e10vq

10-Q 1 c97347e10vq.htm QUARTERLY REPORT e10vq

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


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

		For the quarterly period ended June 30, 2005
OR

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

		For the transition period from to

Commission file number 0-5519

Associated Banc-Corp

(Exact name of registrant as specified in its charter)


Wisconsin		39-1098068
(State or other jurisdiction of incorporation or organization)		(IRS employer identification no.)

1200 Hansen Road, Green Bay, Wisconsin		54304
(Address of principal executive offices)		(Zip code)

(920) 491-7000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at July 31, 2005, was 127,834,981 shares.

ASSOCIATED BANC-CORP

TABLE OF CONTENTS


		Page
		No.

PART I. Financial Information
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheets — June 30, 2005, June 30, 2004 and December 31, 2004		3
	Consolidated Statements of Income — Three and Six Months Ended June 30, 2005 and 2004		4
	Consolidated Statements of Changes in Stockholders’ Equity — Six Months Ended June 30, 2005 and 2004		5
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2005 and 2004		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		45

PART II. Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 4.	Submission of Matters to a Vote of Security Holders		46
Item 6.	Exhibits		47
Signatures			48
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification by the Chief Executive Officer and Chief Financial Officer

PART I — FINANCIAL INFORMATION


ITEM 1.	*Financial Statements:*

ASSOCIATED BANC-CORP

Consolidated Balance Sheets


				June 30,			June 30,			December 31,
				2005			2004			2004

				(Unaudited)
				(In thousands, except share data)
ASSETS
Cash and due from banks				$	412,212		$	309,804		$	389,311
Interest-bearing deposits in other financial institutions					11,236			11,353			13,321
Federal funds sold and securities purchased under agreements to resell					44,325			39,245			55,440
Investment securities available for sale, at fair value					4,794,983			3,799,842			4,815,344
Loans held for sale					112,077			69,891			64,964
Loans					14,054,506			10,556,603			13,881,887
Allowance for loan losses					(190,024	)		(177,980	)		(189,762	)

		Loans, net			13,864,482			10,378,623			13,692,125
Premises and equipment					179,667			129,401			184,944
Goodwill					679,993			232,528			679,993
Other intangible assets					113,010			73,977			119,440
Other assets					541,729			457,892			505,254

			Total assets	$	20,753,714		$	15,502,556		$	20,520,136


LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits				$	2,250,482		$	1,822,716		$	2,347,611
Interest-bearing deposits, excluding brokered certificates of deposit					9,356,368			7,497,441			10,077,069
Brokered certificates of deposit					491,781			263,435			361,559

		Total deposits			12,098,631			9,583,592			12,786,239
Short-term borrowings					2,775,508			2,588,103			2,926,716
Long-term funding					3,685,078			1,827,326			2,604,540
Accrued expenses and other liabilities					176,062			124,641			185,222

			Total liabilities		18,735,279			14,123,662			18,502,717
Stockholders’ equity
	Preferred stock				—			—			—
	Common stock (par value $0.01 per share, authorized 250,000,000 shares, issued 128,042,415, 110,458,038 and 130,042,415 shares, respectively)				1,280			1,105			1,300
	Surplus				1,062,702			584,853			1,127,205
	Retained earnings				934,287			791,432			858,847
	Accumulated other comprehensive income				29,608			15,305			41,205
	Deferred compensation				(3,814	)		(1,981	)		(2,122	)
	Treasury stock, at cost (173,215, 410,360 and 272,355 shares, respectively)				(5,628	)		(11,820	)		(9,016	)

			Total stockholders’ equity		2,018,435			1,378,894			2,017,419

			Total liabilities and stockholders’ equity	$	20,753,714		$	15,502,556		$	20,520,136

See accompanying notes to consolidated financial statements.

ASSOCIATED BANC-CORP

Consolidated Statements of Income


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2005			2004			2005		2004

			(Unaudited)
			(In thousands, except per share data)
INTEREST INCOME
	Interest and fees on loans		$	213,420		$	137,449		$	413,729	$	272,701
	Interest and dividends on investment securities and deposits with other financial institutions:
		Taxable		41,834			30,767			82,868		61,799
		Tax exempt		9,507			10,267			19,230		20,502
	Interest on federal funds sold and securities purchased under agreements to resell			182			68			264		95

		Total interest income		264,943			178,551			516,091		355,097
INTEREST EXPENSE
	Interest on deposits			48,087			26,656			92,520		54,210
	Interest on short-term borrowings			21,731			7,241			38,900		13,780
	Interest on long-term funding			28,451			12,775			52,089		26,153

		Total interest expense		98,269			46,672			183,509		94,143

NET INTEREST INCOME				166,674			131,879			332,582		260,954
	Provision for loan losses			3,671			5,889			5,998		11,065

		Net interest income after provision for loan losses		163,003			125,990			326,584		249,889
NONINTEREST INCOME
	Trust service fees			8,967			8,043			17,295		15,911
	Service charges on deposit accounts			22,215			13,141			40,880		25,538
	Mortgage banking, net			2,376			11,413			12,260		13,667
	Credit card and other nondeposit fees			8,790			6,074			17,901		11,745
	Retail commission income			15,370			13,162			30,075		22,519
	Bank owned life insurance income			2,311			3,641			4,479		6,996
	Asset sale gains, net			539			218			237		440
	Investment securities gains (losses), net			1,491			(569	)		1,491		1,362
	Other			(355	)		2,742			8,459		5,874

		Total noninterest income		61,704			57,865			133,077		104,052
NONINTEREST EXPENSE
	Personnel expense			66,934			53,612			139,919		105,888
	Occupancy			9,374			6,864			19,262		14,336
	Equipment			4,214			2,878			8,232		5,877
	Data processing			6,728			6,128			13,021		11,801
	Business development and advertising			4,153			4,057			8,092		6,714
	Stationery and supplies			1,644			1,429			3,488		2,655
	Intangible amortization expense			2,292			934			4,286		1,716
	Other			20,995			16,085			41,276		29,884

		Total noninterest expense		116,334			91,987			237,576		178,871

Income before income taxes				108,373			91,868			222,085		175,070
Income tax expense				34,358			27,363			70,600		51,005

NET INCOME			$	74,015		$	64,505		$	151,485	$	124,065

Earnings per share:
	Basic		$	0.57		$	0.59		$	1.17	$	1.13
	Diluted		$	0.57		$	0.58		$	1.16	$	1.11
Average shares outstanding:
	Basic			128,990			110,116			129,383		110,205
	Diluted			130,463			111,520			130,868		111,647

See accompanying notes to consolidated financial statements.

ASSOCIATED BANC-CORP

Consolidated Statements of Changes in Stockholders’ Equity


												Accumulated
												Other
			Common						Retained			Comprehensive			Deferred			Treasury
			Stock			Surplus			Earnings			Income			Compensation			Stock			Total

			(Unaudited)
			(In thousands, except per share data)
Balance, December 31, 2003			$	734		$	575,975		$	724,356		$	52,089		$	(1,981	)	$	(2,746	)	$	1,348,427
Comprehensive income:
	Net income			—			—			124,065			—			—			—			124,065
	Net unrealized gains on derivative instruments arising during the period, net of taxes of $1.3 million			—			—			—			1,933			—			—			1,933
	Add: reclassification adjustment to interest expense for interest differential on derivative instruments, net of taxes of $1.6 million			—			—			—			2,360			—			—			2,360
	Net unrealized holding losses on available for sale securities arising during the period, net of taxes of $22.6 million			—			—			—			(40,205	)		—			—			(40,205	)
	Less: reclassification adjustment for net gains on available for sale securities realized in net income, net of taxes of $0.5 million			—			—			—			(872	)		—			—			(872	)

		Comprehensive income																				87,281

Cash dividends, $0.4767 per share				—			—			(52,541	)		—			—			—			(52,541	)
Common stock issued:
	Incentive stock options			2			5,474			(4,448	)		—			—			11,760			12,788
	3-for-2 stock split effected in the form of a stock dividend			369			(369	)		—			—			—			—			—
Purchase of treasury stock				—			—			—			—			—			(20,834	)		(20,834	)
Tax benefit of stock options				—			3,773			—			—			—			—			3,773

Balance, June 30, 2004			$	1,105		$	584,853		$	791,432		$	15,305		$	(1,981	)	$	(11,820	)	$	1,378,894

Balance, December 31, 2004			$	1,300		$	1,127,205		$	858,847		$	41,205		$	(2,122	)	$	(9,016	)	$	2,017,419
Comprehensive income:
	Net income			—			—			151,485			—			—			—			151,485
	Reclassification adjustment for net losses and interest expense for interest differential on derivative instruments realized in net income, net of taxes of $5.9 million			—			—			—			8,761			—			—			8,761
	Net unrealized holding losses on available for sale securities arising during the period, net of taxes of $10.8 million			—			—			—			(19,463	)		—			—			(19,463	)
	Less: reclassification adjustment for net gains on available for sale securities realized in net income, net of taxes of $0.6 million			—			—			—			(895	)		—			—			(895	)

		Comprehensive income																				139,888

Cash dividends, $0.52 per share				—			—			(67,532	)		—			—			—			(67,532	)
Common stock issued:
	Incentive stock options			—			—			(8,513	)		—			—			19,032			10,519
Purchase of treasury stock				(20	)		(66,320	)		—			—			—			(17,329	)		(83,669	)
Restricted stock awards granted, net of amortization				—			7			—			—			(1,692	)		1,685			—
Tax benefit of stock options				—			1,810			—			—			—			—			1,810

Balance, June 30, 2005			$	1,280		$	1,062,702		$	934,287		$	29,608		$	(3,814	)	$	(5,628	)	$	2,018,435

See accompanying notes to consolidated financial statements.

ASSOCIATED BANC-CORP

Consolidated Statements Of Cash Flows


			For the Six Months Ended
			June 30,

			2005			2004

			(Unaudited)
			(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income			$	151,485		$	124,065
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses			5,998			11,065
	Depreciation and amortization			10,818			7,801
	Recovery of valuation allowance on mortgage servicing rights, net			(1,500	)		(4,154	)
	Amortization (accretion) of:
		Mortgage servicing rights		11,719			8,558
		Intangible assets		4,286			1,716
		Premiums and discounts on investments, loans and funding, net		13,844			11,548
	Gain on sales of investment securities, net			(1,491	)		(1,362	)
	Gain on sales of assets, net			(237	)		(440	)
	Gain on sales of loans held for sale, net			(7,850	)		(7,016	)
	Mortgage loans originated and acquired for sale			(723,083	)		(938,812	)
	Proceeds from sales of mortgage loans held for sale			683,820			980,274
	Increase (decrease) in interest receivable			(7,189	)		969
	(Increase) decrease in interest payable			8,142			(2,072	)
	Net change in other assets and other liabilities			(31,014	)		(7,734	)

Net cash provided by operating activities				117,748			184,406

CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans				(180,495	)		(289,865	)
Capitalization of mortgage servicing rights				(8,076	)		(10,662	)
Net increase in Federal Home Loan Bank stock				(4,734	)		(3,243	)
Purchases of:
	Securities available for sale			(640,142	)		(474,529	)
	Premises and equipment, net of disposals			(4,592	)		(2,762	)
Proceeds from:
	Sales of securities available for sale			322,840			31,021
	Calls and maturities of securities available for sale			298,151			351,825
	Sales of other assets			2,824			5,342
Net cash paid in business combination				—			(17,344	)

Net cash used in investing activities				(214,224	)		(410,217	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits				(687,608	)		(202,375	)
Net cash paid in sale of branch deposits				—			(6,575	)
Net increase (decrease) in short-term borrowings				(115,258	)		659,226
Repayment of long-term funding				(500,513	)		(603,340	)
Proceeds from issuance of long-term funding				1,550,238			400,000
Cash dividends				(67,532	)		(52,541	)
Proceeds from exercise of incentive stock options				10,519			12,788
Purchase of treasury stock				(83,669	)		(20,834	)

Net cash provided by financing activities				106,177			186,349

Net increase (decrease) in cash and cash equivalents				9,701			(39,462	)
Cash and cash equivalents at beginning of period				458,072			399,864

Cash and cash equivalents at end of period			$	467,773		$	360,402

Supplemental disclosures of cash flow information:
Cash paid during the period for:
	Interest		$	175,367		$	96,215
	Income taxes			101,999			42,792
Supplemental schedule of noncash investing activities:
	Loans transferred to other real estate			3,168			6,467

See accompanying notes to consolidated financial statements.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with U.S. generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in Associated Banc-Corp’s 2004 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements.


NOTE 1:	Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in stockholders’ equity, and cash flows of Associated Banc-Corp (individually referred to herein as the “Parent Company,” and together with all of its subsidiaries and affiliates, collectively referred to herein as the “Corporation”) for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing rights valuation, derivative financial instruments and hedging activities, and income taxes.


NOTE 2:	Accounting for Certain Derivatives

Effective for the quarter ended June 30, 2005, the Corporation will no longer apply hedge accounting to certain interest rate swap agreements and an interest rate cap. After recent consultation with the Corporation’s independent registered public accounting firm (subsequent to the Corporation’s July 21, 2005 press release on second quarter 2005 earnings), the Corporation determined that the hedge accounting treatment applied to interest rate swaps on portions of its variable rate debt, an interest rate cap on variable rate debt, an interest rate swap on fixed rate subordinated debt and certain interest rate swaps related to specific fixed rate commercial loans, needed to be changed under the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,”(SFAS 133). While this change affects previous period financial statements, the Corporation concluded that a restatement of its historical financial statements was not required as the correction was not material to prior periods presented.

Under the Corporation’s previous interpretation of SFAS 133, the exchange of interest payments related to the swap contracts was included in net interest income, the changes in fair value on the interest rate swaps hedging portions of the variable rate debt and the interest rate cap were recorded in stockholders’ equity as part of accumulated other comprehensive income, and the fair value of the swap on fixed rate subordinated debt and the hedged item were recorded in the balance sheet with changes in fair value of both the swap and hedged item recognized in earnings. For the quarter ended June 30, 2005, and prospectively, hedge accounting will no longer be applied for these aforementioned derivative transactions, and the future exchange of interest payments related to the swap contracts as well as the “mark to market” (i.e., changes in the fair values of the swaps and the interest rate cap) will be recorded on a net basis in other income, and the hedged items (i.e., the subordinated debt and the specific commercial loans) will no longer be adjusted to fair values on a quarterly basis.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

The impact of these changes was effected by recording a loss on derivatives of $6.7 million in other income effective for the quarter ended June 30, 2005. On an after tax basis, this resulted in a $4.0 million reduction to net income, or $0.03 to both basic and diluted earnings per share for the three and six month periods ended June 30, 2005. The aggregate cumulative effect of this adjustment was a net increase to consolidated shareholders’ equity of $3.3 million, at June 30, 2005, attributable to the fair value changes of the interest rate swaps hedging the subordinated debt and commercial loans.

Future reported results will be more sensitive to interest rate fluctuations as a result of this change. The Corporation is currently evaluating its future hedging strategies.


NOTE 3:	Reclassifications

Certain items in the prior period consolidated financial statements have been reclassified to conform with the June 30, 2005 presentation.


NOTE 4:	New Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3,” (“SFAS 154”). SFAS 154 changes the accounting for and reporting of a change in accounting principle by requiring retrospective application to prior periods’ financial statements of changes in accounting principle unless impracticable. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Corporation does not expect the adoption of SFAS 154 will have a material impact on its results of operations, financial position, or liquidity.

In December 2004, the FASB issued SFAS No. 123 (revised December 2004), “Share-Based Payment,” (“SFAS 123R”), which replaces SFAS 123 and supersedes APB Opinion 25. SFAS 123R is effective for all stock-based awards granted on or after July 1, 2005. However, in April 2005, the SEC deferred the effective date of SFAS 123R to the first fiscal year beginning on or after June 15, 2005, with no other changes to SFAS 123R disclosure or measurement requirements. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Pro forma disclosure only of the income statement effects of share-based payments is no longer an alternative. In addition, companies must recognize compensation expense related to any stock-based awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The Corporation anticipates adopting SFAS 123R prospectively in the first quarter of 2006, as required. The proforma information provided under Note 6 provides a reasonable estimate of the impact of adopting SFAS 123R on the Corporation’s results of operations.

In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“EITF 03-1”). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment, and evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized through earnings equal to the difference between the

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

investment’s cost and its fair value. In September 2004, the FASB delayed the accounting requirements of EITF 03-1 until additional implementation guidance is issued and goes into effect. In June 2005, the FASB directed to issue EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. The final EITF, to be retitled FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” is expected to be issued in August 2005 and will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Corporation regularly evaluates its investments for possible other-than-temporary impairment and, therefore, does not expect the requirements of EITF 03-1 will have a material impact on the Corporation’s results of operations, financial position, or liquidity.

In December 2003, the AICPA’s Accounting Standards Executive Committee issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The provisions of this SOP are effective for loans acquired in fiscal years beginning after December 15, 2004. The Corporation does not expect the requirements of SOP 03-3 to have a material impact on the Corporation’s current results of operations, financial position, or liquidity.


NOTE 5:	Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options.

On April 28, 2004, the Board of Directors declared a 3-for-2 stock split, effected in the form of a stock dividend, payable on May 12, 2004, to shareholders of record at the close of business on May 7, 2004. All share and per share information in the accompanying consolidated financial statements has been restated to reflect the effect of this stock split.

Presented below are the calculations for basic and diluted earnings per share.


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2005		2004		2005		2004

	(In thousands, except per share data)
Net income	$	74,015	$	64,505	$	151,485	$	124,065

Weighted average shares outstanding		128,990		110,116		129,383		110,205
Effect of dilutive stock options outstanding		1,473		1,404		1,485		1,442

Diluted weighted average shares outstanding		130,463		111,520		130,868		111,647

Basic earnings per share	$	0.57	$	0.59	$	1.17	$	1.13

Diluted earnings per share	$	0.57	$	0.58	$	1.16	$	1.11


NOTE 6:	Stock-Based Compensation

As allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Corporation accounts for stock-based compensation cost under the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations, under which no compensation cost has been recognized for any periods presented, except with respect to restricted stock awards. Compensation expense for employee stock options is generally not

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant, as such options would have no intrinsic value at the date of grant.

The Corporation may issue common stock with restrictions to certain key employees. The shares are restricted as to transfer, but are not restricted as to dividend payment or voting rights. The restrictions lapse over three or five years, are contingent upon continued employment, and for performance awards are based on earnings per share performance goals. The Corporation amortizes the expense over the vesting period. During the first quarter of 2005 51,000 restricted stock shares were awarded and 75,000 restricted stock shares were awarded during 2003. Expense of approximately $613,000 and $352,000 was recorded for the six months ended June 30, 2005 and 2004, respectively, and expense of approximately $375,000 and $170,000 was recorded for the three months ended June 30, 2005 and 2004, respectively.

For purposes of providing the pro forma disclosures required under SFAS 123, the fair value of stock options granted in the comparable three and six month periods ended June 30, 2005 and 2004 was estimated at the date of grant using a Black-Scholes option pricing model which was originally developed for use in estimating the fair value of traded options which have different characteristics from the Corporation’s employee stock options. The model is also sensitive to changes in the subjective assumptions that can materially affect the fair value estimate.

In January 2005, the Board of Directors, with subsequent approval of the Corporation’s shareholders, approved amendments to the Corporation’s Long-Term Incentive Stock Option Plans to eliminate the requirement that stock options may not be exercisable earlier than one year from the date of grant. With the shareholder approval of these amendments, the stock options issued in January 2005 fully vested on June 30, 2005, while the stock options issued during 2004 and in previous years will fully vest three years from the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS 123.


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,

	2005			2004			2005			2004

	($ In thousands, except per share amounts)
Net income, as reported	$	74,015		$	64,505		$	151,485		$	124,065
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		225			102			368			211
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(3,499	)		(947	)		(6,429	)		(1,884	)

Net income, as adjusted	$	70,741		$	63,660		$	145,424		$	122,392

Basic earnings per share, as reported	$	0.57		$	0.59		$	1.17		$	1.13
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(0.02	)		(0.01	)		(0.05	)		(0.02	)

Basic earnings per share, as adjusted	$	0.55		$	0.58		$	1.12		$	1.11

Diluted earnings per share, as reported	$	0.57		$	0.58		$	1.16		$	1.11
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(0.03	)		(0.01	)		(0.05	)		(0.01	)

Diluted earnings per share, as adjusted	$	0.54		$	0.57		$	1.11		$	1.10

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

The following assumptions were used in estimating the fair value for options granted in 2005 and 2004:


	2005			2004

Dividend yield		3.22	%		3.37	%
Risk-free interest rate		3.81	%		3.40	%
Weighted average expected life		6 yrs			6 yrs
Expected volatility		24.32	%		28.25	%

The weighted average per share fair values of options granted in the comparable six-month periods of 2005 and 2004 were $6.85 and $6.40, respectively. The annual expense allocation methodology attributes a higher percentage of the reported expense to earlier years than to later years, resulting in accelerated expense recognition for proforma disclosure purposes.


NOTE 7:	Business Combinations

As required, the Corporation’s acquisitions are accounted for under the purchase method of accounting; thus, the results of operations of each acquired entity prior to its respective consummation date are not included in the accompanying consolidated financial statements.


	*Pending Business Combination:*

State Financial Services Corporation (“State Financial”): On March 21, 2005, the Corporation announced the signing of a definitive agreement to acquire State Financial. Based on the terms of the agreement, State Financial shareholders will receive 1.2 shares of the Corporation’s stock for each share of State Financial stock they hold. The transaction is valued at approximately $278 million, based on the Corporation’s closing stock price on March 18, 2005. As of June 30, 2005, State Financial is a $1.5 billion financial services company based in Milwaukee, Wisconsin, with 29 banking branches in southeastern Wisconsin and northeastern Illinois and provides commercial and retail banking products, mortgage loan originations, and investment brokerage activities. The transaction is expected to be completed in late third quarter or early fourth quarter 2005, pending approval by regulators and State Financial shareholders. The State Financial shareholders are scheduled to vote on the pending acquisition on August 24, 2005.


	*Completed Business Combinations:*

First Federal Capital Corp (“First Federal”): On October 29, 2004, the Corporation consummated its acquisition of 100% of the outstanding shares of First Federal, based in La Crosse, Wisconsin. As of the acquisition date, First Federal operated a $4 billion savings bank with over 90 banking locations serving more than 40 communities in Wisconsin, northern Illinois, and southern Minnesota, building upon and complementing the Corporation’s footprint. As a result of the acquisition, the Corporation expected to enhance its current branch distribution (including supermarket locations which are new to the Corporation’s distribution model), improve its operational and managerial efficiencies, increase revenue streams, and strengthen its community banking model.

First Federal shareholders received 0.9525 shares of the Corporation’s common stock for each share of First Federal common stock held, an equivalent amount of cash, or a combination thereof. The merger agreement provided that the aggregate consideration paid by the Corporation for the First Federal outstanding common stock must be equal to 90% stock and 10% cash and therefore, the consummation of the transaction included the issuance of approximately 19.4 million shares of common stock and $75 million in cash.

To record the transaction, the Corporation assigned estimated fair values to the assets acquired and liabilities assumed. The excess cost of the acquisition over the estimated fair value of the net assets acquired was allocated to identifiable intangible assets with the remainder then allocated to goodwill. Goodwill of approximately $447 million, a core deposit intangible of approximately $17 million (with a ten-year estimated

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

life), and other intangibles of $4 million recognized at acquisition were assigned to the banking segment. If additional evidence becomes available subsequent to but within one year of recording the transaction indicating a significant difference from an initial estimated fair value used, goodwill could be adjusted.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed of First Federal at the date of the acquisition.


		$ In millions

Investment securities available for sale		$	665
Loans, net			2,727
Other assets			256
Mortgage servicing rights			32
Intangible assets			21
Goodwill			447

	Total assets acquired	$	4,148

Deposits		$	2,701
Borrowings			768
Other liabilities			51

	Total liabilities assumed	$	3,520

Net assets acquired		$	628

Jabas Group, Inc. (“Jabas”): On April 1, 2004, the Corporation (through its subsidiary, Associated Financial Group, LLC) consummated its cash acquisition of 100% of the outstanding shares of Jabas. Jabas is an insurance agency specializing in employee benefit products headquartered in Kimberly, Wisconsin, and was acquired to enhance the Corporation’s existing insurance business. Jabas operates as part of Associated Financial Group, LLC. The acquisition was individually immaterial to the consolidated financial results. Goodwill of approximately $8 million and other intangibles of approximately $6 million recognized in the transaction at acquisition were assigned to the wealth management segment. Goodwill may increase up to an additional $8 million in the future as contingent payments may be made to the former Jabas shareholders through December 31, 2007, if Jabas exceeds certain performance targets. Goodwill was increased during fourth quarter 2004 by approximately $0.7 million for contingent consideration paid in 2004 per the agreement.


NOTE 8:	Investment Securities

The following represents gross unrealized losses and the related fair value of securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2005.


		Less Than 12 Months					12 Months or More					Total

		Unrealized					Unrealized					Unrealized
		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value

		($ In thousands)
U.S. Treasury securities		$	—		$	—	$	(107	)	$	7,892	$	(107	)	$	7,892
Federal agency securities			(495	)		139,112		(353	)		25,726		(848	)		164,838
Obligations of state and political subdivisions			(52	)		11,624		(17	)		2,225		(69	)		13,849
Mortgage-related securities			(10,124	)		1,183,456		(13,447	)		1,284,329		(23,571	)		2,467,785
Other securities (equity)			(160	)		2,422		—			—		(160	)		2,422

	Total	$	(10,831	)	$	1,336,614	$	(13,924	)	$	1,320,172	$	(24,755	)	$	2,656,786

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

Management does not believe any individual unrealized loss at June 30, 2005 represents an other-than-temporary impairment. The unrealized losses reported for mortgage-related securities relate primarily to securities issued by government agencies such as the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses are primarily attributable to changes in interest rates and not credit deterioration and individually were 3.6% or less of their respective amortized cost basis. The Corporation currently has both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the amortized cost.

The Corporation owns four securities that were determined to have an other-than-temporary impairment that resulted in write-downs to earnings on the related securities, two of which have been included in the less than 12 months category above with unrealized losses of $0.2 million. The Corporation owns a collateralized mortgage obligation (“CMO”) determined to have an other-than-temporary impairment that resulted in a write-down on the security of $0.2 million during 2004, based on continued evaluation. As of June 30, 2005, this CMO had a carrying value of $0.8 million. The Corporation also owns three FHLMC preferred stock securities determined to have an other-than-temporary impairment that resulted in a write-down on these securities of $2.2 million during 2004. At June 30, 2005, these FHLMC preferred shares had a carrying value of $8.8 million.


NOTE 9:	Goodwill and Other Intangible Assets

Goodwill: Goodwill is not amortized, but is subject to impairment tests on at least an annual basis. No impairment loss was necessary in 2004 or through June 30, 2005. At June 30, 2005, goodwill of $659 million was assigned to the banking segment and goodwill of $21 million was assigned to the wealth management segment. The change in the carrying amount of goodwill was as follows.


	Six Months Ended
					Year Ended
	June 30, 2005		June 30, 2004		December 31, 2004

	($ In thousands)
Goodwill:
Balance at beginning of period	$	679,993	$	224,388	$	224,388
Goodwill acquired		—		8,140		455,605

Balance at end of period	$	679,993	$	232,528	$	679,993

Other Intangible Assets: The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, other intangibles (primarily related to customer relationships acquired in connection with the Corporation’s insurance agency acquisitions), and mortgage servicing rights. The core deposit intangibles and mortgage servicing rights are assigned to the banking segment, while other intangibles of $17 million are assigned to the wealth management segment and $2 million are assigned to the banking

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

segment as of June 30, 2005. For core deposit intangibles and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows.


	At or for the						At or for the
	Six Months Ended						Year Ended

	June 30, 2005			June 30, 2004			December 31, 2004

	($ In thousands)
Core deposit intangibles:(1)
Gross carrying amount	$	28,202		$	16,783		$	33,468
Accumulated amortization		(8,055	)		(10,098	)		(11,335	)

Net book value	$	20,147		$	6,685		$	22,133

Additions during the period	$	—		$	—		$	16,685
Amortization during the period		(1,985	)		(798	)		(2,035	)
Other intangibles:
Gross carrying amount	$	24,578		$	20,677		$	24,578
Accumulated amortization		(5,818	)		(2,120	)		(3,517	)

Net book value	$	18,760		$	18,557		$	21,061

Additions during the period	$	—		$	5,926		$	9,827
Amortization during the period		(2,301	)		(918	)		(2,315	)


(1)	Core deposit intangibles of $5.3 million were fully amortized during 2004 and were removed from both the gross carrying amount and the accumulated amortization effective January 1, 2005.

A summary of changes in the balance of the mortgage servicing rights asset and the mortgage servicing rights valuation allowance was as follows.


		At or for the						At or for the
		Six Months Ended						Year Ended

		June 30, 2005			June 30, 2004			December 31, 2004

		($ In thousands)
Mortgage servicing rights:
Mortgage servicing rights at beginning of period		$	91,783		$	65,062		$	65,062
	Additions(1)		8,076			10,662			50,508
	Amortization		(11,719	)		(8,558	)		(17,932	)
	Other-than-temporary impairment		(71	)		(5,470	)		(5,855	)

Mortgage servicing rights at end of period		$	88,069		$	61,696		$	91,783

Valuation allowance at beginning of period			(15,537	)		(22,585	)		(22,585	)
	Additions		(2,500	)		(2,500	)		(5,461	)
	Reversals		4,000			6,654			6,654
	Other-than-temporary impairment		71			5,470			5,855

Valuation allowance at end of period			(13,966	)		(12,961	)		(15,537	)

Mortgage servicing rights, net		$	74,103		$	48,735		$	76,246

Portfolio of residential mortgage loans serviced for others(2)		$	9,479,000		$	6,010,000		$	9,543,000
Mortgage servicing rights, net to Portfolio of residential mortgage loans serviced for others			0.78	%		0.81	%		0.80	%


(1)	Included in the December 31, 2004, additions to mortgage servicing rights was $31.8 million from First Federal at acquisition.

(2)	Included in the December 31, 2004, portfolio of residential mortgage loans serviced for others was $3.5 billion from First Federal at acquisition.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

Mortgage servicing rights are amortized in proportion to and over the period of estimated servicing income. The Corporation periodically evaluates its mortgage servicing rights asset for impairment. A valuation allowance is established to the extent the carrying value of the mortgage servicing rights exceeds the estimated fair value by stratification. During the first six months of 2005, a $1.5 million reversal of valuation allowance was recorded, while a $4.2 million and a $1.2 million reversal of valuation allowance was recorded during first six months of 2004 and full year 2004, respectively. Mortgage servicing rights expense, which includes the amortization of the mortgage servicing rights and increases or decreases to the valuation allowance associated with the mortgage servicing rights, was $10.2 million and $4.4 million for the six months ended June 30, 2005 and 2004, respectively, and $16.7 million for the year ended December 31, 2004.

The following table shows the estimated future amortization expense for amortizing intangible assets. The projections of amortization expense for the next five years are based on existing asset balances, the current interest rate environment, and prepayment speeds as of June 30, 2005. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon changes in interest rates, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable.

Estimated amortization expense:


	Core Deposit		Other		Mortgage Servicing
	Intangible		Intangibles		Rights

	($ In thousands)
Six months ending December 31, 2005	$	2,000	$	1,600	$	11,100
Year ending December 31, 2006		3,300		2,800		19,400
Year ending December 31, 2007		2,900		1,300		16,000
Year ending December 31, 2008		2,500		1,200		12,900
Year ending December 31, 2009		2,100		1,100		9,700
Year ending December 31, 2010		1,800		1,100		7,200


NOTE 10:	Long-term Funding

Long-term funding was as follows.


		June 30,		June 30,		December 31,
		2005		2004		2004

		($ In thousands)
Federal Home Loan Bank advances		$	1,394,021	$	711,974	$	1,158,294
Bank notes			925,000		300,000		500,000
Repurchase agreements			975,000		426,175		550,000
Subordinated debt, net			199,085		198,517		204,168
Junior subordinated debentures, net			185,464		184,088		185,517
Other borrowed funds			6,508		6,572		6,561

	Total long-term funding	$	3,685,078	$	1,827,326	$	2,604,540


	*Federal Home Loan Bank advances:*

Long-term advances from the Federal Home Loan Bank had maturities through 2020 and had weighted-average interest rates of 3.14% at June 30, 2005, compared to 2.54% at June 30, 2004, and 2.91% at December 31, 2004. These advances had a combination of fixed and variable contractual rates, of which, 78% were fixed at June 30, 2005, while 58% and 74% were fixed at June 30, and December 31, 2004, respectively.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)


	*Bank notes:*

The long-term bank notes had maturities through 2008 and had weighted-average interest rates of 3.38% at June 30, 2005, 2.43% at June 30, 2004, and 2.54% at December 31, 2004. These notes had a combination of fixed and variable contractual rates, of which 89% was variable rate at June 30, 2005, compared to 50% and 70% variable rate at June 30, and December 31, 2004, respectively.


	*Repurchase agreements:*

The long-term repurchase agreements had maturities through 2008 and had weighted-average interest rates of 2.70% at June 30, 2005, 1.78% at June 30, 2004, and 1.89% at December 31, 2004. These repurchase agreements had a combination of fixed and variable contractual rates, of which 90% was variable at June 30, 2005, while 35% and 82% were variable at June 30, and December 31, 2004, respectively.


	*Subordinated debt:*

In August 2001, the Corporation issued $200 million of 10-year subordinated debt. This debt was issued at a discount and has a fixed interest rate of 6.75%. The subordinated debt qualifies under the risk-based capital guidelines as Tier 2 supplementary capital for regulatory purposes. In 2001, the Corporation had entered into an interest rate swap to hedge the interest rate risk on the subordinated debt which was no longer accounted for under hedge accounting effective for the quarter ended June 30, 2005 (see Note 2).


	*Junior subordinated debentures:*

On May 30, 2002, ASBC Capital I (the “ASBC Trust”), a Delaware business trust whose common stock was wholly owned by the Corporation, completed the sale of $175 million of 7.625% preferred securities (the “Preferred Securities”). The Preferred Securities are traded on the New York Stock Exchange under the symbol “ABW PRA.” The ASBC Trust used the proceeds from the offering to purchase a like amount of 7.625% Junior Subordinated Debentures (the “Debentures”) of the Corporation. Effective in the first quarter of 2004, in accordance with guidance provided on the application of FIN 46R, the Corporation was required to deconsolidate the ASBC Trust from its consolidated financial statements. Accordingly, the Debentures issued by the Corporation to ASBC Trust (as opposed to the trust preferred securities issued by the ASBC Trust) are reflected in the Corporation’s consolidated balance sheet as long-term funding.

The Preferred Securities accrue and pay dividends quarterly at an annual rate of 7.625% of the stated liquidation amount of $25 per Preferred Security. The Corporation has fully and unconditionally guaranteed all of the obligations of the ASBC Trust. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the Preferred Securities, but only to the extent of funds held by the ASBC Trust. The Preferred Securities are mandatorily redeemable upon the maturity of the Debentures on June 15, 2032, or upon earlier redemption as provided in the Indenture. The Corporation has the right to redeem the Debentures on or after May 30, 2007. The Preferred Securities qualify under the risk-based capital guidelines as Tier 1 capital for regulatory purposes.

During May 2002, the Corporation entered into an interest rate swap to hedge the interest rate risk on the Debentures. The fair value of the derivative was a $5.1 million gain at June 30, 2005, a $3.7 million gain at June 30, 2004, and a $5.1 million gain at December 31, 2004. Given the fair value hedge, the Debentures are carried on the balance sheet at fair value.


NOTE 11:	Derivatives and Hedging Activities

The Corporation uses derivative instruments primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheet from changes in interest rates. The predominant derivative and hedging activities include interest rate swaps, interest rate caps,

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

and certain mortgage banking activities. Interest rate swaps are entered into primarily as an asset/liability management strategy to modify interest rate risk, while an interest rate cap is an interest rate protection instrument.

Derivative instruments are required to be carried at fair value on the balance sheet with changes in the fair value recorded directly in earnings. For a derivative 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 earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and the ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

To qualify for and maintain hedge accounting treatment, the Corporation must meet formal documentation and effectiveness evaluation requirements both at the hedge’s inception and on an ongoing basis. If it is determined that a derivative is not highly effective or has ceased to be a highly effective hedge, the Corporation discontinues hedge accounting prospectively. When hedge accounting is discontinued, the Corporation would continue to carry the derivative on the balance sheet at its fair value; however, for a cash flow derivative changes in its fair value would be recorded in earnings instead of through other comprehensive income, and for a fair value derivative the changes in fair value of the hedged asset or liability would no longer be recorded through earnings.

The Corporation measures the effectiveness of its hedges, where applicable, on a periodic basis. For a fair value hedge, the difference between the fair value change of the hedge instrument versus the fair value change of the hedged item is considered to be the “ineffective” portion of a fair value hedge, which is recorded as an increase or decrease in the related income statement classification of the item being hedged. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. For the mortgage derivatives, which are not accounted for as hedges, changes in the fair value are recorded as an adjustment to mortgage banking income.

The table below identifies the Corporation’s derivative instruments at June 30, 2005, as well as which instruments receive hedge accounting treatment (see also Note 2). Included in the table below for June 30, 2005, were customer interest rate swaps and interest rate caps for which the Corporation has mirror swaps and caps. The fair value of these customer swaps and caps is recorded in earnings and the net impact for the year-to-date 2005 period was immaterial.


						Weighted Average
	Notional		Estimated Fair
	Amount		Market Value			Receive Rate			Pay Rate			Maturity

	($ In thousands)
June 30, 2005
Swaps-receive variable/ pay fixed	$	200,000	$	(12,284	)		3.13	%		5.03	%		70 months
Swaps-receive fixed/ pay variable(1)		375,000		10,426			7.21	%		4.81	%		193 months
Swaps-receive variable/ pay fixed(2)		345,818		(3,996	)		5.18	%		6.41	%		52 months
Interest rate cap		200,000		25			Strike 4.72	%		—			14 months
Customer and mirror swaps		106,332		—			3.37	%		3.37	%		92 months
Customer and mirror caps		23,550		—			—			—			50 months


(1)	Fair value hedge accounting is applied on $175 million notional, which hedges long-term, fixed rate debt.

(2)	Fair value hedge accounting is applied on $252 million notional, which hedges longer-term, fixed rate commercial loans.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

For the mortgage derivatives, which are not accounted for as hedges, changes in the fair value are recorded to mortgage banking income. The fair value of the mortgage derivatives at June 30, 2005, was a net loss of $0.7 million, unchanged from the net loss of $0.7 million at June 30, 2004. The $0.7 million net fair value loss of mortgage derivatives at June 30, 2005, is comprised of the net loss on commitments to fund approximately $196 million of loans to individual borrowers and the net loss on commitments to sell approximately $227 million of loans to various investors. The $0.7 million net fair value loss of mortgage derivatives at June 30, 2004, is composed of the net gain on commitments to fund approximately $112 million of loans to individual borrowers and the net loss on commitments to sell approximately $135 million of loans to various investors.


NOTE 12:	Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities


	*Commitments and Off-Balance Sheet Risk*


	*Lending-related Commitments*

As a financial services provider, the Corporation routinely enters into commitments to extend credit. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Corporation. A significant portion of commitments to extend credit may expire without being drawn upon.

Lending-related commitments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, and standby letters of credit. Commitments to extend credit are agreements to lend to customers at predetermined interest rates as long as there is no violation of any condition established in the contracts. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are defined as derivatives and are therefore required to be recorded on the consolidated balance sheet at fair value. The Corporation’s derivative and hedging activity is further summarized in Note 11. The following is a summary of lending-related commitments at June 30.


	June 30,

	2005		2004

	($ In thousands)
Commitments to extend credit, excluding commitments to originate mortgage loans(1)	$	4,589,565	$	3,717,762
Commercial letters of credit(1)		26,937		19,979
Standby letters of credit(2)		437,368		340,050

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)


(1)	These off-balance sheet financial instruments are exercisable at the market rate prevailing at the date the underlying transaction will be completed and thus are deemed to have no current fair value, or the fair value is based on fees currently charged to enter into similar agreements and is not material at June 30, 2005 or 2004.

(2)	As required by FASB Interpretation No. 45, an interpretation of FASB Statements No. 5, 57, and 107, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” the Corporation has established a liability of $4.4 million and $2.9 million at June 30, 2005 and 2004, respectively, as an estimate of the fair value of these financial instruments.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of those instruments. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation uses the same credit policies in making commitments as it does for extending loans to customers. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.


	*Contingent Liabilities*

In the ordinary course of business, the Corporation may be named as defendant in or be a party to various pending and threatened legal proceedings. Since it is not possible to formulate a meaningful opinion as to the range of possible outcomes and plaintiffs’ ultimate damage claims, management cannot estimate the specific possible loss or range of loss that may result from these proceedings. Management believes, based upon advice of legal counsel and current knowledge, that liabilities arising out of any such current proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Corporation.

Residential mortgage loans sold to others are sold on a nonrecourse basis, though First Federal retained the credit risk on the underlying loans it sold to or originated for the Federal Home Loan Bank (“FHLB”), prior to its acquisition by the Corporation, in exchange for a monthly credit enhancement fee. At June 30, 2005, there were $2.3 billion of such loans with credit risk recourse, upon which there have been negligible historical losses.


NOTE 13:	Retirement Plans

The Corporation has a noncontributory defined benefit retirement plan covering substantially all full-time employees. The benefits are based primarily on years of service and the employee’s compensation paid. The Corporation’s funding policy is to pay at least the minimum amount required by the funding requirements of federal law and regulations.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

In connection with the First Federal acquisition on October 29, 2004, the Corporation assumed the First Federal pension plan. The First Federal pension plan was frozen on December 31, 2004, and qualified participants in this plan were eligible to participate in the Associated pension plan as of January 1, 2005. The net periodic benefit cost of the retirement plans is as follows.


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2005			2004			2005			2004

		($ In thousands)
Components of Net Periodic Benefit Cost
Service cost		$	2,340		$	1,674		$	4,680		$	3,347
Interest cost			1,346			964			2,693			1,927
Expected return on plan assets			(1,994	)		(1,572	)		(3,988	)		(3,143	)
Amortization of:
	Transition asset		(81	)		(81	)		(162	)		(162	)
	Prior service cost		19			19			37			37
	Actuarial loss		193			92			385			185

Total net periodic benefit cost		$	1,823		$	1,096		$	3,645		$	2,191

As previously disclosed in its consolidated financial statements for the year ended December 31, 2004, the Corporation contributed $8 million to its pension plans during the first quarter of 2005. The Corporation regularly reviews the funding of its pension plans and generally contributes to its plan assets based on the minimum amounts required by funding requirements with consideration given to the maximum funding amounts allowed.


NOTE 14:	Segment Reporting

Selected financial and descriptive information is required to be provided about reportable operating segments, considering a “management approach” concept as the basis for identifying reportable segments. The management approach is to be based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are to be evident from the structure of the enterprise’s internal organization, focusing on financial information that an enterprise’s chief operating decision-makers use to make decisions about the enterprise’s operating matters.

The Corporation’s primary segment is banking, conducted through its bank and lending subsidiaries. For purposes of segment disclosure as allowed by the governing accounting statement, these entities have been combined as one segment that have similar economic characteristics and the nature of their products, services, processes, customers, delivery channels, and regulatory environment are similar. Banking consists of lending and deposit gathering (as well as other banking-related products and services) to businesses, governments, and consumers (including mortgages, home equity lending, and card products) and the support to deliver, fund, and manage such banking services.

The wealth management segment provides products and a variety of fiduciary, investment management, advisory, and Corporate agency services to assist customers in building, investing, or protecting their wealth, including insurance, brokerage, and trust/asset management. The other segment includes intersegment eliminations and residual revenues and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)

Selected segment information is presented below.


					Wealth						Consolidated
		Banking			Management			Other			Total

		($ In thousands)
As of and for the six months ended June 30, 2005
Net interest income		$	332,391		$	191		$	—		$	332,582
Provision for loan losses			5,998			—			—			5,998
Noninterest income			96,771			48,273			(248	)		144,796
Depreciation and amortization			25,629			1,194			—			26,823
Other noninterest expense			191,844			30,876			(248	)		222,472
Income taxes			64,042			6,558			—			70,600

	Net income	$	141,649		$	9,836		$	—		$	151,485

Total assets		$	20,691,764		$	86,523		$	(24,573	)	$	20,753,714

Total revenues*		$	417,443		$	48,464		$	(248	)	$	465,659
Percent of consolidated total revenues			90	%		10	%		—			100	%
As of and for the six months ended June 30, 2004
Net interest income		$	260,737		$	217		$	—		$	260,954
Provision for loan losses			11,065			—			—			11,065
Noninterest income			74,584			39,370			(1,344	)		112,610
Depreciation and amortization			16,924			1,151			—			18,075
Other noninterest expense			144,386			26,312			(1,344	)		169,354
Income taxes			46,155			4,850			—			51,005

	Net income	$	116,791		$	7,274		$	—		$	124,065

Total assets		$	15,439,014		$	71,829		$	(8,287	)	$	15,502,556

Total revenues*		$	326,763		$	39,587		$	(1,344	)	$	365,006
Percent of consolidated total revenues			90	%		11	%		(1	)%		100	%


*	Total revenues for this segment disclosure are defined to be the sum of net interest income plus noninterest income, net of mortgage servicing rights amortization.

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements — (Continued)


					Wealth						Consolidated
		Banking			Management			Other			Total

		($ In thousands)
As of and for the three months ended June 30, 2005
Net interest income		$	166,595		$	79		$	—		$	166,674
Provision for loan losses			3,671			—			—			3,671
Noninterest income			42,918			24,758			(132	)		67,544
Depreciation and amortization			13,140			552			—			13,692
Other noninterest expense			92,884			15,730			(132	)		108,482
Income taxes			30,936			3,422			—			34,358

	Net income	$	68,882		$	5,133		$	—		$	74,015

Total assets		$	20,691,764		$	86,523		$	(24,573	)	$	20,753,714

Total revenues*		$	203,673		$	24,837		$	(132	)	$	228,378
Percent of consolidated total revenues			89	%		11	%		—			100	%
As of and for the three months ended June 30, 2004
Net interest income		$	131,793		$	86		$	—		$	131,879
Provision for loan losses			5,889			—			—			5,889
Noninterest income			41,280			21,638			(767	)		62,151
Depreciation and amortization			8,438			685			—			9,123
Other noninterest expense			74,002			13,915			(767	)		87,150
Income taxes			24,513			2,850			—			27,363

	Net income	$	60,231		$	4,274		$	—		$	64,505

Total assets		$	15,439,014		$	71,829		$	(8,287	)	$	15,502,556

Total revenues*		$	168,787		$	21,724		$	(767	)	$	189,744
Percent of consolidated total revenues			89	%		11	%		—			100	%


ITEM 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Special Note Regarding Forward-Looking Statements

Statements made in this document and in documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions.

Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of the Corporation and could cause those results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. These factors, many of which are beyond the Corporation’s control, include the following:


	•	operating, legal, and regulatory risks;

	•	economic, political, and competitive forces affecting the Corporation’s banking, securities, asset management, and credit services businesses;

	•	integration risks related to integration of First Federal and other acquisitions;

	•	impact on net interest income of changes in monetary policy and general economic conditions; and

	•	the risk that the Corporation’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made. The Corporation undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporation’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on the six months ended June 30, 2005 and the comparable period in 2004. Discussion of second quarter 2005 results compared to second quarter 2004 is predominantly in section, “Comparable Second Quarter Results.” Discussion of second quarter 2005 results compared to first quarter 2005 is primarily in section, “Sequential Quarter Results.”

The following discussion refers to the Corporation’s business combination activity that may impact the comparability of certain financial data (see Note 7, “Business Combinations,” of the notes to consolidated financial statements). In particular, consolidated financial results for the six months ended June 30, 2004 reflect no contribution from its October 29, 2004, purchase acquisition of First Federal and only three months contribution from its April 1, 2004, purchase acquisition of Jabas.

Critical Accounting Policies

The consolidated financial statements of the Corporation are prepared in conformity with U.S. generally accepted accounting principles and follow general practices within the industries in which it operates. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of the Corporation’s financial condition and results and require subjective or complex judgments and, therefore, management considers the following to be critical accounting policies. The critical accounting policies are discussed directly with the Audit Committee of the Corporation.

Allowance for Loan Losses: Management’s evaluation process used to determine the adequacy of the allowance for loan losses is subject to the use of estimates, assumptions, and judgments. The evaluation process combines several factors: management’s ongoing review and grading of the loan portfolio, consideration of past loan loss and delinquency experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Corporation believes the allowance for loan losses is adequate as recorded in the consolidated financial statements. See section “Allowance for Loan Losses.”

Mortgage Servicing Rights Valuation: The fair value of the Corporation’s mortgage servicing rights asset is important to the presentation of the consolidated financial statements since the mortgage servicing rights are carried on the consolidated balance sheet at the lower of amortized cost or estimated fair value. Mortgage servicing rights do not trade in an active open market with readily observable prices. As such, like other participants in the mortgage banking business, the Corporation relies on an internal discounted cash flow model to estimate the fair value of its mortgage servicing rights. The use of an internal discounted cash flow model involves judgment, particularly of estimated prepayment speeds of underlying mortgages serviced and the overall level of interest rates. Loan type and note rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment. The Corporation periodically reviews the assumptions underlying the valuation of mortgage servicing rights. In addition, the Corporation consults periodically with third parties as to the assumptions used and to determine that the resultant valuation is within the context of the market. While the Corporation believes that the values produced by its internal model are indicative of the fair value of its mortgage servicing rights portfolio, these values can change significantly depending upon key factors, such as the then current interest rate environment, estimated prepayment speeds of the underlying mortgages serviced, and other economic conditions. To better understand the sensitivity of the impact on prepayment speeds to changes in interest rates, if mortgage interest rates moved up 50 basis points (“bp”) at June 30, 2005 (holding all other factors unchanged), it is anticipated that prepayment speeds would have slowed and the modeled estimated value of mortgage servicing rights could have been $6 million higher than that determined at June 30, 2005 (leading to more valuation allowance

reversal and an increase in mortgage banking income). Conversely, if mortgage interest rates moved down 50 bp, prepayment speeds would have likely increased and the modeled estimated value of mortgage servicing rights could have been $8 million lower (leading to adding more valuation allowance and a decrease in mortgage banking income). The proceeds that might be received should the Corporation actually consider a sale of the mortgage servicing rights portfolio could differ from the amounts reported at any point in time. The Corporation believes the mortgage servicing rights asset is properly recorded in the consolidated financial statements. See Note 9, “Goodwill and Other Intangible Assets,” of the notes to consolidated financial statements and section “Noninterest Income.”

Derivative Financial Instruments and Hedge Accounting: In various aspects of its business, the Corporation uses derivative financial instruments to modify exposures to changes in interest rates and market prices for other financial instruments. Derivative instruments are required to be carried at fair value on the balance sheet with changes in the fair value recorded directly in earnings. To qualify for and maintain hedge accounting, the Corporation must meet formal documentation and effectiveness evaluation requirements both at the hedge’s inception and on an ongoing basis. The application of the hedge accounting policy requires strict adherence to documentation and effectiveness testing requirements, judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings, and measurement of changes in the fair value of hedged items. If in the future derivative financial instruments used by the Corporation no longer qualify for hedge accounting, the impact on the consolidated results of operations and reported earnings could be significant. When hedge accounting is discontinued, the Corporation would continue to carry the derivative on the balance sheet at its fair value; however, for a cash flow derivative changes in its fair value would be recorded in earnings instead of through other comprehensive income, and for a fair value derivative the changes in fair value of the hedged asset or liability would no longer be recorded through earnings. Subsequent to its July 21, 2005 press release on second quarter 2005 earnings, but prior to its submission of this quarterly report, the Corporation determined that the hedge accounting applied to certain interest rate swaps and an interest rate cap needed to be changed under the requirements of SFAS 133. Consequently, the Corporation recorded a $6.7 million loss in other income effective for the quarter ended June 30, 2005, which after tax was a $4.0 million reduction to net income, or $0.03 to both basic and diluted earnings per share. See Note 2, “Accounting for Certain Derivatives,” and Note 11, “Derivative and Hedging Activities,” of the notes to consolidated financial statements.

Income Tax Accounting: The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. The Corporation believes the tax assets and liabilities are adequate and properly recorded in the consolidated financial statements. See section “Income Taxes.”

Segment Review

As described in Note 14, “Segment Reporting,” of the notes to consolidated financial statements, the Corporation’s primary reportable segment is banking. Banking consists of lending and deposit gathering (as well as other banking-related products and services) to businesses, governments, and consumers and the support to deliver, fund, and manage such banking services. The Corporation’s wealth management segment provides products and a variety of fiduciary, investment management, advisory, and Corporate agency services to assist customers in building, investing, or protecting their wealth, including insurance, brokerage, and trust/asset management.

Note 14, “Segment Reporting,” of the notes to consolidated financial statements, indicates that the banking segment represents 90% of total revenues for the six months ended June 30, 2005, as defined in the Note. The Corporation’s profitability is predominantly dependent on net interest income, noninterest income, the level of the provision for loan losses, noninterest expense, and taxes of its banking segment. The consolidated discussion is therefore predominantly describing the banking segment results. The critical

accounting policies primarily affect the banking segment, with the exception of income tax accounting, which affects both the banking and wealth management segments (see section “Critical Accounting Policies”).

Results of Operations — Summary

TABLE 1(1)

Summary Results of Operations: Trends


	2nd Qtr.			1st Qtr.			4th Qtr.			3rd Qtr.			2nd Qtr.
	2005			2005			2004			2004			2004

	($ In thousands, except per share data)
Net income (Quarter)	$	74,015		$	77,470		$	70,855		$	63,366		$	64,505
Net income (Year-to-date)		151,485			77,470			258,286			187,431			124,065
Earnings per share — basic (Quarter)	$	0.57		$	0.60		$	0.57		$	0.58		$	0.59
Earnings per share — basic (Year-to-date)		1.17			0.60			2.28			1.70			1.13
Earnings per share — diluted (Quarter)	$	0.57		$	0.59		$	0.57		$	0.57		$	0.58
Earnings per share — diluted (Year-to-date)		1.16			0.59			2.25			1.68			1.11
Return on average assets (Quarter)		1.44	%		1.54	%		1.49	%		1.60	%		1.67	%
Return on average assets (Year-to-date)		1.49			1.54			1.58			1.62			1.62
Return on average equity (Quarter)		14.62	%		15.52	%		15.46	%		17.76	%		18.87	%
Return on average equity (Year-to-date)		15.07			15.52			17.22			18.00			18.12
Return on tangible average equity (Quarter)(2)		22.65	%		24.13	%		22.47	%		21.69	%		23.15	%
Return on tangible average equity (Year-to-date)(2)		23.38			24.13			22.11			21.98			22.13
Efficiency ratio (Quarter)(3)		50.03	%		49.73	%		49.07	%		47.75	%		46.82	%
Efficiency ratio (Year-to-date)(3)		49.88			49.73			48.04			47.63			47.57
Net interest margin (Quarter)		3.63	%		3.68	%		3.74	%		3.76	%		3.80	%
Net interest margin (Year-to-date)		3.65			3.68			3.80			3.79			3.80


(1)	All per share financial information has been restated to reflect the effect of the May 2004 3-for-2 stock split.

(2)	Return on tangible average equity = Net income divided by average equity excluding average goodwill and other intangible assets. This is a non-GAAP financial measure.

(3)	Efficiency ratio = Noninterest expense divided by sum of taxable equivalent net interest income plus noninterest income, excluding investment securities gains (losses), net, and asset sales gains (losses), net.

Net income for the six months ended June 30, 2005 totaled $151.5 million, or $1.17 and $1.16 for basic and diluted earnings per share, respectively. Comparatively, net income for the six months ended June 30, 2004 was $124.1 million, or $1.13 and $1.11 for basic and diluted earnings per share, respectively. Year-to-date 2005 results generated an annualized return on average assets of 1.49% and an annualized return on average equity of 15.07%, compared to 1.62% and 18.12%, respectively, for the comparable period in 2004. The net interest margin for the first six months of 2005 was 3.65% compared to 3.80% for the first six months of 2004.

Net Interest Income and Net Interest Margin

Net interest income on a taxable equivalent basis for the six months ended June 30, 2005, was $345 million, an increase of $71.2 million or 26% over the comparable period last year. As indicated in Tables 2 and 3, the $71.2 million increase in taxable equivalent net interest income was attributable principally to favorable volume variances (with balance sheet growth from both the First Federal acquisition and organic growth adding $82.6 million to taxable equivalent net interest income), mitigated by unfavorable rate

variances (as the impact of changes in the interest rate environment and product pricing reduced taxable equivalent net interest income by $11.4 million).

The net interest margin for the first six months of 2005 was 3.65%, down 15 basis points from 3.80% for the comparable period in 2004. This comparable period decrease was a function of a 23 bp decrease in interest rate spread (the net of a 72 bp increase in the cost of interest-bearing liabilities and a 49 bp increase in the yield on earning assets) offset in part by 8 bp higher contribution from net free funds (attributable largely to the higher interest rate environment in 2005 which increased the value of noninterest-bearing demand deposits, a principle component of net free funds).

The Federal Reserve raised interest rates by 25 bp nine times (totaling 225 bp) since mid-year 2004, resulting in an average Federal funds rate of 2.68% for the first half of 2005, 168 bp higher than the level 1.00% experienced during the first half of 2004. The Corporation’s interest rate sensitive balance sheet positions the Corporation for increased earnings if rates rise. The benefits from this position in the first six months of 2005 were mitigated by competitive pricing pressures and the continued flattening of the yield curve. The Corporation anticipates continued margin pressure in the third quarter.

The yield on earning assets was 5.60% for year-to-date 2005, 49 bp higher than the comparable six-month period last year. The average loan yield was up 75 bp to 5.90%, attributable to the repricing of variable rate loans in the higher interest rate environment, as well as higher, though competitive, pricing on new and refinanced loans. The average yield on investments and other earning assets decreased 28 bp to 4.74%, as higher yielding securities matured and reinvestment occurred in a flattened yield curve environment.

The cost of interest-bearing liabilities was 2.27% for year-to-date 2005, up 72 bp compared to the same period in 2004, reflecting the rising rate environment. The average cost of interest-bearing deposits was 1.86%, 48 bp higher than year-to-date 2004 and the cost of wholesale funds (comprised of short-term borrowings and long-term funding) was 2.96%, up 109 bp from year-to-date 2004. Short-term borrowings were the most directly impacted by the higher interest rates between comparable periods, increasing 161 bp to 2.74%, while long-term debt experienced a more moderate increase, rising only 28 bp to 3.14%.

Average earning assets of $18.8 billion, were up $4.5 billion (31%) over the comparable six-month period last year, due to both the First Federal acquisition and organic growth. On average, loans increased $3.5 billion and investments were up $1.0 billion (predominantly mortgage-related securities), with First Federal adding $2.7 billion and $0.7 billion of loans and investments, respectively, at acquisition. The overall growth in average loans was comprised of increases in commercial loans (up $1.7 billion), retail loans (up $1.0 billion) and residential mortgages (up $0.8 billion).

Average interest-bearing liabilities increased $4.0 billion (33%) over the comparable period in 2004, while net free funds increased $0.5 billion, both supporting the growth in earning assets. Average noninterest-bearing demand deposits (a component of net free funds) increased by $441 million, attributable principally to First Federal. The increase in average interest-bearing liabilities consisted of growth in interest-bearing deposits (up $2.1 billion, with First Federal adding $2.2 billion at acquisition) and higher wholesale funding balances (up $1.9 billion). Long-term debt was up $1.5 billion (including $0.8 billion from First Federal), representing 20.4% of average interest-bearing liabilities for year-to-date 2005 compared to 15.0% for year-to-date 2004. The remaining funding needs were filled with short-term borrowings (up $0.4 billion).

TABLE 2

Net Interest Income Analysis-Taxable Equivalent Basis


			Six Months Ended June 30, 2005							Six Months Ended June 30, 2004

					Interest		Average					Interest		Average
			Average		Income/		Yield/			Average		Income/		Yield/
			Balance		Expense		Rate			Balance		Expense		Rate

			($ In thousands)
Earning assets:
	Loans:(1)(2)(3)
		Commercial	$	8,328,884	$	241,201		5.76	%	$	6,608,371	$	160,794		4.82	%
		Residential mortgage		2,857,510		79,361		5.56			2,072,470		58,410		5.64
		Retail		2,844,834		94,025		6.64			1,878,635		53,986		5.77

	Total loans			14,031,228		414,587		5.90			10,559,476		273,190		5.15
	Investments and other(1)			4,805,953		113,900		4.74			3,773,659		94,698		5.02

		Total earning assets		18,837,181		528,487		5.60			14,333,135		367,888		5.11
	Other assets, net			1,684,349							1,046,506

		Total assets	$	20,521,530						$	15,379,641

Interest-bearing liabilities:
	Interest-bearing deposits:
		Savings deposits	$	1,126,486	$	2,053		0.37	%	$	918,775	$	1,684		0.37	%
		Interest-bearing demand deposits		2,475,344		13,423		1.09			2,380,375		9,571		0.81
		Money market deposits		2,111,396		16,682		1.59			1,537,955		5,952		0.78
		Time deposits, excluding Brokered CDs		4,038,479		56,151		2.80			2,880,996		35,739		2.49

	Total interest-bearing deposits, excluding Brokered CDs			9,751,705		88,309		1.83			7,718,101		52,946		1.38
		Brokered CDs		301,901		4,211		2.81			206,527		1,264		1.23

	Total interest-bearing deposits			10,053,606		92,520		1.86			7,924,628		54,210		1.38
	Wholesale funding			6,119,944		90,989		2.96			4,232,740		39,933		1.87

		Total interest-bearing liabilities		16,173,550		183,509		2.27			12,157,368		94,143		1.55

Noninterest-bearing demand deposits				2,159,974							1,718,881
Other liabilities				160,391							126,674
Stockholders’ equity				2,027,615							1,376,718

		Total liabilities and equity	$	20,521,530						$	15,379,641

Interest rate spread								3.33	%						3.56	%
Net free funds								0.32							0.24

Taxable equivalent net interest income and net interest margin					$	344,978		3.65	%			$	273,745		3.80	%

Taxable equivalent adjustment						12,396							12,791

Net interest income					$	332,582						$	260,954


(1)	The yield on tax exempt loans and securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.

(2)	Nonaccrual loans and loans held for sale are included in the average balances.

(3)	Interest income includes net loan fees.

TABLE 2 (Continued)

Net Interest Income Analysis-Taxable Equivalent Basis


			Three Months Ended June 30, 2005							Three Months Ended June 30, 2004

					Interest		Average					Interest		Average
			Average		Income/		Yield/			Average		Income/		Yield/
			Balance		Expense		Rate			Balance		Expense		Rate

			($ In thousands)
Earning assets:
	Loans:(1)(2)(3)
		Commercial	$	8,391,627	$	125,299		5.91	%	$	6,684,527	$	81,007		4.80	%
		Residential mortgage		2,877,900		39,942		5.55			2,103,558		29,301		5.58
		Retail		2,814,719		48,648		6.92			1,897,457		27,367		5.79

	Total loans			14,084,246		213,889		6.04			10,685,542		137,675		5.13
	Investments and other(1)			4,832,675		57,228		4.74			3,795,159		47,263		4.98

		Total earning assets		18,916,921		271,117		5.71			14,480,701		184,938		5.09
	Other assets, net			1,657,849							1,017,304

		Total assets	$	20,574,770						$	15,498,005

Interest-bearing liabilities:
	Interest-bearing deposits:
		Savings deposits	$	1,133,629	$	1,041		0.37	%	$	939,025	$	843		0.36	%
		Interest-bearing demand deposits		2,349,997		6,677		1.14			2,396,737		4,871		0.82
		Money market deposits		2,106,829		9,287		1.77			1,498,900		2,790		0.75
		Time deposits, excluding Brokered CDs		4,005,390		28,903		2.89			2,824,920		17,327		2.47

	Total interest-bearing deposits, excluding Brokered CDs			9,595,845		45,908		1.92			7,659,582		25,831		1.36
		Brokered CDs		285,456		2,179		3.06			268,709		825		1.24

	Total interest-bearing deposits			9,881,301		48,087		1.95			7,928,291		26,656		1.35
	Wholesale funding			6,326,418		50,182		3.14			4,303,442		20,016		1.85

		Total interest-bearing liabilities		16,207,719		98,269		2.42			12,231,733		46,672		1.53

Noninterest-bearing demand deposits				2,188,418							1,773,654
Other liabilities				147,704							117,986
Stockholders’ equity				2,030,929							1,374,632

		Total liabilities and equity	$	20,574,770						$	15,498,005

Interest rate spread								3.29	%						3.56	%
Net free funds								0.34							0.24

Taxable equivalent net interest income and net interest margin					$	172,848		3.63	%			$	138,266		3.80	%

Taxable equivalent adjustment						6,174							6,387

Net interest income					$	166,674						$	131,879

TABLE 3

Volume/ Rate Variance — Taxable Equivalent Basis


			Comparison of							Comparison of
			Six Months Ended							Three Months Ended
			June 30, 2005 Versus 2004							June 30, 2005 Versus 2004

					Variance Attributable to							Variance Attributable to
			Income/Expense							Income/Expense
			Variance(1)		Volume		Rate			Variance(1)		Volume			Rate

			($ In thousands)
INTEREST INCOME:(2)
Loans:
	Commercial		$	80,407	$	45,521	$	34,886		$	44,292	$	23,071		$	21,221
	Residential mortgage			20,951		21,815		(864	)		10,641		10,747			(106	)
	Retail			40,039		31,537		8,502			21,281		15,878			5,403

Total loans				141,397		98,873		42,524			76,214		49,696			26,518
Investments and other				19,202		24,677		(5,475	)		9,965		12,393			(2,428	)

		Total interest income	$	160,599	$	123,550	$	37,049		$	86,179	$	62,089		$	24,090
INTEREST EXPENSE:
Interest-bearing deposits:
	Savings deposits		$	369	$	374	$	(5	)	$	198	$	181		$	17
	Interest-bearing demand deposits			3,852		392		3,460			1,806		(96	)		1,902
	Money market deposits			10,730		2,817		7,913			6,497		1,491			5,006
	Time deposits, excluding brokered CDs			20,412		15,600		4,812			11,576		8,183			3,393

		Interest-bearing deposits, excluding brokered CDs		35,363		19,183		16,180			20,077		9,759			10,318
	Brokered CDs			2,947		778		2,169			1,354		55			1,299

Total interest-bearing deposits				38,310		19,961		18,349			21,431		9,814			11,617
Wholesale funding				51,056		21,000		30,056			30,166		11,469			18,697

		Total interest expense		89,366		40,961		48,405			51,597		21,283			30,314

Net interest income, taxable equivalent			$	71,233	$	82,589	$	(11,356	)	$	34,582	$	40,806		$	(6,224	)


(1)	The change in interest due to both rate and volume has been allocated proportionately to volume variance and rate variance based on the relationship of the absolute dollar change in each.

(2)	The yield on tax-exempt loans and securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.

Provision for Loan Losses

The provision for loan losses for the first six months of 2005 was $6.0 million, compared to $11.1 million for the same period in 2004. Net charge offs were $5.7 million and $10.7 million for the six months ended June 30, 2005 and 2004, respectively. Annualized net charge offs as a percent of average loans for year-to-date 2005 were 0.08%, compared to 0.15% for the full year 2004 and 0.20% for the comparable year-to-date period in 2004. At June 30, 2005, the allowance for loan losses was $190.0 million, compared to $189.8 million at December 31, 2004, and $178.0 million at June 30, 2004. The ratio of the allowance for loan losses to total loans was 1.35%, down from 1.37% at December 31, 2004 and 1.69% at June 30, 2004. Nonperforming loans at

June 30, 2005 were $112.5 million, compared to $115.0 million at December 31, 2004 and $85.9 million at June 30, 2004. See Table 8.

The provision for loan losses is predominantly a function of the methodology and other qualitative and quantitative factors used to determine the adequacy of the allowance for loan losses which focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses on each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. See additional discussion under sections “Allowance for Loan Losses,” and “Nonperforming Loans and Other Real Estate Owned.”

Noninterest Income

For the six months ended June 30, 2005, noninterest income was $133.1 million, up $29.0 million or 27.9% compared to $104.1 million for year-to-date 2004. The timing of acquisitions affected financial comparisons, as the first six months of 2004 carry no financial results from the October 2004 First Federal acquisition and three months financial results from the April 2004 Jabas acquisition. See Table 10 for detailed trends of selected quarterly information.

TABLE 4

Noninterest Income


								Change										Change
		2nd Qtr.			2nd Qtr.									YTD		YTD
		2005			2004			Dollar			Percent			2005		2004		Dollar			Percent

		($ In thousands)
Trust service fees		$	8,967		$	8,043		$	924			11.5	%	$	17,295	$	15,911	$	1,384			8.7	%
Service charges on deposit accounts			22,215			13,141			9,074			69.1			40,880		25,538		15,342			60.1
Mortgage banking income			10,715			9,045			1,670			18.5			22,479		18,071		4,408			24.4
Mortgage servicing rights expense			8,339			(2,368	)		10,707			N/M			10,219		4,404		5,815			132.0

	Mortgage banking, net		2,376			11,413			(9,037	)		(79.2	)		12,260		13,667		(1,407	)		(10.3	)
Credit card & other nondeposit fees			8,790			6,074			2,716			44.7			17,901		11,745		6,156			52.4
Retail commissions			15,370			13,162			2,208			16.8			30,075		22,519		7,556			33.6
Bank owned life insurance (“BOLI”) income			2,311			3,641			(1,330	)		(36.5	)		4,479		6,996		(2,517	)		(36.0	)
Other			(355	)		2,742			(3,097	)		(112.9	)		8,459		5,874		2,585			44.0

	Subtotal (“fee income”)		59,674			58,216			1,458			2.5			131,349		102,250		29,099			28.5
Asset sale gains, net			539			218			321			N/M			237		440		(203	)		N/M
Investment securities gains (losses), net			1,491			(569	)		2,060			N/M			1,491		1,362		129			N/M

	Total noninterest income	$	61,704		$	57,865		$	3,839			6.6	%	$	133,077	$	104,052	$	29,025			27.9	%

N/ M — Not meaningful

Trust service fees were $17.3 million, up $1.4 million (8.7%) between comparable six-month periods. The change was primarily the result of an improving stock market and its impact on the average market value of assets under management. The market value of assets under management were $4.75 billion and $4.31 billion at June 30, 2005 and 2004, respectively, primarily reflecting higher equity values. Equities represent over 60% of the market value of assets under management for both six-month June periods.

Service charges on deposit accounts were $40.9 million, up $15.3 million (60.1%) over the comparable six-month period last year, a function of higher volumes associated with the increased deposit account base, moderate fee increases in second quarter 2004 related to account service charges and nonsufficient funds, and standardization of service charges in first quarter 2005 following the First Federal system conversion.

Net mortgage banking income consists of gross mortgage banking income (which includes servicing fees and the gain or loss on sales of mortgage loans to the secondary market and other related fees) less mortgage servicing rights expense (i.e., base amortization of the mortgage servicing rights asset and increases or decreases to the valuation allowance associated with the mortgage servicing rights asset). Net mortgage banking income was $12.3 million for the first half of 2005, down $1.4 million (10.3%) from the first half of 2004. The decrease was the net result of higher mortgage servicing rights expense (unfavorable by $5.8 million) and a reduction in other related mortgage fees and gains on sales (down $1.5 million), offset in part by higher servicing fees (up $5.9 million). Including First Federal, the average mortgage portfolio serviced for others increased (up 61%), resulting in the increased servicing fees between the comparable six-month periods. Mortgage interest rates were higher at June 30, 2005 than at June 30, 2004, impacting secondary mortgage production (down 23% to $723 million compared to $939 million for the first half of 2004) and lowering other related mortgage fees and gains on sales by $1.5 million (down 13.8%).

Year-to-date mortgage servicing rights expense was impacted primarily by changes in estimated prepayment speeds and related movements in the estimated fair value of the mortgage servicing rights asset. Mortgage servicing rights expense for the six months ended June 30, 2005, was $10.2 million, $5.8 million higher than the comparable six-month period in 2004. For the first half of 2005, mortgage servicing rights expense included a $1.5 million reversal to the valuation reserve compared to a $4.2 million valuation reversal for the first half of 2004 and $3.1 million higher base amortization expense on the larger mortgage servicing rights asset. At June 30, 2005, the net mortgage servicing rights asset was $74.1 million, representing 78 basis points of the $9.48 billion mortgage portfolio serviced for others, compared to a net mortgage servicing rights asset of $48.7 million, representing 81 basis points of the $6.01 billion mortgage portfolio serviced for others at June 30, 2004.

The mortgage servicing rights asset, net of any valuation allowance, is carried in intangible assets on the consolidated balance sheets at the lower of amortized cost or estimated fair value. The valuation of the mortgage servicing rights asset is considered a critical accounting policy given that estimating the fair value involves an internal discounted cash flow model and assumptions that involve judgment, particularly of estimated prepayment speeds of the underlying mortgages serviced and the overall level of interest rates. See section “Critical Accounting Policies,” as well as Note 9, “Goodwill and Other Intangible Assets,” of the notes to consolidated financial statements for additional disclosure.

Credit card and other nondeposit fees were $17.9 million, up $6.2 million (52.4%) over the first half of 2004, primarily from the inclusion of First Federal accounts, and predominantly from card-related inclearing and other fees. Retail commissions (which includes commissions from insurance and brokerage product sales) were $30.1 million for the first six months of 2005, up $7.6 million (33.6%) compared to the first six months of 2004, attributable to the inclusion of Jabas as well as increased sales.

BOLI income was $4.5 million, down $2.5 million (36.0%) from the first half of 2004, a direct result of the 2004 downward repricings of a large investment of BOLI. Other income was $8.5 million for the first half of 2005, up $2.6 million over first half of 2004. The change in other income was due largely to a $4.5 million non-recurring gain from the dissolution of stock in a regional ATM network along with increases in ATM-based fees and other miscellaneous income due to the inclusion of First Federal, offset partly by a $6.7 million net loss on derivatives (as described in Note 2, “Accounting for Certain Derivatives,” of the notes to consolidated financial statements). Net investment securities gains of $1.5 million for the first half of 2005 included gains of $1.7 million on the sale of common stock holdings, partially offset by losses of $0.2 million on the sale of mortgage-related securities. For the first half of 2004 net investment securities gain of $1.4 million was the net result of a $1.9 million gain on the sale of common stock holdings, net of a $0.2 million other-than-temporary write-down on a mortgage-related security and a $0.4 million loss on the sale of securities.

Noninterest Expense

Noninterest expense was $237.6 million for the first half of 2005, up $58.7 million (32.8%) over the comparable period last year, influenced by the timing of the First Federal and Jabas acquisitions. See Table 10 for detailed trends of selected quarterly information.

TABLE 5

Noninterest Expense


		2nd Qtr.		2nd Qtr.		Dollar		Percent			YTD		YTD		Dollar		Percent
		2005		2004		Change		Change			2005		2004		Change		Change

								($ In thousands)
Personnel expense		$	66,934	$	53,612	$	13,322		24.8	%	$	139,919	$	105,888	$	34,031		32.1	%
Occupancy			9,374		6,864		2,510		36.6			19,262		14,336		4,926		34.4
Equipment			4,214		2,878		1,336		46.4			8,232		5,877		2,355		40.1
Data processing			6,728		6,128		600		9.8			13,021		11,801		1,220		10.3
Business development & advertising			4,153		4,057		96		2.4			8,092		6,714		1,378		20.5
Stationery and supplies			1,644		1,429		215		15.0			3,488		2,655		833		31.4
Intangible amortization expense			2,292		934		1,358		145.4			4,286		1,716		2,570		149.8
Loan expense			2,512		1,670		842		50.4			5,203		3,056		2,147		70.3
Legal and professional			2,896		2,460		436		17.7			5,383		3,789		1,594		42.1
Other			15,587		11,955		3,632		30.4			30,690		23,039		7,651		33.2

	Total noninterest expense	$	116,334	$	91,987	$	24,347		26.5	%	$	237,576	$	178,871	$	58,705		32.8	%

Personnel expense (including salary-related expenses and fringe benefit expenses) was $139.9 million for first six months of 2005, up $34.0 million (32.1%) over the first six months of 2004, particularly reflecting the substantially larger employee base attributable to the 2004 acquisitions. Average full-time equivalent employees were 5,011 for the first half of 2005, up 24.7% from 4,017 for the first half of 2004. Salary-related expenses increased $25.7 million (31.8%) due principally to the larger employee base, merit increases between the years, higher incentives and commission-based pay, as well as higher overtime and severance. Fringe benefits were up $8.3 million (33.2%) over the comparable 2004 period, in response to the larger salary base, as well as the increased cost of premium based benefits and other benefit plans.

Occupancy expense of $19.3 million for the first half of 2005 was up $4.9 million (34.4%), and equipment expense of $8.2 million was up $2.4 million (40.1%) over the comparable period last year, predominantly due to the First Federal acquisition, which added over 90 branches and supermarket locations (43%) to the Corporation’s branch system, and necessary technology expenditures. Data processing, business development and advertising, and stationery and supplies were each up between the comparable six-month periods, reflecting the larger operating base, conversion and integration expenditures, but offset in part by controlling selected discretionary expenses. Intangible amortization expense increased $2.6 million, a direct function of amortizing intangible assets added from the 2004 acquisitions.

Loan expense was $5.2 million for first six months of 2005, an increase of $2.1 million compared to first six months of 2004, fully attributable to processing, security, authorization and conversion costs related to the larger credit and debit card base. Legal and professional expenses were $5.4 million, up $1.6 million, due in part to conversion efforts, but also due to higher base audit/compliance fees and other professional consultant costs. Other expense was up $7.7 million (33.2%) over the comparable period last year, across multiple categories and primarily commensurate with the larger operating base (such as higher ATM expense, customer check printing, insurance and donation costs), but also higher employee training, hiring, placement and relocation costs.

Income Taxes

Income tax expense for the first six months of 2005 was $70.6 million, up $19.6 million from the comparable period in 2004. The effective tax rate (income tax expense divided by income before taxes) was 31.8% and 29.1% for year-to-date 2005 and year-to-date 2004, respectively. The increase in the effective tax rate was primarily attributable to the increase in income before tax and the acquisitions of First Federal and Jabas, with both having higher effective tax rates than the Corporation prior to the acquisitions.

Income tax expense recorded in the consolidated statements of income involves the interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy. The Corporation undergoes examination by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See section “Critical Accounting Policies.”

Balance Sheet

At June 30, 2005, total assets were $20.8 billion, an increase of $5.3 billion, or 33.9%, since June 30, 2004, largely attributable to the First Federal acquisition. The growth in assets was comprised principally of increases in loans (up $3.5 billion or 33.1%, including $2.7 billion from First Federal at consummation) and investment securities (up $1.0 billion or 26.2%, with $0.7 million acquired from First Federal at consummation).

Commercial loans and home equity were strategically emphasized in 2004. In addition, the acquisition of First Federal with its higher mix of retail and residential mortgage loans shifted the mix of loans. Commercial loans were $8.4 billion, up $1.7 billion or 25.7%, and represented 60% of total loans at June 30, 2005, compared to 64% at June 30, 2004. Retail loans grew $0.9 billion or 49.3% to represent 20% of total loans compared to 18% at June 30, 2004, while residential mortgage loans increased $0.9 billion or 43.0% to represent 20% of total loans compared to 18% a year earlier.

At June 30, 2005, total deposits were $12.1 billion, up $2.5 billion or 26.2% over June 30, 2004 (including $2.7 billion added from First Federal at acquisition). Other time deposits increased $1.2 billion (44.2%) to represent 33% of total deposits at June 30, 2005 compared to 28% at June 30, 2004. Money market deposits grew $0.6 billion (41.8%) to represent 17% of total deposits at June 30, 2005 compared to 15% a year earlier, while demand deposits increased $0.4 billion (23.5%) to represent 19% of total deposits at June 30, 2005 (unchanged from 19% of total deposits at June 30, 2004). Short-term borrowings increased $0.2 billion, while long-term funding increased $1.9 billion since June 30, 2004, due primarily to the funding mix acquired from First Federal, as well as the issuance of Federal Home Loan Bank advances, bank notes, and repurchase agreements (see Note 10, “Long-term Funding,” of the notes to consolidated financial statements).

Since year-end 2004 the balance sheet grew modestly, up $0.2 billion (2.3% annualized). Loans grew $0.2 billion (2.5% annualized), especially commercial loans (up $185 million). Total deposits were down $0.7 billion compared to December 31, 2004, primarily in interest-bearing demand deposits (down $628 million).

TABLE 6

Period End Loan Composition


		June 30, 2005					March 31, 2005					December 31, 2004					September 30, 2004					June 30, 2004

				% of					% of					% of					% of					% of
		Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total

		($ In thousands)
Commercial, financial, and agricultural		$	3,086,663		22	%	$	2,852,462		21	%	$	2,803,333		20	%	$	2,479,764		23	%	$	2,247,779		22	%
Real estate construction			1,640,941		12			1,569,013		11			1,459,629		11			1,152,990		11			1,118,284		11
Commercial real estate			3,650,726		26			3,813,465		28			3,933,131		28			3,242,009		30			3,292,783		31
Lease financing			53,270		—			50,181		—			50,718		—			49,423		—			48,979		—

	Commercial		8,431,600		60			8,285,121		60			8,246,811		59			6,924,186		64			6,707,825		64
Home equity(1)			1,806,236		13			1,744,676		13			1,866,485		13			1,290,436		12			1,231,077		12
Installment			1,025,621		7			1,048,510		7			1,054,011		8			672,806		6			666,305		6

	Retail		2,831,857		20			2,793,186		20			2,920,496		21			1,963,242		18			1,897,382		18
	Residential mortgage		2,791,049		20			2,844,889		20			2,714,580		20			1,943,199		18			1,951,396		18

Total loans		$	14,054,506		100	%	$	13,923,196		100	%	$	13,881,887		100	%	$	10,830,627		100	%	$	10,556,603		100	%


(1)	Home equity includes home equity lines and residential mortgage junior liens.

TABLE 7

Period End Deposit Composition


	June 30, 2005					March 31, 2005					December 31, 2004					September 30, 2004					June 30, 2004

			% of					% of					% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total

											($ In thousands)
Noninterest-bearing demand	$	2,250,482		19	%	$	2,156,592		18	%	$	2,347,611		19	%	$	1,867,905		19	%	$	1,822,716		19	%
Savings		1,117,922		9			1,137,120		9			1,116,158		9			936,975		10			948,755		10
Interest-bearing demand		2,227,188		18			2,485,548		20			2,854,880		22			2,334,072		24			2,355,287		25
Money market		2,094,796		17			2,112,490		17			2,083,717		16			1,516,423		16			1,477,513		15
Brokered CDs		491,781		4			218,111		2			361,559		3			186,326		2			263,435		3
Other time		3,916,462		33			4,084,043		34			4,022,314		31			2,835,572		29			2,715,886		28

Total deposits	$	12,098,631		100	%	$	12,193,904		100	%	$	12,786,239		100	%	$	9,677,273		100	%	$	9,583,592		100	%

Total deposits, excluding Brokered CDs	$	11,606,850		96	%	$	11,975,793		98	%	$	12,424,680		97	%	$	9,490,947		98	%	$	9,320,157		97	%

Allowance for Loan Losses

Credit risks within the loan portfolio are inherently different for each different loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses.

As of June 30, 2005, the allowance for loan losses was $190.0 million compared to $178.0 million at June 30, 2004, and $189.8 million at December 31, 2004. The allowance for loan losses at June 30, 2005 increased $12.0 million since June 30, 2004 (including $14.8 million from First Federal at acquisition) and $0.2 million since December 31, 2004. At June 30, 2005, the allowance for loan losses to total loans was 1.35% and covered 169% of nonperforming loans, compared to 1.69% and 207%, respectively, at June 30, 2004, and 1.37% and 165%, respectively, at December 31, 2004. The decline in the ratio of allowance for loan losses to

total loans at June 30, 2005, and year-end 2004 compared to June 30, 2004, was in part a result of acquiring the First Federal thrift balance sheet, which added $14.8 million allowance for loan losses and $2.7 billion of loans (or 0.54% allowance for loan losses to total loans) at consummation. Table 8 provides additional information regarding activity in the allowance for loan losses and nonperforming assets.

Gross charge offs were $11.3 million for the six months ended June 30, 2005, $12.7 million for the comparable period ended June 30, 2004, and $22.2 million for year-end 2004, while recoveries for the corresponding periods were $5.6 million, $2.0 million and $4.9 million, respectively. The ratio of net charge offs to average loans on an annualized basis was 0.08%, 0.20%, and 0.15% for the six-month periods ended June 30, 2005 and June 30, 2004, and for the 2004 year, respectively.

TABLE 8

Allowance for Loan Losses and Nonperforming Assets


				At and for the						At and for the
				Six Months Ended						Year Ended
				June 30,						December 31,

				2005			2004			2004

				($ In thousands)
Allowance for Loan Losses:
Balance at beginning of period				$	189,762		$	177,622		$	177,622
Balance related to acquisition					—			—			14,750
Provision for loan losses					5,998			11,065			14,668
Charge offs					(11,333	)		(12,722	)		(22,202	)
Recoveries					5,597			2,015			4,924

	Net charge offs				(5,736	)		(10,707	)		(17,278	)

Balance at end of period				$	190,024		$	177,980		$	189,762

Nonperforming Assets:
Nonaccrual loans:
	Commercial			$	85,264		$	60,964		$	85,955
	Residential mortgage				16,438			12,127			16,088
	Retail				7,996			7,531			10,718

			Total nonaccrual loans		109,698			80,622			112,761
Accruing loans past due 90 days or more:
	Commercial				—			3,890			659
	Residential mortgage				—			—			—
	Retail				2,806			1,317			1,494

			Total accruing loans past due 90 days or more		2,806			5,207			2,153
Restructured loans (commercial)					35			40			37

		Total nonperforming loans			112,539			85,869			114,951
Other real estate owned					3,685			6,613			3,915

		Total nonperforming assets		$	116,224		$	92,482		$	118,866

Ratios:
Allowance for loan losses to net charge offs (annualized)					16.43	x		8.27	x		10.98	x
Net charge offs to average loans (annualized)					0.08	%		0.20	%		0.15	%
Allowance for loan losses to total loans					1.35			1.69			1.37
Nonperforming loans to total loans					0.80			0.81			0.83
Nonperforming assets to total assets					0.56			0.60			0.58
Allowance for loan losses to nonperforming loans					169			207			165

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable credit losses in the loan portfolio at the balance sheet date. In general, the change in the allowance for loan losses is a function of a number of factors, including but not limited to changes in the loan portfolio (see Table 6), net charge offs and nonperforming loans (see Table 8). To assess the adequacy of the allowance for loan losses, an allocation methodology is applied by the Corporation, which focuses on changes in the size and character of the loan portfolio, changes in levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, historical losses and delinquencies on each portfolio category, and other qualitative and quantitative factors which could affect probable credit losses. Assessing these numerous factors involves significant judgment. Thus, management considers the allowance for loan losses a critical accounting policy (see section “Critical Accounting Policies”).

The allocation methodology used for June 30, 2005, June 30, 2004, and December 31, 2004 were comparable, whereby the Corporation segregated its loss factor allocations (used for both criticized and non-criticized loan categories) into a component primarily based on historical loss rates and a component primarily based on other qualitative factors that may affect loan collectibility. Factors applied are reviewed periodically and adjusted to reflect changes in trends or other risks. Total loans at June 30, 2005, were up $3.5 billion (33.1%) since June 30, 2004, largely attributable to the First Federal acquisition, which added $2.7 billion in loans at consummation (see Table 6). Total loans increased $0.2 billion compared to December 31, 2004, with commercial loans accounting for the majority of growth. Nonperforming loans were $112.5 million, or 0.80% of total loans at June 30, 2005, down from 0.81% of loans a year ago, and from 0.83% of loans at year-end 2004. Criticized commercial loans were up 3% since June 30, 2004, and increased 5% since year-end 2004. The allowance for loan losses to loans was 1.35%, 1.69% and 1.37% for June 30, 2005, and June 30 and December 31, 2004, respectively.

Management believes the allowance for loan losses to be adequate at June 30, 2005.

Consolidated net income could be affected if management’s estimate of the allowance for loan losses is subsequently materially different, requiring additional or less provision for loan losses to be recorded. Management carefully considers numerous detailed and general factors, its assumptions, and the likelihood of materially different conditions that could alter its assumptions. While management uses currently available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions and the impact of such change on the Corporation’s borrowers. Additionally, the number of large credit relationships over the Corporation’s $25 million internal hurdle increased during 2004. Larger credits do not inherently create more risk, but can create wider fluctuations in asset quality measures. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

Nonperforming Loans and Other Real Estate Owned

Management is committed to an aggressive nonaccrual and problem loan identification philosophy. This philosophy is implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified quickly and the risk of loss is minimized.

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, and restructured loans. The Corporation specifically excludes from its definition of nonperforming loans student loan balances that are 90 days or more past due and still accruing and that have contractual government guarantees as to collection of principal and interest. The Corporation had approximately $13 million, $9 million and $15 million of nonperforming student loans at June 30, 2005, June 30, 2004, and December 31, 2004, respectively.

Table 8 provides detailed information regarding nonperforming assets, which include nonperforming loans and other real estate owned. Nonperforming assets to total assets were 0.56%, 0.60%, and 0.58% at June 30, 2005, June 30, 2004, and December 31, 2004, respectively.

Total nonperforming loans of $112.5 million at June 30, 2005 were up $26.7 million from June 30, 2004 and down $2.4 million from year-end 2004. The ratio of nonperforming loans to total loans was 0.80% at June 30, 2005, down from both 0.81% and 0.83% at June 30, 2004, and year-end 2004, respectively. Nonaccrual loans account for the majority of the $26.7 million increase in nonperforming loans between the comparable June periods. Nonaccrual loans increased $29.1 million (primarily attributable to the nonaccrual loans acquired with the First Federal acquisition), while accruing loans past due 90 or more days were down $2.4 million. Nonaccrual loans also account for the majority of the $2.4 million decrease in nonperforming loans since year-end 2004. Nonaccrual loans decreased $3.1 million, while accruing loans past due 90 or more days increased $0.7 million. The most significant changes in nonaccrual loans from year-end 2004 were attributable to the payment on one large problem credit (totaling approximately $13 million, on a commercial credit within the food industry), net of the addition of one large credit (totaling approximately $8 million, on a commercial real estate credit), as management continues to work through problem credits.

Other real estate owned was $3.7 million at June 30, 2005, compared to $6.6 million at June 30, 2004, and $3.9 million at year-end 2004. The change in other real estate owned was predominantly due to the addition and subsequent sale of commercial real estate properties. A $1.3 million commercial property was added during first quarter 2004. During 2004, a $1.1 million commercial property (which was added to other real estate owned during 2003) was sold (at a net gain of $0.4 million) and the $1.3 million commercial property was sold (at a net loss of $0.2 million).

Potential problem loans are certain loans bearing risk ratings by management but that are not in nonperforming status; however, there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Corporation expects losses to occur but that management recognizes a higher degree of risk associated with these loans. The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in the determination of the level of the allowance for loan losses. The loans that have been reported as potential problem loans are not concentrated in a particular industry but rather cover a diverse range of businesses. At June 30, 2005, potential problem loans totaled $239 million, compared to $277 million at June 30, 2004, and $234 million at December 31, 2004.

Liquidity

The objective of liquidity management is to ensure that the Corporation has the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to satisfy the cash flow requirements of depositors and borrowers and to meet its other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries or acquisitions, repurchase common stock, and satisfy other operating requirements.

Funds are available from a number of basic banking activity sources, primarily from the core deposit base and from loans and securities repayments and maturities. Additionally, liquidity is provided from sales of the securities portfolio, lines of credit with major banks, the ability to acquire large and brokered deposits, and the ability to securitize or package loans for sale. The Corporation’s capital can be a source of funding and liquidity as well. See section “Capital.”

The Corporation’s internal liquidity management framework includes measurement of several key elements, such as wholesale funding as a percent of total assets and liquid assets to short-term wholesale funding. Strong capital ratios, credit quality, and core earnings are essential to retaining high credit ratings and, consequently, cost-effective access to the wholesale funding markets. A downgrade or loss in credit ratings could have an impact on the Corporation’s ability to access wholesale funding at favorable interest rates. As a result, capital ratios, asset quality measurements, and profitability ratios are monitored on an ongoing basis as part of the liquidity management process. At June 30, 2005, the Corporation was in compliance with its liquidity objectives.

The Corporation’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. The contingency plan would be

activated to ensure the Corporation’s funding commitments could be met in the event of general market disruption or adverse economic conditions.

While core deposits and loan and investment repayment are principal sources of liquidity, funding diversification is another key element of liquidity management. Diversity is achieved by strategically varying depositor type, term, funding market, and instrument. The Parent Company and certain subsidiary banks are rated by Moody’s, Standard and Poor’s, and Fitch. These ratings, along with the Corporation’s other ratings, provide opportunity for greater funding capacity and funding alternatives.

The Parent Company’s primary funding sources are dividends and service fees from subsidiaries and proceeds from the issuance of equity. The subsidiary banks are subject to regulation and, among other things, may be limited in their ability to pay dividends or transfer funds to the Parent Company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the shareholders or for other cash needs.

The Parent Company also has multiple funding sources that could be used to increase liquidity and provide additional financial flexibility. These sources include two shelf registrations to issue debt and preferred securities or a combination thereof and, used to a lesser degree, a revolving credit facility and commercial paper issuances. The Parent Company has available a $100 million revolving credit facility with established lines of credit from nonaffiliated banks, of which $100 million was available at June 30, 2005. In addition, under the Parent Company’s $200 million commercial paper program, $100 million of commercial paper was outstanding and $100 million of commercial paper was available at June 30, 2005.

In May 2002, the Parent Company filed a “shelf” registration statement under which the Parent Company may offer up to $300 million of trust preferred securities. In May 2002, $175 million of trust preferred securities were issued, bearing a 7.625% fixed coupon rate. At June 30, 2005, $125 million was available under the trust preferred shelf. In May 2001, the Parent Company filed a “shelf” registration statement whereby the Parent Company may offer up to $500 million of any combination of the following securities, either separately or in units: debt securities, preferred stock, depositary shares, common stock, and warrants. In August 2001, the Parent Company issued $200 million in a subordinated note offering, bearing a 6.75% fixed coupon rate and 10-year maturity. At June 30, 2005, $300 million was available under the shelf registration.

Investment securities are an important tool to the Corporation’s liquidity objective. As of June 30, 2005, all securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. Of the $4.8 billion investment portfolio at June 30, 2005, $3.0 billion were pledged to secure certain deposits or for other purposes as required or permitted by law. The majority of the remaining securities could be pledged or sold to enhance liquidity, if necessary.

The bank subsidiaries have a variety of funding sources (in addition to key liquidity sources, such as core deposits, loan and investment portfolio repayments and maturities, and loan and investment portfolio sales) available to increase financial flexibility. A bank note program associated with Associated Bank, National Association, was established during 2000. Under this program, short-term and long-term debt may be issued. As of June 30, 2005, $925 million of long-term bank notes were outstanding and $225 million was available under the bank note program. The Corporation plans to institute a new bank note program. The banks have also established federal funds lines with major banks and the ability to borrow from the Federal Home Loan Bank ($1.4 billion was outstanding at June 30, 2005). In addition, the bank subsidiaries also issue institutional certificates of deposit, from time to time offer brokered certificates of deposit, and to a lesser degree, accept Eurodollar deposits.

For the six months ended June 30, 2005, net cash provided by operating and financing activities was $117.7 million and $106.2 million, respectively, while investing activities used net cash of $214.2 million, for a net increase in cash and cash equivalents of $9.7 million since year-end 2004. Generally, net asset growth since year-end 2004 was modest (up 1.1%), while deposits declined during the first half of 2005. Long-term funding was predominantly used to replenish the net decrease in deposits and repay short-term borrowings as well as to provide for common stock repurchases and the payment of cash dividends to the Corporation’s stockholders.

For the six months ended June 30, 2004, net cash provided from operating and financing activities was $184.4 million and $186.3 million, respectively, while investing activities used net cash of $410.2 million, for a net decrease in cash and cash equivalents of $39.5 million since year-end 2003. In the first six months of 2004 maturities of time deposits occurred (down $303 million or 20% annualized) and net asset growth since year-end 2003 was moderate (up $255 million or 3% annualized). Therefore, other funding sources were utilized, particularly short-term borrowings, to fund asset growth, replenish the net decrease in deposits, provide for the repayment of long-term debt and common stock repurchases, and payment of cash dividends to the Corporation’s stockholders.

Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

The Corporation utilizes a variety of financial instruments in the normal course of business to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, standby letters of credit, forward commitments to sell residential mortgage loans, interest rate swaps, and interest rate caps. Please refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004, for discussion with respect to the Corporation’s quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Items disclosed in the Annual Report on Form 10-K have not materially changed since that report was filed. A discussion of the Corporation’s derivative instruments at June 30, 2005, is included in Note 11, “Derivative and Hedging Activities,” of the notes to consolidated financial statements and a discussion of the Corporation’s commitments is included in Note 12, “Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities,” of the notes to consolidated financial statements.

Capital

Stockholders’ equity at June 30, 2005 increased to $2.0 billion, compared to $1.4 billion at June 30, 2004. The increase in equity between the two periods was primarily composed of the issuance of common stock in connection with the First Federal acquisition, the retention of earnings, and the exercise of stock options, with offsetting decreases to equity from the payment of dividends and the repurchase of common stock. Furthermore, stockholders’ equity at June 30, 2005 included $29.6 million of accumulated other comprehensive income versus $15.3 million at June 30, 2004. Accumulated other comprehensive income included increased unrealized gains, net of the tax effect, on securities available for sale ($29.6 million at June 30, 2005 compared to $22.9 million at June 30, 2004). Additionally, in conjunction with the Corporation’s change in hedge accounting (as described in Note 2, “Accounting for Certain Derivatives,” of the notes to consolidated financial statements), there were no unrealized gains or losses on cash flow hedges at June 30, 2005, while the June 30, 2004 balance sheet included unrealized losses of $7.6 million, net of the tax effect. Stockholders’ equity to assets was 9.73% and 8.89% at June 30, 2005 and 2004, respectively.

Stockholders’ equity was up slightly ($1 million) from year-end 2004. The change in equity between the two periods was composed in part of the retention of earnings and the exercise of stock options, with offsetting decreases to equity from the payment of dividends and the repurchase of common stock. Furthermore, stockholders’ equity at year-end, included $41.2 million of accumulated other comprehensive income versus $29.6 million at June 30, 2005. The decrease in accumulated other comprehensive income was attributable primarily to lower unrealized gains on securities available for sale, net of the tax effect ($29.6 million at June 30, 2005 compared to $50.0 million at December 31, 2004). Additionally, in conjunction with the Corporation’s change in hedge accounting (as described in Note 2, “Accounting for Certain Derivatives,” of the notes to consolidated financial statements), there were no unrealized gains or losses on cash flow hedges at June 30, 2005, while the December 31, 2004 balance sheet included unrealized losses of $8.8 million, net of the tax effect. Stockholders’ equity to assets at June 30, 2005 was 9.73% compared to 9.83% at December 31, 2004.

Cash dividends of $0.52 per share were paid in the first half of 2005, compared to $0.48 per share in the first half of 2004, an increase of 9%.

The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock each quarter in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. For the Corporation’s employee incentive plans, the Board of Directors authorized the repurchase of up to 3.0 million shares in 2005 and 2004 (750,000 shares per quarter). Of these authorizations, 521,500 shares were repurchased for $17.0 million during first six months of 2005 at an average cost of $32.58 per share, while 697,000 shares were repurchased for $20.1 million during first six months of 2004 at an average cost of $28.91 per share.

Additionally, under two separate actions in 2000 and one action in 2003, the Board of Directors authorized the repurchase and cancellation of the Corporation’s outstanding shares, not to exceed approximately 16.5 million shares on a combined basis. In May 2005, the Corporation repurchased (and cancelled) two million shares of its outstanding common stock from UBS AG London Branch (“UBS”) under an accelerated share repurchase program for $66.3 million or an average cost of $33.17 per share. The accelerated share repurchase program enabled the Corporation to repurchase the shares immediately, while UBS will purchase the shares in the market over a 10-month period. The repurchased shares will be subject to a future purchase price settlement adjustment. No shares were repurchased under these authorizations during the comparable 2004 period. At June 30, 2005, approximately 3.6 million shares remain authorized to repurchase. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities.

The adequacy of the Corporation’s capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management. The capital ratios of the Corporation and its banking affiliates are greater than minimums required by regulatory guidelines. The Corporation’s capital ratios are summarized in Table 9.

TABLE 9(1)

Capital Ratios


	June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,
	2005			2005			2004			2004			2004

	(In thousands, except per share data)
Total stockholders’ equity	$	2,018,435		$	2,025,071		$	2,017,419		$	1,453,465		$	1,378,894
Tier 1 capital		1,438,849			1,468,359			1,420,386			1,317,752			1,275,924
Total capital		1,838,181			1,865,137			1,817,016			1,678,543			1,631,109
Market capitalization		4,292,128			4,050,437			4,312,257			3,536,712			3,260,722

Book value per common share	$	15.79		$	15.61		$	15.55		$	13.18		$	12.53
Cash dividend per common share		0.27			0.25			0.25			0.25			0.25
Stock price at end of period		33.58			31.23			33.23			32.07			29.63
Low closing price for the quarter		30.11			30.60			32.08			28.81			27.09
High closing price for the quarter		33.89			33.50			34.85			32.19			30.13

Total equity/ assets		9.73	%		9.88	%		9.83	%		9.01	%		8.89	%
Tier 1 leverage ratio		7.25			7.44			7.79			8.52			8.37
Tier 1 risk-based capital ratio		9.60			9.95			9.64			10.98			11.06
Total risk-based capital ratio		12.26			12.63			12.33			13.99			14.14

Shares outstanding (period end)		127,743			129,622			129,695			110,206			109,973
Basic shares outstanding (average)		128,990			129,781			123,509			110,137			110,116
Diluted shares outstanding (average)		130,463			131,358			125,296			111,699			111,520


(1)	All share and per share financial information has been restated to reflect the effect of the 3-for-2 stock split.

Comparable Second Quarter Results

Net income for second quarter 2005 was $74.0 million, up $9.5 million or 14.7% from second quarter 2004 net income of $64.5 million. Return on average equity was 14.62% for second quarter 2005 versus 18.87% for second quarter 2004, while return on average assets decreased by 23 bp to 1.44%. See Tables 1 and 10. See also Note 2, “Accounting for Certain Derivatives,” of the notes to consolidated financial statements.

Taxable equivalent net interest income for the second quarter of 2005 was $172.8 million, $34.6 million higher than the second quarter of 2004. Changes in the balance sheet volume and mix favorably impacted taxable equivalent net interest income by $40.8 million, while rate variances were unfavorable by $6.2 million. See Tables 2 and 3. First Federal impacted the balance sheet growth, adding $2.7 billion in loans and $2.7 billion in total deposits at consummation in October 2004. Average earning assets were $18.9 billion in the second quarter of 2005, an increase of $4.4 billion from the second quarter of 2004, benefiting from the First Federal acquisition as well as organic growth. On average, loans increased $3.4 billion and investments were up $1.0 billion. Average interest-bearing liabilities increased $4.0 billion, attributable principally to First Federal. Average interest-bearing deposits were up $2.0 billion (primarily in non-brokered time deposits) and demand deposits were up $0.4 billion. The remainder of the growth in average earning assets was funded by wholesale funding sources (up $2.0 billion, principally in long-term funding).

The net interest margin of 3.63% was down 17 bp from 3.80% for the second quarter of 2004, the net result of a 27 bp decrease in the interest rate spread (i.e., a 62 bp increase in the earning asset yield, net of an 89 bp increase in the average cost of interest-bearing liabilities) and a 10 bp higher contribution from net free funds. The Federal Reserve raised short-term interest rates by 25 bp nine times since mid-year 2004, resulting in an average Federal funds rate of 2.91% for the second quarter of 2005, 191 bp higher than the level 1.00% experienced during the second quarter of 2004. The benefits to the margin from the increases in short-term interest rates were substantially offset by the continued flattening of the yield curve and competitive pricing pressures, leading to lower spreads on loans and higher rates on deposits. The yield on earning assets increased (particularly loan yields which were up 91 bp). On the funding side, wholesale funding cost 3.14% on average for second quarter 2005, up 129 bp from the comparable quarter in 2004, and the rate on interest-bearing deposits was up 60 bp.

The provision for loan losses for the second quarter of 2005 was $3.7 million, down from the second quarter of 2004 of $5.9 million. Net charge offs were $3.6 million for the three months ended June 30, 2005 and $5.6 million for the comparable quarter in 2004. Annualized net charge offs as a percent of average loans for second quarter were 0.10% versus 0.21% for the comparable quarter of 2004. The allowance for loan losses to loans at June 30, 2005 was 1.35% compared to 1.69% at June 30, 2004. Total nonperforming loans were $112.5 million, up from $85.9 million at June 30, 2004, but as a percentage of loans, nonperforming loans were down to 0.80% versus 0.81%. See Tables 6 and 8 and discussion under sections “Provision for Loan Losses,” “Allowance for Loan Losses,” and “Nonperforming Loans and Other Real Estate Owned.”

Noninterest income was $61.7 million for the second quarter of 2005, up $3.8 million from the second quarter of 2004 (see Table 4). Excluding both net mortgage banking income and other income, fee income sources such as service charges on deposit accounts (up $9.1 million) and credit card and other nondeposit fees (up $2.7 million) benefited notably from the inclusion of First Federal accounts and growth activity, while trust service fees (up $0.9 million) and retail commissions (up $2.2 million, primarily insurance) benefited from improving stock markets and higher sales volumes. Net mortgage banking income was down $9.0 million, with a $10.7 million increase in mortgage servicing rights expense (second quarter 2005 included a $2.5 million addition to the valuation reserve compared to a $6.7 million valuation reserve reversal in second quarter 2004), partially offset by a $1.7 million increase in mortgage banking revenues. BOLI income decreased $1.3 million, a direct result of the fourth quarter 2004 downward repricings of a large investment of BOLI. Other income decreased $3.1 million, with the second quarter of 2005 including a $6.7 million net loss on derivatives (as described in Note 2, “Accounting for Certain Derivatives,” of the notes to consolidated financial statements), which was offset by higher miscellaneous income due to the inclusion of First Federal (including fees from ATMs, check printing, and safe deposit boxes).

Noninterest expense for the second quarter of 2005 was up $24.3 million from the second quarter of 2004 (see Table 5), reflecting the Corporation’s larger operating base attributable to the First Federal acquisition. Personnel expense increased $13.3 million (with increases of $10.4 million in salary-related expenses and $2.9 million in fringe benefits), particularly attributable to the First Federal acquisition and annual merit increases between the periods. Average full-time equivalent employees were 4,889 for the second quarter of 2005, up 21.9% over 4,010 for the second quarter of 2004. Occupancy expense increased $2.5 million and equipment expense grew $1.3 million, predominantly due to the Corporation’s expanded branch system attributable to the First Federal acquisition. Intangible amortization expense increased $1.4 million, a direct result of amortizing intangible assets added from the 2004 acquisitions. Other expense was up $3.6 million across multiple categories and primarily commensurate with the large operating base.

Sequential Quarter Results

Net income for the second quarter of 2005 was $74.0 million, down $3.5 million from first quarter 2005 net income of $77.5 million. Return on average equity was 14.62% and return on average assets was 1.44%, compared to 15.52% and 1.54%, respectively, for the first quarter of 2005. See Tables 1 and 10.

TABLE 10

Selected Quarterly Information


			For the Quarter Ended

			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,
			2005			2005			2004			2004			2004

			($ In thousands)
*Summary of Operations:*
Net interest income			$	166,674		$	165,908		$	158,457		$	133,216		$	131,879
Provision for loan losses				3,671			2,327			3,603			—			5,889
Noninterest income
	Trust service fees			8,967			8,328			8,107			7,773			8,043
	Service charges on deposit accounts			22,215			18,665			16,943			13,672			13,141
	Mortgage banking, net			2,376			9,884			6,046			618			11,413
	Credit card and other nondeposit fees			8,790			9,111			8,183			6,253			6,074
	Retail commissions			15,370			14,705			12,727			11,925			13,162
	Bank owned life insurance income			2,311			2,168			2,525			3,580			3,641
	Asset sale gains (losses), net			539			(302	)		432			309			218
	Investment securities gains (losses), net			1,491			—			(719	)		(6	)		(569	)
	Other			(355	)		8,814			4,793			3,034			2,742

		Total noninterest income		61,704			71,373			59,037			47,158			57,865
Noninterest expense
	Personnel expense			66,934			72,985			65,193			53,467			53,612
	Occupancy			9,374			9,888			8,297			6,939			6,864
	Equipment			4,214			4,018			3,855			3,022			2,878
	Data processing			6,728			6,293			5,966			5,865			6,128
	Business development and advertising			4,153			3,939			4,271			3,990			4,057
	Stationery and supplies			1,644			1,844			1,567			1,214			1,429
	Other intangible amortization			2,292			1,994			1,699			935			934
	Other			20,995			20,281			19,119			13,599			16,085

		Total noninterest expense		116,334			121,242			109,967			89,031			91,987
Income taxes				34,358			36,242			33,069			27,977			27,363

Net income			$	74,015		$	77,470		$	70,855		$	63,366		$	64,505

Taxable equivalent net interest income			$	172,848		$	172,130		$	164,799		$	139,611		$	138,266
Net interest margin				3.63	%		3.68	%		3.74	%		3.76	%		3.80	%
*Average Balances:*
Assets			$	20,574,770		$	20,467,698		$	18,956,445		$	15,730,451		$	15,498,005
Earning assets				18,916,921			18,756,555			17,437,618			14,688,914			14,480,701
Interest-bearing liabilities				16,207,719			16,139,002			14,761,878			12,381,407			12,231,733
Loans				14,084,246			13,977,621			12,858,394			10,708,701			10,685,542
Deposits				12,069,719			12,359,040			11,658,646			9,621,557			9,701,945
Stockholders’ equity				2,030,929			2,024,265			1,822,715			1,419,600			1,374,632
*Asset Quality Data:*
Allowance for loan losses to total loans				1.35	%		1.36	%		1.37	%		1.62	%		1.69	%
Allowance for loan losses to nonperforming loans				169	%		184	%		165	%		191	%		207	%
Nonperforming loans to total loans				0.80	%		0.74	%		0.83	%		0.84	%		0.81	%
Nonperforming assets to total assets				0.56	%		0.52	%		0.58	%		0.59	%		0.60	%
Net charge offs to average loans (annualized)				0.10	%		0.06	%		0.11	%		0.11	%		0.21	%

Taxable equivalent net interest income for the second quarter of 2005 was $172.8 million, $0.7 million higher than the first quarter of 2005, favorably impacted by net changes in balance sheet volume and mix and unfavorably impacted by changes in the rate environment. The Federal Reserve raised short-term interest rates by 50 bp during both quarters. The benefits to the margin from the interest rate increases were offset by the continued flattening of the yield curve and competitive pricing pressures. As a result, the net interest margin between the sequential quarters was down 5 bp, to 3.63% in the second quarter of 2005. The Corporation anticipates continued margin pressure in the third quarter. Average earning assets were $18.9 billion in the second quarter of 2005, an increase of $160 million from the first quarter of 2005. On average, loans increased $107 million and investments were up $54 million. Average interest-bearing deposits were down $347 million, while demand deposits were up $57 million. Due to the decline in interest-bearing deposits, wholesale funding increased $415 million to $6.3 billion (and represented 39.0% of interest-bearing liabilities for the second quarter of 2005 compared to 36.6% for the first quarter of 2005).

Noninterest income decreased $9.7 million to $61.7 million between sequential quarters. Other income decreased $9.2 million between sequential quarters. Second quarter 2005 included a $6.7 million net loss on derivatives (as described in Note 2, “Accounting for Certain Derivatives,” of the notes to consolidated financial statements), while other income in first quarter 2005 included a $4.1 million non-recurring gain from the dissolution of stock in a regional ATM network. Net mortgage banking income of $2.4 million was $7.5 million lower than first quarter 2005, impacted primarily by a $6.5 million increase in the mortgage servicing rights expense component (including a valuation reserve addition of $2.5 million for second quarter 2005 versus a valuation recovery of $4.0 million for first quarter 2005). Excluding both net mortgage banking and other income, noninterest income for second quarter 2005 was $59.7 million compared to $52.7 million (up $7.0 million or 13.3%). Service charges on deposit accounts were $22.2 million, up $3.6 million (19%) over first quarter 2005, primarily from higher nonsufficient funds fees (reflecting the usual second quarter increase in volume). Trust service fees of $9.0 million grew 7.7% over first quarter 2005, while retail commissions of $15.4 million (up 4.5%) experienced continued growth in insurance.

On a sequential quarter basis, noninterest expense decreased $4.9 million (4%) to $116.3 million in the second quarter of 2005. Personnel expense was $66.9 million in second quarter 2005, down $6.1 million (8%) from first quarter 2005, largely due to reduced personnel costs associated with a 5% decline in average full time equivalent employees (from 5,132 in first quarter 2005 to 4,889 in second quarter 2005), notably attributable to eliminated positions from the First Federal integration. All other noninterest expense categories combined were $49.4 million, up 2% over $48.3 million for the first quarter of 2005. Income tax expense for the second quarter of 2005 was $34.4 million, down $1.9 million from the first quarter of 2005. The effective tax rate was 31.7% and 31.9% for second and first quarters of 2005, respectively.

Recent Accounting Pronouncements

The recent accounting pronouncements have been described in Note 4, “New Accounting Pronouncements,” of the notes to consolidated financial statements.

Subsequent Events

On July 27, 2005, the Board of Directors declared a $0.27 per share dividend payable on August 15, 2005, to shareholders of record as of August 8, 2005. This cash dividend has not been reflected in the accompanying consolidated financial statements.


ITEM 3.	*Quantitative and Qualitative Disclosures About Market Risk*

The Corporation has not experienced any material changes to its market risk position since December 31, 2004, from that disclosed in the Corporation’s 2004 Form 10-K Annual Report.


ITEM 4.	*Controls and Procedures*

The Corporation maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to

ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, the Corporation’s management carried out an evaluation, under the supervision and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Corporation’s management concluded that, as of the end of the period covered by this report, such disclosure controls and procedures were not effective solely because of the material weakness in internal control over financial reporting described below.

The Corporation’s management concluded that the Corporation had a material weakness in its internal control over financial reporting related to its accounting for certain derivative financial instruments under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Specifically, the Corporation’s policies and procedures did not provide for proper application of the provisions of SFAS 133 at inception for certain derivative financial instruments, primarily those originated before or during 2001, the year of adoption of SFAS 133. In addition, the Corporation’s policies and procedures did not provide for periodic review of the proper accounting for certain derivative financial instruments for periods subsequent to inception.

The material weakness mentioned above resulted from the absence of personnel possessing sufficient technical expertise related to the application of the provisions of SFAS 133. The material weakness resulted in accounting errors, as the Corporation determined that the hedge accounting treatment applied to interest rate swaps on portions of its variable rate debt, an interest rate cap on variable rate debt, an interest rate swap on fixed rate subordinated debt and certain interest rate swaps related to specific fixed rate commercial loans was not consistent with the provisions of SFAS 133. The Corporation’s historic accounting for these items reflected the exchange of interest payments related to the swap contracts in net interest income, the changes in fair value on the interest rate swaps hedging portions of the variable rate debt and the interest rate cap in stockholders’ equity as part of accumulated other comprehensive income, and the fair value of the swap on fixed rate subordinated debt and the hedged item in the balance sheet, with changes in fair value of both the swap and hedged item recognized in earnings of the current period. For the quarter ended hedge accounting will no longer be applied for these aforementioned derivative transactions, and the future exchange of interest payments related to the swap contracts as well as the “mark to market” (i.e., changes in the fair values of the swaps and the interest rate cap) will be recorded on a net basis in other income, and the hedged items (i.e., the subordinated debt and the specific commercial loans) will no longer be adjusted to fair values on a quarterly basis. Although certain individual errors in accounting would have been material to certain previously issued historical financial statements, management concluded that restatements of previously issued financial statements for annual and quarterly periods was not required because the aggregate effect of the errors in accounting resulting from this material weakness were not material to such historical financial statements.

There were no changes in the Corporation’s internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In order to remediate the aforementioned material weakness and ensure the ongoing integrity of its financial reporting processes, the Corporation is providing additional and ongoing formal training for treasury and accounting personnel specific to SFAS 133 documentation and effectiveness testing requirements with the assistance of third party consultants with expertise in hedge accounting requirements.

PART II — OTHER INFORMATION


ITEM 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

Following are the Corporation’s monthly common stock purchases during the second quarter of 2005. For a detailed discussion of the common stock repurchase authorizations and repurchases during the period, see section “Capital” included under Part I Item 2 of this document.


	Total Number of		Average Price
Period	Shares Purchased		Paid per Share

April 1, 2005 — April 30, 2005		11,000	$	30.63
May 1, 2005 — May 31, 2005		2,100,000		33.11
June 1, 2005 — June 30, 2005		—		—

Total		2,111,000	$	33.10


ITEM 4:	*Submission of Matters to a Vote of Security Holders*

(a) The corporation held its Annual Meeting of Shareholders on April 27, 2005. Proxies were solicited by corporation management pursuant to Regulation 14A under the Securities Exchange Act of 1934.

(b) Directors elected at the Annual Meeting were Ruth M. Crowley, William R. Hutchinson, Richard T. Lommen, John C. Seramur, Karen T. Beckwith, and Jack C. Rusch.


	(i) Election of the below-named nominees to the Board of Directors of the Corporation:


		For		Withheld

By Nominee:
	Ruth M. Crowley		114,252,742		1,610,470
	William R. Hutchinson		113,819,150		2,044,062
	Richard T. Lommen		114,663,352		1,199,860
	John C. Seramur		101,732,441		14,130,771
	Karen T. Beckwith		114,107,659		1,755,553
	Jack C. Rusch		110,626,302		5,236,910


	Nominees were elected, with an average of 96.26% of shares voted cast in favor.

	(ii) Ratification of the selection of KPMG LLP as independent registered public accounting firm of Associated for the year ending December 31, 2005.


For	Against	Abstain

114,020,973	1,464,516	377,723


	Matter approved by shareholders with 87.93% of shares outstanding voting in favor of the proposal.

	(iii) Approval of the amendments to the Associated Banc-Corp Amended and Restated Long-Term Incentive Stock Plan.


For	Against	Abstain

53,830,424	34,610,937	1,635,668


	Matter approved by shareholders with 59.76% of shares voted cast in favor of the proposal.

	(iv) Approval of the Amendment of the Associated Banc-Corp 2003 Long-Term Incentive Plan.


For	Against	Abstain

53,411,503	34,847,172	1,818,353


	Matter approved by shareholders with 59.29% of shares voted cast in favor of the proposal.

	(v) The shareholder proposal to eliminate the classified Board of Directors.*


For	Against	Abstain

52,172,940	35,136,928	2,767,160


	* This was a non-binding shareholder proposal. Although a majority of votes cast were in favor of the proposal, a majority of the outstanding shares are required to approve an amendment to the Articles of Incorporation of the Corporation.

(d) Not applicable


ITEM 6:	*Exhibits*

(a) Exhibits:


	Exhibit 11, Statement regarding computation of per-share earnings. See Note 5 of the notes to consolidated financial statements in Part I Item I.

	Exhibit (31.1), Certification Under Section 302 of Sarbanes-Oxley by Paul S. Beideman, Chief Executive Officer, is attached hereto.

	Exhibit (31.2), Certification Under Section 302 of Sarbanes-Oxley by Joseph B. Selner, Chief Financial Officer, is attached hereto.

	Exhibit (32), Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto.

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 hereunto duly authorized.


	ASSOCIATED BANC-CORP
	(Registrant)

	/s/ Paul S. Beideman

	Paul S. Beideman
	President and Chief Executive Officer

Date: August 15, 2005


	/s/ Joseph B. Selner

	Joseph B. Selner
	Chief Financial Officer

Date: August 15, 2005