XNAS:ASBC Associated Banc-Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

 

¨ 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 001-31343

 

 

Associated Banc-Corp

(Exact name of registrant as specified in its charter)

 

Wisconsin   39-1098068
(State or other jurisdiction of incorporation or organization)   (I.R.S. 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at July 31, 2012, was 171,640,795.

 

 

 


Table of Contents

ASSOCIATED BANC-CORP

TABLE OF CONTENTS

 

     Page No.  

PART I. Financial Information

  

Item 1. Financial Statements (Unaudited):

  

Consolidated Balance Sheets — June 30, 2012 and December 31, 2011

     3   

Consolidated Statements of Income — Three and Six Months Ended June 30, 2012 and 2011

     4   

Consolidated Statements of Other Comprehensive Income — Three and Six Months Ended June  30, 2012 and 2011

     5   

Consolidated Statements of Changes in Stockholders’ Equity — Six Months Ended June  30, 2012 and 2011

     6   

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2011

     7   

Notes to Consolidated Financial Statements

     8   

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

     49   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     79   

Item 4. Controls and Procedures

     79   

PART II. Other Information

  

Item 1. Legal Proceedings

     79   

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

     80   

Item 6. Exhibits

     80   

Signatures

     81   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements:

ASSOCIATED BANC-CORP

Consolidated Balance Sheets

 

     June 30,
2012
(Unaudited)
    December 31,
2011
(Audited)
 
     (In Thousands, except share and per
share data)
 

ASSETS

    

Cash and due from banks

   $ 414,760     $ 454,958  

Interest-bearing deposits in other financial institutions

     180,050       154,562  

Federal funds sold and securities purchased under agreements to resell

     3,800       7,075  

Investment securities available for sale, at fair value

     4,521,436       4,937,483  

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost

     176,041       191,188  

Loans held for sale

     157,481       249,195  

Loans

     14,698,902       14,031,071  

Allowance for loan losses

     (332,658     (378,151
  

 

 

   

 

 

 

Loans, net

     14,366,244       13,652,920  

Premises and equipment, net

     225,245       223,736  

Goodwill

     929,168       929,168  

Other intangible assets, net

     64,812       67,574  

Trading assets

     73,484       73,253  

Other assets

     968,579       983,105  
  

 

 

   

 

 

 

Total assets

   $ 22,081,100     $ 21,924,217  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Noninterest-bearing demand deposits

   $ 3,874,429     $ 3,928,792  

Interest-bearing deposits

     11,232,442       11,161,863  
  

 

 

   

 

 

 

Total deposits

     15,106,871       15,090,655  

Federal funds purchased and securities sold under agreements to repurchase

     1,253,270       1,514,485  

Other short-term funding

     1,400,000       1,000,000  

Long-term funding

     1,150,729       1,177,071  

Trading liabilities

     80,107       80,046  

Accrued expenses and other liabilities

     180,502       196,166  
  

 

 

   

 

 

 

Total liabilities

     19,171,479       19,058,423  

Stockholders’ equity

    

Preferred equity

     63,272       63,272  

Common stock

     1,750       1,746  

Surplus

     1,594,995       1,586,401  

Retained earnings

     1,213,735       1,148,773  

Accumulated other comprehensive income

     66,579       65,602  

Treasury stock, at cost

     (30,710     —     
  

 

 

   

 

 

 

Total stockholders’ equity

     2,909,621       2,865,794  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 22,081,100     $ 21,924,217  
  

 

 

   

 

 

 

Preferred shares issued

     65,000       65,000  

Preferred shares authorized (par value $1.00 per share)

     750,000       750,000  

Common shares issued

     175,012,686       174,591,841  

Common shares authorized (par value $0.01 per share)

     250,000,000       250,000,000  

Treasury shares of common stock

     2,382,348       —     

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In Thousands, except per share data)  

INTEREST INCOME

        

Interest and fees on loans

   $ 147,188     $ 144,358     $ 296,211     $ 287,129  

Interest and dividends on investment securities

        

Taxable

     23,000       35,351       46,029       70,003  

Tax exempt

     7,135       7,504       14,409       15,217  

Other interest

     1,262       1,438       2,509       2,896  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     178,585       188,651       359,158       375,245  

INTEREST EXPENSE

        

Interest on deposits

     10,553       16,901       22,589       35,150  

Interest on Federal funds purchased and securities sold under agreements to repurchase

     612       1,600       1,379       3,109  

Interest on other short-term funding

     1,197       2,036       2,253       4,107  

Interest on long-term funding

     11,956       13,991       24,002       25,033  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     24,318       34,528       50,223       67,399  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     154,267       154,123       308,935       307,846  

Provision for loan losses

     —          16,000       —          47,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     154,267       138,123       308,935       260,846  

NONINTEREST INCOME

        

Trust service fees

     10,125       10,012       19,912       19,843  

Service charges on deposit accounts

     16,768       19,112       34,810       38,176  

Card-based and other nondeposit fees

     12,084       15,747       22,963       31,345  

Insurance commissions

     12,912       11,552       24,502       23,318  

Brokerage and annuity commissions

     4,206       4,923       8,333       9,538  

Mortgage banking, net

     16,735       (3,320     34,389       (1,475

Capital market fees, net

     2,673       (890     6,389       1,488  

Bank owned life insurance income

     3,164       3,500       7,456       7,086  

Asset losses, net

     (4,984     (3,378     (8,578     (6,541

Investment securities gains (losses), net:

        

Realized gains (losses), net

     563       (14     603       (13

Other-than-temporary impairments

     —          (22     —          (45

Less: Non-credit portion recognized in other comprehensive income (before taxes)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities gains (losses), net

     563       (36     603       (58

Other

     1,705       4,364       3,618       9,871  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     75,951       61,586       154,397       132,591  

NONINTEREST EXPENSE

        

Personnel expense

     93,819       89,526       188,100       178,754  

Occupancy

     14,008       12,663       29,187       27,938  

Equipment

     5,719       4,969       11,187       9,736  

Data processing

     11,304       7,974       20,820       15,508  

Business development and advertising

     5,468       5,652       10,849       10,595  

Other intangible asset amortization

     1,049       1,178       2,098       2,356  

Loan expense

     2,948       2,983       5,858       5,939  

Legal and professional fees

     5,657       4,783       15,372       9,265  

Losses other than loans

     2,060       (1,925     5,610       4,372  

Foreclosure / OREO expense

     4,343       6,358       7,705       11,242  

FDIC expense

     4,778       7,198       9,648       15,442  

Other

     14,877       14,358       29,358       27,569  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     166,030       155,717       335,792       318,716  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     64,188       43,992       127,540       74,721  

Income tax expense

     20,871       9,610       41,590       17,486  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     43,317       34,382       85,950       57,235  

Preferred stock dividends and discount accretion

     1,300       8,812       2,600       16,225  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common equity

   $ 42,017     $ 25,570     $ 83,350     $ 41,010  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic

   $ 0.24     $ 0.15     $ 0.48     $ 0.24  

Diluted

   $ 0.24     $ 0.15     $ 0.48     $ 0.24  

Average common shares outstanding:

        

Basic

     172,839       173,323       173,343       173,268  

Diluted

     172,841       173,327       173,345       173,272  

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

ITEM 1: Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Other Comprehensive Income

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     ($ in Thousands)  

Net income

   $ 43,317     $ 34,382     $ 85,950     $ 57,235  

Other comprehensive income, net of tax:

        

Investment securities available for sale:

        

Net unrealized gains (losses)

     1,305       53,178       (609     80,763  

Reclassification adjustment for net (gains) losses realized in net income

     (563     36       (603     58  

Income tax (expense) benefit

     (290     (20,639     472       (31,347
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) on investment securities available for sale

     452       32,575       (740     49,474  

Defined benefit pension and postretirement obligations:

        

Prior service cost, net of amortization

     60       116       120       233  

Net loss, net of amortization

     640       452       1,280       903  

Income tax expense

     (273     (220     (546     (441
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income on pension and postretirement obligations

     427       348       854       695  

Derivatives used in cash flow hedging relationships:

        

Net unrealized losses

     (24     (824     (14     (374

Reclassification adjustment for net losses and interest expense for interest differential on derivatives realized in net income

     727       1,980       1,458       2,962  

Income tax expense

     (281     (465     (581     (1,038
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income on cash flow hedging relationships

     422       691       863       1,550  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,301       33,614       977       51,719  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 44,618     $ 67,996     $ 86,927     $ 108,954  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

     Preferred
Equity
    Common
Stock
     Surplus      Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Treasury
Stock
    Total  
     ($ in Thousands, except per share data)  

Balance, December 31, 2010

   $ 514,388     $ 1,739      $ 1,573,372      $ 1,041,666     $ 27,626      $ —        $ 3,158,791  

Comprehensive income:

                 

Net income

     —          —           —           57,235       —           —          57,235  

Other comprehensive income

     —          —           —           —          51,719        —          51,719  
                 

 

 

 

Comprehensive income

                    108,954  
                 

 

 

 

Common stock issued:

                 

Stock-based compensation plans, net

     —          6        2,437        (113     —           (47     2,283  

Purchase of treasury stock

     —          —           —           —          —           (616     (616

Cash dividends:

                 

Common stock, $0.02 per share

     —          —           —           (3,487     —           —          (3,487

Preferred stock

     —          —           —           (10,062     —           —          (10,062

Redemption of preferred stock

     (262,500     —           —           —          —           —          (262,500

Accretion of preferred stock discount

     6,163       —           —           (6,163     —           —          —     

Stock-based compensation expense, net

     —          —           5,774        —          —           —          5,774  

Tax benefit of stock options

     —          —           11        —          —           —          11  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, June 30, 2011

   $ 258,051     $ 1,745      $ 1,581,594      $ 1,079,076     $ 79,345      $ (663   $ 2,999,148  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, December 31, 2011

   $ 63,272     $ 1,746      $ 1,586,401      $ 1,148,773     $ 65,602      $ —        $ 2,865,794  

Comprehensive income:

                 

Net income

     —          —           —           85,950       —           —          85,950  

Other comprehensive income

     —          —           —           —          977        —          977  
                 

 

 

 

Comprehensive income

                    86,927  
                 

 

 

 

Common stock issued:

                 

Stock-based compensation plans, net

     —          4        650        (1,009     —           500       145  

Purchase of treasury stock

     —          —           —           —          —           (31,210     (31,210

Cash dividends:

                 

Common stock, $0.10 per share

     —          —           —           (17,379     —           —          (17,379

Preferred stock

     —          —           —           (2,600     —           —          (2,600

Stock-based compensation expense, net

     —          —           7,939        —          —           —          7,939  

Tax benefit of stock options

     —          —           5        —          —           —          5  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, June 30, 2012

   $ 63,272     $ 1,750      $ 1,594,995      $ 1,213,735     $ 66,579      $ (30,710   $ 2,909,621  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2012     2011  
     ($ in Thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 85,950     $ 57,235  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     —          47,000  

Depreciation and amortization

     20,832       15,918  

Addition to valuation allowance on mortgage servicing rights, net

     2,036       5,763  

Amortization of mortgage servicing rights

     11,775       11,637  

Amortization of other intangible assets

     2,098       2,356  

Amortization and accretion on earning assets, funding, and other, net

     30,013       30,421  

Tax benefit from exercise of stock options

     5       11  

(Gain) loss on sales of investment securities, net and impairment write-downs

     (603     58  

Loss on sales of assets and impairment write-downs, net

     8,578       6,541  

Gain on mortgage banking activities, net

     (29,459     (10,581

Mortgage loans originated and acquired for sale

     (1,301,779     (540,893

Proceeds from sales of mortgage loans held for sale

     1,409,805       605,375  

Decrease in interest receivable

     4,744       3,752  

Increase (decrease) in interest payable

     (4,601     1,585  

Net change in other assets and other liabilities

     (3,637     36,838  
  

 

 

   

 

 

 

Net cash provided by operating activities

     235,757       273,016  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net increase in loans

     (857,350     (640,916

Purchases of:

    

Investment securities

     (592,477     (433,972

Premises, equipment, and software, net of disposals

     (33,063     (23,023

Other assets

     (2,810     (1,349

Proceeds from:

    

Sales of investment securities

     113,752       16,799  

Prepayments, calls, and maturities of investment securities

     882,830       829,838  

Sales, prepayments, calls, and maturities of other assets

     26,406       25,576  

Sales of loans originated for investment

     124,903       39,184  
  

 

 

   

 

 

 

Net cash used in investing activities

     (337,809     (187,863
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase (decrease) in deposits

     136,061       (1,159,343

Net decrease in deposits due to branch sales

     (113,622     —     

Net increase in short-term funding

     138,785       1,508,288  

Repayment of long-term funding

     (25,968     (228,078

Proceeds from issuance of long-term funding

     —          297,240  

Redemption of preferred stock

     —          (262,500

Cash dividends on common stock

     (17,379     (3,487

Cash dividends on preferred stock

     (2,600     (10,062

Purchase of treasury stock

     (31,210     (616
  

 

 

   

 

 

 

Net cash provided by financing activities

     84,067       141,442  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (17,985     226,595  

Cash and cash equivalents at beginning of period

     616,595       868,162  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 598,610     $ 1,094,757  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 54,812     $ 65,521  

Cash (received) paid for income taxes

     (21,550     5,052  

Loans and bank premises transferred to other real estate owned

     22,536       28,917  

Capitalized mortgage servicing rights

     13,147       6,584  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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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 2011 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 significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform with the current period’s presentation. 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, goodwill impairment assessment, mortgage servicing rights valuation, derivative financial instruments and hedging activities, and income taxes. Management has evaluated subsequent events for potential recognition or disclosure.

NOTE 2: New Accounting Pronouncements Adopted

In September 2011, the FASB issued amendments intended to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Under the guidance, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying value. The amendments are effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Corporation adopted the accounting standard as of January 1, 2012, as required, with no material impact on its results of operations, financial position, and liquidity. See Note 7 for required disclosures on goodwill.

In June 2011, the FASB issued guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments are effective for interim and annual periods beginning after December 15, 2011 with retrospective application. The Corporation adopted the accounting standard as of January 1, 2012, as required, with no material impact on its results of operations, financial position, and liquidity. In December 2011, the FASB decided that the requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. Therefore, those requirements have not been adopted at this time.

In May 2011, the FASB issued guidance on measuring fair value to create common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments also clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements. The amendments are effective for interim and annual periods beginning after December 15, 2011. The Corporation adopted the accounting standard as of January 1, 2012, with no material impact on its results of operations, financial position, and liquidity. See Note 12 for additional disclosures required under this accounting standard.

 

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In April 2011, the FASB issued guidance which clarifies the definition of effective control for determining whether a repurchase agreement is accounted for as a sale or secured borrowing. The amendments in the guidance remove from the assessment of effective control both the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed upon terms and the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in the update. The guidance is effective for interim and annual periods beginning on or after December 15, 2011. The Corporation adopted the accounting standard as of January 1, 2012, as required, with no material impact on its results of operations, financial position, and liquidity.

NOTE 3: Earnings Per Common Share

Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options, unvested restricted stock, and outstanding stock warrants). Presented below are the calculations for basic and diluted earnings per common share.

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In Thousands, except per share data)  

Net income

   $ 43,317     $ 34,382     $ 85,950     $ 57,235  

Preferred stock dividends and discount accretion

     (1,300     (8,812     (2,600     (16,225
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common equity

   $ 42,017     $ 25,570     $ 83,350     $ 41,010  
  

 

 

   

 

 

   

 

 

   

 

 

 

Common shareholder dividends

     (8,604     (1,733     (17,299     (3,466

Unvested share-based payment awards

     (40     (12     (80     (21
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

   $ 33,373     $ 23,825     $ 65,971     $ 37,523  
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings allocated to common shareholders

     33,222       23,668       65,665       37,293  

Undistributed earnings allocated to unvested share-based payment awards

     151       157       306       230  
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

   $ 33,373     $ 23,825     $ 65,971     $ 37,523  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic

        

Distributed earnings to common shareholders

   $ 8,604     $ 1,733     $ 17,299     $ 3,466  

Undistributed earnings allocated to common shareholders

     33,222       23,668       65,665       37,293  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total common shareholders earnings, basic

   $ 41,826     $ 25,401     $ 82,964     $ 40,759  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Distributed earnings to common shareholders

   $ 8,604     $ 1,733     $ 17,299     $ 3,466  

Undistributed earnings allocated to common shareholders

     33,222       23,668       65,665       37,293  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total common shareholders earnings, diluted

   $ 41,826     $ 25,401     $ 82,964     $ 40,759  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     172,839       173,323       173,343       173,268  

Effect of dilutive common stock awards

     2       4       2       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     172,841       173,327       173,345       173,272  

Basic earnings per common share

   $ 0.24     $ 0.15     $ 0.48     $ 0.24  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.24     $ 0.15     $ 0.48     $ 0.24  
  

 

 

   

 

 

   

 

 

   

 

 

 

Options to purchase approximately 9 million and 6 million shares were outstanding for the three and six months ended June 30, 2012, respectively, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

 

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Options to purchase approximately 6 million and 5 million shares were outstanding for the three and six months ended June 30, 2011, respectively, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

NOTE 4: Stock-Based Compensation

On January 23, 2012, the Compensation and Benefits Committee (the “Committee”) of the Board of Directors of Associated Banc-Corp approved the performance criteria for its short-term cash incentive plan (the “2012 Management Incentive Plan”) and its long-term incentive performance plan (the “2012 Long Term Incentive Performance Plan”). The approvals were the latest step in the Corporation’s transition toward a performance-based short-term and long-term incentive compensation program following the full repayment of the U.S. Department of the Treasury’s investment in the Corporation under the Capital Purchase Program. The Committee intends to ensure that further incentive compensation criteria align to the Corporation’s bottom line financial results, on which it believes shareholders measure their investments in the Corporation.

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 awards and salary shares is their fair market value on the date of grant. The fair values of stock options and restricted stock awards are amortized as compensation expense on a straight-line basis over the vesting period of the grants and the fair value of salary shares is recognized as compensation expense on the date of grant. Compensation expense recognized is included in personnel expense in the consolidated statements of income.

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options 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 and implied volatility of the Corporation’s stock. The following assumptions were used in estimating the fair value for options granted in the first half of 2012 and full year 2011.

 

     2012     2011  

Dividend yield

     2.00     2.00

Risk-free interest rate

     1.20     2.27

Weighted average expected volatility

     49.19     47.24

Weighted average expected life

     6 years        6 years   

Weighted average per share fair value of options

   $ 5.06     $ 5.56  

The Corporation is required to estimate potential forfeitures of stock grants and adjust compensation expense recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

 

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A summary of the Corporation’s stock option activity for the year ended December 31, 2011 and for the six months ended June 30, 2012, is presented below.

 

Stock Options

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

Outstanding at December 31, 2010

     7,301,458     $ 24.33        

Granted

     1,624,369       14.20        

Exercised

     (23,437     12.66        

Forfeited or expired

     (1,847,116     24.51        
  

 

 

   

 

 

       

Outstanding at December 31, 2011

     7,055,274     $ 21.99        5.61        27  
  

 

 

   

 

 

       

Options exercisable at December 31, 2011

     4,623,935     $ 26.10        4.01        7  
  

 

 

   

 

 

       

Outstanding at December 31, 2011

     7,055,274     $ 21.99        

Granted

     3,009,619       12.98        

Exercised

     (11,120     13.16        

Forfeited or expired

     (914,144     21.26        
  

 

 

   

 

 

       

Outstanding at June 30, 2012

     9,139,629     $ 19.10        6.76        723  
  

 

 

   

 

 

       

Options exercisable at June 30, 2012

     4,897,268     $ 24.15        4.64        32  
  

 

 

   

 

 

       

The following table summarizes information about the Corporation’s nonvested stock option activity for the year ended December 31, 2011, and for the six months ended June 30, 2012.

 

Stock Options

   Shares     Weighted Average
Grant  Date Fair Value
 

Nonvested at December 31, 2010

     2,025,720     $ 4.09  

Granted

     1,624,369       5.56  

Vested

     (955,454     3.77  

Forfeited

     (263,296     4.85  
  

 

 

   

Nonvested at December 31, 2011

     2,431,339     $ 5.11  
  

 

 

   

Granted

     3,009,619       5.06  

Vested

     (1,021,742     4.87  

Forfeited

     (176,855     5.13  
  

 

 

   

Nonvested at June 30, 2012

     4,242,361     $ 5.13  
  

 

 

   

For the six months ended June 30, 2012 and for the year ended December 31, 2011, the intrinsic value of stock options exercised was immaterial. (Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock option.) The total fair value of stock options that vested was $5 million for the first six months of 2012 and $4 million for the year ended December 31, 2011. For the six months ended June 30, 2012 and 2011, the Corporation recognized compensation expense of $4 million and $3 million, respectively, for the vesting of stock options. For the full year 2011, the Corporation recognized compensation expense of $5 million for the vesting of stock options. At June 30, 2012, the Corporation had $18 million of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2014.

 

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The following table summarizes information about the Corporation’s restricted stock awards activity (excluding salary shares) for the year ended December 31, 2011, and for the six months ended June 30, 2012.

 

Restricted Stock

   Shares     Weighted Average
Grant  Date Fair Value
 

Outstanding at December 31, 2010

     772,262     $ 13.94  

Granted

     593,437       14.27  

Vested

     (169,499     17.74  

Forfeited

     (182,435     13.86  
  

 

 

   

Outstanding at December 31, 2011

     1,013,765     $ 13.79  
  

 

 

   

Granted

     499,114       13.00  

Vested

     (450,760     13.37  

Forfeited

     (46,634     13.76  
  

 

 

   

Outstanding at June 30, 2012

     1,015,485     $ 13.59  
  

 

 

   

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period specified in the grant. Restricted stock awards granted during 2011 to the senior executive officers and the next 20 most highly compensated employees will vest ratably over a three year period and the restricted stock award recipient must continue to perform substantial services for the Corporation for at least two years after the date of grant. Expense for restricted stock awards of approximately $4 million and $3 million was recognized for the six months ended June 30, 2012 and 2011, respectively. The Corporation recognized approximately $6 million of expense for restricted stock awards for the full year 2011. The Corporation had $8 million of unrecognized compensation costs related to restricted stock awards at June 30, 2012, that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2014.

The Corporation recognizes expense related to salary shares as compensation expense. Each share is fully vested as of the date of grant and is subject to restrictions on transfer that lapse over a period of 9 to 28 months, based on the month of grant. No salary shares were issued during the first half of 2012. The Corporation recognized compensation expense of $2 million on the granting of 139,371 salary shares (or an average cost per share of $14.25) for the six months ended June 30, 2011, and $4 million on the granting of 317,450 salary shares (or an average cost per share of $12.41) for the year ended December 31, 2011.

The Corporation issues shares from treasury, when available, or new shares upon the exercise of stock options, granting of restricted stock awards, and the granting of salary 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. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities.

 

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NOTE 5: Investment Securities

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

 

                                                                                   
      Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  
     ($ in Thousands)  

June 30, 2012:

          

U.S. Treasury securities

   $ 1,004      $ —         $ —        $ 1,004  

Federal agency securities

     7        —           —          7  

Obligations of state and political subdivisions

     786,511        48,781        (156     835,136  

(municipal securities)

          

Residential mortgage-related securities

     3,321,757        107,459        (243     3,428,973  

Commercial mortgage-related securities

     18,774        2,633        —          21,407  

Asset-backed securities(1)

     139,368        1        (205     139,164  

Other securities (debt and equity)

     93,144        2,986        (385     95,745  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 4,360,565      $ 161,860      $ (989   $ 4,521,436  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

                                                                                   
      Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  
     ($ in Thousands)  

December 31, 2011:

          

U.S. Treasury securities

   $ 1,000      $ 1      $ —        $ 1,001  

Federal agency securities

     24,031        18        —          24,049  

Obligations of state and political subdivisions

          

(municipal securities)

     797,691        49,583        (28     847,246  

Residential mortgage-related securities

     3,674,696        112,357        (1,463     3,785,590  

Commercial mortgage-related securities

     16,647        1,896        —          18,543  

Asset-backed securities(1)

     188,439        —           (707     187,732  

Other securities (debt and equity)

     72,896        1,891        (1,465     73,322  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 4,775,400      $ 165,746      $ (3,663   $ 4,937,483  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) The asset-backed securities position is largely comprised of senior, floating rate, tranches of student loan securities issued by SLM Corp (“Sallie Mae”) and guaranteed under the Federal Family Education Loan Program (“FFELP”).

The amortized cost and fair values of investment securities available for sale at June 30, 2012, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

($ in Thousands)    Amortized Cost      Fair Value  

Due in one year or less

   $ 40,394      $ 41,071  

Due after one year through five years

     210,779        217,093  

Due after five years through ten years

     553,326        591,006  

Due after ten years

     75,598        79,884  
  

 

 

    

 

 

 

Total debt securities

     880,097        929,054  

Residential mortgage-related securities

     3,321,757        3,428,973  

Commercial mortgage-related securities

     18,774        21,407  

Asset-backed securities

     139,368        139,164  

Equity securities

     569        2,838  
  

 

 

    

 

 

 

Total investment securities available for sale

   $ 4,360,565      $ 4,521,436  
  

 

 

    

 

 

 

 

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The following represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2012.

 

     Less than 12 months      12 months or more      Total  
     Number  of
Securities
     Unrealized
Losses
    Fair
Value
     Number  of
Securities
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
 
            ($ in Thousands)  

June 30, 2012:

                    

Obligations of state and political subdivisions (municipal securities)

     42        (141     16,808        1        (15     348        (156     17,156  

Residential mortgage-related securities

     9        (35     69,050        11        (208     2,421        (243     71,471  

Asset-backed securities

     2        (2     14,680        28        (203     121,094        (205     135,774  

Other securities (debt and equity)

     7        (308     45,803        1        (77     110        (385     45,913  
     

 

 

   

 

 

       

 

 

   

 

 

    

 

 

   

 

 

 

Total

      $ (486   $ 146,341         $ (503   $ 123,973      $ (989   $ 270,314  
     

 

 

   

 

 

       

 

 

   

 

 

    

 

 

   

 

 

 

The Corporation reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Corporation may consider in the other-than-temporary impairment analysis include, the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions. In addition, with regards to its debt securities, the Corporation may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain debt securities in unrealized loss positions, the Corporation prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

Based on the Corporation’s evaluation, management does not believe any unrealized loss at June 30, 2012, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and the current market conditions, and not credit deterioration. The unrealized losses reported for residential mortgage-related securities relate to non-agency residential mortgage-related securities as well as residential mortgage-related securities issued by government agencies such as the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). At June 30, 2012, the unrealized loss position on other securities was primarily comprised of a trust preferred debt security and floating rate notes. The Corporation currently does not intend to sell nor does it believe that it will be required to sell the securities contained in the above unrealized losses table before recovery of their amortized cost basis.

The following is a summary of the credit loss portion of other-than-temporary impairment recognized in earnings on debt securities for 2011 and the six months ended June 30, 2012, respectively.

 

     Non-agency
Mortgage-Related
Securities
    Trust Preferred
Debt Securities
    Total  
     ($ in Thousands)  

Balance of credit-related other-than-temporary impairment at December 31, 2010

   $ (17,556   $ (10,019   $ (27,575

Credit losses on newly identified impairment

     (2     (816     (818
  

 

 

   

 

 

   

 

 

 

Balance of credit-related other-than-temporary impairment at December 31, 2011

   $ (17,558   $ (10,835   $ (28,393

Reduction due to credit impaired securities sold

     17,026       4,157       21,183  
  

 

 

   

 

 

   

 

 

 

Balance of credit-related other-than-temporary impairment at June 30, 2012

   $ (532   $ (6,678   $ (7,210
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

For comparative purposes, the following represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2011.

 

     Less than 12 months      12 months or more      Total  
     Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value  
     ($ in Thousands)  

December 31, 2011:

              

Obligations of state and political subdivisions (municipal securities)

   $ (10   $ 971      $ (18   $ 348      $ (28   $ 1,319  

Residential mortgage-related securities

     (1,443     186,954        (20     1,469        (1,463     188,423  

Asset-backed securities

     (9     4,091        (698     174,640        (707     178,731  

Other securities (debt and equity)

     (671     45,395        (794     522        (1,465     45,917  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (2,133   $ 237,411      $ (1,530   $ 176,979      $ (3,663   $ 414,390  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank Stocks: The Corporation is required to maintain Federal Reserve stock and FHLB stock as a member of both the Federal Reserve System and the FHLB, and in amounts as required by these institutions. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value is equal to amortized cost. At June 30, 2012 and December 31, 2011, the Corporation had FHLB stock of $106 million and $121 million, respectively. The Corporation had Federal Reserve Bank stock of $70 million at both June 30, 2012 and December 31, 2011.

The Corporation reviewed these securities for impairment, including but not limited to, consideration of operating performance, the severity and duration of market value declines, as well as its liquidity and funding position. After evaluating all of these considerations, the Corporation believes the cost of these investments will be recovered and no impairment has been recorded on these securities during 2011 or the first half of 2012. The FHLB of Chicago initiated tender offers for certain of its shares during the first half of 2012, whereby the FHLB would repurchase its shares at par. The Corporation participated in the tender offers and reduced its equity holdings in the FHLB of Chicago by $15 million.

 

15


Table of Contents

NOTE 6: Loans, Allowance for Loan Losses, and Credit Quality

The period end loan composition was as follows.

 

     June 30,
2012
     December 31,
2011
 
     ($ in Thousands)  

Commercial and industrial

   $ 4,076,370      $ 3,724,736  

Commercial real estate - owner occupied

     1,116,815        1,086,829  

Lease financing

     62,750        58,194  
  

 

 

    

 

 

 

Commercial and business lending

     5,255,935        4,869,759  

Commercial real estate - investor

     2,810,521        2,563,767  

Real estate construction

     612,556        584,046  
  

 

 

    

 

 

 

Commercial real estate lending

     3,423,077        3,147,813  
  

 

 

    

 

 

 

Total commercial

     8,679,012        8,017,572  

Home equity

     2,429,594        2,504,704  

Installment

     510,831        557,782  
  

 

 

    

 

 

 

Total retail

     2,940,425        3,062,486  

Residential mortgage

     3,079,465        2,951,013  
  

 

 

    

 

 

 

Total consumer

     6,019,890        6,013,499  
  

 

 

    

 

 

 

Total loans

   $ 14,698,902      $ 14,031,071  
  

 

 

    

 

 

 

A summary of the changes in the allowance for loan losses was as follows.

 

     June 30,
2012
    December 31,
2011
 
     ($ in Thousands)  

Balance at beginning of period

   $ 378,151     $ 476,813  

Provision for loan losses

     —          52,000  

Charge offs

     (61,599     (189,732

Recoveries

     16,106       39,070  
  

 

 

   

 

 

 

Net charge offs

     (45,493     (150,662
  

 

 

   

 

 

 

Balance at end of period

   $ 332,658     $ 378,151  
  

 

 

   

 

 

 

The level of the allowance for loan losses represents management’s estimate of an amount appropriate to provide for probable credit losses in the loan portfolio at the balance sheet date. In general, the change in the allowance for loan losses is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge offs, trends in past due and impaired loans, and the level of potential problem loans. Management considers the allowance for loan losses a critical accounting policy, as assessing these numerous factors involves significant judgment.

 

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Table of Contents

A summary of the changes in the allowance for loan losses by portfolio segment for the six months ended June 30, 2012, was as follows.

 

$ in Thousands    Commercial
and
industrial
    Commercial
real

estate  -
owner
occupied
    Lease
financing
    Commercial
real

estate  -
investor
    Real estate
construction
    Home
equity
    Installment     Residential
mortgage
    Total  

Balance at Dec 31, 2011

   $ 124,374     $ 36,200     $ 2,567     $ 86,689     $ 21,327     $ 70,144     $ 6,623     $ 30,227     $ 378,151  

Provision for loan losses

     8,498       (2,894     (1,482     (7,823     (3,072     3,387       365       3,021       —     

Charge offs

     (27,630     (2,038     (21     (8,883     (1,651     (15,685     (1,198     (4,493     (61,599

Recoveries

     9,214       459       1,857       1,352       863       1,451       726       184       16,106  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at Jun 30, 2012

   $ 114,456     $ 31,727     $ 2,921     $ 71,335     $ 17,467     $ 59,297     $ 6,516     $ 28,939     $ 332,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

                  

Ending balance impaired loans individually evaluated for impairment

   $ 6,964     $ 2,092     $ 190     $ 9,650     $ 3,268     $ 1,229     $ 521     $ 215     $ 24,129  

Ending balance impaired loans collectively evaluated for impairment

   $ 8,167     $ 4,582     $ 24     $ 8,326     $ 3,525     $ 25,531     $ 1,882     $ 14,570     $ 66,607  

Ending balance all other loans collectively evaluated for impairment

   $ 99,325     $ 25,053     $ 2,707     $ 53,359     $ 10,674     $ 32,537     $ 4,113     $ 14,154     $ 241,922  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 114,456     $ 31,727     $ 2,921     $ 71,335     $ 17,467     $ 59,297     $ 6,516     $ 28,939     $ 332,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                  

Ending balance impaired loans individually evaluated for impairment

   $ 30,493     $ 22,854     $ 7,653     $ 75,357     $ 28,334     $ 6,709     $ 520     $ 10,756     $ 182,676  

Ending balance impaired loans collectively evaluated for impairment

   $ 44,017     $ 17,678     $ 607     $ 62,774     $ 13,907     $ 44,298     $ 3,306     $ 70,838     $ 257,425  

Ending balance all other loans collectively evaluated for impairment

   $ 4,001,860     $ 1,076,283     $ 54,490     $ 2,672,390     $ 570,315     $ 2,378,587     $ 507,005     $ 2,997,871     $ 14,258,801  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,076,370     $ 1,116,815     $ 62,750     $ 2,810,521     $ 612,556     $ 2,429,594     $ 510,831     $ 3,079,465     $ 14,698,902  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The allocation methodology used by the Corporation includes allocations for specifically identified impaired loans and loss factor allocations, (used for both criticized and non-criticized loan categories) with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The methodology used at June 30, 2012 and December 31, 2011 was generally comparable.

At June 30, 2012, the allowance for loan loss allocations declined or remained relatively level with December 31, 2011. The change in the allowance for loan losses portfolio allocations was primarily due to improved credit quality metrics. The allocation of the allowance for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan portfolio.

 

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Table of Contents

For comparison purposes, a summary of the changes in the allowance for loan losses by portfolio segment for the year ended December 31, 2011, was as follows.

 

$ in Thousands    Commercial
and
industrial
    Commercial
real estate -
owner
occupied
    Lease
financing
    Commercial
real estate -
investor
    Real estate
construction
    Home
equity
    Installment     Residential
mortgage
    Total  

Balance at Dec 31, 2010

   $ 137,770     $ 54,320     $ 7,396     $ 111,264     $ 56,772     $ 55,090     $ 17,328     $ 36,873     $ 476,813  

Provision for loan losses

     8,916       (11,144     (6,611     (762     (4,744     54,476       3,845       8,024       52,000  

Charge offs

     (38,662     (9,485     (173     (29,479     (38,222     (42,623     (16,134     (14,954     (189,732

Recoveries

     16,350       2,509       1,955       5,666       7,521       3,201       1,584       284       39,070  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at Dec 31, 2011

   $ 124,374     $ 36,200     $ 2,567     $ 86,689     $ 21,327     $ 70,144     $ 6,623     $ 30,227     $ 378,151  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

                  

Ending balance impaired loans individually evaluated for impairment

   $ 7,619     $ 3,608     $ 161     $ 16,623     $ 4,919     $ 2,922     $ —        $ 957     $ 36,809  

Ending balance impaired loans collectively evaluated for impairment

   $ 7,688     $ 3,962     $ 34     $ 8,378     $ 4,266     $ 27,914     $ 2,021     $ 13,707     $ 67,970  

Ending balance all other loans collectively evaluated for impairment

   $ 109,067     $ 28,630     $ 2,372     $ 61,688     $ 12,142     $ 39,308     $ 4,602     $ 15,563     $ 273,372  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 124,374     $ 36,200     $ 2,567     $ 86,689     $ 21,327     $ 70,144     $ 6,623     $ 30,227     $ 378,151  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                  

Ending balance impaired loans individually evaluated for impairment

   $ 41,474     $ 26,049     $ 9,792     $ 85,287     $ 31,933     $ 9,542     $ —        $ 11,401     $ 215,478  

Ending balance impaired loans collectively evaluated for impairment

   $ 37,153     $ 17,807     $ 852     $ 57,482     $ 20,850     $ 46,315     $ 3,730     $ 70,269     $ 254,458  

Ending balance all other loans collectively evaluated for impairment

   $ 3,646,109     $ 1,042,973     $ 47,550     $ 2,420,998     $ 531,263     $ 2,448,847     $ 554,052     $ 2,869,343     $ 13,561,135  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,724,736     $ 1,086,829     $ 58,194     $ 2,563,767     $ 584,046     $ 2,504,704     $ 557,782     $ 2,951,013     $ 14,031,071  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

The following table presents commercial loans by credit quality indicator at June 30, 2012.

 

                                                                                    
     Pass      Special
Mention
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Commercial and industrial

   $ 3,712,873      $ 167,223      $ 121,764      $ 74,510      $ 4,076,370  

Commercial real estate - owner occupied

     921,985        45,790        108,508        40,532        1,116,815  

Lease financing

     53,268        898        324        8,260        62,750  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     4,688,126        213,911        230,596        123,302        5,255,935  

Commercial real estate - investor

     2,442,713        87,224        142,453        138,131        2,810,521  

Real estate construction

     539,433        6,977        23,905        42,241        612,556  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     2,982,146        94,201        166,358        180,372        3,423,077  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 7,670,272      $ 308,112      $ 396,954      $ 303,674      $ 8,679,012  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents commercial loans by credit quality indicator at December 31, 2011.

 

                                                                                    
     Pass      Special
Mention
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Commercial and industrial

   $ 3,283,090      $ 209,713      $ 153,306      $ 78,627      $ 3,724,736  

Commercial real estate - owner occupied

     853,517        53,090        136,366        43,856        1,086,829  

Lease financing

     46,570        822        158        10,644        58,194  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     4,183,177        263,625        289,830        133,127        4,869,759  

Commercial real estate - investor

     2,055,124        135,668        230,206        142,769        2,563,767  

Real estate construction

     494,839        8,775        27,649        52,783        584,046  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     2,549,963        144,443        257,855        195,552        3,147,813  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 6,733,140      $ 408,068      $ 547,685      $ 328,679      $ 8,017,572  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents consumer loans by credit quality indicator at June 30, 2012.

 

                                                                                    
     Performing      30-89 Days
Past Due
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Home equity

   $ 2,359,112      $ 15,302      $ 4,173      $ 51,007      $ 2,429,594  

Installment

     505,320        1,558        127        3,826        510,831  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     2,864,432        16,860        4,300        54,833        2,940,425  

Residential mortgage

     2,979,377        9,836        8,658        81,594        3,079,465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

   $ 5,843,809      $ 26,696      $ 12,958      $ 136,427      $ 6,019,890  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents consumer loans by credit quality indicator at December 31, 2011.

 

                                                                                    
     Performing      30-89 Days
Past Due
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Home equity

   $ 2,431,207      $ 12,189      $ 5,451      $ 55,857      $ 2,504,704  

Installment

     551,227        2,592        233        3,730        557,782  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     2,982,434        14,781        5,684        59,587        3,062,486  

Residential mortgage

     2,849,082        7,224        13,037        81,670        2,951,013  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

   $ 5,831,516      $ 22,005      $ 18,721      $ 141,257      $ 6,013,499  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an appropriate allowance for loan losses, and sound nonaccrual and charge off policies.

 

19


Table of Contents

For commercial loans, management has determined the pass credit quality indicator to include credits that exhibit acceptable financial statements, cash flow, and leverage. If any risk exists, it is mitigated by the loan structure, collateral, monitoring, or control. For consumer loans, performing loans include credits that are performing in accordance with the original contractual terms. Special mention credits have potential weaknesses that deserve management’s attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Potential problem loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness, or weaknesses, that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Lastly, management considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that commercial and consumer loan relationships that have nonaccrual status or have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. Commercial loans classified as special mention, potential problem, and impaired are reviewed at a minimum on a quarterly basis, while pass and performing rated credits are reviewed on an annual basis or more frequently if the loan renewal is less than one year or if otherwise warranted.

 

20


Table of Contents

The following table presents loans by past due status at June 30, 2012.

 

     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days or
More Past
Due *
     Total Past
Due
     Current      Total  
     ($ in Thousands)  

Accruing loans

                 

Commercial and industrial

   $ 3,698      $ 767      $ —         $ 4,465      $ 4,025,794      $ 4,030,259  

Commercial real estate - owner occupied

     1,632        493        —           2,125        1,081,273        1,083,398  

Lease financing

     28        11        —           39        54,451        54,490  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     5,358        1,271        —           6,629        5,161,518        5,168,147  

Commercial real estate - investor

     5,293        7,561        4,563        17,417        2,704,298        2,721,715  

Real estate construction

     763        855        —           1,618        574,535        576,153  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     6,056        8,416        4,563        19,035        3,278,833        3,297,868  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     11,414        9,687        4,563        25,664        8,440,351        8,466,015  

Home equity

     10,859        4,443        —           15,302        2,372,756        2,388,058  

Installment

     1,074        484        661        2,219        505,565        507,784  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     11,933        4,927        661        17,521        2,878,321        2,895,842  

Residential mortgage

     9,069        767        —           9,836        3,009,337        3,019,173  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     21,002        5,694        661        27,357        5,887,658        5,915,015  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total accruing loans

   $ 32,416      $ 15,381      $ 5,224      $ 53,021      $ 14,328,009      $ 14,381,030  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

                 

Commercial and industrial

   $ 976      $ 930      $ 16,728      $ 18,634      $ 27,477      $ 46,111  

Commercial real estate - owner occupied

     4,726        557        15,983        21,266        12,151        33,417  

Lease financing

     —           —           837        837        7,423        8,260  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     5,702        1,487        33,548        40,737        47,051        87,788  

Commercial real estate - investor

     3,203        2,742        25,580        31,525        57,281        88,806  

Real estate construction

     —           1,547        15,368        16,915        19,488        36,403  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     3,203        4,289        40,948        48,440        76,769        125,209  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     8,905        5,776        74,496        89,177        123,820        212,997  

Home equity

     1,535        3,123        30,532        35,190        6,346        41,536  

Installment

     94        230        1,647        1,971        1,076        3,047  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     1,629        3,353        32,179        37,161        7,422        44,583  

Residential mortgage

     2,151        2,042        44,097        48,290        12,002        60,292  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     3,780        5,395        76,276        85,451        19,424        104,875  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans

   $ 12,685      $ 11,171      $ 150,772      $ 174,628      $ 143,244      $ 317,872  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

                 

Commercial and industrial

   $ 4,674      $ 1,697      $ 16,728      $ 23,099      $ 4,053,271      $ 4,076,370  

Commercial real estate - owner occupied

     6,358        1,050        15,983        23,391        1,093,424        1,116,815  

Lease financing

     28        11        837        876        61,874        62,750  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     11,060        2,758        33,548        47,366        5,208,569        5,255,935  

Commercial real estate - investor

     8,496        10,303        30,143        48,942        2,761,579        2,810,521  

Real estate construction

     763        2,402        15,368        18,533        594,023        612,556  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     9,259        12,705        45,511        67,475        3,355,602        3,423,077  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     20,319        15,463        79,059        114,841        8,564,171        8,679,012  

Home equity

     12,394        7,566        30,532        50,492        2,379,102        2,429,594  

Installment

     1,168        714        2,308        4,190        506,641        510,831  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     13,562        8,280        32,840        54,682        2,885,743        2,940,425  

Residential mortgage

     11,220        2,809        44,097        58,126        3,021,339        3,079,465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     24,782        11,089        76,937        112,808        5,907,082        6,019,890  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 45,101      $ 26,552      $ 155,996      $ 227,649      $ 14,471,253      $ 14,698,902  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* The recorded investment in loans past due 90 days or more and still accruing totaled $5 million at June 30, 2012 (the same as the reported balances for the accruing loans noted above).

 

21


Table of Contents

The following table presents loans by past due status at December 31, 2011.

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or More
Past Due *
     Total Past Due      Current      Total  
     ($ in Thousands)  

Accruing loans

                 

Commercial and industrial

   $ 3,513      $ 5,230      $ 3,755      $ 12,498      $ 3,656,163      $ 3,668,661  

Commercial real estate - owner occupied

     6,788        304        —           7,092        1,044,019        1,051,111  

Lease financing

     31        73        —           104        47,446        47,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     10,332        5,607        3,755        19,694        4,747,628        4,767,322  

Commercial real estate - investor

     2,770        2,200        —           4,970        2,459,445        2,464,415  

Real estate construction

     873        123        481        1,477        540,763        542,240  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     3,643        2,323        481        6,447        3,000,208        3,006,655  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     13,975        7,930        4,236        26,141        7,747,836        7,773,977  

Home equity

     9,399        2,790        —           12,189        2,445,608        2,457,797  

Installment

     1,784        808        689        3,281        551,786        555,067  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     11,183        3,598        689        15,470        2,997,394        3,012,864  

Residential mortgage

     6,320        904        —           7,224        2,880,234        2,887,458  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     17,503        4,502        689        22,694        5,877,628        5,900,322  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total accruing loans

   $ 31,478      $ 12,432      $ 4,925      $ 48,835      $ 13,625,464      $ 13,674,299  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

                 

Commercial and industrial

   $ 5,374      $ 6,933      $ 20,792      $ 33,099      $ 22,976      $ 56,075  

Commercial real estate - owner occupied

     2,190        185        19,724        22,099        13,619        35,718  

Lease financing

     —           —           858        858        9,786        10,644  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     7,564        7,118        41,374        56,056        46,381        102,437  

Commercial real estate - investor

     2,332        2,730        31,529        36,591        62,761        99,352  

Real estate construction

     36        482        18,625        19,143        22,663        41,806  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     2,368        3,212        50,154        55,734        85,424        141,158  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     9,932        10,330        91,528        111,790        131,805        243,595  

Home equity

     2,818        2,408        34,976        40,202        6,705        46,907  

Installment

     403        373        599        1,375        1,340        2,715  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     3,221        2,781        35,575        41,577        8,045        49,622  

Residential mortgage

     1,981        4,301        43,153        49,435        14,120        63,555  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     5,202        7,082        78,728        91,012        22,165        113,177  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans

   $ 15,134      $ 17,412      $ 170,256      $ 202,802      $ 153,970  <