AMCORE FINANCIAL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission file number 0-13393
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AMCORE FINANCIAL, INC.

NEVADA 36-3183870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

501 Seventh Street, Rockford, Illinois 61104
Telephone Number (815) 968-2241

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.22 par value
Common Stock Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes _______ No

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

As of March 1, 2002, 24,593,859 shares of common stock were outstanding and the
aggregate market value of the shares based upon the average of the bid and asked
price held by non-affiliates was approximately $592,050,000.
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DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the 2002 Notice of Annual Meeting and Proxy Statement are
incorporated by reference into Part III of the Form 10-K.

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AMCORE FINANCIAL, INC.

FORM 10-K TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

AMCORE Financial, Inc. (AMCORE) is a registered bank holding company
incorporated under the laws of the State of Nevada in 1982. The corporate
headquarters are located at 501 Seventh Street in Rockford, Illinois. The
operations are divided into three business segments: Banking, Trust and Asset
Management, and Mortgage Banking. AMCORE owns directly or indirectly all of the
outstanding common stock of each of its subsidiaries. AMCORE provides the
subsidiaries with advice and counsel on policies and operating matters among
other things.

BANKING SEGMENT

AMCORE directly owns AMCORE Bank, N.A. (BANK), a nationally chartered bank.
AMCORE also directly owns AMCORE Consumer Finance Company, Inc. (FINANCE), a
consumer finance company and indirectly owns Property Exchange Company, a
qualified intermediary, which is a subsidiary of the BANK. The BANK conducts
business at 37 locations throughout northern Illinois, excluding the far
northwestern counties. The primary service region includes the Illinois cities
of Rockford, Elgin, Woodstock, McHenry, Carpentersville, Crystal Lake,
Schaumburg, Geneva, Huntley, Sterling, Dixon, Princeton, South Beloit, Mendota,
Peru, and the surrounding communities. The BANK conducts business at 25
locations throughout south central Wisconsin. The primary service region
includes the Wisconsin cities of Madison, Monroe, Clinton, Argyle, Baraboo,
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 nine supermarket branches, which gives the customer convenient
access to bank services seven days a week.

Retail Banking - Retail banking services to individuals include demand, savings
and time deposit accounts. Loan services include installment loans, mortgage
loans, overdraft protection, personal credit lines and credit card programs.
AMCORE Vintage Funds, a proprietary family of mutual funds, are also marketed
through each banking location. The Private Banking Group also markets Vintage
Mutual Funds and meets other special needs of high net worth individuals.
Automated teller machines located throughout AMCORE's market area make banking
transactions available to customers when the bank facilities and hours are not
convenient.

Commercial Banking - A wide range of financial services are provided to
commercial, small business and governmental organizations. These services
include, among others, lending, deposits, letters of credit and cash management
services. AMCORE 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 three consecutive years.

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

The BANK also offers several electronic banking services to commercial and
retail customers. AMCORE Online! provides retail customers with online
capability to access deposit and loan account balances, transfer funds between
accounts, make loan payments, and pay bills. AMCORE Online! For Business
facilitates access to commercial customers' accounts via personal computers. It
also permits the transfer of funds between accounts and the initiation of wire
transfers and ACH activity to accounts at other financial institutions. The
AMCORE TeleBank service provides retail and commercial customers the opportunity
to use their telephone 24 hours a day to 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.

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TRUST AND ASSET MANAGEMENT SEGMENT

AMCORE Investment Group, N.A. (AIG) is a nationally chartered non-depository
bank and owns AMCORE Investment Services, Inc. (AIS), Investors Management Group
(IMG), and AMCORE Capital Value, Inc. 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.

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.

See Note 17 of the Notes to Consolidated Financial Statements included under
Item 8 of this document for further financial information on AMCORE's business
segments.

COMPETITION

Active competition exists for all services offered by AMCORE's bank and non-bank
affiliates with other national and state banks, savings and loan associations,
credit unions, finance companies, personal loan companies, brokerage and mutual
fund companies, mortgage bankers, insurance agencies, financial advisory
services, and other financial institutions serving the affiliates' respective
market areas. The principal competitive factors in the banking and financial
services industry are quality of services to customers, ease of access to
services and pricing of services, including interest rates paid on deposits,
interest rates charged on loans, and fees charged for fiduciary and other
professional services.

Since 1982, when Illinois multi-bank holding company legislation became
effective, there have been many bank mergers and acquisitions in Illinois. These
combinations have had the effect of increasing the assets and deposits of bank
holding companies involved in such activities. Illinois legislation, effective
December 1, 1990, permitted bank acquisitions in Illinois by institutions
headquartered in any other state which has reciprocal legislation, further
increasing competition. See "Supervision and Regulation".

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

2

EMPLOYMENT

AMCORE had 1,333 full-time equivalent employees as of March 1, 2002. AMCORE
provides a variety of benefit plans to its employees including health, dental,
group term life and disability insurance, childcare reimbursement, flexible
spending accounts, retirement, profit sharing, 401(k), stock option, stock
purchase and dividend reinvestment plans. AMCORE believes that its relationship
with its employees is good.

SUPERVISION AND REGULATION

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

The acquisition of five percent or more of the voting shares or all or
substantially all of the assets of any bank by a bank holding company requires
the prior approval of the FRB and is subject to certain other federal and state
law limitations. The Act also prohibits, with certain exceptions, a holding
company from acquiring direct or indirect ownership or control of more than five
percent of the voting shares of any company which is not a bank and from
engaging in any business other than banking, managing and controlling banks or
furnishing services to banks and their subsidiaries, except that holding
companies may engage in, and may own shares of companies engaged in, certain
businesses found by the FRB to be "so closely related to banking as to be a
proper incident thereto". On August 31, 1993, the FRB approved an amendment to
add certain activities and to reduce the burden on bank holding companies that
desire to conduct these activities by simplifying the regulatory review process.

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

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

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

In late 1992, Congress passed the Federal Deposit Insurance Corporation
Improvement Act of 1992 which included many provisions that have had significant
effects on the cost structure and operational and managerial standards of
commercial banks. In addition to provisions for recapitalization of the Bank
Insurance Fund, the Act contains provisions that revise bank supervision and
regulation, including, among many other things, the monitoring of capital

3

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 we currently
offer and that can aggressively compete in the markets we currently serve.

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

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

FINANCE is regulated by the Illinois Department of Financial Institutions. 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, 2001, approximately $14.9 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, 2001, the maximum amount available to
AMCORE and its affiliates in the form of loans approximated $20.9 million. Loans
outstanding to affiliates were $5.6 million at December 31, 2001. See Note 12 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, 2001 and 2000. See Note 16 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.

4

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.

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.

6

ITEM 2. PROPERTIES

On December 31, 2001, AMCORE had 72 locations, of which 47 were owned and 25
were leased. The Banking segment had 69 locations, of which 47 were owned and 22
were leased. The Trust and Asset Management segment had two leased facilities
and the Mortgage segment had one leased facility. All of these offices are
considered by management to be well maintained and adequate for the purpose
intended. See Item 1 and Note 6 of the Notes to Consolidated Financial
Statements included under Item 8 of this document for further information on
properties.

ITEM 3. LEGAL PROCEEDINGS

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

On August 26, 1999, Willie Parker and five other plaintiffs filed a civil action
in the Circuit Court of Humphreys County, Mississippi against AMCORE Consumer
Finance Company, Inc., a subsidiary of the Company and other defendants
containing twelve separate counts related to the sale and financing of
residential satellite dish systems. Though the actual purchase price for each of
these systems involves a principal amount of less than $3,000, the complaint
prays for economic loss and compensatory damages in the amount of $5 million for
each plaintiff and punitive damages in the amount of $100 million for each
plaintiff. The Company has denied the plaintiffs' allegations and removed the
case to the United States District Court for the Northern District of
Mississippi. Plaintiffs' filed a motion seeking to remand the case back to state
court.

During the second quarter of 2001, the Company made a settlement offer to
Plaintiff's counsel. The Company recorded an accrual reflecting the amount
offered. There were no other developments during the quarter. Subsequent to the
end of the second quarter of 2001, the Company was notified of several
developments. First, the federal district court ordered the case to be sent to
the federal bankruptcy court to determine if it wants to pursue this case as an
asset of one of the plaintiffs who previously filed for bankruptcy relief and to
remand the case back to state court if the federal bankruptcy court did not keep
jurisdiction. The Company filed a motion to reconsider this order as the federal
district court failed to address the issue of diversity of the parties. Second,
plaintiffs' attorneys have rejected the Company's settlement offer. In addition,
they have notified the Company's counsel that they have identified 17 more
individuals with potential claims similar to those of the named Plaintiffs'. No
suits have yet been filed on their behalf. Company's counsel is currently
investigating these allegations and analyzing whether new suits may be barred by
the Mississippi statute of limitations. Plaintiff's counsel has made a counter
offer to settle the suits which Company has rejected. Settlement talks are
currently on hold pending the courts determination to reconsider its decision.

Although the ultimate disposition of the cases cannot be predicted with
certainty, based on information currently available, the Company believes that
the plaintiffs' damage claims are disproportionate and that the final outcome of
the cases will not have a material adverse effect on the Company's consolidated
financial condition, though it could have a material adverse affect on the
Company's consolidated results of operations in a given year. The Company has
not adjusted its accrual for payment of the damages in these cases because, in
management's opinion, an unfavorable outcome in this litigation beyond the
accrual is not probable.

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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 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

See Items 6 and 8 of this document for information on stock price ranges and
dividends. The principal market for the quotations of stock prices is the NASDAQ
National Market System. There are approximately 9,300 holders of record of
AMCORE's common stock as of March 1, 2002.

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ITEM 6. SELECTED FINANCIAL DATA

FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA

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(1) The 2000 ratios excluding the impact of the $258,000, or $.01 per share,
reversals of after-tax restructuring charges: return on average assets
0.99%; return on average equity 14.83%
(2) The 1999 ratios excluding the impact of the $3.3 million, or $.11 per share,
after-tax restructuring charges: return on average assets 1.03%; return on
average equity 14.02%
(3) The 1998 ratios excluding the impact of the $3.3 million, or $.11 per share,
after-tax merger related charges: return on average assets 1.08%; return on
average equity 13.70%
(4) The 1997 ratios excluding the impact of the $6.4 million, or $.23 per share,
after-tax merger related and information systems charges: return on average
assets 1.00%; return on average equity 13.05%

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

The following discussion highlights the significant factors affecting the
results of operations and financial condition of AMCORE Financial, Inc. and
Subsidiaries ("AMCORE" or the "Company") for the three years ended December 31,
2001. 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 report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of AMCORE. Statements that are not historical facts,
including statements about beliefs and expectations, are forward-looking
statements. These statements are based upon beliefs and assumptions of AMCORE'S
management and on information currently available to such management. The use of
the words "believe", "expect", "anticipate", "plan", "estimate", "may", "will"
or similar expressions are forward-looking statements. Forward-looking
statements speak only as of the date they are made, and AMCORE undertakes no
obligation to update publicly any of them in light of new information or future
events.

Contemplated, projected, forecasted or estimated results in such forward-looking
statements involve certain inherent risks and uncertainties. A number of factors
- - many of which are beyond the ability of the company to control or predict -
could cause actual results to differ materially from those in its
forward-looking statements. These factors include, among others, the following
possibilities: (I) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
formation of new products by new and existing competitors; (II) adverse state
and federal legislation and regulation; (III) failure to obtain new customers
and retain existing customers; (IV) inability to carry out marketing and/or
expansion plans; (V) loss of key executives or personnel; (VI) changes in
interest rates including the effect of prepayment; (VII) general economic and
business conditions which are less favorable than expected; (VIII) equity and
fixed income market fluctuations; (IX) unanticipated changes in industry trends;
(X) unanticipated changes in credit quality and risk factors; (XI) success in
gaining regulatory approvals when required; (XII) changes in Federal Reserve
Board monetary policies; (XIII) unexpected outcomes on existing or new
litigation in which AMCORE, its subsidiaries, officers, directors or employees
are named defendants; (XIV) technological changes; (XV) changes in accounting
principles generally accepted in the United States of America; (XVI) changes in
assumptions or conditions affecting the application of "critical accounting
policies"; (XVII) inability of third-party vendors to perform critical services
to the company or its customers; and (XVIII) the economic impact of the
terrorist attacks on the U.S. on September 11 and the U.S. response to those
attacks.

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 judgements, 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 results of
operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgements 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 AND LEASES

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

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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 the 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. Unpaid interest that has
previously been recorded as income is written-off when a loan is placed on
Non-Accrual Status. The outstanding loan balance is written-off against the
allowance for loan and lease losses when management determines that probability
of collection of principal will not occur. See also the discussion of Allowance
for Loan and Lease Losses that follows.

Those judgements 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
and the enforceability of third-party guarantees. These judgements 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.

If different assumptions or conditions were to prevail, the amount and timing of
interest income and loan and lease losses, due to the inability to collect all
of the remaining principal balance that is due from a borrower, could be
materially different. These factors are most pronounced during economic
downturns. See also Table 2 and Note 4 of the Notes to Consolidated Financial
Statements.

ALLOWANCE FOR LOAN AND LEASE LOSSES

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 are also charged against the Allowance. Unpaid interest for
the current year for loans that are placed on Non-Accrual Status are 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.

In addition to the judgements and assumptions noted in the preceding discussion
of Loans and Leases, those most critical to the application of this accounting
policy are 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. While the Company strives to reflect all
known risk factors in its evaluation of the adequacy of the Allowance,
estimation or judgement errors may occur.

If different assumptions or conditions were to prevail, the Allowance may not be
adequate to absorb the new estimate of probable losses. If so, an additional
Provision may be necessary and the amount could be material. See also Table 2
and Note 4 of the Notes to Consolidated Financial Statements.

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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 unamortized 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
unamortized 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 unamortized carrying amount.

Judgements 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 judgements 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.

If different assumptions and conditions were to prevail, materially different
amortization and valuation allowances than those that were recorded may be
required. See also Note 7 of the Notes to Consolidated Financial Statements.

LOAN SECURITIZATION AND SALE OF RECEIVABLES

During 2000 and 2001, the Company sold certain indirect auto loans in
securitization transactions. Upon the sale, the net carrying amount of the loans
were removed from the balance sheet, and certain retained residual interests
were 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

12

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 projected income from the Servicing Rights approximates the estimated
costs of the Company to service the loans, 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 Overcollateralization 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.

Judgements 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 assets 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. See also Note 8 of the Notes to
Consolidated Financial Statements.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses certain financial instruments called derivatives to help manage
(Hedge) its risk or 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.

13

Interest rate swaps are most commonly used by the Company to convert liabilities
with variable-rate cash flows to liabilities with fixed-rate cash flows (the
"Hedged Items"). Under this arrangement, the Company receives payments from the
Counter-party at a specified floating-rate index that is applied to the Notional
Principal Amount. This periodic receipt of income essentially offsets
floating-rate interest payments that the Company makes to its depositors or
lenders. In exchange for the receipts from the Counter-party, the Company makes
payments to the Counter-party at a specified fixed-rate that is applied to the
Notional Principal Amount. Thus, what was a floating rate obligation before
entering into the derivative arrangement is transformed into a fixed rate
obligation. Interest rate caps and collars are derivative instruments that are
variations of an interest rate swap. They also involve an exchange of interest
payment streams with a Counter-party based upon a Notional Principal Amount. In
the case of an interest rate cap, the exchange of income streams does not take
effect unless the specified floating-rate index rises above a pre-determined
level. In an interest rate cap, the Company retains the risk of rising interest
rates up to the pre-determined level, while benefiting from declines in interest
rates. In the case of an interest rate collar, the exchange of income streams
does not take effect unless the specified floating-rate index rises above or
below pre-determined levels. In an interest rate collar, the Company retains the
risk and benefits of changes in interest rates within the pre-determined levels.
The Company has also used interest rate floors to manage its exposure to
declining mortgage interest rates of its mortgage servicing rights asset. These
floors were terminated during 2001. The net amount payable or receivable from
each Interest Rate Derivative contract is recorded as an adjustment to interest
expense.

Historically, most of the Interest Rate Derivatives have been accounted for
off-balance sheet since the Notional Principal Amount is never advanced from the
Counter-party and, with the exception of the interest rate floor contracts, they
qualified as Hedges under previous accounting standards. Upon the adoption of
SFAS No. 133, as modified by SFAS No. 138, effective beginning January 1, 2001,
all derivatives must be recognized at fair value on the Company's balance sheet.
In the event a derivative does not qualify for Hedge accounting treatment
pursuant to SFAS No. 133, changes in the fair value of the derivative are
included in other income or expense as they occur. With the exception of the
interest rate floors, all of the Company's Interest Rate Derivatives qualify and
have been designated as cash flow Hedges pursuant to SFAS No. 133. Changes in
the fair value of a cash flow Hedge that are due to the passage of time are
recorded as other income or expense for each reporting period. The effective
portion of the remaining changes in the fair value of the derivative are
recorded in other comprehensive income (OCI), a component of stockholders'
equity on the balance sheet. This amount is subsequently recognized as other
income or expense in the same period as interest is accrued on the Hedged Items.
Ineffective portions of changes in the fair value of cash flow Hedges are
recognized in the other income or expense each period. Hedge ineffectiveness is
caused when the change in expected future floating cash flows of the Hedged Item
does not exactly offset the change in the expected future floating cash flows of
the Interest Rate Derivative, and is generally due to differences in the
interest rate indices or interest rate reset dates.

Also considered derivatives under SFAS No. 133 are 1-4 family residential
mortgage loan commitments (the "Commitments") and forward mortgage loan sales
(the "Forward Contracts") to the secondary market (collectively "Mortgage Loan
Derivatives"). While historically Mortgage Loan Derivatives were accounted for
off-balance sheet, they are now reported at fair value on the balance sheet
pursuant to SFAS No. 133. Changes in the fair value of the Mortgage Loan
Derivatives are included in other income or expense as they occur. However,
since the Company's Forward Contracts qualify and have been designated as fair
value Hedges of its portfolio of loans held for sale (the "Warehouse Loans") as
well a Hedge of its Commitments, the Warehouse Loans are also adjusted to fair
value. The change in fair value of Warehouse Loans is recorded in other income
or expense as they occur. To the extent that the Company's Forward Contracts are
highly effective, the changes in the fair value of the Forward Contracts will
largely offset changes in the fair value of the Commitments and Warehouse Loans.

The judgements and assumptions that are most critical to the application of this
accounting policy are those affecting the estimation of fair value, the
timeliness, accuracy and completeness of required Hedge identification and
documentation standards, and Hedge effectiveness. Fair value is usually obtained
via quotes from the Counter-party and validated through independent sources.
Factors that affect Hedge effectiveness include the initial selection of the
derivative that will be used as a Hedge and how well changes in its cash flow or
fair value has correlated and is expected to correlate with changes in the cash
flow or fair value of the Hedged Item. Past correlation can be demonstrated, but
expected correlation depends upon projections and trends that may not always
continue within acceptable limits.

14

If different assumptions and conditions were to prevail, greater than expected
inefficiencies could result, that if material, could invalidate continuation of
Hedge accounting. The consequence of greater inefficiency and discontinuation of
Hedge accounting is increased volatility to reported earnings. For cash flow
Hedges, this would result as more or all of the change in the fair value of the
affected derivative is required to be reported in other income or expense each
period. For fair value Hedges, this would result as less or none of the change
in the fair value of the derivative would be offset by changes in the fair value
of the Hedged Item. Failure to timely, accurately and completely comply with
Hedge identification and documentation standards could retroactively invalidate
Hedge accounting treatment resulting in the restatement and increased volatility
of reported earnings in amounts that could be material. See also Table 6 and
Notes 5 and 11 of the Notes to Consolidated Financial Statements.

LEGAL AND OTHER CONTINGENCIES

The Company recognizes as a loss legal and other contingencies when, based upon
available information, it is probable that a liability has been incurred and the
amount or range of amounts can be reasonably estimated. Typically, these have
been incidental to the Company's business, not rising to the level of a Critical
Accounting Policy. Due to the size of Plaintiffs' claims, certain litigation
related to the sale and financing of residential satellite dish systems in the
state of Mississippi may not necessarily be incidental. See Note 20 of the Notes
to Consolidated Financial Statements.

The judgements and assumptions that are most critical to the application of this
accounting policy relate to the management's belief that an unfavorable outcome
in this litigation beyond what the Company has offered as a settlement is not
probable.

If different assumptions and conditions were to prevail, the final outcome could
be different and have a material adverse affect on the Company's consolidated
results of operations. It unlikely that changes will result in a final outcome
that would have a material adverse effect on the Company's consolidated
financial condition.

OVERVIEW OF OPERATIONS

AMCORE reported net income of $42.2 million for the year ended December 31,
2001. This compares to $43.1 million and $40.1 million reported for the years
ended 2000 and 1999, respectively. This represents a decrease of $840,000 or
1.9% when comparing 2001 and 2000, and an increase of $2.9 million or 7.3% when
comparing 2000 and 1999.

Diluted earnings per share for 2001 were a record $1.64 compared to $1.58 in
2000 and $1.40 in 1999. This represents an increase of $0.06 per share or 3.8%,
when comparing 2001 and 2000, and $0.18 per share or 12.9%, when comparing 2000
and 1999. The 3.8% increase in earnings on a diluted per share basis contrasts
with a 1.9% decrease on a dollar basis, reflecting a 1.5 million decrease in
average diluted shares outstanding attributable to AMCORE's previously announced
stock repurchase programs.

AMCORE's return on average equity for 2001 was 13.50% versus 14.92% in 2000 and
12.96% in 1999. AMCORE's return on average assets for 2001 was 1.04% compared to
1.00% in 2000 and 0.95% in 1999.

Both AMCORE and the BANK continue to exceed the minimum capital requirements
established by regulators for banks and bank holding companies. In addition, the
BANK continues to be "well capitalized" as defined by regulatory guidelines. See
Note 18 of the Notes to Consolidated Financial Statements.

RESTRUCTURING ACTIVITY

In 1999, AMCORE announced a new "Customer Focused Organizational Structure"
(CFOS) designed to improve efficiency, enhance responsiveness to local markets
and increase shareholder value. During the second half of 1999 and throughout
2000, AMCORE merged its nine banks into one BANK charter, centralized retail and
commercial loan operations, streamlined personal trust administration,
centralized corporate support functions and converted data processing records
into one bank. As of December 31, 2000, the CFOS restructuring was complete in
all material respects.

During 1999, AMCORE recorded $3.3 million in net after-tax restructuring-related
charges (the "Restructuring Charge") associated with the CFOS. The major
components of the Restructuring Charge included employee severance and benefits,
systems and integration costs, legal and professional fees and other related
expenses. As of

15

December 31, 1999, $1.1 million net after-tax of the Restructuring Charge
remained unpaid. During 2000, the Company recorded $258,000 in net after-tax
reversals of excess Restructuring Charges (the "Restructuring Reversal"),
reflecting lower than expected costs to complete the restructuring. As of the
end of 2000, the entire Restructuring Charge had been paid or reversed.

Total staff reductions of 187 employees were planned. Through December 31, 2000,
96 employees had been terminated and paid severance benefits. An additional 91
employees had transferred to other open positions due to attrition or had
voluntarily left the Company prior to the time severance benefits became
payable. As of December 31, 2000, there were no further staff reductions
planned.

See Note 16 to the Notes to Consolidated Financial Statements for a tabular
presentation of the Restructuring Charge and Restructuring Reversal by major
component.

During 2001, AMCORE announced additional business changes designed to strengthen
the integration of banking and asset management services to its customers. To
better support these structural changes, AMCORE streamlined its management team
resulting in the departure of certain senior managers. Severance charges related
to these structural changes were $464,000, after-tax (the "Severance Charge").

During 2001, AMCORE recognized $2.0 million in net security losses related to
investment portfolio restructuring (the "Security Portfolio Restructuring")
designed to reduce interest rate risk. The restructuring plan focused on
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 is intended to improve the stability and quality of future
earnings and values, especially in periods of rising interest rates. The
Security Portfolio Restructuring was in addition to AMCORE's strategy of
reducing its investment portfolio as a means of providing liquidity, reducing
its reliance on expensive wholesale funding and reducing interest rate risk (the
"Security Portfolio De-leveraging" or "De-leveraging") and other security sales,
which combined resulted in a net gain of $2.3 million. Net security losses for
all of these activities were $303,000 for 2001.

BRANCH ACTIVITY

On October 11, 2000, AMCORE announced that it was considering the sale of ten
Illinois branches (the "Branch Sales") as part of its strategic objective to
invest in and reallocate capital to higher growth Midwestern markets. The
branches included Aledo, Gridley, Mendota, Freeport, Mount Morris, Oregon,
Ashton, Rochelle, Wyanet and Sheffield. AMCORE has since concluded that Mendota,
Oregon and Freeport no longer fit in its contemplated divestiture program and
are no longer being considered for sale. During 2001, the other seven branches
were sold resulting in $6.3 million in after-tax gains, net of associated costs
(the "Branch Gains"). For the seven branches sold, $65.1 million in loans,
$170.8 million in deposits and $1.4 million in premises and equipment were
transferred to the respective buyers.

On November 30, 2001, AMCORE announced its intentions to close its Huntley, IL
branch effective March 31, 2002. While Huntley is a community with attractive
long-term growth prospects, limitations of the particular location prevented the
branch from achieving the growth targets set by AMCORE. The approximately 400
branch customers will be directed to other BANK branches, while the branch
employees will be offered positions at other nearby branches.

During 2001, in furtherance of the Company's strategic objective to invest in
and reallocate capital to higher growth Midwestern markets, the BANK opened two
branches along the I-90 growth corridor - the Perryville branch on Rockford's
fast growing east side and an office in Geneva, IL, an affluent suburb in Kane
County (the "Branch Expansion"). In addition, a minimum of three additional
branches and one commercial production office are planned for 2002. The branch
sites will be in St. Charles, IL located between the Geneva and Elgin markets,
McHenry, IL, and Madison, WI. The commercial production office will be located
in Schaumburg, IL. All sites are in strong markets at or near where AMCORE has
existing name recognition. The sites in Kane and McHenry counties are expected
to add significantly to the BANK's presence in the Fox River Valley and further
improve the BANK's strategic position along I-90 in the western Chicago suburbs.
The site in Madison, a full-service banking facility, opened January 22, 2002 in
one of Madison's most dynamic and fast growing areas along the beltway and joins
two existing branches in the Madison market. The Schaumburg office opened
January 18, 2002. An application is pending with the OCC for eventual expansion
to a full-service branch.

16

LOAN SALES AND SECURITIZATIONS

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 Strip is subject to prepayment risk and the value of the
Overcollateralization Asset is 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. 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.

ACCOUNTING CHANGE

On January 1, 2001, the Company adopted 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 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 Notes 1 and 11 of the Notes
to Consolidated Financial Statements.

EXTINGUISHMENT OF DEBT

During 2001, AMCORE retired, at par, $15.0 million in capital trust preferred
securities with the coupon rate of 9.35 percent. This early extinguishment of
long-term borrowings (the "Debt Extinguishment") resulted in an after-tax
extraordinary charge of $204,000, or $0.01 per diluted share (the "Extraordinary
Item"). The Extraordinary Item was attributable to unamortized pro-rata issuance
costs and broker fees. See Note 10 of the Notes to Consolidated Financial
Statements.

STOCK REPURCHASE PROGRAM

On April 23, 2001, AMCORE announced a stock repurchase program for up to five
percent of its common stock or 1.29 million shares. As of January 1, 2001,
AMCORE also had 627,000 shares remaining from the Company's August 8, 2000 stock
repurchase authorization. Shares repurchased pursuant to these authorizations
will become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option plan
and other employee benefit plans. As of December 31, 2001, 82,000 shares
remained to be repurchased pursuant to the April 23, 2001 authorization, while
all authorized shares had been repurchased pursuant to the August 8, 2000
authorization. During 2001, the Company repurchased 1.8 million shares at an
average price of $21.42.

EARNINGS REVIEW OF CONSOLIDATED INCOME STATEMENT

The following highlights a comparative discussion of the major components of net
income and their impact for the last two years.

NET INTEREST INCOME

Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred on interest-bearing liabilities. The
interest income on certain loans and investment securities is not subject to
Federal income tax. For analytical purposes, at December 31, 2001, 2000 and
1999, the interest income and rates on

17

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 declined $6.1 million or
4.5% in 2001 compared to a decline of $7.3 million or 5.2% in 2000. The decline
in net interest income in 2001 was attributable to lower average earning assets,
partially offset by improved net interest spread. In 2000, the decline in net
interest income was primarily the result of a lower 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. 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 22 basis points to 2.88%
in 2001 from 2.66% in 2000, which was a decline of 28 basis points from the 1999
level of 2.94%. The interest rate margin was 3.42% in 2001, an increase of 13
basis points from 3.29% in 2000. The 2000 level was a decline of 26 basis points
from 3.55% in 1999.

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 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. In
2000, net interest income on an FTE basis increased due to average volume by
$1.2 million. This was comprised of a $7.1 million increase in interest income
that was partially offset by a $5.9 million increase in interest expense.

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 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 and
De-leveraging strategies as well as prepayments driven by falling interest
rates. Planned reductions have primarily focused on mortgage-related securities
having a higher degree of interest rate risk associated with changing prepayment
speeds. The strategy has also focused on reducing certain other securities with
low yields and/or longer durations.

18

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.

The 2000 increase in interest income of $7.0 million resulted from a $142.7
million or 5.5% increase in average loans, partially offset by a $57.9 million
or 4.3% decline in average investment securities. Average loan growth in 2000
was negatively affected by increasing interest rates, a slowing economy,
adoption of a loan-pricing model that defines acceptable spreads and
profitability for commercial lending, changes in retail loan pricing to increase
loan rates based on creditworthiness and other risk factors, low rate financing
incentives offered by car manufacturers, the Auto Loan Sales and the Mortgage
Securitization. These factors combined to result in lower average loan growth in
2000, compared to 1999, when strong regional economies and sales incentives led
to solid double-digit average loan growth. The decline in average investment
securities for 2000 related to the Security Portfolio De-leveraging strategy.

The 2000 net increase in average earning assets was funded by a $128.7 million
or 5.0% increase in average interest-bearing deposits. This led to the $5.9
million volume-related increase in interest expense.

CHANGES DUE TO RATE

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 $14.3 million
decline in interest income that was more than offset by a $19.8 million decrease
in interest expense. During 2000, net interest income on an FTE basis decreased
due to average rates by $8.5 million, when compared with 1999. This was
comprised of a $12.6 million increase in interest income that was overshadowed
by a $21.1 million increase in interest expense.

The yield on earning assets declined 36 basis points in 2001, compared to 2000.
The yield on average loans fell by 43 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.

The rate paid on interest bearing liabilities declined 58 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 the
Company's indexed money market deposit accounts (AMDEX). The AMDEX accounts
reprice monthly off the three-month Treasury bill discount rate, and have
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 yield on earning assets increased 31 basis points in 2000, compared to 1999.
The yield on average loans improved by 25 basis points and was primarily
attributable to residential and commercial real estate loans and commercial
loans. Rising interest rates during the last half of 1999 and the first half of
2000 impacted pricing on new loan volume and loans that refinanced during the
year, increasing average yields for the year. The yield on average securities
increased by 30 basis points, also the beneficiary of increasing interest rates.

The rate paid on interest bearing liabilities increased 59 basis points in 2000,
compared to 1999. This was primarily due to increased rates on deposits, with
some additional increases due to short-term and long-term borrowings. Increased
rates on interest-bearing deposits were most pronounced on the Company's AMDEX
accounts, which, were adversely affected by higher short-term rates due to the
inversion of the Treasury yield curve. Rates on time deposits were adversely
affected by maturities and increasing volumes during a period of increasing
interest rates. Increased rates paid on short-term debt were driven by AMCORE's
repurchase agreements. Increased rates paid on long-term debt was primarily
attributable to Federal Home Loan Bank (FHLB) advances, a significant portion of
which were called and had to be replaced at higher rates during 2000 and the
fourth quarter of 1999.

19

Decreased reliance on expensive wholesale funding, the Security Portfolio
Restructuring and De-leveraging, reductions in lower yielding residential real
estate loans due to refinancings and the Mortgage Securitization, the Branch
Sales and Branch Expansion plus the launching of aggressive initiatives to grow
core transactional deposits ("Make It Happen" and "Free Checking" initiatives)
are expected to result in continued improvement in the quality and stability of
net interest income. These deliberate actions by the Company, coupled with the
current and projected interest rate environment, are expected to result in
improved interest rate spreads and margins in 2002, compared to 2001. Among
those factors that could cause margins and spreads to not improve as anticipated
by the Company in 2002 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, increased
leverage of capital and greater than expected delinquencies resulting in
non-accrual status.

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses (see Critical Accounting Policies
discussion) was $16.7 million for 2001, an increase of $7.0 million or 72.0%
from the $9.7 million in 2000. Increases in non-performing loans, net
charge-offs and delinquencies compared to 2000, concentrations in industries
that have been impacted more than others by the recession, coupled with overall
concerns over the economy's impact, particularly in light of the unprecedented
events on and subsequent to September 11, contributed to the increased
provisions. During 2000, the provision decreased $840,000 or 8.0% from the $10.6
million in 1999. The 2000 decrease in provision was due to lower charge-offs and
loan growth compared to 1999.

AMCORE recorded net charge-offs of $11.0 million, $7.9 million and $8.6 million
in 2001, 2000 and 1999, respectively. Net charge-offs represented 44 basis
points of average loans in 2001 versus 29 basis points in 2000 and 33 basis
points in 1999. 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. The decline in charge-offs in 2000, compared to 1999, was primarily the
reflection of the charge-off of a single agricultural credit that occurred over
these two years. Excluding the impact of that credit, charge-offs were
relatively stable in 2000 compared to 1999.

The Allowance, as a percent of total loans, was 1.37%, 1.11%, and 1.03% at
December 31, 2001, 2000, and 1999, respectively. The ratio of the Allowance to
non-performing loans was 126.86% at year-end 2001, 132.12% at year-end 2000, and
159.16% at year-end 1999. The increase in the Allowance reflects the factors
listed above as well as the decline in the loan portfolio. As noted previously,
loans declined as a result of the Mortgage Securitization and refinancings, the
Auto Loan Sales, the Branch Sales and the effect of the recession, including
tightening credit standards and stricter pricing discipline.

Future growth in the loan portfolio, further or continued weakening in economic
conditions or specific credit deterioration, among other things, could result in
provisions for loan and lease losses in 2002 that are higher than those for
2001.

NON-INTEREST INCOME

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

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 BOLI and increased service
charges on deposits. These increases more than offset declines in trust and
asset management income and security gains.

Non-interest income totaled $61.2 million in 2000, an increase of $3.0 million
or 5.2% from the $58.2 million in 1999. Growth in trust and asset management
revenues, increased service charges on deposits, higher security gains, gains
from the Auto Loan Sales and increases in CSV of BOLI more than offset declines
in mortgage revenues and insurance commissions.

20

Trust and asset management income, the largest source of fee based revenues,
totaled $26.9 million in 2001, a decrease of $3.2 million or 10.7% from $30.1
million in 2000. This compares to growth in 2000 of $1.2 million or 4.2% from
$28.9 million in 1999. The overall decline in the stock market during the past
two years impacted equity values upon which fees are partially based. This,
along with several larger employee benefit accounts lost, were the primary
factors leading to the decline in trust and asset management revenues in 2001.
The impact was lessened, however, because of the composition of the Company's
asset management mix, which is divided among equity, fixed income and money
market investments. Therefore, when one sector is experiencing pressure, as the
equity markets have been recently, other sectors can lessen the impact. Thus,
while the S&P 500 and the NASDAQ indices were down nearly 13% and 21%
respectively, from December 31, 2000 to December 31, 2001, favorable results in
the fixed income market helped the Company to limit the decrease in trust and
asset management revenue to 10.7%. For 2000, investment performance was
consistent with comparable competitive benchmarks, however, the challenging
investment environment and volatile market conditions experienced throughout the
year resulted in revenue growth that was less favorable when compared to 1999
and recent years.

On average, total assets under administration, which include managed and
custodial assets, and assets under management were down for 2001 compared to
2000 due to the investment environment, market conditions and account attrition
previously mentioned. Nevertheless, end-of-year balances for 2001 had recovered
somewhat, showing only modest declines to $4.9 billion and $4.2 billion,
respectively, compared to $5.0 billion and $4.4 billion at the end of 2000. 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, plan terminations, corporate profit sharing
contributions, and other economic factors. As witnessed in recent months, market
performance can be affected by numerous uncontrollable factors such as the
September 11th attacks and the war on terrorism, recent high-profile
bankruptcies and the proliferation of "accounting irregularities" reported in
the financial press.

Service charges on deposits totaled $14.8 million in 2001, an increase of $3.3
million or 28.6% from the $11.5 million in 2000. During 2000, service charges on
deposits increased $1.3 million or 12.8% from $10.2 million in 1999. Non-
sufficient funds, stop payment and return check fees, primarily personal
accounts, and increased commercial account maintenance fees contributed to the
increase in 2001 over 2000. 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. Higher average
deposit balances and improved overdraft handling procedures contributed to the
increase in 2000 compared to 1999.

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 a record $8.5 million in 2001, an
increase of $4.3 million or 103.2% from $4.2 million in 2000. During 2000,
mortgage revenues declined $2.6 million or 38.5% from $6.8 million in 1999.
Mortgage revenues for 2001 included $780,000 of net servicing rights impairment
charges, whereas 1999 included a $1.2 million impairment reversal. No impairment
charge or reversal was required in 2000. Declining mortgage interest rates
resulted in record volumes of $634.2 million in 2001, compared to volume of
$200.9 million in 2000. Continued strong performance is expected in 2002,
although not at the record levels experienced in 2001 when refinancings
represented 79% of total originations.

As of December 31, 2001, AMCORE had $8.8 million of capitalized mortgage
servicing rights, net of a $780,000 impairment valuation allowance, with a fair
value of $9.0 million. The unpaid principal balance of mortgage loans serviced
for others, which are not included on the Consolidated Balance Sheets, was
$905.0 million as of December 31, 2001. See Note 7 of the Notes to Consolidated
Financial Statements.

BOLI income totaled $5.2 million in 2001, a $3.3 million or 173.1% increase over
the $1.9 million in 2000. This compares to a $1.4 million increase in 2000 over
the $514,000 reported in 1999. AMCORE uses BOLI 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, 2001, the CSV of BOLI stood at $100.0 million,
which included the purchase of $40.0 million during 2001.

Other non-interest income includes customer service charges, credit card and
merchant fees, ATM fees, brokerage commissions, insurance commissions, gains on
fixed asset and loan sales and other miscellaneous income. In 2001, other
non-interest income was $11.4 million, a $354,000 or 3.0% decrease from $11.8
million in 2000. In 2000, there

21

was an increase of $430,000 or 3.8% from $11.3 million in 1999. 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 $1.0 million gain from cash received on the merger of an
ATM service provider. Increases in 2000 included gains of $1.4 million from the
Auto Loan Sales, which were partially offset by a $984,000 decrease in insurance
commissions and a non-recurring gain in 1999 of $750,000. The decrease in
insurance commissions was attributable to the August 1999 sale of AMCORE's
insurance agency and lower credit life commissions associated with lower loan
growth and increased rebates from early pay-offs and cancellations. The non-
recurring gain resulted from the merger and reorganization of an ATM service
provider in which AMCORE had an equity interest.

Net securities losses totaled $303,000 in 2001, compared to net gains of $1.8
million in 2000 and $530,000 in 1999. 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 expense was $123.6 million in 2001, an increase of $6.5 million
from $117.1 million in 2000, which was a $6.7 million decrease from $123.8
million in 1999. Operating expenses in 2001 included the Severance Charge of
$760,000. Operating expenses in 2000 were reduced by the Restructuring Reversal
of $428,000. Operating expenses in 1999 included the Restructuring Charge of
$5.3 million. The efficiency ratio, excluding the above-mentioned charges and
reversals, the Branch Gain and the Security Portfolio Restructuring was 61.87%
in 2001, 59.66% in 2000 and 59.19% in 1999.

Personnel costs, which include compensation expense and employee benefits, are
the largest component of operating expenses. Personnel costs totaled $69.6
million in 2001, an increase of $2.6 million or 3.8% from $67.0 million in 2000,
which was a $2.4 million or 3.4% decrease from $69.4 million in 1999. The 2001
increase was attributable to a $2.2 million increase in compensation expense and
a $385,000 increase in employee benefits. The increase in compensation expense
was due to the $760,000 Severance Accrual, $621,000 of normal merit and
cost-of-living adjustments net of CFOS cost savings 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%. The increase in employee benefits was primarily due to increased
profit sharing that was partially offset by decreased group medical costs
associated with structural changes in the plan and other cost containment
measures. For 2000, the decrease was attributable to the net effect of the 2000
Restructuring Reversal and the 1999 Restructuring Charge, which amounted to $2.3
million. Excluding this impact, cost savings from AMCORE's new CFOS structure
essentially offset normal merit increases, cost-of-living adjustments, growth in
the Trust and Asset Management segment that included a full year of ACV and a
$1.1 million or 34.9% increase in employee health care costs.

Net occupancy expense was $7.6 million in 2001, an increase of $280,000 or 3.9%
from 2000, following an increase of $560,000 or 8.3% from 1999 levels. The 2001
increase included the impact of the Branch Expansion net of less than full year
costs related to the Branch Sales. The 2000 increase was due in part to the
expansion of the Crystal Lake, IL facility, rental expenses associated with a
new branch in Huntley, IL and rental expenses related to the centralization of
loan operations, partially offset by the elimination of one branch.

Equipment expense decreased $501,000 or 5.9% to $8.0 million in 2001. This
followed a $545,000 or 6.0% decrease in 2000. The 2001 decrease was primarily
related to lower depreciation on furniture, fixtures and electronic data
processing equipment including software costs. This followed a similar decrease
in 2000, the result of higher electronic data processing equipment depreciation
and software amortization and maintenance in 1999 associated with the upgrade of
internal local area networks and Year 2000 compliance solutions.

Data processing expenses include expenses related to core bank data processing,
trust and other external processing systems. This category increased $201,000 or
3.4% to $6.0 million in 2001. Expenses in 2000 were $5.8 million, a

22

$1.3 million or 18.3% decrease from $7.2 million in 1999. Excluding the impact
of the Restructuring Reversal of $98,000 in 2000 and the Restructuring Charge of
$1.1 million in 1999, data processing expenses increased only $103,000 or 1.7%
in 2001 and decreased $84,000 or 1.4% in 2000. The modest increase in 2001 and
the decrease in 2000 reflect processing and programming efficiencies associated
with the CFOS structure. Also reflected in the 2000 decrease are non-recurring
costs incurred in 1999 associated with the Midwest Federal Financial Corporation
(Midwest) systems conversion, development of the online banking product and the
Year 2000 initiative.

Professional fees totaled $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.
Professional fees were $3.8 million in 2000, a decrease of $1.5 million or 28.4%
from 1999. The decrease was primarily attributable to the combined effect of
2000 Restructuring Reversal and the 1999 Restructuring Charge in the amount of
$1.3 million.

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. Communication expense was $4.0 million in 2000, a decrease of
$111,000 or 2.7% from 1999. The 2000 decrease was due to lower postage costs and
lower internal communication costs.

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 related to the
BANK's Make It Happen and Free Checking initiatives. Advertising and business
development expenses were $3.8 million in 2000, an increase of $200,000 or 5.6%
from 1999. Higher community public relations costs were the primary reason for
the increase.

Intangibles amortization was $2.1 million in 2001, the same level as 2000.
Intangibles amortization increased $115,000 in 2000 to $2.1 million, a 5.8%
increase from 1999. The increase was associated with increased goodwill
resulting from the payment of contingent purchase price for the IMG acquisition.
Effective January 1, 2002, as required under SFAS No. 142, "Goodwill and Other
Intangible Assets", issued by the Financial Accounting Standards Board in 2001,
the Company will discontinue the amortization of goodwill. The resulting
decrease in annual amortization is estimated to be $1.9 million that resulted
from business combinations prior to the adoption of SFAS No. 141, "Business
Combinations". Upon adoption of SFAS No. 142, unamortized goodwill with an
expected net carrying value of $15.6 million will be evaluated for impairment on
an ongoing basis. No immediate impairment is expected upon adoption of SFAS No.
142, however, the Company continues to evaluate the additional effect, if any,
that adoption will have on the Company's consolidated financial statements. See
Note 1 of the Notes to Consolidated Financial Statements.

Other expenses were $17.7 million in 2001, an increase of $2.9 million or 19.5%,
following a decrease of $1.8 million or 10.6% in 2000. 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 increase. Other
factors included increased charitable contributions, Branch Expansion expenses
and accruals for legal contingencies. Excluding the Restructuring Reversal and
Restructuring Charge, the 2000 decrease was $1.1 million or 6.9%. The decrease
related to lower loan processing and collection expenses and decreased
recruiting and training costs.

INCOME TAXES

Income tax expense totaled $14.4 million in 2001, compared with $16.4 million
and $15.1 million in 2000 and 1999, respectively. The effective tax rates, which
for 2001 includes $130,000 of tax benefit and $144,000 of tax expense for the
Extraordinary Item and the Accounting Change, respectively, were 25.4%, 27.5%,
and 27.3% in 2001, 2000, and 1999, 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 BOLI. The decrease in
effective tax rate in 2001 primarily resulted from increases in CSV on BOLI.

23

EARNINGS REVIEW BY BUSINESS SEGMENT

AMCORE's internal reporting and planning process has focused on three business
segments: Banking, Trust and Asset Management, and Mortgage Banking. Note 17 of
the Notes to Consolidated Financial Statements presents a condensed income
statement for each segment.

The financial results of each segment are presented as if operated on a
stand-alone basis. There are no comprehensive authorities for management
accounting equivalent to accounting principles generally accepted in the United
States of America. Therefore, the information provided is not necessarily
comparable with similar information from other financial institutions.

The financial results reflect direct revenue, expenses, assets and liabilities.
The accounting policies used are similar to those described in Note 1 of the
Notes to Consolidated Financial Statements. In addition, intersegment revenue
and expenses are allocated based on an internal cost basis or market price when
available. For ease of comparison, the discussion of each segment, including the
segment profit percentage, focuses on earnings before the Accounting Change,
Extraordinary Item, Restructuring Charge and Restructuring Reversal (the
"Operating Profit").

BANKING SEGMENT

The Banking segment provides commercial and retail banking services through its
62 banking locations in northern Illinois and south central Wisconsin and the
FINANCE subsidiary. The services provided by this segment include lending,
deposits, cash management, safe deposit rental, automated teller machines, and
other traditional banking services.

The Banking segment's Operating Profit for 2001 was $41.6 million, an increase
of $505,000 or 1.2% from 2000. This followed an increase in 2000 of $678,000 or
1.7% from 1999. For 2001, declining net interest income, an increase in the
provision for loan and lease losses and higher operating expenses were more than
offset by increased non-interest income.

Net interest income declined by $6.5 million in 2001. The decline 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 net of a $287.4 million or 8.0%
decrease in average interest-bearing liabilities. This volume related decrease
in net interest income was partially offset by a 22 basis point improvement in
net interest spread.

Non-interest income, excluding a $343,000 Accounting Change in 2001, increased
by $16.1 million in 2001. The increase is primarily the result of the Branch
Gains, an increase in CSV on BOLI, higher service charges on deposits, and a
gain from cash received on the merger of an ATM service provider. These were
partially offset by losses incurred on the sale of securities in 2001 compared
to gains recognized in 2000 and a lower level of gains from Auto Loan Sales in
2001 versus 2000. The loss on the sale of securities in 2001 was driven by the
Security Portfolio Restructuring.

The provision for loan and lease losses was $16.7 million for 2001, an increase
of $7.0 million or 72.0% from $9.7 million in 2000. Increases in non-performing
loans, net charge-offs and delinquencies compared to 2000, concentrations in
industries that have been impacted more than others by the recession, coupled
with overall concerns over the economy's impact, particularly in light of the
unprecedented events on and subsequent to September 11, contributed to the
increased provisions.

Operating expenses, excluding a Restructuring Reversal of $469,000 in 2000,
increased $2.4 million in 2001. The increase was primarily related to the
Severance Accrual, increased profit sharing expense, increased costs associated
with collection activities including legal fees and foreclosed real estate
losses and expenses, higher direct mail promotions in connection with the Make
It Happen and Free Checking initiatives, and Branch Expansion costs. These were
partially offset by decreases in group medical costs, equipment expense and
director fees. Excluding the Severance Accrual, employee salaries and wages were
flat year-to-year, reflecting the efficiencies of the CFOS.

The Banking segment represented 86.8%, 84.9% and 83.1% of total segment
Operating Profit in 2001, 2000 and 1999, respectively.

24

TRUST AND ASSET MANAGEMENT

The Trust and Asset Management segment provides trust, investment management,
employee benefit recordkeeping and administration and brokerage services. It
also acts as an advisor and provides fund administration to the Vintage Mutual
Funds. These products are distributed nationally (i.e. Vintage Equity Fund is
available through Charles Schwab, OneSource(TM)), regionally to institutional
investors and corporations, and locally through AMCORE's banking locations.

The Trust and Asset Management segment's Operating Profit for 2001 was $3.5
million, a decrease of $2.4 million or 40.5% from 2000. Operating Profit for
2000 was essentially flat with 1999. The 2001 decrease was primarily
attributable to lower revenues.

Trust and Asset Management segment revenues totaled $28.9 million in 2001, a
decrease of $3.4 million or 10.6% from $32.3 million in 2000. The overall
decline in the stock market during the past two years impacted equity values
upon which fees are partially based. This, along with the loss of several larger
employee benefit accounts that occurred at the end of 2000, were the primary
factors leading to the decline in trust and asset management revenues in 2001.
The impact was lessened, however, because of the composition of the Company's
asset management mix, which is divided among equity, fixed income and money
market investments. Therefore, when one sector is experiencing pressure, as the
equity markets have been recently, other sectors can lessen the impact. Thus,
while the S&P 500 and the NASDAQ indices were down nearly 13% and 21%
respectively, from December 31, 2000 to December 31, 2001, favorable results in
the fixed income market helped to limit the decrease in trust and asset
management revenue to 10.6%.

Excluding the 2000 Restructuring Charge, operating expenses increased $502,000
or 2.3% to $22.5 million in 2001, up from $22.0 million in 2000. The increase
was primarily attributable to increased relocation costs, data processing
expenses and goodwill amortization.

As of December 31, 2001, assets under management totaled $4.2 billion including
$1.2 billion in the AMCORE family of Vintage Mutual Funds. Total assets under
administration, which include managed assets and custody assets, total $4.9
billion.

The Trust and Asset Management segment represented 7.2%, 12.0%, and 12.5% of
total segment Operating Profit in 2001, 2000 and 1999, respectively.

MORTGAGE BANKING

The Mortgage Banking segment 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.

The Mortgage Banking segment's Operating Profit was $2.9 million in 2001, an
increase of $1.3 million or 88.3% from 2000. This segment's Operating Profit
decreased $447,000 or 22.8% in 2000 compared to 1999. As of December 31, 2001,
the Mortgage segment serviced $1.35 billion of residential mortgage loans,
including mortgage loans held for sale. This represented an increase of $8.6
million or 0.6% over $1.34 billion at December 31, 2000. Included in the 2001
and 2000 totals were loans serviced for the BANK of $342.3 million and $480.5
million, respectively.

The Mortgage Banking segment revenues, net of $5.6 million in servicing rights
amortization and impairment, were $14.5 million in 2001, an increase of $6.5
million or 81.6% from $8.0 million in 2000. The $8.0 million in revenues in 2000
were net of servicing rights amortization of $1.4 million. Excluding servicing
rights amortization and impairment, gross revenues for 2001 and 2000 were $20.1
million and $9.4 million, respectively. This represented an increase of $10.7
million or 113.8% as falling mortgage interest rates led to record origination
and refinancing volumes of $634.2 million in 2001. Higher servicing rights
amortization and impairment were caused by increased pre-payment speed
assumptions resulting from the declining interest rate environment.

The increase in origination volumes and refinancing activity caused a
corresponding increase in variable production related personnel, loan processing
and BANK commission expenses. These factors contributed to a $4.3 million
increase in operating expenses.

The Mortgage Banking segment represented 6.0%, 3.1% and 4.4% of total segment
Operating Profit in 2001, 2000 and 1999, respectively.

25

BALANCE SHEET REVIEW AND LIQUIDITY RISK MANAGEMENT

Liquidity represents the availability of funding to meet the obligations to
depositors, borrowers, and creditors at a reasonable cost without adverse
consequences. Accordingly, the funding base and asset mix influences the
liquidity position.

The parent company requires adequate liquidity to pay its expenses, repay debt
when due and pay stockholder dividends. Liquidity is primarily provided to the
parent through its subsidiaries in the form of dividends. In 2001, dividends
from subsidiaries amounted to $45.1 million, compared to $47.6 million in 2000.
Other liquidity is provided by access to the capital markets, cash balances in
banks, liquidating short-term investments, commercial paper borrowings and lines
of credit with correspondent banks. While the BANK is limited in the amount of
dividends it can pay, as of December 31, 2001, approximately $14.9 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 $15.4 million from December 31, 2000 to
December 31, 2001, as the net cash provided from investing activities of $226.0
million more than offset the net cash used for financing activities of $203.4
million, plus the net cash used in operating activities of $7.2 million during
2001. This compares to a decline in cash and cash equivalents of $60.3 million
from December 31, 1999 to December 31, 2000, as the net cash provided from
operating activities of $60.6 million plus the net cash provided by investing
activities of $66.1 million was more than offset by net cash used for financing
activities of $187.0 million in 2000.

The $7.2 million of cash used in operating activities during 2001 contrasts with
$60.6 million in net cash provided during 2000, representing a $67.8 million
decrease in cash provided between the two years. The change was primarily
attributable to a $62.3 million increase in originations of loans held for sale,
net of increased proceeds from the sale of such loans.

The $226.0 million of cash provided by investing activities during 2001 compares
with $66.1 million provided in 2000, for an increase of $159.9 million in cash
provided between the two years. This was primarily the result of a $71.7 million
net decrease in federal funds sold and other short-term investments, a $43.8
million increase in the amount of proceeds from investment sales and maturities
that were not reinvested pursuant to the Company's Security Portfolio
Restructuring and De-leveraging strategies, a $34.0 million decrease in interest
earning deposits in banks and an increase of $12.3 million in net cash provided
by loans and leases.

The $203.4 million of cash used for financing activities during 2001 compares to
$187.0 million used during 2000, or an increase of $16.4 million in cash used.
This was primarily the result of a $207.1 million net decrease in cash provided
by demand, savings and time deposit accounts, plus $93.1 million in cash
required to fund the Branch Sales. These were partially offset by a $243.2
million net increase in short-term borrowings, a $32.9 million net decrease in
payments on long-term borrowings and a $7.4 million net increase in cash
required for net treasury stock purchases.

SECURITIES

Total securities as of December 31, 2001 were $1.09 billion, a decrease of
$146.7 million or 11.9% from the prior year-end. At December 31, 2001 and 2000,
the total securities portfolio comprised 29.6% and 31.3%, 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, 2001, 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
needs. The decision to purchase or sell securities is based upon the current
assessment of economic and financial conditions, including the interest rate
environment. The portfolio's scheduled maturities and the prepayment of mortgage
and asset backed securities represent a significant source of liquidity.
Approximately $36.1 million, or 3.3%, of the securities portfolio will
contractually mature in 2002. This does not

26

include mortgage and asset backed securities. Mortgage and asset backed security
maturities may differ from contractual maturities because borrowers may have the
right to prepay obligations with or without penalties.

Mortgage and asset backed securities as of December 31, 2001 totaled $751.4
million and represent 69.1% of total securities. The distribution of mortgage
and asset backed securities includes $501.6 million of U.S. government agency
mortgage-backed pass through securities, $207.7 million of agency collateralized
mortgage obligations and $42.1 million of private issue collateral mortgage
obligations, all of which are rated AAA except for $14.1 million of securities
rated either Aa2 and A2.

At December 31, 2001, securities available for sale totaled $1.09 billion, which
included gross unrealized gains of $10.7 million and gross unrealized losses of
$6.2 million, of which the combined effect, net of tax, is included as
accumulated other comprehensive income in stockholders' equity. For comparative
purposes, at December 31, 2000, gross unrealized gains of $11.0 million and
gross unrealized losses of $10.6 million were included in the securities
available for sale portfolio. There were no held to maturity securities at
December 31, 2001. As of December 31, 2000, held to maturity securities totaled
$10.7 million, which did not include $51,000 of gross unrealized gains and
$77,000 of gross unrealized losses. For further analysis of the securities
portfolio see Table 4 and Note 3 of the Notes to Consolidated Financial
Statements.

LOANS AND LEASES

Loans represent the largest component of AMCORE's earning asset base. At
year-end 2001, total loans and leases were $2.48 billion, a decrease of $148.4
million or 5.6% as compared to 2000. Average loans decreased $217.7 million or
8.0% during 2001. See Table 2 and Note 4 of the Notes to Consolidated Financial
Statements.

Total real estate loans, primarily residential real estate, declined $210.9
million, due to refinancings and the Branch Sales. Refinancings were prompted by
falling mortgage interest rates that at one point during 2001 were at a
forty-year low. Residential mortgage loans are originated by AMCORE's mortgage
affiliate, 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, generate gains on the sale of
these loans, as well as servicing income. All loans of the mortgage affiliate
are considered held for sale and are recorded at the lower of cost or market
value.

The decline in real estate loans was partially offset by a $53.4 million or
13.7% increase in installment and consumer loans and an $8.7 million or 1.3%
increase in commercial and industrial loans. Consumer and installment loan
growth was primarily the result of cessation of the Auto Loan Sales program
during 2001. Commercial loan growth was affected by stricter pricing policies,
tighter credit standards, the recession and the impact of the Branch Sales.

The scheduled repayments and maturities of loans represent a substantial source
of liquidity. Table 3 shows selected loan maturity data as of December 31, 2001.

DEPOSITS

Total deposits at December 31, 2001, were $2.89 billion, a decrease of $249.8
million or 7.9% when compared to 2000. Average deposits decreased $148.8 million
or 4.8% during 2001.

Core deposits, which include demand deposits, consumer time deposits, and
savings deposits are considered by management to be the primary and most stable
source of funding. Total core deposits were $2.36 billion at the end of 2001, a
$100.9 million or 4.1% decrease from the prior year-end. The decline is
attributable to the Branch Sales. Excluding the impact of the Branch Sales, core
deposits increased $52.3 million during 2001. Core deposits represent 81.6% and
78.3% of total deposits at December 31, 2001 and 2000, respectively. Large
certificates of deposit, brokered deposits, and time deposits from governmental
entities supplement these core deposits. These non-core deposits were $533.6
million at year-end 2001, a decrease of $148.9 million over the prior year-end.
Table 5 shows the maturity distribution of time deposits $100,000 and over.

BORROWINGS

Borrowings totaled $743.9 million at year-end 2001 and were comprised of $475.7
million of short-term and $268.2 million of long-term borrowings. See Notes 9
and 10 of the Notes to Consolidated Financial Statements.

27

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 parent company has a commercial paper placement agreement with an unrelated
financial institution that provides for the issuance of non-rated short-term
unsecured debt obligations at negotiated rates and terms, not to exceed $50.0
million. In the event the agent is unable to place the parent company's
commercial paper on a particular day, the proceeds are provided by overnight
borrowings on a reciprocal line of credit with the same financial institution.
At December 31, 2001, $31.3 million in commercial paper was outstanding.

ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT

AMCORE's credit risk is centered in the loan and lease portfolio which on
December 31, 2001 totaled $2.48 billion, or 67.5%, of earning assets. The
objective in managing loan portfolio risk is to quantify and manage credit risk
on a portfolio basis as well as reduce the risk of a loss resulting from a
customer's failure to perform according to the terms of a transaction. To
achieve this objective, AMCORE strives to maintain a loan portfolio that is
diverse in terms of loan type, industry concentration, and borrower
concentration.

ALLOWANCE FOR LOAN AND LEASE LOSSES

The determination by management of the appropriate level of the Allowance (see
Critical Accounting Policies discussion) amounted to $33.9 million at December
31, 2001, compared to $29.2 million at December 31, 2000, an increase of $4.8
million or 16.4%. 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
increased $3.1 million. The increase was primarily attributable to increased
concentrations, particularly with respect to the Company's agricultural
portfolio, and increasing delinquencies. Allocations of the Allowance for real
estate loans increased $586,000 to reflect increased concentrations,
particularly gas stations/convenience stores, and other management factors.
Allocations of the Allowance for installment and consumer loans increased $1.0
million. This increase was attributable to the impact of historical loss factors
on increasing balances and increasing delinquencies. Allocations for impaired
loans increased $639,000 during the year. The increase was driven almost
exclusively by the addition of an auto dealership floor plan loan. Excluding
this impaired credit, the number and average balance of impairment allocations
per credit were relatively unchanged year-to-year. The amount of the unallocated
Allowance declined $550,000 from one year ago.

As of December 31, 2001, the Allowance as a percent of total loans and of
non-performing loans was 1.37% and 126.86%, respectively. These compare to the
same ratios for the prior year of 1.11% and 132.12%. Net charge-offs as a
percent of average loans increased to 0.44% for 2001 versus 0.29% in 2000.
Commercial net 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 net charge-offs in 2001, the result of increasing
unemployment, the weakening economy and higher energy costs that affected the
borrower's ability to repay their loans. Real estate net charge-offs increased
reflecting the impact of increasing delinquencies and foreclosures.

NON-PERFORMING ASSETS

Non-performing assets consist of non-accrual loans, loans with restructured
terms, other real estate owned and other foreclosed assets. Non-performing
assets totaled $33.8 million as of year-end 2001, an increase of $7.3 million or
27.8% from the $26.4 million at year-end 2000. Total non-performing assets
represent 0.84% and 0.62% of total assets at December 31, 2001 and December 31,
2000, respectively.

Non-performing loans increased $4.7 million or 21.2% to total $26.8 million at
December 31, 2001, when compared to the prior year-end. As of December 31, 2001,
non-performing loans to total loans were 1.08% compared to 0.84% at year-end
2000. Table 2 presents non-performing loans for each of the past five years.

28

Foreclosed real estate and other foreclosed assets increased $2.7 million, or
60.8%, to $7.0 million at December 31, 2001, when compared to year-end 2000. The
increase is attributable to two large foreclosures; a hotel loan and a
condominium complex.

Loans 90 days or more past due and still accruing interest were $14.0 million at
December 31, 2001, an increase of $865,000 from the $13.1 million at December
31, 2000. These amounts represented 0.56% and 0.50% of loans outstanding as of
the end of 2001 and 2000, 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 $705.8 million at December
31, 2001, and comprised 28.5% of gross loans, of which 1.46% were
non-performing. Net charge-offs of commercial loans represented 0.70% during
2001, and 0.39% during 2000, of the year-end balance of the category.

Construction, commercial real estate loans, and loans for farmland were $825.3
million at December 31, 2001, comprising 33.3% of gross loans, of which 1.09%
were classified as non-performing. Net charge-offs of this category of loans
represent 0.18% during 2001, and 0.09% during 2000, of the year-end balance of
the category.

Residential real estate loans, which includes home equity and permanent
residential financing, totaled $500.1 million at December 31, 2001, and
represent 20.2% of gross loans, of which 1.12% were non-performing. Net
charge-offs of residential real estate loans represent 0.17% of the category
total in 2001 and 0.12% of the year-end balance in 2000.

Installment and consumer loans were $444.4 million at December 31, 2001, and
comprised 17.9% of gross loans, of which 0.32% were non-performing. Net
charge-offs of consumer loans represented 0.83% and 0.88% of the year-end
category total for 2001 and 2000, respectively. Consumer loans are comprised
primarily of in-market indirect auto loans and direct installment loans.
Indirect auto loans totaled $334.8 million at December 31, 2001. Both direct
loans and indirect auto loans are approved and funded through a centralized
department utilizing the same credit scoring system to provide a standard
methodology for the extension of credit.

CAPITAL MANAGEMENT

Total stockholders' equity at December 31, 2001, was $301.7 million, a decrease
of $6.8 million or 2.2% from December 31, 2000. The decrease in stockholders'
equity was primarily due to the acquisition of treasury shares in conjunction
with announced share repurchase programs and normal dividend distributions, that
were nearly offset by net earnings for the year.

AMCORE paid $16.3 million of cash dividends during 2001, which represent $0.64
per share, or a dividend payout ratio of 38.6%. This compares to $0.64 per share
paid in 2000, which represented a payout ratio of 40.0%. The book value per
share increased $0.39 per share to $12.26 at December 31, 2001, up from $11.87
at December 31, 2000.

On April 23, 2001, AMCORE announced a stock repurchase program for up to five
percent of its common stock or 1.29 million shares. As of January 1, 2001,
AMCORE also had 627,000 shares remaining from the Company's August 8, 2000 stock
repurchase authorization. Shares repurchased pursuant to these authorizations
will become treasury shares and will be used for general corporate purposes,
including the issuance of shares in connection with AMCORE's stock option plan
and other employee benefit plans. As of December 31, 2001, 82,000 shares
remained to be repurchased pursuant to the April 23, 2001 authorization, while
all authorized shares had been repurchased pursuant to the August 8, 2000
authorization. During 2001, the Company repurchased 1.8 million shares at an
average price of $21.42.

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.

Stockholders' equity includes accumulated other comprehensive income which is
comprised primarily of unrealized holding gains and losses of securities
classified as available for sale and the effective component of unrealized gains
and losses attributable to cash flow hedges. During 2001, other comprehensive
income decreased $635,000. The decrease

29

was attributable to $3.1 million of unrealized net losses in connection with
cash flow hedges and a $2.4 million net increase in the fair value of available
for sale securities.

The BANK is considered a "well-capitalized" institution based on regulatory
guidelines. AMCORE's leverage ratio of 7.84% at December 31, 2001 exceeds the
regulatory guidelines of 5% for well-capitalized institutions. AMCORE's ratio of
Tier 1 capital at 10.53% and total risk based capital at 11.68% significantly
exceed the regulatory minimums (as the following table indicates), as of
December 31, 2001. See Note 18 of the Notes to Consolidated Financial
Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

In the near-term, AMCORE expects that its interest-rate risk will be greater
should interest rates continue to decline. This is a change from recent years
where the Company was most vulnerable to increasing interest rates. The Company
benefited from the steep and rapid decline in short-term interest rates that
occurred during 2001, as deposits and short-term borrowings repriced more
rapidly than loans. Continued declines in rates, however, could result in
narrowing of the interest rate spread as there is more room for rates to fall on
loans than is likely on deposits and borrowings.

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 2001, there were no material changes in AMCORE's
primary market risk exposures. Interest-rate risk, as described above, continues
to be AMCORE's most significant market risk. Based upon current expectations, no
material changes are anticipated in the future in the types of market risks
facing AMCORE.

Table 6 and Note 5 of the Notes to Consolidated Financial Statements summarize
AMCORE's market risk and interest sensitivity position as of December 31, 2001.
The amounts and assumptions should not be relied upon as indicative of expected
actual results since, like most financial institutions, AMCORE's net interest
income can be significantly impacted by external factors. These factors include,
but are not limited to: overall economic conditions, policies and actions of
regulatory authorities, the amounts of and rates at which assets and liabilities
re-price, variances in prepayment of loans and securities other than those that
are assumed, early withdrawal of deposits, exercise of call options on
borrowings, competition, a general rise or decline in interest rates, changes in
the slope of the yield-curve and changes in basis.

30

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 quarterly 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 Critical
Accounting Policies, "Derivative Financial Instruments and Hedging Activities",
Item 7, Management Discussion and Analysis. 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.

The total notional amount of swap contracts outstanding was $130.0 million and
$190.0 million as of December 31, 2001 and 2000, respectively. As of the end of
2001, swap contracts had an aggregate negative carrying and fair value of $5.2
million. The total notional amount of collars outstanding was $10.0 million at
December 31, 2001, versus $85.0 million outstanding as of the end of 2000. As of
the end of 2001, these collars had an aggregate negative carrying and fair value
of $168,000. The total notional amount of caps outstanding was $60.0 million at
December 31, 2001, with $160.0 million of outstanding caps as of the end of
2000. As of the end of 2001, the caps had an aggregate carrying and fair value
of $278,000. The total notional amount of floors outstanding was zero at
December 31, 2001 and $20.0 million at December 31, 2000. For further discussion
of derivative contracts, see Notes 5 and 11 of the Notes to the Consolidated
Financial Statements.

Based upon an immediate increase in interest rates of 200 basis points and no
change in the slope of the yield curve, the potential decrease in net income for
2002 would be approximately $1.0 million. This analysis assumes no growth in
assets or liabilities and replacement of maturing instruments with like-kind
instruments. At the end of 2000, comparable assumptions would have resulted in a
potential decrease in 2001 net income of $8.9 million. Thus, AMCORE's earnings
at risk from a rising rate scenario are considerably less at the end of 2001
than they were at the end of 2000. While the Company's short-term funding base
remains sensitive to increasing interest rates, the impact is lessened due to
scheduled maturities of high-rate CDs whose runoff rates are higher than the
shocked replacement rates. Additional factors influencing the improvement over
the end of 2000 is an increasing floating-rate composition of commercial loans
and the origination of longer-term CDs intended to lengthen funding maturities
and fix interest costs over a longer term.

Conversely, an immediate decrease in interest rates of 200 basis points and no
change in the slope of the yield curve would result in a potential decrease in
net income for 2002 of $7.3 million. Rates on certain shorter-term deposit
liabilities were not reduced below zero percent. The same assumptions at the end
of 2000 would have resulted in a potential decrease in net income of $582,000.
AMCORE's sensitivity to declining interest rates has increased markedly since
2000. With further declines in interest rates, assets yields would outpace
liability rate reductions due to compression on non-maturity and indexed
liability products. The increasing mix of floating-rate commercial loans and
negative convexity of mortgage products compound this impact.

31

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.

32

TABLE 1
ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET

The above table shows the changes in interest income (tax equivalent "FTE") and
interest expense attributable to volume and rate variances.

The change in interest income (tax equivalent) due to both volume and rate has
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amounts of the change in each.

(1) The interest on tax-exempt securities and tax-exempt loans is calculated on
a tax equivalent basis assuming a federal tax rate of 35%.

(2) The average balances of the securities are based on amortized historical
cost.

(3) The yield-related fees recognized from the origination of loans held for
sale are in addition to the interest earned on the loans during the period
in which they are warehoused for sale as shown above.

(4) The balances of nonaccrual loans are included in average loans outstanding.
Interest on loans includes yield related loan fees of $3.3 million, $3.1
million, and $4.1 million for 2001, 2000, and 1999, respectively.

34

TABLE 2
ANALYSIS OF LOAN AND LEASE PORTFOLIO AND LOSS EXPERIENCE

35

The allocation of the allowance for loan and lease losses at December 31, was as
follows:

- ------------

* Not applicable

TABLE 3
MATURITY AND INTEREST SENSITIVITY OF LOANS

36

TABLE 4
MATURITY OF SECURITIES

- ------------

(1) Yields were calculated on a tax equivalent basis assuming a federal tax rate
of 35%.

(2) Yields were calculated based on amortized cost.

(3) Mortgage-backed and asset-backed security maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties. Therefore, these securities are not
included within the maturity categories above.

TABLE 5
MATURITY OF TIME DEPOSITS $100,000 OR MORE

37

TABLE 6
INTEREST RATE SENSITIVITY

The following table provides information about the Company's derivative
financial instruments and other financial instruments used for purposes other
than trading that are sensitive to changes in interest rates. For loans,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual
maturities as well as any anticipated prepayments.

For deposits that have no contractual maturity (demand deposit accounts,
interest-bearing checking, savings, and money market deposits) the table was
constructed based on historical Company data and analysis.

For interest rate swaps, caps, floors and collars, the table presents notional
amounts and, if applicable, weighted-average interest rates by contractual
maturity date or call date. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts.

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
Statement of Financial Accounting Standards No. 138, on January 1, 2001. This
Statement outlines accounting and reporting standards for derivative instruments
and hedging activities.

Under this standard, all derivatives are recognized at fair value in the
Consolidated Balance Sheets. Changes in fair value for derivatives that are not
hedges are recognized in the Consolidated Statement of Income (Income Statement)
as they arise. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative are either offset in the
Income Statement or are recorded as a component of other comprehensive income in
the Consolidated Statement of Stockholders' Equity. See Note 11 for further
information on derivative instruments.

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMCORE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Additional paid-in capital............................. 74,045 74,900
Retained earnings...................................... 323,615 297,703
Deferred compensation.................................. (2,107) (1,651)
Treasury stock (2001 - 5,136,888 shares;
2000 - 3,714,769 shares).............................. (100,197) (69,385)
Accumulated other comprehensive (loss) income.......... (301) 334
---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................ $ 301,660 $ 308,497
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $4,021,847 $4,244,106
========== ==========

See accompanying notes to consolidated financial statements.
41

AMCORE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.
42

AMCORE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.
44

AMCORE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Balance changes resulting from branch sales are excluded from individual line
items such as deposits, loans, and fixed assets.
See accompanying notes to consolidated financial statements.
45

AMCORE FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000, AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of AMCORE Financial, Inc. and subsidiaries
(Company) conform to accounting principles generally accepted in the United
States of America. The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the balance sheet date and revenues and expenses
for the period. Actual results could differ from those estimates.

DESCRIPTION OF THE BUSINESS

The Company is a bank holding company headquartered in Rockford, Illinois, and
conducts its principal business activities at locations within northern
Illinois, south central Wisconsin and Iowa. The primary business of the Company
is the extension of credit and the collection of deposits with commercial and
industrial, agricultural, real estate and consumer loan customers throughout
northern Illinois and south central Wisconsin. Although the Company has a
diversified loan portfolio, adverse changes in the local economy would have a
direct impact on the credit risk in the portfolio.

The Company also offers a variety of financial products and services through its
financial services subsidiaries. These include mortgage banking, personal and
employee benefit trust administration for individuals, estates and corporations,
consumer finance, investment management, brokerage, and credit life and accident
and health insurance in conjunction with the lending activities of the BANK.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, the Company considers cash on hand,
amounts due from banks, and cash items in process of clearing to be cash and
cash equivalents. Cash flows for federal funds sold and other short-term
investments, interest earning deposits in banks, loans, demand deposits and
savings accounts, time deposits and short-term borrowings are reported net.

LOANS AND LEASES HELD FOR SALE

Loans originated and intended for sale in the secondary market are recorded at
the lower of cost or fair value in the aggregate. Gains and losses on the sale
of loans are included in other non-interest income.

SECURITIES AND OTHER INVESTMENTS

Debt securities are classified into three categories: held to maturity,
available for sale and trading. Securities for which the Company has the ability
and the intent to hold to maturity are classified as held to maturity and are
reported at amortized cost. Securities held for resale are classified as trading
securities and are reported at fair value with unrealized gains and losses
recorded in earnings. Securities, which are neither held to maturity nor
trading, are classified as available for sale and are reported at fair value.
The level yield method is used for the amortization and accretion of premiums
and discounts. The cost of securities sold is determined on a specific
identification method. There were no trading securities outstanding at December
31, 2001 and 2000. There were no held to maturity securities outstanding as of
December 31, 2001.

Non-marketable equity securities are reported at cost. These include private
equity fund investments where the Company's interest is so minor as to have
virtually no influence over the fund's operating and financial policies. Also
included are investments in Federal Reserve Bank and Federal Home Loan Bank
stock. Investments in affordable

46

housing tax credit projects without guaranteed yields are reported on the equity
method. Those with guaranteed yields are reported using the effective yield
method. Private equity fund and affordable housing tax credit investments are
reported as other assets on the Consolidated Balance Sheet.

When it is determined that securities or other investments are impaired and the
impairment is other than temporary, an impairment loss is recorded in earnings
and a new basis is established. See Note 3 for additional information.

LOANS AND LEASES

Loans and leases that management has the ability and intent to hold for the
foreseeable future 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 using methods that approximate the
level-yield method. Unearned interest on discounted installment loans has been
recognized as income using methods which approximate level rates of return over
the terms of the loans. A liability is recorded for the estimated amount of
recourse due to uncollectible leases and is a component of the gain or loss
recognized on sale.

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 the 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. Unpaid interest that has
previously been recorded as income is written-off when a loan is placed on
Non-Accrual Status. The outstanding loan balance is written-off against the
allowance for loan and lease losses when management determines that probability
of collection of principal will not occur. See Note 4 for additional
information.

ALLOWANCE FOR LOAN AND LEASE LOSSES

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 are also charged against the Allowance. Unpaid interest for
the current year for loans that are placed on Non-Accrual Status are 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. See Note 4 for additional information.

PREMISES AND EQUIPMENT

Premises and equipment including leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is computed principally
on the straight-line method over the estimated useful life of the assets.
Leasehold improvements are being amortized using the straight-line method over
the terms of the respective leases or their useful lives, whichever is shorter.
See Note 6 for additional information.

INTANGIBLE ASSETS

Certain intangible assets, such as core deposit intangibles and goodwill, have
arisen from the purchase of subsidiaries. Core deposit intangibles represent a
valuation of acquired deposit relationships and are being amortized based on the

47

present value of the future net income or cost savings derived from the related
deposits over an original period ranging from six to twelve years. Goodwill
represents the excess of the purchase price over the fair value of the
identifiable net assets acquired and is being amortized over a maximum of
fifteen years using the straight-line method.

FORECLOSED REAL ESTATE

Foreclosed real estate comprises real properties acquired in partial or full
satisfaction of loans. These properties are carried as other assets at the lower
of cost or fair value less estimated costs to sell the properties. When the
property is acquired through foreclosure, any excess of the related loan balance
over the fair value less expected sales costs, is charged against the Allowance.
Subsequent declines in value or losses and gains upon sale, if any, are charged
or credited to other operating expense. Losses on the sales within 90 days of
foreclosure are charged against the Allowance.

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 unamortized 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
unamortized 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 and
prepayment 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 unamortized
carrying amount. See Note 7 for additional information.

LOAN SECURITIZATION AND SALES OF RECEIVABLES

When the Company sells receivables in securitizations of automobile loans, the
net carrying amount of the loans are removed from the balance sheet, and certain
retained residual interests are recorded. The retained interests include 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 are 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 include 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
are allocated to the retained residual interests. These allocations are 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 have a favorable impact on the amount of gain or loss
that is recognized on the sale of the loans.

Since the projected income from the Servicing Rights approximates the estimated
costs of the Company to service the loans, no asset is 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
48

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 Overcollateralization 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 accretion schedules are developed based
upon current estimates, assumptions, adjusted carrying values and revised
constant yields. See Note 8 for additional information.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets including certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would be
recognized by a reduction to the carrying amount of the asset, thus establishing
a new cost basis, with an offsetting charge to expense.

TRUST ASSETS

Assets that are held by subsidiaries in a fiduciary or agency capacity are not
included in the consolidated financial statements as they are not assets of the
Company. The total assets under management at December 31, 2001 were $4.2
billion.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses certain financial instruments called derivatives to help manage
(Hedge) its risk or 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.

Interest rate swaps are most commonly used by the Company to convert liabilities
with variable-rate cash flows to liabilities with fixed-rate cash flows (the
"Hedged Items"). Under this arrangement, the Company receives payments from the
Counter-party at a specified floating-rate index that is applied to the Notional
Principal Amount. This periodic receipt of income essentially offsets
floating-rate interest payments that the Company makes to its depositors or
lenders. In exchange for the receipts from the Counter-party, the Company makes
payments to the Counter-party at a specified fixed-rate that is applied to the
Notional Principal Amount. Thus, what was a floating rate obligation before
entering into the derivative arrangement is transformed into a fixed rate
obligation. Interest rate caps and collars are derivative instruments that are
variations of an interest rate swap. They also involve an exchange of interest
payment
49

streams with a Counter-party based upon a Notional Principal Amount. In the case
of an interest rate cap, the exchange of income streams does not take effect
unless the specified floating-rate index rises above a pre-determined level. In
an interest rate cap, the Company retains the risk of rising interest rates up
to the pre-determined level, while benefiting from declines in interest rates.
In the case of an interest rate collar, the exchange of income streams does not
take effect unless the specified floating-rate index rises above or below
pre-determined levels. In an interest rate collar, the Company retains the risk
and benefits of changes in interest rates within the pre-determined levels. The
Company has also used interest rate floors to manage its exposure to declining
mortgage interest rates of its mortgage servicing rights asset. These floors
were terminated during 2001. The net amount payable or receivable from each
Interest Rate Derivative contract is recorded as an adjustment to interest
expense.

Historically, most of the Interest Rate Derivatives have been accounted for
off-balance sheet since the Notional Principal Amount is never advanced from the
Counter-party and, with the exception of the interest rate floor contracts, they
qualified as Hedges under previous accounting standards. Upon the adoption of
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as modified by SFAS No. 138,
effective beginning January 1, 2001, all derivatives must be recognized at fair
value on the Company's balance sheet. In the event a derivative does not qualify
for Hedge accounting treatment pursuant to SFAS No. 133, changes in the fair
value of the derivative are included in other income or expense as they occur.
With the exception of the interest rate floors, all of the Company's Interest
Rate Derivatives qualify and have been designated as cash flow Hedges pursuant
to SFAS No. 133. Changes in the fair value of a cash flow Hedge that are due to
the passage of time are recorded as other income or expense for each reporting
period. The effective portion of the remaining changes in the fair value of the
derivative are recorded in other comprehensive income (OCI), a component of
stockholders' equity on the balance sheet. This amount is subsequently
recognized as other income or expense in the same period as interest is accrued
on the Hedged Items. Ineffective portions of changes in the fair value of cash
flow Hedges are recognized in the other income or expense each period. Hedge
ineffectiveness is caused when the change in expected future floating cash flows
of the Hedged Item does not exactly offset the change in the expected future
floating cash flows of the Interest Rate Derivative, and is generally due to
differences in the interest rate indices or interest rate reset dates.

Also considered derivatives under SFAS No. 133 are 1-4 family residential
mortgage loan commitments (the "Commitments") and forward mortgage loan sales
(the "Forward Contracts") to the secondary market (collectively "Mortgage Loan
Derivatives"). While historically Mortgage Loan Derivatives were accounted for
off-balance sheet, they are now reported at fair value on the balance sheet
pursuant to SFAS No. 133. Changes in the fair value of the Mortgage Loan
Derivatives are included in other income or expense as they occur. However,
since the Company's Forward Contracts qualify and have been designated as fair
value Hedges of its portfolio of loans held for sale (the "Warehouse Loans") as
well a Hedge of its Commitments, the Warehouse Loans are also adjusted to fair
value. The change in fair value of Warehouse Loans is recorded in other income
or expense as they occur. To the extent that the Company's Forward Contracts are
highly effective, the changes in the fair value of the Forward Contracts will
largely offset changes in fair value of the Commitments and Warehouse Loans.

Fees paid on derivative financial contracts are amortized over their contractual
life as a component of the interest reported on the asset or liability hedged.
See Note 11 for additional information.

LEGAL AND OTHER CONTINGENCIES

The Company recognizes as an expense legal and other contingencies when, based
upon available information, it is probable that a liability has been incurred
and the amount or range of amounts can be reasonably estimated. See Note 20 for
additional information.

INCOME TAXES

Deferred taxes are provided on a liability method whereby net operating losses,
tax credit carryforwards, and deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and

50

liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. See Note 14 for additional information.

EARNINGS PER SHARE

Basic earnings per share is based on dividing net income by the weighted average
number of shares of common stock outstanding during the periods. Diluted
earnings per share reflects the potential dilution that could occur if stock
options granted pursuant to incentive stock option plans were exercised or
converted into common stock, based on the treasury stock method, and any shares
contingently issuable, that then shared in the earnings of the Company. See Note
15 for additional information.

SEGMENT INFORMATION

The Company discloses operating segments based on the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. See Note 17 for further
information.

NEW ACCOUNTING STANDARDS

In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - a replacement of SFAS No. 125". This Statement
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of SFAS No. 125's provisions without reconsideration. This Statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures relative to
securitization transactions and collateral for fiscal years ending after
December 15, 2000 and was implemented by the Company during the first quarter of
2001. The adoption of SFAS No. 140 did not have a material affect on the
Company's Consolidated Financial Statements.

In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion No.
25". This Interpretation clarifies the application of Opinion 25 for only
certain issues. Among other issues, this Interpretation clarifies (a) the
definition of "employee" for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. This Interpretation is effective
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occurred after either December 15, 1998, or January 12, 2000. This
interpretation did not have a material affect on the Company's Consolidated
Financial Statements.

The Company adopted SFAS No. 133, as amended by SFAS No. 138, on January 1,
2001. This Statement outlines accounting and reporting standards for derivative
instruments and hedging activities. See Note 11 of the Notes to Consolidated
Financial Statements.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No.
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but will rather be tested at least annually for
impairment. SFAS No. 142 is effective January 1, 2002 for calendar year
companies, however, any acquired goodwill or intangible assets recorded in
transactions closed subsequent to June 30, 2001 will be subject immediately to
the nonamortization and amortization provisions of SFAS No. 142. As required
under SFAS No. 142, the Company will discontinue the amortization of goodwill
with a net carrying value of $15.6 million at January 1, 2002 and annual
amortization of $1.9 million that resulted from business combinations prior to
the adoption of SFAS No. 141. Other intangible assets with a net carrying value
of $282,000 will continue to be amortized over their remaining estimated useful
life. The remaining goodwill will be evaluated for impairment on an

51

ongoing basis. The Company continues to evaluate the additional effect, if any,
that adoption of SFAS No. 141 and SFAS No. 142 will have on the Company's
consolidated financial statements.

RECLASSIFICATIONS

Certain prior year amounts may be reclassified to conform with the current year
presentation.

NOTE 2 - MERGERS, ACQUISITIONS AND DIVESTITURES

COMPLETED MERGER:

On March 31, 1999, Wellmark Capital Value, Inc. (WCV) of Des Moines, Iowa was
acquired by the Company for $50,000. Additional cash payments of $174,000 were
contingent upon WCV's performance from acquisition through March 31, 2001. Based
on the attainment of performance targets in 2000 and 2001, the entire amount was
earned and paid. The transaction was accounted for as a purchase.

COMPLETED DIVESTITURES:

During 2001 AMCORE sold seven branches as part of its strategic objective to
invest in and reallocate capital to higher growth Midwestern markets. The
branches included Aledo, Gridley, Mount Morris, Ashton, Rochelle, Wyanet and
Sheffield. For the seven branches sold, $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 $10.6 million in pre-tax gains, net of associated
costs.

52

NOTE 3 - SECURITIES

A summary of securities at December 31, 2001, 2000, and 1999 were as follows:

53

Realized gross gains resulting from the sale of securities available for sale
were $2.5 million, $1.8 million and $1.3 million for 2001, 2000 and 1999,
respectively. Realized gross losses were $2.8 million, $3,000 and $736,000 for
2001, 2000 and 1999, respectively. An impairment loss of $1.8 million was
recorded during the second quarter of 2001 related to specific securities for
which a decision to sell had been made. All of these securities were disposed of
prior to year end 2001 and were included in the gross losses of $2.8 million.

The amortized cost and fair value of securities available for sale as of
December 31, 2001, by contractual maturity are shown below. Mortgage-backed
security maturities may differ from contractual maturities because the
underlying mortgages may be called or prepaid without any penalties. Therefore,
these securities are not included in the maturity categories in the following
maturity summary.

At December 31, 2001, 2000, and 1999, securities with a fair value of
approximately $846.0 million, $911.0 million and $906.4 million, respectively,
were pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes required by law.

NOTE 4 - LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of the loan and lease portfolio at December 31, 2001 and 2000
was as follows:

54

Non-performing loan information as of and for the years ended December 31, was
as follows:

- ---------------

(1) These loans are not considered impaired since they are part of a small
balance homogeneous portfolio.

An analysis of the allowance for loan and lease losses for the years ended
December 31, follows:

The Company's subsidiaries have had, and are expected to have in the future,
banking transactions with directors, executive officers, their immediate
families and affiliated companies in which they are a principal stockholder
(commonly referred to as related parties). These transactions were made in the
ordinary course of business on substantially the same terms as comparable
transactions with other borrowers.

Related party loan transactions during 2001 and 2000 were as follows:

55

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK

The fair value amounts have been estimated by the Company using available market
information and appropriate valuation methodologies as discussed below.
Considerable judgement was required, however, to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented below
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.

The following table shows the carrying amounts and fair values of financial
instruments at December 31, 2001 and 2000 that have liquid markets in which fair
value is assumed to be equal to the carrying amount, or have readily available
quoted market prices, or are based on quoted prices for similar financial
instruments:

The carrying amounts and fair values of accruing loans and leases at December
31, 2001 and 2000 were as follows:

Fair values of loans were estimated for portfolios with similar characteristics.
The fair value of loans was calculated by discounting contractual and prepayment
cash flows using estimated market discount rates which reflect the interest rate
risk inherent in the loan. The fair value of non-accrual loans with a recorded
book value of $26.8 million and $22.1 million in 2001 and 2000, respectively,
was not estimated because it was not practicable to reasonably assess the credit
risk adjustment that would be applied in the marketplace for such loans. (See
Note 4)

The carrying value of interest receivable and payable approximates fair value
due to the relatively short period of time between accrual and expected
realization. At December 31, 2001 and 2000, interest receivable was $23.2
million and $32.8 million, respectively, and interest payable was $19.4 million
and $31.8 million, respectively.

56

The following table shows the carrying amounts and fair values of financial
instrument liabilities at December 31, 2001 and 2000:

The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, savings, NOW and money market accounts, is equal to the
carrying amount in accordance with SFAS No. 107. There is, however, additional
value to the deposits of the Company, a significant portion of which has not
been recognized in the consolidated financial statements. This value results
from the cost savings of these core funding sources versus obtaining higher-rate
funding in the market. The fair value of time deposits was determined by
discounting contractual cash flows using currently offered rates for deposits
with similar remaining maturities. The estimated fair value of both accrued
interest receivable and accrued interest payable was considered to be equal to
the carrying value.

The fair value of derivatives was estimated based on the amount the Company
would pay or would be paid to terminate the contracts or agreements, using
current rates and, when appropriate, the current creditworthiness of the
counter-party. The carrying amounts of certain derivatives shown include accrued
net settlements and the unamortized balance of premiums or discounts.

The above fair value estimates were made at a discrete point in time based on
relevant market information and other assumptions about the financial
instruments. As no active market exists for a significant portion of the
Company's financial instruments, fair value estimates were based on judgements
regarding current economic conditions, future expected cash flows and loss
experience, risk characteristics and other factors. These estimates are
subjective in nature and involve uncertainties and therefore cannot be
calculated with precision. There may be inherent weaknesses in calculation
technique, and changes in the underlying assumptions used, including discount
rates and estimates of future cash flows could significantly affect the results.
In addition, the fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to assess the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Significant investments in subsidiaries,
specifically the trust and asset management and mortgage operations, are not
considered financial instruments and the franchise values have not been included
in the fair value estimates. Similarly, premises and equipment and intangible
assets have not been considered.

Many of the above financial instruments are also subject to credit risk. Credit
risk is the possibility that the Company will incur a loss due to the other
party's failure to perform under its contractual obligations. The Company's
exposure to credit loss in the event of non-performance by the other party with
regard to commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for actual extensions of credit. The credit risk involved for commitments
to extend credit and in issuing standby letters of credit is essentially the
same as that involved in extending loans to customers. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, securities, inventory, property and equipment
and income-producing commercial properties.

57

A summary of the contract amount of the Company's exposure to off-balance sheet
credit risk as of December 31, 2001 and 2000, is as follows:

Commitments to extend credit are contractual agreements entered into with
customers as long as there is no violation of any condition established on the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions.

The interest rate swap contracts involve the exchange of fixed for variable or
variable for fixed interest rate payments and are based on the notional amount
of the contract. The cap, collar and floor contracts are also based on the
notional amount of the contract. The collar, cap and floor contracts are
purchased at a premium, which is amortized over the lives of the contracts. The
notional amount of the swap, collar, cap and floor contracts only identify the
size of the contracts and are used to calculate the interest payment amounts.
The only credit risk exposure AMCORE has is in relation to the counter-parties
which all have investment grade credit ratings. All counter-parties are expected
to meet any outstanding interest payment obligations.

NOTE 6 - PREMISES AND EQUIPMENT

A summary of premises and equipment at December 31, 2001 and 2000 follows:

NOTE 7 - MORTGAGE SERVICING RIGHTS

The unpaid principal balance of mortgage loans serviced for others, which are
not included on the consolidated balance sheets, was $905.0 million and $842.7
million at December 31, 2001 and 2000, respectively. Of this amount, the Company
has recorded originated capitalized mortgage servicing rights, as shown below,
on mortgage loans serviced balances of $922.8 million and $758.4 million at
December 31, 2001 and 2000, respectively. The remaining balance of originated
loans sold and serviced for others also have servicing rights associated with
them; however, these servicing rights arose prior to the adoption of SFAS No.
122, as amended by SFAS No. 125, and accordingly, have not been capitalized.

The carrying value and fair value of capitalized mortgage servicing rights
consisted of the following as of December 31, 2001 and 2000, respectively.

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The following is a disclosure of the key assumptions used in estimating the fair
value of originated capitalized mortgage servicing rights.

Estimated fair market value of servicing is the present value of the expected
future cash flows over the projected life of the loan. Assumptions used in the
present value calculation are based on actual performance of the underlying
servicing along with general market consensus. The expected cash flow is the net
amount of all mortgage servicing income and expense items. The expected cash
flow is discounted at an interest rate appropriate for the associated risk given
current market conditions. Significant assumptions include:

Prepayment Speed (5 year average): 15.89%
Discount Rate: 10.73%
Servicing Cost per Loan: $44.00
Escrow Float Rate: 4.00%

The following is an analysis of the mortgage servicing rights activity and the
related valuation allowance for 2001 and 2000. For the purpose of measuring
impairment, loans are stratified and evaluated based on loan type and investor
as determined by materiality and reasonableness.

NOTE 8 - SALE OF RECEIVABLES

During 2001 and 2000, the Company sold $29.9 million and $100.3 million,
respectively, of indirect automobile loans in securitization transactions.
Pre-tax gains of $810,000 and $1.4 million were recognized in 2001 and 2000,
respectively, from these transactions. Upon securitization, the Company retained
Servicing Rights, Interest Only Strip and the Overcollateralization Asset. At
the date of each securitization, these retained interests were allocated a
carrying value of $8.1 million. The Company receives monthly servicing fees
equal to 0.75 percent per annum of the outstanding beginning principal balance
of the loans serviced for the month and rights to future cash flows arising
after the investors in the securitization trust have received the returns for
which they have contracted. The investors and the securitization trust have no
other recourse to the Company's other assets for failure of debtors to pay when
due. The Company's retained interests are subordinate to investor's interests.
The value of the Interest Only Strip is subject to prepayment risk and the value
of the Overcollateralization Asset is subject to credit risk on the transferred
auto loans.

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Key economic assumptions used in measuring the retained interests at the date of
the securitization and as of December 31, 2001 including the sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows:

These sensitivities are hypothetical and should be used with caution. Changes in
fair value based on a 10 percent variation should not be extrapolated because
the relationship of the change in assumption to the change in fair value may not
always be linear. Also, in this table, the effect of a variation in a particular
assumption on the fair value of the retained interests is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might magnify or
counteract the sensitivities.

Total cash flows attributable to the indirect auto loan securitization
transactions was an inflow of $30.4 million and $95.4 million for 2001 and 2000,
respectively. The following table summarizes the various cash flows received
from and paid to the securitization trust:

Other retained interests represents net cash flows received from retained
interests by the transferor other than servicing fees. Other cash flows include,
for example, gross cash flows from interest-only strips net of reductions in
such cash flows for loan defaults.

The following table presents quantitative information about delinquencies (loans
30 or more days past due plus non-accruals), net credit losses, and components
of securitized indirect auto loans and other assets managed together with them.
Loan amounts represent the principal amount of the loan only. Retained interests
held for securitized assets are excluded from this table because they are
recognized separately.

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Actual and projected static pool credit losses, as a percentage of indirect auto
loans securitized are 0.75%, 1.09% and 1.30% as of the years ended December 31,
2001, 2002 and 2003, respectively. Static pool losses are calculated by summing
the actual and projected future credit losses and dividing them by the original
balance of each pool of assets. The amount shown here for each year is a
weighted average for all securitizations during the period.

NOTE 9 - SHORT TERM BORROWINGS

At December 31, 2001, 2000 and 1999 short-term borrowings consisted of:

Additional details on securities sold under agreements to repurchase are as
follows:

The Company has a commercial paper agreement with an unrelated financial
institution (Issuer) that provides for the Company to issue non-rated short-term
unsecured debt obligations at negotiated rates and terms, not to exceed $50.0
million. In the event the agent is unable to place the Company's commercial
paper on a particular day, the proceeds are provided by overnight borrowings on
a line of credit with the same financial institution. This agreement may be
terminated at any time by written notice of either the Issuer or the Company. As
of December 31, 2001, $18.7 million was available.

NOTE 10 - LONG-TERM BORROWINGS

Long-term borrowings consisted of the following at December 31, 2001 and 2000:

The Company periodically borrows additional funds from the Federal Home Loan
Bank in connection with the purchase of mortgage-backed securities and the
financing of 1-4 family real estate loans. Certain Federal Home Loan Bank
borrowings have prepayment penalties and call features associated with them. The
average maturity of these borrowings at December 31, 2001 is 4.27 years, with a
weighted average borrowing rate of 5.31%.

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Reductions of Federal Home Loan Bank borrowings with call features, assuming
they are called at the earliest call date, are as follows:

The Company has $25.0 million of capital securities through AMCORE Capital Trust
I ("Trust"), a statutory business trust. All of the common securities of the
Trust are owned by the Company. The capital securities pay cumulative cash
distributions semiannually at an annual rate of 9.35%. The securities are
redeemable from March 25, 2007 until March 25, 2017 at a declining rate of
104.675% to 100.0% of the principal amount. After March 25, 2017, they are
redeemable at par until June 15, 2027 when redemption is mandatory. Prior
redemption is permitted under certain circumstances such as changes in tax or
regulatory capital rules. The proceeds of the capital securities were invested
by the Trust in junior subordinated debentures which represents all of the
assets of the Trust. The Company fully and unconditionally guarantees the
capital securities through the combined operation of the debentures and other
related documents. The Company's obligations under the guarantee are unsecured
and subordinate to senior and subordinated indebtedness of the company.

During the third quarter of 2001, AMCORE retired, at par, $15.0 million in
capital trust preferred securities with the coupon rate of 9.35 percent. This
early extinguishment of long-term borrowings resulted in an after tax
extraordinary charge of $204,000, or $0.01 per diluted share (the "Extraordinary
Charge"). The Extraordinary Charge was attributable to unamortized pro rata
issuance costs and broker fees.

Other long-term borrowings include a non-interest bearing note requiring annual
payments of $444,000 through 2002. The note was discounted at an interest rate
of 8.0%.

Scheduled reductions of long-term borrowings are as follows:

NOTE 11 - DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
Statement of Financial Accounting Standards No. 138, on January 1, 2001. This
Statement outlines accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities.

Under SFAS No. 133, all derivatives are recognized at fair value in the
Consolidated Balance Sheets. Changes in fair value for derivatives that are not
hedges are recognized in the Consolidated Statement of Income (Income Statement)
as they arise. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative are either offset in the
Income Statement or recorded as a component of other comprehensive income (OCI)
in the Consolidated Statement of Stockholders' Equity. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in the Income Statement. If the derivative is designated as a cash flow hedge,
changes in the fair value due to the passage of time (Time Value) are excluded
from the assessment of hedge effectiveness and therefore flow through the Income

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Statement for each period. The effective portion of the remaining changes in the
fair value of the derivative (Intrinsic Value) are recorded in OCI and are
subsequently recognized in the Income Statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in the Income Statement. Hedge ineffectiveness is caused when the
change in expected future cash flows of a hedged item does not exactly offset
the change in the future expected cash flows of the derivative instrument, and
is generally due to differences in the interest rate indices or interest rate
reset dates.

The Company implemented SFAS No. 133 on January 1, 2001, and, as such, the
impact of the transition to this standard on the Company's earnings and
financial position was dependent on the composition of the hedging portfolio at
that date. The after-tax transition adjustment due to the adoption of SFAS No.
133 resulted in an increase in consolidated assets of $2.1 million, an increase
in consolidated liabilities of $3.4 million, a reduction in OCI of $1.5 million,
and an increase in net income of $225,000. The increase in net income is mostly
attributable to the $353,000 favorable Time Value component of the market value
of the cash flow hedges. As part of the adoption of this standard, $10.7 million
of held to maturity securities were reclassified to available for sale
securities and resulted in an unrealized loss of $15,000 recorded in OCI.

In addition to the transition adjustment, the Income Statement for the twelve
months ended December 31, 2001 included the following derivative related
activity in other non-interest income: $303,000 loss due to the decrease in the
Time Value component of the market value of cash flow hedges, $29,000 loss
related to the ineffective portion of the cash flow hedges, $48,000 income
related to Mortgage Loan Derivatives (net of the corresponding mark-to-market
adjustment on hedged mortgage loans held for sale), and $9,000 income related to
the S & P 500 embedded derivative. These items, net of taxes of $107,000, total
a $168,000 loss recorded for the twelve months ended December 31, 2001.

Reclassification from OCI to the Income Statement occurs each period as
continuing cash flow payments bring the Intrinsic Value component of the market
value of each cash flow hedge closer to zero. Reclassifications may also occur,
as yield adjustments in the same period the hedged items affect earnings, in the
event cash flow hedges no longer meet the requirements to qualify for hedge
accounting. Of the net derivative losses included in OCI, $3.4 million pre-tax
was reclassified to the Income Statement as additional interest expense during
the twelve months ended December 31, 2001, mostly through the normal postings of
cash receipts and cash payments related to the derivatives and the hedged items.

NOTE 12 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the BANK to the Company and its affiliates.
The total amount of dividends which may be paid at any date is generally limited
to the retained earnings of the BANK. Loans or advances to the Company and for
each affiliate are limited to 10 percent of the BANK's capital stock and
surplus, but for no more than 20 percent in aggregate. Loans and advances must
be made on a secured basis.

At December 31, 2001, the BANK's retained earnings available for the payment of
dividends without prior regulatory approval was $14.9 million. The amount
available for loans or advances by the BANK to the Company and its affiliates
amounted to $20.9 million.

In addition, dividends paid by the BANK to the Company would be prohibited if
the effect thereof would cause the BANK's capital to be reduced below applicable
minimum capital requirements.

NOTE 13 - STOCK INCENTIVE AND EMPLOYEE BENEFIT PLANS

At December 31, 2001, the Company has stock-based compensation plans as
described below. Grants under those plans are accounted for following APB
Opinion No. 25 and related interpretations.

STOCK INCENTIVE PLANS. In 2000, stockholders approved the adoption of the AFI
2000 Stock Incentive Plan (Plan). The Plan provides for the grant of stock
options, reload options, stock appreciation rights, performance units,
restricted stock awards and stock bonus awards to key employees. The total
number of shares approved and available for grant under the Plan in its first
year were 2.5% of the total shares of stock outstanding as of the effective
date, with an 1.5% of outstanding shares in each subsequent Plan year (not to
exceed 425,000 in any such year). Options to purchase shares of common stock of
the Company and restricted stock awards were granted to key employees pursuant
to both the Plan and previous stock incentive plans.
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Stock Options. Non-Qualified Stock Options are issued at an option price equal
to the fair market value of the shares on the grant date and become exercisable
at 25% annually beginning one year from the date of grant. The following table
presents certain information with respect to stock options issued pursuant to
these incentive plans.

In 1998, Investors Management Group (IMG) was acquired by the Company. The above
line item "Options issued pursuant to IMG earnout" was contingent based upon
IMG's performance from 1998 through 2000.

Performance Units. Performance Units (Units) granted entitle holders to cash or
stock payments if certain long term return on equity performance targets are
met. The payout range on all Units granted is $4.45 to $11.11 per unit. In
addition, a dividend is paid on each Unit at a rate equivalent to the rate of
dividends paid on each share of the Company's common stock. The expense related
to these Units for the years ended December 31, 2001, 2000 and 1999 was
approximately $154,000, $666,000 and $1.12 million, respectively. The following
table presents certain information with respect to issuances pursuant to these
incentive plans.

Restricted Stock Awards. Pursuant to the Plan, The Company issued common stock
to certain key employees. The shares are restricted as to transfer, but are not
restricted as to dividend payment and voting rights. Transfer restrictions lapse
at the end of three years contingent upon earnings and return on equity
performance goals being met for each of the three years and contingent upon
continued employment. If performance goals are not met, the restrictions lapse
or vest in nine years. The Company amortizes the expense over the performance
period or, if the goals are not met, the vesting period. The expense related to
these awards for the years ended December 31, 2001 and 2000 was approximately
$222,000 and $61,000, respectively. The following table presents certain
information with respect to restricted stock awards granted pursuant to these
incentive plans.

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The following table presents a summary of issuances pursuant to these incentive
plans.

In accordance with APB Opinion No. 25, no compensation cost has been recognized
for stock option grants issued during 2001 pursuant to all option plans. Had
compensation cost for these grants been determined based on the grant date fair
values of awards (the method described in SFAS No. 123, "Accounting for
Stock-Based Compensation"), reported net income and earnings per common share
would have been reduced to the pro forma amounts shown below:

The fair value of each option grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 2001, 2000 and 1999, respectively: dividend rates of
2.86%, 3.09% and 2.33%, price volatility of 33.86%, 38.10% and 25.81%; risk-free
interest rates of 5.24%, 6.79% and 5.77%; and expected lives of 6.1, 6.1 and 6.5
years. The average fair value of each option was $6.37.

DIRECTORS' STOCK PLANS. The Restricted Stock Plan for Non-Employee Directors
provides that each current eligible non-employee director and each subsequently
elected non-employee director receive, in lieu of a cash retainer, shares of
common stock of the Company, the fair value of which is equal to three times the
annual retainer. The shares vest annually over a three-year period based upon
the anniversary date of the original award and continued service as a director.
The expense related to the Stock Plan for the years ended December 31, 2001,
2000 and 1999 was approximately $355,000, $463,000 and $494,000, respectively.

In addition, the Company pays a lifetime annual retainer to certain retired
directors. Effective January 1, 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" to
account for these benefits. This statement requires employers to recognize
postretirement benefits on an accrual basis rather than on a cash basis. The
expense in 2001, 2000 and 1999 related to this plan was $59,000, $71,000 and
$77,000, respectively. The transition obligation, representing the present value
of future payments upon adoption of accrual basis accounting was approximately
$842,000 and is being amortized over a twenty year period.

In 2001, stockholders approved the adoption of the AFI 2001 Stock Option Plan
for Non-Employee Directors (Option Plan). The Option Plan provides that each
current eligible non-employee director and each subsequently elected non-
employee director receive Options to purchase common stock of the Company. Each
option granted under the Option Plan is issued with an option price equal to the
fair market value of the shares on the grant date and has a ten-year

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term. Options granted are exercisable one year after date of grant. The
following table presents certain information with respect to stock options
issued pursuant to the Option Plan and previous stock incentive plans.

OPTIONS SUMMARY. The following table presents certain information as of December
31, 2001 with respect to issuances of stock options pursuant to all plans
discussed above.

EMPLOYEE STOCK PURCHASE PLAN. In 1999, stockholders approved the adoption of the
AMCORE Stock Option Advantage Plan through which eligible employees may purchase
from the Company shares of its common stock. The Company intends that the plan
be an "employee stock purchase plan" ("ESPP") within the meaning of Section 423
of the Internal Revenue Code of 1986. The Company has reserved 250,000 shares of
common stock for issuance under the ESPP.

The Company's employee stock purchase plan is intended to give employees a
convenient means of purchasing shares of common stock through payroll
deductions. Each employee of the Company whose customary employment with the
Company is more than 20 hours per week and more than five months in any calendar
year, is eligible to participate, subject to IRS contribution limitations. Each
participating employee's contributions are used to purchase the Corporation's
common stock on the last day of each quarter at the exercise price. The exercise
price is 85% of the lower of the closing price of the Company's common stock on
the Nasdaq National Market on the first or last day of each offering period. No
charge to earnings is recorded with respect to the ESPP.

The shares issued pursuant to the ESPP were as follows: 39,394 shares at prices
ranging from $14.45 to $19.00 in 2001; 51,630 shares at prices ranging from
$14.45 to $17.11 in 2000; and 55,076 shares at prices ranging from $17.11 to
$19.07 in 1999.

Shares issued pursuant to the ESPP are prohibited from sale by a participant
until two years after the date of purchase. Dividends earned are credited to a
participant's account and used to purchase shares at the next purchase date. The
Company shall have the option to purchase all, or any portion of, the shares
owned by such participant that, at the time of termination, are subject to the
restriction on transfer.

EMPLOYEE BENEFIT PLANS. All subsidiaries of the Company participate in the
AMCORE Financial Security Plan (Security Plan), a qualified profit sharing plan
under Section 401(a) of the Internal Revenue Code. The Security Plan offers
participants a personal retirement account, profit sharing payment and personal
savings account 401(k). In 1998,

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the Security Plan was amended to provide for a higher match percent to employee
contributions and the profit sharing portion converted to a cash payment rather
than contributed to employee accounts. The expense related to the Security Plan
and other similar plans from acquired companies for the years ended December 31,
2001, 2000 and 1999 was approximately $3.79 million, $3.36 million and $3.70
million, respectively.

The Company provides additional retirement benefits to certain key executives
through plans that are non-qualified, non-contributory and unfunded.

Under one such arrangement, the additional retirement benefits replace what
would have been provided under the qualified plans in the absence of limits
placed on qualified plan benefits by the Internal Revenue Code of 1986. The
expense related to this arrangement was approximately $441,000, $289,000 and
$341,000 for 2001, 2000 and 1999, respectively.

Another arrangement provides supplemental retirement benefits that are based
upon three percent of final base salary, times the number of years of service.
Benefits under this plan may not exceed 70% or be less than 45% of a
participant's final base salary less offsets for social security benefits and
other employer sponsored retirement plans. The expense related to this
arrangement was approximately $103,000, $90,000 and $301,000 for 2001, 2000 and
1999, respectively. The balance of the liability at December 31, 2001 and 2000
was approximately $671,000 and $569,000, respectively.

In addition to the Security Plan, certain health care and life insurance
benefits are made available to active employees. The Company's share of cost of
these benefits is expensed as incurred. Group health benefits are offered to
retirees with 100% of the cost borne by the retiree.

The Company provides a deferred compensation plan (entitled "AMCORE Financial,
Inc. Deferred Compensation Plan") for senior officers. This plan provides the
opportunity to defer salary and bonuses.

NOTE 14 - INCOME TAXES

The components of income tax expense were as follows:

The effective tax rates, which for 2001 includes $130,000 of tax benefit and
$144,000 of tax expense for the Extraordinary Item and the Accounting Change,
respectively, were 25.4%, 27.5%, and 27.3% in 2001, 2000, and 1999,

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respectively. Income tax expense was less than the amounts computed by applying
the federal statutory rate of 35% due to the following:

The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

Net operating loss carryforwards for state income tax purposes were
approximately $4.66 million at December 31, 2001. The associated deferred asset
is $368,000 ($239,000 net of federal). The carryforwards expire beginning
December 31, 2009 through December 31, 2014. A valuation allowance of $239,000
has been established at December 31, 2001 against the deferred tax asset, due to
the uncertainty surrounding the utilization of state net operating loss
carryforwards. This compares to a valuation allowance of $398,000 as of December
31, 2000. The decrease in the valuation allowance is attributable to utilization
of loss carryforwards in 2001.

Realization of the deferred tax asset over time is dependent upon the existence
of taxable income in carryback periods or the Company generating sufficient
taxable earnings in future periods. In determining that realization of the
deferred tax asset was more likely than not, the Company gave consideration to a
number of factors including its taxable income during carryback periods, its
recent earnings history, its expectations for earnings in the future, and, where
applicable, the expiration dates associated with tax carryforwards.

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Retained earnings at December 31, 2001 includes $3.18 million for which no
provision for income tax has been made. This amount represents allocations of
income to thrift bad debt deductions for tax purposes only. This amount will
only be taxable upon the occurrence of certain events. At this time, management
does not foresee the occurrence of any of these events.

Tax benefits of $1.21 million, $320,000, and $1.74 million have been credited
directly to paid in capital, with a corresponding decrease in the liability for
current income taxes payable, for non-qualified stock options exercised during
the years ended December 31, 2001, 2000, and 1999, respectively.

NOTE 15 - EARNINGS PER SHARE

Earnings per share calculations are as follows:

NOTE 16 - RESTRUCTURING CHARGE

The components of the 1999 restructuring charge as shown below had a balance of
zero at December 31, 2000 and, therefore, there was no activity during 2001. The
activity during the years ended December 31, 2000 and 1999 were as follows:

- ---------------

(1) Items related to restructuring that were expensed as incurred and were not
included in the original restructuring charge.

(2) Reversal of items included in the original charge that are no longer
expected to be paid.

(3) Amounts include severance benefits for planned staff reductions totaling 187
employees. Through December 31, 2000, 96 employees had been terminated and
paid severance benefits. An additional 91 employees had transferred to other
open positions due to attrition, or had voluntarily left the company prior
to the time severance benefits became payable. As of December 31, 2000,
there were no further staff reductions planned.

(4) Amounts represent social security and medicare taxes on severance and
incentives.

(5) Amounts represent costs to convert data processing records of nine separate
banks into one.

(6) Amounts represent legal fees for regulatory filings and advice as well as
consulting fees for process review, systems redesign and implementation.

(7) Amounts include outplacement services for terminated employees; replacement
of forms, checks, supplies; and customer notifications.

(8) Second quarter 1999 adoption of plan to merge nine separate bank and thrift
charters into one and to centralize retail operations and corporate support
functions.

(9) Fourth quarter 1999 adoption of plan to centralize commercial loan
operations and restructure Trust and Asset Management segment operations.

NOTE 17 - SEGMENT INFORMATION

The Company's operations include three reportable business segments: Banking,
Trust and Asset Management, and Mortgage Banking. The Banking segment provides
commercial and retail banking services through its 62 banking locations in
northern Illinois and south-central Wisconsin, and the FINANCE subsidiary. The
services provided by this segment include lending, deposits, cash management,
safe deposit box rental, automated teller machines, and other traditional
banking services. The Trust and Asset Management segment provides trust,
investment management, employee benefit recordkeeping and administration, and
brokerage services. It also acts as an advisor and provides fund administration
to the Vintage Mutual Funds. These products are distributed nationally and
regionally to institutional investors and corporations, and locally through
AMCORE's banking locations. The Mortgage Banking segment originates residential
mortgage loans for sale to AMCORE's banking affiliate and the secondary market,
as well as providing servicing of these mortgage loans.

The Company's three reportable segments are strategic business units that are
separately managed as they offer different products and services. The Company
evaluates financial performance based on several factors, of which the primary
financial measure is segment profit before remittances to the banking
affiliates. The accounting policies of the three segments are the same as those
described in the summary of significant accounting policies (Note 1). The
Company accounts for intersegment revenue, expenses and transfers at current
market prices.

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NOTE 18 - CAPITAL REQUIREMENTS

The Company and the BANK (Regulated Companies) are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Regulated Companies must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Their capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Regulated Companies to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital to risk-weighted assets,
and of Tier I Capital to average assets. Tier 1 Capital includes common
stockholders' equity, qualifying preferred stock and trust preferred securities,
less goodwill and certain other deductions (including the unrealized net gains
and losses, after applicable taxes, on available-for-sale securities carried at
fair value). Total Capital includes Tier 1 Capital plus preferred stock not
qualifying as Tier 1 Capital, mandatory convertible debt, subordinated debt,
certain unsecured senior debt issued by the Company, the allowance for loan
losses and net unrealized gains on marketable equity securities, subject to
limitations by the guidelines.

As of December 31, 2001, the most recent notification from the Company's
regulators categorized the BANK as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized a
bank must maintain minimum total risk-based, Tier I risk based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the BANK's
category.

Management believes, as of December 31, 2001, that the Regulated Companies meet
all capital adequacy requirements to which it is subject. The Company's and the
BANK's actual capital amounts and ratios are presented in the table.

* Greater than or equal to

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NOTE 19 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

CONDENSED PARENT COMPANY BALANCE SHEETS

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CONDENSED PARENT COMPANY STATEMENTS OF INCOME

74

CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS

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NOTE 20 -- CONTINGENCIES

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

On August 26, 1999, Willie Parker and five other plaintiffs filed a civil action
in the Circuit Court of Humphreys County, Mississippi against AMCORE Consumer
Finance Company, Inc., a subsidiary of the Company and other defendants
containing twelve separate counts related to the sale and financing of
residential satellite dish systems. Though the actual purchase price for each of
these systems involves a principal amount of less than $3,000, the complaint
prays for economic loss and compensatory damages in the amount of $5 million for
each plaintiff and punitive damages in the amount of $100 million for each
plaintiff. The Company has denied the plaintiffs' allegations and removed the
case to the United States District Court for the Northern District of
Mississippi. Plaintiffs' filed a motion seeking to remand the case back to state
court.

During the second quarter of 2001, the Company made a settlement offer to
Plaintiff's counsel. The Company recorded an accrual reflecting the amount
offered. There were no other developments during the quarter. Subsequent to the
end of the second quarter of 2001, the Company was notified of several
developments. First, the federal district court ordered the case to be sent to
the federal bankruptcy court to determine if it wants to pursue this case as an
asset of one of the plaintiffs who previously filed for bankruptcy relief and to
remand the case back to state court if the federal bankruptcy court did not keep
jurisdiction. The Company filed a motion to reconsider this order as the federal
district court failed to address the issue of diversity of the parties. Second,
plaintiffs' attorneys have rejected the Company's settlement offer. In addition,
they have notified the Company's counsel that they have identified 17 more
individuals with potential claims similar to those of the named Plaintiffs'. No
suits have yet been filed on their behalf. Company's counsel is currently
investigating these allegations and analyzing whether new suits may be barred by
the Mississippi statute of limitations. Plaintiff's counsel has made a counter
offer to settle the suits which Company has rejected. Settlement talks are
currently on hold pending the courts determination to reconsider its decision.

Although the ultimate disposition of the cases cannot be predicted with
certainty, based on information currently available, the Company believes that
the plaintiffs' damage claims are disproportionate and that the final outcome of
the cases will not have a material adverse effect on the Company's consolidated
financial condition, though it could have a material adverse affect on the
Company's consolidated results of operations in a given year. The Company has
not adjusted its accrual for payment of the damages in these cases because, in
management's opinion, an unfavorable outcome in this litigation beyond the
accrual is not probable.

76

CONDENSED QUARTERLY EARNINGS & STOCK PRICE SUMMARY (UNAUDITED)

The financial information contains all normal and recurring reclassifications
for a fair and consistent presentation.

Quotes have been obtained from the National Association of Security Dealers.
These quotes do not reflect retail mark-ups, mark-downs or commissions nor are
they necessarily representative of actual transactions.

77

Independent Auditors' Report

The Board of Directors
AMCORE Financial, Inc.:

We have audited the accompanying consolidated balance sheets of AMCORE
Financial, Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AMCORE Financial,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 11 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.

[/s/ KPMG LLP]

Chicago, Illinois
January 22, 2002

78

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors of the Registrant. The Proxy Statement and Notice of 2002 Annual
Meeting dated March 18, 2002 is incorporated herein by reference.

(b) Executive Officers of the Registrant. The information is presented in Item
1 of this document.

ITEM 11. EXECUTIVE COMPENSATION

The Proxy Statement and Notice of 2002 Annual Meeting dated March 18, 2002 is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Proxy Statement and Notice of 2002 Annual Meeting dated March 18, 2002 is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Proxy Statement and Notice of 2002 Annual Meeting dated March 18, 2002 is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1. FINANCIAL STATEMENTS

The following Consolidated Financial Statements of AMCORE are filed as a part of
this document under Item 8. Financial Statements and Supplementary Data.

Consolidated Balance Sheets - December 31, 2001 and 2000

Consolidated Statements of Income for the years ended December 31, 2001,
2000 and 1999

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999

Notes to Consolidated Financial Statements

Independent Auditors' Report

(a)2. FINANCIAL STATEMENT SCHEDULES

All financial statement schedules have been included in the consolidated
financial statements or are either not applicable or not significant.

(a)3. EXHIBITS

3 Amended and Restated Articles of Incorporation of AMCORE
Financial, Inc. dated May 1, 1990 (Incorporated by
reference to Exhibit 23 of AMCORE's Annual Report on Form
10-K for the year ended December 31, 1989).
3.1 By-laws of AMCORE Financial, Inc. as amended December 7,
2001.
4.1 Rights Agreement dated February 16, 2001, between AMCORE
Financial, Inc. and Wells Fargo Bank Minnesota, N.A.
(Incorporated by reference to AMCORE's Form 8-K as filed
with the Commission on February 27, 2001).

79

4.2 Indenture, dated as of March 25, 1997, between the Company
and The First National Bank of Chicago (Incorporated
herein by reference to Exhibit 4.1 of the Company's
registration statement on Form S-4, Registration No.
333-25375 as filed with the Commission on April 17,
1997)).
4.3 Form of New Guarantee between the Company and The First
National Bank of Chicago (Incorporated herein by reference
to Exhibit 4.7 of the Company's registration statement on
Form S-4, Registration No. 333-25375 as filed with the
Commission on April 17, 1997)).
10.1 AMCORE Stock Option Advantage Plan (Incorporated by
reference to AMCORE's Proxy Statement, Appendix A, filed
as Exhibit 22 to AMCORE's Annual Report on Form 10-K for
year ended December 31, 1998).
10.2 AMCORE Financial, Inc. 2000 Stock Incentive Plan
(Incorporated by reference to AMCORE's Proxy Statement,
Appendix A, filed as Exhibit 22 to AMCORE's Annual Report
on Form 10-K for year ended December 31, 1999).
10.3 AMCORE Financial, Inc. 2001 Stock Option Plan for
Non-Employee Directors (Incorporated by reference to
AMCORE's Proxy Statement, Appendix A, filed as Exhibit 22
to AMCORE's Annual Report on Form 10-K for year ended
December 31, 2000).
10.4A Transitional Compensation Agreement dated May 1, 1999
between AMCORE Financial, Inc. and Gregory Sprawka
(Incorporated by reference to Exhibit 10.1 of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.)
10.4B Transitional Compensation Agreement dated February 22, 2000
between AMCORE Financial, Inc. and James M. Hansberry
(Incorporated by reference to Exhibit 10.4G of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.4C Transitional Compensation Agreement dated March 6, 2000
between AMCORE Financial, Inc. and Patricia M. Bonavia
(Incorporated by reference to Exhibit 10.4H of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.4D Amended and Restated Transitional Compensation Agreement
dated December 18, 2001 between AMCORE Financial, Inc. and
the following individuals: Robert J. Meuleman, Kenneth E.
Edge, John R. Hecht and James S. Waddell.
10.4E Amended and Restated Transitional Compensation Agreement
dated December 18, 2001 between AMCORE Financial, Inc. and
the following individuals: David W. Miles, Joseph B.
McGougan and Bruce W. Lammers.
10.5 Executive Insurance Agreement dated March 1, 1996 between
AFI and Robert J. Meuleman (Incorporated by reference to
Exhibit 10.6 of AMCORE's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996).
10.6 Executive Insurance Agreement dated August 10, 1998 between
AMCORE Financial, Inc. and the following executives:
Kenneth E. Edge, John R. Hecht, and James S. Waddell
(Incorporated by reference to Exhibit 10.10 of AMCORE's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.)
10.7 Supplemental Executive Retirement Plan dated May 20, 1998
(Incorporated by reference to Exhibit 10.9 of AMCORE's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.8 Loan Agreement (as amended) with M & I Marshall and Ilsley
Bank dated April 30, 2001 (Incorporated by reference to
Exhibit 10 of AMCORE's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001.)
10.9 AMCORE Financial, Inc. Supplemental Incentive Plan effective
July 1, 2001 (Incorporated by reference to Exhibit 10 of
AMCORE's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.)
13 2001 Summary Annual Report to Stockholders
21 Subsidiaries of the Registrant
22 Proxy Statement and Notice of 2002 Annual Meeting

80

23 Consent of KPMG LLP
24 Powers of Attorney

- ---------------
(b) No reports on Form 8-K were filed during the fourth quarter of 2001.

81

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Rockford, State of
Illinois, on this 18th day of March, 2002.

AMCORE FINANCIAL, INC.

By: [/s/ John R. Hecht]
-----------------------------------------
John R. Hecht
Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below on the 18th day of March, 2002 by the following persons on behalf
of the Registrant in the capacities indicated.

Directors: Paula A. Bauer, Karen L. Branding, Milton R. Brown, Paul Donovan,
Kenneth E. Edge, Lawrence E. Gloyd, John A. Halbrook, Frederick D. Hay, William
R. McManaman, Robert J. Meuleman, Jack D. Ward and Gary L. Watson

[/s/ Robert J. Mueleman]
- ------------------------------------------------
Robert J. Meuleman*

[/s/ John R. Hecht]
- ------------------------------------------------
John R. Hecht*

Attorney in Fact*