e10vq

UNITED STATES 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 September 30, 2005


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at October 31, 2005, was 136,468,718 shares.

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements:

ASSOCIATED BANC-CORP

Consolidated Balance Sheets
(Unaudited)


	September 30,			September 30,			December 31,
	2005			2004			2004
	(In Thousands, except share data)
ASSETS
Cash and due from banks	$	386,151		$	286,799		$	389,311
Interest-bearing deposits in other financial institutions		14,598			10,381			13,321
Federal funds sold and securities purchased under agreements to resell		103,481			63,105			55,440
Investment securities available for sale, at fair value		4,708,730			4,166,760			4,815,344
Loans held for sale		98,473			72,266			64,964
Loans		14,107,137			10,830,627			13,881,887
Allowance for loan losses		(190,080	)		(175,007	)		(189,762	)

Loans, net		13,917,057			10,655,620			13,692,125
Premises and equipment		174,086			131,288			184,944
Goodwill		679,993			232,564			679,993
Other intangible assets		115,692			69,863			119,440
Other assets		543,470			447,115			505,254

Total assets	$	20,741,731		$	16,135,761		$	20,520,136


LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing demand deposits	$	2,256,774		$	1,867,905		$	2,347,611
Interest-bearing deposits, excluding brokered certificates of deposit		9,516,792			7,623,042			10,077,069
Brokered certificates of deposit		407,459			186,326			361,559

Total deposits		12,181,025			9,677,273			12,786,239
Short-term borrowings		2,778,993			2,956,626			2,926,716
Long-term funding		3,545,458			1,911,797			2,604,540
Accrued expenses and other liabilities		173,690			136,600			185,222

Total liabilities		18,679,166			14,682,296			18,502,717

Stockholders’ equity
Preferred stock		—			—			—
Common stock (par value $0.01 per share, authorized 250,000,000 shares, issued 128,110,999, 110,458,038 and 130,042,415 shares, respectively)		1,281			1,105			1,300
Surplus		1,064,833			585,274			1,127,205
Retained earnings		978,489			824,909			858,847
Accumulated other comprehensive income		21,776			49,265			41,205
Deferred compensation		(3,814	)		(1,981	)		(2,122	)
Treasury stock, at cost (0, 177,312 and 272,355 shares, respectively)		—			(5,107	)		(9,016	)

Total stockholders’ equity		2,062,565			1,453,465			2,017,419

Total liabilities and stockholders’ equity	$	20,741,731		$	16,135,761		$	20,520,136

See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Income
(Unaudited)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2005		2004			2005		2004
	(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans	$	223,202	$	142,389		$	636,931	$	415,090
Interest and dividends on investment securities and deposits with other financial institutions:
Taxable		40,050		31,590			122,918		93,389
Tax exempt		9,755		10,255			28,985		30,757
Interest on federal funds sold and securities purchased under agreements to resell		384		241			648		336

Total interest income		273,391		184,475			789,482		539,572
INTEREST EXPENSE
Interest on deposits		53,598		27,191			146,118		81,401
Interest on short-term borrowings		23,628		10,262			62,528		24,042
Interest on long-term funding		32,087		13,806			84,176		39,959

Total interest expense		109,313		51,259			292,822		145,402

NET INTEREST INCOME		164,078		133,216			496,660		394,170
Provision for loan losses		3,345		—			9,343		11,065

Net interest income after provision for loan losses		160,733		133,216			487,317		383,105
NONINTEREST INCOME
Trust service fees		8,667		7,773			25,962		23,684
Service charges on deposit accounts		22,830		13,672			63,710		39,210
Mortgage banking, net		12,000		618			24,260		14,285
Credit card and other nondeposit fees		9,505		6,253			27,406		17,998
Retail commission income		12,905		11,925			42,980		34,444
Bank owned life insurance income		2,441		3,580			6,920		10,576
Asset sale gains, net		942		309			1,179		749
Investment securities gains (losses), net		1,446		(6	)		2,937		1,356
Other		6,229		3,034			14,688		8,908

Total noninterest income		76,965		47,158			210,042		151,210
NONINTEREST EXPENSE
Personnel expense		66,403		53,467			206,322		159,355
Occupancy		9,412		6,939			28,674		21,275
Equipment		4,199		3,022			12,431		8,899
Data processing		7,129		5,865			20,150		17,666
Business development and advertising		4,570		3,990			12,662		10,704
Stationery and supplies		1,599		1,214			5,087		3,869
Intangible amortization expense		1,903		935			6,189		2,651
Other		22,133		13,599			63,409		43,483

Total noninterest expense		117,348		89,031			354,924		267,902

Income before income taxes		120,350		91,343			342,435		266,413
Income tax expense		39,315		27,977			109,915		78,982

NET INCOME	$	81,035	$	63,366		$	232,520	$	187,431


Earnings per share:
Basic	$	0.63	$	0.58		$	1.80	$	1.70
Diluted	$	0.63	$	0.57		$	1.79	$	1.68
Average shares outstanding:
Basic		127,875		110,137			128,825		110,182
Diluted		129,346		111,699			130,252		111,614

See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)


										Accumulated
										Other
	Common						Retained			Comprehensive			Deferred			Treasury
	Stock			Surplus			Earnings			Income			Compensation			Stock			Total
	(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		—			—			187,431			—			—			—			187,431
Net unrealized losses on derivative instruments arising during the period, net of taxes of $1.3 million		—			—			—			(1,467	)		—			—			(1,467	)
Add: reclassification adjustment to interest expense for interest differential on derivative instruments, net of taxes of $2.3 million		—			—			—			2,891			—			—			2,891
Net unrealized holding losses on available for sale securities arising during the period, net of taxes of $2.4 million		—			—			—			(3,380	)		—			—			(3,380	)
Less: reclassification adjustment for net gains on available for sale securities realized in net income, net of taxes of $0.5 million		—			—			—			(868	)		—			—			(868	)

Comprehensive income																				184,607

Cash dividends, $0.7267 per share		—			—			(80,066	)		—			—			—			(80,066	)
Common stock issued:
Incentive stock options		2			5,474			(6,812	)		—			—			18,473			17,137
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		—			4,194			—			—			—			—			4,194

Balance, September 30, 2004	$	1,105		$	585,274		$	824,909		$	49,265		$	(1,981	)	$	(5,107	)	$	1,453,465


Balance, December 31, 2004	$	1,300		$	1,127,205		$	858,847		$	41,205		$	(2,122	)	$	(9,016	)	$	2,017,419
Comprehensive income:
Net income		—			—			232,520			—			—			—			232,520
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		—			—			—			8,762			—			—			8,762
Net unrealized holding losses on available for sale securities arising during the period, net of taxes of $14.7 million		—			—			—			(26,429	)		—			—			(26,429	)
Less: reclassification adjustment for net gains on available for sale securities realized in net income, net of taxes of $1.2 million		—			—			—			(1,762	)		—			—			(1,762	)

Comprehensive income																				213,091

Cash dividends, $0.79 per share		—			—			(102,083	)		—			—			—			(102,083	)
Common stock issued:
Incentive stock options		1			1,172			(10,795	)		—			—			24,982			15,360
Purchase of treasury stock		(20	)		(66,320	)		—			—			—			(17,651	)		(83,991	)
Restricted stock awards granted, net of amortization		—			7			—			—			(1,692	)		1,685			—
Tax benefit of stock options		—			2,769			—			—			—			—			2,769

Balance, September 30, 2005	$	1,281		$	1,064,833		$	978,489		$	21,776		$	(3,814	)	$	—		$	2,062,565

See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements Of Cash Flows
(Unaudited)


	For the Nine Months Ended
	September 30,
	2005			2004
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	232,520		$	187,431
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		9,343			11,065
Depreciation and amortization		16,610			11,697
Recovery of valuation allowance on mortgage servicing rights, net		(6,000	)		(2,204	)
Amortization (accretion) of:
Mortgage servicing rights		17,574			12,583
Intangible assets		6,189			2,651
Premiums and discounts on investments, loans and funding, net		21,541			17,903
Gain on sales of investment securities, net		(2,937	)		(1,356	)
Gain on sales of assets, net		(1,179	)		(749	)
Gain on sales of loans held for sale, net		(13,659	)		(9,698	)
Mortgage loans originated and acquired for sale		(1,221,425	)		(1,192,729	)
Proceeds from sales of mortgage loans held for sale		1,201,575			1,234,497
Increase (decrease) in interest receivable		(10,560	)		5,367
(Increase) decrease in interest payable		9,690			(61	)
Net change in other assets and other liabilities		(21,460	)		(6,565	)

Net cash provided by operating activities		237,822			269,832


CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(244,367	)		(564,471	)
Capitalization of mortgage servicing rights		(14,015	)		(13,457	)
Net increase in Federal Home Loan Bank stock		(6,935	)		(4,826	)
Purchases of:
Securities available for sale		(868,317	)		(973,226	)
Premises and equipment, net of disposals		(8,523	)		(8,330	)
Proceeds from:
Sales of securities available for sale		324,389			31,021
Calls and maturities of securities available for sale		595,306			535,805
Sales of other assets		4,954			8,424
Net cash paid in business combination		—			(17,457	)

Net cash used in investing activities		(217,508	)		(1,006,517	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits		(605,214	)		(108,694	)
Net cash paid in sale of branch deposits		—			(6,575	)
Net increase (decrease) in short-term borrowings		(147,723	)		1,027,750
Repayment of long-term funding		(600,743	)		(881,692	)
Proceeds from issuance of long-term funding		1,550,238			750,080
Cash dividends		(102,083	)		(80,066	)
Proceeds from exercise of incentive stock options		15,360			17,137
Purchase of treasury stock		(83,991	)		(20,834	)

Net cash provided by financing activities		25,844			697,106

Net increase (decrease) in cash and cash equivalents		46,158			(39,579	)
Cash and cash equivalents at beginning of period		458,072			399,864

Cash and cash equivalents at end of period	$	504,230		$	360,285

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	283,132		$	145,463
Income taxes		153,416			61,237
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate		6,561			7,744

See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

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 and Form 10-K/A, 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: Reclassifications

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

NOTE 3: 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 No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 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 under SFAS 123R. 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 123. The Corporation anticipates adopting SFAS 123R using the modified prospective method in the first quarter of 2006, as required. The proforma information provided under Note 5 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 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, retitled FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” will be effective for other-than-temporary impairment analysis conducted in periods beginning after December 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 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 adopted SOP 03-3 in the first quarter of 2005 and it will be applied by the Corporation in connection with its acquisition consummated in the fourth quarter of 2005 (see Note 6). 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, though it may have some impact on the comparability of asset quality and allowance for loan losses ratios, depending on the volume and significance of loans or debt securities acquired that are within the scope of SOP 03-3.

NOTE 4: 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				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
	(In Thousands, except per share data)
Net income	$	81,035	$	63,366	$	232,520	$	187,431

Weighted average shares outstanding		127,875		110,137		128,825		110,182
Effect of dilutive stock options outstanding		1,471		1,562		1,427		1,432

Diluted weighted average shares outstanding		129,346		111,699		130,252		111,614


Basic earnings per share	$	0.63	$	0.58	$	1.80	$	1.70


Diluted earnings per share	$	0.63	$	0.57	$	1.79	$	1.68

NOTE 5: Stock-Based Compensation

As allowed under SFAS 123, the Corporation accounts for stock-based compensation cost under the intrinsic value method of 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 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 $865,000 and $564,000 was recorded for the nine months ended September 30, 2005 and 2004, respectively, and expense of approximately $251,000 and $211,000 was recorded for the three months ended September 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 nine month periods ended September 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 Nine Months
	Ended September 30,						Ended September 30,
	2005			2004			2005			2004
	($ in Thousands, except per share amounts)
Net income, as reported	$	81,035		$	63,366		$	232,520		$	187,431
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		151			127			519			338
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(489	)		(929	)		(6,918	)		(2,813	)

Net income, as adjusted	$	80,697		$	62,564		$	226,121		$	184,956


Basic earnings per share, as reported	$	0.63		$	0.58		$	1.80		$	1.70

Basic earnings per share, as adjusted	$	0.63		$	0.57		$	1.76		$	1.68


Diluted earnings per share, as reported	$	0.63		$	0.57		$	1.79		$	1.68

Diluted earnings per share, as adjusted	$	0.62		$	0.56		$	1.73		$	1.66

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


	2005	2004
Dividend yield	3.21%	3.12%
Risk-free interest rate	3.807%	3.398%
Weighted average expected life	6 yrs	6 yrs
Expected volatility	24.95%	26.70%

The weighted average per share fair values of options granted in the comparable nine-month periods of 2005 and 2004 were $6.89 and $6.28, 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 6: 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.

Completed Business Combinations:

State Financial Services Corporation (“State Financial”): On October 3, 2005, the Corporation consummated its acquisition of 100% of the outstanding shares of State Financial; consequently, financial results of State Financial are not included in the accompanying consolidated financial statements. Based on the terms of the agreement, State Financial shareholders received 1.2 shares of the Corporation’s common stock for each share of State Financial common stock held and cash for all outstanding options. Therefore, the consummation of the transaction included the issuance of 8.4 million shares of common stock and $11 million in cash. As of September 30, 2005, State Financial was a $1.5 billion financial services company based in Milwaukee, Wisconsin, with 29 banking branches in southeastern Wisconsin and northeastern Illinois, providing commercial and retail banking products, mortgage loan originations, and investment brokerage activities. The Corporation expects to expand its branch distribution network, improve its operational efficiencies, and increase revenue streams with the State Financial acquisition. The Corporation is in the process of recording the transaction and assigning fair values of the assets acquired and liabilities assumed. The excess cost of the acquisition over the fair value of the net assets acquired will be allocated to the identifiable intangible assets with the remainder then allocated to goodwill. The preliminary amount of goodwill is estimated to be approximately $0.2 billion. At the time of this filing it is not practicable to provide additional detailed financial information on the transaction. During the fourth quarter of 2005, the Corporation plans to integrate and convert State Financial onto its centralized operating systems and merge State Financial into its banking subsidiary, Associated Bank, National Association.

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. In February 2005 the Corporation completed its conversion of First Federal onto its centralized operating systems and merged the thrift charter into its banking subsidiary, Associated Bank, National Association.

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 were 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 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. 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 7: 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 September 30, 2005.


	Less than 12 months					12 months or more					Total
	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
	($ in Thousands)
U. S. Treasury securities	$	(2	)	$	19,870	$	(82	)	$	6,917	$	(84	)	$	26,787
Federal agency securities		(880	)		120,733		(98	)		5,907		(978	)		126,640
Obligations of state and political subdivisions		(138	)		39,237		(29	)		2,493		(167	)		41,730
Mortgage-related securities		(8,446	)		922,320		(11,525	)		737,760		(19,971	)		1,660,080
Other securities (equity)		(169	)		1,763		—			—		(169	)		1,763

Total	$	(9,635	)	$	1,103,923	$	(11,734	)	$	753,077	$	(21,369	)	$	1,857,000

Management does not believe any individual unrealized loss at September 30, 2005 represents an other-than-temporary impairment. The unrealized losses reported for mortgage-related securities relate primarily to mortgage-

backed 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 4.3% 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. One is 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. This CMO (not included in the table above) had a carrying value of $0.8 million at September 30, 2005. 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 September 30, 2005, these FHLMC preferred shares (one of which is included in the table above in the other securities, less than 12 months category with unrealized losses of $0.2 million) had a carrying value of $8.8 million.

NOTE 8: Goodwill and Other Intangible Assets

Goodwill: Goodwill is not amortized, but is subject to impairment tests on at least an annual basis. The Corporation conducts its impairment testing annually in May and no impairment loss was necessary in 2004 or through September 30, 2005. At September 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.


	Nine months ended				Year ended

	September 30, 2005		September 30, 2004		December 31, 2004

	($ in Thousands)
Goodwill:
Balance at beginning of period	$	679,993	$	224,388	$	224,388
Goodwill acquired		—		8,176		455,605

Balance at end of period	$	679,993	$	232,564	$	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 $16 million are assigned to the wealth management segment and $2 million are assigned to the banking segment as of September 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
	Nine months ended						Year ended

	September 30, 2005			September 30, 2004			December 31, 2004

				($ in Thousands)
Core deposit intangibles: ⁽¹⁾
Gross carrying amount	$	28,202		$	16,783		$	33,468
Accumulated amortization		(9,047	)		(10,497	)		(11,335	)

Net book value	$	19,155		$	6,286		$	22,133

Additions during the period	$	—		$	—		$	16,685
Amortization during the period		(2,978	)		(1,197	)		(2,035	)

Other intangibles:
Gross carrying amount	$	24,578		$	20,678		$	24,578
Accumulated amortization		(6,728	)		(2,656	)		(3,517	)

Net book value	$	17,850		$	18,022		$	21,061

Additions during the period	$	—		$	5,927		$	9,827
Amortization during the period		(3,211	)		(1,454	)		(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.

Mortgage servicing rights are carried on the balance sheet at the lower of amortized cost or estimated fair value. Mortgage servicing rights are amortized in proportion to and over the period of estimated servicing income. A valuation allowance is established through a charge to earnings to the extent the carrying value of the mortgage servicing rights exceeds the estimated fair value by stratification. 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
	Nine months ended						Year ended

	September 30, 2005			September 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)		14,015			13,457			50,508
Amortization		(17,574	)		(12,583	)		(17,932	)
Other-than-temporary impairment		(80	)		(5,518	)		(5,855	)

Mortgage servicing rights at end of period	$	88,144		$	60,418		$	91,783

Valuation allowance at beginning of period		(15,537	)		(22,585	)		(22,585	)
(Additions)/Reversals, net		6,000			2,204			1,193
Other-than-temporary impairment		80			5,518			5,855

Valuation allowance at end of period		(9,457	)		(14,863	)		(15,537	)

Mortgage servicing rights, net	$	78,687		$	45,555		$	76,246


Portfolio of residential mortgage loans serviced for others (2)	$	9,492,000		$	6,011,000		$	9,543,000
Mortgage servicing rights, net to Portfolio of residential mortgage loans serviced for others		0.83	%		0.76	%		0.80	%
Mortgage servicing rights expense (3)	$	11,574		$	10,379		$	16,739


(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.

(3)		Includes the amortization of mortgage servicing rights and additions/reversals to the valuation allowance of mortgage servicing rights, and is a component of mortgage banking, net in the consolidated statements of income.

An other-than-temporary impairment is recognized as a direct write-down of the mortgage servicing rights asset and the related valuation allowance (to the extent a valuation reserve is available) and then against earnings.

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 September 30, 2005. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon acquisition activities, 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)
Three months ending December 31, 2005	$	1,000	$	700	$	5,700
Year ending December 31, 2006		3,300		2,800		20,400
Year ending December 31, 2007		2,900		1,300		16,900
Year ending December 31, 2008		2,500		1,200		13,600
Year ending December 31, 2009		2,100		1,100		10,300
Year ending December 31, 2010		1,800		1,100		7,700

NOTE 9: Long-term Funding

Long-term funding was as follows.


	September 30,		September 30,		December 31,
	2005		2004		2004
	($ in Thousands)
Federal Home Loan Bank advances	$	1,357,840	$	712,048	$	1,158,294
Bank notes		925,000		300,000		500,000
Repurchase agreements		875,000		500,000		550,000
Subordinated debt, net		199,123		205,664		204,168
Junior subordinated debentures, net		181,987		187,493		185,517
Other borrowed funds		6,508		6,592		6,561

Total long-term funding	$	3,545,458	$	1,911,797	$	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 3.29% at September 30, 2005, compared to 2.78% at September 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 September 30, 2005, while 65% and 74% were fixed at September 30, and December 31, 2004, respectively.

Bank notes:

The long-term bank notes had maturities through 2008 and had weighted-average interest rates of 3.83% at September 30, 2005, 2.43% at September 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 September 30, 2005, compared to 50% and 70% variable rate at September 30, and December 31, 2004, respectively.

Repurchase agreements:

The long-term repurchase agreements had maturities through 2008 and had weighted-average interest rates of 3.05% at September 30, 2005, 1.76% at September 30, 2004, and 1.89% at December 31, 2004. These repurchase agreements had a combination of fixed and variable contractual rates, of which 100% was variable at September 30, 2005, while 80% and 82% were variable at September 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.

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 $1.6 million gain at September 30, 2005, a $7.1 million gain at September 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. See also Note 10.

NOTE 10: 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, 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 September 30, 2005, as well as which instruments receive hedge accounting treatment. Included in the table below for September 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.


	Notional		Estimated Fair		Weighted Average
	Amount		Market Value		Receive Rate	Pay Rate			Maturity
September 30, 2005	($ in Thousands)
Swaps-receive fixed / pay variable (1)	$	175,000	$	1,574	7.63%		4.89	%	325 months
Swaps-receive variable / pay fixed (2)		252,012		69	5.35%		6.56	%	53 months
Interest rate cap		200,000		77	Strike 4.72%		—		11 months
Customer and mirror swaps		121,299		—	3.71%		3.71	%	93 months
Customer and mirror caps		23,017		—	—		—		47 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.

Effective for the quarter ended June 30, 2005, the Corporation no longer applied hedge accounting to certain interest rate swap agreements and an interest rate cap. After consultation with the Corporation’s independent registered public accounting firm, 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).

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 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. Certain derivative instruments that lost hedge accounting treatment were terminated in the third quarter of 2005 resulting in a $1.0 million gain, included in other income. The Corporation continues to evaluate its future hedging strategies.

For the mortgage derivatives, which are not included in the table above and 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 September 30, 2005, was a net loss of $0.4 million, comprised of the net loss on commitments to fund approximately $147 million of loans to individual borrowers and the net gain on commitments to sell approximately $198 million of loans to various investors.

NOTE 11: 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 10. The following is a summary of lending-related commitments at September 30.


	September 30,
	2005		2004
	($ in Thousands)
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale ⁽¹⁾	$	4,908,235	$	3,934,750
Commercial letters of credit ⁽¹⁾		24,249		16,632
Standby letters of credit ⁽²⁾		464,727		396,907

(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 September 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 $4.6 million and $3.7 million at September 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 recorded as part of servicing fees within mortgage banking, net in the consolidated statements of income. At September 30, 2005, there were $2.1 billion of such loans with credit risk recourse, upon which there have been negligible historical losses.

NOTE 12: 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.

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 combined is as follows.


	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004
Components of Net Periodic Benefit Cost	($ in Thousands)
Service cost	$	2,241		$	1,673		$	6,722		$	5,020
Interest cost		1,336			964			4,007			2,891
Expected return on plan assets		(2,015	)		(1,572	)		(6,046	)		(4,715	)
Amortization of:
Transition asset		(81	)		(81	)		(243	)		(243	)
Prior service cost		18			19			55			56
Actuarial loss		220			93			661			278

Total net periodic benefit cost	$	1,719		$	1,096		$	5,156		$	3,287

The Corporation contributed $8 million to its pension plans during the first quarter of 2005 and expects to contribute $12 million to its pension plans during the fourth 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 13: 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, and the support to deliver, service, 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.

Selected segment information is presented below.


				Wealth						Consolidated
	Banking			Management			Other			Total
	($ in Thousands)

As of and for the nine months ended September 30, 2005

Net interest income	$	496,384		$	276		$	—		$	496,660
Provision for loan losses		9,343			—			—			9,343
Noninterest income		157,709			70,227			(320	)		227,616
Depreciation and amortization		38,623			1,750			—			40,373
Other noninterest expense		286,015			46,430			(320	)		332,125
Income taxes		100,986			8,929			—			109,915

Net income	$	219,126		$	13,394		$	—		$	232,520


Total assets	$	20,679,375		$	88,324		$	(25,968	)	$	20,741,731


Total revenues *	$	636,519		$	70,503		$	(320	)	$	706,702
Percent of consolidated total revenues		90	%		10	%		—			100	%

As of and for the nine months ended September 30, 2004

Net interest income	$	393,912		$	258		$	—		$	394,170
Provision for loan losses		11,065			—			—			11,065
Noninterest income		105,895			59,462			(1,564	)		163,793
Depreciation and amortization		25,101			1,830			—			26,931
Other noninterest expense		214,728			40,390			(1,564	)		253,554
Income taxes		71,982			7,000			—			78,982

Net income	$	176,931		$	10,500		$	—		$	187,431


Total assets	$	16,063,542		$	81,411		$	(9,192	)	$	16,135,761


Total revenues *	$	487,224		$	59,720		$	(1,564	)	$	545,380
Percent of consolidated total revenues		89	%		11	%		—			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.


				Wealth						Consolidated
	Banking			Management			Other			Total
				($ in Thousands)

As of and for the three months ended September 30, 2005

Net interest income	$	163,993		$	85		$	—		$	164,078
Provision for loan losses		3,345			—			—			3,345
Noninterest income		60,938			21,954			(72	)		82,820
Depreciation and amortization		12,994			556			—			13,550
Other noninterest expense		94,171			15,554			(72	)		109,653
Income taxes		36,944			2,371			—			39,315

Net income	$	77,477		$	3,558		$	—		$	81,035

Total assets	$	20,679,375		$	88,324		$	(25,968	)	$	20,741,731

Total revenues *	$	219,076		$	22,039		$	(72	)	$	241,043
Percent of consolidated total revenues		91	%		9	%		—			100	%

As of and for the three months ended September 30, 2004

Net interest income	$	133,175		$	41		$	—		$	133,216
Provision for loan losses		—			—			—			—
Noninterest income		31,311			20,092			(220	)		51,183
Depreciation and amortization		8,177			679			—			8,856
Other noninterest expense		70,342			14,078			(220	)		84,200
Income taxes		25,827			2,150			—			27,977

Net income	$	60,140		$	3,226		$	—		$	63,366

Total assets	$	16,063,542		$	81,411		$	(9,192	)	$	16,135,761

Total revenues *	$	160,461		$	20,133		$	(220	)	$	180,374
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 and system conversions of 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 nine months ended September 30, 2005 and the comparable period in 2004. Discussion of third quarter 2005 results compared to third quarter 2004 is predominantly in section, “Comparable Third Quarter Results.” Discussion of third quarter 2005 results compared to second 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 6, “Business Combinations,” of the notes to consolidated financial statements). In particular, consolidated financial results for the nine months ended September 30, 2004 reflect no contribution from its October 29, 2004, purchase acquisition of First Federal and only six months contribution from its April 1, 2004, purchase acquisition of Jabas. The acquisition of State Financial was consummated after September 30, 2005, and thus is not included in the accompanying consolidated financial statements.

Management continually evaluates strategic acquisition opportunities and other various strategic alternatives that could involve the sale or acquisition of branches or other assets, or the consolidation or creation of subsidiaries. During the third quarter of 2005, as part of its ongoing effort to reduce complexity and improve efficiency, the Corporation merged Associated Bank Minnesota, National Association and Associated Bank Chicago into a single national banking charter, headquartered in Green Bay, Wisconsin, under the name Associated Bank, National Association.

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 September 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 $3 million higher than that determined at September 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 $5 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 8, “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. Effective in second quarter 2005, 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. Certain derivative instruments that lost hedge accounting treatment were terminated in the third quarter of 2005 at a net gain of $1.0 million recorded in other income. See Note 10, “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 13, “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 13, “Segment Reporting,” of the notes to consolidated financial statements, indicates that the banking segment represents 90% of total revenues for the nine months ended September 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
($ in Thousands, except per share data)


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

Net income (Quarter)	$	81,035		$	74,015		$	77,470		$	70,855		$	63,366
Net income (Year-to-date)		232,520			151,485			77,470			258,286			187,431

Earnings per share — basic (Quarter)	$	0.63		$	0.57		$	0.60		$	0.57		$	0.58
Earnings per share — basic (Year-to-date)		1.80			1.17			0.60			2.28			1.70

Earnings per share — diluted (Quarter)	$	0.63		$	0.57		$	0.59		$	0.57		$	0.57
Earnings per share — diluted (Year-to-date)		1.79			1.16			0.59			2.25			1.68

Return on average assets (Quarter)		1.56	%		1.44	%		1.54	%		1.49	%		1.60	%
Return on average assets (Year-to-date)		1.51			1.49			1.54			1.58			1.62

Return on average equity (Quarter)		15.85	%		14.62	%		15.52	%		15.46	%		17.76	%
Return on average equity (Year-to-date)		15.33			15.07			15.52			17.22			18.00

Return on tangible average equity (Quarter)(2)		24.55	%		22.65	%		24.13	%		22.47	%		21.69	%
Return on tangible average equity (Year-to-date)(2)		23.78			23.38			24.13			22.11			21.98

Efficiency ratio (Quarter)(3)		47.90	%		50.03	%		49.73	%		49.07	%		47.75	%
Efficiency ratio (Year-to-date)(3)		49.20			49.88			49.73			48.04			47.63

Net interest margin (Quarter)		3.56	%		3.63	%		3.68	%		3.74	%		3.76	%
Net interest margin (Year-to-date)		3.62			3.65			3.68			3.80			3.79


(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 nine months ended September 30, 2005 totaled $232.5 million, or $1.80 and $1.79 for basic and diluted earnings per share, respectively. Comparatively, net income for the nine months ended September 30, 2004 was $187.4 million, or $1.70 and $1.68 for basic and diluted earnings per share, respectively. Year-to-date 2005 results generated an annualized return on average assets of 1.51% and an annualized return on average equity of 15.33%, compared to 1.62% and 18.00%, respectively, for the comparable period in 2004. The net interest margin for the first nine months of 2005 was 3.62% compared to 3.79% for the first nine months of 2004.

The $45.1 million (24.1%) increase in net income between the comparable nine month periods came from increased revenues (with net interest income up $102.5 million or 26.0%, and noninterest income up $58.8 million or 38.9%) and lower provision for loan losses (down $1.7 million or 15.6%), offset partly by increased expenses (with noninterest expense up $87.0 million or 32.5%, and income tax expense up $30.9 million or 39.2%).

Net Interest Income and Net Interest Margin

Net interest income on a taxable equivalent basis for the nine months ended September 30, 2005, was $515 million, an increase of $102 million or 25% over the comparable period last year. As indicated in Tables 2 and 3, the $102 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 $122 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 $20 million).

The net interest margin for the first nine months of 2005 was 3.62%, down 17 basis points (“bp”) from 3.79% for the comparable period in 2004. This comparable period decrease was a function of a 26 bp decrease in interest rate spread (the net of an 82 bp increase in the cost of interest-bearing liabilities and a 56 bp increase in the yield on earning assets) offset in part by 9 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 eleven times (totaling 275 bp) beginning in June 2004, resulting in an average Federal funds rate of 2.93% for the first nine months of 2005, 179 bp higher than the average rate of 1.14% during the same period in 2004. Increases to middle- and long-term interest rates have not been commensurate with the short-term interest rate moves by the Federal Reserve, causing a flattened yield curve environment. This flattening of the yield curve, together with competitive pricing pressures, has resulted in margin compression by limiting the Corporation’s ability to obtain reasonable returns on middle- and long-term earning assets.

The yield on earning assets was 5.68% for year-to-date 2005, 56 bp higher than the comparable nine-month period last year. The average loan yield was up 83 bp to 6.01%, 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 24 bp to 4.72%, as higher yielding securities matured and reinvestment occurred in a flattened yield curve environment.

The cost of interest-bearing liabilities was 2.40% for year-to-date 2005, up 82 bp compared to the same period in 2004, reflecting the rising rate environment. The average cost of interest-bearing deposits was 1.95%, 57 bp higher than year-to-date 2004 and the cost of wholesale funds (comprised of short-term borrowings and long-term funding) was 3.13%, up 119 bp versus year-to-date 2004. Short-term borrowings were the most directly impacted by the higher interest rates between comparable periods, increasing 169 bp to 2.96%, while long-term funding experienced a more moderate increase, rising 44 bp to 3.27%.

Average earning assets of $18.9 billion, were up $4.4 billion (31%) over the comparable nine-month period last year, due to both the First Federal acquisition and organic growth. On average, loans increased $3.5 billion and investment securities 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 loans, which are higher yielding than investment securities, grew to represent 74.6% of average earning assets compared to 73.4% for the nine-month period of 2004.

Average interest-bearing liabilities increased $3.9 billion (32%) 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 $0.4 billion, 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 $1.8 billion). Average wholesale funds grew to represent 38.2% of average interest-bearing liabilities for year-to-date 2005 compared to 35.5% last year. Long-term funding was up $1.5 billion (including $0.8 billion from First Federal), while the remaining funding needs were filled with short-term borrowings (up $0.3 billion).

Based on the balance sheet dynamics and the current interest rate environment, the Corporation will be undertaking a new initiative in the fourth quarter that applies cash flows from maturing investments to reduce wholesale borrowings by $1.0 to $1.5 billion over a twelve month period, resulting in further improvement to the margin. A measured approach will be utilized to decrease investments and reduce dependency on wholesale funding. Capital freed up during this period will, in part, be used to buy back shares to ensure that the undertaking is accretive to shareholders.

TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)


	Nine Months ended September 30, 2005							Nine Months ended September 30, 2004
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate

Earning assets:
Loans: (1) (2) (3)
Commercial	$	8,356,785	$	375,704		5.93	%	$	6,668,508	$	246,765		4.86	%
Residential mortgage		2,865,319		119,614		5.56			2,042,406		86,403		5.63
Retail		2,853,809		142,965		6.68			1,898,667		82,655		5.81

Total loans		14,075,913		638,283		6.01			10,609,581		415,823		5.18
Investments and other (1)		4,802,670		169,942		4.72			3,843,013		142,935		4.96

Total earning assets		18,878,583		808,225		5.68			14,452,594		558,758		5.12
Other assets, net		1,672,053							1,043,304

Total assets	$	20,550,636						$	15,495,898


Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits	$	1,116,871	$	3,077		0.37	%	$	927,876	$	2,528		0.36	%
Interest-bearing demand deposits		2,380,397		19,530		1.10			2,366,312		14,186		0.80
Money market deposits		2,140,763		28,505		1.78			1,530,856		9,247		0.81
Time deposits, excluding Brokered CDs		3,996,324		86,545		2.90			2,844,147		53,227		2.50

Total interest-bearing deposits, excluding Brokered CDs		9,634,355		137,657		1.91			7,669,191		79,188		1.38
Brokered CDs		364,381		8,461		3.10			216,371		2,213		1.37

Total interest-bearing deposits		9,998,736		146,118		1.95			7,885,562		81,401		1.38
Wholesale funding		6,183,220		146,704		3.13			4,347,031		64,001		1.94

Total interest-bearing liabilities		16,181,956		292,822		2.40			12,232,593		145,402		1.58

Noninterest-bearing demand deposits		2,187,931							1,750,576
Other liabilities		153,077							121,613
Stockholders’ equity		2,027,672							1,391,116

Total liabilities and equity	$	20,550,636						$	15,495,898


Interest rate spread						3.28	%						3.54	%
Net free funds						0.34							0.25

Taxable equivalent net interest income and net interest margin			$	515,403		3.62	%			$	413,356		3.79	%

Taxable equivalent adjustment				18,743							19,186

Net interest income			$	496,660						$	394,170


(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
($ in Thousands)


	Three Months ended September 30, 2005							Three Months ended September 30, 2004
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
Earning assets:
Loans: (1) (2) (3)
Commercial	$	8,411,678	$	134,503		6.26	%	$	6,787,476	$	85,971		4.96	%
Residential mortgage		2,880,685		40,253		5.56			1,982,929		27,993		5.62
Retail		2,871,464		48,940		6.78			1,938,296		28,668		5.88

Total loans		14,163,827		223,696		6.22			10,708,701		142,632		5.25
Investments and other (1)		4,796,208		56,042		4.67			3,980,213		48,238		4.85

Total earning assets		18,960,035		279,738		5.83			14,688,914		190,870		5.14
Other assets, net		1,647,866							1,041,537

Total assets	$	20,607,901						$	15,730,451


Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits	$	1,097,955	$	1,024		0.37	%	$	945,881	$	844		0.35	%
Interest-bearing demand deposits		2,193,600		6,107		1.10			2,338,492		4,615		0.79
Money market deposits		2,198,538		11,822		2.13			1,516,812		3,294		0.86
Time deposits, excluding Brokered CDs		3,913,389		30,395		3.08			2,771,249		17,488		2.51

Total interest-bearing deposits, excluding Brokered CDs		9,403,482		49,348		2.08			7,572,434		26,241		1.38
Brokered CDs		487,305		4,250		3.46			235,844		950		1.60

Total interest-bearing deposits		9,890,787		53,598		2.15			7,808,278		27,191		1.39
Wholesale funding		6,307,705		55,715		3.47			4,573,129		24,068		2.07

Total interest-bearing liabilities		16,198,492		109,313		2.66			12,381,407		51,259		1.64

Noninterest-bearing demand deposits		2,242,932							1,813,279
Other liabilities		138,692							116,165
Stockholders’ equity		2,027,785							1,419,600

Total liabilities and equity	$	20,607,901						$	15,730,451


Interest rate spread						3.17	%						3.50	%
Net free funds						0.39							0.26

Taxable equivalent net interest income and net interest margin			$	170,425		3.56	%			$	139,611		3.76	%

Taxable equivalent adjustment				6,347							6,395

Net interest income			$	164,078						$	133,216

TABLE 3
Volume / Rate Variance — Taxable Equivalent Basis
($ in Thousands)


	Comparison of							Comparison of
	Nine months ended Sept 30, 2005 versus 2004							Three months ended Sept 30, 2005 versus 2004
			Variance Attributable to							Variance Attributable to
	Income/Expense							Income/Expense
	Variance (1)		Volume		Rate			Variance (1)		Volume			Rate

INTEREST INCOME: (2)
Loans:
Commercial	$	128,939	$	68,743	$	60,196		$	48,532	$	23,081		$	25,451
Residential mortgage		33,211		34,367		(1,156	)		12,260		12,547			(287	)
Retail		60,310		47,631		12,679			20,272		15,691			4,581

Total loans		222,460		150,741		71,719			81,064		51,319			29,745
Investments and other		27,007		34,359		(7,352	)		7,804		9,709			(1,905	)

Total interest income	$	249,467	$	185,100	$	64,367		$	88,868	$	61,028		$	27,840

INTEREST EXPENSE:
Interest-bearing deposits:
Savings deposits	$	549	$	518	$	31		$	180	$	142		$	38
Interest-bearing demand deposits		5,344		85		5,259			1,492		(299	)		1,791
Money market deposits		19,258		4,780		14,478			8,528		1,997			6,531
Time deposits, excluding brokered CDs		33,318		23,959		9,359			12,907		8,318			4,589

Interest-bearing deposits, excluding brokered CDs		58,469		29,342		29,127			23,107		10,158			12,949
Brokered CDs		6,248		2,185		4,063			3,300		1,580			1,720

Total interest-bearing deposits		64,717		31,527		33,190			26,407		11,738			14,669
Wholesale funding		82,703		31,835		50,868			31,647		10,697			20,950

Total interest expense	$	147,420	$	63,362	$	84,058		$	58,054	$	22,435		$	35,619


Net interest income, taxable equivalent	$	102,047	$	121,738	$	(19,691	)	$	30,814	$	38,593		$	(7,779	)

	(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 nine months of 2005 was $9.3 million, compared to $11.1 million for the same period in 2004. Net charge offs were $9.0 million and $13.7 million for the nine months ended September 30, 2005 and 2004, respectively. Annualized net charge offs as a percent of average loans for year-to-date 2005 were 0.09%, compared to 0.17% for the comparable year-to-date period in 2004. At September 30, 2005, the allowance for loan losses was $190.1 million, compared to $175.0 million at September 30, 2004. The ratio of the allowance for loan losses to total loans was 1.35%, down from 1.62% at September 30, 2004. Nonperforming loans at September 30, 2005 were $110.7 million, compared to $91.5 million at September 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 nine months ended September 30, 2005, noninterest income was $210.0 million, up $58.8 million or 38.9% compared to $151.2 million for year-to-date 2004. The timing of acquisitions affected financial comparisons, as the first nine months of 2004 carry no financial results from the October 2004 First Federal acquisition and six months financial results from the April 2004 Jabas acquisition. See Table 10 for detailed trends of selected quarterly information.

TABLE 4
Noninterest Income
($ in Thousands)


	3^rd Qtr.		3^rd Qtr.			Dollar			Percent			YTD		YTD		Dollar			Percent
	2005		2004			Change			Change			2005		2004		Change			Change

Trust service fees	$	8,667	$	7,773		$	894			11.5	%	$	25,962	$	23,684	$	2,278			9.6	%
Service charges on deposit accounts		22,830		13,672			9,158			67.0			63,710		39,210		24,500			62.5
Mortgage banking income		13,355		6,593			6,762			102.6			35,834		24,664		11,170			45.3
Mortgage servicing rights expense		1,355		5,975			(4,620	)		(77.3	)		11,574		10,379		1,195			11.5

Mortgage banking, net		12,000		618			11,382			N/M			24,260		14,285		9,975			69.8
Credit card & other nondeposit fees		9,505		6,253			3,252			52.0			27,406		17,998		9,408			52.3
Retail commissions		12,905		11,925			980			8.2			42,980		34,444		8,536			24.8
Bank owned life insurance (“BOLI”) income		2,441		3,580			(1,139	)		(31.8	)		6,920		10,576		(3,656	)		(34.6	)
Other		6,229		3,034			3,195			105.3			14,688		8,908		5,780			64.9

Subtotal (“fee income”)		74,577		46,855			27,722			59.2			205,926		149,105		56,821			38.1
Asset sale gains, net		942		309			633			N/M			1,179		749		430			N/M
Investment securities gains (losses), net		1,446		(6	)		1,452			N/M			2,937		1,356		1,581			N/M

Total noninterest income	$	76,965	$	47,158		$	29,807			63.2	%	$	210,042	$	151,210	$	58,832			38.9	%

N/M — Not meaningful.

Trust service fees were $26.0 million, up $2.3 million (9.6%) between comparable nine-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 $4.89 billion and $4.37 billion at September 30, 2005 and 2004, respectively, primarily reflecting higher equity values. Equities represent over 60% of the market value of assets under management for both nine-month September periods.

Service charges on deposit accounts were $63.7 million, up $24.5 million (62.5%) over the comparable nine-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 was $24.2 million for the first nine months of 2005, up $10.0 million (69.8%) from the first nine months of 2004. Net mortgage banking income consists of gross mortgage banking income less mortgage servicing rights expense. Gross mortgage banking income (which includes servicing fees and the gain or loss on sales of mortgage loans and other related fees) was $35.8 million, an increase of $11.2 million (45.3%) over the comparable nine months of 2004. The increase was the result of higher servicing fees (up $8.7 million, with the average mortgage portfolio serviced for others up 60% including First Federal) and higher gains on loan sales and fees (up $2.5 million, with secondary mortgage production up 2% to $1.22 billion compared to $1.19 billion for year-to-date 2004).

Mortgage servicing rights expense (which includes base amortization of the mortgage servicing rights asset and increases or decreases to the valuation allowance associated with the mortgage servicing rights assets) was $11.6 million for the nine months ended September 30, 2005, $1.2 million higher than the comparable nine-month period in 2004. For the first nine months of 2005, base amortization expense was $17.6 million ($5.0 million higher than year-to-date 2004 given the larger mortgage servicing asset following the First Federal acquisition), offset by a $6.0 million recovery to the valuation allowance (compared to a $2.2 million recovery for year-to-date 2004). The favorable change to the valuation allowance was primarily due to slower prepayment speeds, increasing the recorded value of the mortgage servicing rights asset and requiring less valuation reserve. At September 30, 2005, the net mortgage servicing rights asset was $78.7 million, representing 83 basis points of the $9.49 billion mortgage portfolio serviced for others, compared to a net mortgage servicing rights asset of $45.6 million, representing 76 basis points of the $6.01 billion mortgage portfolio serviced for others at September 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 8, “Goodwill and Other Intangible Assets,” of the notes to consolidated financial statements for additional disclosure.

Credit card and other nondeposit fees were $27.4 million, up $9.4 million (52.3%) over the first nine months of 2004, primarily from the inclusion of First Federal account activity, and predominantly from card-related inclearing and other fees. Retail commissions (which includes commissions from insurance and brokerage product sales) were $43.0 million for the first nine months of 2005, up $8.5 million (24.8%) compared to the first nine months of 2004, attributable to the inclusion of Jabas as well as increased sales.

BOLI income was $6.9 million, down $3.7 million (34.6%) from the comparable period of 2004, a direct result of the 2004 downward repricings of a certain BOLI investment. Other income was $14.7 million for the first nine months of 2005, up $5.8 million over the first nine months of 2004. Other income for year-to-date 2005 included increases in ATM-based fees and other miscellaneous income due to the inclusion of First Federal, as well as a $4.5 million non-recurring gain from the dissolution of stock in a regional ATM network, offset partly by a $5.7 million net loss on derivatives (as described in Note 10, “Derivatives and Hedging Activities,” of the notes to consolidated financial statements). For the nine months ended September 30, 2005, net investment securities gains were $2.9 million, including gains of $3.1 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 nine months ended September 30, 2004, net investment securities gains were $1.4 million, including 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 $354.9 million for the first nine months of 2005, up $87.0 million (32.5%) 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
($ in Thousands)


	3^rd Qtr.		3^rd Qtr.		Dollar		Percent			YTD		YTD		Dollar		Percent
	2005		2004		Change		Change			2005		2004		Change		Change

Personnel expense	$	66,403	$	53,467	$	12,936		24.2	%	$	206,322	$	159,355	$	46,967		29.5	%
Occupancy		9,412		6,939		2,473		35.6			28,674		21,275		7,399		34.8
Equipment		4,199		3,022		1,177		38.9			12,431		8,899		3,532		39.7
Data processing		7,129		5,865		1,264		21.6			20,150		17,666		2,484		14.1
Business development & advertising		4,570		3,990		580		14.5			12,662		10,704		1,958		18.3
Stationery and supplies		1,599		1,214		385		31.7			5,087		3,869		1,218		31.5
Intangible amortization expense		1,903		935		968		103.5			6,189		2,651		3,538		133.5
Loan expense		3,310		1,152		2,158		187.3			8,514		4,208		4,306		102.3
Legal and professional		2,232		1,438		794		55.2			7,614		5,226		2,388		45.7
Other		16,591		11,009		5,582		50.7			47,281		34,049		13,232		38.9

Total noninterest expense	$	117,348	$	89,031	$	28,317		31.8	%	$	354,924	$	267,902	$	87,022		32.5	%

Personnel expense (including salary-related expenses and fringe benefit expenses) was $206.3 million for first nine months of 2005, up $47.0 million (29.5%) over the first nine months of 2004, particularly reflecting the substantially larger employee base attributable to the 2004 acquisitions. Average full-time equivalent employees were 4,945 for the first nine months of 2005, up 23.5% from 4,004 for the first nine months of 2004. Salary-related expenses increased $35.1 million (28.6%) 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 $11.9 million (32.4%) 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 $28.7 million for the first nine months of 2005 was up $7.4 million (34.8%), and equipment expense of $12.4 million was up $3.5 million (39.7%) over the comparable period last year, predominantly due to the First Federal acquisition, which added over 90 branches and supermarket locations 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 nine-month periods, reflecting the larger operating base, conversion and integration expenditures, but offset in part by controlling selected discretionary expenses. Intangible amortization expense increased $3.5 million, a direct result of amortizing intangible assets added from the 2004 acquisitions.

Loan expense was $8.5 million for first nine months of 2005, an increase of $4.3 million compared to first nine months of 2004, predominantly attributable to processing, security, authorization and conversion costs related to the larger credit and debit card base, and commensurate with increased card-related inclearing and other fees. Legal and professional expenses were $7.6 million, up $2.4 million, due to higher base audit/compliance fees and other professional consultant costs, as well as costs attributable to conversion efforts. Other expense was up $13.2 million (38.9%) 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. Also included in other expense were losses other than loans (such as losses from robberies, litigation, ATM phishing and other operational losses), which were up $3.6 million between the comparable nine-month periods, primarily in ATM phishing and other operational losses.

Income Taxes

Income tax expense for the first nine months of 2005 was $109.9 million, up $30.9 million from the comparable period in 2004. The effective tax rate (income tax expense divided by income before taxes) was 32.1% and 29.6% 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 September 30, 2005, total assets were $20.7 billion, an increase of $4.6 billion, or 28.5%, since September 30, 2004, largely attributable to the First Federal acquisition. The growth in assets was comprised principally of increases in loans (up $3.3 billion or 30.3%, including $2.7 billion from First Federal at consummation) and investment securities (up $0.5 billion or 13.0%, with $0.7 million acquired from First Federal at consummation).

Commercial loans and home equity were strategically emphasized in 2004, and continue to be an area of focus for 2005, while commercial real estate has been paying down due to competitive pricing pressures. 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 $1.5 billion or 21.9%, and represented 60% of total loans at September 30, 2005, compared to 64% at September 30, 2004. Retail loans grew $0.9 billion or 47.9% to represent 20% of total loans compared to 18% at September 30, 2004, while residential mortgage loans increased $0.9 billion or 42.3% to represent 20% of total loans compared to 18% a year earlier.

At September 30, 2005, total deposits were $12.2 billion, up $2.5 billion or 25.9% over September 30, 2004 (including $2.7 billion added from First Federal at acquisition). Other time deposits increased $1.1 billion (39.3%) to represent 33% of total deposits at September 30, 2005 compared to 29% at September 30, 2004. Money market deposits grew $0.7 billion (47.8%) to represent 18% of total deposits at September 30, 2005 compared to 16% a year earlier, while demand deposits increased $0.4 billion (20.8%) to represent 19% of total deposits at September 30, 2005 (unchanged from 19% of total deposits at September 30, 2004). Short-term borrowings decreased $0.2 billion, while long-term funding increased $1.6 billion since September 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 9, “Long-term Funding,” of the notes to consolidated financial statements).

Since year-end 2004 the balance sheet grew modestly, up $0.2 billion (1.4% annualized). Loans grew $0.2 billion (2.2% annualized), especially commercial loans (up $192 million). Total deposits were down $0.6 billion compared to December 31, 2004, primarily in interest-bearing demand deposits (down $602 million).

TABLE 6
Period End Loan Composition
($ in Thousands)


	September 30, 2005					June 30, 2005					March 31, 2005					December 31, 2004					September 30, 2004
			% of					% of					% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total
										($ in Thousands)
Commercial, financial, and agricultural	$	3,213,656		23	%	$	3,086,663		22	%	$	2,852,462		21	%	$	2,803,333		20	%	$	2,479,764		23	%
Real estate construction		1,519,681		11			1,640,941		12			1,569,013		11			1,459,629		11			1,152,990		11
Commercial real estate		3,648,169		26			3,650,726		26			3,813,465		28			3,933,131		28			3,242,009		30
Lease financing		57,270		—			53,270		—			50,181		—			50,718		—			49,423		—

Commercial		8,438,776		60			8,431,600		60			8,285,121		60			8,246,811		59			6,924,186		64
Home equity ⁽¹⁾		1,878,436		13			1,806,236		13			1,744,676		13			1,866,485		13			1,290,436		12
Installment		1,024,356		7			1,025,621		7			1,048,510		7			1,054,011		8			672,806		6

Retail		2,902,792		20			2,831,857		20			2,793,186		20			2,920,496		21			1,963,242		18
Residential mortgage		2,765,569		20			2,791,049		20			2,844,889		20			2,714,580		20			1,943,199		18

Total loans	$	14,107,137		100	%	$	14,054,506		100	%	$	13,923,196		100	%	$	13,881,887		100	%	$	10,830,627		100	%


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

TABLE 7
Period End Deposit Composition
($ in Thousands)


	September 30, 2005					June 30, 2005						March 31, 2005					December 31, 2004					September 30, 2004
			% of						% of					% of					% of					% of
	Amount		Total			Amount			Total			Amount		Total			Amount		Total			Amount		Total
								($ in Thousands)
Noninterest-bearing demand	$	2,256,774		19	%	$	2,250,482			19	%	$	2,156,592		18	%	$	2,347,611		19	%	$	1,867,905		19	%
Savings		1,074,234		9			1,117,922			9			1,137,120		9			1,116,158		9			936,975		10
Interest-bearing demand		2,252,711		18			2,227,188			18			2,485,548		20			2,854,880		22			2,334,072		24
Money market		2,240,606		18			2,094,796			17			2,112,490		17			2,083,717		16			1,516,423		16
Brokered CDs		407,459		3			491,781			4			218,111		2			361,559		3			186,326		2
Other time		3,949,241		33			3,916,462			33			4,084,043		34			4,022,314		31			2,835,572		29

Total deposits	$	12,181,025		100	%	$	12,098,631			100	%	$	12,193,904		100	%	$	12,786,239		100	%	$	9,677,273		100	%

Total deposits, excluding Brokered CDs	$	11,773,566		97	%	$	11,606,850			96	%	$	11,975,793		98	%	$	12,424,680		97	%	$	9,490,947		98	%

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 September 30, 2005, the allowance for loan losses was $190.1 million compared to $175.0 million at September 30, 2004, and $189.8 million at December 31, 2004. The allowance for loan losses at September 30, 2005 increased $15.1 million since September 30, 2004 (including $14.8 million from First Federal at acquisition) and $0.3 million since December 31, 2004. Table 8 provides additional information regarding activity in the allowance for loan losses and nonperforming assets.

Gross charge offs were $16.6 million for the nine months ended September 30, 2005, $16.5 million for the comparable period ended September 30, 2004, and $22.2 million for year-end 2004, while recoveries for the corresponding periods were $7.6 million, $2.8 million and $4.9 million, respectively. As a result, net charge offs (and the annualized ratio of net charge offs to average loans) were $9.0 million (0.09%) for the first nine months of 2005, $13.7 million (0.17%) for the nine-month period of 2004, and $17.3 million (0.15%) for the 2004 year. Comparatively, the provision for loan losses was $9.3 million, $11.1 million, and $14.7 million, for the nine-month periods ended September 30, 2005 and September 30, 2004, and for the 2004 year, respectively.

TABLE 8
Allowance for Loan Losses and Nonperforming Assets
($ in Thousands)


	At and for the						At and for the
	nine months ended						year ended
	September 30,						December 31,
	2005			2004			2004
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		9,343			11,065			14,668
Charge offs		(16,601	)		(16,492	)		(22,202	)
Recoveries		7,576			2,812			4,924

Net charge offs		(9,025	)		(13,680	)		(17,278	)

Balance at end of period	$	190,080		$	175,007		$	189,762


Nonperforming Assets:
Nonaccrual loans:
Commercial	$	83,783		$	62,013		$	85,955
Residential mortgage		14,683			10,761			16,088
Retail		8,832			8,350			10,718

Total nonaccrual loans		107,298			81,124			112,761
Accruing loans past due 90 days or more:
Commercial		29			7,848			659
Residential mortgage		—			755			—
Retail		3,325			1,706			1,494

Total accruing loans past due 90 days or more		3,354			10,309			2,153
Restructured loans (commercial)		33			39			37

Total nonperforming loans		110,685			91,472			114,951
Other real estate owned		10,017			4,526			3,915

Total nonperforming assets	$	120,702		$	95,998		$	118,866


Ratios:
Allowance for loan losses to net charge offs (annualized)		15.75	x		9.58	x		10.98	x
Net charge offs to average loans (annualized)		0.09	%		0.17	%		0.15	%
Allowance for loan losses to total loans		1.35			1.62			1.37
Nonperforming loans to total loans		0.78			0.84			0.83
Nonperforming assets to total assets		0.58			0.59			0.58
Allowance for loan losses to nonperforming loans		172			191			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 September 30, 2005, September 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. During the third quarter of 2005, the Corporation received a $4 million payment on a nonaccrual commercial manufacturing credit for which a $10 million allowance was previously identified. As a result of this payment, the Corporation reduced the identified allowance from $10 million to $5 million.

At September 30, 2005, the allowance for loan losses to total loans was 1.35%, compared to 1.62% at September 30, 2004, and 1.37% at December 31, 2004. The decline in the ratio of allowance for loan losses to total loans at September 30, 2005, and year-end 2004 compared to September 30, 2004, was largely 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. The decline in the ratio of allowance for loan losses to total loans from 1.37% at year-end 2004 to 1.35% at September 30, 2005, was primarily due to tempered loan growth since year-end 2004, and lower levels of net charge offs and nonperforming loans. Total loans at September 30, 2005, were up $3.3 billion (30.3%) since September 30, 2004, largely attributable to the $2.7 billion acquired First Federal loans previously mentioned, but also from organic growth primarily in home equity and commercial loans (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 $110.7 million, or 0.78% of total loans at September 30, 2005, down from 0.84% of loans a year ago, and from 0.83% of loans at year-end 2004. The allowance for loan losses covered nonperforming loans at 172%, 191% and 165%, at September 30, 2005, September 30, 2004 and year-end 2004, respectively. On an annualized basis, net charge offs to average loans were 0.09% for the first nine months of 2005, 0.17% for the comparable nine-month period of 2004, and 0.15% for the 2004 year.

Management believes the allowance for loan losses to be adequate at September 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 has been increasing. 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 $14 million, $11 million and $15 million of nonperforming student loans at September 30, 2005, September 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 0.58%, 0.59%, and 0.58% at September 30, 2005, September 30, 2004, and December 31, 2004, respectively.

Total nonperforming loans of $110.7 million at September 30, 2005 were up $19.2 million from September 30, 2004 and down $4.3 million from year-end 2004. The ratio of nonperforming loans to total loans was 0.78% at September 30, 2005, down from both 0.84% and 0.83% at September 30, 2004, and year-end 2004, respectively. Nonaccrual loans account for the majority of the $19.2 million increase in nonperforming loans between the comparable September

periods, increasing $26.2 million (primarily attributable to the nonaccrual loans acquired with the First Federal acquisition), while accruing loans past due 90 or more days were down $7.0 million. Nonaccrual loans also account for the majority of the $4.3 million decrease in nonperforming loans since year-end 2004, decreasing $5.5 million, while accruing loans past due 90 or more days increased $1.2 million. The most significant changes in nonaccrual loans from year-end 2004 were attributable to the payments on two large problem credits (including a $13 million payment on a commercial credit within the food industry and a $4 million payment on a commercial manufacturing credit), 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 $10.0 million at September 30, 2005, compared to $4.5 million at September 30, 2004, and $3.9 million at year-end 2004. The change was predominantly due to the addition of a $4.6 million tract of bank-owned vacant land reclassified to other real estate owned in third quarter 2005.

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 September 30, 2005, potential problem loans totaled $259 million, compared to $257 million at September 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 September 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 September 30, 2005. In addition, under the Parent Company’s $200 million commercial paper program, $62 million of commercial paper was outstanding and $138 million of commercial paper was available at September 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 September 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 September 30, 2005, $300 million was available under the shelf registration.

Investment securities are an important tool to the Corporation’s liquidity objective. As of September 30, 2005, all securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. Of the $4.7 billion investment portfolio at September 30, 2005, $2.7 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 subsidiary has 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 September 30, 2005, $925 million of long-term bank notes were outstanding and $225 million was available under the bank note program. The Corporation instituted a new bank note program during the third quarter of 2005, of which $2 billion was available at September 30, 2005. The new bank note program will be utilized upon completion of the 2000 bank note program. The bank has 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 September 30, 2005). In addition, the bank subsidiary also issues institutional certificates of deposit, from time to time offers brokered certificates of deposit, and to a lesser degree, accepts Eurodollar deposits.

For the nine months ended September 30, 2005, net cash provided by operating and financing activities was $237.8 million and $25.9 million, respectively, while investing activities used net cash of $217.5 million, for a net increase in cash and cash equivalents of $46.2 million since year-end 2004. Generally, net asset growth since year-end 2004 was modest (up 1.1%), while deposits declined during the first nine months 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 nine months ended September 30, 2004, net cash provided from operating and financing activities was $269.8 million and $697.1 million, respectively, while investing activities used net cash of $1.0 billion, for a net decrease in cash and cash equivalents of $39.6 million since year-end 2003. In the first nine months of 2004 maturities of time deposits occurred (down $183 million or 8% annualized) and net asset growth since year-end 2003 was strong (up $888 million or 8% annualized), particularly in loans and investments. 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 and Form 10-K/A 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 and Form 10-K/A have not materially changed since that report was filed. A discussion of the Corporation’s derivative instruments at September 30, 2005, is included in Note 10, “Derivative and Hedging Activities,” of the notes to consolidated financial statements and a discussion of the Corporation’s commitments is included in Note 11, “Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities,” of the notes to consolidated financial statements.

Capital

Stockholders’ equity at September 30, 2005 increased to $2.1 billion, compared to $1.5 billion at September 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. At September 30, 2005, stockholders’ equity included $21.8 million of accumulated other comprehensive income compared to $49.3 million at September 30, 2004. Accumulated other comprehensive income declined from lower unrealized gains, net of the tax effect, on securities available for sale ($21.8 million at September 30, 2005 compared to $59.8 million at September 30, 2004). In conjunction with the Corporation’s change in hedge accounting (as described in Note 10, “Derivatives and Hedging Activities,” of the notes to consolidated financial statements), there were no cash flow hedges at September 30, 2005, while the September 30, 2004 balance sheet included unrealized losses on cash flow hedges of $10.5 million, net of the tax effect. Stockholders’ equity to assets was 9.94% and 9.01% at September 30, 2005 and 2004, respectively.

Stockholders’ equity was up moderately ($45 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. At September 30, 2005, stockholders’ equity included $21.8 million of accumulated other comprehensive income compared to $ 41.2 million at year-end 2004. The decrease in accumulated other comprehensive income was attributable principally to lower unrealized gains on securities available for sale, net of the tax effect ($21.8 million at September 30, 2005 compared to $50.0 million at December 31, 2004). In conjunction with the Corporation’s change in hedge accounting, there were no cash flow hedges at September 30, 2005, while the December 31, 2004 balance sheet included unrealized losses on cash flow hedges of $8.8 million, net of the tax effect. Stockholders’ equity to assets at September 30, 2005 was 9.94% compared to 9.83% at December 31, 2004.

Cash dividends of $0.79 per share were paid in the first nine months of 2005, compared to $0.73 per share in the first nine months 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 nine months of 2005 at an average cost of $32.58 per share, while 697,000 shares were repurchased for $20.1 million during first nine 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 September 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
(In Thousands, except per share data)


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

Total stockholders’ equity	$	2,062,565		$	2,018,435		$	2,025,071		$	2,017,419		$	1,453,465
Tier 1 capital		1,495,122			1,438,849			1,468,359			1,420,386			1,317,752
Total capital		1,895,420			1,838,181			1,865,137			1,817,016			1,678,543
Market capitalization		3,900,983			4,289,610			4,048,095			4,309,765			3,534,306

Book value per common share	$	16.12		$	15.80		$	15.62		$	15.56		$	13.19
Cash dividend per common share		0.27			0.27			0.25			0.25			0.25
Stock price at end of period		30.48			33.58			31.23			33.23			32.07
Low closing price for the quarter		30.29			30.11			30.60			32.08			28.81
High closing price for the quarter		34.74			33.89			33.50			34.85			32.19

Total equity / assets		9.94	%		9.73	%		9.88	%		9.83	%		9.01	%
Tier 1 leverage ratio		7.52			7.25			7.44			7.79			8.52
Tier 1 risk-based capital ratio		9.92			9.60			9.95			9.64			10.98
Total risk-based capital ratio		12.58			12.26			12.63			12.33			13.99

Shares outstanding (period end)		127,985			127,743			129,622			129,695			110,206
Basic shares outstanding (average)		127,875			128,990			129,781			123,509			110,137
Diluted shares outstanding (average)		129,346			130,463			131,358			125,296			111,699


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

Comparable Third Quarter Results

Net income for third quarter 2005 was $81.0 million, up $17.6 million or 27.9% from third quarter 2004 net income of $63.4 million. Return on average equity was 15.85% for third quarter 2005 versus 17.76% for third quarter 2004, while return on average assets decreased by 4 bp to 1.56%. See Tables 1 and 10.

Taxable equivalent net interest income for the third quarter of 2005 was $170.4 million, $30.8 million higher than the third quarter of 2004. Changes in the balance sheet volume and mix favorably impacted taxable equivalent net interest income by $38.6 million, while rate variances were unfavorable by $7.8 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 $19.0 billion in the third quarter of 2005, an increase of $4.3 billion from the third quarter of 2004, benefiting from the First Federal acquisition as well as organic growth. On average, loans increased $3.5 billion and investments were up $0.8 billion. Average interest-bearing liabilities increased $3.8 billion, attributable principally to First Federal. Average interest-bearing deposits were up $2.1 billion (largely in non-brokered time deposits and money market accounts) and demand deposits were up $0.4 billion. The remainder of the growth in average earning assets was funded by wholesale funding sources (up $1.7 billion, principally in long-term funding).

The net interest margin of 3.56% was down 20 bp from 3.76% for the third quarter of 2004, the net result of a 33 bp decrease in the interest rate spread and 13 bp higher contribution from net free funds. The Federal Reserve raised short-term interest rates by 25 bp ten times since the start of third quarter 2004, resulting in an average Federal funds rate of 3.42% for the third quarter of 2005, 200 bp higher than the average rate of 1.42% for the third 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. While the average yield on earning assets increased by 69 bp (to 5.83%), the average cost of interest-bearing liabilities increased by 102 bp (to 2.66%), for a net decrease in interest rate spread of 33 bp (to 3.17%). Loan yields were up 97 bp (to 6.22%), with increases in commercial and retail loans of 130 bp and 90 bp, respectively, and a decrease in residential mortgage loans of 6 bp. Investment yields were down 18 bp (to 4.67%) as higher yielding securities matured and reinvestment occurred in a flattened yield curve environment. On the funding side, the rate on interest-bearing deposits was up 76 bp (to 2.15%) and the cost of wholesale funding was up 140 bp (to 3.47%), with short-term borrowings, which were most directly impacted by the higher interest rates between the comparable quarters, increasing 188 bp and long-term funding rising 72 bp.

The provision for loan losses for the third quarter of 2005 was $3.3 million, while no provision for loan losses was recorded for the third quarter of 2004. Net charge offs were $3.3 million (or 0.09% of average loans, annualized) for the three months ended September 30, 2005 and $3.0 million (or 0.11% of average loans, annualized) for the comparable quarter in 2004. 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 $77.0 million for the third quarter of 2005, up $29.8 million from the third quarter of 2004 (see Table 4). Net mortgage banking income was up $11.4 million, with a $6.8 million increase in mortgage banking income and a $4.6 million decrease in mortgage servicing rights expense (third quarter 2005 included a $4.5 million recovery to the valuation reserve compared to a $1.9 million addition to the valuation reserve in third quarter 2004 and $1.8 million higher base amortization expense on the larger mortgage servicing rights asset). Fee income sources such as service charges on deposit accounts (up $9.2 million) and credit card and other nondeposit fees (up $3.3 million) benefited notably from the inclusion of First Federal accounts and growth activity. Other income increased $3.2 million, primarily attributable to higher miscellaneous income due to the inclusion of First Federal (including fees from ATMs, check printing, and safe deposit boxes), as well as a $1.0 million net gain on derivatives (as described in Note 10, “Derivatives and Hedging Activities,” of the notes to consolidated financial statements).

Noninterest expense for the third quarter of 2005 was up $28.3 million from the third quarter of 2004 (see Table 5), reflecting the Corporation’s larger operating base attributable to the First Federal acquisition. Personnel expense increased $12.9 million (with increases of $9.3 million in salary-related expenses and $3.6 million in fringe benefits), particularly attributable to the First Federal acquisition and annual merit increases between the periods. Occupancy expense increased $2.5 million and equipment expense grew $1.2 million, predominantly due to the Corporation’s expanded branch system attributable to the First Federal acquisition. Data processing, business development and advertising, and stationery and supplies were each up between the comparable three-month periods, reflecting the larger operating base. Intangible amortization expense increased $1.0 million, a direct result of amortizing intangible assets added from the 2004 acquisitions. Loan expense increased $2.2 million, fully attributable to processing, security, authorization and conversion costs related to the larger credit and debit card base. Other expense was up $5.6 million across multiple categories and primarily commensurate with the large operating base.

Sequential Quarter Results

Net income for the third quarter of 2005 was $81.0 million, up $7.0 million from second quarter 2005 net income of $74.0 million. Return on average equity was 15.85% and return on average assets was 1.56%, compared to 14.62% and 1.44%, respectively, for the second quarter of 2005. See Tables 1 and 10.

TABLE 10
Selected Quarterly Information
($ in Thousands)


	For the Quarter Ended
	Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,
	2005			2005			2005			2004			2004

*Summary of Operations:*
Net interest income	$	164,078		$	166,674		$	165,908		$	158,457		$	133,216
Provision for loan losses		3,345			3,671			2,327			3,603			—
Noninterest income
Trust service fees		8,667			8,967			8,328			8,107			7,773
Service charges on deposit accounts		22,830			22,215			18,665			16,943			13,672
Mortgage banking, net		12,000			2,376			9,884			6,046			618
Credit card and other nondeposit fees		9,505			8,790			9,111			8,183			6,253
Retail commissions		12,905			15,370			14,705			12,727			11,925
Bank owned life insurance income		2,441			2,311			2,168			2,525			3,580
Asset sale gains (losses), net		942			539			(302	)		432			309
Investment securities gains (losses), net		1,446			1,491			—			(719	)		(6	)
Other		6,229			(355	)		8,814			4,793			3,034

Total noninterest income		76,965			61,704			71,373			59,037			47,158
Noninterest expense
Personnel expense		66,403			66,934			72,985			65,193			53,467
Occupancy		9,412			9,374			9,888			8,297			6,939
Equipment		4,199			4,214			4,018			3,855			3,022
Data processing		7,129			6,728			6,293			5,966			5,865
Business development and advertising		4,570			4,153			3,939			4,271			3,990
Stationery and supplies		1,599			1,644			1,844			1,567			1,214
Other intangible amortization		1,903			2,292			1,994			1,699			935
Other		22,133			20,995			20,281			19,119			13,599

Total noninterest expense		117,348			116,334			121,242			109,967			89,031
Income taxes		39,315			34,358			36,242			33,069			27,977

Net income	$	81,035		$	74,015		$	77,470		$	70,855		$	63,366

Taxable equivalent net interest income	$	170,425		$	172,848		$	172,130		$	164,799		$	139,611
Net interest margin		3.56	%		3.63	%		3.68	%		3.74	%		3.76	%

*Average Balances:*
Assets	$	20,607,901		$	20,574,770		$	20,467,698		$	18,956,445		$	15,730,451
Earning assets		18,960,035			18,916,921			18,756,555			17,437,618			14,688,914
Interest-bearing liabilities		16,198,492			16,207,719			16,139,002			14,761,878			12,381,407
Loans		14,163,827			14,084,246			13,977,621			12,858,394			10,708,701
Deposits		12,133,719			12,069,719			12,359,040			11,658,646			9,621,557
Stockholders’ equity		2,027,785			2,030,929			2,024,265			1,822,715			1,419,600

*Asset Quality Data:*
Allowance for loan losses to total loans		1.35	%		1.35	%		1.36	%		1.37	%		1.62	%
Allowance for loan losses to nonperforming loans		172	%		169	%		184	%		165	%		191	%
Nonperforming loans to total loans		0.78	%		0.80	%		0.74	%		0.83	%		0.84	%
Nonperforming assets to total assets		0.58	%		0.56	%		0.52	%		0.58	%		0.59	%
Net charge offs to average loans (annualized)		0.09	%		0.10	%		0.06	%		0.11	%		0.11	%

Taxable equivalent net interest income for the third quarter of 2005 was $170.4 million, $2.4 million lower than the second quarter of 2005, impacted unfavorably 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 prolonged flattening of the yield curve and competitive pricing pressures. As a result, the net interest margin between the sequential quarters was down 7 bp, to 3.56% in the third quarter of 2005. The decrease in the margin was a function of a 12 bp lower interest rate spread (to 3.17% in the third quarter) offset in part by 5 bp

higher contribution from net free funds (to 0.39% in the third quarter). The Corporation anticipates the margin will stabilize and show improvement in the fourth quarter. Average earning assets were $19.0 billion in the third quarter of 2005, an increase of $43 million from the second quarter of 2005. On average, loans increased $79 million, while investments were down $36 million. Average demand deposits were up $55 million and interest-bearing deposits rose $9 million. Due to the growth in average deposits, wholesale funding was down slightly (by $19 million).

Noninterest income increased $15.3 million to $77.0 million between sequential quarters. Other income increased $6.6 million between sequential quarters, with third quarter 2005 including a $1.0 million net gain on derivatives, while second quarter 2005 included a $6.7 million net loss on derivatives (as described in Note 10, “Derivatives and Hedging Activities,” of the notes to consolidated financial statements). Net mortgage banking income of $12.0 million was $9.6 million higher than second quarter 2005, with an additional $2.6 million in mortgage banking income and $7.0 million from improved value in the mortgage servicing rights asset (i.e., a valuation recovery of $4.5 million for third quarter 2005 versus a valuation reserve addition of $2.5 million for second quarter 2005). Service charges on deposit accounts were $22.8 million, up $0.6 million (11% annualized) over second quarter 2005, primarily from higher nonsufficient funds fees (reflecting seasonally higher volume). Retail commissions were $12.9 million, down from $15.4 million in the second quarter of 2005, reflecting the seasonality of insurance income.

On a sequential quarter basis, noninterest expense increased $1.0 million (1%) to $117.3 million in the third quarter of 2005. Personnel expense was $66.4 million in third quarter 2005, down $0.5 million (1%) from second quarter 2005, notably from lower severance costs following branch staffing reductions and back office efficiencies, with a 2% decline in average full time equivalent employees (from 4,889 in second quarter 2005 to 4,815 in third quarter 2005). All other noninterest expense categories combined were $50.9 million, up $1.5 million or 3% over $49.4 million for the second quarter of 2005. Income tax expense for the third quarter of 2005 was $39.3 million, up $5.0 million from the second quarter of 2005. The effective tax rate was 32.7% and 31.7% for the third and second quarters of 2005, respectively.

Recent Accounting Pronouncements

The recent accounting pronouncements have been described in Note 3, “New Accounting Pronouncements,” of the notes to consolidated financial statements.

Subsequent Events

On October 3, 2005, the Corporation consummated its acquisition of 100% of the outstanding shares of State Financial Services Corporation (“State Financial”), based in Milwaukee, Wisconsin. The acquisition will be accounted for under the purchase method and was, therefore, not included in the consolidated financial statements herewith, but will be included in the Corporation’s financial results effective upon the date of acquisition and thereafter. The Corporation is in the process of recording the transaction and assigning fair values of the assets acquired and liabilities assumed. The excess cost of the acquisition over the fair value of the net assets acquired will be allocated to the identifiable intangible assets with the remainder then allocated to goodwill. The preliminary amount of goodwill is estimated to be approximately $0.2 billion. At the time of this filing it is not practicable to provide additional detailed financial information on the transaction. Any specific transaction results should be considered to be the best estimates available at the time of this filing and subject to change upon the completion of the recording of the transaction. See Note 6, “Business Combinations,” of the notes to consolidated financial statements.

On October 26, 2005, the Board of Directors declared a $0.27 per share dividend payable on November 15, 2005, to shareholders of record as of November 7, 2005. This cash dividend has not been reflected in the accompanying consolidated financial statements.

In November 2005, the Corporation repurchased (and cancelled) 974,000 shares of its outstanding common stock from UBS AG London Branch (“UBS”) under an accelerated share repurchase program for $30 million or an average cost of $30.79 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 3-month period. The repurchased shares will be subject to a future purchase price settlement adjustment.

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. 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. As part of this remediation effort, internal policies and procedures are being updated to ensure proper accounting treatment is applied to derivative instruments. It should be noted that certain derivative instruments that lost hedge accounting treatment were terminated in the third quarter of 2005, and that no new derivative programs were implemented during the third quarter of 2005.

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.

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 third 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 Paid
Period	Shares Purchased		per Share

July 1, 2005 - July 31, 2005		—	$	—
August 1, 2005 - August 31, 2005		—		—
September 1, 2005 - September 30, 2005		—		—

Total		—	$	—

ITEM 6: Exhibits

	(a)		Exhibits:

			Exhibit 11, Statement regarding computation of per-share earnings. See Note 4 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.


			Page No.
PART I.	Financial Information

	Item 1.	Financial Statements (Unaudited):

		Consolidated Balance Sheets - September 30, 2005, September 30, 2004 and December 31, 2004		3

		Consolidated Statements of Income - Three and Nine Months Ended September 30, 2005 and 2004		4

		Consolidated Statements of Changes in Stockholders’ Equity - Nine Months Ended September 30, 2005 and 2004		5

		Consolidated Statements of Cash Flows - Nine Months Ended September 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		21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43

	Item 4.	Controls and Procedures		43

PART II.	Other Information

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44

	Item 6.	Exhibits		44

Signatures				45
Section 302 Chief Executive Officer Certification
Section 302 Chief Financial Officer Certification
Section 906 Certification of CEO and CFO


	ASSOCIATED BANC-CORP (Registrant)
Date: November 8, 2005	/s/ Paul S. Beideman
	Paul S. Beideman
	President and Chief Executive Officer


Date: November 8, 2005	/s/ Joseph B. Selner
	Joseph B. Selner
	Chief Financial Officer