UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Associated Banc-Corp

(920) 491-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at April 30, 2005, was 129,747,037.

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ASSOCIATED BANC-CORP
TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements:

ASSOCIATED BANC-CORP

See accompanying notes to consolidated financial statements.

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ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

See accompanying notes to consolidated financial statements.

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ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

See accompanying notes to consolidated financial statements.

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ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

See accompanying notes to consolidated financial statements.

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ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

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

NOTE 1: Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in stockholders’ equity, and cash flows of Associated Banc-Corp (individually referred to herein as the “Parent Company,” and together with all of its subsidiaries and affiliates, collectively referred to herein as the “Corporation”) for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are 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 prior period consolidated financial statements have been reclassified to conform with the March 31, 2005 presentation.

NOTE 3: New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised December 2004), “Share-Based Payment,” (“SFAS 123R”), which replaces SFAS 123 and supersedes APB Opinion 25. SFAS 123R is effective for all stock-based awards granted on or after July 1, 2005. However, in April 2005, the SEC deferred the effective date of SFAS 123R to the first fiscal year beginning on or after June 15, 2005, with no other changes to SFAS 123R disclosure or measurement requirements. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Pro forma disclosure only of the income statement effects of share-based payments is no longer an alternative. In addition, companies must recognize compensation expense related to any stock-based awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The Corporation anticipates adopting SFAS 123R prospectively in the first quarter of 2006, as required. The proforma information provided under Note 5 provides a reasonable estimate of the impact of adopting SFAS 123R on the Corporation’s results of operations.

In March 2004, the SEC issued Staff Accounting Bulletin (“SAB”) No. 105, “Application of Accounting Principles to Loan Commitments,” (“SAB 105”). SAB 105 provides guidance regarding loan commitments accounted for as derivative instruments. Specifically, SAB 105 requires servicing assets to be recognized only once the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. As such, consideration for the expected future cash flows related to the associated servicing of the loan may not be recognized in valuing the loan commitment. This will result in a lower fair value mark of loan commitments, and recognition of the value of the servicing asset later upon sale or securitization of the underlying loan. The provisions of SAB 105 were effective for loan commitments accounted for as derivatives entered into

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after March 31, 2004. The adoption of SAB 105 did not have a material impact on the Corporation’s results of operations, financial position, or liquidity. See Note 10 for further discussion of the Corporation’s loan commitments accounted for as derivative instruments.

In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“EITF 03-1”). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment, and evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized through earnings equal to the difference between the investment’s cost and its fair value. In September 2004, the FASB delayed the accounting requirements of EITF 03-1 until additional implementation guidance is issued and goes into effect. The Corporation regularly evaluates its investments for possible other-than-temporary impairment and, therefore, does not expect the requirements of EITF 03-1 will have a material impact on the Corporation’s results of operations, financial position, or liquidity.

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

NOTE 4: Earnings Per Share

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

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

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

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NOTE 5: Stock-Based Compensation

As allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Corporation accounts for stock-based compensation cost under the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations, under which no compensation cost has been recognized for any periods presented, except with respect to restricted stock awards. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant, as such options would have no intrinsic value at the date of grant.

The Corporation may issue common stock with restrictions to certain key employees. The shares are restricted as to transfer, but are not restricted as to dividend payment or voting rights. The restrictions lapse over three or five years, are contingent upon continued employment, and for performance awards are based on earnings per share performance goals. The Corporation amortizes the expense over the vesting period. During first quarter 2005, 51,000 shares of restricted stock shares were awarded and during second quarter 2003, 75,000 restricted stock shares were awarded. Expense of approximately $239,000 and $183,000 was recorded for the three months ended March 31, 2005 and 2004, respectively.

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

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

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

The weighted average per share fair values of options granted in the comparable first quarter periods of 2005 and 2004 were $7.18 and $7.04, respectively. The annual expense allocation methodology attributes a higher percentage of the reported expense to earlier years than to later years, resulting in accelerated expense recognition for proforma disclosure purposes.

NOTE 6: Business Combinations

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

Pending Business Combination:
State Financial Services Corporation (“State Financial”): On March 21, 2005, the Corporation announced the signing of a definitive agreement to acquire State Financial. Based on the terms of the agreement, State Financial shareholders will receive 1.2 shares of the Corporation’s stock for each share of State Financial stock they hold. The Corporation anticipates it may repurchase up to approximately 1 million shares of its common stock issued in the transaction. The transaction is valued at approximately $278 million, based on the Corporation’s closing stock price on March 18, 2005. As of March 31, 2005, State Financial is a $1.5 billion financial services company based in Milwaukee, Wisconsin, with 29 banking branches in Southeastern Wisconsin and Northeastern Illinois and provides commercial and retail banking products, mortgage loan originations, and investment brokerage activities. As a result of the acquisition, the Corporation will enhance its current branch distribution network. The transaction is expected to be completed in the third quarter of 2005, pending approval by regulators and State Financial shareholders.

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

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

To record the transaction, the Corporation assigned estimated fair values to the assets acquired and liabilities assumed. The excess cost of the acquisition over the estimated fair value of the net assets acquired was allocated to identifiable intangible assets with the remainder then allocated to goodwill. Goodwill of approximately $447 million, a core deposit intangible of approximately $17 million (with a ten-year estimated life), and other intangibles of $4 million recognized at acquisition were assigned to the banking segment. If additional evidence becomes available subsequent to but within one year of recording the transaction indicating a significant difference from an initial estimated fair value used, goodwill could be adjusted.

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

The following represents required supplemental pro forma disclosure of total revenue, net income, and earnings per share as though the First Federal acquisition had been completed at the beginning of 2004.

The pro forma results include amortization of newly created intangibles, interest cost on the cash consideration, and amortization of fair value adjustments on loans, investments, deposits and debt. The pro forma weighted average common shares used in the earnings per share calculations include adjustments for shares issued for the acquisition and the estimated impact of additional dilutive securities but does not assume any incremental share repurchases. The pro forma results presented do not reflect cost savings or revenue enhancements anticipated from the acquisition and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the 2004 period presented, nor are they necessarily indicative of future results.

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

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NOTE 7: Investment Securities

The following represents gross unrealized losses and the related fair value of securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2005.

Management does not believe any individual unrealized loss at March 31, 2005 represents an other-than-temporary impairment. The unrealized losses reported for mortgage-related securities relate primarily to securities issued by government agencies such as the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses are primarily attributable to changes in interest rates and not credit deterioration and individually were 5.6% or less of their respective amortized cost basis. The Corporation currently has both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the amortized cost.

The Corporation owns (not included in the above table) a collateralized mortgage obligation (“CMO”) determined to have an other-than-temporary impairment that resulted in a write-down on the security of $0.2 million during 2004, based on continued evaluation. As of March 31, 2005, this CMO had a carrying value of $0.9 million. The Corporation also owns (not included in the above table) three FHLMC preferred stock securities determined to have an other-than-temporary impairment that resulted in a write-down on these securities of $2.2 million during 2004. At March 31, 2005, these FHLMC preferred shares had a carrying value of $8.4 million.

NOTE 8: Goodwill and Other Intangible Assets

Goodwill: Goodwill is not amortized, but is subject to impairment tests on at least an annual basis. No impairment loss was necessary in 2004 or through March 31, 2005. At March 31, 2005, goodwill of $659 million is assigned to the banking segment and goodwill of $21 million is assigned to the wealth management segment. The change in the carrying amount of goodwill was as follows.

Other Intangible Assets: The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, other intangibles (primarily related to customer relationships acquired in connection with the Corporation’s insurance agency acquisitions), and mortgage servicing rights. The core deposit intangibles and mortgage servicing rights are assigned to the banking segment, while other intangibles of $17 million are assigned to the wealth management segment and $3 million are assigned to the banking segment as of March 31, 2005.

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

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

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

(1)	Included in the December 31, 2004, additions to mortgage servicing rights was $31.8 million from First Federal at acquisition.
(2)	Included in the December 31, 2004, portfolio of residential mortgage loans serviced for others was $3.5 billion from First Federal at acquisition.

Mortgage servicing rights are amortized in proportion to and over the period of estimated servicing income. The Corporation periodically evaluates its mortgage servicing rights asset for impairment. A valuation allowance is established to the extent the carrying value of the mortgage servicing rights exceeds the estimated fair value by stratification. During first quarter 2005, a $4.0 million reversal of valuation allowance was recorded, while a $2.5 million addition to and a $1.2 million reversal of valuation allowance was recorded during first quarter 2004 and full year 2004, respectively. Mortgage servicing rights expense, which includes the amortization of the mortgage servicing rights and increases or decreases to the valuation allowance associated with the mortgage servicing rights,

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was $1.9 million and $6.8 million for the three months ended March 31, 2005 and 2004, respectively, and $16.7 million for the year ended December 31, 2004.

An other-than-temporary impairment is recognized as a write-down of the mortgage servicing rights asset and the related valuation allowance (to the extent valuation allowance is available) and then against earnings. The Corporation periodically evaluates its mortgage servicing rights asset for possible other-than-temporary impairment. During the first quarter of 2005, $48,000 was determined to be other-than-temporarily impaired, while $0.6 million and $5.9 million was determined to be other-than-temporarily impaired during first quarter 2004 and full year 2004, respectively. This resulted in a similar decrease in mortgage servicing rights and the valuation allowance.

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 March 31, 2005. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon changes in interest rates, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable.

Estimated amortization expense:

NOTE 9: Long-term Funding

Long-term funding was as follows.

Federal Home Loan Bank advances:
Long-term advances from the Federal Home Loan Bank had maturities through 2020 and had weighted-average interest rates of 3.04% at March 31, 2005, compared to 3.11% at March 31, 2004 and 2.91% at December 31, 2004. These advances had a combination of fixed and variable rates, of which, 78% were fixed at March 31, 2005, while 92% and 74% were fixed at March 31, and December 31, 2004, respectively.

Bank notes:
The long-term bank notes had maturities through 2008 and had weighted-average interest rates of 2.86% at March 31, 2005, 2.20% at March 31, 2004, and 2.54% at December 31, 2004. These notes had a combination of fixed and variable rates, of which 83% was variable rate at March 31, 2005, compared to 50% and 70% variable rate at March 31, and December 31, 2004, respectively.

Repurchase agreements:
The long-term repurchase agreements had maturities through 2008 and had weighted-average interest rates of 2.39% at March 31, 2005, 1.71% at March 31, 2004, and 1.89% at December 31, 2004. These repurchase

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agreements had a combination of fixed and variable rates, of which 85% was variable at March 31, 2005, while 23% and 82% were variable at March 31, and December 31, 2004, respectively.

Subordinated debt:
In August 2001, the Corporation issued $200 million of 10-year subordinated debt. This debt was issued at a discount and has a fixed interest rate of 6.75%. The Corporation also entered into an interest rate swap to hedge the interest rate risk on the subordinated debt. As of March 31, 2005, the fair value of the derivative was a $0.3 million loss, compared to an $11.9 million gain and $5.2 million gain at March 31, and December 31, 2004, respectively. The subordinated debt qualifies under the risk-based capital guidelines as Tier 2 supplementary capital for regulatory purposes.

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

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

During May 2002, the Corporation entered into an interest rate swap to hedge the interest rate risk on the Debentures. The fair value of the derivative was a $2.9 million gain at March 31, 2005, a $10.5 million gain at March 31, 2004, and a $5.1 million gain at December 31, 2004. Given the fair value hedge, the Debentures are carried on the balance sheet at fair value.

NOTE 10: Derivative and Hedging Activities

The Corporation uses derivative instruments primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheet from changes in interest rates. The predominant derivative and hedging activities include interest rate swaps, interest rate caps, and certain mortgage banking activities. Interest rate swaps are entered into primarily as an asset/liability management strategy to modify interest rate risk, while interest rate caps are entered into as interest rate protection instruments.

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

Included in the table below for March 31, 2005, were customer swaps and caps for which the Corporation has mirror swaps and caps. The fair value of these customer swaps and caps is recorded in earnings and the net impact for the 2005 period was immaterial.

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(1)	Cash flow hedges
(2)	Fair value hedges
(3)	Hedges variable rate long-term debt
(4)	Hedges fixed rate long-term debt
(5)	Hedges specific longer-term fixed rate commercial loans

For the mortgage derivatives, which are not accounted for as hedges, changes in the fair value are recorded to mortgage banking income. The fair value of the mortgage derivatives at March 31, 2005 was a net loss of $0.3 million, compared to a net gain of $0.4 million at March 31, 2004. The $0.3 million net fair value loss of mortgage derivatives at March 31, 2005, is comprised of the net loss on commitments to fund approximately $141 million of loans to individual borrowers and the net gain on commitments to sell approximately $167 million of loans to various investors. The $0.4 million net fair value gain of mortgage derivatives at March 31, 2004, is composed of the net gain on commitments to fund approximately $385 million of loans to individual borrowers and the net loss on commitments to sell approximately $403 million of loans to various investors.

NOTE 11: Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

Commitments and Off-Balance Sheet Risk
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 lending-related commitments (see below) and derivative instruments (see Note 10).

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.

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Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are defined as derivatives and are therefore required to be recorded on the consolidated balance sheet at fair value. The Corporation’s derivative and hedging activity is further summarized in Note 10. The following is a summary of lending-related commitments at March 31.

(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 March 31, 2005 or 2004.
(2)	As required by FASB Interpretation No. 45, an interpretation of FASB Statements No. 5, 57, and 107, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” the Corporation has established a liability of $4.9 million and $2.7 million at March 31, 2005 and 2004, respectively, as an estimate of the fair value of these financial instruments.

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

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

Residential mortgage loans sold to others are sold on a nonrecourse basis, though First Federal retained the credit risk on the underlying loans it sold to the Federal Home Loan Bank (“FHLB”), prior to its acquisition by the Corporation, in exchange for a monthly credit enhancement fee. At March 31, 2005, there were $2.3 billion of such loans with credit risk recourse, upon which there has been negligible historical losses.

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NOTE 12: Retirement Plans

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

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

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

NOTE 13: Segment Reporting

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

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

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

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Selected segment information is presented below.

* 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.

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

Special Note Regarding Forward-Looking Statements

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

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

	•	operating, legal, and regulatory risks;
	•	economic, political, and competitive forces affecting the Corporation’s banking, securities, asset management, and credit services businesses;
	•	integration risks related to integration of First Federal and other acquisitions;
	•	impact on net interest income of changes in monetary policy and general economic conditions; and
	•	the risk that the Corporation’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

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

Overview

The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporation’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith.

The following discussion refers to the Corporation’s business combination activity that may impact the comparability of certain financial data (see Note 6, “Business Combinations,” of the notes to consolidated financial statements). In particular, consolidated financial results for first quarter 2004 reflect no contribution from its October 29, 2004, purchase acquisition of First Federal and April 1, 2004, purchase acquisition of Jabas.

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

Critical Accounting Policies

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.

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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 consults periodically with third parties as to the assumptions used and to determine that the resultant valuation is within the context of the market. In addition, the Corporation periodically reviews the assumptions underlying the valuation of mortgage servicing rights. 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 March 31, 2005 (holding all other factors unchanged), it is anticipated that prepayment speeds would have slowed and the modeled estimated value of mortgage servicing rights could have been $4 million higher than that determined at March 31, 2005 (leading to more valuation allowance reversal and an increase in mortgage banking income). Conversely, if mortgage interest rates moved down 50 bp, prepayment speeds would have likely increased and the modeled estimated value of mortgage servicing rights could have been $8 million lower (leading to adding more valuation allowance and a decrease in mortgage banking income). The proceeds that might be received should the Corporation actually consider a sale of the mortgage servicing rights portfolio could differ from the amounts reported at any point in time. The Corporation believes the mortgage servicing rights asset is properly recorded in the consolidated financial statements. See Note 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

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financial instruments. Substantially all of these derivative financial instruments are designated as hedges for financial reporting purposes. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings, and measurement of changes in the fair value of hedged items. However, if in the future the derivative financial instruments used by the Corporation no longer qualify for hedge accounting treatment and, consequently, the change in the fair value of hedged items could no longer be recognized in earnings, the impact on the consolidated results of operations and reported earnings could be significant. The Corporation believes hedge effectiveness is evaluated properly in the consolidated financial statements. See Note 10, “Derivative and Hedging Activities,” of the notes to consolidated financial statements.

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

Segment Review

As described in Note 13, “Segment Reporting,” of the notes to consolidated financial statements, the Corporation’s primary reportable segment is banking. Banking consists of lending and deposit gathering (as well as other banking-related products and services) to businesses, governments, and consumers and the support to deliver, fund, and manage such banking services. The Corporation’s wealth management segment provides products and a variety of fiduciary, investment management, advisory, and Corporate agency services to assist customers in building, investing, or protecting their wealth, including insurance, brokerage, and trust/asset management.

Note 13, “Segment Reporting,” of the notes to consolidated financial statements, indicates that the banking segment represents 90% of total revenues, as defined in the Note. The Corporation’s profitability is predominantly dependent on net interest income, noninterest income, the level of the provision for loan losses, noninterest expense, and taxes of its banking segment. The consolidated discussion is therefore predominantly describing the banking segment results. The critical accounting policies primarily affect the banking segment, with the exception of income tax accounting, which affects both the banking and wealth management segments (see section “Critical Accounting Policies”).

Results of Operations — Summary

Net income for the three months ended March 31, 2005 totaled $77.5 million, or $0.60 and $0.59 for basic and diluted earnings per share, respectively. Comparatively, net income for the first quarter of 2004 was $59.6 million, or $0.54 and $0.53 for basic and diluted earnings per share, respectively. For the first quarter of 2005 the annualized return on average assets was 1.54% and the annualized return on average equity was 15.52%, compared to 1.57% and 17.37%, respectively, for the comparable period in 2004. The net interest margin for the first three months of 2005 was 3.68% compared to 3.80% for the first three months of 2004.

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

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

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

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

Net Interest Income and Net Interest Margin

Net interest income on a taxable equivalent basis for the three months ended March 31, 2005, was $172.1 million, an increase of $36.7 million or 27.1% over the comparable period last year. As indicated in Tables 2 and 3, the increase in taxable equivalent net interest income was attributable principally to favorable volume variances (with balance sheet growth from both the First Federal acquisition and organic growth adding $40.1 million to taxable equivalent net interest income), reduced in part by unfavorable rate variances (as the impact of changes in the interest rate environment reduced taxable equivalent net interest income by $3.4 million).

The net interest margin for the first three months of 2005 was 3.68%, down 12 basis points (“bp”) from 3.80% for the same period in 2004. This comparable period decrease was a function of a 19 bp lower interest rate spread (the net of a 37 bp rise in the yield on earning assets and a 56 bp increase in the cost of interest-bearing liabilities) mitigated by a 7 bp higher contribution from net free funds (reflecting the higher interest rate environment in 2005).

The Federal Reserve raised interest rates by 25 bp seven times since mid-year 2004, resulting in an average Federal funds rate of 2.44% for first quarter 2005, 144 bp higher than 1.00% during the first quarter 2004. The benefits to the margin from the interest rate increases were substantially offset by the continued flattening of the yield curve and competitive pricing pressures (which the Corporation anticipates will continue in the near term), producing lower spreads on loans and higher rates on deposits.

The yield on earning assets was 5.51% for the first quarter of 2005, 37 bp higher than the comparable quarter last year. The average loan yield was 5.77%, up 60 bp, as increases in interest rates impacted the pricing on new and refinanced loans, as well as, the repricing of variable rate loans. The average yield on investments and other earning assets was 4.75% for first quarter 2005, down 31 bp from first quarter 2004, attributable largely to the maturing of higher yielding investments and investments made during 2004 in the lower rate environment.

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The cost of interest-bearing liabilities was 2.13% for the first quarter of 2005, up 56 bp compared to the same period in 2004, reflecting the rising rate environment. The average cost of interest-bearing deposits was 1.76%, 36 bp higher than the first quarter of 2004, and the cost of wholesale funds (comprised of short-term borrowings and long-term funding) was 2.76%, up 86 bp from first quarter 2004. The cost of short-term borrowings were the most unfavorably impacted by the higher interest rates between comparable first quarter periods, increasing 133 bp to 2.46%, while long-term debt rose more modestly, increasing only 18 bp to 3.03%, attributable to a greater percentage of more favorably priced variable rate debt in the first quarter of 2004.

Average earning assets grew to $18.8 billion for first quarter 2005, an increase of $4.6 billion or 32.2% over the comparable quarter last year. On average, loans increased $3.5 billion and investments were up $1.0 billion (predominantly mortgage-related securities), with First Federal adding $2.7 billion and $0.7 billion of loans and investments, respectively, at acquisition. The overall growth in average loans was comprised of increases in commercial loans (up $1.7 billion), retail loans (up $1.0 billion) and residential mortgages (up $0.8 billion).

Average interest-bearing liabilities were $16.1 billion for first quarter 2005, up $4.1 billion versus the comparable period in 2004, and net free funds increased $0.5 billion, both supporting the growth in earning assets. Noninterest-bearing demand deposits (a component of net free funds) were up $0.5 billion, attributable principally to First Federal. The increase in interest-bearing liabilities was comprised of growth in interest-bearing deposits (up $2.3 billion, with First Federal adding $2.2 billion at acquisition) and higher wholesale funding balances (up $1.7 billion). Long-term debt expanded by $1.2 billion (including $0.4 billion from First Federal) and represented 19.3% of average interest-bearing liabilities for the first quarter 2005 versus 15.4% for the comparable quarter in 2004. The remaining funding needs were filled with short-term borrowings (up $0.5 billion).

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TABLE 2
Net Interest Income Analysis
($ in Thousands)