

Table of Contents

Mortgage Segment

AMCORE Mortgage, Inc. (AMI), a wholly–owned subsidiary of the BANK, was incorporated under the laws of the State of Nevada in 1987. AMI is a full service mortgage banker providing a broad spectrum of mortgage products to their customers in addition to providing the BANK with a variety of mortgage lending products to meet its customer needs. Residential mortgage loans are originated by AMI, of which non-conforming adjustable rate, fixed-rate and balloon residential mortgages are normally sold to the BANK. The conforming adjustable rate, fixed-rate and balloon residential mortgage loans are sold in the secondary market. AMI continues to service most of the loans that are sold.

During January 2003, AMI was merged with and into AMCORE Bank, N.A., however, it continues as a reportable segment. See Note 18 of the Notes to Consolidated Financial Statements included under Item 8 of this document for further financial information on AMCORE’s business segments.

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” below in this Item 1.

On September 29, 1994, Congress passed laws allowing interstate banking and interstate branching. A year later, nationwide interstate banking became effective allowing institutions to make acquisitions in any state. Beginning July 1, 1997, interstate branching became effective, and banks can merge with affiliate banks or establish de novo branches in any state. Individual states, however, have the right to opt out of interstate branching. Illinois and Wisconsin have not opted out.

Employment

AMCORE had 1,406 full–time equivalent employees as of March 1, 2003. AMCORE provides a variety of benefit plans to its employees including health, dental, group term life and disability insurance, childcare reimbursement, flexible spending accounts, retirement, profit sharing, 401(k), stock option, stock purchase and dividend reinvestment plans.

Supervision and Regulation

AMCORE is subject to regulations under the Bank Holding Company Act of 1956, as amended (the Act), and is registered with the Federal Reserve Board (FRB) under the Act. AMCORE is required by the Act to file quarterly and annual reports of its operations and such additional information as the FRB may require and is subject, along with its subsidiaries, to examination by the FRB.

The acquisition of five percent or more of the voting shares or all or substantially all of the assets of any bank by a bank holding company requires the prior approval of the FRB and is subject to certain other federal and state law limitations. The Act also prohibits, with certain exceptions, a bank holding company from acquiring direct or

6

Table of Contents

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 bank holding company and its non-bank subsidiaries are permitted, among other activities, to engage in such banking-related businesses as sales and consumer finance, equipment leasing, computer service bureau and software operations, mortgage banking, brokerage and financial advisory services. The Act does not place territorial restrictions on the activities of non–bank subsidiaries of bank holding companies. In addition, federal legislation prohibits acquisition of “control” of a bank or bank holding company without prior notice to certain federal bank regulators. “Control” is defined in certain cases as acquisition of ten percent or more of the outstanding shares of a bank or bank holding company.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (FDIC) insurance fund in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.

The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” as such terms are defined under regulations issued by each of the federal banking agencies.

In late 1992, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1992 which included many provisions that have had significant effects on the cost structure and operational and managerial standards of commercial banks. In addition to provisions for recapitalization of the Bank Insurance Fund, this 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 Gramm-Leach-Bliley Act (GLB Act) was enacted November 1999, and, among other things, established a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. We do not believe that the GLB Act will have a material effect upon our operations in the near term. However, to the extent the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves.

The foregoing references to applicable statutes and regulations are brief summaries thereof and are not intended to be complete and are qualified in their entirety by reference to the full text of such statutes and regulations.

7

Table of Contents

AMCORE is supervised and examined by the FRB. The BANK, AMI and AIG are supervised and regularly examined by the Office of the Comptroller of the Currency (OCC) and are subject to examination by the FRB. In addition, the BANK is subject to periodic examination by the FDIC.

FINANCE is regulated by the Illinois Department of Financial Institutions. AIS and IMG are supervised and examined by the NASD and are regulated by the Securities and Exchange Commission (SEC).

Subsidiary Dividends and Capital

Legal limitations exist as to the extent to which the BANK can lend or pay dividends to AMCORE and/or its affiliates. The payment of dividends by a national bank without prior regulatory approval is limited to the current year’s net income plus the adjusted retained net income for the two preceding years. The payment of dividends by any bank or bank holding company is affected by the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the FRB and regulations issued by the FDIC and the OCC (collectively “Agencies”). As of December 31, 2002, approximately $28.6 million was available for payment to AMCORE in the form of dividends without prior regulatory approval. The BANK is also limited as to the amount it may lend to AMCORE and its affiliates. At December 31, 2002, the maximum amount available to AMCORE and its affiliates in the form of loans approximated $23.7 million. Loans outstanding to affiliates were $2.7 million at December 31, 2002. See Note 19 of the Notes to Consolidated Financial Statements.

The FRB issues risk-based capital guidelines for bank holding companies. These capital rules require minimum capital levels as a percent of risk-weighted assets. In order to be adequately capitalized under these guidelines, banking organizations must have minimum capital ratios of 4% and 8% for Tier 1 capital and total capital, respectively. The FRB also established leverage capital requirements intended primarily to establish minimum capital requirements for those banking organizations that have historically invested a significant portion of their funds in low risk assets. Federally supervised banks are required to maintain a minimum leverage ratio of not less than 4%. Refer to the Capital Management section of Item 7 for a summary of AMCORE’s capital ratios as of December 31, 2002 and 2001. See Note 20 of the Notes to Consolidated Financial Statements.

Governmental Monetary Policies and Economic Conditions

The earnings of all subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB influences general economic conditions and interest rates through various monetary policies and tools. It does so primarily through open–market operations in U.S. Government securities, varying the discount rate on member and non-member bank borrowings, and setting reserve requirements against bank deposits. FRB monetary policies have had a significant effect on the operating results of banks in the past and are expected to do so in the future. The general effect of such policies upon the future business and earnings of each of the subsidiary companies cannot accurately be predicted.

Interest rate sensitivity has a major impact on the earnings of banks. As market rates change, yields earned on assets may not necessarily move to the same degree as rates paid on liabilities. For this reason, AMCORE attempts to minimize earnings volatility related to fluctuations in interest rates through the use of a formal asset/liability management program and certain derivative activities. See Item 7A and Note 11 of the Notes to Consolidated Financial Statements included under Item 8 for additional discussion of interest rate sensitivity and related derivative activities.

8

Table of Contents

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.

9

Table of Contents

ITEM 2.    PROPERTIES

On December 31, 2002, AMCORE had 82 locations, of which 55 were owned and 27 were leased. The Banking segments had 79 locations, of which 55 were owned and 24 were leased. The Trust and Asset Management segment had two leased facilities and the Mortgage segment had one leased facility. All of these offices are considered by management to be well maintained and adequate for the purpose intended. See Item 1 and Note 5 of the Notes to Consolidated Financial Statements included under Item 8 of this document for further information on properties. In addition, AMCORE had 112 ATM machine locations that were available without fee to AMCORE customers.

ITEM 3.    LEGAL PROCEEDINGS

Management believes that no litigation is threatened or pending in which the Company faces potential loss or exposure which will materially affect the Company’s financial position or results of operations, other than as noted below. Since the Company’s subsidiaries act as depositories of funds, trustee and escrow agents, they occasionally are named as defendants in lawsuits involving claims to the ownership of funds in particular accounts. This and other litigation is incidental to the Company’s business.

The Company has reached a negotiated agreement with its insurance carrier and Plaintiffs’ counsel to settle the lawsuit and other potential claims outlined below. The settlement agreement did not have a material effect on the Company’s consolidated financial condition and consolidated results of operations.

On August 26, 1999, Willie Parker and five other plaintiffs filed a civil action in the Circuit Court of Humphreys County, Mississippi against AMCORE Consumer Finance Company, Inc., a subsidiary of the Company and other defendants containing twelve separate counts related to the sale and financing of residential satellite dish systems. Though the actual purchase price for each of these systems involved a principal amount of less than $3,000, the complaint prayed for economic loss and compensatory damages in the amount of $5 million for each plaintiff and punitive damages in the amount of $100 million for each plaintiff. The Company denied the plaintiffs’ allegations.

During the second quarter of 2001, the Company made a settlement offer to Plaintiffs’ counsel. The Company recorded an accrual reflecting the amount offered. During the second quarter of 2002, the Company’s counsel submitted a new offer to Plaintiffs’ counsel to resolve all claims and the Company adjusted its accrual to reflect the offer. During the third quarter of 2002, Plaintiffs’ counsel and the Company entered into a settlement of all claims. All Plaintiffs and potential claimants have executed full releases and the United States District Court for the Northern District of Mississippi has dismissed the lawsuit on file with prejudice.

10

Table of Contents

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 2002.

PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

See Items 6 and 8 of this document for information on the Company’s stock price ranges and dividends. AMCORE’s common stock trades on the NASDAQ National Market System under the symbol “AMFI.” There were approximately 8,200 holders of record of AMCORE’s common stock as of March 1, 2003. See Item 12 of this document for information on the Company’s equity compensation plans.

The Company’s policy is to declare regular quarterly dividends based upon the Company’s earnings, financial position, capital requirements and such other factors deemed relevant by the Board of Directors. This dividend policy is subject to change, however, and the payment of dividends by the Company is necessarily dependent upon the availability of earnings and the Company’s financial condition in the future. The payment of dividends on the Common Stock is also subject to regulatory capital requirements.

The Company’s principal source of funds for dividend payments to its stockholders is dividends received from its subsidiary banks. Under applicable banking laws, the declaration of dividends by the BANK in any year, in excess of its net profits, as defined, for that year, combined with its retained net profits of the preceding two years, must be approved by the Office of the Comptroller of the Currency. For further discussion of restrictions on the payment of dividends, see Item 7, Management’s Discussion and Analysis of the Results of Operations and Financial Condition, Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Note 19 of the Notes to the Consolidated Financial Statements.

11

Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

Five Year Comparison of Selected Financial Data

12

Table of Contents

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the significant factors affecting AMCORE Financial, Inc.’s and its Subsidiaries’ (“AMCORE” or the “Company”) financial condition as of December 31, 2002 compared to December 31, 2001 and the results of operations for the three years ended December 31, 2002. The discussion should be read in conjunction with the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report.

FACTORS INFLUENCING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains, and our periodic filings with the Securities and Exchange Commission and written or oral statements made by the Company’s officers and directors to press, potential investors, securities analysts and others will contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby with respect to, among other things, the financial condition, results of operations, plans, objectives, future performance and business of AMCORE. Statements that are not historical facts, including statements about beliefs and expectations, are forward-looking statements. These statements are based upon beliefs and assumptions of AMCORE’s management and on information currently available to such management. The use of the words “believe”, “expect”, “anticipate”, “plan”, “estimate”, “should”, “may”, “will” or similar expressions identify forward-looking statements. Forward-looking statements speak only as of the date they are made, and AMCORE undertakes no obligation to update publicly any forward-looking statements in light of new information or future events.

Contemplated, projected, forecasted or estimated results in such forward-looking statements involve certain inherent risks and uncertainties. A number of factors—many of which are beyond the ability of the Company to control or predict—could cause actual results to differ materially from those in its forward-looking statements. These factors include, among others, the following possibilities: (I) heightened competition, including specifically the intensification of price competition, the entry of new competitors and the formation of new products by new or existing competitors; (II) adverse state, local 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) ability to attract and retain key executives or personnel; (VI) changes in interest rates including the effect of prepayment; (VII) general economic and business conditions which are less favorable than expected; (VIII) equity and fixed income market fluctuations; (IX) unanticipated changes in industry trends;  (X) unanticipated changes in credit quality and risk factors; (XI) success in gaining regulatory approvals when required; (XII) changes in Federal Reserve Board monetary policies; (XIII) unexpected outcomes on existing or new litigation in which AMCORE, its subsidiaries, officers, directors or employees are named defendants;  (XIV) technological changes; (XV) changes in accounting principles generally accepted in the United States of America; (XVI) changes in assumptions or conditions affecting the application of “critical accounting policies”; and (XVII) inability of third-party vendors to perform critical services for the Company or its customers.

CRITICAL ACCOUNTING POLICIES

The financial condition and results of operations for AMCORE presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements, selected financial data appearing elsewhere within this report, and management’s discussion and analysis are, to a large degree, dependent upon the Company’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.

Presented below are discussions of those accounting policies that management believes are the most important (Critical Accounting Policies) to the portrayal and understanding of the Company’s financial condition and

13

Table of Contents

results of operations. These Critical Accounting Policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.

Loans, Leases and Allowance for Estimated Losses

Loans and leases are the Company’s largest income earning asset category. Loans are recorded at the amount advanced to the borrower plus certain costs incurred by AMCORE to originate the loan, less certain origination fees that are collected from the borrower. The carrying amount of loans is reduced as principal payments are made. Payments made by the borrower are allocated between interest income and principal payment based upon the outstanding principal amount, the contractual rate of interest and other contractual terms. The carrying amount is further adjusted to reflect amortization of the origination costs net of origination fees. These items are amortized over the expected life of the loan.

The accrual of interest income is generally discontinued (Non-Accrual Status) when management believes that collection of principal and/or interest is doubtful or when payment becomes 90 to 120 days past due, except for loans that are well secured and are in a short-term, well-defined process of collection. Payments received from the borrower after a loan is placed on Non-Accrual Status are applied to reduce the principal balance of the loan until such time that collectibility of remaining principal and interest is no longer doubtful.

Management periodically reviews the loan and lease portfolio in order to establish an estimated allowance for loan and lease losses (Allowance) that are probable as of the respective reporting date. Additions to the Allowance are charged against earnings for the period as a provision for loan and lease losses (Provision). Actual loan and lease losses are charged against (reduce) the Allowance when management believes that the collection of principal will not occur. Unpaid interest attributable to prior years for loans that are placed on Non-Accrual Status is also charged against the Allowance. Unpaid interest for the current year for loans that are placed on Non-Accrual Status is reversed against the interest income previously recognized. Subsequent recoveries of amounts previously charged to the Allowance, if any, are credited to (increase) the Allowance.

The Allowance is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb probable losses. If not, an additional Provision is made to increase the Allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan groups or pools that are based on historical loss experience and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other things. The Allowance is also subject to periodic examination by regulators whose review includes a determination as to its adequacy to absorb potential losses.

Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk gradings, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the Allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees.

While the Company strives to reflect all known risk factors in its evaluations, judgment errors may occur. If different assumptions or conditions were to prevail, the amount and timing of interest income and loan and lease

14

Table of Contents

losses could be materially different. These factors are most pronounced during economic downturns. Since, as described above, so many factors can affect the amount and timing of losses on loans and leases it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to adversely affect the adequacy of the Allowance by ten percent, an additional Provision of approximately $3.5 million would be necessary. See also Table 2 and Note 4 of the Notes to Consolidated Financial Statements.

Mortgage Servicing Rights

The Company recognizes as separate assets the rights to service mortgage loans for others. Mortgage servicing rights that are retained when mortgage loans are sold are recorded by allocating the previous carrying amount of the sold loan between the servicing rights retained and the loans that are sold. This allocation is based upon the relative fair values of the mortgage servicing rights and the loans sold. Because it is retained as an asset, the amount allocated to mortgage servicing rights will have a favorable impact on the amount of gain or loss that is recognized on the sale of the loans.

The mortgage servicing rights asset is amortized over the projected period of and in proportion to the estimated amount of net servicing income. Amortization of the servicing rights asset will reduce the amount of income that is recorded in the respective period from the servicing of the mortgage loans.

Each reporting period, the Company re-evaluates the fair value of its remaining mortgage servicing rights assets. The amount that the carrying amount of mortgage servicing rights exceeds the new estimate of fair value is charged against earnings for the period. Rather than directly reducing the carrying amount of the servicing rights asset, a valuation allowance is established for the same amount as the charge against earnings. In subsequent reporting periods, depending upon current estimates of fair value, the valuation allowance may be reversed. The reversal is limited to the remaining amount of the valuation allowance and will result in an increase in recorded earnings.

The periodic re-evaluation of fair value is based upon current estimates of the present value of remaining net servicing cash flows that incorporate numerous assumptions including the cost of servicing the loans, discount rates, prepayment rates and default rates. This re-evaluation is done by stratifying servicing rights assets into pools based upon one or more predominant risk characteristics of the underlying loans that are being serviced. Risk characteristics include loan type and interest rate. Valuation allowances required for one pool cannot be offset by the amount that the fair value of another pool exceeds its carrying amount.

Judgments and assumptions that are most critical to the application of this accounting policy are the appropriate risk-weighted discount rates used to determine the present value of estimated net future cash flows, prepayment speeds that will determine the amount and period of servicing revenue that is expected to be earned, estimated costs to service the loans and estimated interest earned on amounts collected for real estate tax and property insurance premiums that are held in escrow until payment is due. These assumptions are based upon actual performance of the underlying loans and the general market consensus regarding changes in mortgage and other interest rates. For example, declining mortgage interest rates typically result in accelerated mortgage prepayments, which tend to shorten the life and reduce the value of the servicing rights asset.

In addition to the judgments and assumptions affecting the application of this accounting policy, the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, permitted mortgage servicers to restratify their mortgage servicing rights pools. Upon consideration, the Company determined that its existing stratification was preferable to other alternatives and chose not to restratify its pools. This represented the selection of an accounting policy that could have produced different results for 2001 had the Company chose to restratify its pools. In general, the greater the number of pools, the greater the likelihood of earnings volatility associated with valuation allowances. Conversely, the fewer the number of pools the less likely there will be earnings volatility.

15

Table of Contents

If different assumptions and conditions were to prevail, materially different amortization and valuation allowances than those that were recorded may be required. Since, as described above, so many factors can affect the value of mortgage servicing rights it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to adversely affect their value by an additional ten percent, an additional impairment charge of approximately $1.1 million would be necessary. See also Note 7 of the Notes to Consolidated Financial Statements.

Loan Securitization and Sale of Receivables

When the Company sells receivables in securitizations of indirect automobile loans, the net carrying amount of the loans is removed from the balance sheet, and certain retained residual interests are recorded. The retained interests included rights to service the loans that were sold (the “Servicing Rights”), the excess of interest collected on the loans over the amount required to be paid to the investors and the securitization agent (the “Interest Only Strip”) and an interest in sales proceeds that were not remitted by the securitization trust at the time of the initial sale of the loans to the extent it exceeds projected credit losses (the “Credit Enhancement” or “Overcollateralization Asset”). The carrying value of the loans removed from the balance sheet included the unpaid principal balance of the loans, net of an allocable portion of the Allowance for Loan and Lease Losses, minus the portion of the carrying value of the loans that were allocated to the retained residual interests. These allocations were based upon the relative fair values of the retained residual interests and the loans sold. Because they are retained assets, the amount allocated and recorded for the residual interests had a favorable impact on the amount of gain or loss that was recognized on the sale of the loans.

Since the benefits to be received from the Servicing Rights represent adequate compensation for the Company’s servicing responsibilities, no asset was recorded for Servicing Rights. Income from servicing is recognized as earned pursuant to the terms of the servicing agreement and to the extent cash collections from the borrowers exceed payments to the investors and agent. Cash collections in excess of the Servicing Rights income that is earned is next applied to the Interest Only Strip. The value allocated to the Interest Only Strip is reduced and interest income is recorded assuming a constant yield based upon the discount rate used to estimate its fair value. At the end of the estimated life of the securitization, the carrying value of the Interest Only Strip will be fully amortized. The value allocated to the Overcollateralization Asset is accreted assuming a constant yield based upon the discount rate used to estimate its fair value. Accretion is recorded as other income for the period. At the end of the estimated life of the securitization, the carrying value of the Overcollateralization Asset will have accreted to the amount of the sales proceeds that were not remitted by the securitization trust at the time of the initial sale of the loans, net of projected credit losses. At that time the cash is expected to be released from the securitization in an amount that equals the accreted value of the Overcollateralization Asset.

Because the Company’s retained residual interests are subordinated to the interests of securitization investors and the trust agent, there is risk that the carrying value of the Interest Only Strip will not be fully recovered, resulting in a loss charged to earnings. In addition, since actual credit losses may exceed projected credit losses over the life of the securitization, there is risk that the accreted value of the Over collateralization Asset will not be fully realized, resulting in a loss charged to earnings. Recourse against the Company for credit losses is limited to the amount of the sales proceeds that were not remitted by the securitization trust at the time of the initial sale of the loans. Thus, a loss in excess of the accreted value of the Overcollateralization Asset is not possible. Each reporting period, the fair values of the Interest Only Strip and the Overcollateralization Asset are re-evaluated based upon current estimates and assumptions of the net present value of residual future cash flows net of remaining expected credit losses. If this re-evaluation results in fair values that are less than the amortized carrying value of the Interest Only Strip and the accreted value of the Overcollateralization Asset, respectively, and if remaining projected cash flows are less than previously estimated, the carrying values are written-down to fair value. The amount of the write-downs is charged against earnings for the current period. Finally, each reporting period, new Interest Only Strip amortization schedules and new Overcollateralization Asset accretion schedules are developed based upon current estimates, assumptions, adjusted carrying values and revised constant yields.

16

Table of Contents

Judgments and assumptions that are most critical to the application of this accounting policy are estimated defaults, delinquencies and credit losses, projected prepayment speeds and discount rates. These assumptions are based upon demonstrated credit and prepayment performance of the underlying loans. These are, in turn, most highly influenced by general economic conditions, with the greatest adverse affect during economic downturns and periods of rapidly falling interest rates.

If different assumptions and conditions were to prevail, noticeably different results could occur because the recorded asset may need to be written off or written down faster than planned and cash flows from the retained residual interests may be less than expected. Since, as described above, so many factors can affect the value of the retained residual interests it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to adversely affect their value by an additional ten percent and the decline was determined to be other than temporary, an impairment charge of approximately $891,000 would be necessary. See also Note 8 of the Notes to Consolidated Financial Statements.

OVERVIEW OF OPERATIONS

AMCORE reported record net income of $43.5 million for the year ended December 31, 2002. This compares to $42.2 million and $43.1 million reported for the years ended December 31, 2001 and 2000, respectively. This represents an increase of $1.2 million or 2.9% when comparing 2002 and 2001, and a decrease of $840,000 or 1.9% when comparing 2001 and 2000. Results for 2001 and 2000 included amortization expense related to goodwill of $2.0 million. Amortization of goodwill was discontinued in 2002. See discussion of Accounting Changes.

Diluted earnings per share for 2002 were a record $1.75 compared to $1.64 in 2001 and $1.58 in 2000. This represents an increase of $0.11 per share or 6.7%, when comparing 2002 and 2001, and $0.06 per share or 3.8%, when comparing 2001 and 2000. The 6.7% increase in earnings on a diluted per share basis compares favorably to the 2.9% increase on a dollar basis, reflecting the accretive impact to per share earnings of AMCORE’s previously announced stock repurchase programs. During 2002, average diluted shares outstanding declined 819,000.

AMCORE’s return on average realized equity for 2002 was 13.71% versus 13.67% in 2001 and 13.68% in 2000. Average realized equity excludes the average impact of unrealized gains and losses that are otherwise included in other comprehensive income, net of related income tax expense. AMCORE’s return on average assets for 2002 was 1.02% compared to 1.04% in 2001 and 1.00% in 2000.

Both AMCORE and its banking subsidiary (the “BANK”) continue to exceed the minimum capital requirements established by regulators for banks and bank holding companies. In addition, the BANK continues to be “well capitalized” as defined by regulatory guidelines. See Note 20 of the Notes to Consolidated Financial Statements.

Branch Strategy

During 2001, the Company launched a strategic initiative to reallocate capital to higher growth Midwestern markets, particularly along the I-90 growth corridor between Chicago’s northwest suburbs and Madison, Wisconsin (the “Branch Expansion”). The Company’s strategy is to move into a new market where there are strong demographic growth rates and high concentrations of mid-size businesses, with a seasoned commercial service staff in a leased facility. Once a book of business is developed and the branch becomes profitable, a more permanent site for a full service retail facility is sought. At the same time, AMCORE is exiting certain markets that no longer fit its growth objectives (the “Branch Sales”).

During the second and third quarters of 2001, the BANK sold seven Illinois branches and during the first quarter of 2002 closed one additional branch. For the seven Illinois Branch Sales, $65.1 million in loans, $170.8 million in deposits and $1.4 million in premises and equipment were transferred to the respective buyers resulting in net

17

Table of Contents

after-tax gains of $5.2 million and $1.1 million in the second and third quarters of 2001, respectively (the “Branch Gains”). Loans and deposits for the closed branch were transferred to nearby BANK branches. In the fourth quarter of 2002, the Company announced it had reached definitive agreements to sell six Wisconsin branches. The sales closed in first quarter 2003. First National Bank and Trust Company of Beloit, Wisconsin, acquired the Clinton and Darien branches with combined loans and deposits of approximately $22.1 million and $52.0 million, respectively. The National Exchange Bank and Trust of Fond du Lac, Wisconsin, acquired the Montello, Kingston, Dalton and Westfield branches, which have combined loans and deposits of approximately $27.8 million and $77.0 million, respectively. For the Wisconsin Branch Sales, the Company will report a combined net after-tax Branch Gain of approximately $5.2 million in the first quarter of 2003.

Branch Expansion activities in 2001 included two new offices: one on Rockford’s fast-growing east side and one in Geneva, Illinois, an affluent Chicago suburb. During 2002, the BANK opened four commercial loan offices and three full-service branches. The commercial loan offices included three in the Chicago suburbs of Schaumburg, Lincolnshire and Des Plaines, Illinois and one on the east side of Madison, Wisconsin. The full-service branches included one each in St. Charles and McHenry, Illinois and one along the beltway in Madison. As a result of the new office openings, a limited branch office in Geneva, Illinois and a smaller full-service branch in downtown McHenry, Illinois were closed. Combined, the nine new locations have generated $234.2 million in loans and $67.4 million in deposits as of December 31, 2002. The impact of the Branch Expansion was a decrease of $0.04 and $0.02 per diluted share in 2002 and 2001, respectively. In 2003 and early 2004, the Company plans to open an additional nine branches in the Illinois Fox River Valley, the Chicago suburbs and Madison, Wisconsin.

The nine branches planned for 2003 and early 2004, will require approximately $28 million in incremental capital expenditures and, when considered with all the new offices opened since April, 2001, are expected to have a dilutive impact on 2003 earnings of 10 to 15 cents per share as start-up costs initially outpace net revenues. The impact of any gains or loss of earnings on the Wisconsin branch sales was not factored into the decrease in earnings per share expected in 2003 from the Branch Expansion strategy. Despite this dilutive impact, AMCORE expects year-over-year growth in earnings per share from improvements in existing business performance during 2003. For 2004 and thereafter, the Company expects earnings accretion from its Branch Expansion efforts.

As a complement to its Branch Expansion, the BANK added 37 additional automated teller machines (ATMs) in 15 communities in northern Illinois and southern Wisconsin. The ATMs primarily will be located in Kelley-Williamson Mobil stations as part of a co-branding relationship, and will be owned and operated by an unaffiliated third party. The BANK currently owns and operates 75 ATMs throughout Wisconsin (24) and Illinois (51). Expansion of the BANK’s ATM network through this co-branded relationship will increase its Wisconsin and Illinois ATM presence to 34 and 78, respectively, or 112 overall.

Organizational Changes and Related Charges

During 2002, Kenneth E. Edge was named President and Chief Executive Officer, effective July 1, 2002, and Chairman of the Board, to be effective January 1, 2003. Mr. Edge, who most recently served as AMCORE’s President and Chief Operating Officer, replaced Robert J. Meuleman. Mr. Meuleman continued as Chairman until his retirement at the end of 2002. In connection with these changes, and in an effort to gain efficiencies, the position of Chief Operating Officer was not replaced. The net present value of early retirement obligations, pursuant to Meuleman’s Separation, Release and Consulting Agreement, including certain enhanced post retirement benefits and continued participation in the Company’s Long-Term Incentive Plan (the “Separation Agreement”), at $784,000 net of tax (the “Retirement Obligation”), was accrued in 2002. Amounts due for consulting services subsequent to retirement date will be charged to earnings as incurred.

During 2001, AMCORE announced additional business changes designed to better integrate banking and asset management services to its customers. To better support these structural changes, AMCORE streamlined its

18

Table of Contents

management team resulting in the departure of certain senior managers. Additional changes were made in 2002. Severance charges related to these structural changes were $215,000 and $464,000 after-tax in 2002 and 2001, respectively (the “Severance Charge(s)”).

During 2000, the Company reversed $258,000 in excess net after-tax restructuring charges (the “Restructuring Reversals”), reflecting lower than expected costs to complete the restructuring of its operations (the “Restructuring”) that occurred throughout 1999 and 2000.

Securities Sales and Loan Securitizations

During 2001, AMCORE recognized $2.0 million in net security losses related to investment portfolio restructuring (the “Security Portfolio Restructuring”); a strategy designed to reduce interest rate risk. The restructuring plan focused on the disposal of securities having a higher degree of interest rate risk associated with changes in prepayment speeds and on securities with low yields and/or longer durations. The restructuring was intended to improve the stability and quality of future earnings and values.

During 2001 and 2000, the BANK sold $29.9 million and $100.3 million, respectively, of indirect automobile loans in securitization transactions (the “Auto Loan Sales”). Net after-tax gains of $494,000 and $812,000, were recorded for the respective years. Upon securitization, the BANK retained Servicing Rights, Interest Only Strips and Overcollateralization Assets. The Company’s retained interests are subordinate to investors’ interests. The value of the Company’s Interest Only Strips subject to prepayment risk and the value of the Overcollateralization Asset are subject to credit risk on the transferred auto loans. The investors and the securitization trust have no other recourse to the Company’s other assets for failure of debtors to pay when due. There were no Auto Loan Sales in 2002. See Note 8 of the Notes to Consolidated Financial Statements.

During 2000, the Bank securitized $51.5 million of 1-4 family mortgage loans (the “Mortgage Securitization”). No gain or loss was recognized during 2000, as the securities were retained by the BANK in its available for sale portfolio. These securities were disposed of during 2001 as part of the Security Portfolio Restructuring. There were no Mortgage Securitizations in 2001 or 2002.

Accounting Changes

On January 1, 2002, the Company adopted SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”, with respect to business combinations that were completed prior to  July 1, 2001. These statements require that the Company evaluate its existing intangible assets and goodwill classifications. Goodwill and intangible assets with indefinite useful lives may no longer be amortized, but instead must be tested for impairment at least annually. The useful life and residual values of all other intangibles must also be reassessed. As of the date of adoption, the Company had unamortized goodwill in the amount of $15.6 million and unamortized identifiable intangible assets (the “Core Deposit Intangibles”) in the amount of $282,000, that were subject to the transition provisions of SFAS Nos. 141 and 142. The Company had no other intangible assets affected by this accounting change. Amortization expense related to goodwill was $2.0 million for 2001 and 2000. Amortization of Core Deposit Intangibles was $141,000 in 2002, compared to $96,000 in 2001 and $101,000 in 2000. The increase in 2002 over 2001 reflects the reassessment of and reduction in useful life. Fair value exceeded carrying value for all reporting units that have allocated goodwill at both the transitional and annual evaluation dates. Thus, no transitional or annual impairment loss was recognized and no cumulative effect of a change in accounting principle was recorded. In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions” (SFAS No. 147). SFAS No. 147 requires financial institutions to evaluate their accounting for past acquisitions to determine whether revisions are needed. SFAS No. 147 applies to all new and past financial institution acquisitions, including “branch acquisitions” that qualify as acquisitions of a business, but excludes acquisitions between mutual institutions. The Company does not have any acquisitions affected by this new standard. See Note 6 of the Notes to Consolidated Financial Statements.

19

Table of Contents

On January 1, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138. This statement outlines accounting and reporting standards for derivative instruments and hedging activities. Net income for 2001 includes a cumulative effect increase to earnings of $225,000 net of tax, or $0.01 per diluted share, attributable to the adoption of the new accounting standard (the “Accounting Change”). See Note 11 of the Notes to Consolidated Financial Statements.

Extinguishment of Debt

During 2001, AMCORE reacquired for its own portfolio at par $15.0 million in capital trust preferred securities, issued in March 1997, which was accounted for as a retirement (the “Debt Extinguishment”), with the coupon rate of 9.35 percent. The Debt Extinguishment resulted in an after-tax extraordinary charge of $204,000, or $0.01 per diluted share (the “Extraordinary Item”). See Note 10 of the Notes to Consolidated Financial Statements.

Stock Repurchase Programs

During 2002, 2001 and 2000 the Company reacquired shares pursuant to various share repurchase authorizations (the “Stock Repurchase Programs”). Shares so acquired became treasury shares available for general corporate purposes, including the issuance of shares in connection with AMCORE’s stock option plan and other employee benefit plans. During 2002, the Company repurchased 82,000 shares at an average price of $22.20. During 2001, the Company repurchased 1.8 million shares at an average price of $21.42. During 2000, the Company repurchased 2.0 million shares at an average price of $19.43. No shares remain to be purchased under any Stock Repurchase Program.

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 three 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, the interest income and rates on these types of assets are adjusted to a “fully taxable equivalent” or FTE basis. The FTE adjustment was calculated using AMCORE’s statutory Federal income tax rate of 35%. Adjusted interest income is as follows (in thousands):

Net interest income on a fully taxable equivalent basis increased $9.7 million or 7.6% in 2002 compared to a decline of $6.1 million or 4.5% in 2001. The increase in net interest income in 2002 was primarily the result of decreased funding costs and an increase in average earning assets. In 2001, the decline in net interest income was attributable to lower average earning assets, partially offset by improved net interest spread.

The net interest spread is the difference between the average rates on interest-earning assets and the average rates on interest-bearing liabilities. The interest rate margin represents net interest income divided by average earning assets.

20

Table of Contents

These ratios can also be used to analyze net interest income. Since a significant portion of the Company’s funding is derived from interest-free sources, primarily demand deposits, other liabilities and stockholders’ equity, the effective rate paid for all funding sources is lower than the rate paid on interest-bearing liabilities alone.

As Table 1 indicates, the interest rate spread improved 27 basis points to 3.15% in 2002 from 2.88% in 2001, which was an improvement of 22 basis points from the 2000 level of 2.66%. The interest rate margin was 3.53% in 2002, an increase of 11 basis points from 3.42% in 2001. The 2001 level was an increase of 13 basis points from 3.29% in 2000.

The level of net interest income is the result of the relationship between the total volume and mix of interest-earning assets and the rates earned and the total volume and mix of interest-bearing liabilities and the rates paid. The rate and volume components associated with interest earning assets and interest-bearing liabilities can be segregated to analyze the year-to-year changes in net interest income. Changes due to rate/volume variances have been allocated between changes due to average volume and changes due to average rate based on the absolute value of each to the total change of both categories. Because of changes in the mix of the components of interest-earning assets and interest-bearing liabilities, the computations for each of the components do not equal the calculation for interest-earning assets as a total and interest-bearing liabilities as a total. Table 1 analyzes the changes attributable to the volume and rate components of net interest income.

Changes Due to Volume

In 2002, net interest income on an FTE basis increased due to average volume by $4.7 million. This was comprised of an $11.9 million increase in interest income that was partially offset by a $7.2 million increase in interest expense. In 2001, net interest income on an FTE basis decreased due to average volume by $11.6 million. This was comprised of a $26.4 million decline in interest income that was partially offset by a $14.8 million decrease in interest expense.

The 2002 increase in interest income of $11.9 million was largely the result of a $147.1 million or 5.8% increase in average loans. Average installment and consumer loans, primarily indirect automobile lending, increased $127.9 million, while average commercial real estate and average commercial, financial and agricultural loans increased $87.9 million and $28.2 million, respectively. The combined increase in commercial lending was primarily driven by AMCORE’s Branch Expansion in the Chicago suburban and Madison area markets, notwithstanding the stricter pricing policies, tightened credit standards implemented in previous years and the continuing sluggish business environment. These increases were partially offset by a decline in average residential real estate loans of $97.0 million due to the impact of refinancings, as mortgage interest rates dropped to forty-year lows.

The 2002 increase in average earning assets was funded by a $139.6 million increase in average interest-bearing deposits, plus a $15.3 million increase in non-interest bearing deposits. The combined increase was comprised of a $78.4 million increase in brokered deposits and a $76.5 million or 2.9% increase in core deposits. The growth in core deposits reflects company-wide initiatives to attract additional core deposits as well as deposit growth attributable to the Branch Expansion. Over 95% of the core deposit growth was attributable to primary transaction account business, which is the Company’s lowest cost funding source. Growth in core deposits was insufficient to fund loan growth, leading to the increase in brokered deposits. AMCORE recognizes the importance of continued core deposit growth, not only as a means of funding the Branch Expansion, but also to continue the strategy expressed in 2001 of reducing its reliance on wholesale funding sources. Strong well-established markets, the transition to full-service retail branches in new markets as the Branch Expansion develops, continued emphasis on attracting and retaining primary transaction accounts, and asset securitization are all means by which the Company expects to implement these strategies.

The 2001 decline in interest income of $26.4 million was driven by a $217.7 million or 8.0% decline in average loans and a $141.8 million or 11.0% decline in average investment securities. The decrease in average loans was

21

Table of Contents

led by a $118.5 million average decrease in 1-4 family real estate loans due to refinancings and the Mortgage Securitization. Refinancings were prompted by falling mortgage interest rates which reached a forty-year low during 2001. Installment and consumer loan volume decreased $54.9 million, on average, as a result of the Auto Loan Sales. Commercial loan volume declined an average $26.5 million due to stricter pricing policies, tighter credit standards and the recession. These declines also reflect the impact of $65.1 million in loans transferred as part of the Branch Sales. The decline in average investment securities was the result of AMCORE’s Security Portfolio Restructuring, de-leveraging and prepayments driven by falling interest rates. Planned reductions primarily focused on mortgage-related securities with a higher degree of interest rate risk associated with changing prepayment speeds. The strategy also focused on reducing certain other securities with low yields and/or longer durations.

The 2001 decline in average earning assets led to a $287.4 million or 8.0% decrease in average interest-bearing liabilities and the resulting $14.8 million volume related reduction in interest expense. This was largely attributable to a $235.8 million average reduction in wholesale funding, including brokered deposits. This was a deliberate strategy aimed at reducing the Company’s reliance on these higher-cost funding sources, which included the Debt Extinguishment, and to reduce interest rate risk. Also included in the decrease is the impact of $170.8 million in deposits that were assumed by the buyers as part of the Branch Sales.

Changes Due to Rate

During 2002, net interest income on an FTE basis increased due to average rates by $5.0 million when compared with 2001. This was comprised of a $46.4 million decline in interest expense that was partly offset by a $41.4 million decrease in interest income. During 2001, net interest income on an FTE basis increased due to average rates by $5.5 million, when compared with 2000. This was comprised of a $14.0 million decline in interest income that was more than offset by a $19.5 million decrease in interest expense.

The yield on average earning assets declined 107 basis points in 2002, compared to 2001. The yield on average loans fell by 119 basis points, while the yield on average securities fell by 87 basis points. The decline in loan yields was primarily attributable to commercial real estate and commercial loans. Loans that refinanced during the year, variable priced loans and new loan production were all adversely impacted by the decline in interest rates that occurred throughout 2001 and 2002, driving overall yields down year-over-year. The decline in security yields was affected by the sale of higher risk securities in the 2001 Security Portfolio Restructuring and the prepayment of higher-yielding mortgage-related securities that occurred as mortgage interest rates fell. These securities were replaced with lower yielding securities due to the current interest rate environment.

The rate on interest-bearing liabilities declined 134 basis points during 2002 compared to 2001, due to lower deposit and short-term borrowing rates. While rates fell on all deposit products, the decrease was most pronounced on certificates of deposit (CD’s) and the Company’s indexed money market deposit accounts (AMDEX). Average rates on CD’s have declined as older CD’s bearing higher rates have matured and re-priced since the decline in interest rates that have occurred over the past two years. The AMDEX accounts re-price monthly off the three-month Treasury bill discount rate, and have also benefited from the decline in short-term interest rates. The decrease in short-term borrowing rates was largely the result of lower rates paid on reverse repurchase agreements as short-term interest rates have declined.

The yield on average earning assets declined 35 basis points in 2001, compared to 2000. The yield on average loans fell by 42 basis points and was primarily attributable to commercial and commercial real estate loans. Falling interest rates during the year impacted pricing on new loan volume, variable priced loans and loans that refinanced during the year. The yield on average securities decreased by 26 basis points, also the result of declining interest rates. Yields on securities were also affected by the sale of higher risk securities in the Security Portfolio Restructuring and de-Leveraging as well as the pre-payment of higher yielding securities that occurred as interest rates fell.

22

Table of Contents

The rate paid on interest-bearing liabilities declined 57 basis points in 2001, compared to 2000. This was primarily due to decreased rates paid on deposits and short-term borrowings. The decrease in deposit costs was largely driven by AMDEX deposit accounts that benefited from the decline in short-term interest rates. The decrease in short-term borrowing costs was mainly due to reverse repurchase agreements that renewed at lower rates, also due to the decline in short-term interest rates.

The current and projected interest rate environments are expected to result in improved interest rate spreads and margins in 2003, compared to 2002. Specifically, the Company expects continuing benefits from deposit re-pricing during the coming year. It will also realize a full year’s benefit from an expired interest rate swap that negatively impacted funding costs in 2002 by $5.2 million or 13 basis points. Among those factors that could cause margins and spreads not to improve as anticipated by the Company in 2003 include, unexpected changes in interest rates, changes in the slope of the yield curve, the effect of prepayments or renegotiated rates, changes in the mix of earning assets and the mix of liabilities, including greater than anticipated reliance on expensive wholesale sources to fund the Branch Expansion and Wisconsin Branch Sales and greater than expected delinquencies resulting in non-accrual status.

Provision for Loan and Lease Losses

The Provision (see Critical Accounting Policies discussion) was $12.6 million for 2002, a decrease of $4.1 million or 24.7% from the $16.7 million recorded in 2001. The Provision in 2001 was increased to address a variety of factors as noted below. While non-accrual loans and net charge-offs were up year-over-year in 2002, the total of non-accrual loans, loans past due 90 days or more and restructured loans were down compared to 2001. Further additions to the Allowance in 2002 were not necessary. As a result, although non-accrual loans and net-charge-offs were up, there was a decrease in the Provision year-over-year. During 2001, the provision increased $7.0 or 72.0% from the $9.7 million in 2000. The 2001 increase in provision was due to increases in non-accrual loans, higher net charge-offs and delinquencies compared to 2000, concentrations in industries that were impacted more than others by the recession, and concerns over the economy’s impact on the loan portfolio, particularly in light of the unprecedented events on and subsequent to the terrorist attacks of September 11, 2001.

AMCORE recorded net charge-offs of $11.3 million, $11.0 million and $7.9 million in 2002, 2001 and 2000, respectively. Net charge-offs represented 42 basis points of average loans in 2002 versus 44 basis points in 2001 and 29 basis points in 2000. Commercial net charge-offs declined $1.5 million in 2002, compared to 2001, and reflects the settlement activity that occurred in 2001. Installment and consumer loan net charge-offs increased $1.4 million, the result of the continued sluggish economy and increasing loss levels on repossessed vehicles. Real estate loan net charge-offs were up $78,000 year-to-year. Commercial charge-offs increased during 2001, partially the result of settlements reached with several borrowers to terminate or avoid costly litigation or protracted negotiation. Retail and installment loans also experienced increased charge-offs in 2001, the result of increasing unemployment and the weakening economy that affected the borrower’s ability to repay their loans.

Future growth in the loan portfolio, further weakening or continued uncertainties in economic conditions, changes in underlying collateral values, specific credit deterioration, or a change in management’s workout strategies on high-risk or non-performing loans, among other things, could result in Provisions in 2003 that are materially higher than those for 2002.

Non-Interest Income

Total non-interest income is comprised primarily of fee based revenues from trust and asset management activities, bank-related service charges on deposits and mortgage revenues. Net security gains or losses and increases in cash surrender value (CSV) of BANK and Company owned life insurance (COLI) are also included in this category. For 2001, this category also included Branch Gains.

Non-interest income totaled $70.3 million in 2002, a decline of $6.8 million or 8.8% from the $77.1 million in 2001. Excluding the 2001 Branch Gains of $10.6 million, non-interest income increased $3.8 million or 5.8%. This increase was primarily attributable to increased service charges on deposits and net security gains.

23

Table of Contents

Non-interest income totaled $77.1 million in 2001, an increase of $15.9 million or 25.9% from the $61.2 million in 2000. The Branch Gains accounted for $10.6 million of the increase. The remaining $5.3 million increase was attributable to growth in mortgage revenues, increases in CSV of COLI and increased service charges on deposits. These increases more than offset declines in trust and asset management income and security gains.

Trust and asset management income, the Company’s largest source of fee based revenues, totaled $24.7 million in 2002, a decrease of $2.2 million or 8.1% from $26.9 million in 2001. This follows a decrease in 2001 of $3.2 million or 10.7% from $30.1 million in 2000. The overall decline in the stock market during the past two years negatively impacted the value of AMCORE-administered assets, upon which fees are partially based, leading to the decrease in fee revenue. The loss of several larger employee benefit accounts at the end of 2000 and the beginning of 2001 also contributed to the decline.

Total assets under administration, excluding the BANK’s investment portfolio, were $4.6 billion at the end of 2002, compared to $4.9 billion and $5.0 billion at the end of 2001 and 2000, respectively. Assets under administration include both managed and custodial assets. In addition to overall market performance, trust and asset management revenues are dependent upon the Company’s ability to attract and retain accounts, specific investment performance and other economic factors. As witnessed over the last two years, investor confidence and market performance can be affected by numerous uncontrollable factors such as the September 11, 2001 attacks, uncertainties surrounding the war on terrorism, bankruptcies of high-profile public companies and the proliferation of questionable accounting practices by a variety of public companies that are reported in the financial press from time-to-time.

Service charges on deposits totaled $17.9 million in 2002, an increase of $3.1 million or 21.0% from the $14.8 million in 2001. During 2001, service charges on deposits increased $3.3 million or 28.6% from $11.5 million in 2000. Deposit growth initiatives, which primarily affected retail accounts, and increased commercial account maintenance fees contributed to the increases both in 2002 and 2001.

Mortgage revenues include fees generated from underwriting, originating and servicing of mortgage loans along with gains realized from the sale of these loans, net of servicing rights amortization and impairment (see Critical Accounting Policies). Mortgage revenues were $7.9 million in 2002, a decline of $542,000 or 6.4% from the record of $8.5 million reported in 2001. During 2001, mortgage revenues increased $4.3 million or 103.2% from $4.2 million in 2000. Mortgage revenues for 2002 included $2.6 million of net servicing rights impairment charges, compared to $780,000 in 2001. No impairment charges were required in 2000. For the second year in a row, declining mortgage interest rates resulted in record closing volumes. In 2002, closing volumes were $718.0 million, compared to $634.2 million in 2001, compared to volume of $200.9 million in 2000. Continued strong performance is expected in 2003, although not at the levels experienced during 2002 and 2001.

As of December 31, 2002, the carrying value of AMCORE’s capitalized mortgage servicing rights was $7.3 million. This amount is net of a $3.4 million impairment valuation allowance. The fair value of the Company’s capitalized mortgage servicing rights was $7.4 million. The unpaid principal balance of mortgage loans serviced for others, which are not included on the Consolidated Balance Sheets, including loans held for sale, was $1.1 billion as of December 31, 2002. See Note 7 of the Notes to Consolidated Financial Statements.

COLI income totaled $5.7 million in 2002, a $435,000 or 8.3% increase over the $5.2 million in 2001. This compares to a $3.3 million increase in 2001 over the $1.9 million reported in 2000. The 2002 increase over 2001 was primarily due to the impact of compounding. The 2001 increase over 2000 also included the impact of compounding, but was primarily the result of increased average investments year-over-year. AMCORE uses COLI as a tax-advantaged means of financing its future obligations with respect to certain non-qualified retirement and deferred compensation plans in addition to other employee benefit programs. As of December 31, 2002, the CSV of COLI stood at $108.9 million, which included the purchase of $3.2 million during 2002.

Other non-interest income includes customer service charges, debit card interchange income, ATM fees, brokerage commissions, insurance commissions, gains on fixed asset and loan sales and other miscellaneous

24

Table of Contents

income. In 2002, other non-interest income was $11.6 million, a $209,000 or 1.8% increase from $11.4 million in 2001. The increase was attributable to improved brokerage commission income of $636,000, a $607,000 increase in derivative related income due to mark-to-market gains in 2002 as opposed to losses in 2001, higher debit card interchange income of $419,000, a $365,000 gain on the sale of excess land and a $309,000 gain associated with an excess retirement plan asset reversion. These increases were partly offset by 2001 gains from Auto Loan Sales of $810,000 and a 2001 gain of $1.0 million from cash received on the merger of an ATM service provider. In 2001, there was a decrease in other non-interest income of $354,000 or 3.0% from $11.8 million in 2000. The 2001 decrease was attributable to $656,000 less gains on loan sales that were primarily related to the Auto Loan Sales, decreased brokerage and insurance commissions of $449,000 combined, and $275,000 in losses attributable to derivative mark-to-market adjustments and hedge ineffectiveness. These declines were nearly offset by the $1.0 million ATM service provider gain.

Net securities gains totaled $2.5 million in 2002, compared to net losses of $303,000 in 2001 and net gains of $1.8 million in 2000. 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. In 2001, the Company’s balance sheet risk objectives included the Security Portfolio Restructuring in addition to continuation of the Security Portfolio de-leveraging strategy that began in 1999.

Operating Expenses

Total operating expenses were $131.0 million in 2002, an increase of $7.4 million from $123.6 million in 2001, which was a $6.5 million increase from $117.1 million in 2000. Operating expenses in 2002 included the $1.3 million Retirement Obligation and a $352,000 Severance Charge. Operating expenses in 2001 included Severance Charges of $760,000. Operating expenses in 2000 were reduced by the Restructuring Reversal of $428,000. Pursuant to SFAS No. 142, the Company discontinued the amortization of goodwill, effective January 1, 2002. Amortization expense related to goodwill was $2.0 million for 2001 and 2000. The efficiency ratio, excluding the Retirement Obligation, the Severance Charges, the Restructuring Reversal, the Branch Gains and the Security Portfolio Restructuring was 61.71% in 2002, 61.87% in 2001 and 59.66% in 2000.

Compensation expense is the largest component of operating expenses, totaling $60.5 million in 2002. This was a $5.1 million or 9.3% increase from $55.3 million in 2001, which was a $2.2 million or 4.1% increase from $53.2 million in 2000. The 2002 increase included $1.3 million in net staff additions associated with the Branch Strategy, $922,000 in increased incentive costs, higher commissions of $819,000, mainly driven by increased mortgage closings, and $527,000 of the Retirement Obligation. Severance Charges decreased $408,000 when compared to 2001. The remaining $1.9 million or 3.2% increase was largely due to normal merit and cost-of-living increases. The 2001 increase was attributable to the $760,000 Severance Charge, $621,000 of normal merit and cost-of-living adjustments net of cost savings attributable to the Restructuring and lower costs due to the impact of the Branch Sales, increased commissions of $599,000 associated with the record mortgage volumes and $188,000 related to the 2000 Restructuring Reversal. Excluding the Severance Accrual, the volume related mortgage commissions increase and the Restructuring Reversal, compensation expense increased 1.2% in 2001 from 2000.

Employee benefit costs were $16.2 million in 2002, an increase of $2.0 million or 14% from $14.2 million in 2001, which was a $385,000 or 2.8% increase from $13.8 million in 2000. The 2002 increase was primarily attributable to $757,000 of the Retirement Obligation, $665,000 in increased retirement and deferred compensation costs and $538,000 in increased payroll tax costs. The 2001 increase was primarily due to increased profit sharing, which was partially offset by decreased group medical costs associated with structural changes in the plan and other cost containment measures.

Net occupancy expense was $7.9 million in 2002, an increase of $303,000 or 4.0% from 2001. This follows an increase of $280,000 or 3.9% from 2000 levels. The 2002 and 2001 increases included net increases due to the Branch Strategy.

25

Table of Contents

Equipment expense decreased $173,000 or 2.2% to $7.8 million in 2002. This followed a $501,000 or 5.9% decrease in 2001. The 2002 decrease reflects lower net electronic data processing equipment and software expense expenses. These costs also decreased in 2001, as did depreciation on furniture and fixtures, when compared to 2000.

Data processing expenses include costs related to core bank data processing, trust and other external processing systems. This category increased $738,000 or 12.2% to $6.8 million in 2002, primarily due to increased core bank data processing costs. Expenses in 2001 were $6.0 million, a $201,000 or 3.4% increase from $5.8 million in 2000. Excluding the impact of the Restructuring Reversal of $98,000 in 2000, data processing expenses increased only $103,000 or 1.7% in 2001. The modest increase in 2001 also reflects processing and programming efficiencies associated with the Restructuring.

Professional fees totaled $4.3 million in 2002, an increase of $149,000 or 7.6% from 2001. Audit and consulting fee increases were partly offset by decreased legal fees. Professional fees were $4.1 million in 2001, an increase of $343,000 or 9.1% from 2000. This was due to increased legal fees, primarily associated with credit collection activities, and a $139,000 Restructuring Reversal in 2000.

Communication expense was $4.1 million in 2002, an increase of $196,000 or 5.0% from 2001. The increase was due to increased courier and postage costs due in part to the Branch Expansion and postal rate increases. Communication expense was $3.9 million in 2001, a decrease of $49,000 or 1.2% from 2000. Increased postage and courier services were more than offset by lower telephone costs.

Advertising and business development expenses were $4.7 million in 2002, an increase of $120,000 or 2.6% from 2001. This reflects increases in branch and market level public relations and business development expenses, which were partly funded by a decrease in newspaper and direct mail advertising. Advertising and business development expenses were $4.6 million in 2001, an increase of $797,000 or 21.0% from 2000. Increased direct mail campaigns were the principal reasons for the increase, partially offset by decreased customer relations spending. The increase in direct mail campaigns was due in part to Free Checking initiatives.

Intangibles amortization was $141,000 in 2002, compared to $2.1 million in 2001 and 2000. The decrease in 2002 relates to the discontinuation of goodwill amortization pursuant to SFAS No. 142. This is more fully explained in the “Accounting Changes” section, above. See also Notes 1 and 6 of the Notes to Consolidated Financial Statements.

Other expenses were $18.6 million in 2002, an increase of $878,000 or 4.9%, following an increase of $2.9 million or 19.5% in 2001. The 2002 increase was largely the result of higher loan processing expenses of $633,000, mainly associated with collection and repossession activities, $323,000 of investment related impairment charges and $291,000 in increased travel and entertainment costs. These were partly offset by a $388,000 reduction in expenses related to foreclosed real estate. Higher loan processing expenses of $1.8 million, mainly related to heightened mortgage origination and refinancing, plus $735,000 in increased credit losses and expenses from foreclosed real estate were primarily responsible for the 2001 increase. Other factors included increased charitable contributions, Branch Expansion expenses and accruals for legal contingencies.

Income Taxes

Income tax expense totaled $14.0 million in 2002, compared with $14.4 million and $16.4 million in 2001 and 2000, respectively. The effective tax rates, which for 2001 includes $130,000 of tax benefit and $143,000 of tax expense for the Extraordinary Item and the Accounting Change, respectively, were 24.4%, 25.4%, and 27.5% in 2002, 2001, and 2000, respectively. The effective tax rate was less than the statutory tax rates due primarily to investments in tax-exempt municipal bonds and loans and increases in CSV on COLI. The decrease in the effective rate in 2002 primarily resulted from the discontinuation of goodwill amortization pursuant to SFAS No. 142 and the favorable resolution of various tax audits and other pending tax issues. The decrease in effective tax rate in 2001 was mainly due to increases in CSV on COLI.

26

Table of Contents

EARNINGS REVIEW BY BUSINESS SEGMENT

AMCORE’s internal reporting and planning process focuses on four primary lines of business or (Segments): Commercial Banking, Retail Banking, Trust and Asset Management, and Mortgage Banking. Note 18 of the Notes to Consolidated Financial Statements presents a condensed income statement and selected balance sheet information for each Segment.

The financial information presented was derived from the Company’s internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, portray each Segment as if it operated on a stand-alone basis. Thus, each Segment, in addition to its direct revenues, expenses, assets and liabilities, includes an appropriate allocation of shared support function expenses. The Commercial and Retail Banking Segments also include funds transfer adjustments to appropriately reflect the cost of funds on loans made and funding credits on deposits generated. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of the Notes to Consolidated Financial Statements.

Since there are no comprehensive authorities for management accounting equivalent to accounting principles generally accepted in the United States of America, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure. The presentation of Segments was changed in the first quarter of 2002 to reflect the Company’s shift to a line of business structure. The primary impact of this change was to segregate the previous Banking Segment into its Retail and Commercial components. However, due to allocation methodologies for shared support costs, fund transfer pricing adjustments for loans (Cost of Funds Allocations) and deposits (Funds Credit Allocations) and the exclusion of investment and treasury activities from either the Retail or Commercial Banking Segments, the sum of these two “new” Segments will not equal the total of the “old” Banking Segment presentation. Prior period Segment results have been restated to reflect the new line of business structure. The Trust and Asset Management Segment and the Mortgage Banking Segment were not affected by the shift to a line of business structure and have not been restated.

Total Segment results differ from consolidated results primarily due to intersegment eliminations, certain corporate administration costs, items not otherwise allocated in the management accounting process and treasury and investment activities. The impact of these items is aggregated to reconcile the amounts presented for the Segments to the consolidated results and are included in the “Other” column of Note 18 of the Notes to Consolidated Financial Statements. For ease of comparison, the discussion of each Segment, including the Segment profit percentage, focuses on earnings before the Extraordinary Item and the Accounting Change (the “Operating Profit” or “Operating Loss”). In addition, due to its unusual and non-recurring nature, the Branch Gain has not been allocated to either the Commercial or Retail segments. It is included in the Other column.

Commercial Banking

The Commercial Banking Segment (Commercial) provides commercial banking services to large and small business customers through the BANK’s 64 banking locations in northern Illinois and south central Wisconsin. The services provided by this Segment include lending, business checking and deposits, cash management, merchant card services and other traditional as well as e-commerce commercial banking services.

Commercial Operating Profit for 2002 was $22.5 million, an increase of $7.3 million or 48.2% from 2001. This followed a decline in 2001 of $1.9 million or 11.2% from an Operating Profit of $17.1 million in 2000. The 2002 increase was primarily attributable to increased net interest income, increases in non-interest income and decreased Provision. These were partially offset by increased operating expenses and income taxes.

27

Table of Contents

Net interest income increased $10.4 million in 2002. The increase was due to increased loan volumes, particularly commercial real estate loans, lower priced deposits and decreased net Cost of Funds Allocations, which more than compensated for lower yields on loans. The lower yields on loans, reduced rates on deposits and decreased net Cost of Funds Allocations were all attributable to declining short-term interest rates over the previous year. Strong loan demand, aided by the Branch Expansion, was more than sufficient to replace average loan balances transferred in the Branch Sales leading to the increased volumes.

Non-interest income increased $1.2 million in 2002. The increase was attributable to increased service charge income associated with commercial deposit account analysis and letter-of-credit fees. Lower short-term interest rates reduced the value of account balances maintained to compensate the BANK for deposit services, resulting in higher fees collected for account maintenance.

The 2002 Provision decrease from 2001 was $4.6 million. The decrease in the Provision was primarily related to decreased charge-offs in 2002, as compared to 2001, and additions to the Allowance in 2001 prompted by concerns about delinquencies, concentrations and the economy’s impact on the commercial portfolio. Comparable additions were not necessary during 2002.

Operating expenses increased $4.3 million in 2002. The increase was largely due to higher personnel expenses, which included the impact of the Branch Strategy, and a higher allocation of shared support function costs. These increases were partially offset by the discontinuation of goodwill amortization pursuant to SFAS No. 142.

Income taxes increased $4.5 million in 2002, primarily the result of higher income before taxes.

The Commercial Segment represented 59.4%, 52.5% and 45.6% of total segment Operating Profit in 2002, 2001 and 2000, respectively.

Retail Banking

The Retail Banking Segment (Retail) provides retail-banking services to individual customers through the BANK’s 64 banking locations in northern Illinois and south central Wisconsin. The services provided by this Segment include direct and indirect lending, checking, savings, money market and CD accounts, safe deposit rental, automated teller machines, and other traditional and e-commerce retail banking services.

Retail Operating Profit for 2002 was $9.4 million, an increase of $2.0 million or 26.5% from 2001. This followed a decline in 2001 of $5.6 million or 42.9% from an Operating Profit of $13.0 million in 2000. The 2002 increase was primarily attributable to increased net interest income. Partially offsetting this increase was a decline in non-interest income, increased Provision and higher income taxes.

Net interest income increased $3.6 million in 2002. The increase was due to increased loan volumes, particularly indirect automobile loans net of reduced residential real estate loans, and lower priced deposits, which more than offset lower yields on loans and reduced net Funds Credit Allocations. The lower yields on loans, reduced rates on deposits and decreased net Funds Credit Allocations were all attributable to declining short-term interest rates over the previous year. Auto Loan Sales in 2001 and strong demand in 2002 led to the increase in indirect automobile loan volume year-over-year. Declining volumes on residential real estate loans were driven by accelerated prepayments due to falling mortgage interest rates and the Branch Sales. In all other retail loan categories, the impact of the Branch Expansion was essentially offset, on average for the year, by the impact of the Illinois Branch Sales.

Non-interest income declined $281,000 in 2002. Increased deposit service charge income, other customer service fees and a gain on the sale of excess land were more than offset by decreased commissions from mortgage originations and gain on Auto Loan Sales in 2001. The decrease in mortgage origination commissions was due to the transfer of mortgage originator staff to the Mortgage Banking Segment.

28

Table of Contents

The 2002 Provision increase from 2001 was $424,000. The increase in the Provision was primarily related to increased charge-offs and growth in loan balances in 2002. Increased allocations made in 2001 for specific non-conforming real estate loans were decreased in 2002 due to the sale of a portion of that portfolio.

Operating expenses, in total, were relatively unchanged year-to-year. Increased allocations of shared support function and home office costs, as well as increased personnel costs were essentially offset by the discontinuation of goodwill amortization pursuant to SFAS No. 142 and lower foreclosed real estate costs.

Income taxes increased $833,000 in 2002, primarily the result of higher income before taxes.

The Retail Segment represented 24.8%, 25.7% and 34.8% of total segment Operating Profit in 2002, 2001 and 2000, respectively.

Trust and Asset Management

The Trust and Asset Management Segment (TAM) provides trust, investment management, employee benefit recordkeeping and administration and brokerage services. It also acts as an advisor and provides fund administration to the Vintage Mutual Funds and various public fund programs. 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 banking locations.

The TAM Segment’s Operating Profit for 2002 was $3.7 million, an increase of $207,000 or 5.9% from 2001. This followed a $2.4 million or 40.5% decline from an Operating Profit of $5.9 million in 2001. The increase was primarily due to lower operating expenses and income tax expense, which were nearly offset by a decline in non-interest income.

Declines in fee-based revenue, partly offset by increased brokerage commission income, were responsible for a $1.3 million decrease in non-interest income. The declines in the equity market have impacted the value of AMCORE-administered assets, which in turn have caused a reduction in fee-based revenue. Net brokerage commissions on the other hand have been particularly strong and are primarily the result of increased fixed-annuity sales. In addition, processing costs associated with annuity sales, which are netted against commissions, have declined as the TAM segment is now processing its own sales.

Operating expenses decreased $1.2 million in 2002 and is primarily related to the discontinuation of goodwill amortization pursuant to SFAS No. 142. Lower personnel costs and decreased allocations of shared support function and home office costs, net of an increase in data processing costs and other losses, associated with reimbursements to customers and funds, also contributed to the decrease in operating expenses.

Income taxes declined $351,000 for 2002. The decrease in taxes is related to declines in pre-tax Operating Profit, exclusive of the change related to the discontinuation of goodwill amortization, which was not tax deductible.

The TAM Segment manages or administers $5.8 billion of investments, inclusive of traditional assets as well as the management of the BANK’s diverse fixed income portfolio of approximately $1.2 billion. Assets in the AMCORE Vintage Mutual Funds totaled $877 million.

The TAM Segment represented 9.7%, 12.0% and 15.6% of total segment Operating Profit in 2002, 2001 and 2000, respectively.

Mortgage Banking

The Mortgage Banking Segment (Mortgage) provides a variety of mortgage lending products to meet its customer needs. It sells these loans to the BANK and the secondary market and continues to service most of the loans sold.

29

Table of Contents

The Mortgage Segment’s Operating Profit was $2.3 million in 2002, compared to $2.9 in 2001, a decline of $530,000 or 18.6%. This follows an increase of $1.3 million or 88.3% from $1.5 million in 2000. The 2002 decrease was primarily attributable to higher operating costs and lower non-interest income.

Net interest income increased $228,000 during 2002. This was primarily due to higher average mortgage loans held for sale in 2002 compared to 2001, net of associated funding costs.

Non-interest income for 2002, which for the Mortgage Segment is net of servicing right amortization and impairment, declined $302,000 from 2001. Closing volumes were $718.0 million in 2002, a second consecutive year of record closings, compared to $634.2 million in 2001. Increased amortization and impairment of servicing rights, due to the accelerated run-off of the portfolio and increasing prepayment speeds, and a lower-of-cost-or-market write-down on mortgages held for sale more than offset otherwise strong revenue gains from the increased volumes.

Operating expenses increased $791,000 in 2002 compared to 2001. The increase was primarily due to higher commissions that were paid due to the increase in mortgage volumes. Other increases in personnel costs, due to the transfer of the mortgage originators from the Retail Segment, were essentially offset by the elimination of affiliate commissions due to the transfer.

The unpaid principal balance of mortgage loans serviced at December 31, 2002, including loans held for sale and loans serviced for the BANK, was unchanged from a year ago at $1.35 billion.

The Mortgage Segment represented 6.1%, 9.8% and 4.0% of total segment Operating Profit in 2002, 2001 and 2000, respectively.

BALANCE SHEET REVIEW AND LIQUIDITY RISK MANAGEMENT

Liquidity management is the process by which the Company, through its Asset and Liability Committee (ALCO) and treasury function, ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, repayment of debt when due or called, maintaining adequate collateral for secured deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include brokered CD’s, federal funds purchased lines (FED funds), Federal Home Loan Bank (FHLB) advances, repurchase agreements, commercial paper and back-up lines of credit, the sale or securitization of loans, and access to other capital markets.

The parent company requires adequate liquidity to pay its expenses, repay debt when due and pay stockholder dividends. Liquidity is primarily provided to the parent through the BANK and other subsidiaries in the form of dividends. In 2002, dividends from subsidiaries amounted to $30.5 million, compared to $45.1 million in 2001. While the BANK is limited in the amount of dividends it can pay, as of December 31, 2002, approximately $28.6 million was available for payment to the parent in the form of dividends without prior regulatory approval.

Cash and Cash Equivalents

Cash and cash equivalents increased $11.0 million from December 31, 2001 to December 31, 2002, as the net cash provided from financing activities of $426.1 million, plus the cash provided from operating activities of

30

Table of Contents

$86.7 million more than offset the net cash used for investing activities of $501.8 million during 2002. This compares to an increase in cash and cash equivalents of $15.4 million from December 31, 2000 to December 31, 2001, as the net cash provided from investing activities of $227.1 million more than offset the net cash used for financing activities of $203.4 million, plus the net cash used in operating activities of $8.3 million during 2001.

The $86.7 million of cash provided from operating activities during 2002 contrasts with $8.3 million in net cash used during 2001, representing a $94.9 million increase in cash provided between the two years. The change was attributable to a $98.8 million increase in proceeds from the sale of loans held for sale, net of increased originations of such loans, primarily attributable to the Mortgage segment’s origination and sale of loans into the secondary market.

The $501.8 million of cash used for investing activities during 2002 contrasts with $227.1 million provided in 2001, for an increase of $728.9 million in cash used between the two years. This was primarily the result of a $490.5 million net increase in loans and leases and a $224.0 million decrease in the amount of proceeds from investment sales. The net increase in loans and leases was due in large part to Branch Expansion in 2002 compared to Branch Sales in 2001, while the decrease in proceeds from investment sales was mainly due to the 2001 Security Portfolio Restructuring.

The $426.1 million of cash provided by financing activities during 2002 contrasts with $203.4 million used during 2001, or an increase of $629.5 million in cash provided. This was primarily the result of a $480.8 million net increase in cash provided by demand, savings and time deposit accounts, $93.1 million in cash required in 2001 to fund the Branch Sales and a $38.2 million decrease in cash used for net treasury stock repurchases. The net increase in deposit accounts reflects company-wide initiatives to attract additional core deposits as well as the Branch Expansion in 2002 compared to the Branch Sales in 2001. The decrease in cash used to fund treasury stock repurchases is due to the completion of the Company’s Stock Repurchase Programs.

Securities

Total securities as of December 31, 2002 were $1.17 billion, an increase of $85.8 million or 7.9% from the prior year-end. At December 31, 2002 and 2001, the total securities portfolio comprised 28.3% and 29.6%, respectively, of total earning assets.

In connection with the adoption of SFAS No. 133 on January 1, 2001, $10.7 million of held to maturity securities were reclassified to available for sale. Thus, as of December 31, 2002, all securities are classified as available for sale. The Company believes the reclassification will improve AMCORE’s ability to manage interest rate and liquidity risk. Fluctuations in the unrealized gain or loss component of total stockholders’ equity may result; however, federal banking regulations generally exclude this component from regulatory risk-based capital calculations.

The securities portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and the prepayment of mortgage and asset backed securities represent a significant source of liquidity. Approximately $24.2 million, or 2.1%, of the securities portfolio will contractually mature in 2003. This does not include mortgage and asset backed securities. Mortgage and asset backed security maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. For example, scheduled maturities for 2002, excluding mortgage and asset backed securities, were $36.1 million, whereas proceeds from actual maturities, which included prepayments of mortgage and asset backed securities, were $366.5 million. This compares to proceeds of $336.7 million and $175.9 million in 2001 and 2000, respectively. As of December 31, 2002, $264.8 million of investment securities were unpledged and available as a source of liquidity.

Mortgage and asset backed securities as of December 31, 2002 totaled $849.6 million and represent 72.4% of total securities. The distribution of mortgage and asset backed securities includes $438.5 million of U.S.

31

Table of Contents

government agency mortgage-backed pass through securities, $313.8 million of agency collateralized mortgage obligations and $97.2 million of private issue collateral mortgage obligations, all of which are rated AAA except for $7.6 million of securities rated either Aa2 and A2.

At December 31, 2002, securities available for sale totaled $1.17 billion, which included gross unrealized gains of $35.3 million and gross unrealized losses of $4.0 million, of which the combined effect, net of tax, is included as accumulated other comprehensive income (OCI) in stockholders’ equity. For comparative purposes, at December 31, 2001, gross unrealized gains of $10.7 million and gross unrealized losses of $6.2 million were included in the securities available for sale portfolio. There were no held to maturity securities at December 31, 2002. For further analysis of the securities portfolio see Table 4 and Note 3 of the Notes to Consolidated Financial Statements.

Loans and Leases Held for Sale

At December 31, 2002, mortgage origination fundings awaiting delivery to the secondary market were $79.9 million, compared to $101.8 million at December 31, 2001. Residential mortgage loans are originated by AMCORE’s mortgage segment, of which non-conforming adjustable rate, fixed-rate and balloon residential mortgages are normally sold to the BANK. The conforming adjustable rate, fixed-rate and balloon residential mortgage loans are sold in the secondary market to eliminate interest rate risk, as well as to generate gains on the sale of these loans and servicing income. All loans of the mortgage segment are considered held for sale and are recorded at the lower of cost or market value.

For the second year in a row, declining mortgage interest rates resulted in record closing volumes, increasing the pressure on short-term liquidity. In 2002, closing volumes were $718.0 million, compared to $634.2 million in 2001. Continued strong performance is expected in 2003, although not at the levels experienced during 2002 and 2001. Outstanding residential mortgage commitments, a potential use of liquidity, were $99.8 million at December 31, 2002.

Loans and Leases

Loans represent the largest component of AMCORE’s earning asset base, while the funding of loan originations is its most significant liquidity need. At December 31, 2002, total loans and leases were $2.88 billion, an increase of $406.5 million or 16.4% as compared to 2001. Average loans increased $147.1 million or 5.8% during 2002. See Table 2 and Note 4 of the Notes to Consolidated Financial Statements.

Total real estate loans increased $191.8 million or 14.5%, and was net of a $50.7 million decline in residential real estate loans. Installment and consumer loans increased $161.6 million or 36.5%. Commercial, financial and agricultural loans increased $55.5 million or 7.9%. The Branch Expansion and indirect automobile loan volumes were the primary reasons for the increase in loan balances. Residential real estate loan balances continue to be affected by refinancings, as mortgage interest rates continued at forty-year lows.

The scheduled repayments and maturities of loans represent a substantial source of liquidity. Table 3 shows selected loan maturity data as of December 31, 2002. The increasing indirect automobile loan balances, which at December 31, 2002 were $505.8 million, represent a potential source of liquidity through an additional Loan Securitization. In addition to same branch and Branch Expansion loan growth, potential uses of liquidity include $587.4 million in commitments to extend credit and $161.4 in standby and performance letters of credit.

Deposits

Total deposits at December 31, 2002, were $3.29 billion, an increase of $400.9 million or 13.9% when compared to 2001. Average deposits increased $154.9 million or 5.3% during 2002.

Core deposits, which exclude brokered CD’s, are considered by management to be the primary, most stable and cost-effective source of funding and liquidity. Total core deposits were $2.77 billion at the end of 2002, a $148.1

32

Table of Contents

million or 5.6% increase from the prior year-end. The increase is attributable to company-wide initiatives to attract additional core deposits as well as the Branch Expansion. Core deposits represent 84.2% and 90.7% of total deposits at December 31, 2002 and 2001, respectively. Table 5 shows the maturity distribution of time deposits $100,000 and over. Although it has no commitment from brokered deposit sources, the BANK has capacity, over time, to place sufficient amounts of additional brokered CD’s as a source of mid to long-term liquidity.

Borrowings

Borrowings totaled $781.3 million at year-end 2002 and were comprised of $595.5 million of short-term and $185.8 million of long-term borrowings. See Notes 9 and 10 of the Notes to Consolidated Financial Statements.

AMCORE has $25.0 million of capital securities outstanding through AMCORE Capital Trust I (Trust), a statutory business trust, of which all common securities are owned by AMCORE. The capital securities pay cumulative cash distributions semiannually at an annual rate of 9.35%. The securities are redeemable from March 25, 2007 until March 25, 2017, at a declining premium of 104.675% to 100.0% of the principal amount. After March 25, 2017, they are redeemable at par until June 15, 2027, when redemption is mandatory. The capital securities qualify as Tier 1 capital for regulatory purposes. During 2001, AMCORE retired at par $15.0 million in capital trust preferred securities with the coupon rate of 9.35 percent. Prior to the Debt Extinguishment that occurred in 2001, $40.0 million of capital securities were outstanding.

The 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 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. At December 31, 2002, $28.4 million in commercial paper was outstanding.

As of December 31, 2002, available sources of liquidity from borrowings included $144.9 million of unused FED funds lines, $70.4 million of FHLB advances, unused collateral to sufficient to support $8.9 million in FED discount window advances and $21.6 million in unused commercial paper and backup line of credit borrowings.

ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT

AMCORE’s credit risk is centered in the loan and lease portfolio, which on December 31, 2002 totaled $2.88 billion, or 69.6%, of earning assets. The objective in managing loan portfolio risk is to quantify and manage credit risk on a portfolio basis as well as reduce the risk of a loss resulting from a customer’s failure to perform according to the terms of a transaction. To achieve this objective, AMCORE strives to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, and borrower concentration.

The Company is also exposed to credit risk with respect to its $108.9 million investment in COLI. AMCORE manages this risk by diversifying its holdings among various carriers and by periodic internal credit reviews. All carriers have “Secure” ratings from A. M. Best that range from a low of “A” (Excellent) to “A++” (Superior).

Allowance for Loan and Lease Losses

The determination by management of the appropriate level of the Allowance (see Critical Accounting Policies discussion) amounted to $35.2 million at December 31, 2002, compared to $33.9 million at December 31, 2001, an increase of $1.3 million or 3.8%. A detailed analysis of the Allowance and the allocation of the Allowance by category for the past five years are shown in Table 2.

Allocations of the Allowance for commercial, financial and agricultural loans declined $666,000, primarily reflecting additions to the Allowance in 2001 that were prompted by concerns about delinquencies,

33

Table of Contents

concentrations and the economy’s impact on the commercial portfolio. Comparable additions were not necessary during 2002. Allocations of the Allowance for real estate loans increased $355,000 primarily due to an increase in historical loss factors on increasing commercial real estate balances. Allocations of the Allowance for installment and consumer loans increased $435,000. This increase was attributable to the impact of historical loss factors on increasing balances. Allocations for specifically identified impaired loans increased $1.5 million during the year. Over 50% of the allocation for impaired loans relate to five credits. The amount of the unallocated Allowance declined $329,000 from one year ago to $1.5 million.

As of December 31, 2002, the Allowance as a percent of total loans and of non-accrual loans was 1.22% and 108%, respectively. These compare to the same ratios for the prior year of 1.37% and 128%. Net charge-offs as a percent of average loans decreased to 42 basis points for 2002 versus 44 basis points in 2001. Commercial net charge-offs declined $1.5 million in 2002, compared to 2001, and reflects the settlement activity that occurred in 2001. Installment and consumer loan net charge-offs increased $1.4 million, the result of the continued sluggish economy and increasing loss levels on repossessed vehicles. Real estate loan net charge-offs were up $78,000 year-to-year.

Non-performing Assets

Non-performing assets consist of non-accrual loans, other real estate owned and other foreclosed assets. Non-performing assets totaled $38.0 million as of year-end 2002, an increase of $4.2 million or 12.4% from the $33.8 million at year-end 2001. Total non-performing assets represented 0.84% of total assets at December 31, 2002 and December 31, 2001.

Non-accrual loans increased $6.1 million or 23.0% to total $32.5 million at December 31, 2002, when compared to the prior year-end. As of December 31, 2002, non-accrual loans to total loans were 1.13% compared to 1.07% at year-end 2001. Table 2 presents non-accrual loans for each of the past five years.

Foreclosed real estate and other foreclosed assets declined $1.9 million, or 25.8%, to $5.4 million at December 31, 2002, when compared to year-end 2001. The decrease is primarily attributable to the sale of two large foreclosures that occurred in 2001; one a hotel loan and the other a condominium complex.

Loans 90 days or more past due and still accruing interest were $3.6 million at December 31, 2002, a decline of $10.4 million from the $14.0 million at December 31, 2001. These amounts represented 0.12% and 0.57% of loans outstanding as of the end of 2002 and 2001, respectively.

Concentration of Credit Risks

As previously discussed, AMCORE strives to maintain a diverse loan and lease portfolio in an effort to minimize the effect of credit risk. Summarized below are the characteristics of classifications that exceed 10% of total loans.

Commercial, financial, and agricultural loans were $761.0 million at December 31, 2002, and comprised 26.4% of gross loans, of which 1.48% were non-performing. Net charge-offs of commercial loans represented 0.45% during 2002, and 0.70% during 2001, of the year-end balance of the category.

Construction, commercial real estate loans, and loans for farmland were $1.1 billion at December 31, 2002, comprising 37.0% of gross loans, of which 1.26% were classified as non-performing. Net charge-offs of this category of loans represent 0.12% during 2002, and 0.18% during 2001, of the year-end balance of the category.

Residential real estate loans, which includes home equity and permanent residential financing, totaled $449.3 million at December 31, 2002, and represent 15.6% of gross loans, of which 1.39% were non-performing. Net charge-offs of residential real estate loans represent 0.24% of the category total in 2002 and 0.17% of the year-end balance in 2001.

34

Table of Contents

Installment and consumer loans were $604.7 million at December 31, 2002, and comprised 21.0% of gross loans, of which 0.22% were non-performing. Net charge-offs of consumer loans represented 0.85% and 0.83% of the year-end category total for 2002 and 2001, respectively. Consumer loans are comprised primarily of in-market indirect auto loans and direct installment loans. Indirect auto loans totaled $506.0 million at December 31, 2002. Both direct loans and indirect auto loans are approved and funded through a centralized underwriting unit utilizing the same credit scoring system and related policies to provide a standard and consistent methodology for the extension of credit.

CAPITAL MANAGEMENT

Capital Management

Total stockholders’ equity at December 31, 2002, was $355.7 million, an increase of $54.0 million or 17.9% from December 31, 2001. The increase in stockholders’ equity was primarily due to $27.6 million in earnings for the year in excess of dividends paid and an increase in OCI of $22.6 million. The increase in OCI relates to increases $16.3 million in net after-tax unrealized gains on the Company’s available for sale investment portfolio and $5.0 million of net after-tax mark-to-market adjustments on cash flow hedges.

AMCORE paid $15.8 million of cash dividends during 2002, which represent $0.64 per share, or a dividend payout ratio of 36.4%. This compares to $0.64 per share paid in 2001, which represented a payout ratio of 38.7%. The book value per share increased $2.09 per share to $14.35 at December 31, 2002, up from $12.26 at December 31, 2001.

During 2002, 2001 and 2000 the Company reacquired shares pursuant to various Stock Repurchase Programs. During 2002, the Company repurchased 82,000 shares at an average price of $22.20. During 2001, the Company repurchased 1.8 million shares at an average price of $21.42. During 2000, the Company repurchased 2.0 million shares at an average price of $19.43. No shares remain to be purchased under any Stock Repurchase Program.

AMCORE has outstanding $25.0 million of capital securities through AMCORE Capital Trust I (Trust), a statutory business trust, of which all common securities are owned by AMCORE. The capital securities qualify as Tier 1 capital for regulatory capital purposes.

The BANK is considered a “well-capitalized” institution based on regulatory guidelines. AMCORE’s ratio of Tier 1 capital at 9.95% and total risk based capital at 10.97% significantly exceed the regulatory minimums (as the following table indicates), as of December 31, 2002. See Note 20 of the Notes to Consolidated Financial Statements.

35

Table of Contents

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As part of its normal operations, AMCORE is subject to interest-rate risk on the interest-earning assets it invests in (primarily loans and securities) and the interest-bearing liabilities it funds with (primarily customer deposits, brokered deposits and borrowed funds), as well as its ability to manage such risk. Fluctuations in interest rates may result in changes in the fair market values of AMCORE’s financial instruments, cash flows and net interest income. Like most financial institutions, AMCORE has an exposure to changes in both short-term and long-term interest rates. In the near-term, AMCORE expects that its interest-rate risk will be greater should interest rates continue to decline.

While AMCORE manages other risks in its normal course of operations, such as credit and liquidity risk, it considers interest-rate risk to be its most significant market risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of AMCORE’s business activities and operations. In addition, since AMCORE does not hold a trading portfolio, it is not exposed to significant market risk from trading activities. During 2002, there were no material changes in AMCORE’s primary market risk exposures. Based upon current expectations, no material changes are anticipated in the future in the types of market risks facing AMCORE.

Table 6 and Note 12 of the Notes to Consolidated Financial Statements summarize AMCORE’s market risk and interest sensitivity position as of December 31, 2002. The amounts and assumptions should not be relied upon as indicative of expected actual results since, like most financial institutions, AMCORE’s net interest income can be significantly impacted by external factors. These factors include, but are not limited to: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities re-price, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices and balance sheet growth.

AMCORE’s asset and liability management process is utilized to manage market and interest rate risk through structuring the balance sheet and off-balance sheet portfolios to maximize net interest income while maintaining acceptable levels of risk to changes in market interest rates. While achievement of this goal requires a balance between profitability, liquidity and interest rate risk, there are opportunities to enhance revenues through controlled risk. Interest rate sensitivity analysis is performed monthly using various simulations with an asset/liability modeling system. These analyses are reviewed by the Asset and Liability Committee (ALCO), whose actions attempt to minimize any sudden or sustained negative impact that interest rate movements may have on net interest income. ALCO reviews the impact of liquidity, loan and deposit pricing compared to its competition, capital adequacy and rate sensitivity, among other things, and determines appropriate policy direction to maintain or meet established ALCO guidelines.

The Company may, from time-to-time, use derivative contracts to help manage its exposure to changes in interest rates and in conjunction with its mortgage banking operations. The derivatives used most often are interest rate swaps, caps, collars and floors (collectively “Interest Rate Derivatives”), mortgage loan commitments and forward contracts. Interest Rate Derivatives are contracts with a third party (the “Counter-party”) to exchange interest payment streams based upon an assumed principal amount (the “Notional Principal Amount”). The Notional Principal Amount is not advanced from the Counter-party. It is used only as a reference point to calculate the exchange of interest payment streams.

Management will, from time-to-time, use derivative contracts to help manage its exposure to interest rate risk by modifying the existing interest rate risk characteristics of certain assets and liabilities. The derivatives most commonly utilized in the asset/liability management program are described in Note 11 of the Notes to Consolidated Financial Statements. AMCORE does not have any derivatives that are held or issued for trading purposes. The only credit risk exposure AMCORE has is in relation to the counter-parties, which all have investment grade credit ratings. All counter-parties are expected to meet any outstanding interest payment obligations.

36

Table of Contents

The total notional amount of swap contracts outstanding was $90.0 million and $130.0 million as of December 31, 2002 and 2001, respectively. As of December 31, 2002, swap contracts had an aggregate positive carrying and fair value of $3.9 million. The total notional amount of collars outstanding was zero at December 31, 2002, versus $10.0 million outstanding as of the end of 2001. The total notional amount of caps outstanding was $40.0 million at December 31, 2002, with $60.0 million of outstanding caps as of the end of 2001. As of the end of 2002, the caps had an aggregate carrying and fair value of $2,000. See Table 6. For further discussion of derivative contracts, see Notes 11 and 12 of the Notes to Consolidated Financial Statements.

Based upon an immediate increase in interest rates of 100 basis points and no change in the slope of the yield curve, the potential increase in net interest income for 2003 would be approximately $3.3 million or 2.12% of base forecasted net interest income. This analysis assumes no growth in assets or liabilities and replacement of maturing instruments with like-kind instruments. At the end of 2001, comparable assumptions would have resulted in a potential decrease in 2002 net income of $566,000 or 0.41%. AMCORE has moved to an asset sensitive position with net interest income projected to increase if rates were to rise. This shift reflects the Company’s repositioning of its balance sheet in anticipation of economic recovery and increased interest rates. A material factor in this repositioning is the significant increase in the amount of floating rate commercial loans on the balance sheet. At December 31, 2001, variable-rate loans comprised 40% of the commercial loan portfolio. At December 31, 2002, this percentage had increased to 54%.

Conversely, an immediate decrease in interest rates of 100 basis points and no change in the slope of the yield curve would result in a potential decrease in net interest income for 2003 of $7.7 million or 5.01% of base forecasted net interest income. At the end of 2001, a similar decrease in rates would have resulted in a potential decrease in net interest income of $3.1 million or 2.24%. AMCORE’s sensitivity to declining interest rates has more than doubled since the end of 2001. With further declines in interest rates the decrease in asset yields would outpace liability rate reductions due to compression on non-maturity and indexed liability products, the increased volume of floating-rate commercial loans, and the negative convexity of the mortgage-backed products.

The amounts and assumptions used in the rising and falling rate scenarios should not be viewed as indicative of expected actual results. In addition to rising or falling interest rates, AMCORE’s net interest income can be significantly impacted by a variety of external factors, such as those previously noted. In addition, as interest rates move, the ALCO is likely to adjust interest rate risk management strategies to limit, to the extent possible, the adverse impact that such changes in interest rates might otherwise have on AMCORE’s net interest income, as well as maximize potential positive impacts such movements might have.

37

Table of Contents

TABLE 1

ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET