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, 2006


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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer 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, 2006, was 130,308,978 shares.

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements:

ASSOCIATED BANC-CORP

Consolidated Balance Sheets

(Unaudited)


	September 30,			September 30,			December 31,
	2006			2005			2005
	(In Thousands, except share data)
ASSETS
Cash and due from banks	$	367,406		$	386,151		$	460,230
Interest-bearing deposits in other financial institutions		27,627			14,598			14,254
Federal funds sold and securities purchased under agreements to resell		34,752			103,481			17,811
Investment securities available for sale, at fair value		3,436,774			4,708,730			4,711,605
Loans held for sale		87,330			98,473			57,710
Loans		15,284,608			14,107,137			15,206,464
Allowance for loan losses		(203,442	)		(190,080	)		(203,404	)

Loans, net		15,081,166			13,917,057			15,003,060
Premises and equipment		196,201			174,086			206,153
Goodwill		871,629			679,993			877,680
Other intangible assets		112,544			115,692			120,358
Other assets		711,094			543,470			631,221

Total assets	$	20,926,523		$	20,741,731		$	22,100,082


LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing demand deposits	$	2,534,686		$	2,256,774		$	2,504,926
Interest-bearing deposits, excluding brokered certificates of deposit		11,043,222			9,516,792			10,538,856
Brokered certificates of deposit		630,637			407,459			529,307

Total deposits		14,208,545			12,181,025			13,573,089
Short-term borrowings		2,004,982			2,778,993			2,666,307
Long-term funding		2,272,654			3,545,458			3,348,476
Accrued expenses and other liabilities		169,962			173,690			187,232

Total liabilities		18,656,143			18,679,166			19,775,104

Stockholders’ equity
Preferred stock		—			—			—
Common stock (par value $0.01 per share, authorized 250,000,000 shares, issued 132,426,588, 128,110,999 and 135,697,755 shares, respectively)		1,324			1,281			1,357
Surplus		1,183,169			1,064,833			1,301,004
Retained earnings		1,156,869			978,489			1,029,247
Accumulated other comprehensive income (loss)		(6,122	)		21,776			(3,938	)
Deferred compensation		—			(3,814	)		(2,081	)
Treasury stock, at cost (2,063,645, 0, and 23,500 shares, respectively)		(64,860	)		—			(611	)

Total stockholders’ equity		2,270,380			2,062,565			2,324,978

Total liabilities and stockholders’ equity	$	20,926,523		$	20,741,731		$	22,100,082

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,
	2006		2005		2006		2005
	(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans	$	284,397	$	223,202	$	823,985	$	636,931
Interest and dividends on investment securities and deposits in other financial institutions:
Taxable		30,225		40,050		101,990		122,918
Tax exempt		9,691		9,755		29,640		28,985
Interest on federal funds sold and securities purchased under agreements to resell		260		384		798		648

Total interest income		324,573		273,391		956,413		789,482
INTEREST EXPENSE
Interest on deposits		99,242		53,598		265,196		146,118
Interest on short-term borrowings		30,450		23,628		97,820		62,528
Interest on long-term funding		26,664		32,087		89,912		84,176

Total interest expense		156,356		109,313		452,928		292,822

NET INTEREST INCOME		168,217		164,078		503,485		496,660
Provision for loan losses		3,837		3,345		11,988		9,343

Net interest income after provision for loan losses		164,380		160,733		491,497		487,317
NONINTEREST INCOME
Trust service fees		9,339		8,667		27,543		25,962
Service charges on deposit accounts		23,438		22,830		67,379		63,710
Mortgage banking, net		2,833		11,969		13,066		24,229
Card-based and other nondeposit fees		10,461		9,505		31,394		27,406
Retail commissions		14,360		12,905		46,203		42,980
Bank owned life insurance income		4,390		2,441		11,053		6,920
Asset sale gains, net		89		942		213		1,179
Investment securities gains, net		1,164		1,446		5,158		2,937
Other		6,911		6,260		18,957		14,719

Total noninterest income		72,985		76,965		220,966		210,042
NONINTEREST EXPENSE
Personnel expense		71,321		66,403		215,116		206,322
Occupancy		10,442		9,412		32,854		28,674
Equipment		4,355		4,199		13,166		12,431
Data processing		7,190		7,129		21,537		20,150
Business development and advertising		4,142		4,570		12,492		12,662
Stationery and supplies		1,787		1,599		5,345		5,087
Other intangible amortization expense		2,280		1,903		6,904		6,189
Other		22,169		22,133		64,403		63,409

Total noninterest expense		123,686		117,348		371,817		354,924

Income before income taxes		113,679		120,350		340,646		342,435
Income tax expense		36,791		39,315		98,502		109,915

NET INCOME	$	76,888	$	81,035	$	242,144	$	232,520


Earnings per share:
Basic	$	0.58	$	0.63	$	1.82	$	1.80
Diluted	$	0.58	$	0.63		1.81	$	1.79
Average shares outstanding:
Basic		131,520		127,875		132,951		128,825
Diluted		132,591		129,346		134,119		130,252

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 (Loss)			Compensation			Stock			Total
							(In Thousands, except per share data)
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 for 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


Balance, December 31, 2005	$	1,357		$	1,301,004		$	1,029,247		$	(3,938	)	$	(2,081	)	$	(611	)	$	2,324,978
Comprehensive income:
Net income		—			—			242,144			—			—			—			242,144
Net unrealized holding gains on available for sale securities arising during the period, net of taxes of $0.7 million		—			—			—			1,169			—			—			1,169
Less: reclassification adjustment for net gains on available for sale securities realized in net income, net of taxes of $1.8 million		—			—			—			(3,353	)		—			—			(3,353	)

Comprehensive income																				239,960

Cash dividends, $0.85 per share		—			—			(113,337	)		—			—			—			(113,337	)
Common stock issued for stock options		8			15,268			(1,131	)		—			—			3,681			17,826
Purchase of treasury stock		(41	)		(137,133	)		—			—			—			(67,930	)		(205,104	)
Stock-based compensation, net		—			1,206			(54	)		—			2,081			—			3,233
Tax benefit of stock options		—			2,824			—			—			—			—			2,824

Balance, September 30, 2006	$	1,324		$	1,183,169		$	1,156,869		$	(6,122	)	$	—		$	(64,860	)	$	2,270,380

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,
	2006			2005
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	242,144		$	232,520
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		11,988			9,343
Depreciation and amortization		18,054			16,610
Recovery of valuation allowance on mortgage servicing rights, net		(2,778	)		(6,000	)
Amortization (accretion) of:
Mortgage servicing rights		15,196			17,574
Intangible assets		6,904			6,189
Premiums and discounts on earning assets, funding, and other, net		9,998			21,541
Tax benefit from exercise of stock options		2,824			2,769
Excess tax benefit from stock-based compensation		(1,860	)		—
Federal Home Loan Bank stock dividend		—			(6,935	)
Gain on sales of investment securities, net		(5,158	)		(2,937	)
Gain on sales of assets, net		(213	)		(1,179	)
Gain on sales of loans held for sale and mortgage servicing rights, net		(7,332	)		(13,659	)
Mortgage loans originated and acquired for sale		(994,998	)		(1,221,425	)
Proceeds from sales of mortgage loans held for sale		961,630			1,201,575
Increase in interest receivable		(7,699	)		(10,560	)
Increase (decrease) in interest payable		(2,301	)		9,690
Net change in other assets and other liabilities		(29,884	)		(24,229	)

Net cash provided by operating activities		216,515			230,887


CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(102,875	)		(244,367	)
Additions to mortgage servicing rights		—			(14,015	)
Purchases of:
Securities available for sale		(771,015	)		(868,317	)
Premises and equipment, net of disposals		(8,877	)		(8,523	)
Bank owned life insurance		(50,000	)		—
Proceeds from:
Sales of securities available for sale		730,626			46,810
Calls and maturities of securities available for sale		1,306,210			872,885
Sales of other assets		10,800			4,954

Net cash provided by (used in) investing activities		1,114,869			(210,573	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		635,456			(605,214	)
Net decrease in short-term borrowings		(661,325	)		(147,723	)
Repayment of long-term funding		(1,373,369	)		(600,743	)
Proceeds from issuance of long-term funding		300,000			1,550,238
Cash dividends		(113,337	)		(102,083	)
Proceeds from exercise of stock options		17,826			15,360
Excess tax benefit from stock-based compensation		1,860			—
Purchase of treasury stock		(201,005	)		(83,991	)

Net cash provided by (used in) financing activities		(1,393,894	)		25,844

Net increase (decrease) in cash and cash equivalents		(62,510	)		46,158
Cash and cash equivalents at beginning of period		492,295			458,072

Cash and cash equivalents at end of period	$	429,785		$	504,230

Supplemental disclosures of cash flow information:
Cash paid for interest	$	455,229		$	283,132
Cash paid for income taxes		89,963			153,416
Loans and bank premises transferred to other real estate		12,228			11,389
Capitalized mortgage servicing rights		11,508			14,015

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 (the “SEC”) 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 2005 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements.

NOTE 1: Basis of Presentation

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

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

NOTE 2: Reclassifications

Certain items in the prior period consolidated financial statements have been reclassified to conform with the September 30, 2006 presentation.

NOTE 3: New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” (“SFAS 158”). SFAS 158 requires an employer to report on its balance sheet the amount by which the defined-benefit-postretirement obligation is over or under-funded and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The amount will be measured as the difference between the fair value of plan assets and the projected benefit obligation (“PBO”). If the fair value of plan assets is larger than the PBO, a net asset would be reported on the balance sheet, whereas a liability would be reported if the PBO is larger than the fair value of plan assets. SFAS 158 also requires an employer to measure its plan assets and benefit obligations as of its balance sheet date, which requires a calendar year employer with an alternative measurement date to record an adjustment to retained earnings as of the effective date of the measurement provisions. The requirement to recognize the funded status of a benefit plan and the disclosure requirements of SFAS 158 are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the employer’s balance sheet date are effective for fiscal years ending after December 15, 2008. The Corporation will adopt the provisions of SFAS 158 for year-end 2006, with the exception of the measurement date provisions, which will be adopted in 2008. The Corporation is in the process of assessing the impact on its results of operations, financial position, liquidity, and disclosures.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). According to SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing

the asset or liability by establishing a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value measurements must then be disclosed separately by level within the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Corporation will adopt SFAS 157 in 2008 and does not believe the requirements of this statement will have a material impact on the Corporation.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF 06-4”). EITF 06-4 requires companies with split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods to recognize a liability for future benefits based on the substantive agreement with the employee. Recognition should be in accordance with FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion – 1967,” depending on whether a substantive plan is deemed to exist. Companies are permitted to recognize the effects of applying the consensus through either (1) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets as of the beginning of the year of adoption or (2) a change in accounting principle through retrospective application to all prior periods. EITF 06-4 will be effective for fiscal years beginning after December 15, 2007, with early adoption permitted. The Corporation anticipates adopting EITF 06-4 in 2008 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In September 2006, the FASB ratified the consensus reached by the EITF in Issue No. 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance,” (“EITF 06-5”). EITF 06-5 concluded that companies purchasing a life insurance policy including COLI or BOLI should record the amount that could be realized, considering any additional amounts beyond cash surrender value included in the contractual terms of the policy. The amount that could be realized should be based on assumed surrender at the individual policy or certificate level, unless all policies or certificates are required to be surrendered as a group. When it is probable that contractual restrictions would limit the amount that could be realized, such contractual limitations should be considered and any amounts recoverable at the insurance company’s discretion should be excluded from the amount that could be realized. Companies are permitted to recognize the effects of applying the consensus through either (1) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets as of the beginning of the year of adoption or (2) a change in accounting principle through retrospective application to all prior periods. EITF 06-5 will be effective for fiscal years beginning after December 15, 2006. The Corporation will adopt EITF 06-5 in 2007 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108 provides guidance regarding the process of quantifying financial statement misstatements. In order to address the current diversity in practice, SAB 108 requires that registrants should quantify errors using both a balance sheet approach (the “iron curtain” method) and an income statement approach (the “rollover” approach). The balance sheet approach, also known as the “iron curtain” method, quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. The income statement, or “rollover” method, quantifies a misstatement based on the amount of the error originating in the current year income statement, while ignoring the carryover effects of prior year misstatements. SAB 108 requires companies to quantify an error under both the rollover and iron curtain approaches and by evaluating the materiality of the error measured under each approach. If deemed material, companies are required to adjust their financial statements. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The Corporation will adopt SAB 108 in the fourth quarter of 2006 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires the impact of a tax position to be recognized in the financial statements if that

position is more- likely-than-not of being sustained upon examination, based on the technical merits of the position. A tax position meeting the more-likely-than-not threshold is then to be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation will adopt FIN 48 in 2007 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140,” (“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. All separately recognized servicing assets and servicing liabilities are to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose either the amortization method or the fair value measurement method for subsequently measuring each class of separately recognized servicing assets or servicing liabilities. Under the amortization method, servicing assets or servicing liabilities are amortized in proportion to and over the period of estimated net servicing income or loss and servicing assets or servicing liabilities are assessed for impairment based on fair value at each reporting date. The fair value measurement method measures servicing assets and servicing liabilities at fair value at each reporting date with the changes in fair value recognized in earnings in the period in which the changes occur. SFAS 156 is effective for fiscal years beginning after September 15, 2006, and earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements for any period of that fiscal year. The Corporation will adopt SFAS 156 in 2007 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140,” (“SFAS 155”), effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133. Additionally, SFAS 155 establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 also amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Corporation will adopt SFAS 155 in 2007 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In December 2004, the FASB issued SFAS No. 123 (revised December 2004), “Share-Based Payment,” (“SFAS 123R”). SFAS 123R 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 in the first fiscal year beginning on or after June 15, 2005. 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 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. The Corporation adopted SFAS 123R effective January 1, 2006, using the modified prospective method. During the first nine months of 2006, as a result of the adoption of SFAS 123R, the Corporation recognized $0.7 million of compensation expense for unvested stock options and the $2.1 million unamortized deferred compensation relating to unvested restricted stock shares was no longer carried within stockholders’ equity. See Note 5 for additional information on stock-based compensation.

NOTE 4: Earnings Per Share

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options and, having a lesser impact, unvested restricted stock and unsettled share repurchases. Presented below are the calculations for basic and diluted earnings per share.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(In Thousands, except per share data)
Net income	$	76,888	$	81,035	$	242,144	$	232,520


Weighted average shares outstanding		131,520		127,875		132,951		128,825
Effect of dilutive stock awards and unsettled share repurchases		1,071		1,471		1,168		1,427

Diluted weighted average shares outstanding		132,591		129,346		134,119		130,252


Basic earnings per share	$	0.58	$	0.63	$	1.82	$	1.80


Diluted earnings per share	$	0.58	$	0.63	$	1.81	$	1.79

NOTE 5: Stock-Based Compensation

At September 30, 2006, the Corporation had three stock-based compensation plans (discussed below). All stock awards granted under these plans have an exercise price that is equal to the fair market value of the Corporation’s stock on the date the awards were granted. The stock incentive plans of acquired companies were terminated as to future option grants at each respective merger date. Option holders under such plans received the Corporation’s common stock, options to buy the Corporation’s common stock, or cash, based on the conversion terms of the various merger agreements.

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 transfer restrictions lapse over three or five years, depending upon whether the awards are fixed or performance-based, are contingent upon continued employment, and for performance-based awards are based on earnings per share performance goals.

Prior to January 1, 2006, the Corporation accounted for stock-based compensation cost under the intrinsic value method of APB 25 and related Interpretations, as allowed by SFAS 123. Under APB 25, compensation expense for employee stock options was generally not recognized if the exercise price of the option equaled or exceeded the fair value of the stock on the date of grant, as such options would have no intrinsic value at the date of grant. Therefore, no stock-based compensation cost was recognized in the consolidated statements of income for the first nine months of 2005, except with respect to restricted stock awards.

Effective January 1, 2006, the Corporation adopted the fair value recognition provisions of SFAS 123R using the modified prospective method. Under this method, compensation cost recognized during the first nine months of 2006 includes compensation cost for all share-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated.

As a result of adopting SFAS 123R on January 1, 2006, the Corporation’s income before income taxes and net income for the nine months ended September 30, 2006, would have been $0.7 million and $0.4 million higher, respectively, and for the three months ended September 30, 2006, would have been $0.2 million and $0.1 million higher, respectively, than if the Corporation had not adopted SFAS 123R. Basic and diluted earnings per share for both the nine and three months ended September 30, 2006, would have been relatively unchanged (i.e., no more than $0.01) if the Corporation had not adopted SFAS 123R.

Prior to the adoption of SFAS 123R, the Corporation presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS 123R requires the cash flows on the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

Stock-Based Compensation Plans:
In 1987 (as amended subsequently, and most recently in 2005), the Board of Directors, with subsequent approval of the Corporation’s shareholders, approved the Amended and Restated Long-Term Incentive Stock Plan (“Stock Plan”). Options are generally exercisable up to 10 years from the date of grant and vest ratably over three years. As of September 30, 2006, approximately 2.4 million shares remain available for grants.

The Board of Directors approved the implementation of a broad-based stock option grant effective July 28, 1999. The only stock option grant under this was in 1999, which provided all qualifying employees with an opportunity and an incentive to buy shares of the Corporation and align their financial interest with the growth in value of the Corporation’s shares. These options have 10-year terms, fully vested after two years, and have an exercise price equal to the market value on the date of grant. As of September 30, 2006, approximately 2.8 million shares remain available for grants.

In January 2003 (and as amended in 2005), the Board of Directors, with subsequent approval of the Corporation’s shareholders, approved the adoption of the 2003 Long-Term Incentive Plan (“2003 Plan”), which provides for the granting of options or other stock incentive awards (e.g., restricted stock awards) to key employees. Options are generally exercisable up to 10 years from the date of grant and vest ratably over three years. As of September 30, 2006, approximately 3.2 million shares remain available for grants.

In January 2005, both the Stock Plan and the 2003 Plan were amended 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 granted during 2005 were fully vested by year-end 2005. All stock options granted prior to 2005 vest ratably over 3 years, and those granted during 2006 will vest ratably over 3 years.

Accounting for Stock-Based Compensation:
The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model, while the fair value of restricted stock shares is their market value on the date of grant. The fair values of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is included in personnel expense in the consolidated statements of income.

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical volatility of the Corporation’s stock. The following assumptions were used in estimating the fair value for options granted in the comparable nine-month periods of 2006 and 2005:


	2006			2005

Dividend yield		3.23	%		3.21	%
Risk-free interest rate		4.44	%		3.81	%
Expected volatility		23.98	%		24.95	%
Weighted average expected life		6 yrs			6 yrs
Weighted average per share fair value of options	$	6.97		$	6.89

In accordance with SFAS 123R, the Corporation is required to estimate potential forfeitures of stock grants and adjust compensation expense recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in

estimated forfeitures will be recognized in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

A summary of the Corporation’s stock option activity for the nine months ended September 30, 2006, is presented below.


				Weighted Average		Weighted Average Remaining		Aggregate Intrinsic Value
Stock Options	Shares			Exercise Price		Contractual Term		(000s)

Outstanding at December 31, 2005		7,859,686		$	25.40
Granted		77,000			32.28
Exercised		(819,881	)		21.57
Forfeited		(130,450	)		31.38

Outstanding at September 30, 2006		6,986,355		$	25.81		6.13	$	46,724

Options exercisable at September 30, 2006		6,596,338		$	25.58		6.04	$	45,648

For the nine months ended September 30, 2006 and 2005, the intrinsic value of stock options exercised was $9.8 million and $11.8 million, respectively. (Intrinsic value represents the amount by which the market value of the underlying stock exceeds the exercise price of the stock option.) During the first nine months of 2006, $17.7 million was received for the exercise of stock options.

The following table summarizes information about the Corporation’s nonvested stock option activity for the nine months ended September 30, 2006:


				Weighted Average
Stock Options	Shares			Grant Date Fair Value

Nonvested at December 31, 2005		1,003,891		$	6.00
Granted		77,000			6.97
Vested		(663,051	)		5.87
Forfeited		(27,823	)		6.26

Nonvested at September 30, 2006		390,017		$	6.40

The total fair value of stock options that vested was $3.9 million and $13.9 million, respectively, for the comparable nine-month periods in 2006 and 2005. At September 30, 2006, the Corporation had $0.7 million of unrecognized compensation costs related to stock options that is expected to be recognized over a weighted-average period of 4 months.

The following table summarizes information about the Corporation’s restricted stock shares activity for the nine months ended September 30, 2006.


				Weighted Average
Restricted Stock	Shares			Grant Date Fair Value

Outstanding at December 31, 2005		72,500		$	28.70
Granted		92,300			33.50
Vested		(15,000	)		23.25
Forfeited		(2,700	)		33.60

Outstanding at September 30, 2006		147,100		$	32.18

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period. For performance-based restricted stock shares, the Corporation estimates the degree to which performance conditions will be met to determine the number of shares which will vest and the related compensation expense prior to the vesting date. Compensation expense is adjusted in the period such estimates change. At September 30, 2006, there were 42,500 shares of performance-based restricted stock shares that will vest only if certain earnings per share goals and service conditions are achieved. Failure to achieve the goals and service conditions will result in all or a portion of the shares being forfeited.

During the first nine months of 2006, 92,300 shares of restricted stock shares were awarded, of which, 2,700 shares were forfeited during the third quarter of 2006 and the remaining are restricted at September 30, 2006. During the second quarter of 2006, the Corporation estimated that the performance hurdles associated with 17,000 performance-based restricted stock shares would likely not be met, and thus, previously recognized expense related to these shares was reversed. Expense for restricted stock awards of approximately $722,000 and $865,000 was recorded for the nine months ended September 30, 2006 and 2005, respectively, and expense of approximately $278,000 and $251,000 was recorded for the three months ended September 30, 2006 and 2005, respectively. At September 30, 2006, the Corporation had $2.9 million of unrecognized compensation costs related to restricted stock shares that is expected to be recognized over a weighted-average period of 18 months.

During the second quarter of 2006, in connection with satisfying the Chief Executive Officer’s income tax withholding obligation related to his income from the vesting of 15,000 shares of restricted stock granted in 2003, he elected to surrender 6,480 shares of that grant valued at approximately $219,000 (or $33.82 per share). The effect to the Corporation of his surrendering shares to pay his income tax withholding obligation was an increase in treasury stock and a decrease in cash of approximately $219,000 in the second quarter of 2006.

The Corporation issues shares from treasury, when available, or new shares upon the exercise of stock options and vesting of restricted stock shares. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities.

As discussed above, results for prior periods have not been restated to reflect the effects of implementing SFAS 123R. The following table illustrates the effect on net income and earnings per share as if the Corporation had applied the fair value recognition provisions of SFAS 123 to options granted under the Corporation’s stock option plans for the prior periods presented. For purposes of this pro forma disclosure, the fair value of the options was estimated using a Black-Scholes option pricing model and amortized to expense over the options’ vesting periods. Under SFAS 123, the annual expense allocation methodology attributed a higher percentage of the reported expense to earlier years than to later years, resulting in accelerated expense recognition for pro forma disclosure purposes. In addition, given actions taken by management during 2005, the stock options issued in January 2005 fully vested on June 30, 2005, and the stock options issued in December 2005 fully vested on the date of grant, while the stock options issued during 2004 and in previous years will fully vest three years from the date of grant.


	For the Three			For the Nine
	Months Ended			Months Ended
	September 30,			September 30,
($ in Thousands, except per share amounts)	2005			2005

Net income, as reported	$	81,035		$	232,520
Add: Stock-based employee compensation expenses included in reported net income, net of related tax effects		151			519
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(489	)		(6,918	)

Net income, as adjusted	$	80,697		$	226,121


Basic earnings per share, as reported	$	0.63		$	1.80

Basic earnings per share, as adjusted	$	0.63		$	1.76


Diluted earnings per share, as reported	$	0.63		$	1.79

Diluted earnings per share, as adjusted	$	0.62		$	1.73

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. When valuing acquisitions, the Corporation considers a range of valuation methodologies, including comparable publicly-traded companies, comparable precedent transactions, and discounted cash flow. For the acquisition noted below, the resulting purchase price exceeded the value of the net assets acquired. To record the transaction, the Corporation assigns estimated fair values to the assets acquired, including identifying and measuring acquired intangible assets, and to liabilities assumed (using sources of information such as observable market prices or discounted cash flows). To identify intangible assets that should be measured, the Corporation determines if the asset arose from contractual or other legal rights or if the asset is capable of being separated from the acquired entity. When valuing identified intangible assets, the Corporation generally relies on valuation reports by independent third parties. In each acquisition, the excess cost of the acquisition over the fair value of the net assets acquired is allocated to goodwill.

State Financial Services Corporation (“State Financial”): On October 3, 2005, the Corporation consummated its acquisition of 100% of the outstanding shares of State Financial. Based on the terms of the agreement, the consummation of the transaction included the issuance of approximately 8.4 million shares of common stock and $11 million in cash. As of the date of acquisition, State Financial was a $2 billion financial services company based in Milwaukee, Wisconsin, with 29 banking branches in southeastern Wisconsin and northeastern Illinois, providing commercial and retail banking products. Goals of the acquisition were to expand the branch distribution network, improve operational efficiencies, and increase revenue streams. During the fourth quarter of 2005, the Corporation integrated and converted State Financial onto its centralized operating systems and merged State Financial into its banking subsidiary, Associated Bank, National Association.

To record the transaction, the Corporation assigned 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 $199 million, a core deposit intangible of approximately $15 million (with a ten-year estimated life), and other intangibles of $2 million (noncompete contracts) recognized at acquisition were assigned to the banking segment. During the third quarter of 2006, goodwill was reduced by $4 million attributable to finalizing the distribution of an employee stock ownership plan acquired with State Financial. The Corporation relied on valuation reports by independent third parties in valuing the core deposit intangible and the noncompete contracts. 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. See Note 8 for additional information.

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


	$ in Millions
Investment securities available for sale	$	348
Loans, net		979
Other assets		108
Intangible assets		17
Goodwill		199

Total assets acquired	$	1,651


Deposits	$	1,050
Borrowings		311
Other liabilities		9

Total liabilities assumed	$	1,370


Net assets acquired	$	281

NOTE 7: Investment Securities

The amortized cost and fair values of securities available for sale were as follows.


	September 30, 2006			September 30, 2005			December 31, 2005
	($ in Thousands)
Amortized cost	$	3,445,977		$	4,674,553		$	4,717,489
Gross unrealized gains		35,329			63,971			54,491
Gross unrealized losses		(44,532	)		(29,794	)		(60,375	)

Fair value	$	3,436,774		$	4,708,730		$	4,711,605

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, 2006.


	Less than 12 months					12 months or more					Total
	Unrealized					Unrealized					Unrealized
September 30, 2006	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value
	($ in Thousands)
U. S. Treasury securities	$	(9	)	$	1,980	$	—		$	—	$	(9	)	$	1,980
Federal agency securities		(404	)		46,440		(305	)		15,623		(709	)		62,063
Obligations of state and political subdivisions		(1,007	)		120,912		(629	)		54,999		(1,636	)		175,911
Mortgage-related securities		(5,544	)		421,315		(36,547	)		1,565,953		(42,091	)		1,987,268
Other securities (debt & equity)		(76	)		8,105		(11	)		289		(87	)		8,394

Total	$	(7,040	)	$	598,752	$	(37,492	)	$	1,636,864	$	(44,532	)	$	2,235,616

Management does not believe any individual unrealized loss at September 30, 2006 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 the Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses are primarily attributable to changes in interest rates and not credit deterioration. 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.

In late March 2006, $0.7 billion of investment securities were sold as part of the Corporation’s initiative to reduce wholesale borrowings that started in October 2005. Investment securities sales included losses of $15.8 million, offset by gains of $18.3 million on equity security sales, resulting in a net $2.5 million gain for first quarter 2006. The Corporation does not have a historical pattern of restructuring its balance sheet through large investment reductions. Balance sheet and net interest margin challenges in the first quarter of 2006 led to the targeted sale decision in support of its wholesale funding reduction initiative, and did not change the Corporation’s intent on the remaining investment portfolio.

The Corporation owns three FHLMC preferred stock securities that were determined to have an other-than-temporary impairment that resulted in a write-down of $2.2 million on these securities during 2004. At September 30, 2006, these securities were in an unrealized gain position with an amortized cost of $8.4 million and a fair value of $9.0 million.

For comparative purposes, 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 and December 31, 2005, respectively.


	Less than 12 months					12 months or more					Total
	Unrealized					Unrealized					Unrealized
September 30, 2005	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value
	($ in Thousands)
U. S. Treasury securities	$	(2	)	$	19,870	$	(282	)	$	31,707	$	(284	)	$	51,577
Federal agency securities		(880	)		120,733		(730	)		43,337		(1,610	)		164,070
Obligations of state and political subdivisions		(138	)		39,237		(148	)		24,320		(286	)		63,557
Mortgage-related securities		(8,446	)		922,320		(18,999	)		1,699,886		(27,445	)		2,622,206
Other securities (debt & equity)		(169	)		1,763		—			—		(169	)		1,763

Total	$	(9,635	)	$	1,103,923	$	(20,159	)	$	1,799,250	$	(29,794	)	$	2,903,173


	Less than 12 months					12 months or more					Total
	Unrealized					Unrealized					Unrealized
December 31, 2005	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value
	($ in Thousands)
U. S. Treasury securities	$	(16	)	$	22,830	$	(246	)	$	31,747	$	(262	)	$	54,577
Federal agency securities		(2,356	)		139,240		(1,079	)		40,960		(3,435	)		180,200
Obligations of state and political subdivisions		(2,890	)		263,308		(340	)		17,076		(3,230	)		280,384
Mortgage-related securities		(20,544	)		1,475,275		(32,559	)		1,450,647		(53,103	)		2,925,922
Other securities (debt & equity)		(337	)		15,050		(8	)		292		(345	)		15,342

Total	$	(26,143	)	$	1,915,703	$	(34,232	)	$	1,540,722	$	(60,375	)	$	3,456,425

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 2005 or through September 30, 2006. At September 30, 2006, goodwill of $850 million was assigned to the banking segment and goodwill of $22 million was assigned to the wealth management segment. The $6 million reduction to goodwill during the nine months ended September 30, 2006, resulted from a $4 million adjustment attributable to finalizing the dissolution of an employee stock ownership plan acquired with State Financial in October 2005 and a $2 million adjustment to the initially estimated fair values of tax liabilities related to the Corporation’s acquisition of a thrift in October 2004. The change in the carrying amount of goodwill was as follows.


	Nine months ended					Year ended
	September 30, 2006			September 30, 2005		December 31, 2005
	($ in Thousands)
Goodwill:
Balance at beginning of period	$	877,680		$	679,993	$	679,993
Goodwill acquired, net of adjustments		(6,051	)		—		197,687

Balance at end of period	$	871,629		$	679,993	$	877,680

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 $15 million are assigned to the wealth management segment and $1 million are assigned to the banking segment as of September 30, 2006.

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, 2006			September 30, 2005			December 31, 2005
	($ in Thousands)
Core deposit intangibles:
Gross carrying amount	$	43,363		$	28,202		$	43,363
Accumulated amortization		(14,401	)		(9,047	)		(10,508	)

Net book value	$	28,962		$	19,155		$	32,855


Additions during the period	$	—		$	—		$	15,161
Amortization during the period		(3,893	)		(2,978	)		(4,438	)

Other intangibles:
Gross carrying amount	$	26,348		$	24,578		$	26,348
Accumulated amortization		(10,697	)		(6,728	)		(7,686	)

Net book value	$	15,651		$	17,850		$	18,662


Additions during the period	$	—		$	—		$	1,770
Amortization during the period		(3,011	)		(3,211	)		(4,169	)

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. 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. 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, 2006			September 30, 2005			December 31, 2005
	($ in Thousands)
Mortgage servicing rights:
Mortgage servicing rights at beginning of period	$	76,236		$	91,783		$	91,783
Additions		11,508			14,015			18,496
Sale of servicing (1)		—			—			(10,087	)
Amortization		(15,196	)		(17,574	)		(23,134	)
Other-than-temporary impairment		(8	)		(80	)		(822	)

Mortgage servicing rights at end of period	$	72,540		$	88,144		$	76,236

Valuation allowance at beginning of period		(7,395	)		(15,537	)		(15,537	)
(Additions) / Reversals, net		2,778			6,000			7,320
Other-than-temporary impairment		8			80			822

Valuation allowance at end of period		(4,609	)		(9,457	)		(7,395	)

Mortgage servicing rights, net	$	67,931		$	78,687		$	68,841


Portfolio of residential mortgage loans serviced for others (1)	$	8,226,000		$	9,492,000		$	8,028,000
Mortgage servicing rights, net to Portfolio of residential mortgage loans serviced for others		0.83	%		0.83	%		0.86	%
Mortgage servicing rights expense (2)	$	12,418		$	11,574		$	15,814


(1)		The Corporation sold approximately $1.5 billion of its mortgage portfolio serviced for others with a carrying value of $10.1 million in the fourth quarter of 2005 at a $5.3 million gain, included in mortgage banking, net in the consolidated statements of income.

(2)		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.

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, 2006. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon acquisition or sale 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, 2006	$	1,300	$	700	$	4,900
Year ending December 31, 2007		4,500		1,900		17,600
Year ending December 31, 2008		3,900		1,200		14,400
Year ending December 31, 2009		3,600		1,100		11,100
Year ending December 31, 2010		3,200		1,100		8,600
Year ending December 31, 2011		3,200		1,000		6,300

NOTE 9: Long-term Funding

Long-term funding (funding with original contractual maturities greater than one year) was as follows.


	September 30,		September 30,		December 31,
	2006		2005		2005
	($ in Thousands)
Federal Home Loan Bank advances	$	925,515	$	1,357,840	$	1,290,722
Bank notes		825,000		925,000		925,000
Repurchase agreements		105,000		875,000		709,550
Subordinated debt, net		199,274		199,123		199,161
Junior subordinated debentures, net		215,696		181,987		217,534
Other borrowed funds		2,169		6,508		6,509

Total long-term funding	$	2,272,654	$	3,545,458	$	3,348,476

Federal Home Loan Bank (“FHLB”) advances: Long-term advances from the FHLB had maturities through 2020 and had weighted-average interest rates of 3.63% at September 30, 2006, compared to 3.29% at September 30, 2005 and 3.49% at December 31, 2005. These advances had a combination of fixed and variable rates, of which, 89% were fixed at September 30, 2006, while 78% and 77% were fixed at September 30, and December 31, 2005, respectively.

Bank notes: The long-term bank notes had maturities through 2008 and had weighted-average interest rates of 5.32% at September 30, 2006, 3.83% at September 30, 2005, and 4.31% at December 31, 2005. These notes had a combination of fixed and variable rates, of which 88% was variable rate at September 30, 2006, compared to 89% variable rate at both September 30, and December 31, 2005, respectively.

Repurchase agreements: The long-term repurchase agreements had maturities through 2009 and had weighted-average interest rates of 4.88% at September 30, 2006, 3.05% at September 30, 2005, and 3.55% at December 31, 2005. These repurchase agreements were 100% variable rate for all periods presented.

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 coupon 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 “ASBC Preferred Securities”). The ASBC Preferred Securities are traded on the New York Stock Exchange under the symbol “ABW PRA.” The ASBC Trust used the proceeds from the offering and

from the common stock to purchase a like amount of 7.625% Junior Subordinated Debentures (the “ASBC Debentures”) of the Corporation. The ASBC Preferred Securities accrue and pay dividends quarterly at a fixed annual rate of 7.625% of the stated liquidation amount of $25 per ASBC 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 ASBC Preferred Securities, but only to the extent of funds held by the ASBC Trust. The ASBC Preferred Securities are mandatorily redeemable upon the maturity of the ASBC Debentures on June 15, 2032, or upon earlier redemption. The Corporation has the right to redeem the ASBC Debentures, at par, on or after May 30, 2007. The ASBC Preferred Securities qualify under the risk-based capital guidelines as Tier 1 capital for regulatory purposes within certain limitations.

During 2002, the Corporation entered into interest rate swaps to hedge the interest rate risk on the ASBC Debentures. The fair value of the derivatives was a $1.8 million loss at September 30, 2006, compared to a $1.6 million gain at September 30, 2005 and a $0.2 million loss at December 31, 2005.

During the fourth quarter of 2005, as part of the State Financial acquisition, the Corporation acquired 100% of the common stock of SFSC Capital Trust II (the “SFSC Trust II”) and SFSC Capital Trust I (the “SFSC Trust I”). The SFSC Trust II and I each issued and sold $15 million of variable rate preferred securities (the “SFSC Preferred Securities”) and used the proceeds from the offerings and from the common stock to purchase a like amount of variable rate Junior Subordinated Debentures (the “SFSC Debentures”). The SFSC Preferred Securities accrue and pay dividends semi-annually at a variable dividend rate adjusted quarterly based on the 90-day LIBOR plus 2.80% and 3.45%, which was 8.29% and 8.86%, at September 30, 2006, for SFSC Trust II and I, respectively. The SFSC Preferred Securities are mandatorily redeemable upon the maturity of the SFSC Debentures on April 23, 2034 and November 7, 2032, respectively, or upon earlier redemption. The Corporation has the right to redeem the SFSC Debentures, at par, on January 23, 2009 and November 7, 2007, respectively, and quarterly thereafter.

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 the use of interest rate swaps and interest rate caps, and certain mortgage banking activities. Interest rate swaps and caps are entered into primarily as an asset/liability management strategy to modify interest rate risk.

Derivative instruments are required to be carried at fair value on the balance sheet with changes in the fair value recorded directly in earnings. If a derivative transaction qualifies to be designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the risk being hedged are recognized as an increase or decrease to the carrying value of the hedged item on the balance sheet and in the related income statement account. For fair value hedges in which the ineffectiveness is assumed to be zero, i.e. short cut hedges, the Corporation reviews the hedges on a quarterly basis to ensure the terms of the hedged item and hedging instrument remain unchanged. If the derivative qualifies to be 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 portion is recognized immediately in interest expense.

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 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 discontinued cash flow hedge changes in the fair value of the derivative would be recorded in earnings instead of through other comprehensive income, and for a discontinued fair value hedge the changes in fair value of the hedged asset or liability would no longer be recorded through earnings. No unrealized gains or losses were recorded

at September 30, 2006, as the Corporation had no cash flow hedges. When the cash flows associated with the hedged item are realized, the gain or loss is reclassified out of other comprehensive income and included in the same income statement account of the item being hedged.

The Corporation measures the effectiveness of its hedges, where applicable, at inception and each quarter on an ongoing basis. For a fair value hedge, the difference between the cumulative change in the fair value of the hedge instrument attributable to the risk being hedged versus the cumulative fair value change of the hedged item attributable to the risk being hedged is considered to be the “ineffective” portion, which is recorded as an increase or decrease in the related income statement classification of the item being hedged (i.e. net interest income). Ineffective portions of the changes in the fair value of cash flow hedges are recognized immediately in interest expense.

For the first nine months of 2006, the Corporation recognized combined ineffectiveness of $0.1 million (which increased net interest income), relating to the Corporation’s fair value hedges of long-term, fixed-rate commercial loans and a long-term, fixed-rate subordinated debenture. No components of the derivatives change in fair value were excluded from the assessment of hedge effectiveness. Prior to March 31, 2006, the Corporation had been using the short cut method of assessing hedge effectiveness for a fair value hedge with $175 million notional balance hedging a long-term, fixed-rate subordinated debenture. Effective March 31, 2006, the Corporation de-designated the hedging relationship under the short cut method and re-designated the hedging relationship under a long-haul method utilizing the same instruments.

The table below identifies the Corporation’s derivative instruments, excluding mortgage derivatives, at September 30, 2006, as well as which instruments received hedge accounting treatment. Included in the table below for September 30, 2006, 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 and of the mirror swaps and caps is recorded in earnings and the net impact for the first nine months of 2006 was immaterial.


	Notional		Estimated Fair			Weighted Average
	Amount		Market Value			Receive Rate			Pay Rate			Maturity
	($ in Thousands)
September 30, 2006
Swaps–receive fixed / pay variable (1)	$	175,000	$	(1,830	)		7.63	%		6.41	%	313 months
Swaps–receive variable / pay fixed (2)		235,375		2,898			7.31	%		6.50	%	63 months
Customer and mirror swaps (3)		404,303		—			5.06	%		5.06	%	68 months
Customer and mirror caps (3)		22,327		—			—			—		35 months


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

(2)		Fair value hedge accounting is applied on $235 million notional, which hedges long-term, fixed-rate commercial loans.

(3)		Hedge accounting is not applied on $427 million notional of interest rate swaps and caps entered into with our customers, whose value changes are offset by mirror swaps and caps entered into with third parties.

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, 2006, was a net loss of $1.1 million, comprised of the net loss on commitments to fund approximately $125 million of loans to individual borrowers and the net loss on commitments to sell approximately $176 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.

The following is a summary of lending-related commitments.


	September 30,
	2006		2005
	($ in Thousands)
Commitments to extend credit, excluding commitments to originate mortgage loans ^{(1) (2)}	$	5,825,882	$	4,908,235
Commercial letters of credit ⁽¹⁾		37,221		24,249
Standby letters of credit ⁽³⁾		624,237		464,727


(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, 2006 or 2005.

(2)		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.

(3)		The Corporation has established a liability of $5.0 million and $4.6 million at September 30, 2006 and 2005, 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 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 one acquired thrift (prior to its acquisition by the Corporation in October 2004) retained the credit risk on the underlying loans it sold to the FHLB, in exchange for a monthly credit enhancement fee. At September 30, 2006 and 2005, there were $1.8 billion and $2.1 billion, respectively, of such loans being serviced 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 (“the Associated Plan”) covering substantially all full-time employees. The benefits are based primarily on years of service and the employee’s compensation paid. The Corporation assumed a pension plan in connection with its acquisition of a thrift in October 2004, which was then frozen on December 31, 2004, and qualified participants in this plan became eligible to participate in the Associated Plan as of January 1, 2005. The net periodic benefit cost of the retirement plans combined was as follows.


	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
	($ in Thousands)
Components of Net Periodic Benefit Cost

Service cost	$	2,386		$	2,241		$	7,160		$	6,722
Interest cost		1,334			1,336			4,001			4,007
Expected return on plan assets		(2,388	)		(2,016	)		(7,163	)		(6,047	)
Amortization of:
Transition asset		(22	)		(81	)		(66	)		(243	)
Prior service cost		12			18			35			55
Actuarial loss		259			220			776			661

Total net periodic benefit cost	$	1,581		$	1,718		$	4,743		$	5,155

The Corporation contributed $23 million to its pension plan during the nine months ended September 30, 2006. 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 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, fund, and manage such banking services.

The wealth management segment provides a variety of fiduciary, investment management, advisory, and Corporate agency products and 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, 2006

Net interest income	$	503,116		$	369		$	—		$	503,485
Provision for loan losses		11,988			—			—			11,988
Noninterest income		163,917			74,617			(2,372	)		236,162
Depreciation and amortization		38,700			1,454			—			40,154
Other noninterest expense		299,032			50,199			(2,372	)		346,859
Income taxes		89,169			9,333			—			98,502

Net income	$	228,144		$	14,000		$	—		$	242,144

Percent of consolidated net income		94	%		6	%		—			100	%

Total assets	$	20,861,322		$	104,079		$	(38,878	)	$	20,926,523

Percent of consolidated total assets		100	%		—			—			100	%

Total revenues *	$	667,033		$	74,986		$	(2,372	)	$	739,647
Percent of consolidated total revenues*		90	%		10	%		—			100	%

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

Percent of consolidated net income		94	%		6	%		—			100	%

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

Percent of consolidated total assets		100	%		—			—			100	%

Total revenues *	$	654,093		$	70,503		$	(320	)	$	724,276
Percent of consolidated total revenues*		90	%		10	%		—			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, 2006

Net interest income	$	168,118		$	99		$	—		$	168,217
Provision for loan losses		3,837			—			—			3,837
Noninterest income		54,865			23,979			(790	)		78,054
Depreciation and amortization		12,666			457			—			13,123
Other noninterest expense		100,583			15,839			(790	)		115,632
Income taxes		33,678			3,113			—			36,791

Net income	$	72,219		$	4,669		$	—		$	76,888

Percent of consolidated net income		94	%		6	%		—			100	%

Total assets	$	20,861,322		$	104,079		$	(38,878	)	$	20,926,523

Percent of consolidated total assets		100	%		—			—			100	%

Total revenues *	$	222,983		$	24,078		$	(790	)	$	246,271
Percent of consolidated total revenues*		90	%		10	%		—			100	%

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

Percent of consolidated net income		96	%		4	%		—			100	%

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

Percent of consolidated total assets		100	%		—			—			100	%

Total revenues *	$	224,931		$	22,039		$	(72	)	$	246,898
Percent of consolidated total revenues*		91	%		9	%		—			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.

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 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 following discussion refers to the Corporation’s business combination activity that may impact the comparability of certain financial data (see also Note 6, “Business Combinations,” of the notes to consolidated financial statements). In particular, consolidated financial results for the first nine months of 2005 reflect no contribution from its October 3, 2005 purchase acquisition of State Financial, which at acquisition was a $2 billion financial services company.

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, 2006 (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 $1.4 million higher (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 $2.0 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 some or all 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 the second quarter of 2005, certain interest rate swaps and an interest rate cap lost hedge accounting treatment as determined by the Corporation, and a $6.7 million net loss was recorded in other income for the quarter ended June 30, 2005, which after tax was a $4.0 million reduction to net income. Certain derivative instruments that lost hedge accounting in the second quarter of 2005 were subsequently terminated in the third quarter of 2005 at a net gain of $1.0 million recorded in other income. The Corporation continues to evaluate its future hedging strategies. See Note 10, “Derivatives 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 judgment 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 a variety of fiduciary, investment management, advisory, and Corporate agency products and 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 consolidated total revenues and 94% of consolidated net income for the first nine months of 2006, 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 therefore predominantly describes the banking segment results. The Corporation’s 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”).

The contribution from the wealth management segment to consolidated net income and total revenues (as defined and disclosed in Note 13, “Segment Reporting,” of the notes to consolidated financial statements) was approximately 6% and 10%, respectively, for both comparable nine-month periods in 2006 and 2005. Wealth management segment revenues were up $4 million (6%) and expenses were up $3 million (7%) between the first nine months of 2006 and the first nine months of 2005. Wealth segment assets (which consist predominantly of cash equivalents, investments, customer receivables, goodwill and intangibles) were up $16 million (18%) between September 30, 2006 and September 30, 2005, predominantly cash equivalents. The major components of wealth management revenues are trust fees, insurance fees and commissions, and brokerage commissions, which are

individually discussed in section “Noninterest Income.” The major expenses for the wealth management segment are personnel expense (72% and 71%, respectively, of total segment noninterest expense for year-to-date 2006 and the comparable period in 2005), as well as occupancy, processing, and other costs, which are covered generally in the consolidated discussion in section “Noninterest Expense.” See also Note 8, “Goodwill and Other Intangible Assets,” of the notes to consolidated financial statements for additional disclosure related to goodwill and other intangible assets assigned to the wealth management segment.

Results of Operations – Summary

TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)


	3rd Qtr.			2^nd Qtr.			1^st Qtr.			4th Qtr.			3^rd Qtr.
	2006			2006			2006			2005			2005

Net income (Quarter)	$	76,888		$	83,549		$	81,707		$	87,641		$	81,035
Net income (Year-to-date)		242,144			165,256			81,707			320,161			232,520

Earnings per share – basic (Quarter)	$	0.58		$	0.63		$	0.60		$	0.65		$	0.63
Earnings per share – basic (Year-to-date)		1.82			1.24			0.60			2.45			1.80

Earnings per share – diluted (Quarter)	$	0.58		$	0.63		$	0.60		$	0.64		$	0.63
Earnings per share – diluted (Year-to-date)		1.81			1.23			0.60			2.43			1.79

Return on average assets (Quarter)		1.46	%		1.58	%		1.52	%		1.58	%		1.56	%
Return on average assets (Year-to-date)		1.52			1.55			1.52			1.53			1.51

Return on average equity (Quarter)		13.36	%		14.86	%		14.16	%		14.99	%		15.85	%
Return on average equity (Year-to-date)		14.12			14.51			14.16			15.24			15.33

Return on tangible average equity (Quarter) (1)		22.32	%		25.18	%		23.48	%		22.70	%		24.55	%
Return on tangible average equity (Year-to-date) (1)		23.64			24.31			23.48			23.47			23.78

Efficiency ratio (Quarter) (2)		50.19	%		49.82	%		51.00	%		48.38	%		47.90	%
Efficiency ratio (Year-to-date) (2)		50.33			50.40			51.00			48.99			49.20

Net interest margin (Quarter)		3.63	%		3.59	%		3.48	%		3.59	%		3.56	%
Net interest margin (Year-to-date)		3.56			3.53			3.48			3.64			3.62


(1)		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.

(2)		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, 2006 totaled $242.1 million, or $1.82 and $1.81 for basic and diluted earnings per share, respectively. Comparatively, net income for the nine months ended September 30, 2005 was $232.5 million, or $1.80 and $1.79 for basic and diluted earnings per share, respectively. Year-to-date 2006 results generated an annualized return on average assets of 1.52% and an annualized return on average equity of 14.12%, compared to 1.51% and 15.33%, respectively, for the comparable period in 2005. The net interest margin for the first nine months of 2006 was 3.56% compared to 3.62% for the first nine months of 2005.

Net Interest Income and Net Interest Margin

Net interest income on a taxable equivalent basis for the nine months ended September 30, 2006, was $523 million, an increase of $7.8 million (1.5%) over the comparable period last year. As indicated in Tables 2 and 3, the $7.8 million increase in taxable equivalent net interest income was attributable principally to favorable volume variances (with balance sheet changes from the State Financial acquisition, organic growth and corporate initiatives adding $24.5 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 $16.7 million).

The net interest margin for the first nine months of 2006 was 3.56%, down 6 bp from 3.62% for the comparable period in 2005. This comparable period decrease was a function of a 23 bp decrease in interest rate spread (the net of a 122 bp increase in the cost of interest-bearing liabilities and a 99 bp increase in the yield on earning assets) offset in part by 17 bp higher contribution from net free funds (attributable largely to the higher interest rate environment in 2006 which increased the value of noninterest-bearing demand deposits, a principal component of net free funds).

The Federal Reserve raised interest rates by 300 bp since the beginning of 2005, resulting in an average Federal funds rate of 4.86% for the first nine months of 2006, 193 bp higher than the average Federal funds rate during the comparable 2005 period. The prolonged flattening of the yield curve (i.e., rising short-term interest rates without commensurate increases to longer-term rates), together with competitive pricing on both loans and deposits put downward pressure on the interest rate spread.

The year-to-date 2006 yield on earning assets was 6.67%, 99 bp higher than the comparable nine-month period last year, aided in part by higher-yielding loans representing a larger percentage of earning assets. The average loan yield was up 108 bp to 7.09%, 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 increased 30 bp to 5.02%, in part, impacted favorably by the sale of $0.7 billion of targeted low-yielding investment securities in March 2006. See Note 7, “Investment Securities,” of the notes to consolidated financial statements and section “Balance Sheet” for additional information.

The year-to-date 2006 cost of interest-bearing liabilities was 3.62%, up 122 bp compared to the same period in 2005, principally reflecting the rising rate environment, though mitigated, in part, as lower-costing deposits represented a larger percentage of interest-bearing liabilities. The average cost of interest-bearing deposits increased 119 bp to 3.14%, given aggressive pricing to attract and retain business and municipal deposits. The cost of wholesale funding (comprised of short-term borrowings and long-term funding) was 4.62%, up 149 bp from year-to-date 2005. Short-term borrowings were the most directly impacted by the higher interest rates between comparable periods, increasing 179 bp to 4.75%, while long-term funding rose 121 bp to 4.48%.

Average earning assets of $19.4 billion, were up $0.5 billion (2.8%) over the comparable nine-month period last year, with the State Financial acquisition and organic growth adding to earning assets, while corporate initiatives reduced the level of investments. On average, loans of $15.4 billion for the first nine months of 2006, increased $1.3 billion (9.5%), with State Financial adding $1.0 billion of loans at acquisition. The overall growth in average loans was comprised of increases in commercial loans (up $1.2 billion) and retail loans (up $0.2 billion, primarily in home equity), while residential mortgages decreased slightly (down $0.1 million). Average loans represented 79% of average earning assets for the first nine months of 2006, compared to 75% for the comparable 2005 period. Average investments of $4.0 billion decreased by $0.8 billion from the average investments of $4.8 billion for the first nine months of 2005. The decrease was the net result of $0.3 billion added from State Financial at acquisition and a $1.1 billion net reduction from maturities and sales in conjunction with the corporate initiative whereby cash flows from maturing or sold investments beginning in the fourth quarter 2005 were not reinvested, but used to reduce wholesale funding and repurchase stock.

Average interest-bearing liabilities of $16.7 billion increased by $0.5 billion (3.0%) over the comparable period in 2005, supporting the growth in earning assets. Average interest-bearing deposits were higher by $1.3 billion and net free funds (largely noninterest-bearing demand deposits) were up slightly, with State Financial adding deposits of $1.0 billion at consummation. Average interest-bearing deposits represented 68% of average interest-bearing liabilities for the first nine months of 2006, compared to 62% for the comparable 2005 period. Average wholesale funding balances declined between the nine-month periods by $0.8 billion (with long-term funding down $0.7 billion and short-term borrowings down $0.1 billion), as a result of the wholesale funding reduction strategy cited above. As a percentage of total average interest-bearing liabilities, wholesale funding declined to 32% for the first nine months of 2006 compared to 38% for the same period in 2005.

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


	Nine Months ended September 30, 2006							Nine Months ended September 30, 2005
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate

Earning assets:
Loans: (1) (2) (3) (4)
Commercial	$	9,534,532	$	525,319		7.27	%	$	8,356,785	$	375,704		5.93	%
Residential mortgage		2,804,961		122,006		5.80			2,865,319		119,614		5.56
Retail		3,076,726		178,541		7.74			2,853,809		142,965		6.68

Total loans		15,416,219		825,866		7.09			14,075,913		638,283		6.01
Investments and other (1)		3,987,542		150,212		5.02			4,802,670		169,942		4.72

Total earning assets		19,403,761	$	976,078		6.67			18,878,583	$	808,225		5.68
Other assets, net		1,935,900							1,672,053

Total assets	$	21,339,661						$	20,550,636


Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits	$	1,037,542	$	2,921		0.38	%	$	1,116,871	$	3,077		0.37	%
Interest-bearing demand deposits		2,087,670		26,950		1.73			2,380,397		19,530		1.10
Money market deposits		3,188,616		84,086		3.53			2,140,763		28,505		1.78
Time deposits, excluding Brokered CDs		4,398,820		129,618		3.94			3,996,324		86,545		2.90

Total interest-bearing deposits, excluding Brokered CDs		10,712,648		243,575		3.04			9,634,355		137,657		1.91
Brokered CDs		579,650		21,621		4.99			364,381		8,461		3.10

Total interest-bearing deposits		11,292,298		265,196		3.14			9,998,736		146,118		1.95
Wholesale funding		5,368,157		187,732		4.62			6,183,220		146,704		3.13

Total interest-bearing liabilities		16,660,455	$	452,928		3.62			16,181,956	$	292,822		2.40

Noninterest-bearing demand deposits		2,289,368							2,187,931
Other liabilities		97,241							153,077
Stockholders’ equity		2,292,597							2,027,672

Total liabilities and equity	$	21,339,661						$	20,550,636


Interest rate spread						3.05	%						3.28	%
Net free funds						0.51							0.34

Taxable equivalent net interest income and net interest margin			$	523,150		3.56	%			$	515,403		3.62	%

Taxable equivalent adjustment				19,665							18,743

Net interest income			$	503,485						$	496,660


(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.

(4)		Commercial includes commercial, financial, and agricultural, real estate construction, commercial real estate, and lease financing; residential mortgage includes residential mortgage first liens; and retail includes home equity lines, residential mortgage junior liens, and installment loans (such as educational and other consumer loans).

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


	Three Months ended September 30, 2006							Three Months ended September 30, 2005
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate

Earning assets:
Loans: (1) (2) (3) (4)
Commercial	$	9,571,264	$	182,603		7.47	%	$	8,411,678	$	134,503		6.26	%
Residential mortgage		2,727,101		40,348		5.89			2,880,685		40,253		5.56
Retail		3,105,858		62,127		7.96			2,871,464		48,940		6.78

Total loans		15,404,223		285,078		7.29			14,163,827		223,696		6.22
Investments and other (1)		3,564,361		45,990		5.16			4,796,208		56,042		4.67

Total earning assets		18,968,584	$	331,068		6.89			18,960,035	$	279,738		5.83
Other assets, net		1,922,417							1,647,866

Total assets	$	20,891,001						$	20,607,901

Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits	$	993,677	$	998		0.40	%	$	1,097,955	$	1,024		0.37	%
Interest-bearing demand deposits		1,740,296		7,571		1.73			2,193,600		6,107		1.10
Money market deposits		3,582,339		34,438		3.81			2,198,538		11,822		2.13
Time deposits, excluding Brokered CDs		4,433,660		47,049		4.21			3,913,389		30,395		3.08

Total interest-bearing deposits, excluding Brokered CDs		10,749,972		90,056		3.32			9,403,482		49,348		2.08
Brokered CDs		684,150		9,186		5.33			487,305		4,250		3.46

Total interest-bearing deposits		11,434,122		99,242		3.44			9,890,787		53,598		2.15
Wholesale funding		4,636,853		57,114		4.83			6,307,705		55,715		3.47

Total interest-bearing liabilities		16,070,975	$	156,356		3.84			16,198,492	$	109,313		2.66

Noninterest-bearing demand deposits		2,450,282							2,242,932
Other liabilities		85,811							138,692
Stockholders’ equity		2,283,933							2,027,785

Total liabilities and equity	$	20,891,001						$	20,607,901

Interest rate spread						3.05	%						3.17	%
Net free funds						0.58							0.39

Taxable equivalent net interest income and net interest margin			$	174,712		3.63	%			$	170,425		3.56	%

Taxable equivalent adjustment				6,495							6,347
Net interest income			$	168,217						$	164,078

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


	Comparison of									Comparison of
	Nine months ended Sept. 30, 2006 versus 2005									Three months ended Sept. 30, 2006 versus 2005
	Income/Expense			Variance Attributable to						Income/Expense			Variance Attributable to
	Variance (1)			Volume			Rate			Variance (1)			Volume			Rate

INTEREST INCOME: (2)
Loans:
Commercial	$	149,615		$	57,878		$	91,737		$	48,100		$	20,138		$	27,962
Residential mortgage		2,392			(2,555	)		4,947			95			(2,206	)		2,301
Retail		35,576			11,330			24,246			13,187			4,173			9,014

Total loans		187,583			66,653			120,930			61,382			22,105			39,277
Investments and other		(19,730	)		(30,788	)		11,058			(10,052	)		(15,521	)		5,469

Total interest income	$	167,853		$	35,865		$	131,988		$	51,330		$	6,584		$	44,746

INTEREST EXPENSE:
Interest-bearing deposits:
Savings deposits	$	(156	)	$	(222	)	$	66		$	(26	)	$	(101	)	$	75
Interest-bearing demand deposits		7,420			(2,645	)		10,065			1,464			(1,453	)		2,917
Money market deposits		55,581			18,508			37,073			22,616			10,045			12,571
Time deposits, excluding brokered CDs		43,073			9,403			33,670			16,654			4,435			12,219


Interest-bearing deposits, excluding brokered CDs		105,918			25,044			80,874			40,708			12,926			27,782
Brokered CDs		13,160			6,494			6,666			4,936			2,114			2,822

Total interest-bearing deposits		119,078			31,538			87,540			45,644			15,040			30,604
Wholesale funding		41,028			(20,162	)		61,190			1,399			(16,436	)		17,835

Total interest expense		160,106			11,376			148,730			47,043			(1,396	)		48,439

Net interest income, taxable equivalent	$	7,747		$	24,489		$	(16,742	)	$	4,287		$	7,980		$	(3,693	)


(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

At September 30, 2006, the allowance for loan losses was $203.4 million, unchanged from December 31, 2005, and up from $190.1 million at September 30, 2005. The provision for loan losses for the first nine months of 2006 was $12.0 million, compared to $9.3 million for the same period in 2005. Net charge offs were $12.0 million and $9.0 million for the nine months ended September 30, 2006 and 2005, respectively. Annualized net charge offs as a percent of average loans for year-to-date 2006 were 0.10%, compared to 0.09% for both the full year 2005 and the comparable year-to-date period in 2005. The ratio of the allowance for loan losses to total loans was 1.33%, down from 1.34% at December 31, 2005, and 1.35% at September 30, 2005. Nonperforming loans at September 30, 2006, were $128.6 million (or 0.84% of loans), compared to $98.6 million (or 0.65% of loans) at December 31, 2005, and $110.7 million (or 0.78% of loans) at September 30, 2005. See Table 8 for additional details.

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 and delinquencies 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, 2006, noninterest income was $221.0 million, up $10.9 million or 5.2% compared to $210.1 million for year-to-date 2005. The first nine months of 2005 carry no financial results from the October 2005 State Financial acquisition. (See also Table 12 for detailed trends of selected quarterly information.)

Core fee-based revenues of trust service fees, service charges on deposits, card-based and other non-deposit fees, and retail commissions totaled $172.5 million, up 7.8% over $160.1 million for the comparable nine month period of 2005. Net mortgage banking income was down 46.1% between year-to-date periods, as the real estate market continues to experience a slowdown. All other noninterest income sources combined (including BOLI, net asset and investment securities gains, and other income) totaled $35.4 million for the first nine months of 2006, compared to $25.8 million last year.

TABLE 4
Noninterest Income
($ in Thousands)


	3rd Qtr.		3rd Qtr.		Dollar			Percent			YTD		YTD		Dollar			Percent
	2006		2005		Change			Change			2006		2005		Change			Change

Trust service fees	$	9,339	$	8,667	$	672			7.8	%	$	27,543	$	25,962	$	1,581			6.1	%
Service charges on deposit accounts		23,438		22,830		608			2.7			67,379		63,710		3,669			5.8
Mortgage banking income		8,450		13,324		(4,874	)		(36.6	)		25,484		35,803		(10,319	)		(28.8	)
Mortgage servicing rights (“MSR”) expense		5,617		1,355		4,262			314.5			12,418		11,574		844			7.3

Mortgage banking, net		2,833		11,969		(9,136	)		(76.3	)		13,066		24,229		(11,163	)		(46.1	)
Card-based & other nondeposit fees		10,461		9,505		956			10.1			31,394		27,406		3,988			14.6
Retail commissions		14,360		12,905		1,455			11.3			46,203		42,980		3,223			7.5
Bank owned life insurance (“BOLI”) income		4,390		2,441		1,949			79.8			11,053		6,920		4,133			59.7
Other		6,911		6,260		651			10.4			18,957		14,719		4,238			28.8

Subtotal		71,732		74,577		(2,845	)		(3.8	)		215,595		205,926		9,669			4.7
Asset sale gains, net		89		942		(853	)		N/M			213		1,179		(966	)		N/M
Investment securities gains, net		1,164		1,446		(282	)		N/M			5,158		2,937		2,221			N/M

Total noninterest income	$	72,985	$	76,965	$	(3,980	)		(5.2	)%	$	220,966	$	210,042	$	10,924			5.2	%


		N/M – Not meaningful.

Trust service fees were $27.5 million, up $1.6 million (6.1%) between the comparable nine-month periods. The change was primarily the result of an improved stock market, particularly starting late in 2005. The market value of assets under management was $5.46 billion and $4.89 billion at September 30, 2006 and 2005, respectively.

Service charges on deposit accounts were $67.4 million, up $3.7 million (5.8%) over the comparable nine-month period last year. The increase was primarily a function of higher volumes associated with the increased deposit account base, including fees on nonsufficient funds up $3.3 million (7.8%) and service charges on personal accounts up $0.5 million (6.1%).

Net mortgage banking income was $13.1 million for the first nine months of 2006, down $11.1 million (46.1%) from the first nine months of 2005. The net decrease was a result of lower mortgage banking revenues (down $10.3 million, with servicing fees down $3.3 million and net gains on sales and other fees down $7.0 million), and higher mortgage servicing rights (“MSR”) expense (unfavorable by $0.8 million). Servicing fees declined (down $3.3 million) in relation to the residential mortgage portfolio serviced for others which was down 15% on average from the first nine months of 2005, due principally to the Corporation’s sale of approximately $1.5 billion of its servicing portfolio at a $5.3 million gain recorded late in the fourth quarter of 2005. Net gains on sales and other fees (down $7.0 million) were affected by lower margins on sales between the years and lower secondary mortgage production to sell which was down 19% (from $1.2 billion to $1.0 billion for the nine months of 2005 and 2006, respectively).

MSR expense is affected primarily by changes in estimated prepayment speeds and related movements in the estimated fair value of the MSR asset. MSR expense for the nine months ended September 30, 2006, was $0.8 million higher than the comparable period in 2005, with $2.4 million lower base amortization on the MSR asset (in line with the reduced MSR asset following the bulk sale of servicing in the fourth quarter of 2005) and $3.2 million lower valuation reserve recovery (i.e. a $2.8 million valuation recovery in the first nine months of 2006 compared to a $6.0 million valuation recovery in the first nine months of 2005). As mortgage interest rates rise, prepayment speeds are usually slower and the value of the MSR asset generally increases, requiring less valuation reserve. At September 30, 2006, the net MSR asset was $67.9 million, representing 83 basis points of the $8.23 billion mortgage portfolio serviced for others, compared to a net MSR asset of $78.7 million, representing 83 basis points of the $9.49 billion servicing portfolio at September 30, 2005. The valuation of the mortgage servicing rights asset is considered a critical accounting policy. 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.

Card-based and other nondeposit fees were $31.4 million, up $4.0 million (14.6%) over the first nine months of 2005, aided by the inclusion of State Financial accounts, increases in card-related inclearing and other fees, and higher ancillary loan fees. Retail commissions (which include commissions from insurance and brokerage product sales) were $46.2 million for the first nine months of 2006, up $3.2 million (7.5%) compared to the first nine months of 2005, attributable to increased sales. Insurance commissions of $33.4 million were up $1.7 million (5.3%), fixed annuity commissions of $6.4 million were up $1.4 million (28.9%), and brokerage (including variable annuities) of $6.4 million was up $0.1 million, compared to the first nine months of 2005.

BOLI income was $11.1 million, up $4.1 million (59.7%) from the first nine months of 2005, a direct result of additional BOLI balances between the periods and the 2006 upward repricing of BOLI investments. Other income was $19.0 million for the first nine months of 2006, compared to $14.7 million for the first nine months of 2005, with 2005 including a $5.7 million net loss on derivatives no longer accounted for as hedges (see also section “Critical Accounting Policies”), offset partly by a $4.5 million non-recurring gain due to cash received from the dissolution of stock in a regional ATM network. The remaining increase in other income resulted from higher miscellaneous fees (such as check charge income, international banking income, and safe deposit box revenues).

For the first nine months of 2006, net investment securities gains were $5.2 million. Gains on equity securities sales of $21.0 million were offset by losses of $15.8 million, predominantly from the March 2006 sale of $0.7 billion of investments as part of the Corporation’s initiative to reduce wholesale borrowings. Net investment securities gains of $2.9 million for the first nine months of 2005 included gains of $3.1 million on the sale of common stock holdings and losses of $0.2 million on the sale of mortgage-related securities.

Noninterest Expense

Noninterest expense was $371.8 million for the first nine months of 2006, up $16.9 million (4.8%) over the comparable period last year, reflecting the larger operating base attributable to the October 2005 State Financial acquisition, offset partly by a focus on expense control. The first nine months of 2005 carry no financial results from State Financial. (See also Table 12 for detailed trends of selected quarterly information.)

Personnel expense, up $8.8 million or 4.3%, accounted for approximately half of the increase in total noninterest expense, while all remaining expense categories on a combined basis were up $8.1 million or 5.5%. Included in personnel expense for the first nine months of 2006 was $0.7 million of compensation expense related to unvested stock options, due to the Corporation’s required adoption of SFAS 123R effective January 1, 2006. See Note 3, “New Accounting Pronouncements,” and Note 5, “Stock-Based Compensation,” of the notes to consolidated financial statements for additional disclosure. The Corporation had anticipated that the expense recorded in 2006 would not be significant given that the expense would be based on the unvested options granted in 2003 and 2004, with no expense from the options granted in 2005 (as these options were fully vested by year-end 2005), and no significant option grants to be made in 2006.

TABLE 5
Noninterest Expense
($ in Thousands)


	3rd Qtr.			3rd Qtr.			Dollar			Percent			YTD			YTD			Dollar			Percent
	2006			2005			Change			Change			2006			2005			Change			Change

Personnel expense	$	71,321		$	66,403		$	4,918			7.4	%	$	215,116		$	206,322		$	8,794			4.3	%
Occupancy		10,442			9,412			1,030			10.9			32,854			28,674			4,180			14.6
Equipment		4,355			4,199			156			3.7			13,166			12,431			735			5.9
Data processing		7,190			7,129			61			0.9			21,537			20,150			1,387			6.9
Business development & advertising		4,142			4,570			(428	)		(9.4	)		12,492			12,662			(170	)		(1.3	)
Stationery and supplies		1,787			1,599			188			11.8			5,345			5,087			258			5.1
Other intangible amortization expense		2,280			1,903			377			19.8			6,904			6,189			715			11.6
Legal and professional		2,981			2,232			749			33.6			8,816			7,614			1,202			15.8
Postage		1,877			1,632			245			15.0			5,589			4,992			597			12.0
Other		17,311			18,269			(958	)		(5.2	)		49,998			50,803			(805	)		(1.6	)

Total noninterest expense	$	123,686		$	117,348		$	6,338			5.4	%	$	371,817		$	354,924		$	16,893			4.8	%

Efficiency ratio *		50.19	%		47.90	%								50.33	%		49.20	%


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

Personnel expense (including salary-related expenses and fringe benefit expenses) was $215.1 million for the first nine months of 2006, up $8.8 million (4.3%) over the first nine months of 2005, in part as the number of full time equivalent employees increased by an average of 4%. Salary-related expenses were up $4.2 million (2.6%), with higher net salaries (up $7.6 million or 6.2%) from the larger employee base and merit increases between the years, largely offset by lower overtime and severance costs (down $1.7 million combined), as well as lower incentives and commission-based pay (down $1.7 million combined). Fringe benefit expenses were up $4.6 million (9.5%) over the comparable 2005 period, in response to the larger salary base and higher premium-based benefits (due to rising health care costs and increased claims experience), offset partly by reductions in other benefit plans (primarily profit sharing ).

Between the comparable nine-month periods, occupancy expense was up $4.2 million, equipment expense was up $0.7 million, data processing was up $1.4 million, and postage was up $0.6 million, in part due to the rise in the cost of underlying services (such as utilities, rent, property taxes and postage), as well as increased costs to support the larger operating base in terms of the number of branches, employees, and accounts serviced (such as higher depreciation, technology expenditures, third party processing, and mailing costs).

Business development and advertising was down slightly ($0.2 million or 1.3%), and other expense was down ($0.8 million or 1.6%), while stationery and supplies were up modestly ($0.3 million or 5.1%) between the comparable nine-month periods, reflecting efforts to control selected discretionary expenses. Intangible amortization expense increased $0.7 million, primarily a function of amortizing intangible assets added from the 2005 acquisition. Legal and professional expenses were up $1.2 million over the first nine months of 2005, predominantly from increased consultant costs.

Income Taxes

Income tax expense for the first nine months of 2006 was $98.5 million compared to $109.9 million for the first nine months of 2005. The effective tax rate (income tax expense divided by income before taxes) was 28.9% and 32.1% for the comparable nine-month periods of 2006 and 2005, respectively. The decline in the effective tax rate was primarily due to the first quarter 2006 resolution of certain multi-jurisdictional tax issues for certain years, which resulted in the reduction of previously recorded tax liabilities and reduced income tax expense in the first quarter of 2006, as well as a $4.2 million reduction of income tax expense during the second quarter of 2006 related to changes in exposure of uncertain tax positions. In addition, the Corporation entered into a confidential settlement agreement with the State of Wisconsin regarding its Nevada investment subsidiaries during the first quarter of 2006.

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

In October 2005, the Corporation began a year-long initiative to use cash flows from maturing or sold investments to substantially reduce wholesale funding and repurchase common stock when opportunistic, toward improving the net interest margin, the balance sheet position, and the quality of earnings. Additionally, in October 2005, the Corporation acquired State Financial (see Note 6, “Business Combinations,” of the notes to consolidated financial statements).

Consequently, total assets at September 30, 2006, of $20.9 billion, were up slightly ($0.2 billion or 0.9%) over total assets at September 30, 2005, impacted predominantly by growth in loans (up $1.2 billion or 8.3%, including $1.0 billion from State Financial at acquisition), net of a decline in investment securities (down $1.3 million or 27.0%, including $0.3 billion from State Financial at acquisition, but more than offset by maturing and sold investment securities including the targeted sale of $0.7 billion of investment securities in March 2006).

Commercial loans were $9.6 billion, up $1.1 billion or 13.4%, and represented 63% of total loans at September 30, 2006, compared to 60% at September 30, 2005. Retail loans grew $0.2 billion or 7.0% to represent 20% of total loans (unchanged from 20% of total loans at September 30, 2005), while residential mortgage loans decreased $0.1 billion to represent 17% of total loans compared to 20% a year earlier. Due to the year-over-year decrease in investment securities, total loans grew to represent 73% of total assets at September 30, 2006, compared to 68% a year earlier.

At September 30, 2006, total deposits were $14.2 billion, up $2.0 billion or 16.6% over September 30, 2005 (including $1.0 billion added from State Financial at acquisition). In general, savings and interest-bearing demand deposits were declining as customer behavior and product choices shifted deposits into higher-yielding money market or time deposits, and a checking product design change by the Corporation in third quarter 2006 also affected a shift of interest-bearing demand to noninterest-bearing demand. As a result, money market deposits accounted for $1.7 billion of the increase in total deposits and grew to represent 28% of total deposits at September 30, 2006 compared to 18% a year earlier. Also notable were noninterest-bearing demand and other time deposits which grew $0.3 billion and $0.5 billion, respectively, between September period ends, while savings and interest-bearing demand deposits fell $0.7 billion on a combined basis.

Since September 30, 2005, and after adjusting for the $0.3 billion acquired with the State Financial acquisition, wholesale funding was reduced by $2.4 billion to $4.3 billion, reducing the ratio of wholesale funding to total funding (defined as wholesale funding plus total deposits) from 34% at September 30, 2005, to 23% at September 30, 2006. Since September 30, 2005, the Corporation repurchased 7 million shares of its outstanding common stock under accelerated share repurchase agreements for approximately $228 million.

Since year-end 2005 total assets declined $1.2 billion or 5.3%, as the Corporation continued to execute its wholesale funding reduction strategy. Investments decreased $1.3 billion (from sales and maturities activity as noted above), while total loans were relatively unchanged (up $0.1 billion) with a slight shift in mix. Total deposits increased $0.6 billion (6.3% annualized) compared to December 31, 2005, while wholesale funding declined by $1.7 billion (28.9%). Since year-end 2005, the Corporation repurchased 6 million shares of its outstanding common stock under accelerated share repurchase agreements for approximately $198 million.

TABLE 6
Period End Loan Composition
($ in Thousands)


	September 30, 2006					June 30, 2006					March 31, 2006					December 31, 2005					September 30, 2005
			% of					% of					% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total

	($ in Thousands)
Commercial, financial, and agricultural	$	3,549,216		23	%	$	3,505,819		23	%	$	3,571,835		23	%	$	3,417,343		22	%	$	3,213,656		23	%
Real estate construction		2,186,810		14			2,122,136		14			1,981,473		13			1,783,267		12			1,519,681		11
Commercial real estate		3,755,037		25			3,872,819		25			4,024,260		26			4,064,327		27			3,648,169		26
Lease financing		79,234		1			74,919		—			62,600		—			61,315		—			57,270		—

Commercial		9,570,297		63			9,575,693		62			9,640,168		62			9,326,252		61			8,438,776		60
Home equity ⁽¹⁾		2,166,312		14			2,151,858		14			2,121,601		14			2,025,055		13			1,878,436		13
Installment		940,139		6			945,123		6			957,877		6			1,003,938		7			1,024,356		7

Retail		3,106,451		20			3,096,981		20			3,079,478		20			3,028,993		20			2,902,792		20
Residential mortgage		2,607,860		17			2,732,956		18			2,819,541		18			2,851,219		19			2,765,569		20

Total loans	$	15,284,608		100	%	$	15,405,630		100	%	$	15,539,187		100	%	$	15,206,464		100	%	$	14,107,137		100	%


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

TABLE 7
Period End Deposit Composition
($ in Thousands)


	September 30, 2006					June 30, 2006					March 31, 2006					December 31, 2005					September 30, 2005
			% of					% of					% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total

	($ in Thousands)

Noninterest-bearing demand	$	2,534,686		18	%	$	2,276,463		17	%	$	2,319,075		17	%	$	2,504,926		18	%	$	2,256,774		19	%
Savings		959,650		7			1,031,993		8			1,074,938		8			1,079,851		8			1,074,234		9
Interest-bearing demand		1,712,833		12			1,975,364		14			2,347,104		17			2,549,782		19			2,252,711		18
Money market		3,959,719		28			3,434,288		25			2,863,174		21			2,629,933		19			2,240,606		18
Brokered CDs		630,637		4			518,354		4			567,660		4			529,307		4			407,459		3
Other time		4,411,020		31			4,409,946		32			4,444,919		33			4,279,290		32			3,949,241		33

Total deposits	$	14,208,545		100	%	$	13,646,408		100	%	$	13,616,870		100	%	$	13,573,089		100	%	$	12,181,025		100	%

Total deposits, excluding Brokered CDs	$	13,577,908		96	%	$	13,128,054		96	%	$	13,049,210		96	%	$	13,043,782		96	%	$	11,773,566		97	%

Allowance for Loan Losses

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

As of September 30, 2006, the allowance for loan losses was $203.4 million compared to $190.1 million at September 30, 2005, and $203.4 million at December 31, 2005. The allowance for loan losses at September 30, 2006 increased $13.3 million since September 30, 2005 (including $13.3 million added from State Financial at acquisition) and was relatively unchanged from December 31, 2005. At September 30, 2006, the allowance for loan losses to total loans was 1.33% and covered 158% of nonperforming loans, compared to 1.35% and 172%, respectively, at September 30, 2005, and 1.34% and 206%, respectively, at December 31, 2005. Table 8 provides additional information regarding activity in the allowance for loan losses and nonperforming assets.

Gross charge offs were $19.9 million for the nine months ended September 30, 2006, $16.6 million for the comparable period ended September 30, 2005, and $27.7 million for year-end 2005, while recoveries for the corresponding periods were $8.0 million, $7.6 million and $15.1 million, respectively. The ratio of net charge offs to average loans on an annualized basis was 0.10%, 0.09%, and 0.09% for the nine-month periods ended September 30, 2006 and September 30, 2005, and for the 2005 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,
	2006			2005			2005

Allowance for Loan Losses:
Balance at beginning of period	$	203,404		$	189,762		$	189,762
Balance related to acquisition		—			—			13,283
Provision for loan losses		11,988			9,343			13,019
Charge offs		(19,933	)		(16,601	)		(27,743	)
Recoveries		7,983			7,576			15,083

Net charge offs		(11,950	)		(9,025	)		(12,660	)

Balance at end of period	$	203,442		$	190,080		$	203,404


Nonperforming Assets:
Nonaccrual loans:
Commercial	$	91,877		$	83,783		$	68,304
Residential mortgage		23,167			14,683			15,912
Retail		8,699			8,832			11,097

Total nonaccrual loans	$	123,743		$	107,298		$	95,313
Accruing loans past due 90 days or more:
Commercial	$	60		$	29		$	148
Residential mortgage		—			—			—
Retail		4,766			3,325			3,122

Total accruing loans past due 90 days or more	$	4,826		$	3,354		$	3,270
Restructured loans (commercial)		28			33			32

Total nonperforming loans	$	128,597		$	110,685		$	98,615
Other real estate owned		13,866			10,017			11,336

Total nonperforming assets	$	142,463		$	120,702		$	109,951


Ratios:
Allowance for loan losses to net charge offs (annualized)		12.7x			15.8x			16.1x
Net charge offs to average loans (annualized)		0.10	%		0.09	%		0.09	%
Allowance for loan losses to total loans		1.33			1.35			1.34
Nonperforming loans to total loans		0.84			0.78			0.65
Nonperforming assets to total assets		0.68			0.58			0.50
Allowance for loan losses to nonperforming loans		158	%		172	%		206	%

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. The allocation methodology focuses on evaluation of facts and issues related to specific loans, the risk inherent in specific loans, changes in the size and character of the loan portfolio, changes in levels of impaired or other nonperforming loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of the underlying collateral, historical losses and delinquencies on each portfolio category, and other qualitative and quantitative factors. 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, 2006, September 30, 2005, and December 31, 2005 was comparable, whereby the Corporation segregated its loss factor allocations (used for both criticized and non-criticized loan categories) into a component primarily based on historical loss rates and a component primarily based on other qualitative factors that may affect loan collectibility. Factors applied are reviewed periodically and adjusted to reflect changes in trends or other risks. Total loans at September 30, 2006, were up $1.2 billion (8.3%) since September 30, 2005, largely attributable to the State Financial acquisition, which added $1.0 billion in loans at consummation (see Table 6), while total loans increased $0.1 billion compared to December 31, 2005. Nonperforming loans were $128.6 million or 0.84% of total loans at September 30, 2006, up from 0.78% of loans a year ago, and up from 0.65% of loans at year-end 2005. The allowance for loan losses to loans was 1.33%, 1.35% and 1.34% for September 30, 2006, and September 30 and December 31, 2005, respectively.

Management believes the allowance for loan losses to be adequate at September 30, 2006.

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 (defined as over $25 million) has been increasing in recent years. 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 of nonperforming student loans at September 30, 2006, compared to nonperforming student loans of approximately $14 million and $13 million at September 30, 2005, and December 31, 2005, respectively. Table 8 provides detailed information regarding nonperforming assets, which include nonperforming loans and other real estate owned.

Total nonperforming loans of $128.6 million at September 30, 2006 were up $17.9 million from September 30, 2005 and up $30.0 million from year-end 2005. The ratio of nonperforming loans to total loans was 0.84% at September 30, 2006, up from 0.78% at September 30, 2005 and up from 0.65% at year-end 2005. Nonaccrual loans account for the majority of the change in nonperforming loans since September 30, 2005. From September 30, 2005 to December 31, 2005, nonperforming loans decreased $12.1 million including a $12.0 million decrease in nonaccrual loans (with the majority of the decrease attributable to the resolution of selected commercial credits in the fourth quarter of 2005) and a $0.1 million decrease in accruing loans past due 90 or more days. Since year-end 2005 nonperforming loans increased $30.0 million, with nonaccrual loans up by $28.4 million (with the majority of the increase attributable to certain large commercial credits) and accruing loans past due 90 or more days up by $1.6 million.

Other real estate owned was $13.8 million at September 30, 2006, compared to $10.0 million at September 30, 2005, and $11.3 million at year-end 2005. The $1.3 million increase in other real estate owned from September 30,

2005 to year-end 2005 was predominantly due to a $2.0 million increase in commercial real estate owned, net of a $0.4 million decrease in residential real estate owned and a $0.3 million decrease due to the sale of two bank properties classified as other real estate owned. Since year-end 2005, the $2.5 million increase in other real estate owned was primarily attributable to the addition of five bank properties (totaling $1.8 million) no longer used for banking reclassified into other real estate owned and a $0.7 million increase in residential real estate owned.

Potential problem loans are certain loans bearing criticized loan 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. At September 30, 2006, potential problem loans totaled $402 million, compared to $259 million at September 30, 2005, and $333 million at December 31, 2005. The increase reflects the greater uncertainty about the potential impact of the economic environment on our borrowers and the application of the Corporation’s loan policy and risk rating standards on acquired loans. The level of potential problem loans is another factor evaluated 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.

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.”

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 its subsidiary bank 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.

At September 30, 2006, the Corporation was in compliance with its internal liquidity objectives.

The Corporation also has multiple funding sources that could be used to increase liquidity and provide additional financial flexibility. 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, 2006. In addition, under the Parent Company’s $200 million commercial paper program, $145 million of commercial paper was outstanding and $55 million of commercial paper was available at September 30, 2006.

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, 2006, $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, 2006, $300 million was available under the shelf registration.

A bank note program associated with Associated Bank, National Association, (the “Bank”) was established during 2000. Under this program, short-term and long-term debt may be issued. As of September 30, 2006, $825 million of long-term bank notes were outstanding and $225 million was available under the 2000 bank note program. A new bank note program was instituted during the third quarter of 2005, of which $2 billion was available at September 30, 2006. The 2005 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 FHLB ($0.9 billion was outstanding at September 30, 2006). The Bank also issues institutional certificates of deposit, from time to time offers brokered certificates of deposit, and to a lesser degree, accepts Eurodollar deposits.

Investment securities are an important tool to the Corporation’s liquidity objective. Cash flows from maturing and sold investment securities were key to the execution and completion of a year-long initiative announced in October 2005 to significantly reduce wholesale funding. As of September 30, 2006, all securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. Of the $3.4 billion investment portfolio at September 30, 2006 (representing 16% of total assets), $1.9 billion were pledged to secure certain deposits or for other purposes as required or permitted by law, and $206 million of FHLB and Federal Reserve stock combined is “restricted” in nature and less liquid than other tradable equity securities. The majority of the remaining securities could be pledged or sold to enhance liquidity, if necessary.

For the nine months ended September 30, 2006, net cash provided by operating and investing activities was $216.5 million and $1.1 billion, respectively, while financing activities used net cash of $1.4 billion, for a net decrease in cash and cash equivalents of $62.5 million since year-end 2005. Generally, during the first nine months of 2006, net assets declined $1.2 billion (5.3%) since year-end 2005 given the previously announced initiative to reduce wholesale funding. Investment proceeds from sales and maturities were used to reduce wholesale funding, 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, 2005, net cash provided by operating and financing activities was $230.9 million and $25.9 million, respectively, while investing activities used net cash of $210.6 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.

Quantitative and Qualitative Disclosures about Market Risk

Market risk arises from exposure to changes in interest rates, exchange rates, commodity prices, and other relevant market rate or price risk. The Corporation faces market risk in the form of interest rate risk through other than trading activities. Market risk from other than trading activities in the form of interest rate risk is measured and managed through a number of methods. The Corporation uses financial modeling techniques that measure the sensitivity of future earnings due to changing rate environments to measure interest rate risk. Policies established by the Corporation’s Asset/Liability Committee and approved by the Board of Directors limit exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Corporation believes it has no primary exposure to a specific point on the yield curve. These limits are based on the Corporation’s exposure to a 100 bp and 200 bp immediate and sustained parallel rate move, either upward or downward.

Interest Rate Risk

In order to measure earnings sensitivity to changing rates, the Corporation uses three different measurement tools: static gap analysis, simulation of earnings, and economic value of equity. These three measurement tools represent static (i.e., point-in-time) measures that do not take into account subsequent interest rate changes, changes in management strategies and market conditions, and future production of assets or liabilities, among other factors.

Static gap analysis: The static gap analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate

(interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition to the contractual information, residential mortgage whole loan products and mortgage-backed securities are adjusted based on industry estimates of prepayment speeds that capture the expected prepayment of principal above the contractual amount based on how far away the contractual coupon is from market coupon rates.

The following table represents the Corporation’s consolidated static gap position as of September 30, 2006.

TABLE 9: Interest Rate Sensitivity Analysis


	September 30, 2006
	Interest Sensitivity Period
										Total Within
	0-90 Days			91-180 Days			181-365 Days			1 Year			Over 1 Year			Total
							($ in Thousands)
Earning assets:
Loans held for sale	$	87,330		$	—		$	—		$	87,330		$	—		$	87,330
Investment securities, at fair value		496,982			180,996			358,652			1,036,630			2,400,144			3,436,774
Loans (1)		8,689,858			566,537			1,260,072			10,516,467			4,768,141			15,284,608
Other earning assets		62,379			—			—			62,379			—			62,379

Total earning assets	$	9,336,549		$	747,533		$	1,618,724		$	11,702,806		$	7,168,285		$	18,871,091

Interest-bearing liabilities:
Interest-bearing deposits (2) (3)	$	2,855,759		$	1,732,179		$	3,238,679		$	7,826,617		$	5,751,291		$	13,577,908
Other interest-bearing liabilities (3)		3,716,413			374,301			21,163			4,111,877			796,396			4,908,273
Interest rate swap		175,000			—			—			175,000			(175,000	)		—

Total interest-bearing liabilities	$	6,747,172		$	2,106,480		$	3,259,842		$	12,113,494		$	6,372,687		$	18,486,181

Interest sensitivity gap	$	2,589,377		$	(1,358,947	)	$	(1,641,118	)	$	(410,688	)	$	795,598		$	384,910
Cumulative interest sensitivity gap	$	2,589,377		$	1,230,430		$	(410,688	)

12 Month cumulative gap as a percentage of earning assets at September 30, 2006		13.7	%		6.5	%		(2.2	)%


(1)		Included in loans are $235 million of fixed-rate commercial loans that have been swapped from fixed-rate to floating-rate and have been reflected with their repricing altered for the impact of the swaps.

(2)		The interest rate sensitivity assumptions for demand deposits, savings accounts, money market accounts, and interest-bearing demand deposit accounts are based on current and historical experiences regarding portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and fairly stable and are, therefore, included in the “Over 1 Year” category.

(3)		For analysis purposes, Brokered CDs of $631 million have been included with other interest-bearing liabilities and excluded from interest-bearing deposits.

The static gap analysis in Table 9 provides a representation of the Corporation’s earnings sensitivity to changes in interest rates. It is a static indicator that does not reflect various repricing characteristics and may not necessarily indicate the sensitivity of net interest income in a changing interest rate environment. As of September 30, 2006, the 12-month cumulative gap results were within the Corporation’s interest rate risk policy.

At year-end 2005, the Corporation was slightly asset sensitive as a result of issuing long-term funding, growth in demand deposits, and shortening of the mortgage portfolio and investment portfolio due to faster prepayment experience over the course of 2005. (Asset sensitive means that assets will reprice faster than liabilities. In a rising rate environment, an asset sensitive bank will generally benefit.) However, the flattening of the yield curve, competitive pricing pressures and changes in the mix of loans and deposits has substantially offset the benefits to net interest income from the interest rate increases that occurred throughout 2005. The Corporation’s interest rate position shifted to being neutral to rate changes at September 30, 2006. For the remainder of 2006, the Corporation’s objective is to allow the interest rate profile to continue to move towards a more liability sensitive posture. However, the interest rate position is at risk to changes in other factors, such as the slope of the yield curve, competitive pricing pressures, changes in balance sheet mix from management action and / or from customer behavior relative to loan or deposit products. See also section “Net Interest Income and Net Interest Margin.”

Interest rate risk of embedded positions (including prepayment and early withdrawal options, lagged interest rate changes, administered interest rate products, and cap and floor options within products) require a more dynamic measuring tool to capture earnings risk. Earnings simulation and economic value of equity are used to more

completely assess interest rate risk.

Simulation of earnings: Along with the static gap analysis, determining the sensitivity of short-term future earnings to a hypothetical plus or minus 100 bp and 200 bp parallel rate shock can be accomplished through the use of simulation modeling. In addition to the assumptions used to create the static gap, simulation of earnings included the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. This difference represents the Corporation’s earnings sensitivity to a plus or minus 100 bp parallel rate shock.

The resulting simulations for September 30, 2006, projected that net interest income would decrease by approximately 0.2% of budgeted net interest income if rates rose by a 100 bp shock, and projected that the net interest income would decrease by approximately 0.5% of budgeted net interest income if rates fell by a 100 bp shock. At December 31, 2005, the 100 bp shock up was projected to increase budgeted net interest income by approximately 0.1% and the 100 bp shock down was projected to decrease budgeted net interest income by approximately 0.9%. As of September 30, 2006, the simulation of earnings results were within the Corporation’s interest rate risk policy.

Economic value of equity: Economic value of equity is another tool used to measure the impact of interest rates on the value of assets, liabilities, and off-balance sheet financial instruments. This measurement is a longer-term analysis of interest rate risk as it evaluates every cash flow produced by the current balance sheet.

These results are based solely on immediate and sustained parallel changes in market rates and do not reflect the earnings sensitivity that may arise from other factors. These factors may include changes in the shape of the yield curve, the change in spread between key market rates, or accounting recognition of the impairment of certain intangibles. The above results are also considered to be conservative estimates due to the fact that no management action to mitigate potential income variances is included within the simulation process. This action could include, but would not be limited to, delaying an increase in deposit rates, extending liabilities, using financial derivative products to hedge interest rate risk, changing the pricing characteristics of loans, or changing the growth rate of certain assets and liabilities.

As of September 30, 2006, the projected changes for the economic value of equity were within the Corporation’s interest rate risk policy.

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. A discussion of the Corporation’s derivative instruments at September 30, 2006, is included in Note 10, “Derivatives 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. The following table summarizes significant contractual obligations and other commitments at September 30, 2006, at those amounts contractually due to the recipient, not including any interest, unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments.

Table 10: Contractual Obligations and Other Commitments


	One Year		One to		Three to		Over
	or Less		Three Years		Five Years		Five Years		Total
	($ in Thousands)
Time deposits	$	3,209,528	$	1,094,031	$	81,674	$	114,455	$	4,499,688
Short-term borrowings		2,004,982		—		—		—		2,004,982
Long-term funding		943,150		888,150		222,500		214,224		2,268,024
Operating leases		12,072		20,687		14,463		23,568		70,790
Commitments to extend credit		4,391,186		969,018		528,882		61,764		5,950,850

Total	$	10,560,918	$	2,971,886	$	847,519	$	414,011	$	14,794,334

Capital

Stockholders’ equity at September 30, 2006 was $2.3 billion, compared to $2.1 billion at September 30, 2005 and $2.3 billion at December 31, 2005. The changes in equity between both the 12-month and 9-month periods were primarily composed of the issuance of common stock in connection with the State Financial acquisition (during the fourth quarter of 2005), the retention of earnings, and the exercise of stock options, with partially offsetting decreases to equity from the payment of dividends and the repurchase of common stock. At September 30, 2006, stockholders’ equity included $6.1 million of accumulated other comprehensive loss compared to $21.8 million of accumulated other comprehensive income at September 30, 2005 and $3.9 million of accumulated other comprehensive loss at year-end 2005. The declines in accumulated other comprehensive income were attributable to higher unrealized losses on securities available for sale, net of the tax effect. Stockholders’ equity to assets was 10.85%, 9.94%, and 10.52% at September 30, 2006, September 30, 2005, and December 31, 2005, respectively.

Cash dividends of $0.85 per share were paid in the first nine months of 2006, compared to $0.79 per share in the first nine months of 2005, an increase of 8%.

The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock each quarter in the market (authorized at 2.0 million shares per quarter as of September 30, 2006), to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. Under this authorization, the Corporation repurchased (and recorded to treasury stock) 521,500 shares for $17.0 million during the full year 2005 at an average cost of $32.58 per share and 6,480 shares for $219,000 during the first nine months of 2006 at an average cost of $33.82 per share.

Additionally, under actions in October 2000, July 2003, and March 2006, the Board of Directors authorized the repurchase of the Corporation’s outstanding shares, not to exceed approximately 17.6 million shares on a combined basis. During the full year 2005, the Corporation repurchased (and cancelled) approximately 3.0 million shares of its outstanding common stock for $96.4 million or an average cost of $32.40 per share under accelerated share repurchase agreements. During the first quarter of 2006, the Corporation settled the 2005 accelerated share repurchase agreements. In addition, during the nine months ended September 30, 2006, the Corporation repurchased 6.0 million shares (4.0 million cancelled shares and 2.0 million recorded to treasury stock) for a combined cost of $198 million or an average cost of $33.07 under accelerated share repurchase agreements. The Corporation settled one of the 2006 accelerated share repurchase agreement in shares, while the remaining accelerated share repurchase agreement is anticipated to settle in fourth quarter 2006. The accelerated share repurchase enabled the Corporation to repurchase the shares immediately, while the investment banker will purchase the shares in the market over time. At September 30, 2006, approximately 3.3 million shares remain authorized to repurchase under the March 2006 authorization as the 2000 and 2003 authorizations have been fully utilized. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities.

The Corporation regularly reviews the adequacy of its capital 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 affiliate are greater than minimums required by regulatory guidelines. The Corporation’s capital ratios are summarized in Table 11.

TABLE 11
Capital Ratios
(In Thousands, except per share data)


	September 30,			June 30,			March 31,			Dec. 31,			Sept. 30,
	2006			2006			2006			2005			2005

Total stockholders’ equity	$	2,270,380		$	2,274,860		$	2,244,695		$	2,324,978		$	2,062,565
Tier 1 capital		1,558,462			1,578,353			1,527,479			1,597,826			1,495,122
Total capital		1,968,221			1,988,587			1,937,961			2,013,354			1,895,420
Market capitalization		4,232,020			4,170,883			4,491,035			4,413,845			3,900,983

Book value per common share	$	17.44		$	17.20		$	16.98		$	17.15		$	16.12
Cash dividend per common share		0.29			0.29			0.27			0.27			0.27
Stock price at end of period		32.50			31.53			33.98			32.55			30.48
Low closing price for the quarter		30.27			30.69			32.75			29.09			30.29
High closing price for the quarter		32.58			34.45			34.83			33.23			34.74

Total equity / assets		10.85	%		10.77	%		10.43	%		10.52	%		9.94	%
Tier 1 leverage ratio		7.77			7.73			7.29			7.58			7.52
Tier 1 risk-based capital ratio		9.44			9.53			9.18			9.73			9.92
Total risk-based capital ratio		11.92			12.00			11.65			12.26			12.58

Shares outstanding (period end)		130,216			132,283			132,167			135,602			127,985
Basic shares outstanding (average)		131,520			132,259			135,114			135,684			127,875
Diluted shares outstanding (average)		132,591			133,441			136,404			137,005			129,346

Comparable Third Quarter Results

Net income for the third quarter of 2006 was $76.9 million, down $4.1 million (5.1%) from net income of $81.0 million for the third quarter of 2005. The third quarter of 2005 carries no financial results from the October 2005 State Financial acquisition. See Note 6, “Business Combinations,” of the notes to consolidated financial statements. Return on average equity was 13.36% for third quarter 2006 versus 15.85% for third quarter 2005. Return on average assets decreased to 1.46% compared to 1.56% for third quarter 2005. See also Tables 1 and 12.

Taxable equivalent net interest income for the third quarter of 2006 was $174.7 million, $4.3 million higher than the third quarter of 2005. Changes in balance sheet volumes and mix favorably impacted taxable equivalent net interest income by $8.0 million, while rate variances were unfavorable by $3.7 million. See Tables 2 and 3. State Financial aided balance sheet growth (adding $1.0 billion in loans and $1.0 billion in total deposits at consummation in October 2005), while the Corporation’s initiative to use investment cash flows to reduce wholesale funding (including the targeted sale of $0.7 billion in investments in March 2006) countered balance sheet growth between the comparable quarter periods. As a result, average earning assets were relatively unchanged at $19.0 billion in both the third quarter of 2006 and the third quarter of 2005; however, the mix of earning assets shifted given the Corporation’s initiative noted previously. Average loans grew $1.2 billion (9%), while investments declined by $1.2 billion (26%). Average interest-bearing liabilities of $16.1 billion were down $0.1 billion compared to the third quarter of 2005, with average interest-bearing deposits up $1.5 billion (16%) and average wholesale funding down $1.6 billion (26%).

The net interest margin of 3.63% was up 7 bp from 3.56% for the third quarter of 2005, the net result of a 19 bp higher contribution from net free funds (attributable to the higher interest rate environment in 2006 which increased the value of noninterest-bearing demand deposits) and a 12 bp decrease in the interest rate spread (comprised of a 118 bp rise in the average cost of interest-bearing liabilities versus a 106 bp increase in the earning asset yield). Benefits to the margin from the rise in short-term interest rates (i.e., the average Federal funds rate for third quarter 2006 was 183 bp higher than for third quarter 2005), were countered by the flat yield curve and competitive pricing pressures, leading to lower spreads on loans and higher rates on deposits. However, the actions taken to reduce the levels of low-yielding investments and high-costing wholesale funding aided the net interest margin. Average loans (yielding 7.29%, up 107 bp over third quarter 2005) represented a larger portion of earning assets (at 81% of earning assets, compared to 75% for third quarter 2005). Average investments (yielding 5.16%, up 49 bp over third quarter 2005) declined to 19% of average earning assets, compared to 25% for third quarter 2005. On the funding side,

average wholesale funding (costing 4.83% for third quarter 2006, up 136 bp) fell as a percentage of interest-bearing liabilities (to 29%, versus 39% for third quarter 2005), while interest-bearing deposits (costing 3.44%, up 129 bp compared to third quarter 2005) increased to 71% of average interest-bearing liabilities, versus 61% for third quarter 2005.

The provision for loan losses was $3.8 million for the third quarter of 2006 and $3.3 million for the third quarter of 2005, with both quarters approximating the level of net charge offs. Annualized net charge offs to average loans were 0.10% and 0.09% for the third quarter of 2006 and 2005, respectively. The allowance for loan losses to loans at September 30, 2006 was 1.33% compared to 1.35% at September 30, 2005. Total nonperforming loans were $128.6 million, up from $110.7 million at September 30, 2005, and as a percentage of loans, nonperforming loans increased to 0.84% versus 0.78%. See Table 8 and discussion under sections “Provision for Loan Losses,” “Allowance for Loan Losses,” and “Nonperforming Loans and Other Real Estate Owned.”

Noninterest income was $73.0 million for the third quarter of 2006, down $4.0 million (5.2%) compared to the third quarter of 2005 (see also Table 4). Fee income sources such as service charges on deposit accounts (up $0.6 million) and card-based and other nondeposit fees (up $1.0 million) benefited most notably from the inclusion of State Financial accounts and improved collection of fees, while trust service fees (up $0.7 million) and retail commissions (up $1.5 million, primarily in insurance and fixed annuities) benefited mainly from improving stock markets and higher sales volumes. Net mortgage banking income was down $9.1 million, with a $4.9 million decrease in mortgage banking income (primarily a function of lower margins on sales and a 22% decline in secondary mortgage production) and a $4.2 million increase in mortgage servicing rights expense (primarily attributable to third quarter 2006 including a $0.5 million addition to the valuation reserve compared to a $4.5 million valuation reserve reversal in third quarter 2005). BOLI income increased $1.9 million, mostly a direct result of additional BOLI balances between the periods and the 2006 upward repricing of BOLI investments. All other noninterest income categories combined totaled $8.2 million for third quarter 2006, down $0.5 million (5.6%) compared to third quarter 2005.

Noninterest expense for the third quarter of 2006 was $123.7 million, up $6.3 million (5.4%) from the third quarter of 2005 (see also Table 5), reflecting partly the Corporation’s larger operating base attributable to the State Financial acquisition. Personnel expense increased $4.9 million (7.4%) over third quarter 2005, in part as the number of full time equivalent employees increased by an average of 6%. Salary-related expenses (up 5.6%) accounted for $2.9 million of the increase, due primarily to the larger employee base and merit increases between the years, while fringe benefit expenses were up $2.0 million, largely in premium-based benefits due to rising health care costs. Occupancy expense rose $1.0 million, primarily due to increased depreciation, rent, property taxes, and utilities. All other noninterest expenses collectively totaled $41.9 million for third quarter 2006, up $0.4 million (0.9%), reflective of efforts to control selected discretionary expenses.

Income tax expense for the third quarter of 2006 was $36.8 million compared to $39.3 million for the third quarter of 2005. The effective tax rate was 32.4% and 32.7% for the comparable third quarter periods of 2006 and 2005, respectively.

Sequential Quarter Results

Net income of $76.9 million for the third quarter of 2006 was $6.6 million lower than the second quarter 2006 net income of $83.5 million. Return on average equity was 13.36% and return on average assets was 1.46%, compared to 14.86% and 1.58%, respectively, for the second quarter of 2006. See Tables 1 and 12.

TABLE 12
Selected Quarterly Information
($ in Thousands)


	For the Quarter Ended
	Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,
	2006			2006			2006			2005			2005

*Summary of Operations:*
Net interest income	$	168,217		$	168,399		$	166,869		$	175,595		$	164,078
Provision for loan losses		3,837			3,686			4,465			3,676			3,345
Noninterest income
Trust service fees		9,339			9,307			8,897			9,055			8,667
Service charges on deposit accounts		23,438			22,982			20,959			23,073			22,830
Mortgage banking, net		2,833			5,829			4,404			12,166			11,969
Card-based and other nondeposit fees		10,461			11,047			9,886			10,033			9,505
Retail commissions		14,360			16,365			15,478			13,624			12,905
Bank owned life insurance income		4,390			3,592			3,071			3,022			2,441
Asset sale gains (losses), net		89			354			(230	)		2,766			942
Investment securities gains, net		1,164			1,538			2,456			1,179			1,446
Other		6,911			6,194			5,852			6,126			6,260

Total noninterest income		72,985			77,208			70,773			81,044			76,965
Noninterest expense
Personnel expense		71,321			74,492			69,303			68,619			66,403
Occupancy		10,442			10,654			11,758			10,287			9,412
Equipment		4,355			4,223			4,588			4,361			4,199
Data processing		7,190			7,099			7,248			7,240			7,129
Business development and advertising		4,142			4,101			4,249			4,999			4,570
Stationery and supplies		1,787			1,784			1,774			1,869			1,599
Other intangible amortization expense		2,280			2,281			2,343			2,418			1,903
Other		22,169			20,026			22,208			25,746			22,133

Total noninterest expense		123,686			124,660			123,471			125,539			117,348
Income tax expense		36,791			33,712			27,999			39,783			39,315

Net income	$	76,888		$	83,549		$	81,707		$	87,641		$	81,035


Taxable equivalent net interest income	$	174,712		$	174,902		$	173,536		$	182,361		$	170,425
Net interest margin		3.63	%		3.59	%		3.48	%		3.59	%		3.56	%

*Average Balances:*
Assets	$	20,891,001		$	21,266,792		$	21,871,969		$	22,022,165		$	20,607,901
Earning assets		18,968,584			19,342,628			19,910,420			20,080,758			18,960,035
Interest-bearing liabilities		16,070,975			16,717,761			17,204,860			17,090,134			16,198,492
Loans		15,404,223			15,515,789			15,327,803			15,154,225			14,163,827
Deposits		13,884,404			13,534,725			13,319,664			13,282,910			12,133,719
Stockholders’ equity		2,283,933			2,254,933			2,339,539			2,320,134			2,027,785

*Asset Quality Data:*
Allowance for loan losses to total loans		1.33	%		1.32	%		1.31	%		1.34	%		1.35	%
Allowance for loan losses to nonperforming loans		158	%		197	%		185	%		206	%		172	%
Nonperforming loans to total loans		0.84	%		0.67	%		0.71	%		0.65	%		0.78	%
Nonperforming assets to total assets		0.68	%		0.56	%		0.57	%		0.50	%		0.58	%
Net charge offs to average loans (annualized)		0.10	%		0.10	%		0.12	%		0.10	%		0.09	%

Taxable equivalent net interest income for the third quarter of 2006 was $174.7 million, $0.2 million lower than the second quarter of 2006, with unfavorable rate changes (which lowered net interest income by approximately $1.1 million) substantially mitigated by additional net interest income from one extra day in the third quarter and by favorable changes in balance sheet mix. Short-term interest rates rose by 50 bp during the second quarter of 2006 and remained level during the third quarter of 2006, resulting in an average Federal funds rate of 5.25% in the third quarter of 2006, 35 bp higher than the second quarter average. The net interest margin between the sequential

quarters improved 4 bp, to 3.63% in the third quarter of 2006. The contribution from net free funds increased 8 bp (due largely to higher balances of noninterest-bearing deposits, a principal component of net free funds), while the interest rate spread decreased 4 bp (the net of 19 bp higher rates on interest-bearing liabilities and 15 bp higher yield on earning assets). On average, loan yields were up 14 bp (to 7.29%) and investment yields rose 8 bp (to 5.16%). On the funding side, the cost of interest-bearing deposits increased 32 bp (to 3.44%), unfavorably impacted by aggressive pricing to attract and retain deposits. The cost of wholesale funding (both short-term borrowings and long-term funding) was up more modestly, by 7 bp (to 4.83%), with the impact of the higher rate environment tempered partly by the third quarter of 2006 benefiting from a favorable fair value mark on junior subordinated debentures, while the second quarter of 2006 included an unfavorable fair value mark recorded through interest expense.

Average earning assets were $19.0 billion in the third quarter of 2006, a decrease of $0.4 billion from the second quarter of 2006. On average, investments were down $0.3 billion and loans decreased $0.1 billion (predominantly residential mortgages). Average interest-bearing liabilities were $16.1 billion in the third quarter of 2006, a decrease of $0.6 billion from the second quarter of 2006. Average interest-bearing deposits were up $0.1 billion (3.8% annualized) and demand deposits were up $0.2 billion. Due to the decrease in average earning assets, together with the increase in average deposits, wholesale funding balances (which cost more than deposits) were lower on average by $0.7 billion, representing 29% of interest-bearing liabilities for the third quarter of 2006 compared to 32% for the second quarter of 2006.

Provision for loan losses was $3.8 million in the third quarter of 2006 versus $3.7 million in the previous quarter, with both quarters approximating the level of net charge offs. Annualized net charge offs represented 0.10% of average loans for both the second and third quarters of 2006. The allowance for loan losses to loans at September 30, 2006 was 1.33% compared to 1.32% at June 30, 2006. Total nonperforming loans of $128.6 million (0.84% of total loans) at September 30, 2006 were up from $103.0 million (0.67% of total loans) at June 30, 2006.

Noninterest income decreased $4.2 million (5.5%) between sequential quarters to $73.0 million. Net mortgage banking was lower than second quarter 2006 by $3.0 million (51.4%), driven primarily by a $2.5 million increase in mortgage servicing rights expense (with third quarter 2006 including a $0.5 million addition to the valuation allowance versus a $1.9 million reversal to the valuation allowance in second quarter 2006) and a modest ($0.5 million) decrease in mortgage banking income. Card-based and other nondeposit fees were down $0.6 million (5.3%), with notably higher ancillary loan fees in second quarter. Retail commissions decreased $2.0 million (12.3%), with insurance commissions down $1.7 million (primarily attributable to seasonal profit sharing/contingency income from insurance carriers received in second quarter 2006) and brokerage (including variable annuities) down $0.3 million. BOLI income was higher by $0.8 million (22.2%), attributable to increased cash surrender values as well as underlying rate increases. All other noninterest income categories combined totaled $40.9 million, up $0.6 million (1.4%) compared to second quarter 2006.

On a sequential quarter basis, noninterest expense decreased $1.0 million (0.8%) to $123.7 million for the third quarter of 2006. Personnel expense of $71.3 million for third quarter 2006 was $3.2 million (4.3%) lower than second quarter 2006, as the second quarter included $3.2 million additional premium-based benefits due to rising health care costs and higher claims experience. Other expense of $22.2 million was up $2.1 million, predominantly from lower second quarter expenses, while all other noninterest expense categories combined totaled $30.2 million, essentially unchanged (up $0.1 million) from the second quarter of 2006.

Income tax expense of $36.8 million for the third quarter of 2006 represented a $3.1 million increase over the previous quarter. The effective tax rate was 32.4% and 28.8% for third and second quarters of 2006, respectively. The lower effective tax rate in the second quarter was primarily attributable to a $4.2 million reduction of income tax expense during the second quarter of 2006 related to changes in exposure of uncertain tax positions. See additional discussion under section, “Income Taxes.”

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 25, 2006, the Board of Directors declared a $0.29 per share dividend payable on November 15, 2006, to shareholders of record as of November 6, 2006. This cash dividend has not been reflected in the accompanying consolidated financial statements.

On November 6, 2006, the Corporation repurchased (and cancelled) 2.0 million shares of its outstanding common stock from an investment banker under an accelerated share repurchase program for $32.40 per share or a total cost of approximately $65 million. The repurchased shares will be subject to a future purchase price settlement adjustment.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Information required by this item is set forth in Item 2 under the captions “Quantitative and Qualitative Disclosures About Market Risk” and “Interest Rate Risk.”

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 disclosure.

As of September 30, 2006, 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 the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2006. No changes were made to the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s 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 2006. 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.


							Maximum Number of
	Total Number				Total Number of Shares		Shares that May Yet
	of Shares		Average Price		Purchased as Part of		Be Purchased Under
Period	Purchased		Paid per Share		Publicly Announced Plans		the Plan

July 1- July 31, 2006		—	$	—		—		—
August 1 - August 31, 2006		2,000,000		31.43		2,000,000		3,331,602
September 1 - September 30, 2006		—		—		—		—

Total		2,000,000	$	31.43		2,000,000		3,331,602

In March 2006 the Board of Directors authorized the repurchase of the Corporation’s outstanding shares, not to exceed approximately 6.8 million shares. During the third quarter of 2006, the Corporation repurchased 2.0 million shares of its outstanding common stock for $63 million (or $31.43 per share) under an accelerated share repurchase agreement. At September 30, 2006, approximately 3.3 million shares remain authorized to repurchase under the March 2006 authorization.

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, 2006, September 30, 2005 and December 31, 2005		3

Consolidated Statements of Income - Three and Nine Months Ended September 30, 2006 and 2005		4

Consolidated Statements of Changes in Stockholders’ Equity - Nine Months Ended September 30, 2006 and 2005		5

Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2006 and 2005		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		49

Item 4. Controls and Procedures		49

PART II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 6. Exhibits		50

Signatures		51
302 Certification of President and Chief Executive Officer
302 Certification of Chief Financial Officer
Section 906 Certifications of CEO and CFO


		ASSOCIATED BANC-CORP (Registrant)

Date: November 7, 2006		/s/ Paul S. Beideman Paul S. Beideman
		President and Chief Executive Officer

Date: November 7, 2006		/s/ Joseph B. Selner Joseph B. Selner
		Chief Financial Officer