

NOTE M – SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION PLANS

Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss):



	2011			2010			2009
	(in thousands)
Balance at beginning of year	$	12,495		$	7,458		$	(17,907	)
Cumulative effect of FSP FAS 115-2 and FAS 124-2 adoption (net of a $3.4 million tax effect)	—			—			(6,298		)
Other comprehensive loss (income):
Unrealized gain on securities (net of a $4.7 million, $2.2 million and $15.9 million tax effect in 2011, 2010 and 2009, respectively)	8,768			3,994			29,550
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities (net of a $129,000, $89,000 and $1.8 million tax effect in 2011, 2010 and 2009, respectively)	240			(166		)	(3,385		)
Amortization of unrealized gain on derivative financial instruments (net of a $73,000 tax effect in 2011, 2010 and 2009) (1)	136			136			136
Reclassification adjustment for securities gains included in net income (net of a $1.6 million, $245,000 and $378,000 tax expense in 2011, 2010 and 2009, respectively)	(2,964		)	(455		)	(701		)
Unrecognized pension and postretirement (costs) income (net of a $5.7 million, $783,000 and $3.0 million tax effect in 2011, 2010 and 2009, respectively)	(10,672		)	1,454			5,592
(Accretion) amortization of unrecognized pension and postretirement costs (net of a $26,000, $40,000 and $253,000 tax benefit in 2011, 2010 and 2009, respectively)	(48		)	74			471
Other comprehensive (loss) income	(4,540		)	5,037			31,663
Balance at end of year	$	7,955		$	12,495		$	7,458

(1)

Amounts represent the amortization of the effective portions of losses on forward-starting interest rate swaps, designated as cash flow hedges and entered into in prior years in connection with the issuance of fixed-rate debt. The total amount recorded as a reduction to accumulated other comprehensive income upon settlement of these derivatives is being amortized to interest expense over the life of the related securities using the effective interest method. The amount of net losses in accumulated other comprehensive loss that will be reclassified into earnings during the next 12 months is expected to be approximately $136,000.

Stock-based Compensation Plans

The following table presents compensation expense and related tax benefits for equity awards recognized in the consolidated statements of operations:



	2011			2010			2009
	(in thousands)
Compensation expense	$	4,249		$	1,996		$	1,781
Tax benefit	(1,192		)	(456		)	(241		)
Stock-based compensation, net of tax	$	3,057		$	1,540		$	1,540

The tax benefit shown in the preceding table is less than the benefit that would be calculated using the Corporation’s 35% statutory federal tax rate. Tax benefits are only recognized over the vesting period for awards that ordinarily will generate a tax deduction when exercised, in the case of non-qualified stock options, or upon vesting, in the case of restricted stock. The Corporation granted 1,000 and 42,000 non-qualified stock options in 2011 and 2009, respectively. The Corporation did not grant any non-qualified stock options in 2010.

The following table presents compensation expense and related tax benefits for restricted stock awards recognized in the consolidated statements of operations, and included as a component of total stock-based compensation within the preceding table:



	2011			2010			2009
	(in thousands)
Compensation expense	$	3,194		$	1,172		$	458
Tax benefit	(1,119		)	(412		)	(164		)
Restricted stock compensation, net of tax	$	2,075		$	760		$	294

Stock option fair values are estimated through the use of the Black-Scholes valuation methodology as of the date of grant, and carry terms of up to ten years. Restricted stock fair values are equal to the average trading price of the Corporation’s stock on the date of grant. Restricted stock awards earn dividends during the vesting period, which are forfeitable if the awards do not vest. Certain events as defined in the Employee Option Plan and the Directors' Plan result in the acceleration of the vesting of both stock options and restricted stock.

Stock options and restricted stock awarded under the Employee Option Plan have historically been granted annually on July 1 and become fully vested over or after a three-year vesting period. As of December 31, 2011, the Employee Option Plan had 12.4 million shares reserved for future grants through 2013.

On July 1, 2011, the Corporation granted approximately 11,000 shares of restricted stock to non-employee directors of the holding company under its Directors’ Plan that become fully vested after one year. As of December 31, 2011, the Directors’ Plan had 489,000 shares reserved for future grants through 2021.

In connection with the Corporation’s participation in the U.S. Treasury Department's (UST) Capital Purchase Program (CPP), the 2010 restricted stock shares granted to certain key employees are subject to the requirements and limitations contained in the Emergency Economic Stabilization Act of 2008 (EESA), as amended, and related regulations. Among other things, restricted stock grants to these key employees may not fully vest until the longer of: two years after the date of grant, or the Corporation’s participation in the CPP ends. The Corporation's participation in the CPP ended on July 14, 2010. None of the key employees who received 2010 restricted stock grants subject to the CPP vesting restrictions received 2010 stock option awards.

The following table provides information about stock option activity for the year ended December 31, 2011:



	Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2010	6,432,264		$	13.15
Granted	616,686		10.88
Exercised	(261,272	)	7.48
Forfeited	(116,472	)	12.61
Expired	(289,048	)	11.08
Outstanding as of December 31, 2011	6,382,158		$	13.27	4.7 years	$	2.4
Exercisable as of December 31, 2011	5,294,042		$	14.01	3.8 years	$	1.6

The following table provides information about nonvested stock options and restricted stock granted under the Employee Option and Directors' Plans for the year ended December 31, 2011:



	Nonvested Stock Options				Restricted Stock
	Options		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested as of December 31, 2010	981,766		$	1.48	525,868		$	7.92
Granted	616,686		2.10		352,091		10.52
Vested	(451,817	)	1.40		(54,671	)	9.89
Forfeited	(58,519	)	1.74		(13,401	)	8.56
Nonvested as of December 31, 2011	1,088,116		$	1.86	809,887		$	8.90

As of December 31, 2011, there was $4.2 million of total unrecognized compensation cost related to nonvested stock options and restricted stock that will be recognized as compensation expense over a weighted average period of two years.

The following table presents information about options exercised:



	2011		2010		2009
	(dollars in thousands)
Number of options exercised	261,272		162,151		121,155
Total intrinsic value of options exercised	$	763	$	600	$	317
Cash received from options exercised	$	1,855	$	962	$	662
Tax deduction realized from options exercised	$	680	$	466	$	286

Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options.

The fair value of option awards under the Employee Option Plan was estimated on the date of grant using the Black-Scholes valuation methodology, which is dependent upon certain assumptions, as summarized in the following table:



	2011		2010		2009
Risk-free interest rate	2.35	%	2.23	%	3.36	%
Volatility of Corporation’s stock	22.80		20.40		31.14
Expected dividend yield	2.41		2.49		2.28
Expected life of options	6 Years		6 Years		7 Years

The expected life of the options was estimated based on historical employee behavior and represents the period of time that options granted are expected to be outstanding. Volatility of the Corporation’s stock was based on historical volatility for the period commensurate with the expected life of the options. The risk-free interest rate is the zero-coupon U.S. Treasury rate commensurate with the expected life of the options on the date of the grant.

Based on the assumptions used in the model, the Corporation calculated an estimated fair value per option of $2.10, $1.57 and $1.53 for options granted in 2011, 2010 and 2009, respectively. Approximately 616,686, 578,000 and 485,000 options were granted in 2011, 2010 and 2009, respectively.

Under the ESPP, eligible employees can purchase stock of the Corporation at 85% of the fair market value of the stock on the date of purchase. The ESPP is considered to be a compensatory plan and, as such, compensation expense is recognized for the 15% discount on shares purchased.

The following table summarizes activity under the ESPP:



	2011		2010		2009
ESPP shares purchased	164,610		184,092		261,691
Average purchase price per share (85% of market value)	$	8.39	$	7.93	$	5.46
Compensation expense recognized (in thousands)	$	244	$	258	$	252

Series A Preferred Stock, Common Stock Warrant and Common Stock Issuance

In connection with the EESA, the UST initiated a CPP which allowed for qualifying financial institutions to issue preferred stock to the UST, subject to certain limitations and terms. The EESA was developed to attract broad participation by strong financial institutions, to stabilize the financial system and to increase lending to benefit the national economy and citizens of the U.S.

On December 23, 2008, the Corporation entered into a Securities Purchase Agreement with the UST pursuant to which the Corporation sold to the UST, for an aggregate purchase price of $376.5 million, 376,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (preferred stock), par value $1,000 per share, and a warrant to purchase up to 5.5 million shares of common stock, par value $2.50 per share. The preferred stock carried a dividend rate of 5.00%.

On May 5, 2010, the Corporation issued 21.8 million shares of its common stock, in an underwritten public offering, for net proceeds of $226.3 million, net of underwriting discounts and commissions. On July 14, 2010 the Corporation redeemed all 376,500 outstanding shares of its preferred stock with a total payment to the UST of $379.6 million, consisting of $376.5 million of principal and $3.1 million of dividends. The preferred stock had a carrying value of $371.0 million on the redemption date. Upon redemption, the remaining $5.5 million preferred stock discount was recorded as a reduction to net income available to common shareholders.

On September 8, 2010, the Corporation repurchased the outstanding common stock warrant for the purchase of 5.5 million shares of its common stock for $10.8 million, completing the Corporation’s participation in the UST’s CPP. Upon repurchase, the common stock warrant had a carrying value of $7.6 million. The repurchase price of $10.8 million was recorded as a reduction to additional paid-in capital on the statement of shareholders’ equity and comprehensive income.