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 March 31, 2006

OR

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

For the transition period from                                           to                                          

Commission file number 0-5519

Associated Banc-Corp

(Exact name of registrant as specified in its charter)

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

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

(920) 491-7000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is 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 April 30, 2006, was 132,238,765.

 

 

ASSOCIATED BANC-CORP
TABLE OF CONTENTS

		Page No.
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets — March 31, 2006, March 31, 2005 and December 31, 2005			3
Consolidated Statements of Income — Three Months Ended March 31, 2006 and 2005			4
Consolidated Statements of Changes in Stockholders’ Equity — Three Months Ended March 31, 2006 and 2005			5
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2006 and 2005			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			43
Item 4. Controls and Procedures			44
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6. Exhibits			44
Signatures			45
Amended and Restated Articles of Incorporation
Subsidiaries
Certification of CEO
Certification of CFO
Certifications

PART I — FINANCIAL INFORMATION

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with U.S. generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in Associated Banc-Corp’s 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 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, 2006 presentation.

NOTE 3: New Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards (“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 November 2005, the FASB issued FASB Staff Position (“FSP”) 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“FSP 115-1”). FSP 115-1 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. If, after consideration of all available evidence, impairment is determined to be other-than-temporary, then an impairment loss should be recognized through earnings equal to the difference between the cost of the investment and its fair value. This FSP nullifies certain provisions of Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“EITF 03-1”) while retaining the disclosure requirements of EITF 03-1, which were adopted in 2003. FSP 115-1 is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The Corporation regularly evaluates its investments for possible other-than-temporary impairment and, therefore, the requirements of FSP 115-1 did not have a material impact on the Corporation’s results of operations, financial position, or liquidity.

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

In December 2004, the FASB issued SFAS No. 123 (revised December 2004), “Share-Based Payment,” (“SFAS 123R”), which replaces SFAS 123 and supersedes APB Opinion 25. SFAS 123R is effective for all stock-based awards granted 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 quarter of 2006, the Corporation recognized $0.2 million of compensation expense for unvested stock options related to the adoption of SFAS 123R. 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. Presented below are the calculations for basic and diluted earnings per share.

NOTE 5: Stock-Based Compensation

At March 31, 2006, the Corporation has three stock-based compensation plans (discussed below). All stock options 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 options 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.

Prior to January 1, 2006, the Corporation accounted 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, as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation” (“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 quarter of 2005, except with respect to restricted stock awards.

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. The Corporation amortizes the expense over the vesting period. During the first quarter of 2006, 87,900 shares of restricted stock shares were awarded, 51,000 shares of restricted stock shares were awarded during the first quarter of 2005 (of which, 42,500 remain restricted at March 31, 2006), and 75,000 restricted stock shares were awarded during 2003 (of which, 30,000 remain restricted at March 31, 2006). Expense for restricted stock awards of approximately $366,000 and $239,000 was recorded for the three months ended March 31, 2006 and 2005, respectively.

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 quarter 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 three months ended March 31, 2006, were $228,000 and $137,000 lower, respectively, than if it had continued to account for the share-based compensation under APB 25. Basic and diluted earnings per share for the three months ended March 31, 2006, would have been unchanged at $0.60 and $0.59, respectively, 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 resulting from 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. The $1.4 million excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow if the Corporation had not adopted SFAS 123R.

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 two to three years. As of March 31, 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 exercise prices equal to 100% of market value on the date of grant. As of March 31, 2006, approximately 2.8 million shares remain available for granting.

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 to key employees. Options are generally exercisable up to 10 years from the date of grant and vest ratably over three years. As of March 31, 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 are expected to 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.

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 first quarter periods of 2006 and 2005:

In accordance with SFAS 123R, the Corporation is required to estimate potential forfeitures of stock grants and adjust compensation cost 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 through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation cost to be recognized in future periods.

A summary of the Corporation’s stock-based compensation activity for the three months ended March 31, 2006, is presented below.

The following table summarizes information about the Corporation’s nonvested stock compensation activity for the three months ended March 31, 2006:

The weighted average per share fair value of stock options granted in the first quarter of 2006 was $7.11, compared to a weighted average per share fair value of $7.04 for stock options granted in the first quarter of 2005. During the same periods, the total intrinsic value of stock options exercised was $7.2 million and $5.1 million, respectively, and the total fair value of stock options that vested was $3.7 million and $4.3 million, respectively. The Corporation had $0.8 million of unrecognized compensation costs related to stock options at March 31, 2006, that is expected to be recognized on a straight-line based over a period of 10 months.

There were no restricted stock shares that vested during the three months ended March 31, 2006. The Corporation had $3.7 million of unrecognized compensation costs related to restricted stock shares at March 31, 2006, that is expected to be recognized over a weighted-average period of 2 years.

During the first quarter of 2006, $13.2 million was received for the exercise of stock options. Cash was not used to settle any equity instruments previously granted. 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 each quarter in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. For the Corporation’s employee incentive plans, the Board of Directors authorized the repurchase of up to 3.0 million shares in 2006 (750,000 shares per quarter). 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 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 period 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 attributes 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.

NOTE 6: Business Combinations

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

Completed Business Combination:

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.

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

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

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, 2006.

Management does not believe any individual unrealized loss at March 31, 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. Circumstances 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 March 31, 2006, these FHLMC preferred stock securities (two of which are included in the table above in the other securities, 12 months or more category with unrealized losses of $0.1 million) had a carrying value of $9.0 million.

NOTE 8: Goodwill and Other Intangible Assets

Goodwill: Goodwill is not amortized, but is subject to impairment tests on at least an annual basis. The Corporation conducts its impairment testing annually in May and no impairment loss was necessary in 2005 or through March 31, 2006. At March 31, 2006, goodwill of $854 million is assigned to the banking segment and goodwill of $22 million is assigned to the wealth management segment. The $2.0 million reduction to goodwill during the first quarter of 2006 represents adjustments to the initially estimated fair values of tax liabilities related to the acquisition of First Federal Capital Corp (“First Federal”) in October 2004. 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 $15.3 million are assigned to the wealth management segment and $2.3 million are assigned to the banking segment as of March 31, 2006.

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

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.

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, 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:

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 3.77% at March 31, 2006, compared to 3.04% at March 31, 2005 and 3.49% at December 31, 2005. These advances had a combination of fixed and variable rates, of which, 77% were fixed at March 31, 2006, while 78% and 77% were fixed at March 31, and December 31, 2005, respectively.

Bank notes: The long-term bank notes had maturities through 2008 and had weighted-average interest rates of 4.64% at March 31, 2006, 2.86% at March 31, 2005, and 4.31% at December 31, 2005. These notes had a combination of fixed and variable rates, of which 89% was variable rate at March 31, 2006, compared to 83% and 89% variable rate at March 31, and December 31, 2005, respectively.

Repurchase agreements: The long-term repurchase agreements had maturities through 2009 and had weighted-average interest rates of 3.87% at March 31, 2006, 2.39% at March 31, 2005, and 3.55% at December 31, 2005. These repurchase agreements had a combination of fixed and variable rates, of which 100% was variable at March 31, 2006, while 85% and 100% were variable at March 31, and December 31, 2005, 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 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 an 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 an interest rate swap to hedge the interest rate risk on the ASBC Debentures. The fair value of the derivative was a $2.6 million loss at March 31, 2006, compared to a $2.9 million gain at March 31, 2005 and a $0.2 million loss at December 31, 2005. Given the fair value hedge, the ASBC Debentures are carried on the consolidated balance sheet at fair value.

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 7.46% and 8.20%, at March 31, 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: 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 the use of interest rate swaps and interest rate caps, and certain mortgage banking activities. Interest rate swaps are entered into primarily as an asset/liability management strategy to modify interest rate risk, while an interest rate cap is an interest rate protection instrument.

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

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

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

The table below identifies the Corporation’s derivative instruments, excluding mortgage derivatives, at March 31, 2006, as well as which instruments receive hedge accounting treatment. Included in the table below for March 31, 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 quarter of 2006 was immaterial.

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 March 31, 2006, was a net loss of $0.8 million, comprised of the net loss on commitments to fund approximately $129 million of loans to individual borrowers and the net gain on commitments to sell approximately $154 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.

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.

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 First Federal retained the credit risk on the underlying loans it sold to the FHLB, prior to its acquisition by the Corporation in October 2004, in exchange for a monthly credit enhancement fee. At March 31, 2006 and 2005, there were $2.0 billion and $2.3 billion, respectively, of such loans with credit risk recourse, upon which there have been negligible historical losses.

The Corporation contributed $8 million to its pension plan during the first quarter of 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 (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.

Selected segment information is presented below.

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 Note 6, “Business Combinations,” of the notes to consolidated financial statements). In particular, consolidated financial results for first quarter 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

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.

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 March 31, 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 $1.0 million higher than that determined at March 31, 2006 (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 $1.5 million lower (leading to adding more valuation allowance and a decrease in mortgage banking income). The proceeds that might be received should the Corporation actually consider a sale of 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. The Corporation continues to evaluate its future hedging strategies. 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 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 products and a variety of fiduciary, investment management, advisory, and Corporate agency services to assist customers in building, investing, or protecting their wealth, including insurance, brokerage, and trust/asset management.

Note 13, “Segment Reporting,” of the notes to consolidated financial statements, indicates that the banking segment represents 90% of total revenues for the first quarter 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 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, 2006, totaled $81.7 million, or $0.60 for both basic and diluted earnings per share. Comparatively, net income for the first quarter of 2005 was $77.5 million, or $0.60 and $0.59 for basic and diluted earnings per share, respectively. For the first quarter of 2006 the annualized return on average assets was 1.52% and the annualized return on average equity was 14.16%, compared to 1.54% and 15.52%, respectively, for the comparable period in 2005. The net interest margin for the first three months of 2006 was 3.48% compared to 3.68% for the first three months of 2005.

Net Interest Income and Net Interest Margin

Net interest income on a taxable equivalent basis for the three months ended March 31, 2006, was $173.5 million, an increase of $1.4 million or 0.8% 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 State Financial acquisition and organic growth adding $10.7 million to taxable equivalent net interest income), reduced in large part by unfavorable rate variances (as the impact of changes in the interest rate environment reduced taxable equivalent net interest income by $9.3 million).

The net interest margin for the first three months of 2006 was 3.48%, down 20 bp from 3.68% for the same period in 2005. This comparable period decrease was a function of a 37 bp lower interest rate spread (the net of a 124 bp rise in the cost of interest-bearing liabilities and an 87 bp increase in the yield on earning assets) mitigated by a 17 bp higher contribution from net free funds (reflecting the higher interest rate environment in 2006).

The Federal Reserve raised interest rates multiple times across the comparable timeframes, resulting in an average Federal funds rate of 4.43% for first quarter 2006, 199 bp higher than 2.44% during the first quarter 2005. The benefits to the margin from the interest rate increases were substantially offset by the continued flattening of the yield curve (i.e., rising short-term interest rates without commensurate increases to longer-term interest rates) and competitive pricing pressures, producing lower spreads on loans and higher rates on deposits.

The yield on earning assets was 6.38% for the first quarter of 2006, 87 bp higher than the comparable quarter last year. The average loan yield of 6.84% was up 107 bp, as increases in interest rates benefitted the pricing on new and refinanced loans and the repricing of variable rate loans, though lagged the full increase seen in the Federal funds rate due to the appreciably flatter yield curve between the quarters, competitive pricing, and due to a portion of the loan portfolio being fixed rate. The average yield on investments and other earning assets was 4.86% for first quarter 2006, 11 bp higher than a year earlier. The relatively modest increase in investment yields reflects that returns on these assets are generally tied to U.S. Treasury yields, which experienced significantly smaller rate increases year-over-year than Federal funds.

The rate on interest-bearing liabilities was 3.37% for the first quarter of 2006, up 124 bp compared to the same period in 2005, with the cost of funds repricing upward in the rising rate environment. The average cost of interest-bearing deposits of 2.84% was 108 bp higher than the first quarter of 2005, including competitive pricing to retain balances. The cost of wholesale funds was 4.32%, up 156 bp from first quarter 2005, with short-term borrowings increasing 194 bp (approximating the increase in quarterly average Federal funds rates) and long-term funding up 122 bp (as approximately 47% is variable rate debt at March 31, 2006).

Average earning assets grew to $19.9 billion for first quarter 2006, an increase of $1.2 billion or 6.2% over the comparable quarter last year. On average, loans grew $1.4 billion, with State Financial adding $1.0 billion and the remainder of the increase attributable to organic growth. Average investments and other earning assets were down $196 million, the net of $348 million added by State Financial at acquisition and an overall decrease of $544 million, per the corporate initiative beginning in fourth quarter 2005 whereby cash from maturing or sold investments was not reinvested, but used to reduce wholesale borrowings and repurchase stock. Therefore, as a percentage of average earning assets, investment securities decreased to 23.0% in first quarter 2006 (from 25.5% a year earlier) and loans experienced a corresponding increase (from 74.5% for first quarter 2005 to 77.0% for first quarter 2006).

Average interest-bearing deposits were higher by $0.9 billion and net free funds (largely noninterest-bearing demand deposits) grew by $0.1 billion, with State Financial adding deposits totaling $1.1 billion. The remainder of the net growth in earning assets was funded by a $0.2 million increase in wholesale funding. Short-term borrowings increased $236 million, while long-term funding declined $55 million. However, as a percentage of total average interest-bearing liabilities, wholesale funds declined year-over-year, representing 35.4% for the first quarter 2006 versus 36.6% for the comparable quarter in 2005.

In late March 2006, the Corporation accelerated the pace of its wholesale funding reduction initiative announced in October 2005, whereby cash flows from maturing investments and the proceeds from investment securities sales will be used to repurchase shares of common stock and reduce wholesale funding levels. The late-March 2006 investment sale activity and subsequent reduction in wholesale funding levels had minimal impact on net interest income and net interest margin in the first quarter of 2006. However, management anticipates that the reduction in wholesale funding dependency should aid margin improvement in subsequent quarters. (See section, “Balance Sheet” and Note 7, “Investment Securities,” of the notes to consolidated financial statements for additional information)