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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 0–13393

AMCORE FINANCIAL, INC.

501 Seventh Street, Rockford, Illinois 61104

Telephone Number (815) 968–2241

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

Common Stock, $0.22 par value

Common Stock Purchase Rights

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

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

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

As of February 1, 2005, 24,801,000 shares of common stock were outstanding. The aggregate market value of the common equity held by non-affiliates, computed by reference to the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $660,853,000.

Documents Incorporated by Reference:

Portions of the Proxy Statement and Notice of 2005 Annual Meeting, dated March 14, 2005, are incorporated by reference into Part III of the Form 10-K for the fiscal year ended December 31, 2004.

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

AMCORE provides free of charge, through the Company’s Internet site at www.AMCORE.com/SEC, access to annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (SEC). However, the information found on AMCORE’s website is not part of this or any other report. The Company has adopted a code of ethics applicable to all employees. The AMCORE Financial, Inc. Code of Ethics is posted on the Company’s website at www.AMCORE.com/governance. The Company intends that this website posting and future postings of amendments, waivers or modifications of the Code of Ethics shall contain all required disclosures, however, a Form 8-K will be filed for amendments and waivers in order to meet the more stringent NASDAQ rules.

Banking Segments

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

Geographic and Economic Information – The BANK conducts business at 69 locations throughout northern Illinois and south central Wisconsin (the “Service Areas”). The Banking segments’ Service Area is dispersed among five basic economic areas: the Rockford, Illinois metropolitan area (Rockford), the Madison, Wisconsin metropolitan area (Madison), the Chicago, Illinois suburbs (Chicagoland), the Milwaukee, Wisconsin suburbs (Milwaukee) and community banking branches which are not otherwise specified (Community Banking). Locations in the Chicagoland, Rockford, Madison and Milwaukee economic areas are bounded by Interstates 94 in the north, 294 and 94 in the east, 80 in the south and 90 and 39 in the west where population growth, homeownership and household income are high and where there is a high concentration of mid-sized businesses. The Company’s recent growth strategy has focused on expansion within this area. At the same time, AMCORE exited certain Community Banking markets that no longer fit its growth objectives. For additional information see the “Branch Strategy” discussion under Item 7, Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.

Among the five economic areas, Rockford has the highest concentration of manufacturing activities. Community Banking, on the other hand, has less growth potential and a greater concentration of smaller-sized business and agricultural concentrations. At the end of 2004, economic conditions for Madison were characterized as strong with low unemployment. For Chicagoland, economic conditions were stable with strong development activity and loan growth. For Rockford, economic conditions were characterized as improving with declining unemployment rates. Economic conditions for the Community Banking Areas were stable with declining unemployment rates.

The BANK has 48 locations throughout northern Illinois, excluding the far northwestern counties, including the Illinois cities of Rockford, Algonquin, Elgin, Carpentersville, Carol Stream, Crystal Lake, Des Plaines, Gurnee, Lake Zurich, Lincolnshire, McHenry, Morton Grove, Naperville, Schaumburg, Oak Brook, Aurora, St. Charles,

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Woodstock, Dixon, Freeport, Mendota, Peru, Princeton, Sterling and the surrounding communities. The BANK conducts business at 21 locations throughout south central Wisconsin, including the Wisconsin cities of Madison, Monroe, Baraboo, Portage, Mt. Horeb, Waukesha 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 four supermarket branches, which gives the customer convenient access to bank services seven days a week.

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

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

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

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

Mortgage and home equity lending have the lowest risk profile due to the nature of the collateral. Installment loans have an intermediate risk due to the lower principal amounts and the depreciating nature of the collateral. Personal lines and overdraft have the highest degree of risk since the loans are unsecured. The bankcard programs are a fee service for originating the relationship and no credit risk is retained by the BANK. The BANK manages its retail lending risk via a centralized credit process, risk scoring, loan-to-value and other

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underwriting standards and knowledge of its customers and their credit history. As a general rule, the BANK does not actively engage in retail lending activities outside its geographic market areas.

The Vintage Mutual Funds, a proprietary family of mutual funds, are also marketed through most banking locations. The Private Banking Group also markets Vintage Mutual Funds and meets other special needs of high net worth individuals.

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

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

The BANK is a lender in the Small Business Administration (SBA) program, with a total loan portfolio of $52.6 million as of December 31, 2004, and has earned Preferred Lender Status from the SBA in both Illinois and Wisconsin. This year the Company also achieved Express Lender status, a national designation which significantly shortens the turnaround from application to loan acceptance. SBA loans are popular with small business customers offering them another source of financing.

Mortgage Banking Segment – While AMCORE Mortgage, Inc. merged into AMCORE Bank, N.A. effective January 1, 2003, it continues as a reportable segment. The mortgage banking segment is a full service operation providing a broad spectrum of mortgage products to meet its customer needs. Residential mortgage loans are originated, of which non-conforming adjustable rate, fixed-rate, jumbo and balloon mortgages are normally placed in the BANK’s real estate portfolio. The conforming adjustable rate, fixed-rate and balloon residential mortgage loans are normally sold in the secondary market. The mortgage banking segment services most of the loans that are sold. See Note 18 of the Notes to Consolidated Financial Statements included under Item 8 of this document for further information on AMCORE’s business segments.

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

The BANK also offers several electronic banking services to commercial and retail customers. AMCORE Online provides retail customers with online capability to access deposit and loan account balances, transfer funds between accounts, make loan payments, view checks 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 and retail mortgage loans; all from a completely automated system. Automated teller machines located throughout AMCORE’s market area make banking transactions available to customers when the bank facilities or hours are not convenient. Through Vintage Mutual Funds WebAccess or via telephone, shareholders can access all of their accounts and purchase, redeem or exchange shares.

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Trust and Asset Management Segment

AMCORE also owns AMCORE Investment Group, N.A. (AIG), a nationally chartered non-depository bank. AIG owns AMCORE Investment Services, Inc. (AIS) and Investors Management Group, Ltd. (IMG). AIG provides trust services, employee benefit plan and estate administration and various other services to corporations and individuals.

AIS, a wholly–owned subsidiary of AIG, is incorporated under the laws of the State of Illinois and is a member of the National Association of Security Dealers (NASD). AIS is a full–service brokerage company that offers a full range of investment alternatives including annuities, mutual funds, stocks, bonds, and other insurance products. 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 a Registered Investment Advisor under the Investment Company Act of 1940 and is an asset management company whose primary customers include trust customers, retirement plans, foundations, endowments, private investors, Vintage Mutual Funds family, insurance companies, banks, public entities and individuals. IMG also provides the mutual fund administration for the Vintage Mutual Funds.

Competition

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

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

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

Employment

AMCORE had 1,547 full–time equivalent employees as of February 1, 2005. AMCORE provides a variety of benefit plans to its employees including health, dental, group term life and disability insurance, childcare reimbursement, flexible spending accounts, retirement, profit sharing, 401(k), stock option, stock purchase and dividend reinvestment plans.

Supervision and Regulation

AMCORE is subject to regulations under the Bank Holding Company Act of 1956, as amended (the Act), and is registered with the Federal Reserve Board (FRB) under the Act. AMCORE is required by the Act to file quarterly

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and annual reports of its operations and such additional information as the FRB may require and is subject, along with its subsidiaries, to examination by the FRB.

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

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

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

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

In late 1992, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1992 that included many provisions that have had significant effects on the cost structure and operational and managerial standards of commercial banks. In addition to provisions for recapitalization of the Bank Insurance Fund, this Act contains provisions that revised bank supervision and regulation, including, among many other things, the monitoring of capital levels, additional management reporting and external audit requirements, and the addition of 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. To date, the GLB Act has not materially affected the Company’s operations. 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

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a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves.

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

AMCORE is supervised and examined by the FRB. The BANK 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 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, 2004, approximately $66.8 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, 2004, the maximum amount available to AMCORE and its affiliates in the form of loans approximated $26.5 million. There were no loans outstanding from the BANK to affiliates at December 31, 2004. See Note 19 of the Notes to Consolidated Financial Statements.

The FRB issues risk–based capital guidelines for bank holding companies. These capital rules require minimum capital levels as a percent of risk–weighted assets. In order to be adequately capitalized under these guidelines, banking organizations must have minimum capital ratios of 4% and 8% for Tier 1 capital and total capital, respectively. The FRB also established leverage capital requirements intended primarily to establish minimum capital requirements for those banking organizations that have historically invested a significant portion of their funds in low risk assets. Federally supervised banks are required to maintain a minimum leverage ratio of not less than 4%. Refer to the Liquidity and Capital Management section of Item 7 for a summary of AMCORE’s capital ratios as of December 31, 2004 and 2003. See also Note 20 of the Notes to Consolidated Financial Statements.

Governmental Monetary Policies and Economic Conditions

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

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

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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.

ITEM 2.    PROPERTIES

On December 31, 2004, AMCORE had 82 locations, of which 54 were owned and 28 were leased. The Commercial, Retail and Mortgage Banking segments had 80 locations, of which 54 were owned and 26 were leased. The Trust and Asset Management segment had two leased facilities. All of these offices are considered by management to be well maintained and adequate for the purpose intended. See Item 1 and Note 5 of the Notes to Consolidated Financial Statements included under Item 8 of this document for further information on properties. In addition, AMCORE had 169 ATM machine locations that were available without fee to AMCORE customers.

ITEM 3.    LEGAL PROCEEDINGS

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

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No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

See Items 6 and 8 of this document for information on the Company’s stock price ranges and dividends. AMCORE’s common stock trades on the NASDAQ National Market System under the symbol “AMFI.” There were approximately 8,200 holders of record of AMCORE’s common stock as of March 1, 2005. See Item 12 of this document for information on the Company’s equity compensation plans.

The Company’s policy is to declare regular quarterly dividends based upon the Company’s earnings, financial position, capital requirements and such other factors deemed relevant by the Board of Directors. This dividend policy is subject to change, however, and the payment of dividends by the Company is necessarily dependent upon the availability of earnings and the Company’s expected financial condition in the future. The payment of dividends on the Common Stock is also subject to regulatory capital requirements. For further information on quarterly dividend payments, see the Condensed Quarterly Earnings and Stock Price Summary at the end of Item 8.

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

The following table presents information relating to all Company repurchases of common stock during the fourth quarter of 2004:

Issuer Purchases of Equity Securities

The Company does not have a formally announced Repurchase Program in place at this time, however, the Company does repurchase shares in open-market transactions in accordance with Exchange Act Rule 10b-18 through a limited group of brokers. These repurchases are used to replenish the Company’s Treasury Stock for re-issuances related to stock options and other employee benefit plans. Also included in the repurchased shares above are direct repurchases from participants related to the administration of the Amended and Restated AMCORE Stock Option Advantage Plan.

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ITEM 6.    SELECTED FINANCIAL DATA

Five Year Comparison of Selected Financial Data

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The following discussion highlights the significant factors affecting AMCORE Financial, Inc. and Subsidiaries (“AMCORE” or the “Company”) consolidated financial condition as of December 31, 2004 compared to December 31, 2003, and the consolidated results of operations for the three years ended December 31, 2004. 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 on Form 10-K contains, and our periodic filings with the Securities and Exchange Commission and written or oral statements made by the Company’s officers and directors to the press, potential investors, securities analysts and others will contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby with respect to, among other things, the financial condition, results of operations, plans, objectives, future performance and business of AMCORE. Statements that are not historical facts, including statements about beliefs and expectations, are forward-looking statements. These statements are based upon beliefs and assumptions of AMCORE’s management and on information currently available to such management. The use of the words “believe”, “expect”, “anticipate”, “plan”, “estimate”, “should”, “may”, “will” or similar expressions identify forward-looking statements. Forward-looking statements speak only as of the date they are made, and AMCORE undertakes no obligation to update publicly any forward-looking statements in light of new information or future events.

Contemplated, projected, forecasted or estimated results in such forward-looking statements involve certain inherent risks and uncertainties. A number of factors – many of which are beyond the ability of the Company to control or predict – could cause actual results to differ materially from those in its forward-looking statements. These factors include, among others, the following possibilities: (I) heightened competition, including specifically the intensification of price competition, the entry of new competitors and the formation of new products by new or existing competitors; (II) adverse state, local and federal legislation and regulation; (III) failure to obtain new customers and retain existing customers; (IV) inability to carry out marketing and/or expansion plans; (V) ability to attract and retain key executives or personnel; (VI) changes in interest rates including the effect of prepayments; (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 U.S. generally accepted accounting principles; (XVI) changes in assumptions or conditions affecting the application of “critical accounting estimates”; (XVII) inability of third-party vendors to perform critical services for the Company or its customers; (XVIII) disruption of operations caused by the conversion and installation of data processing systems; and (XIX) zoning restrictions or other limitations at the local level, which could prevent limited branches from transitioning to full-service facilities.

CRITICAL ACCOUNTING ESTIMATES

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

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Presented below are discussions of those accounting policies that management believes requires its most difficult, subjective and complex judgments about matters that are inherently uncertain (Critical Accounting Estimates) and are most important to the portrayal and understanding of the Company’s financial condition and results of operation. 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.

Allowance for Loan Losses

Loans, the Company’s largest income earning asset category, are periodically evaluated by management in order to establish an estimated allowance for loan losses (Allowance) that are probable as of the respective reporting date and considered adequate to absorb probable losses. 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 other loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other things. Additions to the Allowance are charged against earnings for the period as a provision for loan losses (Provision). Conversely, this evaluation could result in a decrease in the Allowance and Provision.

Actual loan losses are charged against and reduce the Allowance when management believes that the collection of principal will not occur. Unpaid interest attributable to prior years for loans that are placed on non-accrual status is also charged against and reduces the Allowance. Unpaid interest for the current year for loans that are placed on non-accrual status is charged against and reduces the interest income previously recognized. Subsequent recoveries of amounts previously charged to the Allowance, if any, are credited to and increase the Allowance. The Allowance is also subject to periodic examination by regulators whose review includes a determination as to its adequacy to absorb probable losses.

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

While the Company strives to reflect all known risk factors in its evaluations, judgment errors may occur. If different assumptions or conditions were to prevail, the amount and timing of interest income and loan losses could be materially different. These factors are most pronounced during economic downturns and may continue into an economic recovery, as specific credit performance may not be immediately affected by the stress of the downturn. Since, as described above, so many factors can affect the amount and timing of losses on loans it is difficult to predict, with any degree of certainty, the effect to income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to have adversely affected the adequacy of the Allowance by ten percent, an additional Provision of $4.1 million would have been necessary. See also Table 2 and Note 4 of the Notes to Consolidated Financial Statements.

Mortgage Servicing Rights

The Company recognizes as separate assets the right to service mortgage loans for others. Mortgage servicing rights that are retained when mortgage loans are sold to a third-party are recorded by allocating the previous

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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 based upon the actual amortization of the underlying servicing portfolio. 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 asset. The amount by which 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 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 performed by stratifying mortgage servicing rights assets into pools based upon loan type and investor. Valuation allowances are recorded for each defined pool, as applicable. Valuation allowances required for one pool cannot be offset by the amount that the fair value of another pool exceeds its unamortized carrying amount.

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

If different assumptions and conditions were to prevail, materially different amortization and valuation allowances than those that were recorded may be required. Since, as described above, so many factors can affect the value of mortgage servicing rights it is difficult to predict, with any degree of certainty, the effect to income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to have adversely affected their fair value by ten percent beyond their carrying value, an additional impairment charge of $1.3 million would have been necessary. See also Note 7 of the Notes to Consolidated Financial Statements.

Loan Securitizations and Sale of Receivables

The Company periodically sells certain indirect automobile loans in securitization transactions. Upon the sale, the net carrying amount of the loans are removed from the consolidated balance sheet in exchange for cash and certain retained residual interests. The retained interests include rights to service the loans that are sold (the “Servicing Rights”) and an interest in residual cash flows (the “Interest Only Strip”). The Interest Only Strip includes the excess of interest collected on the loans over the amount required to be paid to the investors and the securitization agent (the “Excess Spread”) plus 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”). The carrying value of the loans removed from the balance sheet includes the unpaid principal balance of the loans, net of an allocable portion of the Allowance for Loan

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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 has a favorable impact on the amount of gain or loss that is recognized upon the sale of the loans.

Since the projected income from the Servicing Rights has approximated what is considered “adequate compensation” for servicing the loans, no asset or liability 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 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 that is attributable to the Excess Spread will be fully amortized. At that time the carrying value of the Interest Only Strip that is attributable to the Overcollateralization 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 less credit losses and excess Overcollateralization subsequently released to the Company by the securitization trust because it exceeded contractual requirements. At that time, remaining cash is expected to be released by the securitization trust in an amount that equals the accreted value of the Overcollateralization.

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, which would result in a charge to earnings. These include the risk the asset will have a shorter life than originally estimated (prepayment risk), that actual credit losses may exceed expected credit losses (credit risk) and that interest paid to the securitization trust and investors will be greater than projected (interest rate risk). The Company’s risk of loss attributable to credit and prepayment is limited to its interest in the Interest Only Strip. Neither the investors nor the securitization trust have any further recourse to the Company’s other assets. Interest rate risk could exceed the Company’s interest in the Excess Spread, but such a possibility is considered remote as of December 31, 2004. Each reporting period, the fair value of the Interest Only Strip is evaluated based upon current estimates and assumptions of the net present value of residual future cash flows net of remaining expected credit losses and anticipated releases of Overcollateralization. Changes in fair value are generally recorded net of tax as a component of other comprehensive income (OCI). If this evaluation results in fair values that are less than the amortized carrying value of the Interest Only Strip, and if the decline is considered other than temporary, in accordance with Emerging Issues Task Force (EITF) Issue No. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets,” the decline is charged against earnings for the current period. Finally, each reporting period, new Interest Only Strip amortization schedules are developed based upon current estimates, assumptions, adjusted carrying values and revised constant yields.

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

If different assumptions and conditions were to prevail, noticeably different results could occur because the recorded value of the Interest Only Strip may need to be written off or written down faster than planned and cash flows from the retained residual interests may be less than expected. Since, as described above, so many factors can affect the value of the Interest Only Strip it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to prevail. Nonetheless, if any combination of the above judgments or assumptions were to have adversely affected their value by an additional ten percent and the

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decline was determined to be other than temporary, an impairment charge of $1.4 million would have been necessary. See also Note 8 of the Notes to Consolidated Financial Statements.

OVERVIEW OF OPERATIONS

AMCORE reported net income of $45.7 million or $1.81 per diluted share for the year ended December 31, 2004. This compares to $43.5 million or $1.73 per diluted share for the same period in 2003. This represents a $2.2 million or 5% increase year to year. Diluted earnings per share also increased 5% or $0.08. AMCORE’s return on average equity and on average assets for 2004 was 12.06% and 0.96%, respectively, compared to 11.90% and 0.98% in 2003.

The most significant factors affecting 2004 net income, compared to 2003, were:

Net interest income – Increased $14.3 million due to increased loan and investment volumes and improved spread. Net interest margin was 3.59% in 2004 compared to 3.54% in 2003.

Provision for loan losses – Declined $9.4 million, reflecting reduced loan concentration concerns, lower net charge-offs, improved economic conditions, lower delinquencies and non-accrual loans and improved credit quality due to increasing experience in branch expansion markets and expanded workout/collection activities.

Non-interest income – Decreased $17.1 million. The most significant decreases were attributable to $8.2 million in gains on the sale of branches in 2003 and an $8.4 million decline in mortgage banking income in 2004 compared to 2003. The mortgage banking income decline included a $53,000 mortgage servicing rights impairment charge in 2004, compared to a $3.4 million impairment reversal in 2003. Mortgage closing volume also declined 48% as a result of lower refinancing activity. Trust and asset management income, company owned life insurance income and net security gains were down $1.5 million, $1.3 million and $990,000, respectively, over the same period.

Operating expenses – Increased $2.2 million from 2003 to 2004. Personnel costs increased $7.2 million primarily due to branch expansion, annual cost-of-living increases and escalating employee health care costs. Partially offsetting these increases were a $2.8 million decrease in data processing expenses due to the conversion and in-sourcing of core data processing systems in July 2003, a $1.6 million prepayment penalty related to debt restructurings in 2003 and a $1.7 million decrease in loan processing expenses associated with lower mortgage volumes.

Income taxes – Increased $2.2 million, mainly due to higher earnings before income taxes. The effective tax rate was 28.6% in 2004 compared to 27.0% in 2003.

KEY INITIATIVES AND OTHER SIGNIFICANT EVENTS

Key Initiatives

Branch Expansion – During 2001, the Company’s banking operations (BANK) launched a branch expansion initiative targeting the high growth area bounded by Interstates 94 in the north, 294 and 94 in the east, 80 in the south and 90 and 39 in the west (the “Branch Expansion”). The Branch Expansion strategy initially targets markets where there are high concentrations of mid-size businesses, with a seasoned commercial lending and treasury management service staff in a leased facility (limited branch office or “LBO”). Once a book of business is developed and the LBO becomes profitable, plans to develop a permanent site for a full service facility in a nearby area that is surrounded by a high concentration of homeowners with strong population and household income growth are initiated. Increased capabilities in the markets served by these facilities is expected to

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accelerate the Company’s ability to generate deposits, which will better support loan growth and decrease the use of wholesale funding.

Since the inception of the Branch Expansion strategy, 20 new branches, net of closed offices, have opened. The new locations have contributed $1.0 billion in loans and $402 million in deposits outstanding as of December 31, 2004. Same store contributions, which include new branches that have been open at least one year, were $948 million in loans and $379 million in deposits outstanding at December 31, 2004. During 2004, the Company opened 11 offices and closed three LBOs and two in-store branches as new branches opened. As of the end of 2004, more than one-third of the Company’s 70 branch locations were concentrated in the Chicago and Milwaukee suburbs and Madison, Wisconsin.

During 2004, the Company announced that its Board of Directors had authorized an incremental capital investment of $55 million to enhance the Company’s successful Branch Expansion program raising the total commitment to $120 million. As of December 31, 2004, $71 million of the total $120 million capital commitment remained to be spent.

The Company plans to add up to five LBOs each year for three years, beginning in 2005. In 2005, AMCORE expects to open eight offices, and close four offices due to upgrades to full-service facilities for a net total of four additional branches. In 2006, AMCORE expects to open seven offices and close two offices due to upgrades to full-service facilities for a net total of five additional branches. In 2007, AMCORE expects to open a net total of five branches as full-service facilities replace the limited branches opened two years earlier. In 2008 and 2009, AMCORE expects to convert the five LBOs opened in each of 2006 and 2007 to full-service facilities. No new LBOs are currently planned for 2008 and 2009. By the end of 2009, AMCORE expects to have added 34 new offices, net of those closed, since the beginning of the Branch Expansion initiative in 2001. Total offices by the end of 2009 are expected to total 84, two-thirds of which will be located in markets that the Company believes to exhibit strong growth characteristics.

The Branch Expansion achieved breakeven earnings during 2004, compared to dilution of $0.08 and $0.04 per diluted share in 2003 and 2002, respectively. Even with the addition of the new branches authorized in 2004, AMCORE expects its Branch Expansion program to be accretive to earnings by $0.10 to $0.15 per share in 2005.

As a complement to its Branch Expansion, the BANK has also expanded its automated teller machine system (“ATMs”), which includes both owned and third party operated, to 132 in Illinois and 37 in Wisconsin, or 169 overall from 113 in Illinois and 34 in Wisconsin, or 147 overall, at December 31, 2003.

Quality Loan Growth – Improving credit quality is part of AMCORE’s Quality Loan Growth initiative. As part of this initiative, the Company expanded its commercial collection team, allowing it to intervene at a much earlier stage of the credit process as individual credits begin to show signs of stress. Taking early action helps the Company to limit any further erosion in value. Average loans rose $226 million to $3.1 billion during 2004, an 8% increase over 2003. Over the same period of time, total non-accrual loans decreased 5% or $1.5 million to $30.1 million. Loans ninety-days past due and still accruing decreased 44% or $1.5 million to $1.8 million.

Deposit Growth – Average bank-issued deposits grew to nearly $3.0 billion in 2004, an increase of 5%, or $153 million, compared to 2003. AMCORE’s focus is to grow transactional deposits, such as checking accounts, which helps lower funding costs, as well as increasing the number of households served by the Company. Handling a customer’s checking account enables the BANK to cross-sell other products and increases the likelihood of retaining their business over time. The Company’s goal is to become the customer’s primary bank, meeting all of their banking, mortgage and investment needs. Over the last year, the total number of households served by AMCORE increased by 8%. AMCORE is focusing on continued bank-issued Deposit Growth because it provides a source of funding for the Branch Expansion and the Quality Loan Growth initiatives, and is also a means of reducing its reliance on wholesale funding sources.

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Increasing Trust and Asset Management Income – Trust and asset management income declined $1.5 million, or 7%, to $21.0 million in 2004 from $22.5 million in 2003. Assets under administration totaled $4.4 billion at the end of 2004 compared to $4.3 billion at the end of 2003. Challenges facing this segment over the last several years include below benchmark equity funds investment performance, a shift in asset mix from equity to fixed income and money market, and the loss of a major public fund client in 2003 and two large retirement plans in 2004. The Company is working on solutions to bring equity funds performance more in line with industry benchmarks and to attract new business, which includes an open architecture that allows greater customer access to non-proprietary products.

Other Significant Events

Securitizations – During 2004 and 2003, the BANK sold $159 million and $106 million of indirect automobile loans, respectively, in securitization transactions (the “Auto Loan Sale(s)”), resulting in pre-tax gains of $1.7 million and $2.5 million for the respective periods (the “Auto Loan Sale Gain(s)”). Upon securitization, the BANK retained certain residual interests. The BANK’s retained interests are subordinate to investors’ interests and are subject to prepayment risk, interest-rate risk and credit risk on the transferred auto loans (see Critical Accounting Estimates discussion). The BANK anticipates similar transactions in 2005. See Note 8 of the Notes to Consolidated Financial Statements.

Branch Sales – Since launching the Branch Expansion in 2001, the BANK has sold seven Illinois branches and six Wisconsin branches in markets that no longer fit its growth objectives (the “Branch Sales”). The Illinois Branch Sales occurred in 2001 and the Wisconsin Branch Sales occurred in 2003. Combined loans, deposits and premises and equipment of $48 million, $125 million and $2 million, respectively, were sold to the respective buyers of the Wisconsin branches, resulting in a pre-tax gain of $8.2 million (“Branch Gain”). The BANK currently has no plans to sell any additional branches.

Accounting Changes – Following is a discussion of accounting standards that materially affected the Company’s Consolidated Financial Statements for the periods and dates presented, along with recently issued accounting standards that may impact future periods.

In 2004, the Company adopted Financial Accounting Standards Board (FASB) Financial Interpretation No. 46 Revised (FIN 46R) “Consolidation of Variable Interest Entities.” Upon adoption of FIN 46R, the Company de-consolidated its investment in AMCORE Capital Trust I (Trust) a statutory business trust. As a result of the de-consolidation, the December 31, 2004 balance reflects $41.2 million of long-term debt on the Consolidated Balance Sheet which includes the previously reported $25.0 million of outstanding preferred securities, $15.0 million of preferred securities held by the BANK and previously eliminated in consolidation, plus $1.2 million of common securities held by the Company, which were also previously eliminated in consolidation. See Note 10 of the Notes to the Consolidated Financial Statements.

In September 2004, the FASB issued Staff Position No. EITF 03-1-1 which delayed the effective date for the measurement recognition guidance contained in EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which was effective for fiscal years ending after December 15, 2003. Until new guidance is issued, companies must continue to comply with the disclosure requirements of EITF 03-1 and all relevant measurement and recognition requirements of other accounting literature. EITF 03-1 requires certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. These disclosures are contained in Note 3 of the Notes to Consolidated Financial Statements. The Company will complete its evaluation of the impact upon issuance of final guidance from the FASB.

SFAS No. 123 (Revised 2004) (123R), “Share-Based Payment” was issued in December 2004 and will require compensation cost relating to share-based payment transactions be recognized in Consolidated Financial

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Statements, effective for the Company’s third quarter 2005. The Company has not yet completed its evaluation of the standard, but anticipates that it will result in a reduction in earnings and earnings per share beginning with the third quarter of 2005.

EARNINGS REVIEW OF CONSOLIDATED STATEMENTS OF INCOME

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

Net Interest Income

Net interest income is the difference between income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. The interest income on certain loans and investment securities is not subject to federal income tax. For analytical purposes, the interest income and rates on these types of assets are adjusted to a “fully taxable equivalent,” or FTE basis. The FTE adjustment was calculated using AMCORE’s statutory federal income tax rate of 35%.

Overview- FTE adjusted interest income is as follows (in thousands):

Net interest income on an FTE basis increased $13.4 million or 9% in 2004 and increased $6.3 million or 5% in 2003. The increases for both 2004 and 2003 were driven by increases in average loan volumes of 8% and 9%, respectively, and reductions in total interest expense of 10% and 26%, respectively.

Net interest spread is the difference between the average rates on interest-earning assets and the average rates on interest-bearing liabilities. Net interest margin represents net interest income divided by average earning assets. These ratios can also be used to analyze net interest income. Since a 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 net interest spread improved 11 basis points to 3.35% in 2004 from 3.24% in 2003, which was an eight basis point increase from the 2002 level of 3.16%. The net interest margin was 3.59% in 2004, an increase of five basis points from 3.54% in 2003. The 2003 level was an increase of one basis point from 3.53% in 2002.

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 period-to-period 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

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the calculation for interest-earning assets as a total, or 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 2004, net interest income (FTE) increased due to average volume by $10.8 million when compared to 2003. This increase was comprised of a $17.4 million increase in interest income that was partially offset by a $6.6 million increase in interest expense. In 2003, net interest income (FTE) increased due to average volume by $7.4 million. This was comprised of a $10.9 million increase in interest income that was partially offset by a $3.6 million increase in interest expense.

The 2004 increase in interest income of $10.8 million was driven by a $226 million or 8% increase in average loans and a $111 million or 10% increase in average investment securities. The growth in average loans came from an increase of $316 million in commercial lending driven mostly by the Branch Expansion. Average consumer loan balances declined $86 million compared to the prior year, largely due to the Auto Loan Sales, and 1-to-4 family real estate loans declined $4 million. The growth in average investment securities was primarily attributable to mortgage-backed securities as the Company sought to replace mortgage-related assets that prepaid during the mortgage re-financing boom in 2002 and 2003 and pre-funding of expected cash flows from mortgage-backed securities.

The increase in average loans and investment securities was funded by a $153 million or 5% increase in average bank-issued deposits and a $172 million or 15% increase in average wholesale fundings, which included a $78 million increase in wholesale deposits. The increase in average bank-issued deposits was attributable to the Company’s Deposit Growth and Branch Expansion initiatives.

The 2003 increase in interest income of $10.9 million was driven by a $236 million or 9% increase in average loans offset by a decline of $82 million or 7% in average investment securities. The growth in average loans was attributable to an increase of $288 million in commercial lending, driven mostly by the Branch Expansion, and a $32 million increase in average consumer loans. Partially offsetting these increases was an $84 million average decline in residential real estate loans, due to the impact of refinancings, as fixed mortgage interest rates reached 45-year lows. Strong loan growth, particularly in new markets, allowed the Company to reshape its balance sheet to an improved mix of earning assets. This, along with accelerated prepayments of mortgage-backed securities associated with the mortgage re-financing boom, contributed to the decline in average investment securities.

Changes due to rate – During 2004, net interest income (FTE) increased due to average rates by $2.6 million when compared with 2003. This was comprised of a $13.2 million decline in interest income that was more than offset by a $15.8 million decrease in interest expense. During 2003, net interest income (FTE) declined due to average rates by $1.1 million when compared with 2002. This was comprised of a $36.9 million decrease in interest income that was partly offset by a $35.9 million decline in interest expense.

During 2004, the yield on earning assets declined 31 basis points compared to 2003. This was comprised of a 33 basis point decline in the yield on average loans and 29 basis point decline in the yield on average investment securities. Four 25 basis point increases in the federal funds (Fed Funds) rate that occurred during the second half of 2004 were insufficient in terms of magnitude and length of time in effect to offset the negative impact on re-financing and re-pricing of loans and investment securities of a 450 basis point decline in the national prime rate that occurred from January 2001 through June 2004.

The rate paid on average interest bearing liabilities declined 42 basis points during 2004, compared to 2003. This was primarily due to decreased rates paid on certificates of deposit (CDs), including brokered CDs, as older CDs bearing higher rates matured and re-priced during the period of lower interest rates and not yet fully impacted by recent increases in the Fed Funds rate.

In 2003, the yield on earning assets declined 92 basis points compared to 2002. The yield on average securities fell by 109 basis points, while the yield on average loans fell by 89 basis points. The decline in security yields

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was affected by the prepayment of higher-yielding mortgage-related securities, including accelerated premium amortization, which occurred as mortgage interest rates fell. Proceeds were reinvested, but in lower yielding securities due to the low interest rate environment. While nearly all loan categories were affected, the largest dollar decline was attributable to commercial real estate loans. Loans that refinanced during the year, variable priced loans and new loan production were all adversely impacted by the reductions in interest rates that had been in decline since January of 2001.

The rate on average interest-bearing liabilities declined 100 basis points during 2003 compared to 2002, due to lower bank-issued deposit, wholesale deposit, short-term and long-term borrowing rates. While rates fell on all deposit products, the decrease was most pronounced on CD’s. Average rates on CD’s declined as older CD’s bearing higher rates matured and re-priced following the decline in interest rates that occurred over the previous three years. The Company also benefited from an expired interest rate swap that had increased funding costs in 2002, as well as new swaps entered into during 2002 that lowered the cost of wholesale deposits during 2003. The decrease in borrowing rates was largely the result of lower rates paid on reverse repurchase agreements that renewed at lower rates as short-term interest rates declined.

The Company expects a modest improvement in net interest margin in 2005. Among those factors that could cause margin and spread not to perform as anticipated by the Company include: greater and more frequent than anticipated changes in interest rates, including the impact of basis risk between various interest rate indices, changes in the shape of the yield curve, the effect of prepayments or renegotiated rates, increased price competition on both deposits and loans, changes in the mix of earning assets and the mix of liabilities, including greater than anticipated use of expensive wholesale sources to fund the Branch Expansion and greater than expected loan delinquencies resulting in non-accrual status. The Company is liability sensitive over a one-year horizon, meaning that interest-bearing liabilities are expected to re-price more quickly than interest-earning assets. If the Federal Reserve Board were to increase the Fed Funds rate more aggressively than anticipated by the Company, there could be some modest stress in net interest margin.

Provision for Loan Losses

The 2004 Provision (see Critical Accounting Estimates discussion) was $15.5 million, a decrease of $9.4 million or 38% from $24.9 million in 2003. Reduced loan concentration concerns, lower net charge-offs, improved economic conditions, lower delinquencies and non-accrual loans and improved credit quality due to increasing experience in Branch Expansion markets and expanded workout/collection activities were all factors contributing to the reduction in Provision. The reduced loan concentration concerns primarily related to improved credit quality and industry outlook for loans concentrated in the non-residential building operators and the general farms/dairy portfolios. Net charge-offs were $14.6 million or 47 basis points of average loans in 2004, compared to $16.6 million or 57 basis points of average loans in 2003.

The $24.9 million Provision for 2003 was a $12.3 million or 98% increase compared to a Provision of $12.6 million in 2002. Increases in net charge-offs, higher specific loss estimates on individually reviewed loans, increased concentration concerns, increasing loan balances in emerging markets, higher levels of delinquencies and continued economic weakness were all among the factors leading to the increased Provision. Net charge-offs were $16.6 million or 57 basis points of average loans in 2003, compared to $11.3 million or 42 basis points of average loans in 2002. The increased concentration concerns primarily related to higher delinquencies and loans graded as potential problem, substandard or doubtful in the health services portfolio.

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 banking income. Net security gains or losses, gain on Auto Loan Sales and Branch Sales, increases in cash surrender value (CSV) and death benefits on BANK and

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Company owned life insurance (COLI), brokerage commission income and bankcard fee income are also included in this category.

Overview – For 2004, non-interest income totaled $70.5 million, a decline of $17.1 million or 19% from $87.6 million in 2003. The decline was primarily attributable to an $8.4 million reduction in mortgage banking income and $8.2 million of Branch Gains that occurred in 2003.

For 2003, non-interest income was $87.6 million, an increase of $20.7 million or 31% from $66.9 million in 2002. The increase was primarily attributable to an $8.7 million increase in mortgage banking income, $8.2 million of Branch Gains and $2.5 million of Auto Loan Sales Gains in 2003.

Trust and asset management income – Trust and asset management income includes trust, investment management, employee benefit recordkeeping and administration services. It also includes advisory and fund administration fees from the Vintage Mutual Funds and various public fund programs. Trust and asset management income has historically been the Company’s largest source of non-interest income and totaled $21.0 million in 2004. This was a decrease of $1.5 million or 7% from $22.5 million in 2003. This followed a decrease of $2.2 million or 9% from $24.7 million in 2002. The decline for 2004 was primarily attributable to lower advisory, management and administration fees from public fund clients, including the loss of a major public fund customer in the fourth quarter of 2003 and two large retirement plans in 2004, the loss and migration of business associated with poor investment performance of the Vintage equity funds and a move to an open architecture platform, as well as increased price competition. Partly offsetting these factors was a recovery in the equity markets that positively impacted the value of AMCORE-administered assets, upon which fees are partially based. The decline in 2003 was primarily due to declining equity markets over the preceding three years that challenged the investment industry with the S & P 500 losing 24.3% of its value from 2000 to 2003. These declines negatively impacted the value of AMCORE-administered assets, upon which fees are partially based, leading to the decrease in fee revenue. Also contributing to the decline was the loss of the major public fund customer effective October 1, 2003 and the loss and migration of business associated with poor investment performance of the Vintage equity funds. As noted above, Increasing Trust and Asset Management Income is a key initiative of the Company that is directed at reversing the declines. Changes that have been made and that are under consideration as a result of this initiative are expected to improve the long-term bottom-line impact of this important source of non-interest income.

As of December 31, 2004, total assets under administration were $4.4 billion, which includes $686 million in the Vintage Mutual Funds, compared to $4.3 billion and $827 million, respectively, as of December 31, 2003. In addition to overall market performance, trust and asset management revenues are dependent upon the Company’s ability to attract and retain accounts, specific investment performance and other economic factors. Fees from money market mutual funds, which comprise approximately 8% of managed assets, can also be negatively affected by a low short-term interest rate environment. At low levels, investors may seek alternative investments. Thus, waivers of fees on money market mutual funds have been, and may continue to be, required to provide more competitive returns for investors as a means of inducing investors to maintain their level of investments. Waivers were $363,000, $238,000 and virtually none in 2004, 2003 and 2002, respectively.

Mortgage banking income – Mortgage banking income includes fees generated from the underwriting, originating and servicing of mortgage loans along with gains realized from the sale of these loans, net of origination costs, servicing rights amortization and impairment.

For 2004, mortgage banking income was $4.8 million, a decline of $8.4 million from $13.2 million in 2003. The decline included a $53,000 mortgage servicing rights impairment charge in 2004, compared to a $3.4 million impairment reversal in 2003. Excluding impairment charges and reversals, mortgage banking income declined $5.0 million driven by a 48% decline in closings to $468 million in 2004, from $894 million in 2003. These declines were expected, as rising mortgage interest rates led to decreased refinancing activity. However, the Company still expects continued growth in new purchase mortgages as a result of additional mortgage

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originators, primarily in the Branch Expansion markets. New purchase mortgage growth could be negatively affected by a number of factors beyond the Company’s control, including heightened competition, higher mortgage interest rates, declines in new housing construction and adverse regulatory developments. New purchase mortgage closings were $262 million or 56% of total closings in 2004, compared to $241 million or 27% of total closings in 2003.

For 2003, mortgage banking income was up $8.7 million or 191% from $4.5 million in 2002. Contributing to the increase was the $3.4 million impairment reversal in 2003 compared to an impairment charge of $2.6 million in 2002. Excluding impairment charges and reversals, mortgage banking income increased $2.7 million reflecting record closing volumes of $894 million that were driven by refinancings in the wake of declining mortgage interest rates. The $894 million was a 24% increase from $718 million of closings in 2002.

As of December 31, 2004, the carrying value of AMCORE’s capitalized mortgage servicing rights was $12.5 million, net of a $53,000 impairment valuation allowance. This compares to $11.2 million at December 31, 2003, and no impairment valuation allowance. The unpaid principal balance of mortgage loans serviced for others was $1.3 billion as of December 31, 2004. This compares to $1.2 billion as of December 31, 2003. The net carrying value of the Company’s capitalized mortgage servicing rights, as a percentage of the unpaid principal balance of mortgage loans serviced for others, was 0.97% and 0.93% as of December 31, 2004 and 2003, respectively.

COLI income – COLI income totaled $5.7 million in 2004, a $1.3 million or 18% decline from $7.0 million in 2003. This contrasts with a $1.3 million or 24% increase in 2003 from $5.7 million in 2002. The decrease in 2004 from 2003 was primarily due to a $350,000 negative adjustment in 2004 attributable to a change in estimate in a policy’s CSV provided by the carrier, which reversed a positive estimate of value adjustment in 2003, declines in the value of underlying variable return investments, lower underlying investment rates and the impact of death benefit pay-outs. The 2003 increase over 2002 included the impact of interest compounding, higher average investments year-over-year and net death benefits received in 2003. AMCORE uses COLI as a tax-advantaged means of financing its future obligations with respect to certain non-qualified retirement and deferred compensation plans in addition to other employee benefit programs. As of December 31, 2004, the CSV of COLI was $124 million, compared to $116 million at December 31, 2003.

Other non-interest income – For 2004, service charges on deposits, brokerage commission income, bankcard fee income, gain on sale of branches, gain on sale of loans, net security gains and other non-interest income totaled $39.0 million, a $5.9 million or 13% decline from 2003. The decrease was primarily attributable to the $8.2 million Branch Gain in the 2003 and lower net security gains, net of increased service charges on deposit income, brokerage commission income, bankcard fee income and other income. Other income included derivatives mark-to-market gains in 2004 compared to losses in 2003 and increased customer service charge income.

From 2002 to 2003, these same categories increased $12.9 million or 40%. The increase was primarily due to the $8.2 million Branch Gains and the $2.5 million Auto Loan Sales Gain that occurred in 2003.

Recent litigation involving MasterCard and VISA concerning the amount of fees charged to process signature-based debit card transactions is expected to reduce the amount of interchange income that AMCORE receives on the debit cards that it issues. Rate reductions of approximately 30% became effective August 1, 2003. Effective January 1, 2004, merchants were permitted to refuse signature-based debit card transactions. This may result in future reductions in interchange income. For 2004, the Company’s bankcard fee income increased $624,000 to $4.1 million from $3.5 million in 2003. The increase was primarily due to a larger cardholder base, a benefit of both the Branch Expansion and Deposit Growth initiatives, and greater card utilization that have more than offset the rate reduction. While some merchants have altered their point-of-sale practices to discourage signature-based debit card transactions, many merchants have been slow to refuse acceptance altogether.

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Operating Expenses

Overview – In 2004, total operating expense was $143.9 million, an increase of $2.2 million or 2%, from $141.8 million in 2003. The increase was primarily due to a $7.2 million increase in personnel costs that were partially offset by a $2.8 million decline in data processing expense and a $3.1 million decline in other expense.

In 2003, total operating expense increased $14.2 million or 11% from $127.6 million in 2002. The increase was primarily due to a $6.9 million increase in personnel costs, a $4.8 million increase in other expense and a $2.7 million increase in facilities related costs, which were partially offset by a $1.7 million decline in data processing expense and a $4.8 million decline in other expense.

The efficiency ratio was 64.40% in 2004, compared to 62.65% in 2003 and 64.56% in 2002. The efficiency ratio is calculated by dividing total operating expenses by revenues. Revenues are the sum of net interest income and non-interest income.

Personnel expense – Personnel expense includes compensation expense and employee benefits and is the largest component of operating expenses, totaling a combined $87.4 million in 2004, $80.2 million in 2003 and $73.3 million in 2002. Increases were $7.2 million or 9% in 2004 compared to 2003 and $6.9 million or 9% in 2003 compared to 2002. Direct expenses of the Branch Expansion accounted for $5.8 million of the increase in 2004 and $4.0 million in 2003. Health care costs increased $827,000 and $874,000 over the same respective period due to the impact of Branch Expansion, adverse claim experience in the Company’s self-funded plan and overall medical cost inflation.

Facilities expense – Facilities expense, which includes net occupancy expense and equipment expense, was a combined $19.2 million in 2004, $18.4 million in 2003 and $15.7 million in 2002. Increases were $779,000 or 4% in 2004 compared to 2003 and $2.7 million or 17% in 2003 compared to 2002. Increases for both periods were primarily the result of Branch Expansion as well as higher computer hardware and software costs, mainly due to the conversion and in-sourcing of the Company’s core data processing systems. The 2003 increase also included higher personal computer replacement costs associated with the data processing conversion that occurred in July 2003.

Data processing expense – Data processing expenses include costs related to core bank data processing, trust and other external processing systems. Data processing expense was $2.3 million in 2004, $5.1 million in 2003 and $6.8 million in 2002. These represented a decrease of $2.8 million or 55% in 2004 compared to 2003 and $1.7 million or 25% in 2003 compared to 2002. The decrease for both periods was due to lower processing costs resulting from the data processing system conversion and in-sourcing. Expense savings, compared to prior periods, are fully reflected as of the end of 2004 due to the July 2003 conversion date. As a result, similar reductions in costs are not expected in 2005.

Other operating expenses – Other operating expenses includes professional fees, communication expense, advertising and business development expenses and other costs, and were a combined $35.1 million in 2004, $38.1 million in 2003 and $31.9 million in 2002. These represented a decrease of $3.0 million or 8% in 2004 compared to 2003 and an increase of $6.2 million or 20% in 2003 compared to 2002. Other costs for 2003 included a $1.6 million prepayment penalty related to debt restructuring. The remaining decline for 2004, compared to 2003, was primarily due to lower loan processing and collection costs associated with lower mortgage volumes. The remaining increase for 2003, compared to 2002, included higher loan processing and collection costs associated with increased mortgage volumes, private equity fund impairment charges and losses on lease termination and fixed asset disposals in connection with the Branch Expansion.

Income Taxes

Income tax expense totaled $18.3 million in 2004, compared to $16.1 million and $14.0 million in 2003 and 2002, respectively. The increase in income tax expense over the three years was mainly due to higher income

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before taxes and a lower mix of tax-exempt income. The effective tax rates were 28.6%, 27.0% and 24.4% in 2004, 2003 and 2002, respectively. Effective tax rates are lower than the statutory tax rates due primarily to investments in tax-exempt municipal bonds and increases in CSV and death benefits on COLI that are not taxable. The increase in effective tax rate in 2004 and 2003 over the prior respective years is primarily due to a decrease in the size of these tax-exempt items relative to total pre-tax earnings. See Note 16 of the Notes to Consolidated Financial Statements.

EARNINGS REVIEW BY BUSINESS SEGMENT

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

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

Since there are no comprehensive authorities for management accounting equivalent to U.S. generally accepted accounting principles, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure.

Total Segment results differ from consolidated results primarily due to inter-segment eliminations, certain corporate administration costs, items not otherwise allocated in the management accounting process and treasury and investment activities. The impact of these items is aggregated to reconcile the amounts presented for the Segments to the consolidated results and is included in the “Other” column of Note 18 of the Notes to Consolidated Financial Statements.

Commercial Banking

The Commercial Banking Segment (“Commercial”) provides commercial banking services to large and small business customers through the BANK’s full service branch and LBO locations. The services provided by this Segment include lending, business checking and deposits, treasury management and other traditional as well as electronic commercial banking services.

Overview – The Commercial Segment represented 68%, 53% and 61% of total Segment earnings in 2004, 2003 and 2002, respectively. Commercial Segment total assets were $2.5 billion at December 31, 2004 and represented 50% of total consolidated assets. This compares to $2.0 billion and 45% at December 31, 2003.

Comparison of 2004 to 2003 – Commercial earnings for 2004 were $25.5 million, an increase of $2.1 million or 9% from 2003. The increase was due to a $7.2 million increase in net interest income and a $5.0 million decrease in Provision that were partially offset by an $7.8 million increase in non-interest expense, a $1.0 million decline in non-interest income and a $1.3 million increase in income taxes.

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The increase in net interest income was driven by higher average commercial real estate loan volumes, due in large part to the Branch Expansion. Reduced loan concentration concerns, lower delinquencies and non-accrual loans, improved economic conditions, and improved credit quality due to expansion of workout and collection staffs that enabled the Company to address deteriorating credits more quickly were all factors contributing to the reduction in Provision. The increase in non-interest expense was primarily due to higher personnel and facilities expense as a result of Branch Expansion. The decline in non-interest income was due to Branch Gains that occurred in 2003. Income taxes were higher due to higher earnings before tax.

Comparison of 2003 to 2002 – Commercial earnings for 2003 totaled $23.5 million and were $1.7 million or 8% higher than 2002 earnings. The increase was due to a $13.8 million increase in net interest income and a $2.4 million increase in non-interest income that were partially offset by a $10.3 million increase in Provision, a $2.4 million increase in non-interest expense and a $1.7 million increase in income taxes.

The increase in net interest income was driven by higher average commercial real estate loan volumes, due in large part to the Branch Expansion. The increase in non-interest income was due to Branch Gains that occurred in 2003. The increase in Provision was primarily due to higher net charge-offs, increased loan concentration concerns, deteriorating loan quality and collateral values, increased delinquencies and continued weakness in the overall economy. The increase in non-interest expense was largely due to higher personnel costs, which included the impact of the Branch Expansion. Income taxes were higher due to higher earnings before tax.

Retail Banking

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

Overview – The Retail Segment represented 21%, 22% and 13% of total segment earnings in 2004, 2003 and 2002, respectively. Retail Segment total assets were $708 million at December 31, 2004 and represented 14% of total consolidated assets. This compares to $810 million and 18% at December 31, 2003.

Comparison of 2004 to 2003 – Retail earnings for 2004 were $8.0 million, a decrease of $1.9 million or 19% from 2003. The decrease was due to a $5.5 million decrease in non-interest income and a $1.1 million increase in non-interest expense that were partially offset by a $3.5 million decrease in Provision and a $1.2 million decrease in income taxes.

The decrease in non-interest income was mainly due to the Branch Gains that occurred in 2003. The increase in non-interest expense was largely due to higher personnel costs, which included the impact of the Branch Expansion as LBOs transitioned to full-service branches. The decrease in Provision was mainly due to lower net charge-offs, lower inter-segment allocations and reductions in loans due to the Auto Loan Sales. Income taxes declined due to lower earnings before taxes.

Comparison of 2003 to 2002 – Retail earnings for 2003 totaled $9.9 million and were $5.3 million or 117% higher than 2002 earnings. The increase was due to an $8.4 million increase in non-interest income and a $2.2 million decrease in non-interest expense that were partially offset by a $1.9 million increase in Provision and a $3.4 million increase in income taxes.

The increase in non-interest income was due to Branch Gains and the Auto Loan Sale Gain that occurred in 2003. The decrease in non-interest expense was due to lower allocations for support function expenses. The increase in Provision was primarily due to an increase in net charge-offs due to higher loss levels on repossessed automobiles. Income taxes were higher due to higher earnings before tax.

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Trust and Asset Management

The Trust and Asset Management Segment (“TAM”) provides trust, investment management, employee benefit recordkeeping and administration and brokerage services. It also acts as an advisor and provides fund administration to the Vintage Mutual Funds and various public fund programs. These products are distributed nationally (i.e., Vintage Equity Fund is available through Charles Schwab, OneSource^™), regionally to institutional investors and corporations, and locally through the BANK’s locations.

Overview – The TAM Segment represented 4%, 5% and 10% of total segment earnings in 2004, 2003 and 2002, respectively. TAM Segment total assets were $18 million at December 31, 2004 and represented less than 1% of total consolidated assets. At December 31, 2003 TAM total assets were $19 million, also less than 1% of total consolidated assets.

Comparison of 2004 to 2003 – TAM earnings for 2004 were $1.6 million, a $772,000 or 32% decline from 2003 earnings of $2.4 million. A $1.0 million decline in non-interest income and a $423,000 increase in non-interest expenses were partially offset by a $668,000 decline in income tax expense.

The decline in non-interest income was primarily due to lower advisory, management and administration fees from public fund clients, including the loss of a major public fund customer in the fourth quarter of 2003 and two large retirement plans in 2004, the loss and migration of business associated with poor investment performance in the Vintage equity funds and a move to an open architecture platform, as well as increased price competition. Recovery in the equity markets and higher commissions partially offset these factors. The increase in non-interest expense was primarily due to higher personnel costs. Income taxes declined due to lower earnings before taxes.

Comparison of 2003 to 2002 – TAM earnings for 2003 declined $1.3 million or 36% from 2003 earnings of $3.7 million. A $1.5 million decline in non-interest income and a $566,000 increase in non-interest expenses were partially offset by a $788,000 decline in income tax expense.

The decline in non-interest income was primarily due to declining equity markets over the preceding three years that negatively impacted the value of AMCORE-administered assets, upon which fees are partially based. Also contributing to the decline was the loss of the major public fund customer in the fourth quarter of 2003 and the loss and migration of business associated with poor investment performance of the Vintage equity funds. The increase in non-interest expense was primarily due to due to higher personnel costs. Income taxes declined due to lower earnings before taxes.

Mortgage Banking

The Mortgage Banking Segment (“Mortgage”) provides a variety of mortgage lending products to meet its customers’ needs. It sells the majority of the long-term, fixed-rate loans to the secondary market and continues to service most of the loans sold.

Overview – The Mortgage Segment represented 7%, 20% and 16% of total segment earnings in 2004, 2003 and 2002, respectively. Mortgage Segment total assets were $252 million at December 31, 2004 and represented 5% of total consolidated assets. This compares to $256 million and 6% at December 31, 2003.

Comparison of 2004 to 2003 – Mortgage earnings for 2004 were $2.6 million, a decrease of $6.1 million or 70% from 2003. The decrease was due to an $8.0 million decline in non-interest income and a $4.3 million decline in net interest income that were partially offset by an $1.4 million decrease in non-interest expense, an $878,000 decrease in Provision and a $3.9 million decrease in income taxes.

The decline in non-interest income was due to a 48% decline in mortgage closings as rising mortgage interest rates led to decreased refinancing activity. Also contributing was a $53,000 mortgage servicing rights impairment

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charge in 2004, compared to a $3.4 million impairment reversal in 2003. The decline in net-interest income was driven by lower average held for sale loan volumes as refinancing activity declined and lower yields on residential real estate loans held in portfolio. Recent increases in mortgage interest rates, which led to the decreased refinancing activity, were insufficient in terms of magnitude and length of time in effect to offset the negative impact of portfolio loans that re-financed or re-priced during the 2001 to 2003 period of declining mortgage interest rates. Lower specific loss allocations and lower net charge-offs were the main factors leading to the reduction in Provision. The decrease in non-interest expense was primarily due to lower loan processing and collection expenses due to lower mortgage volumes. Income taxes were lower due to lower earnings before tax.

Comparison of 2003 to 2002 – Mortgage earnings for 2003 totaled $8.7 million and were $3.0 million or 53% higher than 2002 earnings. The increase was due to an $8.0 million increase in non-interest income and was partially offset by a $1.6 million increase in non-interest expense, a $1.4 million decrease in net-interest income and a $1.9 million increase in income taxes.

The increase in non-interest income was due to increased mortgage volume, primarily driven by refinancing activity, and the $3.4 million reversal of mortgage servicing right impairment in 2003 compared to a $2.6 million impairment charge in 2002. The increase in non-interest expense was primarily due to higher loan processing and collection expenses due to the increased mortgage volumes. The decline in net-interest income was primarily due to lower rates on mortgage loans retained in portfolio and on mortgage loans held for sale. Average balances on mortgage loans held in portfolio continued their decline, as fixed mortgage rates reached 45-year lows. Income taxes were higher due to higher earnings before tax.

BALANCE SHEET REVIEW

Total assets were $4.9 billion at December 31, 2004, an increase of $397 million or 9% from December 31, 2003. Total liabilities increased $386 million over the same period and stockholders’ equity increased $11 million. The following discusses changes in the major components of the Consolidated Balance Sheet since December 31, 2003.

Cash and Cash Equivalents

Cash and cash equivalents increased $9 million from December 31, 2003 to December 31, 2004, as the cash provided by operating activities of $85 million plus the cash provided by financing activities of $326 million exceeded the cash used for investing activities of $402 million. This compares to a decrease of $37 million from December 31, 2002 to December 31, 2003, as the net cash used for investing activities of $211 million exceeded the cash provided by operating activities of $94 million plus the cash provided by financing activities of $80 million.

The $85 million of cash provided by operating activities during 2004 compares with $94 million provided in 2003, representing a $9 million decrease in cash provided between the two years. The change was attributable to the decrease in proceeds from the sale of mortgage loans held for sale, net of increased originations of such loans, primarily attributable to the Mortgage segment’s origination and sale of loans into the secondary market.

The $402 million of cash used for investing activities during 2004 compares with $211 million cash used in 2003, for an increase of $191 million in cash used between the two years. This was primarily the result of a decrease of $416 million in proceeds from the sales and maturities of securities and an increase of $181 million in funding of loan originations. These changes were partially offset by a $353 million decrease in securities available for sale purchases and a $56 million increase in proceeds from the sale of loans, primarily Auto Loan Sales.

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The $326 million of cash provided by financing activities during 2004 compares with $80 million cash provided during 2003, or an increase of $246 million in cash provided between the two years. This was primarily due to $160 million growth in demand, savings and time deposit accounts, $65 million in cash required to fund the Branch Sales in 2003 and a net increase in short-term and long-term borrowings of $36.

Securities Available for Sale

Total securities available for sale as of December 31, 2004 were $1.2 billion, an increase of $84 million or 7% from the prior year-end. At December 31, 2004 and 2003, the total securities available for sale portfolio comprised 27% of total earning assets, including COLI, for both 2004 and 2003. The increase in securities available for sale was primarily attributable to mortgage-backed securities and state and political subdivisions. Among the factors affecting the decision to purchase or sell securities are the current assessment of economic and financial conditions, including the interest rate environment, the liquidity needs of the Company and its pledging obligations.

Mortgage and asset backed securities as of December 31, 2004 totaled $907 million and represent 73% of total available for sale securities. The distribution of mortgage and asset backed securities includes $420 million of U.S. government-sponsored enterprise (GSE) mortgage-backed pass through securities, $469 million of GSE collateralized mortgage obligations and $18 million of private issue collateral mortgage obligations, all of which are rated AAA except for $1 million of securities rated Aa2.

The $1.2 billion of total securities available for sale includes gross unrealized gains of $11 million and gross unrealized losses of $8 million, of which the combined effect, net of tax, is included as accumulated OCI in stockholders’ equity. For comparative purposes, at December 31, 2003, gross unrealized gains of $20 million and gross unrealized losses of $6 million were included in the securities available for sale portfolio. For further analysis of the securities available for sale portfolio, see Table 4 and Note 3 of the Notes to Consolidated Financial Statements.

Loans Held for Sale

At December 31, 2004, mortgage origination fundings awaiting delivery to the secondary market were $31 million, compared to $32 million at December 31, 2003. Residential mortgage loans are originated by the BANK’s Mortgage Segment, of which non-conforming adjustable rate, fixed-rate and balloon residential mortgages are normally retained by the BANK. The conforming adjustable rate, fixed-rate and balloon residential mortgage loans are sold in the secondary market to eliminate interest rate risk, as well as to generate gains on the sale of these loans and servicing income. All loans held for sale are recorded at the lower of cost or market value.

Loans

Loans represent the largest component of AMCORE’s earning asset base. At year-end 2004, total loans were $3.3 billion, an increase of $286 million or 10% as compared to 2003, and represented 70% of total earning assets including COLI. Loan growth included the impact of the Branch Expansion and was reduced by $159 million in loans sold in the Auto Loan Sale. See Table 2 and Note 4 of the Notes to Consolidated Financial Statements.

Total commercial real estate loans, including real estate construction loans, increased $443 million or 34%. Residential real estate loans increased $50 million or 14%. Commercial, financial and agricultural loans increased $31 million or 4%. These increases were driven primarily by the Branch Expansion. Installment and consumer loans declined $238 million or 43%, due to lower indirect automobile lending and the Auto Loan Sales.

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Deposits

Total deposits at December 31, 2004, were $3.7 billion, an increase of $359 million or 11% when compared to 2003. The increase included $232 million in bank-issued deposit balances and $127 million in wholesale deposits. Total bank-issued deposits were $3.1 billion at the end of 2004. The $232 million represented an 8% increase from the prior year-end balance of $2.9 billion. The increase is attributable to the Deposit Growth initiative and Branch Expansion. Bank-issued deposits represent 83% and 85% of total deposits at December 31, 2004 and 2003, respectively. Table 5 shows the maturity distribution of time deposits $100,000 and over.

Borrowings

Borrowings totaled $754 million at year-end 2004 and were comprised of $589 million of short-term and $165 million of long-term borrowings. Comparable amounts at the end of 2003 were $557 million and $185 million, for a combined increase in borrowings of $13 million or 2%. See Notes 9 and 10 of the Notes to Consolidated Financial Statements.

AMCORE has $40 million of Trust Preferred securities outstanding through the Trust. These securities pay cumulative cash distributions semiannually at an annual rate of 9.35% and 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 securities qualify as Tier 1 capital for regulatory purposes.

The parent company has a commercial paper placement agreement with an unrelated financial institution that provides for the issuance of non-rated short-term unsecured debt obligations at negotiated rates and terms, not to exceed $50.0 million. In the event the agent is unable to place the parent company’s commercial paper on a particular day, the proceeds are provided by overnight borrowings on a reciprocal line of credit with the same financial institution. At December 31, 2004, no commercial paper and no overnight borrowings were outstanding.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Off-Balance Sheet Arrangements

During the ordinary course of its business, the Company engages in financial transactions that are not recorded on its Consolidated Balance Sheets, are recorded in amounts that are different than their full principal or notional amount, or are recorded on an equity or cost basis rather than being consolidated. Such transactions serve a variety of purposes including management of the Company’s interest rate risk, liquidity and credit concentration risks, optimization of capital utilization, meeting the financial needs of its customers and fulfilling Community Reinvestment Act obligations in the markets that it serves.

Auto loan sales – Structured as sales pursuant to SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” Auto Loan Sales are a component of the Company’s liquidity and credit concentration risk management strategy. The Auto Loan Sales are also helpful as a capital management tool.

In the Auto Loan Sales, indirect automobile loan receivables are transferred to a multi-seller variable-interest entity (VIE). Since the Company is not the primary beneficiary of the VIE, consolidation is not required under the terms of FIN No. 46R, “Consolidation of Variable Interest Entities.” As a result, the net carrying amount of the loans is removed from the consolidated balance sheet and certain retained residual interests are recorded. The Company’s retained interests are subordinate to the interests of investors in the VIE and are subject to prepayment risk, interest-rate risk and credit risk on the transferred auto loans. Neither the investors nor the VIE have any other recourse to the Company’s other assets for failure of automobile loan debtors to pay when due. The Company also retains the rights to service the loans that are sold.

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As of December 31, 2004, the balance of automobile loans serviced and not included on the Company’s Consolidated Balance Sheet was $196 million, compared to $93 million at December 31, 2003. The carrying value of retained interests was $14 million and $13 million at the end of 2004 and 2003, respectively. The carrying value of the retained interests is the maximum estimated exposure to loss of the retained residual interests. See Note 8 of the Notes to Consolidated Financial Statements.

Mortgage loan sales – The Company also originates mortgage loans that it sells to the secondary market. The Company typically retains the right to service the loans that are sold. As of December 31, 2004, the unpaid principal balance of mortgage loans serviced for others was $1.3 billion, compared to $1.2 billion at December 31, 2003. These loans are not recorded on the Company’s Consolidated Balance Sheets. The Company, as of December 31, 2004 and 2003, and in accordance with SFAS No 140, had recorded $12 million and $11 million, respectively, of capitalized mortgage servicing rights, net of impairment valuation allowances of $53,000 and $0, respectively. See Note 7 of the Notes to Consolidated Financial Statements.

Derivatives – The Company uses 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 and is not recorded on the Consolidated Balance Sheets. 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 $219 million and $159 million as of December 31, 2004 and 2003, respectively. As of December 31, 2004, swap contracts had an aggregate positive carrying and fair value of $286,000. See Table 6. For further discussion of derivative contracts, see Notes 11 and 12 of the Notes to Consolidated Financial Statements.

Loan commitments and letters of credit – The Company, as a provider of financial services, routinely enters into commitments to extend credit to its BANK customers, including performance and standby letters of credit. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. Commitments and letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company.

At December 31, 2004 and 2003 liabilities in the amount of $351,000 and $802,000, respectively, representing the value of the guarantee obligations associated with certain of the financial and standby letters of credit, had been recorded in accordance with FIN 45. These amounts are expected to be amortized into income over the lives of the commitments. The contractual amount of all letters of credit, including those exempted from the scope of FIN 45, was $196 million and $190 million at the end of 2004 and 2003, respectively. See Notes 12 and 15 of the Notes to Consolidated Financial Statements.

The carrying value of mortgage loan commitments recorded as an asset totaled $222,000 and $342,000 at December 31, 2004 and 2003, respectively. These amounts represent the fair value of those commitments marked-to-market in accordance with SFAS 138, “Accounting for Derivative Instruments and Hedging Activities” and in accordance with Staff Accounting Bulletin No. 105. The total notional amount of mortgage loan commitments was $28 million at December 31, 2004 and $27 million at December 31, 2003. See Note 11 of the Notes to Consolidated Financial Statements.

At December 31, 2004 and 2003, the Company had extended $817 million and $635 million, respectively, in loan commitments other than the mortgage loan commitments and letters of credit described above. This amount represented the notional amount of the commitment. No asset or liability has been recorded.

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Equity investments – The Company has a number of non-marketable equity investments that have not been consolidated in its financial statements. At December 31, 2004 and 2003, these investments included $5 million in private equity fund investments that were reported under either the cost or equity method, depending on the percentage of ownership. Not included in the carrying amount were commitments to fund an additional $1 million and $2 million, respectively, at some future date. The Company also has recorded investments of $4 million, $24 million, and $9 million, respectively, in stock of the Federal Reserve Bank, the Federal Home Loan Bank (FHLB) and preferred stock of Freddie Mac. At December 31, 2003, these amounts were $4 million, $23 million and $9 million, respectively. These investments are recorded at amortized historical cost or fair value, as applicable, with income recorded when dividends are declared. At December 31, 2004, the fair value of Freddie Mac preferred stock exceeded amortized historical cost, based on market quotes. Subsequent to December 31, 2004, the Company decided to sell the Freddie Mac stock, recording a loss of $51,000. Other investments, comprised of various affordable housing tax credit projects (AHTCP) and other community reinvestment act investments, totaled approximately $531,000 and $742,000 at December 31, 2004 and 2003, respectively. Losses are limited to the remaining investment and there are no additional funding commitments on the AHTCPs. Those investments without guaranteed yields were reported on the equity method, while those with guaranteed yields were reported using the effective yield method. The maximum exposure to loss for all non-marketable equity investments is the sum of the carrying amounts plus additional commitments.

Other investments – The Company also holds $1 million in a common security investment in the Trust, to which the Company has $41 million in long-term debt outstanding. The Trust, in addition to the $1 million in common securities issued to the Company, issued $40 million in preferred securities. The $40 million in preferred securities were issued to non-affiliated investors in 1997 and are redeemable beginning in 2007. The BANK acquired $15 million in preferred securities from one of the investors in 2002. Prior to 2004, the Trust was consolidated with the Company and the Company reflected $25.0 million in long-term debt outstanding, which was treated as Tier 1 capital for regulatory purposes. Pursuant to FIN 46R, the Trust was de-consolidated beginning in 2004. As a result, the Company now reflects its $1 million common security investment on the equity method. The $15 million preferred securities are included in the BANK’s available for sale investment portfolio. The Company now reports the entire $41 million as outstanding long-term debt. Despite the adoption of FIN 46R in 2004, there has been no change in the amount that qualifies as Tier 1 Capital for regulatory purposes. Rules proposed by the Federal Reserve are not expected to have a material impact on the Company’s regulatory capital ratios.

Fiduciary and agency – The Company’s subsidiaries also hold assets in a fiduciary or agency capacity that are not included in the Consolidated Financial Statements because they are not assets of the Company. Total assets managed or administered by the Company at December 31, 2004 and 2003 were $4.4 billion and $4.3 billion, respectively.

Contractual Obligations

In the ordinary course of its business, the Company enters into certain contractual arrangements. These obligations include issuance of debt to fund operations, property leases and derivative transactions. During 2004, the Company entered into seven operating lease agreements and terminated four operating leases. There are no residual value guarantees on these leases. Other than these transactions, there were no material changes in the Company’s contractual obligations since the end of 2003. Amounts as of December 31, 2004 are listed in the following table.

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See Table 6 and Notes 5, 10 and 11 of the Notes to the Consolidated Financial Statements.

ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT

AMCORE’s credit risk is centered in its loan portfolio, which on December 31, 2004 totaled $3.3 billion, or 70% of earning assets including COLI. The objective in managing loan portfolio risk is to quantify and manage credit risk on a portfolio basis as well as reduce the risk of a loss resulting from a customer’s failure to perform according to the terms of a transaction. To achieve this objective, AMCORE strives to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, and borrower concentration.

The Company is also exposed to credit risk with respect to its $124 million investment in COLI. AMCORE manages this risk by diversifying its holdings among various carriers and by periodic internal credit reviews. All carriers have “Secure” ratings from A. M. Best that range from a low of “A” (Excellent) to “A++” (Superior).

Allowance for Loan Losses

The determination by management of the appropriate level of the Allowance (see Critical Accounting Estimates discussion) amounted to $40.9 million at December 31, 2004, compared to $42.1 million at December 31, 2003, a decrease of $1.2 million or 3%. Increases of $3.6 million in specific loss estimates on certain individually reviewed loans, $722,000 in unallocated loss estimates and $301,000 for statistical loss estimates on loan groups or pools based upon historical loss experience, were more than offset by a $5.8 million decrease for other loss estimates that are based upon the size, quality and concentration characteristics of the various loan portfolios, adverse situations that may affect the borrower’s ability to repay, and current economic and industry conditions. Factors leading to the $5.8 million decrease in other loss estimates were reduced concerns over loan concentrations, improvement in the overall and local economies, lower non-accrual loans and delinquencies, and improved credit quality due to expansion of workout and collection staffs that enabled the Company to address deteriorating credits more quickly. The reduced loan concentration concerns primarily related to improved credit quality and industry outlook for loans concentrated in the non-residential building operators and the general farms/dairy portfolios.

Allocations of the Allowance for commercial, financial and agricultural loans decreased $671,000 in 2004. Allocations of the Allowance for real estate loans increased $1.4 million, primarily due to increased specific loss estimates on commercial real estate loans. Allocations of the Allowance for installment and consumer loans declined $1.7 million, largely the impact to statistical pool loss estimates of lower indirect automobile lending

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and the Auto Loan Sales. Allocations for impaired loans decreased $913,000 during the year. The amount of the unallocated Allowance increased $722,000 from one year ago to $3.7 million, but due to an increase in loans during 2004 remained at approximately 0.1% of total loans outstanding. A detailed analysis of the Allowance and the allocation of the Allowance by category for the past five years are shown in Table 2.

As of December 31, 2004, the Allowance as a percent of total loans and of non-accrual loans was 1.25% and 136%, respectively. These compare to the same ratios for the prior year of 1.41% and 133%. Net charge-offs were $14.6 million in 2004, a decline of $2.0 million from $16.6 million in 2003. This was 0.47% of average loans in 2004 versus 0.57% in 2003. Declines in consumer/installment, commercial and residential real estate net charge-offs of $2.2 million, $1.1 million and $702,000, respectively, were partially offset by an increase in commercial real estate net charge-offs of $2.0 million. Improvements in overall credit quality and the improving economy led to the declines in net charge-offs. The earlier recognition of losses in 2003 on repossessed autos, the Auto Loan Sales and a reduction in the number of repossessions year-over-year also contributed to the decline in consumer/installment net charge-offs. The increase in the commercial real estate loan net charge-offs is attributable to the growth in that portfolio generally, plus the charge-off late in 2004 of a construction industry related credit that was secured in part by real estate totaling $1.4 million.

Non-performing Assets

Non-performing assets consist of non-accrual loans, loans 90 days past due and still accruing, foreclosed real estate and other repossessed assets. Non-performing assets totaled $37.9 million as of December 31, 2004, a decline of $3.5 million or 9% from $41.4 million at December 31, 2003. The $3.5 million decrease consisted of a $1.5 million decrease in non-accrual loans, a $1.5 million decrease in loans 90 days past due and still accruing and a $1.1 million decrease in other foreclosed assets. Partially offsetting these declines was a $507,000 increase in foreclosed real estate. Total non-performing assets represented 0.77% and 0.91% of total assets at December 31, 2004 and December 31, 2003, respectively.

In addition to the amount of non-accruing and delinquent loans over 90 days past due, management is aware that other possible credit problems of borrowers may exist. Credits are considered substandard assets due to either less than satisfactory performance history, lack of borrower’s sound worth or paying capacity, or inadequate collateral. Loans classified as substandard are monitored accordingly. As of December 31, 2004 and 2003, there were $11.4 million and $990,000, respectively, in this risk category that were 60 to 89 days delinquent and $2.1 million and $4.6 million, respectively, that were 30 to 59 days past due. In addition, as of December 31, 2004 and 2003, respectively, there were $18.2 million and $6.3 million of loans that were current, but had loss allocations of $6.3 million and $1.8 million.

Concentration of Credit Risks

As previously discussed, AMCORE strives to maintain a diverse loan 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 $764 million at December 31, 2004, and comprised 23% of gross loans, of which 0.80% were non-performing. Net charge-offs of commercial loans represented 0.89% during 2004, and 1.07% during 2003, of the year-end balance of the category. There were no loan concentrations within this category in excess of 10% of total loans.

Construction and commercial real estate loans were $1.8 billion at December 31, 2004, comprising 54% of gross loans, of which 1.11% were classified as non-performing. Net charge-offs of this category of loans represent 0.15% during 2004, and 0.06% during 2003, of the year-end balance of the category. This category included $425 million of loans to nonresidential building operators, which was 13% of total loans. There were no other loan concentrations within this category that exceeded of 10% of total loans.

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Residential real estate loans, which includes home equity and permanent residential financing, totaled $413 million at December 31, 2004, and represent 13% of gross loans, of which 1.11% were non-performing. Net charge-offs of residential real estate loans represent 0.82% of the category total in 2004 and 0.52% of the year-end balance in 2003.

Installment and consumer loans were $317 million at December 31, 2004, and comprised 10% of gross loans, of which 0.48% were non-performing. Net charge-offs of consumer loans represented 1.46% and 1.22% of the year-end category total for 2004 and 2003, respectively. Consumer loans are comprised primarily of in-market indirect auto loans and direct installment loans. Indirect auto loans totaled $251 million at December 31, 2004. 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 consumer credit.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management

Overview – Liquidity management is the process by which the Company, through its Asset and Liability Committee (ALCO) and treasury function, ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is derived primarily from bank-issued deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include brokered CDs, Fed Funds purchased lines, Federal Reserve Bank discount window advances, FHLB advances, repurchase agreements, commercial paper and back-up lines of credit, the sale or securitization of loans, balances maintained at correspondent banks and access to other capital markets. Bank-issued deposits, which exclude brokered CD’s, are considered by management to be the primary, most stable and most cost-effective source of funding and liquidity. The BANK also has capacity, over time, to place additional brokered CD’s as a source of mid to long-term funds.

Uses of liquidity include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, repayment of debt when due or called, maintaining adequate collateral for public deposits, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

Overall liquidity decreased during 2004, as non-core funding, which includes borrowings and brokered deposits, increased $140 million. Non-core funding represented 28% and 27% of total assets as of the end of 2004 and 2003, respectively. The Company remains confident of its ability to meet and manage its short and long-term liquidity needs.

Investment securities portfolio – Scheduled maturities of the Company’s investment securities portfolio and the prepayment of mortgage and asset backed securities represent a significant source of liquidity. Approximately $13 million, or 1%, of the securities portfolio will contractually mature in 2005. See Table 4. This does not include mortgage and asset backed securities since their payment streams may differ from contractual maturities because borrowers may have the right to prepay obligations, typically without penalty. For example, scheduled maturities for 2004, excluding mortgage and asset backed securities, were $14 million, whereas proceeds from actual maturities, which included prepayments of mortgage and asset backed securities, were $237 million. This compares to proceeds of $623 million and $367 million in 2003 and 2002, respectively.

Loans – Funding of loans is the most significant liquidity need, representing 66% of total assets as of December 31, 2004. Since December 31, 2003, loans increased $286 million. Loans held for sale, which represents mortgage origination funding awaiting delivery to the secondary market, declined $2 million. The scheduled

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repayments and maturities of loans represent a substantial source of liquidity. Table 3 shows for selected loan categories that $580 million in maturities are scheduled for 2005. Loan growth from same-store and Branch Expansion continue to be the greatest liquidity need of the Company.

Bank-issued deposits – Bank-issued deposits are the most cost-effective and reliable source of liquidity for the Company. During 2004, bank-issued deposits increased $232 million. The increase in bank-issued deposits was primarily due to the Branch Expansion and Deposit Growth initiative. Scheduled maturities of time deposits of $100,000 or more, as reflected in Table 5, are $477 million in 2005, of which $205 million are bank-issued.

Branch expansion – The Company’s Branch Expansion strategy poses the greatest challenge to short and long-term liquidity. The Branch Expansion has required, and will continue to require, other sources of liquidity to fund the expected loan growth net of expected deposit growth and the remaining $71 million capital investment. Through December 31, 2004, Branch Expansion has required the funding of $1.0 billion in loans while generating $402 million in deposits.

Parent company – In addition to the overall liquidity needs of the consolidated Company, the parent company requires adequate liquidity to pay its expenses, repay debt when due and pay stockholder dividends. Liquidity is primarily provided to the parent through the BANK and other subsidiaries in the form of dividends and through commercial paper borrowings. In 2004, dividends from subsidiaries amounted to $33 million, compared to $23 million in 2003. The increase in dividends was used to retire $10 million in commercial paper that was outstanding at December 31, 2003. While the BANK is limited in the amount of dividends it can pay, as of December 31, 2004, approximately $67 million was available for payment to the parent in the form of dividends without prior regulatory approval. See Note 19 of the Notes to Consolidated Financial Statements.

Other sources of liquidity – As of December 31, 2004, other sources of readily available liquidity totaled $859 million and included $142 million of Fed Funds lines, unused collateral sufficient to support $382 million in Federal Reserve Bank discount window advances, $256 million of unpledged debt investment securities, $50 million of unused commercial paper and backup line of credit borrowings and $29 million of FHLB advances. These amounts totaled $825 million at December 31, 2003. The Company also has capacity, over time, to place sufficient amounts of brokered CDs as a source of mid- to long-term liquidity. The BANK’s indirect auto portfolio, which at December 31, 2004 was $251 million, is a potential source of liquidity through additional Auto Loan Sales, but is subject to eligibility criteria by the securitization trust that could place limits on the amount that could be sold.

Other uses of liquidity – At December 31, 2004, other potential uses of liquidity totaled $1.0 billion and included $817 million in commitments to extend credit, $28 million in residential mortgage commitments primarily for sale to the secondary market, and $196 million in letters of credit. At December 31, 2003, these amounts totaled $852 million.

Capital Management

Total stockholders’ equity at December 31, 2004, was $387 million, an increase of $11 million or 3% from December 31, 2003. The increase in stockholders’ equity was primarily due to retained earnings for 2004 of $29 million, partly offset by an $11 million increase in treasury stock and a $7 million decline in OCI. The increase in treasury stock was attributable to shares purchased to offset the reissuance of shares for stock-based incentive plans. The decline in OCI relates to changes in net unrealized gains on the investment securities available for sale portfolio and the reclassification to earnings of after-tax gains on hedging activities.

AMCORE paid $17 million of cash dividends during 2004, which represent $0.68 per share, or a dividend payout ratio of 37%. This compares to $0.66 per share paid in 2003, which represented a payout ratio of 38%. The book value per share increased $0.59 per share to $15.57 at December 31, 2004, up from $14.98 at December 31, 2003.

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The Company does not have a formally announced Repurchase Program in place at this time, however, the Company does repurchase shares in open-market transactions in accordance with Exchange Act Rule 10b-18 through a limited group of brokers. These repurchases are used to replenish the Company’s Treasury Stock for re-issuances related to stock options and other employee benefit plans. Also included in the repurchased shares above are direct repurchases from participants related to the administration of the Amended and Restated AMCORE Stock Option Advantage Plan. During 2004, the Company purchased 863,000 shares in open-market transactions at an average price of $28.80 per share.

AMCORE has outstanding $41.2 million of capital securities through the Trust. Of the $41.2 million, $25.0 million qualifies as Tier 1 capital for regulatory capital purposes, which is the $41.2 million reduced by the $1.2 million of common equity securities owned by the Company and the $15.0 million of preferred securities that were acquired by the BANK in 2002. Pursuant to regulations recently proposed by the Federal Reserve Board, the capital securities are expected to continue to qualify as Tier 1 Capital.

AMCORE’s total risk-based capital at 11.39%, its Tier 1 capital at 10.31% and its leverage ratio at 8.03%, all significantly exceed the regulatory minimums (as the following table indicates), as of December 31, 2004. The BANK, whose ratios are not presented below, is considered a “well-capitalized” institution based on regulatory guidelines. See Note 20 of the Notes to Consolidated Financial Statements.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

While AMCORE manages other risks in its normal course of operations, such as credit and liquidity risk, it considers interest-rate risk to be its most significant market risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of AMCORE’s business activities and operations. In addition, since AMCORE does not hold a trading portfolio, it is not exposed to significant market risk from trading activities. During 2004, there were no material changes in AMCORE’s primary market risk exposures. Based upon current expectations, no material changes are anticipated in the future in the types of market risks facing AMCORE.

Table 6 and Note 12 of the Notes to Consolidated Financial Statements summarize AMCORE’s market risk and interest sensitivity position as of December 31, 2004. The amounts and assumptions should not be relied upon as indicative of expected actual results since, like most financial institutions, AMCORE’s net interest income can be significantly impacted by external factors. These factors include, but are not limited to: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities re-price, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices and balance sheet growth.

AMCORE’s asset and liability management process is utilized to manage market and interest rate risk through structuring the balance sheet and off-balance sheet positions 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 earnings, liquidity and interest rate risk, there are opportunities to enhance revenues through managed risk. Interest rate sensitivity analysis is performed monthly using various simulations with an asset/liability modeling system. These analyses are reviewed by the Asset and Liability Committee (ALCO), whose actions attempt to minimize any sudden or sustained negative impact that interest rate movements may have on net interest income. ALCO reviews the impact of liquidity, capital adequacy and rate sensitivity, among other things, and determines appropriate policy direction to maintain or meet established ALCO guidelines.

Based upon an immediate increase in interest rates of 100 basis points and no change in the slope of the yield curve, the potential decrease in net interest income for 2005 would be approximately $934,000 or 0.55% of base forecasted net interest income. This analysis assumes no growth in assets or liabilities and replacement of maturing instruments with like-kind instruments. At the end of 2003, comparable assumptions would have resulted in a potential decrease in 2004 net interest income of $764,000 or 0.48%. Thus, AMCORE’s earnings at risk for rising rates has increased since the end of 2003, as the Company moved from an asset sensitive position to a slightly liability sensitive position.

Conversely, an immediate decrease in interest rates of 100 basis points and no change in the slope of the yield curve would result in a potential decrease in net interest income for 2005 of $3.2 million or 1.91% of base forecasted net interest income. At the end of 2003, a similar decrease in rates would have resulted in a potential decrease in net interest income of $7.1 million or 4.48%. AMCORE’s sensitivity to declining interest rates has decreased since the end of 2003. With the recent increases in rates, all points on the yield curve are now being shocked down the full 100 basis points. AMCORE continues to have rate compression on non-maturity deposits.

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Factors that contribute to the continued negative sensitivity to declining interest rates include the negative convexity of the mortgage-backed products and the larger volume of floating rate commercial loans.

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.

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TABLE 1

ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET