Amcore Financial (AMFI) 10-Q 2003 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission file number 0–13393

AMCORE FINANCIAL, INC.

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

501 Seventh Street, Rockford, Illinois 61104

Telephone Number (815) 968–2241

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.  Yes  x  No  ¨

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

The number of shares outstanding of the registrant’s common stock, par value $0.22 per share, at October 31, 2003 was 24,980,547 shares.

AMCORE FINANCIAL, INC.

Form 10–Q Table of Contents

		Page Number
PART I
Item 1	Financial Statements
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002	4
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2003 and 2002	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4	Controls and Procedures	46
PART II
Item 1	Legal Proceedings	47
Item 4	Submission of Matters to a Vote of Security Holders	47
Item 6	Exhibits and Reports on Form 8-K	47
Signatures		48
Exhibit Index		49

PART I. ITEM 1: Financial Statements

AMCORE Financial, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)

			September 30, 2003			December 31, 2002
			( in thousands, except share data)
ASSETS
Cash and cash equivalents			$	123,688		$	145,224
Interest earning deposits in banks				3,503			2,151
Federal funds sold and other short-term investments				23,300			4,200
Securities available for sale				1,080,824			1,173,461
Loans held for sale				38,951			79,893
Gross loans				2,907,139			2,883,717
Allowance for loan losses				(42,512	)		(35,214	)
Net loans			$	2,864,627		$	2,848,503
Company owned life insurance				114,682			108,914
Premises and equipment, net				68,241			57,911
Goodwill				15,575			15,645
Foreclosed real estate				5,098			3,415
Other assets				80,396			81,397
TOTAL ASSETS			$	4,418,885		$	4,520,714
LIABILITIES
Deposits:
Demand deposits			$	1,574,226		$	1,372,446
Savings deposits				215,300			135,720
Other time deposits				1,602,768			1,786,496
Total deposits			$	3,392,294		$	3,294,662
Short-term borrowings				378,757			595,513
Long-term borrowings				210,377			185,832
Other liabilities				68,188			89,026
TOTAL LIABILITIES			$	4,049,616		$	4,165,033
STOCKHOLDERS’ EQUITY
Preferred stock, $1 par value; authorized 10,000,000 shares; none issued			$	—		$	—
Common stock, $0.22 par value; authorized 45,000,000 shares;
	September 30, 2003	December 31, 2002
Issued	29,813,280	29,785,861
Outstanding	24,941,804	24,788,510		6,621			6,615
Additional paid-in capital				73,581			74,326
Retained earnings				372,685			351,247
Deferred compensation				(450	)		(523	)
Treasury stock (9/30/03 - 4,871,476 shares; 12/31/02 - 4,997,351 shares)				(94,525	)		(97,043	)
Accumulated other comprehensive income				11,357			21,059
TOTAL STOCKHOLDERS’ EQUITY			$	369,269		$	355,681
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	4,418,885		$	4,520,714

See accompanying notes to consolidated financial statements.

3

AMCORE Financial, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2003		2002		2003		2002
	( in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans	$	42,647	$	47,573	$	132,422	$	137,965
Interest on securities:
Taxable	$	8,605	$	13,492	$	29,106	$	39,652
Tax-exempt		1,955		2,906		6,775		8,794
Total Income from Securities	$	10,560	$	16,398	$	35,881	$	48,446
Interest on federal funds sold and other short-term investments	$	82	$	16	$	136	$	119
Interest and fees on loans held for sale		1,592		1,272		4,397		3,215
Interest on deposits in banks		18		23		33		64
Total Interest Income	$	54,899	$	65,282	$	172,869	$	189,809
INTEREST EXPENSE
Interest on deposits	$	16,822	$	23,865	$	53,836	$	70,685
Interest on short-term borrowings		2,349		4,397		8,241		13,015
Interest on long-term borrowings		2,703		3,162		8,158		9,879
Total Interest Expense	$	21,874	$	31,424	$	70,235	$	93,579
Net Interest Income	$	33,025	$	33,858	$	102,634	$	96,230
Provision for loan losses		4,318		3,360		21,622		8,653
Net Interest Income After Provision for Loan Losses	$	28,707	$	30,498	$	81,012	$	87,577
NON-INTEREST INCOME
Trust and asset management income	$	5,619	$	5,929	$	17,034	$	18,808
Service charges on deposits		4,751		4,882		13,787		12,862
Mortgage revenues		8,053		1,049		15,486		3,388
Company owned life insurance income		1,753		1,458		5,229		4,184
Gain on sale of branches		—		—		8,208		—
Gain on sale of loans		—		—		2,491		—
Other		2,785		2,943		8,383		8,777
Non-Interest Income, Excluding Net Security Gains	$	22,961	$	16,261	$	70,618	$	48,019
Net security gains		—		1,144		2,285		2,503
Total Non-Interest Income	$	22,961	$	17,405	$	72,903	$	50,522
OPERATING EXPENSES
Compensation expense	$	16,901	$	15,795	$	48,697	$	44,576
Employee benefits		3,690		4,168		12,285		11,856
Net occupancy expense		2,220		2,034		6,325		5,883
Equipment expense		2,404		2,036		6,949		5,820
Data processing expense		1,122		1,624		4,547		4,885
Professional fees		1,134		1,112		3,403		3,207
Communication expense		1,174		999		3,405		3,058
Advertising and business development		1,204		1,095		3,461		3,486
Amortization of intangible assets		36		35		106		106
Other		5,297		5,060		18,393		14,000
Total Operating Expenses	$	35,182	$	33,958	$	107,571	$	96,877
Income Before Income Taxes	$	16,486	$	13,945	$	46,344	$	41,222
Income taxes		4,806		3,262		12,716		10,030
Net Income	$	11,680	$	10,683	$	33,628	$	31,192
EARNINGS PER COMMON SHARE (EPS)
Basic	$	0.47	$	0.43	$	1.35	$	1.26
Diluted	$	0.47	$	0.43	$	1.34	$	1.25
DIVIDENDS PER COMMON SHARE	$	0.17	$	0.16	$	0.49	$	0.48
AVERAGE COMMON SHARES OUTSTANDING
Basic		24,909		24,732		24,860		24,676
Diluted		25,100		24,923		25,024		24,899

See accompanying notes to consolidated financial statements.

4

AMCORE Financial, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Deferred Compensation			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	(in thousands, except share data)
Balance at December 31, 2001	$	6,605	$	74,045		$	323,615		$	(2,107	)	$	(100,197	)	$	(301	)	$	301,660
Comprehensive Income:
Net Income		—		—			31,192			—			—			—			31,192
Current period unrealized gains on hedging activities		—		—			—			—			—			4,307			4,307
Reclassification of losses on hedging activites to earnings		—		—			—			—			—			3,761			3,761
Income tax effect related to items of other comprehensive income																(3,147	)
Net effect of hedging activites		—		—			—			—			—			4,921			8,068
Unrealized holding gains on securities available for sale arising during the period		—		—			—			—			—			37,260			37,260
Less reclassification adjustment for security gains included in earnings		—		—			—			—			—			(2,503	)		(2,503	)
Income tax effect related to items of other comprehensive income		—		—			—			—			—			(13,578	)		(13,578	)
Net unrealized gains on securities available for sale		—		—			—			—			—			21,179			21,179
Comprehensive Income		—		—			31,192			—			—			26,100			60,439
Cash dividends on common stock - $0.48 per share		—		—			(11,854	)		—			—			—			(11,854	)
Purchase of 109,318 shares for the treasury		—		—			—			—			(2,410	)		—			(2,410	)
Deferred compensation expense and other		—		(389	)		—			1,358			—			—			969
Reissuance of 230,780 treasury shares for incentive plans		—		(1,195	)		—			(8	)		5,162			—			3,959
Issuance of 38,033 common shares for Employee Stock Plan		8		679			—			—			—			—			687
Balance at September 30, 2002	$	6,613	$	73,140		$	342,953		$	(757	)	$	(97,445	)	$	25,799		$	350,303
Balance at December 31, 2002	$	6,615	$	74,326		$	351,247		$	(523	)	$	(97,043	)	$	21,059		$	355,681
Comprehensive Income:
Net Income		—		—			33,628			—			—			—			33,628
Current period unrealized losses on hedging activities		—		—			—			—			—			—			—
Reclassification of gains on hedging activites to earnings		—		—			—			—			—			(1,732	)		(1,732	)
Income tax effect related to items of other comprehensive income		—		—			—			—			—			676			676
Net effect of hedging activites		—		—			—			—			—			(1,056	)		(1,056	)
Unrealized holding losses on securities available for sale arising during the period		—		—			—			—			—			(12,027	)		(12,027	)
Less reclassification adjustment for security gains included in earnings		—		—			—			—			—			(2,285	)		(2,285	)
Income tax effect related to items of other comprehensive income		—		—			—			—			—			5,666			5,666
Net unrealized losses on securities available for sale		—		—			—			—			—			(8,646	)		(8,646	)
Comprehensive Income		—		—			33,628			—			—			(9,702	)		23,926
Cash dividends on common stock – $0.49 per share		—		—			(12,190	)		—			—			—			(12,190	)
Purchase of 190,944 shares for the treasury		—		—			—			—			(4,570	)		—			(4,570	)
Deferred compensation expense and other		—		63			—			239			—			—			302
Reissuance of 316,819 treasury shares for incentive plans		—		(1,316	)		—			(166	)		7,088			—			5,606
Issuance of 27,419 common shares for Employee Stock Plan		6		508			—			—			—			—			514
Balance at September 30, 2003	$	6,621	$	73,581		$	372,685		$	(450	)	$	(94,525	)	$	11,357		$	369,269

See accompanying notes to consolidated financial statements.

5

AMCORE Financial, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2003			2002
	(in thousands)
Cash Flows From Operating Activities
Net income	$	33,628		$	31,192
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		4,757			4,404
Amortization and accretion of securities, net		9,143			4,721
Provision for loan losses		21,622			8,653
Amortization of intangible assets		106			106
Gain on branch sales		(8,208	)		—
Net securities gains		(2,285	)		(2,503	)
Net gain on sale of loans		(2,491	)		—
Net gain on sale of loans held for sale		(16,186	)		(6,251	)
Originations of loans held for sale		(804,873	)		(417,223	)
Proceeds from sales of loans held for sale		862,001			441,474
Deferred income tax (benefit) expense		(1,794	)		1,136
Tax benefit on exercise of stock options		952			914
Other, net		(17,975	)		(1,798	)
Net cash provided by operating activities	$	78,397		$	64,825
Cash Flows From Investing Activities
Proceeds from maturities of securities available for sale	$	541,565		$	244,885
Proceeds from sales of securities available for sale		76,640			61,568
Purchase of securities available for sale		(546,739	)		(386,585	)
Net increase in federal funds sold and other short-term investments		(19,100	)		(2,500	)
Net increase in interest earning deposits in banks		(1,352	)		(228	)
Net increase in loans		(195,445	)		(304,622	)
Proceeds from the sale of loans		107,734			—
Investment in company owned life insurance		(1,055	)		(3,248	)
Premises and equipment expenditures, net		(17,424	)		(6,256	)
Proceeds from the sale of foreclosed real estate		3,056			7,193
Net cash used for investing activities	$	(52,120	)	$	(389,793	)
Cash Flows From Financing Activities
Net increase in demand deposits and savings accounts	$	345,811		$	107,498
Net (decrease) increase in time deposits		(123,998	)		228,552
Net (decrease) increase in short-term borrowings		(216,795	)		9,547
Proceeds from long-term borrowings		40,000			—
Payment of long-term borrowings		(15,800	)		(495	)
Net payments to settle branch sales		(65,439	)		—
Dividends paid		(12,190	)		(11,854	)
Issuance of common shares for employee stock plan		514			687
Reissuance of treasury shares for incentive plans		4,654			3,045
Purchase of shares for treasury		(4,570	)		(2,410	)
Net cash (used for) provided by financing activities	$	(47,813	)	$	334,570
Net change in cash and cash equivalents	$	(21,536	)	$	9,602
Cash and cash equivalents:
Beginning of year		145,224			134,244
End of period	$	123,688		$	143,846
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	59,562		$	66,633
Interest paid on borrowings		15,954			24,105
Income tax payments		18,854			8,221
Non-Cash Investing and Financing
Foreclosed real estate - acquired in settlement of loans		5,189			5,071
Transfer current portion of long-term borrowings to short-term borrowings		39			82,950
Capitalized interest		264			80

Balance changes resulting from branch sales are excluded from individual line items such as deposits, loans, and fixed assets.

See accompanying notes to consolidated financial statements.

6

AMCORE FINANCIAL, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10–Q and Rule 10–01 of Regulation S–X. These financial statements include all adjustments (consisting of normal recurring accruals) that in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown. Certain prior year amounts may be reclassified to conform to the current year presentation.

Operating results for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10–K Annual Report of AMCORE Financial, Inc. and Subsidiaries (the “Company”) for the year ended December 31, 2002.

New Accounting Standards

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 expands the information required to be disclosed by guarantors for obligations under certain types of guarantees. It also requires initial recognition at fair value of a liability for such guarantees. In addition, FIN 34, “Disclosure of Indirect Guarantees of Others,” is rescinded, though the guidance contained therein has been carried forward into FIN 45 without modification. The initial recognition and initial measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. Adoption of the Interpretation did not have a material effect on the Company’s Consolidated Financial Statements. See Note 10 of the Notes to the Consolidated Financial Statements.

In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. See Note 9 of the Notes to the Consolidated Financial Statements for a table that illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock options granted.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to certain variable interest entities (“VIEs”) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The recognition and measurement provisions of this Interpretation are effective for newly created VIEs formed after January 31, 2003, on the first interim or annual reporting period beginning after June 15, 2003. However, a public entity need not apply the provisions of FIN 46 to an interest in a variable interest entity until the end of the first reporting period ending after December 15, 2003 for VIEs created before February 1, 2003. The Company has no newly formed VIEs subject to the January 31, 2003 effective date. The Company is in the process of determining whether consolidation of various affordable housing tax credit projects will be necessary in the fourth quarter of 2003 to reflect the December effective date. Consolidation of these entities, if required, is not expected to have a material effect on the consolidated financial statements. The classification of these capital securities as Tier 1 Capital may be impacted by potential de-consolidation of the Trust pursuant to FIN 46. Any such disqualification is not expected to have a material impact on the Company’s capital adequacy. The Company will adopt the provisions of FIN 46 for existing VIEs during the fourth quarter of 2003.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” to amend and clarify financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In addition, SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is effective for contracts entered into or modified after June 30,

7

2003 (with certain exceptions) and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company’s Consolidated Financial Statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards regarding the manner in which an issuer classifies and measures certain types of financial instruments having characteristics of both liabilities and equity. Pursuant to SFAS No. 150, such freestanding financial instruments (i.e., those entered into separately from an entity’s other financial instruments or equity transactions or that are legally detachable and separately exercisable) must be classified as liabilities or, in some cases, assets. In addition, SFAS No.150 requires that financial instruments containing obligations to repurchase the issuing entity’s equity shares and, under certain circumstances, obligations that are settled by delivery of the issuer’s shares be classified as liabilities. SFAS No. 150 amends SFAS No. 128,Earnings Per Share, and SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and nullifies (or partially nullifies) various EITF consensuses. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and for contracts in existence at the start of the first interim period beginning after June 15, 2003. On November 7, 2003, the FASB issued Staff Position (“FSP”) No. 150-3 which deferred the application of several provisions of SFAS No. 150. The adoption of SFAS No. 150 and FSP No. 150-3 are not expected to have a material effect on the Company’s Consolidated Financial Statements.

Completed Divestitures

During the first quarter of 2003, AMCORE Bank, N.A. (the “BANK”) sold six Wisconsin branches in Clinton, Darien, Montello, Kingston, Dalton and Westfield, resulting in $8.2 million pre-tax or $4.9 million in after-tax gains, net of associated costs. For the six branches sold, $47.8 million in loans, $124.6 in deposits and $2.1 million in premises and equipment were transferred to the respective buyers.

8

NOTE 2 – SECURITIES

A summary of securities at September 30, 2003 and December 31, 2002 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
At September 30, 2003
Securities Available for Sale:
U.S. Treasury	$	5,000	$	30	$	—		$	5,030
U.S. Government agencies		55,334		623		(7	)		55,950
Agency mortgage-backed securities		738,371		11,120		(4,766	)		744,725
State and political subdivisions		163,528		9,965		—			173,493
Corporate obligations and other		101,652		1,075		(1,101	)		101,626
Total Securities Available for Sale	$	1,063,885	$	22,813	$	(5,874	)	$	1,080,824
At December 31, 2002
Securities Available for Sale:
U.S. Treasury	$	5,002	$	15	$	—		$	5,017
U.S. Government agencies		3,841		17		(4	)		3,854
Agency mortgage-backed securities		730,969		21,801		(421	)		752,349
State and political subdivisions		215,109		11,129		(4	)		226,234
Corporate obligations and other		187,289		2,304		(3,586	)		186,007
Total Securities Available for Sale	$	1,142,210	$	35,266	$	(4,015	)	$	1,173,461

There were no realized gross gains or losses resulting from the sale of securities available for sale for the three months ended September 30, 2003. Realized gross gains and losses for the three months ended September 30, 2002 were $1.2 million and $90,000, respectively. Realized gross gains were $2.6 million for the nine months ended September 30, 2003 and 2002. Realized gross losses were $358,000 and $90,000 for the nine month periods ended September 30, 2003 and 2002, respectively. At September 30, 2003 and 2002, securities with a fair value of $772.1 million and $950.3 million, respectively, were pledged to secure public deposits, securities under agreements to repurchase and for other purposes required by law.

NOTE 3 – LOANS

The composition of the loan portfolio at September 30, 2003 and December 31, 2002 was as follows:

	September 30, 2003			December 31, 2002
	(in thousands)
Commercial, financial and agricultural	$	737,288		$	760,950
Real estate-construction		176,828			142,844
Real estate-commercial		1,058,304			925,003
Real estate-residential		371,489			449,330
Installment and consumer		562,861			604,663
Direct lease financing		369			927
Gross loans	$	2,907,139		$	2,883,717
Allowance for loan losses		(42,512	)		(35,214	)
Net Loans	$	2,864,627		$	2,848,503

Total loans sold during the nine months ended September 30, 2003 as a result of branch sales and securitization of indirect automobile loans was $153.8 million. A gain of $2.5 million was recognized on the securitization of $106.0 million in indirect automobile loans. For further information on the securitization, see Note 5 of the Notes to the Consolidated Financial Statements. Loans sold in the branch sales transactions totaled $47.8 million.

9

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company’s intangible asset values by segment at September 30, 2003 are as follows:

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
Amortized Intangible Assets
Core Deposits – Retail Banking	$	683	$	658	$	25
– Commercial Banking		293		283		10
Total Amortized Intangible Assets	$	976	$	941	$	35
Unamortized Intangible Assets
Goodwill – Trust and Asset Management					$	9,622
– Retail Banking						3,572
– Commercial Banking						2,381
Total Unamortized Intangible Assets					$	15,575
Total Intangibles (net)					$	15,610
The current and estimated amortization expense by segment is as follows:
	Retail Banking		Commercial Banking		Total
	(in thousands)
Aggregate Amortization Expense
For Quarter Ended 9/30/03	$	25	$	11	$	36
For Nine Months Ended 9/30/03		74		32		106
Estimated Amortization Expense
For Remainder of Year Ending 12/31/03	$	25	$	10	$	35
Total estimated amortization expense					$	35
Changes in the carrying amount of goodwill for the nine months ended September 30, 2003 were related to the sale of six bank branches in the first quarter of 2003. The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows:
	Retail Banking		Commercial Banking		Total
	(in thousands)
Balance as of January 1, 2003	$	3,614	$	2,409	$	6,023
Goodwill related to branches sold		42		28		70
Balance as of September 30, 2003	$	3,572	$	2,381	$	5,953

The Originated Mortgage Servicing Right (“OMSR”) asset values which are recorded in Other Assets are all included in the Mortgage Banking Segment. The September 30, 2003 balances are in the table below. At December 31, 2002, the OMSR Valuation Allowance was $3.36 million and the net carrying amount of OMSR was $7.3 million.

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	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
Capitalized OMSR	$	30,734	$	19,642	$	11,092
Less: OMSR Valuation Allowance						(306	)
Net OMSR					$	10,786
OMSR Valuation Allowance
Balance at beginning of year						($3,361	)
Reversal of impairment valuation						3,055
Balance at September 30, 2003						($306	)

The current and estimated OMSR amortization expense on the Company’s OMSR asset are as follows:

	Mortgage Banking
	(in thousands)
Aggregate Amortization Expense
For Quarter Ended 9/30/03	$	2,224
For Nine Months Ended 9/30/03		6,021
Estimated Amortization Expense
For Remainder of Year Ending 12/31/03	$	1,109
For Year Ending 12/31/04		2,995
For Year Ending 12/31/05		1,747
For Year Ending 12/31/06		1,310
For Year Ending 12/31/07		786
For Year Ending 12/31/08		629
Thereafter		2,516
Total	$	11,092

The weighted-average amortization period for OMSR retained during the third quarter of 2003 was 10.8 years. The unpaid principal balance of mortgage loans serviced for others, including mortgage loans held for sale, was $1.2 billion as of September 30, 2003. This compares to $1.0 billion as of September 30, 2002.

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NOTE 5 - SALE OF RECEIVABLES

There were no sales of indirect automobile loans during the third quarter 2003 or 2002. Year-to-date 2003, the Company sold $106.0 million of indirect automobile loans, reporting a pre-tax gain of $2.5 million ($1.5 million after-tax). There were no sales during the comparable period in 2002. Upon sale, the net carrying amount of the loans is removed from the consolidated balance sheet in exchange for cash and certain retained interests. The retained interests included rights to service the loans that were 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 were not remitted by the securitization trust at the time of the initial sale of the loans to the extent it exceeds projected credit losses (the "Credit Enhancement" or "Overcollateralization"). These retained interests were allocated a carrying value of $9.2 million.

The Company receives monthly servicing fees equal to 0.75 percent per annum of the outstanding beginning principal balance of the loans serviced for the month and rights to future cash flows arising after the investors in the securitization trust have received the returns for which they have contracted. The investors and the securitization trust have no other recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are subordinate to investor's interests. The value of the Interest-Only Strip is subject to prepayment risk and interest rate risk on the Excess Spread and credit risk on the transferred automobile loans on the Overcollateralization.

Key economic assumptions used in measuring the retained interests at the date of the securitization and as of September 30, 2003 including the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows:

				As of September 30, 2003
	Loans Sold During 2003			Actual			10% Adverse Change			20% Adverse Change
				(in thousands)
Prepayment speed assumptions
Prepayment speed		1.7	%		2.3	%		2.6	%		2.8	%
Weighted average life (in months)		19.5			15.7			15.1			14.5
Fair value of retained interests	$	9,418		$	13,228		$	13,179		$	13,134
Change in fair value	$	—		$	—		$	(49	)	$	(94	)
Expected credit loss assumptions
Expected credit losses (loss to liquidation)		1.9	%		1.9	%		2.0	%		2.2	%
Fair value of retained interests	$	9,418		$	13,228		$	13,048		$	12,870
Change in fair value	$	—		$	—		$	(180	)	$	(358	)
Residual cash flow discount rate assumptions
Residual cash flow discount rate (annual)		20	%		19.6	%		21.5	%		23.5	%
Fair value of retained interests	$	9,418		$	13,228		$	12,980		$	12,741
Change in fair value	$	—		$	—		$	(248	)	$	(487	)

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

Total cash flows attributable to the indirect automobile loan securitization transactions was an inflow of $2.2 million and $531,000 for the third quarters of 2003 and 2002, respectively. The following table summarizes the various cash flows received from and paid to the securitization trust:

	Proceeds From Securitizations		Servicing Fees Collected		Other Cash Flows		Fees Paid
	(in thousands)
Cash flows received from trust in third quarter 2003	$	—	$	233	$	1,989	$	—
Cash flows received from trust in third quarter 2002	$	—	$	110	$	421	$	—

Other retained interests represents net cash flows received from retained interests by the transferor other than servicing fees. Other cash flows include, for example, gross cash flows from Interest-Only Strips, net of reductions in such cash flows for loan defaults, including the release of excess Overcollateralization funds.

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

	Total Principal Amount of Loans				Principal Amount of Delinquent Loans				Net Credit Losses Year-to-Date
	As of September 30
	2003		2002		2003		2002		2003		2002
	(in thousands)
Held in portfolio	$	475,161	$	475,198	$	7,482	$	4,510	$	3,098	$	2,361
Securitized		106,224		48,924		2,287		1,196		805		686
Total	$	581,385	$	524,122	$	9,769	$	5,706	$	3,903	$	3,047

Actual and projected static pool credit losses, as a percentage of indirect automobile loans securitized are 1.13%, 1.49% and 1.81% as of the quarters ended September 30, 2003, 2004, and 2005, respectively. Static pool losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. The amounts shown here for each year are a weighted average for all indirect automobile loan securitizations.

NOTE 6 - SHORT-TERM BORROWINGS

Short-term borrowings at September 30, 2003 and December 31, 2002 consisted of the following:

	September 30, 2003		December 31, 2002
	(in thousands)
Securities sold under agreements to repurchase	$	344,465	$	416,760
Federal Home Loan Bank borrowings		57		83,022
Federal funds purchased		17,550		55,323
U.S. Treasury tax and loan note accounts		11,556		28,408
Commercial paper borrowings		5,129		12,000
Total short-term borrowings	$	378,757	$	595,513

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NOTE 7 - LONG-TERM BORROWINGS

Long-term borrowings at September 30, 2003 and December 31, 2002 consisted of the following:

	September 30, 2003		December 31, 2002
	(in thousands)
Federal Home Loan Bank borrowings	$	184,312	$	159,765
Capital Trust preferred securities		25,000		25,000
Capitalized Lease Obligation and other		1,065		1,067
Total Long-Term Borrowings	$	210,377	$	185,832

The Company periodically borrows additional funds from the Federal Home Loan Bank (“FHLB”) in connection with the purchase of mortgage-backed securities and the financing of 1-to-4 family real estate loans. Certain FHLB borrowings have prepayment penalties and call features associated with them. The average maturity of these borrowings at September 30, 2003 is 3.78 years, with a weighted average borrowing rate of 4.36%. The Company reclassifies FHLB borrowings to short term borrowings when the remaining maturity becomes less than one year.

Reductions of FHLB borrowings with call features, assuming they are called at the earliest call date, total $102.0 million in 2003.

The Company has $25.0 million of capital securities outstanding through AMCORE Capital Trust I (“Trust”), a statutory business trust. All of the common securities of the Trust are owned by the Company. The capital securities pay cumulative cash distributions semiannually at an annual rate of 9.35%. The securities are redeemable from March 25, 2007 until March 25, 2017 at a declining rate of 104.675% to 100% of the principal amount. After March 25, 2017, they are redeemable at par until June 15, 2027 when redemption is mandatory. Prior redemption is permitted under certain circumstances such as changes in tax or regulatory capital rules. The proceeds of the capital securities were invested by the Trust in junior subordinated debentures which represents all of the assets of the Trust. The Company fully and unconditionally guarantees the capital securities through the combined operation of the debentures and other related documents. The Company’s obligations under the guarantee are unsecured and subordinate to senior and subordinated indebtedness of the Company.

Other long-term borrowings includes a capital lease with a net carrying amount of $1.1 million on a branch facility leased by the Company. The Company is amortizing the capitalized lease obligation and depreciating the facility over the remaining non-cancelable term of the original lease, which expires or renews in 2021.

	Total
	(in thousands)
Scheduled reductions of long-term borrowings are as follows:
2004	$	25,008
2005		35,187
2006		16,722
2007		28
2008		80,416
Thereafter		53,016
Total	$	210,377

During the first quarter of 2003, the Company extinguished $15.8 million of above-market interest rate FHLB debt early and replaced the debt with lower cost funding. A prepayment penalty of $1.6 million on the early extinguishment is recorded in the ‘other’ line of operating expenses in the Consolidated Statement of Income for the nine months ended September 30, 2003.

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NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING

The Company uses certain financial instruments called derivatives to help manage (“Hedge”) its risk or exposure to changes in interest rates and in conjunction with its mortgage banking operations. The derivatives used most often are interest rate swaps, caps, collars and floors (collectively, “Interest Rate Derivatives”), mortgage loan commitments and forward contracts. Interest Rate Derivatives are contracts with a third party (the “Counter-party”) to exchange interest payment streams based upon an assumed principal amount (the “Notional Principal Amount”). The Notional Principal Amount is not advanced from the Counter-party. It is used only as a reference point to calculate the exchange of interest payment streams. The Company also has a deposit product whose interest rate is tied to the S & P 500 Index.

Interest rate swaps are used by the Company to convert assets and liabilities with variable-rate cash flows to assets and liabilities with fixed-rate cash flows (the “Hedged Items”). Under this arrangement, the Company receives payments from or makes payments to the Counter-party at a specified floating-rate index that is applied to the Notional Principal Amount. This periodic receipt or payment essentially offsets floating-rate interest payments that the Company makes to its depositors or lenders or receives from its loan customers. In exchange for the receipts from or payments to the Counter-party, the Company makes payments to or receives a payment from the Counter-party at a specified fixed-rate that is applied to the Notional Principal Amount. Thus, what was a floating rate obligation or a floating rate asset before entering into the derivative arrangement is transformed into a fixed rate obligation or asset. These types of Hedges are considered cash flow Hedges. The Company also uses interest rate swaps to convert fixed-rate liabilities to floating-rate liabilities. This is typically done when a fixed rate liability has been incurred to fund a variable-rate loan or investment. The interest rate swap has the effect of matching the interest rate risk on the funding with the interest rate risk on the loans or investment. This type of Hedge is considered a fair value Hedge. The longest-term derivative that the Company has used to Hedge its interest rate exposure (cash flow Hedge) expires in September 2004, while the longest-term fair value Hedge expires in March 2013.

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

All derivatives are recognized at fair value in the Consolidated Balance Sheets. Changes in fair value for derivatives that are not Hedges as defined by generally accepted accounting principles are recognized in the Consolidated Statement of Income (“Income Statement”) as they arise. If the derivative is a Hedge, depending on the nature of the Hedge, changes in the fair value of the derivative are either offset in the Income Statement or recorded as a component of other comprehensive income (“OCI”) in the Consolidated Statement of Stockholders’ Equity. If the derivative is designated as a fair value Hedge, the changes in the fair value of the derivative and of the Hedged Item attributable to the Hedged risk are recognized in the Income Statement. To the extent that fair value Hedges are highly effective, changes in the fair value of the derivatives will largely be offset by changes in the fair values of the Hedged Items. If the derivative is designated as a cash flow Hedge, changes in the fair value of the derivative due to the passage of time (“Time Value”) are excluded from the assessment of Hedge effectiveness and therefore flow through the Income Statement for each period. The effective portion of the remaining changes in the fair value of the derivative (“Intrinsic Value”) are recorded in OCI and are subsequently recognized in the Income Statement when the Hedged Item affects earnings. Ineffective portions of changes in the fair value of cash flow Hedges are recognized in the Income Statement. Hedge ineffectiveness is caused when the change in expected future cash flows or fair value of a Hedged Item does not exactly offset the change in the future expected cash flows or fair value of the derivative instrument, and is generally due to differences in the interest rate indices or interest rate reset dates. All derivatives, with the exception of the deposit product tied to the S&P 500 Index and a $50,000 swap left unhedged due to the call of the Hedged Item, qualify and have been designated as Hedges.

15

Also considered derivatives are 1-to-4 family residential mortgage loan commitments (the “Commitments”) and forward mortgage loan sales (the “Forward Contracts”) to the secondary market (collectively “Mortgage Loan Derivatives”) which are reported at fair value on the balance sheet. Changes in the fair value of the Mortgage Loan Derivatives are included in other income or expense as they occur. However, since the Company’s Forward Contracts qualify and have been designated as fair value Hedges of its portfolio of loans held for sale (the “Warehouse Loans”) as well as a Hedge of its Commitments, the Warehouse Loans are also adjusted to fair value. The change in fair value of Warehouse Loans is recorded in other income or expense as it occurs. To the extent that the Company’s Forward Contracts are highly effective, the changes in the fair value of the Forward Contracts will largely offset changes in the fair value of the Commitments and Warehouse Loans.

The Income Statement for the three months ended September 30, 2003 included the following derivative related activity in other non-interest income: no income or loss due to the change in the Time Value component of the market value of cash flow Hedges, $12,000 loss related to the ineffective portion of the fair value Hedges, $77,000 income related to Mortgage Loan Derivatives (net of the corresponding mark-to-market adjustment on Hedged Warehouse Loans), and no income or loss related to the S & P 500 Index embedded derivative. These items, net of taxes of $25,000, totaled $40,000 in income recorded for the quarter ended September 30, 2003.

The Income Statement for the nine months ended September 30, 2003 included the following derivative related activity in other non-interest income: $2,000 loss due to the decrease in the Time Value component of the market value of cash flow Hedges, $12,000 loss related to the ineffective portion of the fair value Hedges, $274,000 loss related to Mortgage Loan Derivatives (net of the corresponding mark-to-market adjustment on Hedged Warehouse Loans), and no income or loss related to the S & P 500 Index embedded derivative. These items, net of taxes of $112,000, totaled $176,000 in losses recorded for the nine months ended September 30, 2003.

The Income Statement for the three months ended September 30, 2002 included the following derivative related activity in other non-interest income: $6,000 loss due to the decrease in the Time Value component of the market value of cash flow Hedges, $11,000 income related to the ineffective portion of the cash flow Hedges, $261,000 income related to Mortgage Loan Derivatives (net of the corresponding mark-to-market adjustment on Hedged Warehouse Loans held for sale), and no income or loss related to the S & P 500 Index embedded derivative. These items, net of taxes of $104,000, totaled income of $162,000 recorded for the quarter ended September 30, 2002.

The Income Statement for the nine months ended September 30, 2002 included the following derivative related activity in other non-interest income: $43,000 loss due to the decrease in the Time Value component of the market value of cash flow Hedges, $29,000 income related to the ineffective portion of the cash flow Hedges, $385,000 income related to Mortgage Loan Derivatives (net of the corresponding mark-to-market adjustment on Hedged Warehouse Loans), and no income or loss related to the S & P 500 Index embedded derivative. These items, net of taxes of $145,000, totaled $226,000 in income recorded for the nine months ended September 30, 2002.

Reclassification from OCI to the Income Statement occurs each period as continuing cash flow payments bring the Intrinsic Value component of the market value of each cash flow Hedge closer to zero. Reclassifications may also occur, as yield adjustments in the same period the Hedged Items affect earnings, in the event cash flow Hedges no longer meet the requirements to qualify for Hedge accounting or are sold. During 2002, swaps that were Hedging loan cash flows were sold, for which the Company received $3.3 million plus accrued interest. The gain continued to be classified in OCI and amortized over the original term of the swap. For the quarter ended September 30, 2003, $577,000 of pre-tax gain was amortized to the Income Statement as additional interest income. For the nine months ended September 30, 2003, $1.7 million of pre-tax gain was amortized to the Income Statement as additional interest income. During the three months ended September 30, 2002, $902,000 (pre-tax) of the net derivative losses included in OCI was reclassified to the Income Statement as additional interest expense. During the nine months ended September 30, 2002, $3.8 million (pre-tax) of the net derivative losses included in OCI was reclassified to the Income Statement as additional interest expense. The 2002 reclassifications occurred mostly through the normal postings of cash receipts and cash payments related to the derivatives and the Hedged Items.

16

NOTE 9 – STOCK INCENTIVE PLANS

At September 30, 2003, the Company had various stock-based compensation plans that are described more fully in Note 13 included in the Form 10–K Annual Report of the Company for the year ended December 31, 2002. During the first nine months of 2003, 358,000 stock options were granted in connection with the Company’s annual grant. The Company accounts for these plans under the recognition and measurement principles of the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based compensation cost for option grants under these plans is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The Company’s Employee Stock Purchase Plan (“ESPP”) allows participating employees to purchase the Corporation’s common stock at an exercise price of 85% of the lower of the closing price of the Company’s common stock on the Nasdaq National Market on the first or last day of each offering period. No charge to earnings is recorded with respect to the ESPP. Accordingly, the Pro Forma table below includes fair value compensation expense in the amount of the 15% discount between the stock price and the option exercise price.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to all stock-based compensation. The fair values were calculated using a Black-Scholes option pricing model.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2003			2002			2003			2002
	(in thousands, except per share data)
Net Income:
As reported	$	11,680		$	10,683		$	33,628		$	31,192
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(461	)		(767	)		(1,863	)		(2,055	)
Pro forma	$	11,219		$	9,916		$	31,765		$	29,137
Basic earnings per share:
As reported	$	0.47		$	0.43		$	1.35		$	1.26
Pro forma		0.45			0.40			1.28			1.18
Diluted earnings per share:
As reported	$	0.47		$	0.43		$	1.34		$	1.25
Pro forma		0.45			0.40			1.27			1.17

NOTE 10 – CONTINGENCIES AND GUARANTEES

Contingencies:

Management believes that no litigation is threatened or pending in which the Company faces potential loss or exposure which will materially affect the Company’s 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.

Guarantees:

The Company, in the normal course of its business, regularly offers financial and performance standby letters of credit to its BANK customers. Financial and performance standby letters of credit are a conditional but irrevocable form of guarantee. Under a financial standby letter of credit, the Company guarantees payment to a third party obligee upon the default of payment by the BANK customer, and upon receipt of complying documentation from the obligee. Under a performance standby letter of credit, the Company guarantees payment to a third party obligee upon nonperformance by the BANK customer and upon receipt of complying documentation from the obligee.

17

Both financial and performance standby letters of credit are typically issued for a period of one year to five years, but can be extended depending on the BANK customer’s needs. As of September 30, 2003, the maximum remaining term for any outstanding standby letters of credit was approximately six and one-half years, expiring on April 15, 2010. An annual fee of one to two percent of face value is normally charged to the BANK customer and is recognized as income over the term of the standby letter of credit. The carrying value of deferred fees as of September 30, 2003 was $1.4 million.

At September 30, 2003, the contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay under the guarantees, was $182.5 million, with $155.8 million in financial standby letters of credit and $26.7 million in performance standby letters of credit.

The issuance of either a financial or performance standby letter of credit is generally backed by collateral. The collateral can take various forms including bank accounts, investments, fixed assets, inventory, accounts receivable and real estate, among other things. At the time that the letters of credit are issued, the value of the collateral is usually in an amount that is considered sufficient to cover the contractual amount of the standby letters of credit.

NOTE 11 – EARNINGS PER SHARE (EPS)

Earnings per share calculations are as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2003		2002		2003		2002
	(in thousands, except per share data)
Net Income	$	11,680	$	10,683	$	33,628	$	31,192
Basic earnings per share:
Average basic shares outstanding		24,909		24,732		24,860		24,676
Earnings per share	$	0.47	$	0.43	$	1.35	$	1.26
Diluted earnings per share:
Weighted average shares outstanding		24,909		24,732		24,860		24,676
Dilutive shares		186		191		159		223
Contingently issuable shares		5		—		5		—
Average diluted shares outstanding		25,100		24,923		25,024		24,899
Diluted earnings per share	$	0.47	$	0.43	$	1.34	$	1.25

Basic EPS is computed by dividing net income available to common stockholders (numerator) by the weighted-average number of common shares outstanding (denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding.

The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued and to include shares contingently issuable pursuant to employee incentive plans. Securities (e.g. options) that do not have a current right to participate fully in earnings but that may do so in the future by virtue of their option rights are potentially dilutive shares. The dilutive shares are calculated based on the treasury stock method meaning that, for the purposes of this calculation, all outstanding options are assumed to have been exercised during the period and the resulting proceeds used to repurchase Company stock at the average market price during the period. In computing diluted EPS, only potential common shares that are dilutive—those that reduce earnings per share or increase loss per share—are included. Exercise of options is not assumed if the result would be antidilutive.

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NOTE 12 - SEGMENT INFORMATION

AMCORE’s internal reporting and planning process focuses on its four primary business Segment(s): Commercial Banking, Retail Banking, Trust and Asset Management, and Mortgage Banking. 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 appropriate allocation of shared support function expenses. The Commercial, Retail and Mortgage Banking Segments also include fund 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 in the Company’s Form 10-K for the year ended December 31, 2002.

Since there are no comprehensive authorities for management accounting equivalent to accounting principles generally accepted in the United States of America, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure. During the first quarter of 2003, the Company also changed the classification of mortgage loans not sold into the secondary market that are retained by the BANK. All revenues from these loans, along with related Provisions and expenses, are now reported as part of the Mortgage Banking Segment instead of the Retail Banking Segment. Prior period Segment results have been restated to reflect this change.

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 are included in the “Other” column.

The Company provides Commercial and Retail banking services through its 62 banking locations. The Commercial Banking Segment provides services including lending, business checking and deposits, cash management, merchant card services and other traditional as well as e-commerce commercial banking services to large and small business customers. The Retail Banking Segment provides services including direct and indirect lending, checking, savings, money market and certificate of deposit (CD) accounts, safe deposit rental, automated teller machines and other traditional and e-commerce retail banking services to individual customers. The Trust and Asset Management segment provides trust, investment management, employee benefit recordkeeping and administration and brokerage services. It also acts as 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, One Source™), regionally to institutional investors and corporations, and locally through AMCORE’s banking locations. The Mortgage Banking segment provides a variety of mortgage lending products to meet its customer needs. It sells a majority of these loans to the secondary market and continues to service most of the loans sold.

19

	Operating Segments
	Commercial Banking			Retail Banking			Trust and Asset Management			Mortgage Banking			Other			Consolidated
	(dollars in thousands)
For the three months ended September 30, 2002
Net interest income	$	19,338		$	9,980		$	10		$	3,463		$	234		$	33,025
Non-interest income		1,808			3,678			6,492			8,127			2,856			22,961
Total revenue		21,146			13,658			6,502			11,590			3,090			55,986
Provision for loan losses		1,659			2,240			—			419			—			4,318
Depreciation and amortization		175			482			96			12			903			1,668
Other non-interest expense		7,841			9,633			5,523			4,151			6,366			33,514
Pretax earnings (loss)		11,471			1,303			883			7,008			(4,179	)		16,486
Income taxes (benefits)		4,106			485			394			2,608			(2,787	)		4,806
Earnings (loss)	$	7,365		$	818		$	489		$	4,400		$	(1,392	)	$	11,680
Segment profit percentage		56.3	%		6.3	%		3.7	%		33.7	%		N/A			100.0	%
For the three months ended September 30, 2002
Net interest income	$	16,659		$	11,201		$	28		$	3,656		$	2,314		$	33,858
Non-interest income		1,782			3,939			6,607			1,272			3,805			17,405
Total revenue		18,441			15,140			6,635			4,928			6,119			51,263
Provision for loan losses		1,304			1,714			—			342			—			3,360
Depreciation and amortization		158			519			87			5			721			1,490
Other non-interest expense		7,972			10,888			5,145			3,417			5,046			32,468
Pretax earnings		9,007			2,019			1,403			1,164			352			13,945
Income taxes (benefits)		3,216			757			568			437			(1,716	)		3,262
Earnings	$	5,791		$	1,262		$	835		$	727		$	2,068		$	10,683
Segment profit percentage		67.2	%		14.7	%		9.7	%		8.4	%		N/A			100.0	%
	Operating Segments
	Commercial Banking			Retail Banking			Trust and Asset Management			Mortgage Banking			Other			Consolidated
	(dollars in thousands)
For the nine months ended September 30, 2003
Net interest income	$	57,403		$	32,962		$	33		$	10,445		$	1,791		$	102,634
Non-interest income		7,566			19,172			19,569			15,234			11,362			72,903
Total Revenue		64,969			52,134			19,602			25,679			13,153			175,537
Provision for loan and lease losses		14,930			5,761			—			931			—			21,622
Depreciation and amortization		519			1,520			320			31			2,466			4,856
Other non-interest expense		23,483			29,082			15,677			11,921			22,552			102,715
Pretax earnings (loss)		26,037			15,771			3,605			12,796			(11,865	)		46,344
Income taxes (benefits)		9,142			5,826			1,509			4,736			(8,497	)		12,716
Earnings (loss)	$	16,895		$	9,945		$	2,096		$	8,060		$	(3,368	)	$	33,628
Segment profit percentage		45.7	%		26.9	%		5.6	%		21.8	%		N/A			100.0	%
Assets	$	1,968,637		$	796,417		$	18,926		$	333,980		$	1,300,925		$	4,418,885
For the nine months ended September 30, 2002
Net interest income	$	45,608		$	32,009		$	95		$	10,488		$	8,030		$	96,230
Non-interest income		5,197			10,513			20,690			3,761			10,361			50,522
Total Revenue		50,805			42,522			20,785			14,249			18,391			146,752
Provision for loan and lease losses		3,976			4,246			—			431			—			8,653
Depreciation and amortization		439			1,644			257			20			2,154			4,514
Other non-interest expense		21,311			30,621			15,950			8,786			15,695			92,363
Pretax earnings		25,079			6,011			4,578			5,012			542			41,222
Income taxes (benefits)		8,702			2,229			1,845			1,849			(4,595	)		10,030
Earnings	$	16,377		$	3,782		$	2,733		$	3,163		$	5,137		$	31,192
Segment profit percentage		62.9	%		14.5	%		10.5	%		12.1	%		N/A			100.0	%
Assets	$	1,657,262		$	732,439		$	21,737		$	378,768		$	1,496,720		$	4,286,926

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the significant factors affecting AMCORE Financial, Inc. and Subsidiaries (“AMCORE” or the “Company”) consolidated financial condition as of September 30, 2003 compared to December 31, 2002 and the consolidated results of operations for the three and nine months ended September 30, 2003 compared to the same periods in 2002. The discussion should be read in conjunction with the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report.

FACTORS INFLUENCING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q 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 prepayment; (VII) general economic and business conditions which are less favorable than expected; (VIII) equity and fixed income market fluctuations; (IX) unanticipated changes in industry trends; (X) unanticipated changes in credit quality and risk factors; (XI) success in gaining regulatory approvals when required; (XII) changes in Federal Reserve Board monetary policies; (XIII) unexpected outcomes on existing or new litigation in which AMCORE, its subsidiaries, officers, directors or employees are named defendants; (XIV) technological changes; (XV) changes in accounting principles generally accepted in the United States of America; (XVI) changes in assumptions or conditions affecting the application of “critical accounting policies”; (XVII) inability of third-party vendors to perform critical services for the Company or its customers; and (XVIII) disruption of operations caused by the conversion of core bank data processing systems.

OVERVIEW OF OPERATIONS

AMCORE reported net income of $11.7 million for the three months ended September 30, 2003. This compares to $10.7 million for the same period in 2002, representing an increase of $997,000 or 9.3%. Net income for the nine months ended September 30, 2003 was $33.6 million, an increase of $2.4 million or 7.8% from the $31.2 million reported for the same period in 2002.

Diluted earnings per share were $0.47 and $1.34 for the three and nine months ended September 30, 2003, respectively, compared to $0.43 and $1.25 for the same periods in 2002. This represents an increase of 9.3% and 7.2% for the three and nine month periods, respectively.

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AMCORE’s annualized return on average equity for the third quarter and year-to-date for 2003 was 12.70% and 12.35%, respectively. Annualized return on average equity for the comparable periods in 2002 was 12.53% and 12.94%. The annualized return on average assets was 1.04% for the third quarter of 2003 and 1.02% for the 2003 year-to-date period, and was 0.97% and 1.00% for the third quarter and year-to-date periods in 2002, respectively.

Branch Strategy

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

During 2001, the Company’s banking subsidiary (the “BANK”) sold seven Illinois branches and in 2002 closed one additional branch. For the seven Illinois Branch Sales, $65.1 million in loans, $170.8 million in deposits and $1.4 million in premises and equipment were sold to the respective buyers resulting in net after-tax gains of $6.3 million (the “Branch Gain(s)”). Loans and deposits for the closed branch were transferred to nearby BANK branches. During the first quarter of 2003, the BANK sold six Wisconsin branches located in Clinton, Darien, Montello, Kingston, Dalton and Westfield. Combined loans, deposits and premises and equipment of $47.8 million, $124.6 million and $2.1 million, respectively, were sold to the respective buyers of the Wisconsin branches, resulting in a pre-tax gain of $8.2 million or a net after-tax gain of $4.9 million (also referred to as “Branch Gain(s)”).

Branch Expansion activities in 2001 included two new offices: one on Rockford’s east side and one in Geneva, Illinois, a Chicago suburb. During 2002, the BANK opened four commercial loan offices and three full-service branches. The commercial loan offices included three in the Chicago suburbs of Schaumburg, Lincolnshire and Des Plaines, Illinois and one on the east side of Madison, Wisconsin. The full-service branches included one each in St. Charles and McHenry, Illinois and one along the beltway in Madison. As a result of the new office openings, a limited branch office in Geneva, Illinois and a smaller full-service branch in downtown McHenry, Illinois were closed.

During the first nine months of 2003, the BANK opened five new branches, including a limited branch office in Aurora, Illinois, a full-service branch on Rockford’s northwest side, full-service branches in South Elgin and Algonquin, Illinois, and a limited branch office for commercial services in Waukesha, Wisconsin, a suburb of Milwaukee. Combined, the new locations opened since April 1, 2001 have $470.3 million in loans and $204.8 million in deposits outstanding as of September 30, 2003. The impact of the Branch Expansion was dilutive $0.045 for the year-to-date period in 2003 compared to dilution of $0.03 for the year-to-date period ending September 30, 2002.

A full service branch was opened in Machesney Park, Illinois and limited branch offices were opened in Oak Brook, Illinois and Freeport, Illinois in October 2003. During the remainder of 2003, the Company plans to open three more branches. The branches will include two full-service facilities in Madison, Wisconsin, and one in Elgin, Illinois. In connection with the opening of these locations, the Company closed one in-store branch in Rockford and will convert one limited branch office to a full-service facility. Total capital expenditures in 2003, including the eight new branches already opened, are estimated at approximately $25.3 million. The total expected impact on 2003 earnings of all offices opened since April 2001 is a decrease of $0.05 to $0.09 per share as start-up costs initially outpace net revenues. The original estimated dilution of $0.10 to $0.15 per share for the year has been reduced due to better than expected year-to-date results. Despite this dilutive impact, AMCORE expects year-over-year growth in earnings per share from improvements in existing business performance during 2003.

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On May 12, 2003, the Company announced the second phase of its Branch Expansion program (“Phase II”), authorizing $30 million in incremental capital investment. These funds will be used to open new full-service facilities and upgrade several limited branch offices to full-service facilities in selected high-growth Midwestern communities. Increased capabilities in these markets will accelerate the Company’s ability to generate deposits, which will better support loan growth and decrease its use of wholesale funding. Phase II calls for a total of 10 additional branches opening in 2004 through 2006. When both phases of the Branch Expansion are complete, AMCORE will have a total of 26 new branches opened since April 2001, net of closed branches. More than two-thirds of its offices will be located in high growth communities. See Table 6 for a tabular presentation of the Company’s Branch Expansion plans. Phase II, when considered with Phase I expansion, is expected to dilute earnings by $0.04 to $0.08 per share in 2004. By 2005, the combined Branch Expansion initiative is expected to be accretive in a range of $0.10 to $0.15 per share.

During 2002, as a complement to its Branch Expansion, the BANK added 37 additional automated teller machines (“ATMs”) in 15 communities in northern Illinois and southern Wisconsin. The ATMs are primarily located in Kelley-Williamson Mobil stations as part of a co-branding relationship, and are owned and operated by an unaffiliated third party. During 2003, the co-branding relationship was expanded and an additional 21 ATM’s were added. The BANK currently owns and operates 75 ATMs throughout Wisconsin (24) and Illinois (51). The co-branded relationship increased the Wisconsin and Illinois ATM presence to 35 and 98, respectively, or 133 overall.

Loan Securitizations

During the first quarter of 2003, the BANK sold $106.0 million of indirect automobile loans in a securitization transaction (the “Auto Loan Sale”), reporting a pre-tax gain of $2.5 million or a net after-tax gain of $1.5 million (the “Auto Loan Sale Gain”). 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. The investors and the securitization trust have no other recourse to the BANK’s other assets for failure of debtors to pay when due. See Note 5 of the Notes to Consolidated Financial Statements.

Other Matters

The Company has learned that late-day trading activity occurred in shares of the Vintage Mutual Funds, advised by its wholly-owned subsidiary, Investors Management Group, Ltd. Late-day trades are trades that occur after the market has closed for the day but are posted at the net asset value for that trading day. Based on its initial investigation, the Company believes the net dollar value associated with the late-day trading activity is not material to the Company’s operating results. The Company will continue to investigate the circumstances surrounding the late-day trading activity and is working to promptly resolve this issue, including by way of addressing any harm that may have been caused to shareholders in the fund.

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

EARNINGS REVIEW OF CONSOLIDATED INCOME STATEMENT

The following highlights a comparative discussion of the major components of net income and their impact for the three and nine months ended September 30, 2003 and 2002.

Net Interest Income

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2003		2002		2003		2002
Interest Income Book Basis	$	54,899	$	65,282	$	172,869	$	189,809
FTE Adjustment		1,193		1,705		4,125		5,278
Interest Income FTE Basis		56,092		66,987		176,994		195,087
Interest Expense		21,874		31,424		70,235		93,579
Net Interest Income FTE Basis	$	34,218	$	35,563	$	106,759	$	101,508

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Net interest income on an FTE basis declined $1.3 million or 3.8% in the third quarter of 2003 compared to the same period in 2002 as lower spreads more than offset improved volumes. On a year-to-date basis, net interest income on an FTE basis was up $5.3 million or 5.2% as improved volumes more than compensated for lower spreads.

The net interest spread is the difference between the average rates on interest-earning assets and the average rates on interest-bearing liabilities. The 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 interest rate spread declined 14 basis points to 3.04% in the third quarter of 2003 from 3.18% in the third quarter of 2002. The net interest margin was 3.33% in the third quarter of 2003, a decline of 22 basis points from 3.55% in the third quarter of 2002.

As Table 2 indicates, the interest rate spread for the nine months ended September 30, 2003 improved 8 basis points from 3.12% in the prior year period to 3.20%. The net interest margin declined 1 basis point to 3.51% from 3.52% for the year-to-date periods ending September 30, 2003 and 2002, respectively.

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 the calculation for interest-earning assets as a total, or interest-bearing liabilities as a total. Tables 3 and 4 analyze the changes attributable to the volume and rate components of net interest income.

Changes Due to Volume

In the third quarter of 2003, net interest income (FTE) increased due to average volume by $1.4 million when compared to the third quarter of 2002. This was comprised of a $1.5 million increase in interest income that was partially reduced by an $86,000 increase in interest expense.

The $1.5 million increase in interest income was driven by a $163.4 million or 6.0% increase in average loans and a $44.1 million or 94.4% increase in average loans held for sale. Offsetting these increases was a decline of $151.7 million or 12.5% in average investment securities. The growth in average loans came from an increase of $253.9 million in commercial real estate lending driven mostly by the Branch Expansion. Partially offsetting this increase was a $99.7 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,

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particularly in new markets, has allowed the Company to reshape its balance sheet to an improved mix of earning assets, contributing to the decline in investment securities.

The increase in average loans, offset by the decline in investment securities, was funded by a $112.2 million or 4.7% increase in average bank-issued deposits and by a $39.6 million or 9.4% increase in brokered certificate of deposits (“CDs”). The increase in average bank-issued deposits was attributable to a Company-wide initiative to attract deposits, especially transaction deposits, and the Branch Expansion. This growth occurred despite the transfer of $124.6 million of deposits in connection with the Wisconsin Branch Sales. AMCORE recognizes the importance of continued bank-issued deposit growth, not only as a means of funding the Branch Expansion loan growth, but also to continue the strategy of reducing its reliance on wholesale funding sources. The transition to full-service branches in new growth markets as the Branch Expansion develops, continued emphasis on attracting and retaining primary transaction accounts, and Auto Loan Sales are all means by which the Company has and expects to implement these strategies. To this end, the Company was able to decrease average borrowings by $142.0 million or 18.7% when comparing the third quarter of 2003 with the same period in 2002.

For the first nine months of 2003, net interest income increased due to average volume by $6.6 million when compared to the same period in 2002. This was comprised of an increase of $10.5 million in interest income that was partially offset by a $3.9 million increase in interest expense. Average loans over this period increased $270.0 million or 10.3% while average securities declined $93.8 million or 8.0%. Average bank-issued deposits increased $92.8 million or 4.0% while average wholesale funding, including brokered CDs, increased $52.8 million or 4.8%.

Changes Due to Rate

During the third quarter of 2003, net interest income (FTE) declined due to average rates by $2.7 million when compared with the same quarter of 2002. This was comprised of a $12.4 million decline in interest income that was partly offset by a $9.6 million decrease in interest expense.

The yield on earning assets declined 121 basis points during the third quarter of 2003, when compared to the same period a year ago. The yield on average loans fell by 108 basis points, as falling interest rates since the first quarter of 2002 impacted pricing on new loan volume, variable priced loans which represent an increasing percentage of the Company’s loan portfolio, and loans that prepaid or refinanced during the year. While all loan categories registered declines, the largest dollar decrease was attributable to commercial real estate loans. The yield on average securities decreased by 155 basis points. This decrease was driven by accelerated premium amortization due to record prepayment levels and lower reinvestment rates.

The rate paid on interest bearing liabilities declined 107 basis points during the third quarter of 2003, compared to the third quarter of 2002. The decline was driven by lower rates paid on all deposit accounts, but was most pronounced on CDs, as older CDs bearing higher rates matured and re-priced during the period of declining interest rates. The Company also benefited from an expired interest rate swap that had negatively impacted funding costs in the third quarter of 2002, as well as new swaps entered into during 2002 that lowered the cost of brokered CDs during the third quarter of 2003. The decrease in short-term borrowing costs was primarily due to reverse repurchase agreements that renewed at lower rates due to the decline in short-term interest rates.

For the first nine months of 2003, net interest income decreased due to average rates by $1.4 million. This was comprised of a $28.6 million decline in interest income that was partly offset by a $27.2 million decrease in interest expense. The yield on earning assets declined by 95 basis points while average rates paid on interest bearing liabilities decreased by 103 basis points.

The current interest rate environment is expected to result in lower deposit interest costs in 2003 compared to 2002. Specifically, the Company expects continuing benefits from deposit re-pricing during the coming year. It will also realize a full year’s benefit from the expired interest rate swap that negatively impacted funding costs in 2002.

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Provision for Loan Losses

The provision for loan losses (“Provision”) is an amount added to the allowance for loan losses (“Allowance”) for loan losses that are probable as of the respective reporting date. Actual loan losses are charged against (reduce) the Allowance when management believes that the collection of principal will not occur. Subsequent recoveries of amounts previously charged to the Allowance, if any, are credited to (increase) the Allowance.

The Allowance is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb probable losses. If not, an additional Provision is made to increase the Allowance. Conversely, this review could result in a decrease in the Allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan groups or pools that are based on historical loss experience and 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. The Allowance is also subject to periodic examination by regulators whose review includes a determination as to its adequacy to absorb probable losses.

The Provision was $4.3 million in the third quarter of 2003, an increase of $958,000 or 28.5% from the $3.4 million in the third quarter of 2002. For the first nine months of 2003, the Provision was $21.6 million, an increase of $13.0 million over the $8.7 million recorded in the same period a year ago. Increases in net non-performing loans and delinquencies, higher net charge-offs, increasing loan balances in emerging markets, deteriorating collateral values, increased concentrations, systems conversion and continued economic weakness were all among the factors leading to the increased Provision.

Loans placed on non-accrual and loans 90-days past due and still accruing increased by $5.8 million when comparing the third quarter of 2003 with the third quarter of 2002. The net increase included one healthcare services related credit totaling $6.0 million included in non-accrual loans. This, combined with deteriorating collateral values on individually reviewed loans, led to an increase of $2.3 million in specific loss estimates since September 30, 2002.

Increasing loan balances in 2003, 10.3% greater on average compared to the first nine months of 2002, and increased historical loss experience led to higher statistical loss estimates on loan pools in an amount of $3.4 million.

Increased delinquencies, growth in emerging markets where our knowledge of the customer base and local conditions is not as strong as existing markets, continued weakness in the overall economy, particularly the manufacturing segment; deteriorating collateral values, including used cars and loans that are secured by receivables, inventory and specialized equipment; and increased concentrations, including commercial real-estate loans, and other factors including systems conversion resulted in additional increases for loss estimates of $7.3 million.

Year-to-date, AMCORE recorded net charge-offs of $12.9 million in 2003 compared to $8.4 million in 2002, an increase of $4.5 million. Annualized net charge-offs were 60 basis points of average loans for the first nine months of 2003 compared to an annualized rate of 43 basis points for the same period last year.

The Allowance, as a percent of total non-accrual loans, was 123.8% and 124.3% at September 30, 2003 and September 30, 2002, respectively.

Future growth in the loan portfolio, weakening economic conditions, specific credit deterioration, or declines in collateral values, among other things, could result in increased Provisions during the remainder of 2003 compared to 2002.

Non-Interest Income

Total non-interest income is comprised primarily of fee-based revenues from trust and asset management, bank-related service charges on deposits and mortgage revenues. Net security gains or losses, gains on

26

Auto Loan Sales and Branch Sales and increases in cash surrender value (“CSV”) and death benefits on bank and company owned life insurance (“COLI”) are also included in this category.

Non-interest income, including net security gains, totaled $23.0 million in the third quarter of 2003, an increase of $5.6 million or 31.9% from $17.4 million in the third quarter of 2002. The increase related primarily to increased mortgage revenues. On a year-to-date basis, non-interest income increased $22.4 million to $72.9 million in 2003 compared to $50.5 million in 2002. In addition to a $12.1 million increase in mortgage revenues, the year-to-date increase included $8.2 million of Branch Gains and $2.5 million of Auto Loan Sale Gain recorded in the first quarter of 2003.

Trust and asset management income totaled $5.6 million in the third quarter of 2003, a decrease of $310,000 or 5.2% from $5.9 million in the third quarter of 2002. For the nine month periods ended September 30, 2003 and 2002, respectively, trust and asset management revenues were $17.0 million and $18.8 million, a decline of $1.8 million or 9.4%. For the quarter, lower AMCORE-managed asset values combined with a shift to a higher mix of fixed income and money market assets contributed to the decrease in trust and asset management revenues. Overall declines in the stock market, when comparing year-to-date 2003 to 2002, negatively impacted the value of AMCORE-administered assets, upon which fees are partially based, leading to the decrease in fee revenue. The loss of a major public fund customer effective October 1, 2003, unless replaced with new business, could adversely affect trust and asset management income. Revenues from this customer were $1.1 million in 2002 and $917,000 year-to-date in 2003.

The trust and asset management segment manages or administers $5.4 billion of investments, inclusive of traditional assets as well as the management of the BANK’s fixed income portfolio of approximately $1.0 billion. Assets in the AMCORE Vintage Mutual Funds totaled $827.6 million at September 30, 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 funds, which comprise approximately one-third of managed assets, can also be negatively affected as the federal funds purchased (“FED Funds”) rate approaches 1.00%, a level generally viewed as a minimum acceptable return by investors.

Service charges on deposits totaled $4.8 million in the third quarter of 2003, a decrease of $131,000 or 2.7% from the third quarter of 2002. For the year-to-date period in 2003, service charges on deposits increased $925,000 or 7.2% to $13.8 million from $12.9 million during the same period in 2002. Deposit growth initiatives, which primarily affected retail accounts, led to the increase in revenues for the year-to-date period.

Mortgage revenues include fees generated from the underwriting, originating and servicing of mortgage loans along with gains realized from the sale of these loans, net of servicing right amortization and impairment. Mortgage revenues were $8.1 million in the third quarter of 2003, an increase of $7.0 million from $1.0 million in the third quarter of 2002. Contributing to the $7.0 million increase was a $4.1 million recapture of mortgage servicing right impairment reserves compared to an impairment charge of $1.7 million in the prior year quarter which resulted in a $5.8 million change year over year. Closing volumes increased 48.9% to $307.1 million in the third quarter of 2003, from $206.3 million in the third quarter 2002. For the first nine months of 2003, mortgage revenues increased $12.1 million to $15.5 million compared to $3.4 million for the first nine months of 2002. This included a volume driven increase due to closings of $804.9 million compared to $417.2 million a year ago. The recapture of mortgage servicing right impairment reserves also contributed to increased revenues and was partially reduced by accelerated amortization of mortgage servicing rights.

Refinancing activity is expected to decline significantly during the fourth quarter resulting in lower mortgage revenues, excluding impairment charges or reversals, as mortgage rates begin to rise. The Company has, however, added 13 mortgage loan originators, primarily in the Branch Expansion markets, to capitalize on growth opportunities in new purchase home mortgages. During the third quarter of 2003, new purchase new home mortgages increased 52.0% compared to the same quarter in 2002.

As of September 30, 2003, AMCORE had $11.1 million of capitalized mortgage servicing rights, less a $306,000 impairment valuation allowance, with a carrying value of $10.8 million. Capitalized mortgage servicing rights at December 31, 2002 were $10.6 million less an impairment valuation allowance of $3.4

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million with a carrying value of $7.3 million. The net capitalized mortgage servicing rights were 0.91% of the servicing portfolio balance at September 30, 2003. The unpaid principal balance of mortgage loans serviced for others, including mortgage loans held for sale, was $1.18 billion as of September 30, 2003. This compares to $1.00 billion as of September 30, 2002.

COLI income totaled $1.8 million in the third quarter of 2003, a $295,000 or 20.2% increase from $1.5 million in the third quarter of 2002. Year-to-date in 2003, COLI income increased $1.0 million or 25.0% to $5.2 million from the prior year period. This includes $467,000 in net death benefits received in the first quarter of 2003. The remaining increases are due to additional investments and the impact of compounding, which are partially offset by lower yields due to declining interest rates. 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 September 30, 2003, the CSV of COLI stood at $114.7 million.

Other non-interest income includes customer service charges, debit card interchange income, ATM fees, brokerage commissions, insurance commissions, gains on fixed asset sales and other miscellaneous income. In the third quarter of 2003, other non-interest income was $2.8 million, a $158,000 or 5.4% decrease from the third quarter of 2002. Declines in the mark-to-market adjustment on derivatives and in insurance commissions were offset by increased brokerage commissions. For the first nine months of 2003, other non-interest income declined $396,000 or 4.5% to $8.4 million from the same period in 2002. Similar factors contributed to the 2003 year-to-date decrease in other non-interest income as well as increased customer service fees and a $309,000 gain on the reversion of excess retirement plan assets that was recorded in 2002.

Recent litigation involving MasterCard and VISA concerning the amount of fees charged to process signature-based debit card transactions are expected to reduce the amount of interchange income that AMCORE receives on the debit cards that it issues. Rate reductions became effective August 1, 2003 and are not expected to materially impact 2003 earnings. Beginning January 1, 2004, merchants may also refuse to accept signature-based debit card transactions. This is likely to result in additional reductions in interchange income for 2004 that could be material. At this time it is not possible to accurately predict the magnitude of this reduction since it will be driven by the individual practices and policies of the point-of-sale merchant. During the first nine months of 2003 and for all of 2002, AMCORE recorded $1.6 million and $1.8 million, respectively, in debit card interchange fee income.

There were no net realized securities gains recorded in the third quarter of 2003, compared to $1.1 million in the third quarter of 2002. For the nine month periods ended September 30, 2003 and 2002, net realized security gains were $2.3 million and $2.5 million, respectively. The security sales in 2003, which included $23.1 million in municipal securities with longer duration and unfavorable call structures, have facilitated efforts to reduce the duration of the investment portfolio as well as fund loan growth. The level of security gains or losses is dependent on the size of the available for sale portfolio, pledging requirements, interest rate levels, AMCORE’s liquidity needs, and balance sheet risk objectives.

Operating Expenses

Total operating expense was $35.2 million in the third quarter of 2003, an increase of $1.2 million or 3.6%, from $34.0 million in the third quarter of 2002. For the first nine months of 2003, operating expenses were $107.6 million, an increase of $10.7 million or 11.0% from $96.9 million for the first nine months of 2002. The increases were primarily due to higher personnel costs and other operating expenses. The increase included a $1.6 million charge for the early extinguishments of debt that occurred in the first quarter of 2003 and a $623,000 writedown of an investment in a private equity fund in the second quarter of 2003. The efficiency ratio was 62.84% in the third quarter of 2003, compared to 66.24% in the third quarter of 2002. On a year-to-date basis, the efficiency ratio was 61.28% and 66.01% for 2003 and 2002, respectively. The efficiency ratio is calculated by dividing total operating expenses by the sum of net interest income and non-interest income.

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Compensation expense is the largest component of operating expenses, totaling $16.9 million in the third quarter of 2003, an increase of $1.1 million or 7.0% from $15.8 million in the third quarter of 2002. The increase included $1.1 million in salaries and wages associated with the Branch Expansion strategy, net of reductions due to the Branch Sales, and $501,000 in increased salary expenses and commissions driven by increased mortgage activity in the third quarter of 2003 compared to the third quarter of 2002. These increases were partly offset by lower incentive costs. For the nine month periods ended September 30, 2003 and 2002, compensation expenses totaled $48.7 million and $44.6 million respectively, an increase of $4.1 million or 9.2%. For the year-to-date period, $2.7 million of the increase was due to the Branch Expansion, net of the Branch Sales, and $1.5 million was due to salary expenses and commissions related to increased mortgage activity.

Employee benefit costs were $3.7 million in the third quarter of 2003 compared to $4.2 million in the third quarter of 2002, representing a $478,000 or 11.5% decrease due to lower employee retirement expenses. The third quarter of 2002 included the $784,000 Retirement Obligation for the retiring Chief Executive Officer. On a year-to-date basis, employee benefit costs were $12.3 million in 2003 compared to $11.9 million in 2002, an increase of $429,000 or 3.6% due to increased employee payroll tax expense and insurance expenses.

Net occupancy expense for the third quarters of 2003 and 2002 was $2.2 million and $2.0 million, respectively, an increase of $186,000 or 9.1%. On a year-to-date basis, net occupancy expense totaled $6.3 million for 2003 compared to $5.9 million for 2002, an increase of $442,000 or 7.5%, primarily due to the impact of the Branch Expansion strategy.

Equipment expense increased $368,000 or 18.1% to $2.4 million in the third quarter of 2003, compared to $2.0 million in the third quarter of 2002. For the year-to-date period ended September 30, 2003, equipment expense totaled $6.9 million compared to $5.8 million for the same period in 2002, an increase of $1.1 million or 19.4%. The increase was primarily due to increased depreciation and amortization on new computer hardware and software resulting from the July 2003 data processing conversion. The increase for the full year is expected to be $1.1 million. Also necessitated by the data processing conversion were personal computer replacements and the acceleration of existing hardware and software depreciation and amortization.

Data processing expense was $1.1 million in the third quarter of 2003, a decline of $502,000 or 30.9% compared to $1.6 million for the same period in 2002. For the year-to-date period ended September 30, 2003, data processing expense totaled $4.5 million compared to $4.9 million for the same period in 2002, a decrease of $338,000 or 6.9%. The decrease was primarily due to lower processing costs resulting from the conversion from an outsourced data processing system to a new in-house data processing system. The decline for the full year 2003 is expected to be $1.5 million.

Professional fees were $1.1 million for the third quarters of 2003 and 2002. For the year-to-date period ended September 30, 2003, professional fees totaled $3.4 million compared to $3.2 million for the same period in 2002, an increase of $196,000 or 6.1% due to tax consulting services.

Communication expense was $1.2 million and $999,000 in the third quarters of 2003 and 2002, respectively. This was an increase of $175,000 or 17.5%. For the year-to-date period ended September 30, 2003, communication expense totaled $3.4 million compared to $3.1 million for the same period in 2002, an increase of $347,000 or 11.3%. Higher telecommunication, postage and courier costs all contributed to the increase in communication expense and were due to Branch Expansion and rate increases.

Advertising and business development expenses were $1.2 million in the third quarter of 2003, an increase of $109,000 or 10.0% from $1.1 million in the third quarter of 2002. The increase is mainly due to the Branch Expansion. For the nine month periods ended September 30, 2003 and 2002, expenses totaled $3.5 million. For the full year, expenses are expected to rise over 2002 levels as the Company continues to grow, due in part to Branch Expansion into new markets and totally-free checking promotions.

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Other expenses were $5.3 million in the third quarter of 2003, an increase of $237,000 or 4.7% from $5.1 million in the third quarter of 2002. The increase was primarily due to higher loan processing costs associated with increased mortgage activity. For the year-to-date period ended September 30, 2003, other expenses totaled $18.4 million compared to $14.0 million for the same period in 2002, an increase of $4.4 million or 31.4%. The increase was primarily due to increased loan processing costs of $1.7 million, $1.6 million in prepayment penalties related to restructuring of Federal Home Loan Bank (“FHLB”) advances, and the $623,000 private equity fund impairment charge.

Income Taxes

Income tax expense totaled $4.8 million in the third quarter of 2003, compared with $3.3 million in the third quarter of 2002, an increase of $1.5 million or 47.3%. For the nine month period ended September 30, 2003, income tax expense totaled $12.7 million, a $2.7 million or 26.8% increase over the $10.0 million in the same period of 2002. Increases for both the three and nine month periods of 2003 over the same periods of 2002 were primarily the result of higher earnings before tax and higher state income taxes.

The effective tax rates were 29.2% and 23.4% in the third quarters of 2003 and 2002, respectively, and were 27.4% and 24.3% for the nine months ended September 30, 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 rates over the prior year periods are due to a decrease in the size of these tax-exempt items relative to total pre-tax earnings as well as an increase in state income taxes.

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 12 of the Notes to Consolidated Financial Statements presents a condensed income statement and selected balance sheet information for each Segment.

The financial information presented was derived from the Company’s internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, 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 appropriate 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Since there are no comprehensive authorities for management accounting equivalent to accounting principles generally accepted in the United States of America, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure. During the first quarter of 2003, the Company also changed the classification of mortgage loans not sold into the secondary market that are retained by the BANK. All revenues from these loans, along with related Provisions and expenses, are now reported as part of the Mortgage Banking Segment instead of the Retail Banking Segment. Prior period Segment results have been restated to reflect this change.

Total Segment results differ from consolidated results primarily due to intersegment eliminations, certain corporate administration costs, items not otherwise allocated in the management accounting process and treasury and investment activities. The impact of these items is aggregated to reconcile the amounts presented for the Segments to the consolidated results and is included in the “Other” column of Note 12 of the Notes to Consolidated Financial Statements.

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Commercial Banking

The Commercial Banking Segment (“Commercial”) provides commercial banking services to large and small business customers through the BANK’s 62 banking locations. The services provided by this Segment include lending, business checking and deposits, cash management, merchant card services and other traditional as well as e-commerce commercial banking services.

Commercial earnings for the third quarter of 2003 were $7.4 million, an increase of $1.6 million or 27.2% from the third quarter of 2002. An increase in net interest income was partially offset by an increase in Provision expense. Year-to-date earnings in 2003 were $16.9 million compared to $16.4 million in the same period in 2002, an increase of $518,000 or 3.2%. The increase for the 2003 year-to-date period was primarily attributable to increased net interest income partially offset by increased Provision and operating expenses.

Net interest income increased $2.7 million in the third quarter of 2003 and by $11.8 million for the nine month period ended September 30, 2003 compared to the same periods a year ago. The increases were due to higher average loan volumes, particularly commercial real estate loans, lower priced deposits and decreased cost of funds allocations, which more than compensated for lower yields on loans. The lower yields on loans, reduced rates on deposits and decreased cost of funds allocations were all attributable to declining short-term interest rates over the past two years, which have impacted new product (loans and deposits) pricing as well as the re-pricing of variable priced products and fixed-price product renewals. Strong loan demand, aided by the Branch Expansion, was more than sufficient to replace average loan balances transferred in the Branch Sales, leading to the increased volumes.

Non-interest income increased $26,000 in the third quarter of 2003 when compared to the same period a year ago. On a year-to-date basis, the increase was $2.4 million and was attributable to Commercial’s allocable portion of the Branch Gain of $2.2 million.

The third quarter 2003 Provision increased $355,000 from the same period in 2002. The $11.0 million increase in the Provision for the year-to-date period ended September 30, 2003 over the same period for 2002 was attributable to a $4.3 million increase in net charge-offs, a $2.1 million increase in specific loss estimates, higher statistical loss estimates on increasing loan pools of $517,000 and other loss estimates of $4.1 million. These estimates are based upon growth in emerging markets; increased delinquencies; deteriorating collateral values, including loans that are secured by receivables, inventory and specialized equipment; systems conversion; continued weakness in the overall economy, particularly the manufacturing segment; increased concentrations, including commercial real estate; and other factors.

Operating expenses decreased $114,000 in the third quarter of 2003 and increased $2.3 million year-to-date when compared to the same periods in 2002. The increase was largely due to higher personnel expenses, which included the impact of the Branch Expansion strategy.

Income taxes increased $890,000, quarter-to-quarter, and $440,000 when comparing the year-to-date period ended September 30, 2003 to the same period in 2002, due to higher income before taxes and higher state income taxes.

The Commercial Segment represented 56.3% and 67.2% of total Segment earnings in the third quarters of 2003 and 2002, respectively, and 45.7% for 2003 year-to-date versus 62.9% for the same period in 2002. Commercial Segment total assets were $2.0 billion at September 30, 2003 and represented 44.6% of total consolidated assets.

Retail Banking

The Retail Banking Segment (“Retail”) provides retail-banking services to individual customers through the BANK’s 62 banking locations in northern Illinois and south central Wisconsin. The services provided by this

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Segment include direct and indirect lending, checking, savings, money market and CD accounts, safe deposit rental, automated teller machines, and other traditional and e-commerce retail banking services.

Retail earnings for the third quarter of 2003 were $818,000, a decrease of $444,000 or 35.2% from the third quarter of 2002 due to lower net interest income and higher provision expense, partially offset by lower operating expenses. Year-to-date Retail earnings were $9.9 million compared to $3.8 million for the same period in 2002, an increase of $6.2 million or 163.0%. Improved net interest income, higher non-interest income and lower operating expenses were partially offset by increased income taxes and Provision.

Net interest income decreased by $1.2 million in the third quarter of 2003 due to lower loan yields and reduced funds credit allocations partially offset by lower priced deposits. Net interest income increased by $953,000 for the year-to-date period in 2003 when compared to the same period in 2002. This increase was due to higher average loan volumes, particularly indirect automobile loans, and lower priced deposits. These factors more than offset lower yields on loans and reduced funds credit allocations. The lower yields on loans, reduced rates on deposits and decreased funds credit allocations were all attributable to declining rates over the past two years, which have impacted new product (loans and deposits) pricing as well as the re-pricing of variable priced products and fixed-price product renewals. The growth in overall average loan balances occurred despite the Auto Loan Sales and the transfer of loans associated with the Wisconsin Branch Sales totaling $129.5 million, both of which occurred in March 2003.

Non-interest income decreased $261,000 in the third quarter of 2003, compared to the same period in 2002. Year-to-date non-interest income increased $8.7 million from the prior year period. Of this increase, $6.0 million was attributable to the Branch Gain and $2.5 million related to the Auto Loan Sale Gain. The remaining increase related to higher deposit service charge income.

The third quarter 2003 Provision increased by $526,000 compared to the third quarter of 2002. For the nine month period ended September 30, 2003, the provision increased $1.5 million when compared to the same period in 2002. The increase in the Provision was attributable to a $659,000 increase in net charge-offs and other loss estimates of $1.1 million which were partially offset by a decline of $216,000 in statistical loss estimates on loan pools. These estimates are based upon increased delinquency, deteriorating used car values and other factors including systems conversion.

Operating expenses decreased by $1.3 million when comparing the third quarter of 2003 with the same quarter in 2002, and decreased $1.7 million when comparing the year-to-date periods. The decline for both periods is due to lower allocations for support function expenses.

Income taxes decreased $272,000 quarter-to-quarter due to lower pre-tax earnings and higher state income taxes. An increase of $3.6 million for the year-to-date period ending September 30, 2003 compared to the prior year period was primarily the result of higher income before taxes and higher state income taxes.

The Retail Segment represented 6.3% and 14.7% of total segment earnings in the third quarters of 2003 and 2002, respectively, and 26.9% for 2003 year-to-date versus 14.5% for the same period in 2002. Retail Segment total assets were $796.4 million at September 30, 2003 and represented 18.0% of total consolidated assets.

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.

TAM earnings for the third quarter of 2003 were $489,000, a decrease of $346,000 or 41.4% from the same period in 2002. Year-to-date TAM’s 2003 earnings were $2.1 million, a $637,000 or 23.3% decline from the

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same period in 2002. The decrease was primarily due to declines in non-interest income net of lower operating expenses and income taxes.

TAM non-interest income declined $115,000 and $1.1 million, respectively, for the three and nine month periods ended September 30, 2003 when compared to the same periods in 2002. Declines in fee-based revenue were partially offset by increased brokerage commission income. Lower AMCORE-managed asset values combined with a shift to a higher mix of fixed income and money market assets contributed to the decrease in trust and asset management revenues. Overall declines in the stock market, when comparing year-to-date 2003 to 2002, negatively impacted the value of AMCORE-administered assets, upon which fees are partially based, leading to the decrease in fee revenue. The loss of a major public fund customer effective October 1, 2003, unless replaced with new business, could adversely affect TAM revenues. Revenues from this customer were $1.1 million in 2002 and $917,000 year-to-date in 2003. Net brokerage commissions on the other hand have been particularly strong and are primarily the result of increased fixed-annuity sales. In addition, processing costs associated with annuity sales, which are netted against commissions, have declined as the TAM segment is now processing its own sales.

Operating expenses increased $387,000 in the third quarter of 2003 due to higher personnel costs and decreased $210,000 for 2003 year-to-date when compared to the same periods in 2002. The increase for the quarter was due to higher personnel costs, which on a year-to-date basis are lower than the prior year period and contributed to the year-to-date decline in expense. In addition, the year-to-date decrease was related to lower advertising costs compared to the prior year.

Income taxes declined $174,000 and $336,000 for the three and nine month periods of 2003, respectively, when compared to the same periods in 2002. The decrease in taxes is related to the decline in pre-tax earnings.

The TAM Segment represented 3.7% and 9.7% of total segment earnings in the third quarters of 2003 and 2002, respectively, and 5.6% and 10.5% for the nine month periods ended September 30, 2003 and 2002, respectively. TAM Segment total assets were $18.9 million at September 30, 2003 and represented 0.4% of total consolidated assets.

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.

Mortgage earnings were $4.4 million in the third quarter of 2003, compared to $727,000 in the same period in 2002. Year-to-date 2003 earnings were $8.1 million compared to $3.2 million in the same period of 2002. The increase for both periods is due to increased mortgage volume, primarily driven by refinancing activity, and the $4.1 recapture of mortgage servicing right impairment reserves in the third quarter 2003.

Net interest income decreased $193,000 in the third quarter of 2003 compared to the same quarter in 2002, and decreased $43,000 on a year-to-date basis compared to the prior year period. This was primarily due to decreased interest and fees on mortgage loans held for sale net of lower cost of funds allocations for both the third quarter and year-to-date periods.

Non-interest income includes fees generated from the underwriting, originating and servicing of mortgage loans along with the gains realized from the sale of these loans, net of servicing right amortization and impairment. Non-interest income for the third quarter of 2003 increased $6.9 million from the third quarter of 2002. Closing volumes increased 48.9% to $307.1 million in the third quarter of 2003, from $206.3 million in the third quarter of 2002. Also contributing to the increase in non-interest income was the recapture of mortgage servicing right impairment reserves of $4.1 million in the third quarter 2003 compared to an impairment charge of $1.7 million in the prior year quarter which resulted in a $5.8 million change year over year. Non-interest income for the year-to-date period in 2003 was $15.2 million compared to $3.8 million in

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2002, an increase of $11.5 million or 305.1%, also impacted by the recapture of mortgage servicing right impairment revenues. Closings for the year-to-date period in 2003 increased 92.9% to $804.9 million from $417.2 million in 2002.

Operating expenses increased $741,000 in the third quarter of 2003 compared to same period in 2002. Year-to-date 2003 operating expenses totaled $11.9 million, an increase of $3.1 million from the $8.8 million in the prior year period. The increases were primarily due to higher salaries, commissions and processing costs that were paid due to the increase in mortgage volumes.

Income taxes increased $2.2 million and $2.9 million for the three and nine month periods of 2003, respectively, when compared to the same periods in 2002. The increase was due to higher pre-tax earnings.

The unpaid principal balance of mortgage loans serviced for others, including mortgage loans held for sale, was $1.18 billion as of September 30, 2003. This compares to $1.00 billion as of September 30, 2002.

The Mortgage Segment represented 33.7% and 8.4% of total segment earnings in the third quarters of 2003 and 2002, respectively, and 21.8% and 12.1% for the nine month periods ended September 30, 2003 and 2002, respectively. Mortgage Segment total assets were $334.0 million at September 30, 2003 and represented 7.6% of total consolidated assets.

BALANCE SHEET REVIEW

Total assets were $4.5 billion at September 30, 2003, a decrease of $101.8 million or 2.3% from December 31, 2002. Total liabilities decreased $115.4 million over the same period, while stockholders’ equity increased $13.6 million.

Total earning assets, including COLI, decreased $83.9 million from December 31, 2002. Non-earning assets decreased $17.9 million over the same period. The decrease in earning assets was primarily attributable to a $92.6 million decrease in investment securities and a $40.9 million decrease in loans held for sale partially offset by increases of $23.4 million in gross loans and $19.1 million in short-term investments. The decrease in investment securities includes reductions in corporate obligations and municipal securities and also reflects mortgage prepayment activity as well as actions taken by AMCORE to improve liquidity and to reduce duration. Loan balances reflect a less than 1.0% net increase from December 31, 2002 as internal loan growth including the impact of the Branch Expansion was mostly offset by the $106.0 million in loans sold in the Auto Loan Sale and $47.8 million of loans transferred in the Branch Sales.

Total deposits increased $97.6 million from December 31, 2002 including a $180.4 million increase in bank-issued deposits and an $82.8 million decrease in brokered CDs. Short-term borrowings decreased by $216.8 million over the same period, while long-term borrowings increased by $24.5 million. Increased deposit balances, proceeds from the Auto Loan Sales and the decline in investment securities were used to pay down short-term borrowings and brokered CDs and to fund the Branch Sales. Other liabilities decreased $20.8 million.

The stockholders’ equity increase was due to earnings for the first nine months of 2003 less dividends paid to shareholders. Other comprehensive income declined due to changes in the unrealized value of investment securities available for sale.

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 Sheet, 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

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transactions serve a variety of purposes including management of the Company’s 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.

The Company’s largest off-balance sheet arrangement relates to the Auto Loan Sales that occurred during 2000, 2001 and the first quarter of 2003. Structured as sales pursuant to Statement of Financial Accounting Standard (“SFAS”) 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” the 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 Financial Accounting Standards Board Interpretation (“FIN”) 46 “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.

As of September 30, 2003, the balance of automobile loans serviced and not included on the Company’s Consolidated Balance Sheet was $106.2 million. The carrying value of retained interests was $13.5 million. The carrying value of the retained interests is the maximum estimated exposure to loss of the retained residual interests. See Note 5 of the Notes to Consolidated Financial Statements.

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 September 30, 2003, the unpaid principal balance of mortgage loans serviced for others was $1.18 billion. These loans are not recorded on the Company’s consolidated balance sheets. The Company, as of September 30, 2003 and in accordance with SFAS No 140, had recorded $11.1 million of capitalized mortgage servicing rights, less a $306,000 impairment valuation allowance. See Note 4 of the Notes to Consolidated Financial Statements.

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 September 30, 2003, a liability in the amount of $1.4 million, representing the value of the guarantee obligations associated with certain of the financial and standby letters of credit, has been recorded in accordance with FIN 45. This amount will be amortized into income over the life of the commitment. The notional amount of all letters of credit, including those exempted from the scope of FIN 45, was $182.5 million. See Note 10 of the Notes to Consolidated Financial Statements.

The carrying value of mortgage loan commitments at September 30, 2003 was an asset of $717,000. This amount represents the fair value of those commitments marked-to-market in accordance with SFAS 138, “Accounting for Derivative Instruments and Hedging Activities.” The total notional amount of mortgage loan commitments was $47.1 million at September 30, 2003. See Note 8 of the Notes to Consolidated Financial Statements.

At September 30, 2003, the Company had extended $579.7 million 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.

The Company has a number of non-marketable equity investments that have not been consolidated in its financial statements. At September 30, 2003, these investments included $5.9 million in private equity fund

35

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 $2.0 million at some future date. The Company also has recorded investments of $4.3 million, $22.6 million, and $8.9 million, respectively, in stock of the Federal Reserve Bank, FHLB and preferred stock of Freddie Mac. These investments are recorded at historical cost, with income recorded when dividends are declared. Other investments, comprised of various affordable housing tax credit projects (“AHTCP”), totaled approximately $846,000 at September 30, 2003. Those investments without guaranteed yields were reported on the equity method, while those with guaranteed yields were reported using the effective yield method. With the possible exception of the AHTCPs, consolidation of these investments will not be required pursuant to FIN 46 since the Company is not the primary beneficiary in the investments. The Company is in the process of determining whether consolidation of the AHTCPs will be necessary in the fourth quarter of 2003 to reflect the December 31, 2003 effective date. Consolidation of these entities, if required, is not expected to have a material effect on the consolidated financial statements. The maximum exposure to loss for all non-marketable equity investments is the sum of the carrying amounts plus additional commitments.

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. The total assets managed or administered by the Company at September 30, 2003, excluding the BANK’s investment portfolio, were $4.4 billion.

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 the third quarter of 2003, the Company entered into two operating lease arrangements in connection with the Branch Expansion. During the first quarter of 2003, the Company incurred $1.6 million in prepayment penalties to restructure a portion of its FHLB advances and the Company entered into two operating lease arrangements in connection with the Branch Expansion. There were no residual value guarantees on these leases. During the quarter, the Company entered into fair value hedges of FHLB borrowing for total notional amount of $74.0 million. Other than these transactions, there were no material changes in the Company’s contractual obligations since December 31, 2002. See Notes 6, 7 and 8 of the Notes to Consolidated Financial Statements and Note 5 to the Notes to the Consolidated Financial Statements included in the Form 10-K Annual Report for the year ended December 31, 2002.

ASSET QUALITY REVIEW AND CREDIT RISK MANAGEMENT

AMCORE’s credit risk is centered in its loan portfolio, which on September 30, 2003 totaled $2.91 billion, or 69.7% of earning assets. The objective in managing loan portfolio risk is to quantify and manage credit risk on a portfolio basis as well as reduce the risk of a loss resulting from a customer’s failure to perform according to the terms of a transaction. To achieve this objective, AMCORE strives to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, and borrower concentration.

The Company is also exposed to credit risk with respect to its $114.7 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 amounted to $42.5 million at September 30, 2003, compared to $35.2 million at December 31, 2002, an increase of $7.3 million or 20.7%. The Allowance is a significant estimate that is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb probable losses. If not, an additional Provision is made to increase the Allowance. Conversely, this review could result in a decrease in the Allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan groups or pools that are based on historical loss experience, and loss estimates that are based upon the size,

36

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.

As of September 30, 2003, the Allowance as a percent of total loans and of non-accrual loans was 1.46% and 124%, respectively. These compare to the same ratios at December 31, 2002 of 1.22% and 108%. Net charge-offs were $12.9 million for the first nine months of 2003 versus $8.4 million for the first nine months of 2002. These represented 0.60% and 0.43% of average loans, respectively, on an annualized basis. AMCORE’s management believes that the Allowance coverage is adequate.

An analysis of the Allowance is shown in Table 5.

Non-performing Assets

Non-performing assets consist of non-accrual loans, loans 90 days past due and still accruing, other real estate owned and other foreclosed assets. Non-performing assets totaled $46.6 million as of September 30, 2003, an increase of $5.1 million or 12.3% from $41.5 million at December 31, 2002. The $5.1 million increase consisted of a $2.7 million increase in loans 90 days past due and still accruing, an increase of $1.8 million in non-accrual loans, a $1.7 million increase in other real estate owned, and a $1.1 million decrease in other foreclosed assets. Total non-performing assets represented 1.06% and 0.92% of total assets at September 30, 2003 and December 31, 2002, respectively.

An analysis of non-performing assets is shown in Table 5.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management

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

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include brokered CDs, FED Funds lines, FHLB advances, repurchase agreements, commercial paper and back-up lines of credit, the sale or securitization of loans, and access to other capital markets.

The parent company requires adequate liquidity to pay its expenses, repay debt when due and pay stockholder dividends. Liquidity is primarily provided to the parent through the BANK and other subsidiaries in the form of dividends. Year-to-date in 2003, dividends from subsidiaries amounted to $18.0 million.

Funding of loans is the most significant liquidity need, representing 65.8% of total assets as of September 30, 2003. Since December 31, 2002, loans increased $23.4 million. Loans held for sale, which represents mortgage origination fundings awaiting delivery to the secondary market, decreased $40.9 million. During this same time period, bank-issued deposits increased $180.4 million. The increases in loans and bank-issued deposits were due to increases resulting from the Branch Expansion and same-branch growth net of declines due to the Branch Sales and the Auto Loan Sale. The decrease in loans held for sale reflects decreased refinancing activity due to increasing mortgage interest rates. Overall, liquidity improved during the first nine months of 2003, as non-core funding, which includes borrowings and brokered CDs, declined $275.0 million. This improvement was due to the proceeds from increased bank-issued deposits, the Auto

37

Loan Sales, lower balance in loans held for sale, and from the decline in investment securities that were not needed to fund the Branch Sales.

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 loan growth and the total estimated $54.8 million capital investment. This reflects the Company’s strategy to move into new markets where business density is greatest and where revenues and a profitable book of business can be developed over a shorter period of time. Once this is accomplished, a more permanent full-service site is sought where the Company expects deposit generation to mitigate the liquidity pressure inherent in the early phases of the strategy.

Notwithstanding the funding requirements posed by the Branch Expansion, the Company is confident of its ability to meet and manage its short and long-term liquidity needs. As of September 30, 2003, available sources of liquidity included $178.4 million of FED Funds lines, $301.5 million from the FED in connection with pledging of commercial loans, $256.5 million of unpledged investment securities and $44.9 million of unused commercial paper and backup line of credit borrowings. The Company also has significant 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 September 30, 2003 was $475.0 million, also remains an attractive source of liquidity through additional Auto Loan Sales. At September 30, 2003, potential uses of liquidity included $579.7 million in commitments to extend credit, $47.1 million in residential mortgage commitments primarily for sale to the secondary market, and $182.5 million in standby letters of credit. At December 31, 2002, these amounts were $587.4 million, $99.8 million and $161.4 million, respectively.

Capital Management

Total stockholders’ equity at September 30, 2003, was $369.3 million, an increase of $13.6 million or 3.8% from December 31, 2002. The stockholders’ equity increase was due to earnings for the first nine months of 2003 less dividends paid to shareholders. Other comprehensive income also declined due to changes in the unrealized value of investment securities available for sale and the year-to-date 2003 reclassification to earnings of deferred gains on cash flow hedge derivatives that were sold during 2002. See Note 8 of the Notes to Consolidated Financial Statements. AMCORE paid dividends of $0.17 per share in the third quarter of 2003 compared to $0.16 per share in the third quarter of 2002.

AMCORE has outstanding $25.0 million of capital securities through AMCORE Capital Trust I (“Trust”), a statutory business trust, of which all common securities are owned by AMCORE. The capital securities qualify as Tier 1 capital for regulatory capital purposes. The classification of these capital securities as Tier 1 Capital may be impacted by potential de-consolidation of the Trust pursuant to FIN 46. Any such disqualification is not expected to have a material impact on the Company’s capital adequacy.

AMCORE’s ratio of risk-based capital at 11.80%, its Tier 1 capital at 10.57% and its leverage ratio at 8.30%, all significantly exceed the regulatory minimums (as the following table indicates), as of September 30, 2003. The BANK, whose ratios are not presented below, is considered a “well-capitalized” institution based on regulatory guidelines.

(dollars in thousands)	September 30, 2003				September 30, 2002
	Amount		Ratio		Amount		Ratio
Total Capital (to Risk Weighted Assets)	$	408,779	11.80	%	$	367,451	10.92	%
Total Capital Minimum		277,243	8.00	%		268,916	8.00	%
Amount in Excess of Regulatory Minimum	$	131,536	3.80	%	$	98,535	2.92	%
Tier 1 Capital (to Risk Weighted Assets)	$	366,166	10.57	%	$	333,114	9.90	%
Tier 1 Capital Minimum		138,622	4.00	%		134,458	4.00	%
Amount in Excess of Regulatory Minimum	$	227,544	6.57	%	$	198,656	5.90	%
Tier 1 Capital (to Average Assets)	$	366,166	8.30	%	$	333,114	7.73	%
Tier 1 Capital Minimum		176,423	4.00	%		172,352	4.00	%
Amount in Excess of Regulatory Minimum	$	189,743	4.30	%	$	160,762	3.73	%
Risk adjusted assets	$	3,465,543			$	3,363,445
Average assets	$	4,410,596			$	4,308,804

38

TABLE 1

ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET

	Quarter Ended September 30, 2003							Quarter Ended September 30, 2002
	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
	(dollars in thousands)
Assets:
Investment securities(1) (2)	$	1,062,464		$	11,612	4.37	%	$	1,214,179		$	17,963	5.92	%
Short-term investments		43,182			100	0.92	%		10,506			39	1.47	%
Loans held for sale(3)		90,862			1,592	7.01	%		46,728			1,272	10.89	%
Commercial		737,687			10,411	5.59	%		734,247			11,913	6.43	%
Commercial real estate		1,205,728			16,778	5.52	%		951,786			15,743	6.56	%
Residential real estate		384,463			5,837	6.05	%		484,122			8,797	7.25	%
Consumer		563,397			9,762	6.87	%		557,683			11,260	8.01	%
Total loans(1) (4)	$	2,891,275		$	42,788	5.87	%	$	2,727,838		$	47,713	6.95	%
Total interest-earning assets	$	4,087,783		$	56,092	5.46	%	$	3,999,251		$	66,987	6.67	%
Allowance for loan losses		(43,166	)						(34,643	)
Non-interest-earning assets		394,935							384,138
Total assets	$	4,439,552						$	4,348,746
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings	$	1,326,271		$	3,018	0.90	%	$	1,126,334		$	4,672	1.65	%
Time deposits		1,179,649			9,462	3.18	%		1,267,353			13,822	4.33	%
Total Bank issued interest-bearing deposits	$	2,505,920		$	12,480	1.98	%	$	2,393,687		$	18,494	3.07	%
Wholesale deposits		458,814			4,342	3.75	%		419,206			5,372	5.08	%
Short-term borrowings		419,447			2,349	2.22	%		546,622			4,397	3.19	%
Long-term borrowings		196,135			2,703	5.47	%		210,996			3,161	5.94	%
Total interest-bearing liabilities	$	3,580,316		$	21,874	2.42	%	$	3,570,511		$	31,424	3.49	%
Non-interest bearing deposits		409,540							360,049
Other liabilities		84,801							79,926
Realized Stockholders’ Equity		353,295							322,254
Other Comprehensive Income		11,600							16,006
Total Liabilities & Stockholders’ Equity	$	4,439,552						$	4,348,746
Net Interest Income (FTE)				$	34,218						$	35,563
Net Interest Spread (FTE)						3.04	%						3.18	%
Interest Rate Margin (FTE)						3.33	%						3.55	%

Notes:

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

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

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

⁽⁴⁾ The balances of nonaccrual loans are included in average loans outstanding. Interest on loans includes yield related loan fees of $554,000 and $626,000, respectively.

39

TABLE 2

ANALYSIS OF NET INTEREST INCOME AND AVERAGE BALANCE SHEET

	Nine Months Ended September 30, 2003							Nine Months Ended September 30, 2002
	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
	(dollars in thousands)
Assets:
Investment securities(1) (2)	$	1,080,042		$	39,529	4.88	%	$	1,173,810		$	53,181	6.04	%
Short-term investments		23,353			169	0.97	%		15,802			183	1.55	%
Loans held for sale(3)		73,467			4,397	7.98	%		41,928			3,215	10.22	%
Commercial		751,920			32,559	5.79	%		726,847			35,118	6.46	%
Commercial real estate		1,162,704			50,065	5.76	%		884,200			44,651	6.75	%
Residential real estate		408,535			19,436	6.35	%		491,744			27,242	7.39	%
Consumer		561,220			30,839	7.35	%		511,673			31,497	8.23	%
Total loans(1) (4)	$	2,884,379		$	132,899	6.16	%	$	2,614,464		$	138,508	7.08	%
Total interest-earning assets	$	4,061,241		$	176,994	5.82	%	$	3,846,004		$	195,087	6.77	%
Allowance for loan losses		(39,872	)						(34,261	)
Non-interest-earning assets		395,489							368,365
Total assets	$	4,416,858						$	4,180,108
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings	$	1,212,438		$	8,181	0.90	%	$	1,076,254		$	13,641	1.69	%
Time deposits		1,202,684			31,271	3.48	%		1,246,064			42,077	4.51	%
Total Bank issued interest-bearing deposits	$	2,415,122		$	39,452	2.18	%	$	2,322,318		$	55,718	3.21	%
Wholesale deposits		515,225			14,384	3.73	%		361,481			14,967	5.54	%
Short-term borrowings		457,530			8,241	2.04	%		526,039			13,015	3.32	%
Long-term borrowings		189,984			8,158	5.74	%		222,385			9,879	5.94	%
Total interest-bearing liabilities	$	3,577,861		$	70,235	2.62	%	$	3,432,223		$	93,579	3.65	%
Non-interest bearing deposits		389,445							355,474
Other liabilities		85,508							70,028
Realized Stockholders’ Equity		346,232							313,358
Other Comprehensive Income		17,812							9,025
Total Liabilities & Stockholders’ Equity	$	4,416,858						$	4,180,108
Net Interest Income (FTE)				$	106,759						$	101,508
Net Interest Spread (FTE)						3.20	%						3.12	%
Interest Rate Margin (FTE)						3.51	%						3.52	%

Notes:

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

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

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

⁽⁴⁾ The balances of nonaccrual loans are included in average loans outstanding. Interest on loans includes yield related loan fees of $2.2 million and $2.1 million, respectively.

40

TABLE 3

ANALYSIS OF QUARTER-TO-QUARTER CHANGES IN NET INTEREST INCOME

	Quarter Ended Sept 2003/Sept 2002
	Increase (Decrease) Due to Change In						Total Net Increase (Decrease)
	Average Volume			Average Rate
	(in thousands)
Interest Income:
Investment securities(1) (2)	$	(2,055	)	$	(4,296	)	$	(6,351	)
Short-term investments		81			(20	)		61
Loans held for sale(3)		890			(570	)		320
Commercial		56			(1,558	)		(1,502	)
Commercial real estate		3,782			(2,747	)		1,035
Residential real estate		(1,644	)		(1,316	)		(2,960	)
Consumer		114			(1,612	)		(1,498	)
Total loans(1) (4)		2,741			(7,666	)		(4,925	)
Total Interest-Earning Assets	$	1,459		$	(12,354	)	$	(10,895	)
Interest Expense:
Interest-bearing demand and savings	$	723		$	(2,377	)	$	(1,654	)
Time deposits	$	(904	)	$	(3,456	)	$	(4,360	)
Total Bank issued interest-bearing deposits	$	831		$	(6,845	)	$	(6,014	)
Wholesale deposits		473			(1,503	)		(1,030	)
Short-term borrowings		(888	)		(1,160	)		(2,048	)
Long-term borrowings		(215	)		(243	)		(458	)
Total Interest-Bearing Liabilities	$	86		$	(9,636	)	$	(9,550	)
Net Interest Margin / Net Interest Income (FTE)	$	1,373		$	(2,718	)	$	(1,345	)

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

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

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

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

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

⁽⁴⁾ The balances of nonaccrual loans are included in average loans outstanding. Interest on loans includes yield related loan fees.

41

TABLE 4

ANALYSIS OF YEAR-TO-DATE CHANGES IN NET INTEREST INCOME

	Nine Months Ended September 30, 2003/September 30, 2002
	Increase (Decrease) Due to Change In						Total Net Increase (Decrease)
	Average Volume			Average Rate
	(in thousands)
Interest Income:
Investment securities(1) (2)	$	(4,008	)	$	(9,644	)	$	(13,652	)
Short-term investments		69			(83	)		(14	)
Loans held for sale(3)		2,008			(826	)		1,182
Commercial		1,184			(3,743	)		(2,559	)
Commercial real estate		12,652			(7,238	)		5,414
Residential real estate		(4,256	)		(3,550	)		(7,806	)
Consumer		2,895			(3,553	)		(658	)
Total loans(1) (4)		13,474			(19,083	)		(5,609	)
Total Interest-Earning Assets	$	10,474		$	(28,567	)	$	(18,093	)
Interest Expense:
Interest-bearing demand and savings	$	1,554		$	(7,014	)	$	(5,460	)
Time deposits		(1,421	)		(9,385	)		(10,806	)
Total Bank issued interest-bearing deposits		2,148			(18,414	)		(16,266	)
Wholesale deposits		5,191			(5,774	)		(583	)
Short-term borrowings		(1,205	)		(3,569	)		(4,774	)
Long-term borrowings		(1,400	)		(321	)		(1,721	)
Total Interest-Bearing Liabilities	$	3,861		$	(27,205	)	$	(23,344	)
Net Interest Margin / Net Interest Income (FTE)	$	6,613		$	(1,362	)	$	5,251

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

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

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

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

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

⁽⁴⁾ The balances of nonaccrual loans are included in average loans outstanding. Interest on loans includes yield related loan fees.

42

TABLE 5

ASSET QUALITY

The components of non-performing loans, foreclosed assets and troubled debt restructurings at September 30, 2003

and December 31, 2002 were as follows:

	September 30, 2003		December 31, 2002
	(in thousands)
Impaired loans:
Non-accrual loans
Commercial	$	6,971	$	12,185
Real estate		4,606		1,671
Other non-performing:
Non-accrual loans(1)		22,766		18,679
Loans 90 days or more past due and still accruing		6,260		3,555
Total non-performing loans	$	40,603	$	36,090
Foreclosed assets:
Real estate		5,098		3,415
Other		921		2,024
Total foreclosed assets	$	6,019	$	5,439
Total non-performing assets	$	46,622	$	41,529
Troubled debt restructurings	$	1,166	$	3,327

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

An anaylsis of the allowance for loan losses for the periods ended September 30, 2003 and 2002 is presented below:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2003			2002			2003			2002
	($ in thousands)
Balance at beginning of period	$	42,154		$	33,986		$	35,214		$	33,940
Charge-Offs:
Commercial, financial and agricultural		2,060			1,536			7,427			2,822
Real estate		574			500			2,146			2,210
Installment and consumer		1,760			1,559			5,200			4,622
Direct leases		—			51			120			117
		4,394			3,646			14,893			9,771
Recoveries:
Commercial, financial and agricultural		61			185			586			341
Real estate		108			17			565			185
Installment and consumer		265			274			825			813
Direct leases		—			1			—			16
		434			477			1,976			1,355
Net Charge-Offs		3,960			3,169			12,917			8,416
Provision charged to expense		4,318			3,360			21,622			8,653
Reductions due to sale of loans		—			—			(1,407	)		—
Balance at end of period	$	42,512		$	34,177		$	42,512		$	34,177
Ratio of net-charge-offs during the period to average loans outstanding during the period(1)		0.54	%		0.46	%		0.60	%		0.43	%

⁽¹⁾ On an annualized basis.

43

TABLE 6

AMCORE Branch Expansion Plans

Strategy	LBO*		Full Serv.		In-store		Branch Expansion		Total Branches
2001									64
– Sold branches									(7	)
+ New branches	1		1		0		2		2
– Closed, moved to new facility	0		0		0		0		0
Cumulative total	1		1		0		2		59
2002
+ New branches	4		3		0		7		7
– Closed, moved to new facility	(1	)	(1	)	0		(2	)	(2	)
Cumulative total	4		3		0		7		64
2003
– Sold branches									(6	)
– Closed in-store									(1	)
+ New branches	4		7		0		11		11
– Closed, moved to new facility	(1	)	(1	)	(2	)	(4	)	(4	)
Cumulative total	7		9		(2	)	14		64
2004
+ New branches	3		6		0		9		9
– Closed, moved to new facility	(2	)	0		(2	)	(4	)	(4	)
Cumulative total	8		15		(4	)	19		69
2005
+ New branches	2		8		0		10		10
– Closed, moved to new facility	(5	)	0		0		(5	)	(5	)
Cumulative total	5		23		(4	)	24		74
2006
+ New branches	0		2		0		2		2
– Closed, moved to new facility	(2	)	0		0		(2	)	(2	)
Cumulative total	3		25		(4	)	24		74

* LBO is a limited branch office.

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ITEM 3. 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.

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. AMCORE’s net interest income can be significantly impacted by external factors. These factors include, but are not limited to: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities re-price, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings, competition, a general rise or decline in interest rates, changes in the slope of the yield curve, 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 instruments to maximize net interest income while maintaining acceptable levels of risk to changes in market interest rates. Interest rate sensitivity analysis is performed monthly using various simulations with an asset/liability modeling system. These analyses are reviewed by the Asset and Liability Committee (“ALCO”), whose actions attempt to minimize any sudden or sustained negative impact that interest rate movements may have on net interest income. ALCO reviews the impact of liquidity, loan and deposit pricing compared to its competition, capital adequacy and rate sensitivity, among other things, and determines appropriate policy direction to maintain or meet established ALCO guidelines.

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 the twelve-month period beginning October 1, 2003 would be approximately $128,000 or 0.09% 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 2002, comparable assumptions would have resulted in a potential increase in 2003 net interest income of $3.3 million or 2.12%. Thus, AMCORE’s earnings at risk from a rising-rate scenario have increased since the end of 2002.

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 the twelve-month period beginning October 1, 2003 of approximately $7.4 million or 4.92% of base forecasted net interest income. The same assumptions at the end of 2002 would have resulted in a potential decrease in net interest income of $7.7 million or 5.01%. AMCORE’s sensitivity to declining interest rates has decreased slightly since the end of 2002. AMCORE continues to be sensitive to compression as rates on earning assets are adversely affected by the full 100 basis point decline whereas interest paying liabilities may already be paying less than one percent and thus cannot decline the full 100 basis points.

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, and by the impact of the growth of the Company. 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.

A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in the Company's December 31, 2002 Form 10-K.

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ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

(b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II.

ITEM 1. Legal Proceedings

Management believes that no litigation is threatened or pending in which the Company faces potential loss or exposure which will materially affect the Company’s financial position or results of operations. 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.

ITEM 4. Submission of Matters to a Vote of Security Holders

(a) – (d) None

ITEM 6. Exhibits and Reports on Form 8-K

(a)	3	Amended and Restated Articles of Incorporation of AMCORE Financial, Inc. dated April 8, 1986 (Incorporated by reference to Exhibit 3 of AMCORE’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1986); as amended May 3, 1988 to Article 8 (Incorporated by reference to AMCORE’s definitive 1988 Proxy Statement dated March 18, 1988); and as amended May 1, 1990 to Article 5 (Incorporated by reference to AMCORE’s definitive 1990 Proxy Statement dated March 21, 1990).
	3.1	By-laws of AMCORE Financial, Inc. as amended December 7, 2001 (Incorporated by reference to Exhibit 3.1 of AMCORE’s Annual Report on Form 10-K for the year ended December 31, 2001).
	4	Rights Agreement dated February 16, 2001, between AMCORE Financial, Inc. and Wells Fargo Bank Minnesota, N.A. (Incorporated by reference to AMCORE’s Form 8-K as filed with the Commission on February 27, 2001).
	31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		A report on Form 8-K, dated July 15, 2003, was filed concerning the Company’s results of operations for the quarter ended June 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMCORE FINANCIAL, INC.
Date: November 14, 2003	By:	/s/    JOHN R. HECHT
		John R. Hecht Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX

(a)	3	Amended and Restated Articles of Incorporation of AMCORE Financial, Inc., dated April 8, 1986 (Incorporated by reference to Exhibit 3 of AMCORE’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1986); as amended May 3, 1988 to Article 8 (Incorporated by reference to AMCORE’s definitive 1988 Proxy Statement dated March 18, 1988); and as amended May 1, 1990 to Article 5 (Incorporated by reference to AMCORE’s definitive 1990 Proxy Statement dated March 21, 1990).
	3.1	By-laws of AMCORE Financial, Inc., as amended December 7, 2001 (Incorporated by reference to Exhibit 3.1 of AMCORE’s Annual Report on Form 10-K for the year ended December 31, 2001).
	4	Rights Agreement dated February 16, 2001, between AMCORE Financial, Inc. and Wells Fargo Bank Minnesota, N.A. (Incorporated by reference to AMCORE’s Form 8-K as filed with the Commission on February 27, 2001).
	31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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