The following discussion highlights the significant factors affecting AMCORE Financial, Inc. and subsidiaries' ("AMCORE" or the "Company") consolidated financial condition as of March 31, 2009 compared to December 31, 2008, and the consolidated results of operations for the three months ended March 31, 2009 compared to the same period in 2008. 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.

This report on Form 10-Q contains, and 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 or adverse findings or rulings made by local, state or federal regulators or agencies regarding AMCORE and its operations; (III) failure to obtain new customers and retain existing customers;
(IV) inability to carry out marketing and/or expansion plans; (V) ability to attract and retain key executives or personnel; (VI) changes in interest rates including the effect of prepayments; (VII) general economic and business conditions which are less favorable than expected; (VIII) equity and fixed income market fluctuations; (IX) unanticipated changes in industry trends; (X) unanticipated changes in credit quality and risk factors; (XI) success in gaining regulatory approvals when required; (XII) changes in Federal Reserve Board monetary policies; (XIII) unexpected outcomes on existing or new litigation in which AMCORE, its subsidiaries, officers, directors or employees are named defendants; (XIV) technological changes; (XV) changes in accounting principles generally accepted in the United States of America; (XVI) changes in assumptions or conditions affecting the application of "critical accounting estimates"; (XVII) inability of third-party vendors to perform critical services for the Company or its customers; (XVIII) disruption of operations caused by the conversion and installation of data processing systems; (XIX) adverse economic or business conditions affecting specific loan portfolio types in which the Company has a concentration, such as construction and land development loans;
(XX) zoning restrictions or other limitations at the local level, which could prevent limited branch offices from transitioning to full-service facilities;
(XXI) possible changes in the creditworthiness of customers and value of collateral and the possible impairment of collectibility of loans; (XXII) changes in lending terms to the Company and the Bank by the Federal Reserve, Federal Home Loan Bank, or any other regulatory agency or third party; and,
(XXIII) the recently enacted Emergency Economic Stabilization Act of 2008, and the various programs the U.S. Treasury and the banking regulators are implementing to address capital and liquidity issues in the banking system, all of which may have significant effects on the Company and the financial services industry, the exact nature and extent of which cannot be determined at this time.

Key Initiatives

Credit quality-The Company continues to enhance the credit risk administration and measurement processes of its banking subsidiary (the "Bank"). Actions already taken or underway include: implemented an expanded risk grading system to provide more detailed information as to the conditions underlying the portfolio; engaged an independent third party to review a representative sample of the commercial loan portfolio to verify risk rating accuracy; shifted virtually all construction and development loan relationships to an experienced specialty unit to manage and reduce the concentration; reorganized the commercial credit approval process; increased the allowance for loan losses and enhanced the processes related to the allowance calculation; implemented straight-through-processing system for commercial lending; increased staffing and resources in the Bank's non-performing assets resolution specialty group, which pursues resolution of non-performing assets; hired a new chief credit officer with strong leadership and portfolio management skills; added qualified and experienced senior staff to manage the credit administration, loan review and appraisal functions; reorganized the commercial line of business to eliminate two layers of management, to improve communication and accelerate decision making; formed a risk committee that reviews the loan portfolio including segments that could develop into a concentration to ensure that the Company is appropriately monitoring and managing its credit portfolio risk; and initiated a plan to substantially lower its exposure to non-strategic, non-relationship based accounts, especially loans concentrated in single-service accounts such as investment real estate loans, while increasing its focus on commercial and industrial relationship lending.

Cost efficiencies-The Company continues its efforts in 2009 to right size its cost structure to its revenue stream. Pre-FDIC operating expenses for first quarter 2009 declined 16% from the prior year first quarter. This included more than an 11% reduction in full-time equivalent positions since the beginning of 2008.

On April 27, 2009, the Company announced further strategic cost reduction measures that better align the Company's operations and cost structure to the realities of the current marketplace. These actions included reductions in executive salaries by five percent, suspension of employee merit increases, decreases in the Company's contribution to the 401(k) plan, and a nine percent reduction of its work force, resulting in approximately $20 million in annualized cost savings. Estimated charges due to the restructuring are expected to be $2 million in the second quarter 2009.

During 2008, the Company identified five under-utilized high-cost facilities that could be consolidated with other nearby locations (the "Facilities Consolidation"). These were two office buildings, one small older branch in a historical market, one leased Chicago suburban location with minimal consumer activity that housed mainly commercial lenders, and a leased branch with excess capacity, minimal access to customers, and high maintenance costs. A $1.7 million non-cash impairment charge was recorded in connection with the Facilities Consolidation. One property was sold during 2008 at an amount equal to its book value while the other properties continue to be listed for sale.

Capital and Liquidity-The Company continues to actively evaluate all opportunities to raise additional capital and otherwise enhance its capital position. During fourth quarter 2008, the Company merged its Investment Management and Trust Group into the main Bank charter. This added more than $8 million of capital to the Bank, a more efficient use of the capital of the organization. See Capital Management section below for an expanded discussion of the regulatory capital standards. This also allows the Company to serve its customers with greater "One-Bank" operational clarity. In fourth quarter 2008, the Company suspended its quarterly dividend to preserve capital and parent company liquidity. AMCORE also elected to participate in the FDIC Transaction Account Guarantee Program, providing unlimited insurance on non-interest bearing transaction accounts through December 2009. During 2008, the Bank continued to build its liquidity reserves to strengthen its funding stability as the economic environment became less stable. At March 31 2009, the Bank's liquidity reserves exceeded $680 million.

Broadening Customer Relationships-The Company's reputation for customer and community service has always been an important driver of its business. Reducing its non-relationship accounts, while reaffirming and building upon its core customer relationships, is expected to build consistency across the Company footprint. Developing deep and enduring customer relationships across all our lines of business is a key objective. The "One-Bank" initiative for serving customers across all lines of business continues to be a focus for 2009. The initiative is expected to better leverage the combined expertise of the Company and its people across the lines of business to better meet the customers' financial needs, while enhancing the profitability of the Company.

The Company also focused on measuring line of business performance and closely aligning profitability with incentive compensation in order to drive strong core customer-based growth. This focus on profitability, rather than volume only measures, has led to improved product pricing that is more reflective of true costs and market risks and is expected to help the Company strengthen its earnings stream as it emerges from this credit cycle.

During 2008, the Bank joined the MoneyPass and Sum, surcharge-free ATM networks. As a result, AMCORE cardholders now have access to surcharge-free transactions at more than 19,000 ATMs across the United States, including a large concentration of ATMs conveniently located in the same geographic regions as AMCORE customers. These new relationships expand AMCORE's channel of ATMs throughout Illinois and Wisconsin from 336 at March 31, 2008 to more than 1,650 as of March 31, 2009.

Other Significant Items

Corporate restructuring and key personnel changes-The previously mentioned reduction in workforce resulted in the elimination of approximately 116 positions, including that of Donald H. Wilson, President and Chief Operating Officer, and Richard E. Stiles, Executive Vice President, Commercial Banking Group. As a result of the workforce reductions, one layer and in some cases two layers of management were eliminated. This is expected to improve communications and accelerate decision making in the Company. The Company's objective is to build an organization that is streamlined, disciplined and driven to weather a variety of economic circumstances.

On February 22, 2008, Kenneth E. Edge retired as Chief Executive Officer (the "Executive Retirement") of the Company, and remained as Chairman of the Board of Directors (the "Board") of the Company until May 6, 2008.

Also, on February 22, 2008, the Board of Directors of the Company elected William R. McManaman as Chief Executive Officer. Prior to his appointment as Chief Executive Officer, Mr. McManaman, age 60, has served as a Director of the Company since 1997. On May 6, 2008, the Board elected Mr. McManaman as Chairman of the Board.

Branch expansion-During first quarter 2009, the Bank opened two new branches, one in Antioch, Illinois and one in Naperville, Illinois, and has plans to open a third in Northbrook, Illinois during the fourth quarter. These three locations were already committed to and in the pipeline prior to the recent downturn in the credit cycle. This completes the Branch Expansion initiative that began in 2001. The Bank's Lake Zurich, Illinois commercial team will relocate to the Vernon Hills branch during June 2009. Modifications in branch hours were implemented in April 2009 to more closely reflect customer usage patterns and as part of the Company's cost reduction measures.

Significant transactions-Net security gains of $6.9 million were realized in the first quarter 2009 due to the sale of $384 million in bonds. Security gains allowed the Company to improve liquidity, optimize capital usage and capture gains jeopardized by the risk of prepayment during the quarter.

Trust preferred interest deferral-The Company has $50 million of Trust Preferred securities that qualify as Tier 1 Capital for regulatory capital purposes for the Company. In first quarter of 2009, the Company elected to defer regularly scheduled quarterly interest payments on the Trust Preferred securities. The deferral of interest does not constitute an event of default, per the terms of the indentures. While the Company defers the payment of interest, it will continue to accrue expense for interest owed at a compounded rate.

Regulatory developments-On May 15, 2008, the Bank entered into a written agreement (the "Agreement") with the OCC. The Agreement describes commitments made by the Bank to address and strengthen banking practices relating to asset quality and the overall administration of the credit function at the Bank. The Bank has implemented enhancements to its credit processes to address the matters identified by the OCC and expects to comply with all the requirements specified in the Agreement. In the meantime, the Agreement results in the Bank's ineligibility for certain actions and expedited approvals without the prior written consent and approval of the OCC. These actions include, among other things, the appointment of directors and senior executives, making or agreeing to make certain payments to executives or directors, business combinations and branching.

Recent market and legislative developments-The global and U.S. economies continue to experience significantly reduced business activity as a result of, among other factors, disruptions in the financial system during the past year and a half. Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government sponsored entities and major commercial and investment banks.

Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have been significantly adversely affected as a result. Volatility and disruption in the capital and credit markets has reached unprecedented levels. In many cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers' underlying financial strength.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, subsequent to the end of third quarter 2008, Congress enacted and the President signed into law the Emergency Economic Stabilization Act of 2008 (ESA). Shortly thereafter, the Federal banking agencies announced the Troubled Asset Relief Program (TARP) and Capital Purchase Program (CPP). Collectively, these actions provided a variety of programs that financial institutions could participate in, including the potential sale of certain troubled loans to the United States Government, sale of preferred stock to the United States Treasury and temporary expansion of FDIC insured deposit levels (some voluntary and some automatic). These programs continue to evolve as the administration strives to keep pace with rapidly changing economic conditions. AMCORE continues to review these programs for their potential to add value to its shareholders, customers and business and the potential impact of the ESA or related programs on the financial markets generally and the Company's future financial position, results of operation, cash flows or liquidity.

It is not yet clear what impact the ESA, TARP, including the CPP, the temporary FDIC guarantee expansion and other liquidity and funding initiatives of the Federal Reserve Board (Fed) and other agencies, and any additional programs that may be initiated in the future, will ultimately have on the financial markets and the other difficulties described above, including the extreme levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies.

Impact of inflation-Apart from operating expenses, the financial services industry is not directly affected by inflation, however, as the Federal Reserve Board (Fed) monitors economic trends and developments, it may change monetary policy in response to economic changes which would have an influence on interest rates. See the discussion of Net Interest Income, changes due to rate, below.

Accounting Changes

Fair Value Measurements-In April 2009, the Financial Accounting Standards Board (the "FASB") issued FASB Staff Position (FSP) No. FAS 157-4 "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly", which amends Statement of Financial Accounting Standard (SFAS) No. 157 "Fair Value Measurements." FSP No. FAS 157-4 provides additional guidance for determining fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly. FSP No. FAS 157-4 also provides guidance for determining whether a transaction is orderly. FSP No. FAS 157-4, which must be applied prospectively, is effective for interim and annual reporting periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. Adoption of this standard in first quarter 2009 did not have a material impact on the Company's Consolidated Balance Sheets or Statements of Operation.

Other-Than-Temporary Impairment-In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2 "Recognition and Presentation of Other-Than-Temporary Impairments", which revise and expand the guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities classified as available for sale or held to maturity. In addition, it requires enhanced disclosures concerning such impairment for both debt and equity securities. FSP No. FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. Adoption of this standard in first quarter 2009 did not have a material impact on the Company's Consolidated Balance Sheets or Statements of Operation.

Fair Value Disclosure-In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" which amend both SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" and APB Opinion No. 28, "Interim Financial Reporting", to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. The requirements of FSP No. FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. Early adoption is permitted for interim periods ending after March 15, 2009, but only if the election is made to adopt FSP No. FAS 157-4 and FSP No. FAS 115-2 and FAS 124-2 at the same time. Adoption of this standard in fiscal year 2009 is not expected to have a material impact on the Company's Consolidated Balance Sheets or Statements of Operation.

Minority Interests-In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements - an amendment of ARB No. 51." Among other things, SFAS No. 160 requires minority interests be recorded as a separate component of equity and that net income attributable to minority interests be clearly identified on the Statement of Income. SFAS No. 160 is effective for fiscal years and interim periods beginning on or after December 15, 2008. Statement No. 160 is required to be applied prospectively, except for the presentation and disclosure requirements. Adoption of the standard in first quarter 2009 did not have a material impact on the Consolidated Balance Sheets or Statements of Operations. Disclosure is provided in Note 1 of Notes to the Consolidated Financial Statements.

Derivative Instruments and Hedging Activities Disclosure-In 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" to provide enhanced disclosures and thereby improve the transparency of financial reporting. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. Adoption of this standard in the first quarter 2009 did not have a material impact on the Company's Consolidated Balance Sheets or Statements of Operations.

Overview

AMCORE reported a net loss of $30.4 million or $1.34 per diluted share for the quarter ended March 31, 2009 compared to a net loss of $27.5 million or $1.21 per diluted share for the same period in 2008, representing a $2.9 million or $0.13 per diluted share decrease quarter over quarter. AMCORE had negative returns on average equity and on average assets of 48.24% and 2.40%, respectively, for first quarter 2009, compared to negative returns of 29.44% and 2.13%, respectively, for the same period in 2008.

Significant Categories

Changes in the significant categories of first quarter 2009 net loss, compared to first quarter 2008, were:

Net interest income-Declined $14.2 million primarily due to lower spreads. Net interest margin was 1.94% in first quarter 2009 compared to 3.12% in first quarter 2008.

Provision for loan losses-Increased $5.5 million to $62.7 million in first quarter 2009 from $57.2 million in first quarter 2008, reflecting deteriorating credit quality, particularly with respect to construction and development loans.

Non-interest income-Increased $3.5 million to $21.4 million in the first quarter 2009 compared to $17.9 million in the same period of 2008. Security gains in the first quarter of 2009 were $6.9 million, an increase of $5.9 million over the $1.0 million during the first quarter of 2008. Investment management and trust income declined $1.3 million to $3.0 million during the first quarter of 2009 from $4.3 million in first quarter of 2008. Service charges on deposits and brokerage commission also declined during the quarter by $957,000 and $557,000, respectively.

Operating expenses-Declined $5.5 million to $39.4 million in first quarter 2009 from $44.9 million in first quarter 2008. Declines included $3.6 million in compensation expense and employee benefits costs, $3.0 million in provision for unfunded commitment losses and $505,000 in professional fees. These were partially offset by increased insurance expense and loan processing and collection expense of $2.0 million and $657,000, respectively.

Income taxes-Decreased $7.8 million, primarily due to a $58.3 million loss before income taxes in first quarter 2009 compared to a $47.5 million loss before income taxes in first quarter 2008 and the reversal of a $2.6 million valuation allowance on state tax loss carryforwards. See Note 11 of Notes to the Consolidated Financial Statements.

The effective tax rate was 47.9% in first quarter 2009 compared to 42.2% in first quarter 2008. Items that are exempt from taxes, such as municipal bond income and increases in cash surrender value (CSV) of Bank and Company owned life insurance (COLI), while generally resulting in an effective tax rate that is lower than the statutory tax rate, have the opposite effect in a period where there is a loss before income taxes. This, along with the valuation allowance reversal, are the primary reasons that the effective tax rate is higher than the statutory tax rate.

The following discussion compares the major components of the Consolidated Statements of Operations and their impact for three months ended March 31, 2009 and 2008.

Net Interest Income

Net interest income is the Company's largest source of revenue and represents the difference between income earned on loans and investments (interest-earning assets) and the interest expense incurred on deposits and borrowed funds (interest-bearing liabilities). Fluctuations in interest rates as well as volume and mix changes in interest-earning assets and interest-bearing liabilities can materially affect the level of net interest income. Because the interest that is earned on certain loans and investment securities is not subject to federal income tax, and in order to facilitate comparisons among various taxable and tax-exempt interest-earning assets, the following discussion of net interest income is presented on a "fully taxable equivalent," or FTE basis. The FTE adjustment was calculated using AMCORE's statutory federal income tax rate of 35%.

Net interest spread is the difference between the average yields earned on interest-earning assets and the average rates incurred on interest-bearing liabilities. Net interest margin represents net interest income divided by average interest-earning assets. Since a portion of the Company's funding is derived from interest-free sources, primarily demand deposits, other liabilities and stockholders' equity, the effective interest rate incurred for all funding sources is lower than the interest rate incurred on interest-bearing liabilities alone.

Overview-As reflected below, net interest income, on an FTE basis, declined $14.3 million or 38% in first quarter 2009 compared to first quarter 2008. The decline was due to a $22.0 million decline in FTE interest income, partially offset by a $7.7 million decline in interest expense.

                                               Quarter Ended March 31,
                                                 2009             2008
                                                    (in thousands)
. . .