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 September 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
(Registrants 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 ¨
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 registrants common stock, par value $0.01 per share, at October 31, 2012, was 171,662,324.
ASSOCIATED BANC-CORP
2
PART I FINANCIAL INFORMATION
ITEM 1. | Financial Statements: |
ASSOCIATED BANC-CORP
September 30, 2012 (Unaudited) |
December
31, 2011 (Audited) |
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(In Thousands, except share and per share data) |
||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 419,529 | $ | 454,958 | ||||
Interest-bearing deposits in other financial institutions |
531,303 | 154,562 | ||||||
Federal funds sold and securities purchased under agreements to resell |
2,460 | 7,075 | ||||||
Investment securities held to maturity, at amortized cost |
21,852 | | ||||||
Investment securities available for sale, at fair value |
4,496,198 | 4,937,483 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stocks, at cost |
166,100 | 191,188 | ||||||
Loans held for sale |
157,093 | 249,195 | ||||||
Loans |
14,966,214 | 14,031,071 | ||||||
Allowance for loan losses |
(315,150 | ) | (378,151 | ) | ||||
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|
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Loans, net |
14,651,064 | 13,652,920 | ||||||
Premises and equipment, net |
238,756 | 223,736 | ||||||
Goodwill |
929,168 | 929,168 | ||||||
Other intangible assets, net |
61,294 | 67,574 | ||||||
Trading assets |
76,159 | 73,253 | ||||||
Other assets |
987,378 | 983,105 | ||||||
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Total assets |
$ | 22,738,354 | $ | 21,924,217 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Noninterest-bearing demand deposits |
$ | 4,320,437 | $ | 3,928,792 | ||||
Interest-bearing deposits |
12,130,155 | 11,161,863 | ||||||
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Total deposits |
16,450,592 | 15,090,655 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
1,138,027 | 1,514,485 | ||||||
Other short-term funding |
615,258 | 1,000,000 | ||||||
Long-term funding |
1,305,422 | 1,177,071 | ||||||
Trading liabilities |
82,861 | 80,046 | ||||||
Accrued expenses and other liabilities |
195,742 | 196,166 | ||||||
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|
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Total liabilities |
19,787,902 | 19,058,423 | ||||||
Stockholders equity |
||||||||
Preferred equity |
63,272 | 63,272 | ||||||
Common stock |
1,750 | 1,746 | ||||||
Surplus |
1,599,070 | 1,586,401 | ||||||
Retained earnings |
1,250,189 | 1,148,773 | ||||||
Accumulated other comprehensive income |
67,303 | 65,602 | ||||||
Treasury stock, at cost |
(31,132 | ) | | |||||
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|
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Total stockholders equity |
2,950,452 | 2,865,794 | ||||||
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|
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Total liabilities and stockholders equity |
$ | 22,738,354 | $ | 21,924,217 | ||||
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|
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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 |
2,413,867 | |
See accompanying notes to consolidated financial statements.
3
ITEM 1. | Financial Statements Continued: |
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In Thousands, except per share data) | ||||||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | 149,647 | $ | 145,778 | $ | 445,858 | $ | 432,907 | ||||||||
Interest and dividends on investment securities |
||||||||||||||||
Taxable |
20,548 | 30,513 | 66,577 | 100,516 | ||||||||||||
Tax exempt |
7,127 | 7,376 | 21,536 | 22,593 | ||||||||||||
Other interest |
1,334 | 1,428 | 3,843 | 4,324 | ||||||||||||
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Total interest income |
178,656 | 185,095 | 537,814 | 560,340 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on deposits |
9,751 | 15,644 | 32,340 | 50,794 | ||||||||||||
Interest on Federal funds purchased and securities sold under agreements to repurchase |
750 | 1,810 | 2,129 | 4,919 | ||||||||||||
Interest on other short-term funding |
815 | 1,229 | 3,068 | 5,336 | ||||||||||||
Interest on long-term funding |
11,738 | 13,252 | 35,740 | 38,285 | ||||||||||||
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|
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Total interest expense |
23,054 | 31,935 | 73,277 | 99,334 | ||||||||||||
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NET INTEREST INCOME |
155,602 | 153,160 | 464,537 | 461,006 | ||||||||||||
Provision for loan losses |
| 4,000 | | 51,000 | ||||||||||||
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Net interest income after provision for loan losses |
155,602 | 149,160 | 464,537 | 410,006 | ||||||||||||
NONINTEREST INCOME |
||||||||||||||||
Trust service fees |
10,396 | 9,791 | 30,308 | 29,634 | ||||||||||||
Service charges on deposit accounts |
17,290 | 19,949 | 52,100 | 58,125 | ||||||||||||
Card-based and other nondeposit fees |
12,209 | 15,291 | 35,172 | 46,636 | ||||||||||||
Insurance commissions |
11,650 | 11,020 | 36,152 | 34,338 | ||||||||||||
Brokerage and annuity commissions |
3,632 | 4,027 | 11,965 | 13,565 | ||||||||||||
Mortgage banking, net |
15,581 | 4,521 | 49,970 | 3,046 | ||||||||||||
Capital market fees, net |
3,609 | 3,273 | 9,998 | 4,761 | ||||||||||||
Bank owned life insurance income |
3,290 | 3,990 | 10,746 | 11,076 | ||||||||||||
Asset losses, net |
(3,309 | ) | (3,859 | ) | (11,887 | ) | (10,400 | ) | ||||||||
Investment securities gains (losses), net: |
||||||||||||||||
Realized gains (losses), net |
3,506 | 1 | 4,109 | (12 | ) | |||||||||||
Other-than-temporary impairments |
(59 | ) | (1,611 | ) | (59 | ) | (1,656 | ) | ||||||||
Less: Non-credit portion recognized in other comprehensive income (before taxes) |
59 | 866 | 59 | 866 | ||||||||||||
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Total investment securities gains (losses), net |
3,506 | (744 | ) | 4,109 | (802 | ) | ||||||||||
Other |
3,134 | 1,737 | 6,752 | 11,608 | ||||||||||||
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Total noninterest income |
80,988 | 68,996 | 235,385 | 201,587 | ||||||||||||
NONINTEREST EXPENSE |
||||||||||||||||
Personnel expense |
95,231 | 91,084 | 283,331 | 269,838 | ||||||||||||
Occupancy |
14,334 | 14,205 | 43,521 | 42,143 | ||||||||||||
Equipment |
5,935 | 4,851 | 17,122 | 14,587 | ||||||||||||
Data processing |
11,022 | 7,887 | 31,842 | 23,395 | ||||||||||||
Business development and advertising |
5,059 | 5,539 | 15,908 | 16,134 | ||||||||||||
Other intangible asset amortization |
1,048 | 1,179 | 3,146 | 3,535 | ||||||||||||
Loan expense |
3,297 | 2,600 | 9,155 | 8,539 | ||||||||||||
Legal and professional fees |
7,686 | 4,289 | 23,058 | 13,554 | ||||||||||||
Losses other than loans |
3,577 | 1,659 | 9,187 | 6,031 | ||||||||||||
Foreclosure / OREO expense |
4,071 | 4,982 | 11,776 | 16,224 | ||||||||||||
FDIC expense |
5,017 | 6,906 | 14,665 | 22,348 | ||||||||||||
Other |
13,426 | 14,299 | 42,784 | 41,868 | ||||||||||||
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Total noninterest expense |
169,703 | 159,480 | 505,495 | 478,196 | ||||||||||||
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Income before income taxes |
66,887 | 58,676 | 194,427 | 133,397 | ||||||||||||
Income tax expense |
20,492 | 17,337 | 62,082 | 34,823 | ||||||||||||
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Net income |
46,395 | 41,339 | 132,345 | 98,574 | ||||||||||||
Preferred stock dividends and discount accretion |
1,300 | 7,305 | 3,900 | 23,530 | ||||||||||||
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Net income available to common equity |
$ | 45,095 | $ | 34,034 | $ | 128,445 | $ | 75,044 | ||||||||
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Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.26 | $ | 0.20 | $ | 0.74 | $ | 0.43 | ||||||||
Diluted |
$ | 0.26 | $ | 0.20 | $ | 0.74 | $ | 0.43 | ||||||||
Average common shares outstanding: |
||||||||||||||||
Basic |
171,650 | 173,418 | 172,774 | 173,319 | ||||||||||||
Diluted |
171,780 | 173,418 | 172,848 | 173,321 | ||||||||||||
See accompanying notes to consolidated financial statements.
4
ITEM 1: | Financial Statements Continued: |
ASSOCIATED BANC-CORP
Consolidated Statements of Other Comprehensive Income
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Net income |
$ | 46,395 | $ | 41,339 | $ | 132,345 | $ | 98,574 | ||||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
Net unrealized gains |
3,479 | 14,144 | 2,870 | 94,907 | ||||||||||||
Reclassification adjustment for net (gains) losses realized in net income |
(3,506 | ) | 744 | (4,109 | ) | 802 | ||||||||||
Income tax (expense) benefit |
11 | (5,772 | ) | 483 | (37,119 | ) | ||||||||||
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Other comprehensive income (loss) on investment securities available for sale |
(16 | ) | 9,116 | (756 | ) | 58,590 | ||||||||||
Defined benefit pension and postretirement obligations: |
||||||||||||||||
Prior service cost, net of amortization |
60 | 116 | 180 | 349 | ||||||||||||
Net loss, net of amortization |
640 | 451 | 1,920 | 1,354 | ||||||||||||
Income tax expense |
(273 | ) | (220 | ) | (819 | ) | (661 | ) | ||||||||
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Other comprehensive income on pension and postretirement obligations |
427 | 347 | 1,281 | 1,042 | ||||||||||||
Derivatives used in cash flow hedging relationships: |
||||||||||||||||
Net unrealized gains (losses) |
20 | (154 | ) | 6 | (528 | ) | ||||||||||
Reclassification adjustment for net losses and interest expense for interest differential on derivatives realized in net income |
496 | 1,007 | 1,954 | 3,969 | ||||||||||||
Income tax expense |
(203 | ) | (348 | ) | (784 | ) | (1,386 | ) | ||||||||
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Other comprehensive income on cash flow hedging relationships |
313 | 505 | 1,176 | 2,055 | ||||||||||||
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Total other comprehensive income |
724 | 9,968 | 1,701 | 61,687 | ||||||||||||
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Comprehensive income |
$ | 47,119 | $ | 51,307 | $ | 134,046 | $ | 160,261 | ||||||||
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See accompanying notes to consolidated financial statements.
5
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 |
| | | 98,574 | | | 98,574 | |||||||||||||||||||||
Other comprehensive income |
| | | | 61,687 | | 61,687 | |||||||||||||||||||||
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Comprehensive income |
160,261 | |||||||||||||||||||||||||||
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Common stock issued: |
||||||||||||||||||||||||||||
Stock-based compensation plans, net |
| 7 | 3,101 | (399 | ) | | 640 | 3,349 | ||||||||||||||||||||
Purchase of treasury stock |
| | | | | (640 | ) | (640 | ) | |||||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||
Common stock, $0.03 per share |
| | | (5,231 | ) | | | (5,231 | ) | |||||||||||||||||||
Preferred stock |
| | | (12,918 | ) | | | (12,918 | ) | |||||||||||||||||||
Issuance of preferred stock |
63,272 | | | | | | 63,272 | |||||||||||||||||||||
Redemption of preferred stock |
(525,000 | ) | | | | | | (525,000 | ) | |||||||||||||||||||
Accretion of preferred stock discount |
10,612 | | | (10,612 | ) | | | | ||||||||||||||||||||
Stock-based compensation expense, net |
| | 8,724 | | | | 8,724 | |||||||||||||||||||||
Tax benefit of stock options |
| | 11 | | | | 11 | |||||||||||||||||||||
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Balance, September 30, 2011 |
$ | 63,272 | $ | 1,746 | $ | 1,585,208 | $ | 1,111,080 | $ | 89,313 | $ | | $ | 2,850,619 | ||||||||||||||
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Balance, December 31, 2011 |
$ | 63,272 | $ | 1,746 | $ | 1,586,401 | $ | 1,148,773 | $ | 65,602 | $ | | $ | 2,865,794 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
| | | 132,345 | | | 132,345 | |||||||||||||||||||||
Other comprehensive income |
| | | | 1,701 | | 1,701 | |||||||||||||||||||||
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Comprehensive income |
134,046 | |||||||||||||||||||||||||||
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Common stock issued: |
||||||||||||||||||||||||||||
Stock-based compensation plans, net |
| 4 | 743 | (1,020 | ) | | 420 | 147 | ||||||||||||||||||||
Purchase of treasury stock |
| | | | | (31,552 | ) | (31,552 | ) | |||||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||
Common stock, $0.15 per share |
| | | (26,009 | ) | | | (26,009 | ) | |||||||||||||||||||
Preferred stock |
| | | (3,900 | ) | | | (3,900 | ) | |||||||||||||||||||
Stock-based compensation expense, net |
| | 11,921 | | | | 11,921 | |||||||||||||||||||||
Tax benefit of stock options |
| | 5 | | | | 5 | |||||||||||||||||||||
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Balance, September 30, 2012 |
$ | 63,272 | $ | 1,750 | $ | 1,599,070 | $ | 1,250,189 | $ | 67,303 | $ | (31,132 | ) | $ | 2,950,452 | |||||||||||||
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See accompanying notes to consolidated financial statements.
6
ITEM 1. | Financial Statements Continued: |
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
($ in Thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 132,345 | $ | 98,574 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
| 51,000 | ||||||
Depreciation and amortization |
31,737 | 24,220 | ||||||
Addition to valuation allowance on mortgage servicing rights, net |
4,477 | 8,966 | ||||||
Amortization of mortgage servicing rights |
17,326 | 17,380 | ||||||
Amortization of other intangible assets |
3,146 | 3,535 | ||||||
Amortization and accretion on earning assets, funding, and other, net |
45,400 | 46,186 | ||||||
Tax benefit from exercise of stock options |
5 | 11 | ||||||
(Gain) loss on sales of investment securities, net and impairment write-downs |
(4,109 | ) | 802 | |||||
Loss on sales of assets and impairment write-downs, net |
11,887 | 10,400 | ||||||
Gain on mortgage banking activities, net |
(46,655 | ) | (15,141 | ) | ||||
Mortgage loans originated and acquired for sale |
(2,016,963 | ) | (1,011,423 | ) | ||||
Proceeds from sales of mortgage loans held for sale |
2,137,051 | 960,423 | ||||||
Decrease in interest receivable |
3,336 | 2,865 | ||||||
Decrease in interest payable |
(11,446 | ) | (7,191 | ) | ||||
Net change in other assets and other liabilities |
10,441 | 52,055 | ||||||
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Net cash provided by operating activities |
317,978 | 242,662 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Net increase in loans |
(1,151,440 | ) | (1,094,612 | ) | ||||
Purchases of: |
||||||||
Investment securities |
(1,175,405 | ) | (533,674 | ) | ||||
Premises, equipment, and software, net of disposals |
(58,865 | ) | (49,312 | ) | ||||
Other assets |
(3,846 | ) | (2,545 | ) | ||||
Proceeds from: |
||||||||
Sales of investment securities |
296,403 | 17,916 | ||||||
Prepayments, calls, and maturities of investment securities |
1,286,345 | 1,216,224 | ||||||
Sales, prepayments, calls, and maturities of other assets |
28,366 | 38,160 | ||||||
Sales of loans originated for investment |
124,903 | 39,184 | ||||||
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|
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Net cash used in investing activities |
(653,539 | ) | (368,659 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase (decrease) in deposits |
1,479,782 | (442,983 | ) | |||||
Net decrease in deposits due to branch sales |
(113,622 | ) | | |||||
Net increase (decrease) in short-term funding |
(761,200 | ) | 784,394 | |||||
Repayment of long-term funding |
(25,979 | ) | (370,091 | ) | ||||
Proceeds from issuance of long-term funding |
154,738 | 432,504 | ||||||
Proceeds from issuance of preferred stock |
| 63,272 | ||||||
Redemption of preferred stock |
| (525,000 | ) | |||||
Cash dividends on common stock |
(26,009 | ) | (5,231 | ) | ||||
Cash dividends on preferred stock |
(3,900 | ) | (12,918 | ) | ||||
Purchase of treasury stock |
(31,552 | ) | (640 | ) | ||||
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|||||
Net cash provided by (used in) financing activities |
672,258 | (76,693 | ) | |||||
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Net increase (decrease) in cash and cash equivalents |
336,697 | (202,690 | ) | |||||
Cash and cash equivalents at beginning of period |
616,595 | 868,162 | ||||||
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Cash and cash equivalents at end of period |
$ | 953,292 | $ | 665,472 | ||||
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Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 84,699 | $ | 106,302 | ||||
Cash (received) paid for income taxes |
(32,050 | ) | 17,517 | |||||
Loans and bank premises transferred to other real estate owned |
29,957 | 37,168 | ||||||
Capitalized mortgage servicing rights |
18,669 | 9,807 | ||||||
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|
See accompanying notes to consolidated financial statements.
7
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-Corps 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 and comprehensive income, 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 periods 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 Boards 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.
8
In April 2011, the FASB issued guidance that 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 September 30, |
For the Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(In Thousands, except per share data) | ||||||||||||||||
Net income |
$ | 46,395 | $ | 41,339 | $ | 132,345 | $ | 98,574 | ||||||||
Preferred stock dividends and discount accretion |
(1,300 | ) | (7,305 | ) | (3,900 | ) | (23,530 | ) | ||||||||
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Net income available to common equity |
$ | 45,095 | $ | 34,034 | $ | 128,445 | $ | 75,044 | ||||||||
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Common shareholder dividends |
(8,594 | ) | (1,734 | ) | (25,893 | ) | (5,200 | ) | ||||||||
Unvested share-based payment awards |
(36 | ) | (11 | ) | (116 | ) | (31 | ) | ||||||||
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Undistributed earnings |
$ | 36,465 | $ | 32,289 | $ | 102,436 | $ | 69,813 | ||||||||
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Undistributed earnings allocated to common shareholders |
36,311 | 32,087 | 101,975 | 69,382 | ||||||||||||
Undistributed earnings allocated to unvested share-based payment awards |
154 | 202 | 461 | 431 | ||||||||||||
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Undistributed earnings |
$ | 36,465 | $ | 32,289 | $ | 102,436 | $ | 69,813 | ||||||||
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Basic |
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Distributed earnings to common shareholders |
$ | 8,594 | $ | 1,734 | $ | 25,893 | $ | 5,200 | ||||||||
Undistributed earnings allocated to common shareholders |
36,311 | 32,087 | 101,975 | 69,382 | ||||||||||||
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Total common shareholders earnings, basic |
$ | 44,905 | $ | 33,821 | $ | 127,868 | $ | 74,582 | ||||||||
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Diluted |
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Distributed earnings to common shareholders |
$ | 8,594 | $ | 1,734 | $ | 25,893 | $ | 5,200 | ||||||||
Undistributed earnings allocated to common shareholders |
36,311 | 32,087 | 101,975 | 69,382 | ||||||||||||
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Total common shareholders earnings, diluted |
$ | 44,905 | $ | 33,821 | $ | 127,868 | $ | 74,582 | ||||||||
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Weighted average common shares outstanding |
171,650 | 173,418 | 172,774 | 173,319 | ||||||||||||
Effect of dilutive common stock awards |
130 | | 74 | 2 | ||||||||||||
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Diluted weighted average common shares outstanding |
171,780 | 173,418 | 172,848 | 173,321 | ||||||||||||
Basic earnings per common share |
$ | 0.26 | $ | 0.20 | $ | 0.74 | $ | 0.43 | ||||||||
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Diluted earnings per common share |
$ | 0.26 | $ | 0.20 | $ | 0.74 | $ | 0.43 | ||||||||
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9
Options to purchase approximately 9 million and 6 million shares were outstanding for the three and nine months ended September 30, 2012, respectively, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive. Options to purchase approximately 7 million shares were outstanding for the three and nine months ended September 30, 2011, 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 Corporations transition toward a performance-based short-term and long-term incentive compensation program following the full repayment of the U.S. Department of the Treasurys investment in the Corporation under the Capital Purchase Program. The Committee intends to ensure that further incentive compensation criteria align to the Corporations 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 Corporations stock. The following assumptions were used in estimating the fair value for options granted in the first nine months 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 |
49.11 | % | 47.24 | % | ||||
Weighted average expected life |
6 years | 6 years | ||||||
Weighted average per share fair value of options |
$ | 5.05 | $ | 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.
10
A summary of the Corporations stock option activity for the year ended December 31, 2011 and for the nine months ended September 30, 2012, is presented below.
Stock Options |
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value (000s) |
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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 | |||||||||||||
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Outstanding at December 31, 2011 |
7,055,274 | $ | 21.99 | 5.61 | $ | 27 | ||||||||||
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Options exercisable at December 31, 2011 |
4,623,935 | $ | 26.10 | 4.01 | 7 | |||||||||||
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Outstanding at December 31, 2011 |
7,055,274 | $ | 21.99 | |||||||||||||
Granted |
3,025,269 | 12.98 | ||||||||||||||
Exercised |
(11,120 | ) | 13.16 | |||||||||||||
Forfeited or expired |
(1,156,987 | ) | 21.04 | |||||||||||||
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Outstanding at September 30, 2012 |
8,912,436 | $ | 19.06 | 6.52 | $ | 817 | ||||||||||
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Options exercisable at September 30, 2012 |
4,818,426 | $ | 23.98 | 4.45 | 56 | |||||||||||
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The following table summarizes information about the Corporations nonvested stock option activity for the year ended December 31, 2011, and for the nine months ended September 30, 2012.
Stock Options |
Shares | Weighted Average Grant Date Fair Value |
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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 | |||||
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Nonvested at December 31, 2011 |
2,431,339 | $ | 5.11 | |||||
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Granted |
3,025,269 | 5.05 | ||||||
Vested |
(1,073,821 | ) | 4.88 | |||||
Forfeited |
(288,777 | ) | 5.13 | |||||
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Nonvested at September 30, 2012 |
4,094,010 | $ | 5.13 | |||||
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For the nine months ended September 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 nine months of 2012 and $4 million for the year ended December 31, 2011. For the nine months ended September 30, 2012 and 2011, the Corporation recognized compensation expense of $7 million and $4 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 September 30, 2012, the Corporation had $15 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.
11
The following table summarizes information about the Corporations restricted stock awards activity (excluding salary shares) for the year ended December 31, 2011, and for the nine months ended September 30, 2012.
Restricted Stock |
Shares | Weighted Average Grant Date Fair Value |
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Outstanding at December 31, 2010 |
772,262 | $ | 13.94 | |||||
Granted |
593,437 | 14.27 | ||||||
Vested |
(169,499 | ) | 17.74 | |||||
Forfeited |
(182,435 | ) | 13.86 | |||||
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Outstanding at December 31, 2011 |
1,013,765 | $ | 13.79 | |||||
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Granted |
500,127 | 13.00 | ||||||
Vested |
(522,784 | ) | 13.41 | |||||
Forfeited |
(53,264 | ) | 13.73 | |||||
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Outstanding at September 30, 2012 |
937,844 | $ | 13.59 | |||||
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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 $5 million and $5 million was recognized for the nine months ended September 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 $6 million of unrecognized compensation costs related to restricted stock awards at September 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 nine months of 2012, as the Corporation changed its compensation plan upon the full repayment of the funds received under the Capital Purchase Program during 2011. The Corporation recognized compensation expense of $3 million on the granting of 234,969 salary shares (or an average cost per share of $12.99) for the nine months ended September 30, 2011, and a total of $4 million on the granting of 317,450 salary shares (or an average cost per share of $12.41) for the year ended December 31, 2011.
The Corporation issues shares from treasury, when available, or new shares upon the exercise of stock options, granting of restricted stock awards, and the granting of salary shares. The Board of Directors has authorized management to repurchase shares of the Corporations common stock each quarter in the market, to be made available for issuance in connection with the Corporations employee incentive plans and for other corporate purposes. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities.
12
NOTE 5: Investment Securities
The amortized cost and fair values of investment securities available for sale and held to maturity were as follows.
September 30, 2012: |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value | ||||||||||||
($ in Thousands) | ||||||||||||||||
Investment securities available for sale: |
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U.S. Treasury securities |
$ | 1,004 | $ | 1 | $ | | $ | 1,005 | ||||||||
Federal agency securities |
6 | | | 6 | ||||||||||||
Obligations of state and political subdivisions (municipal securities) |
779,328 | 47,948 | (105 | ) | 827,171 | |||||||||||
Residential mortgage-related securities |
3,381,526 | 109,479 | (485 | ) | 3,490,520 | |||||||||||
Commercial mortgage-related securities |
71,965 | 2,760 | | 74,725 | ||||||||||||
Other securities (debt and equity) |
101,525 | 1,323 | (77 | ) | 102,771 | |||||||||||
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Total investment securities available for sale |
$ | 4,335,354 | $ | 161,511 | $ | (667 | ) | $ | 4,496,198 | |||||||
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Investment securities held to maturity: |
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Obligations of state and political subdivisions (municipal securities) |
$ | 21,852 | $ | 36 | $ | (165 | ) | $ | 21,723 | |||||||
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Total investment securities held to maturity |
$ | 21,852 | $ | 36 | $ | (165 | ) | $ | 21,723 | |||||||
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December 31, 2011: |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value | ||||||||||||
($ in Thousands) | ||||||||||||||||
Investment securities available for sale: |
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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 | |||||||||||
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Total investment securities available for sale |
$ | 4,775,400 | $ | 165,746 | $ | (3,663 | ) | $ | 4,937,483 | |||||||
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(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). |
13
The amortized cost and fair values of investment securities available for sale and held to maturity at September 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.
Available for Sale | Held to Maturity | |||||||||||||||
($ in Thousands) | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | ||||||||||||
Due in one year or less |
$ | 45,629 | $ | 46,380 | $ | | $ | | ||||||||
Due after one year through five years |
231,892 | 240,348 | | | ||||||||||||
Due after five years through ten years |
534,809 | 571,046 | 5,785 | 5,771 | ||||||||||||
Due after ten years |
69,513 | 73,133 | 16,067 | 15,952 | ||||||||||||
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Total debt securities |
881,843 | 930,907 | 21,852 | 21,723 | ||||||||||||
Residential mortgage-related securities |
3,381,526 | 3,490,520 | | | ||||||||||||
Commercial mortgage-related securities |
71,965 | 74,725 | | | ||||||||||||
Equity securities |
20 | 46 | | | ||||||||||||
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Total investment securities |
$ | 4,335,354 | $ | 4,496,198 | $ | 21,852 | $ | 21,723 | ||||||||
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The following represents gross unrealized losses and the related fair value of investment securities available for sale and held to maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||
September 30, 2012: |
Number of Securities |
Unrealized Losses |
Fair Value | Number of Securities |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value | ||||||||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||||||||||
Investment securities available for sale: |
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Obligations of state and political subdivisions (municipal securities) |
31 | (91 | ) | 11,699 | 2 | (14 | ) | 457 | (105 | ) | 12,156 | |||||||||||||||||||||
Residential mortgage-related securities |
6 | (421 | ) | 116,685 | 5 | (64 | ) | 2,040 | (485 | ) | 118,725 | |||||||||||||||||||||
Other debt securities |
| | | 1 | (77 | ) | 110 | (77 | ) | 110 | ||||||||||||||||||||||
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Total |
$ | (512 | ) | $ | 128,384 | $ | (155 | ) | $ | 2,607 | $ | (667 | ) | $ | 130,991 | |||||||||||||||||
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Investment securities held to maturity: |
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Obligations of state and political subdivisions (municipal securities) |
35 | (165 | ) | 15,253 | | | | (165 | ) | 15,253 | ||||||||||||||||||||||
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Total |
$ | (165 | ) | $ | 15,253 | $ | | $ | | $ | (165 | ) | $ | 15,253 | ||||||||||||||||||
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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 securitys 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 Corporations evaluation, management does not believe any unrealized loss at September 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 September 30,
14
2012, the unrealized loss position on other debt securities was attributable to a pooled trust preferred debt security. 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 nine months ended September 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 | ) | ||||||
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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 | 4,499 | 21,525 | |||||||||
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Balance of credit-related other-than-temporary impairment at September 30, 2012 |
$ | (532 | ) | $ | (6,336 | ) | $ | (6,868 | ) | |||
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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 | ||||||||||||||||||||||
December 31, 2011: |
Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | ||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||
Investment securities available for sale: |
||||||||||||||||||||||||
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 September 30, 2012 and December 31, 2011, the Corporation had FHLB stock of $96 million and $121 million, respectively. The Corporation had Federal Reserve Bank stock of $70 million at both September 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 nine months of 2012. The FHLB of Chicago initiated tender offers for certain of its shares during the first nine months 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 $25 million.
15
NOTE 6: Loans, Allowance for Loan Losses, and Credit Quality
The period end loan composition was as follows.
September 30, 2012 |
December 31, 2011 |
|||||||
($ in Thousands) | ||||||||
Commercial and industrial |
$ | 4,265,356 | $ | 3,724,736 | ||||
Commercial real estate - owner occupied |
1,197,517 | 1,086,829 | ||||||
Lease financing |
60,818 | 58,194 | ||||||
|
|
|
|
|||||
Commercial and business lending |
5,523,691 | 4,869,759 | ||||||
Commercial real estate - investor |
2,787,158 | 2,563,767 | ||||||
Real estate construction |
611,186 | 584,046 | ||||||
|
|
|
|
|||||
Commercial real estate lending |
3,398,344 | 3,147,813 | ||||||
|
|
|
|
|||||
Total commercial |
8,922,035 | 8,017,572 | ||||||
Home equity |
2,356,900 | 2,504,704 | ||||||
Installment |
482,451 | 557,782 | ||||||
|
|
|
|
|||||
Total retail |
2,839,351 | 3,062,486 | ||||||
Residential mortgage |
3,204,828 | 2,951,013 | ||||||
|
|
|
|
|||||
Total consumer |
6,044,179 | 6,013,499 | ||||||
|
|
|
|
|||||
Total loans |
$ | 14,966,214 | $ | 14,031,071 | ||||
|
|
|
|
A summary of the changes in the allowance for loan losses was as follows.
September 30, 2012 |
December 31, 2011 |
|||||||
($ in Thousands) | ||||||||
Balance at beginning of period |
$ | 378,151 | $ | 476,813 | ||||
Provision for loan losses |
| 52,000 | ||||||
Charge offs |
(86,629 | ) | (189,732 | ) | ||||
Recoveries |
23,628 | 39,070 | ||||||
|
|
|
|
|||||
Net charge offs |
(63,001 | ) | (150,662 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 315,150 | $ | 378,151 | ||||
|
|
|
|
The level of the allowance for loan losses represents managements 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.
16
A summary of the changes in the allowance for loan losses by portfolio segment for the nine months ended September 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 |
8,943 | (2,492 | ) | (1,677 | ) | (11,965 | ) | (6,684 | ) | 6,293 | 163 | 7,419 | | |||||||||||||||||||||||
Charge offs |
(35,830 | ) | (2,402 | ) | (21 | ) | (10,968 | ) | (2,139 | ) | (25,146 | ) | (1,763 | ) | (8,360 | ) | (86,629 | ) | ||||||||||||||||||
Recoveries |
13,583 | 831 | 1,877 | 1,532 | 1,538 | 2,990 | 967 | 310 | 23,628 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at Sep 30, 2012 |
$ | 111,070 | $ | 32,137 | $ | 2,746 | $ | 65,288 | $ | 14,042 | $ | 54,281 | $ | 5,990 | $ | 29,596 | $ | 315,150 | ||||||||||||||||||
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Ending balance impaired loans individually evaluated for impairment |
$ | 7,814 | $ | 1,042 | $ | | $ | 8,759 | $ | 1,653 | $ | 888 | $ | 515 | $ | 1,870 | $ | 22,541 | ||||||||||||||||||
Ending balance impaired loans collectively evaluated for impairment |
$ | 7,578 | $ | 4,721 | $ | 22 | $ | 7,507 | $ | 3,072 | $ | 24,343 | $ | 1,796 | $ | 14,241 | $ | 63,280 | ||||||||||||||||||
Ending balance all other loans collectively evaluated for impairment |
$ | 95,678 | $ | 26,374 | $ | 2,724 | $ | 49,022 | $ | 9,317 | $ | 29,050 | $ | 3,679 | $ | 13,485 | $ | 229,329 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 111,070 | $ | 32,137 | $ | 2,746 | $ | 65,288 | $ | 14,042 | $ | 54,281 | $ | 5,990 | $ | 29,596 | $ | 315,150 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Ending balance impaired loans individually evaluated for impairment |
$ | 28,409 | $ | 17,372 | $ | 5,386 | $ | 59,441 | $ | 24,359 | $ | 4,880 | $ | 515 | $ | 11,565 | $ | 151,927 | ||||||||||||||||||
Ending balance impaired loans collectively evaluated for impairment |
$ | 48,300 | $ | 25,495 | $ | 541 | $ | 61,330 | $ | 10,886 | $ | 43,054 | $ | 3,050 | $ | 69,380 | $ | 262,036 | ||||||||||||||||||
Ending balance all other loans collectively evaluated for impairment |
$ | 4,188,647 | $ | 1,154,650 | $ | 54,891 | $ | 2,666,387 | $ | 575,941 | $ | 2,308,966 | $ | 478,886 | $ | 3,123,883 | $ | 14,552,251 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 4,265,356 | $ | 1,197,517 | $ | 60,818 | $ | 2,787,158 | $ | 611,186 | $ | 2,356,900 | $ | 482,451 | $ | 3,204,828 | $ | 14,966,214 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2012 and December 31, 2011 was generally comparable.
At September 30, 2012, the allowance for loan losses declined and the loan portfolio segment allocations also declined relative to 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.
17
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 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
The following table presents commercial loans by credit quality indicator at September 30, 2012.
Pass | Special Mention |
Potential Problem |
Impaired | Total | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Commercial and industrial |
$ | 3,918,190 | $ | 149,569 | $ | 120,888 | $ | 76,709 | $ | 4,265,356 | ||||||||||
Commercial real estate - owner occupied |
984,133 | 50,483 | 120,034 | 42,867 | 1,197,517 | |||||||||||||||
Lease financing |
52,424 | 2,253 | 214 | 5,927 | 60,818 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
4,954,747 | 202,305 | 241,136 | 125,503 | 5,523,691 | |||||||||||||||
Commercial real estate - investor |
2,466,151 | 67,190 | 133,046 | 120,771 | 2,787,158 | |||||||||||||||
Real estate construction |
551,109 | 6,355 | 18,477 | 35,245 | 611,186 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
3,017,260 | 73,545 | 151,523 | 156,016 | 3,398,344 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
$ | 7,972,007 | $ | 275,850 | $ | 392,659 | $ | 281,519 | $ | 8,922,035 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
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 September 30, 2012. |
| |||||||||||||||||||
Performing | 30-89 Days Past Due |
Potential Problem |
Impaired | Total | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Home equity |
$ | 2,290,800 | $ | 14,823 | $ | 3,343 | $ | 47,934 | $ | 2,356,900 | ||||||||||
Installment |
477,062 | 1,693 | 131 | 3,565 | 482,451 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
2,767,862 | 16,516 | 3,474 | 51,499 | 2,839,351 | |||||||||||||||
Residential mortgage |
3,108,808 | 6,878 | 8,197 | 80,945 | 3,204,828 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
$ | 5,876,670 | $ | 23,394 | $ | 11,671 | $ | 132,444 | $ | 6,044,179 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
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
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 managements 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
The following table presents loans by past due status at September 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 |
$ | 2,525 | $ | 1,270 | $ | | $ | 3,795 | $ | 4,219,867 | $ | 4,223,662 | ||||||||||||
Commercial real estate - owner occupied |
1,453 | 3,390 | 1,052 | 5,895 | 1,164,461 | 1,170,356 | ||||||||||||||||||
Lease financing |
| 17 | | 17 | 54,874 | 54,891 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
3,978 | 4,677 | 1,052 | 9,707 | 5,439,202 | 5,448,909 | ||||||||||||||||||
Commercial real estate - investor |
7,203 | 1,606 | 615 | 9,424 | 2,706,212 | 2,715,636 | ||||||||||||||||||
Real estate construction |
1,057 | 197 | | 1,254 | 578,248 | 579,502 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
8,260 | 1,803 | 615 | 10,678 | 3,284,460 | 3,295,138 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
12,238 | 6,480 | 1,667 | 20,385 | 8,723,662 | 8,744,047 | ||||||||||||||||||
Home equity |
11,020 | 3,803 | 55 | 14,878 | 2,303,555 | 2,318,433 | ||||||||||||||||||
Installment |
1,235 | 458 | 612 | 2,305 | 477,253 | 479,558 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
12,255 | 4,261 | 667 | 17,183 | 2,780,808 | 2,797,991 | ||||||||||||||||||
Residential mortgage |
6,214 | 664 | | 6,878 | 3,139,126 | 3,146,004 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
18,469 | 4,925 | 667 | 24,061 | 5,919,934 | 5,943,995 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total accruing loans |
$ | 30,707 | $ | 11,405 | $ | 2,334 | $ | 44,446 | $ | 14,643,596 | $ | 14,688,042 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nonaccrual loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 923 | $ | 4,013 | $ | 10,808 | $ | 15,744 | $ | 25,950 | $ | 41,694 | ||||||||||||
Commercial real estate - owner occupied |
1,797 | 1,576 | 11,867 | 15,240 | 11,921 | 27,161 | ||||||||||||||||||
Lease financing |
| | 483 | 483 | 5,444 | 5,927 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
2,720 | 5,589 | 23,158 | 31,467 | 43,315 | 74,782 | ||||||||||||||||||
Commercial real estate - investor |
3,338 | 4,104 | 33,045 | 40,487 | 31,035 | 71,522 | ||||||||||||||||||
Real estate construction |
| 288 | 16,578 | 16,866 | 14,818 | 31,684 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
3,338 | 4,392 | 49,623 | 57,353 | 45,853 | 103,206 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
6,058 | 9,981 | 72,781 | 88,820 | 89,168 | 177,988 | ||||||||||||||||||
Home equity |
2,072 | 2,068 | 29,292 | 33,432 | 5,035 | 38,467 | ||||||||||||||||||
Installment |
144 | 173 | 1,590 | 1,907 | 986 | 2,893 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
2,216 | 2,241 | 30,882 | 35,339 | 6,021 | 41,360 | ||||||||||||||||||
Residential mortgage |
2,018 | 4,237 | 41,173 | 47,428 | 11,396 | 58,824 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
4,234 | 6,478 | 72,055 | 82,767 | 17,417 | 100,184 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total nonaccrual loans |
$ | 10,292 | $ | 16,459 | $ | 144,836 | $ | 171,587 | $ | 106,585 | $ | 278,172 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 3,448 | $ | 5,283 | $ | 10,808 | $ | 19,539 | $ | 4,245,817 | $ | 4,265,356 | ||||||||||||
Commercial real estate - owner occupied |
3,250 | 4,966 | 12,919 | 21,135 | 1,176,382 | 1,197,517 | ||||||||||||||||||
Lease financing |
| 17 | 483 | 500 | 60,318 | 60,818 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
6,698 | 10,266 | 24,210 | 41,174 | 5,482,517 | 5,523,691 | ||||||||||||||||||
Commercial real estate - investor |
10,541 | 5,710 | 33,660 | 49,911 | 2,737,247 | 2,787,158 | ||||||||||||||||||
Real estate construction |
1,057 | 485 | 16,578 | 18,120 | 593,066 | 611,186 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
11,598 | 6,195 | 50,238 | 68,031 | 3,330,313 | 3,398,344 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
18,296 | 16,461 | 74,448 | 109,205 | 8,812,830 | 8,922,035 | ||||||||||||||||||
Home equity |
13,092 | 5,871 | 29,347 | 48,310 | 2,308,590 | 2,356,900 | ||||||||||||||||||
Installment |
1,379 | 631 | 2,202 | 4,212 | 478,239 | 482,451 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
14,471 | 6,502 | 31,549 | 52,522 | 2,786,829 | 2,839,351 | ||||||||||||||||||
Residential mortgage |
8,232 | 4,901 | 41,173 | 54,306 | 3,150,522 | 3,204,828 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
22,703 | 11,403 | 72,722 | 106,828 | 5,937,351 | 6,044,179 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 40,999 | $ | 27,864 | $ | 147,170 | $ | 216,033 | $ | 14,750,181 | $ | 14,966,214 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
* | The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at September 30, 2012 (the same as the reported balances for the accruing loans noted above). |
21
The following table presents loans by past due status at December 31, 2011.
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due * |
Total Past Due |
Current | Total | |||||||||||||||||||
($ 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 | $ | 356,772 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 8,887 | $ | 12,163 | $ | 24,547 | $ | 45,597 | $ | 3,679,139 | $ | 3,724,736 | ||||||||||||
Commercial real estate - owner occupied |
8,978 | 489 | 19,724 | 29,191 | 1,057,638 | 1,086,829 | ||||||||||||||||||
Lease financing |
31 | 73 | 858 | 962 | 57,232 | 58,194 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
17,896 | 12,725 | 45,129 | 75,750 | 4,794,009 | 4,869,759 | ||||||||||||||||||
Commercial real estate - investor |
5,102 | 4,930 | 31,529 | 41,561 | 2,522,206 | 2,563,767 | ||||||||||||||||||
Real estate construction |
909 | 605 | 19,106 | 20,620 | 563,426 | 584,046 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
6,011 | 5,535 | 50,635 | 62,181 | 3,085,632 | 3,147,813 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
23,907 | 18,260 | 95,764 | 137,931 | 7,879,641 | 8,017,572 | ||||||||||||||||||
Home equity |
12,217 | 5,198 | 34,976 | 52,391 | 2,452,313 | 2,504,704 | ||||||||||||||||||
Installment |
2,187 | 1,181 | 1,288 | 4,656 | 553,126 | 557,782 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
14,404 | 6,379 | 36,264 | 57,047 | 3,005,439 | 3,062,486 | ||||||||||||||||||
Residential mortgage |
8,301 | 5,205 | 43,153 | 56,659 | 2,894,354 | 2,951,013 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
22,705 | 11,584 | 79,417 | 113,706 | 5,899,793 | 6,013,499 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 46,612 | $ | 29,844 | $ | 175,181 | $ | 251,637 | $ | 13,779,434 | $ | 14,031,071 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
* | The recorded investment in loans past due 90 days or more and still accruing totaled $5 million at December 31, 2011 (the same as the reported balances for the accruing loans noted above). |
22
The following table presents impaired loans at September 30, 2012.
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
YTD Average Recorded Investment |
YTD Interest Income Recognized* |
||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Loans with a related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 64,379 | $ | 71,469 | $ | 15,392 | $ | 61,871 | $ | 2,133 | ||||||||||
Commercial real estate - owner occupied |
28,651 | 33,207 | 5,763 | 29,659 | 801 | |||||||||||||||
Lease financing |
541 | 541 | 22 | 629 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
93,571 | 105,217 | 21,177 | 92,159 | 2,934 | |||||||||||||||
Commercial real estate - investor |
99,242 | 122,537 | 16,266 | 100,899 | 2,514 | |||||||||||||||
Real estate construction |
19,393 | 26,048 | 4,725 | 20,931 | 273 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
118,635 | 148,585 | 20,991 | 121,830 | 2,787 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
212,206 | 253,802 | 42,168 | 213,989 | 5,721 | |||||||||||||||
Home equity |
46,117 | 53,402 | 25,231 | 49,216 | 1,276 | |||||||||||||||
Installment |
3,565 | 3,939 | 2,311 | 3,812 | 121 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
49,682 | 57,341 | 27,542 | 53,028 | 1,397 | |||||||||||||||
Residential mortgage |
74,082 | 81,538 | 16,111 | 76,284 | 1,505 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
123,764 | 138,879 | 43,653 | 129,312 | 2,902 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 335,970 | $ | 392,681 | $ | 85,821 | $ | 343,301 | $ | 8,623 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans with no related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 12,330 | $ | 20,446 | $ | | $ | 12,932 | $ | 98 | ||||||||||
Commercial real estate - owner occupied |
14,216 | 17,290 | | 15,250 | 197 | |||||||||||||||
Lease financing |
5,386 | 5,386 | | 7,564 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
31,932 | 43,122 | | 35,746 | 295 | |||||||||||||||
Commercial real estate - investor |
21,529 | 32,191 | | 23,201 | 46 | |||||||||||||||
Real estate construction |
15,852 | 30,052 | | 16,994 | 22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
37,381 | 62,243 | | 40,195 | 68 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
69,313 | 105,365 | | 75,941 | 363 | |||||||||||||||
Home equity |
1,817 | 2,206 | | 1,985 | 2 | |||||||||||||||
Installment |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
1,817 | 2,206 | | 1,985 | 2 | |||||||||||||||
Residential mortgage |
6,863 | 8,296 | | 7,824 | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
8,680 | 10,502 | | 9,809 | 42 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 77,993 | $ | 115,867 | $ | | $ | 85,750 | $ | 405 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
||||||||||||||||||||
Commercial and industrial |
$ | 76,709 | $ | 91,915 | $ | 15,392 | $ | 74,803 | $ | 2,231 | ||||||||||
Commercial real estate - owner occupied |
42,867 | 50,497 | 5,763 | 44,909 | 998 | |||||||||||||||
Lease financing |
5,927 | 5,927 | 22 | 8,193 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
125,503 | 148,339 | 21,177 | 127,905 | 3,229 | |||||||||||||||
Commercial real estate - investor |
120,771 | 154,728 | 16,266 | 124,100 | 2,560 | |||||||||||||||
Real estate construction |
35,245 | 56,100 | 4,725 | 37,925 | 295 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
156,016 | 210,828 | 20,991 | 162,025 | 2,855 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
281,519 | 359,167 | 42,168 | 289,930 | 6,084 | |||||||||||||||
Home equity |
47,934 | 55,608 | 25,231 | 51,201 | 1,278 | |||||||||||||||
Installment |
3,565 | 3,939 | 2,311 | 3,812 | 121 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
51,499 | 59,547 | 27,542 | 55,013 | 1,399 | |||||||||||||||
Residential mortgage |
80,945 | 89,834 | 16,111 | 84,108 | 1,545 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
132,444 | 149,381 | 43,653 | 139,121 | 2,944 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 413,963 | $ | 508,548 | $ | 85,821 | $ | 429,051 | $ | 9,028 | ||||||||||
|
|
|
|
|
|
|
|
|
|
* | Interest income recognized included $5 million of interest income recognized on accruing restructured loans for the nine months ended September 30, 2012. |
23
The following table presents impaired loans at December 31, 2011.
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
YTD Average Recorded Investment |
YTD Interest Income Recognized* |
||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Loans with a related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 57,380 | $ | 65,945 | $ | 15,307 | $ | 65,042 | $ | 2,265 | ||||||||||
Commercial real estate - owner occupied |
27,456 | 31,221 | 7,570 | 28,938 | 587 | |||||||||||||||
Lease financing |
1,176 | 1,176 | 195 | 1,792 | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
86,012 | 98,342 | 23,072 | 95,772 | 2,892 | |||||||||||||||
Commercial real estate - investor |
101,704 | 117,469 | 25,001 | 107,153 | 3,552 | |||||||||||||||
Real estate construction |
30,100 | 38,680 | 9,185 | 35,411 | 1,220 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
131,804 | 156,149 | 34,186 | 142,564 | 4,772 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
217,816 | 254,491 | 57,258 | 238,336 | 7,664 | |||||||||||||||
Home equity |
52,756 | 58,221 | 30,836 | 56,069 | 1,909 | |||||||||||||||
Installment |
3,730 | 4,059 | 2,021 | 4,135 | 217 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
56,486 | 62,280 | 32,857 | 60,204 | 2,126 | |||||||||||||||
Residential mortgage |
74,415 | 81,215 | 14,664 | 77,987 | 2,197 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
130,901 | 143,495 | 47,521 | 138,191 | 4,323 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 348,717 | $ | 397,986 | $ | 104,779 | $ | 376,527 | $ | 11,987 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans with no related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 21,247 | $ | 27,631 | $ | | $ | 23,514 | $ | 532 | ||||||||||
Commercial real estate - owner occupied |
16,400 | 20,426 | | 18,609 | 200 | |||||||||||||||
Lease financing |
9,468 | 9,468 | | 11,436 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
47,115 | 57,525 | | 53,559 | 732 | |||||||||||||||
Commercial real estate - investor |
41,065 | 63,872 | | 50,936 | 242 | |||||||||||||||
Real estate construction |
22,683 | 41,636 | | 30,937 | 330 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
63,748 | 105,508 | | 81,873 | 572 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
110,863 | 163,033 | | 135,432 | 1,304 | |||||||||||||||
Home equity |
3,101 | 5,087 | | 3,314 | 6 | |||||||||||||||
Installment |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
3,101 | 5,087 | | 3,314 | 6 | |||||||||||||||
Residential mortgage |
7,255 | 7,806 | | 7,376 | 117 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
10,356 | 12,893 | | 10,690 | 123 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 121,219 | $ | 175,926 | $ | | $ | 146,122 | $ | 1,427 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
||||||||||||||||||||
Commercial and industrial |
$ | 78,627 | $ | 93,576 | $ | 15,307 | $ | 88,556 | $ | 2,797 | ||||||||||
Commercial real estate - owner occupied |
43,856 | 51,647 | 7,570 | 47,547 | 787 | |||||||||||||||
Lease financing |
10,644 | 10,644 | 195 | 13,228 | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
133,127 | 155,867 | 23,072 | 149,331 | 3,624 | |||||||||||||||
Commercial real estate - investor |
142,769 | 181,341 | 25,001 | 158,089 | 3,794 | |||||||||||||||
Real estate construction |
52,783 | 80,316 | 9,185 | 66,348 | 1,550 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
195,552 | 261,657 | 34,186 | 224,437 | 5,344 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
328,679 | 417,524 | 57,258 | 373,768 | 8,968 | |||||||||||||||
Home equity |
55,857 | 63,308 | 30,836 | 59,383 | 1,915 | |||||||||||||||
Installment |
3,730 | 4,059 | 2,021 | 4,135 | 217 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
59,587 | 67,367 | 32,857 | 63,518 | 2,132 | |||||||||||||||
Residential mortgage |
81,670 | 89,021 | 14,664 | 85,363 | 2,314 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
141,257 | 156,388 | 47,521 | 148,881 | 4,446 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 469,936 | $ | 573,912 | $ | 104,779 | $ | 522,649 | $ | 13,414 | ||||||||||
|
|
|
|
|
|
|
|
|
|
* | Interest income recognized included $6 million of interest income recognized on accruing restructured loans for the year ended December 31, 2011. |
24
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments, unless the loan is well secured and in the process of collection. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is managements practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, amortization of related deferred loan fees or costs is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal and interest of the loan is collectible. If collectability of the principal and interest is in doubt, payments received are applied to loan principal.
While an asset is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge off of identified losses, if any) is deemed to be fully collectible. The determination as to the ultimate collectability of the assets remaining recorded investment must be supported by a current, well documented credit evaluation of the borrowers financial condition and prospects for repayment, including consideration of the borrowers sustained historical repayment performance and other relevant factors. A nonaccrual loan is returned to accrual status when all delinquent principal and interest payments become current in accordance with the terms of the loan agreement, the borrower has demonstrated a period of sustained performance, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. A sustained period of repayment performance generally would be a minimum of six months.
Troubled Debt Restructurings (Restructured Loans):
Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings which are considered and accounted for as impaired loans. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status. If the borrowers ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status. The Corporation had a $46 million recorded investment in loans modified in a troubled debt restructuring for the nine months ended September 30, 2012, of which, $25 million were in accrual status and $21 million were in nonaccrual pending a sustained period of repayment.
As of September 30, 2012 and December 31, 2011, there were $74 million and $87 million, respectively, of nonaccrual restructured loans, and $136 million and $113 million, respectively, of performing restructured loans, included within impaired loans. All restructured loans are considered impaired in the calendar year of restructuring. In subsequent years, a restructured loan may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain classified as a restructured loan. The following table presents nonaccrual and performing restructured loans by loan portfolio.
September 30, 2012 | December 31, 2011 | |||||||||||||||
Performing Restructured Loans |
Nonaccrual Restructured Loans * |
Performing Restructured Loans |
Nonaccrual Restructured Loans * |
|||||||||||||
($ in Thousands) | ||||||||||||||||
Commercial and industrial |
$ | 35,015 | $ | 15,414 | $ | 22,552 | $ | 12,211 | ||||||||
Commercial real estate - owner occupied |
15,706 | 11,692 | 8,138 | 9,706 | ||||||||||||
Commercial real estate - investor |
49,249 | 23,985 | 43,417 | 30,303 | ||||||||||||
Real estate construction |
3,561 | 6,468 | 10,977 | 14,253 | ||||||||||||
Home equity |
9,467 | 5,477 | 8,950 | 6,268 | ||||||||||||
Installment |
672 | 1,102 | 1,015 | 1,163 | ||||||||||||
Residential mortgage |
22,121 | 10,113 | 18,115 | 13,589 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 135,791 | $ | 74,251 | $ | 113,164 | $ | 87,493 | ||||||||
|
|
|
|
|
|
|
|
* | Nonaccrual restructured loans have been included with nonaccrual loans. |
25
The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the three and nine months ended September 30, 2012, and the recorded investment and unpaid principal balance as of September 30, 2012.
Three Months Ended September 30, 2012 |
Nine Months Ended September 30, 2012 |
|||||||||||||||||||||||
Number of Loans |
Recorded Investment (1) |
Unpaid Principal Balance (2) |
Number of Loans |
Recorded Investment (1) |
Unpaid Principal Balance (2) |
|||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||
Commercial and industrial |
27 | $ | 4,984 | $ | 5,165 | 82 | $ | 15,956 | $ | 19,053 | ||||||||||||||
Commercial real estate - owner occupied |
11 | 5,747 | 5,958 | 29 | 11,371 | 12,116 | ||||||||||||||||||
Commercial real estate - investor |
3 | 3,201 | 3,583 | 25 | 12,514 | 13,400 | ||||||||||||||||||
Real estate construction |
3 | 45 | 48 | 8 | 864 | 1,214 | ||||||||||||||||||
Home equity |
9 | 619 | 652 | 33 | 1,796 | 1,845 | ||||||||||||||||||
Installment |
5 | 138 | 140 | 10 | 219 | 222 | ||||||||||||||||||
Residential mortgage |
1 | 108 | 108 | 15 | 3,145 | 3,329 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
59 | $ | 14,842 | $ | 15,654 | 202 | $ | 45,865 | $ | 51,179 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Represents post-modification outstanding recorded investment. |
(2) | Represents pre-modification outstanding recorded investment. |
Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure (A/B Note), principal reduction, or some combination of these concessions. During the three and nine months ended September 30, 2012, restructured loan modifications of commercial and industrial, commercial real estate and real estate construction loans primarily included maturity date extensions and payment schedule modifications. Restructured loan modifications of home equity and residential mortgage loans primarily included maturity date extensions, interest rate concessions, payment schedule modifications, or a combination of these concessions for the three and nine months ended September 30, 2012.
The following table provides the number of loans modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three and nine months ended September 30, 2012, as well as the recorded investment in these restructured loans as of September 30, 2012.
Three Months Ended September 30, 2012 |
Nine Months Ended September 30, 2012 |
|||||||||||||||
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
|||||||||||||
($ in Thousands) | ||||||||||||||||
Commercial and industrial |
6 | $ | 847 | 19 | $ | 2,103 | ||||||||||
Commercial real estate - owner occupied |
4 | 572 | 8 | 2,734 | ||||||||||||
Commercial real estate - investor |
4 | 3,678 | 12 | 8,487 | ||||||||||||
Real estate construction |
2 | 432 | 6 | 2,079 | ||||||||||||
Home equity |
8 | 1,829 | 12 | 2,065 | ||||||||||||
Installment |
| | 2 | 333 | ||||||||||||
Residential mortgage |
5 | 609 | 11 | 1,157 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
29 | $ | 7,967 | 70 | $ | 18,958 | ||||||||||
|
|
|
|
|
|
|
|
All loans modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a subsequent payment default, is considered in the determination of an appropriate level of the allowance for loan losses.
26
NOTE 7: Goodwill and Other Intangible Assets
Goodwill: Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis. In addition, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Corporation conducted its annual impairment testing in May 2012. Management also assessed and determined during the fourth quarter of 2011 that an extended decline in the Corporations stock price qualified as a triggering event and as such, performed an interim impairment test. Both the annual impairment test and the interim impairment test indicated that the estimated fair value exceeded the carrying value (including goodwill) for all of the reported segments. Therefore, a step two analysis was not required for these reporting units and no impairment charge was recorded. There were no impairment charges recorded in 2011, or through September 30, 2012. It is possible that a future conclusion could be reached that all or a portion of the Corporations goodwill may be impaired, in which case a non-cash charge for the amount of such impairment would be recorded in earnings. Such a charge, if any, would have no impact on tangible capital and would not affect the Corporations well-capitalized designation.
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 Corporations insurance agency acquisitions), and mortgage servicing rights. For core deposit intangibles and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows.
Nine Months Ended September 30, 2012 |
Year Ended December 31, 2011 |
|||||||
($ in Thousands) | ||||||||
Core deposit intangibles: |
||||||||
Gross carrying amount |
$ | 41,831 | $ | 41,831 | ||||
Accumulated amortization |
(33,237 | ) | (30,815 | ) | ||||
|
|
|
|
|||||
Net book value |
$ | 8,594 | $ | 11,016 | ||||
|
|
|
|
|||||
Amortization during the period |
$ | 2,422 | $ | 3,695 | ||||
Other intangibles: |
||||||||
Gross carrying amount |
$ | 19,283 | $ | 19,283 | ||||
Accumulated amortization |
(11,601 | ) | (10,877 | ) | ||||
|
|
|
|
|||||
Net book value |
$ | 7,682 | $ | 8,406 | ||||
|
|
|
|
|||||
Amortization during the period |
$ | 724 | $ | 1,019 |
The Corporation sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Upon sale, a mortgage servicing rights asset is capitalized, which represents the current fair value of future net cash flows expected to be realized for performing servicing activities. Mortgage servicing rights, when purchased, are initially recorded at fair value. As the Corporation has not elected to subsequently measure any class of servicing assets under the fair value measurement method, the Corporation follows the amortization method. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other intangible assets, net, in the consolidated balance sheets.
The Corporation periodically evaluates its mortgage servicing rights asset for impairment. Impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the mortgage servicing rights asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the mortgage servicing rights asset generally increases, requiring less valuation reserve. A valuation allowance is established, through a charge to earnings, to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through
27
a recovery to earnings. An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan pay off activity) is recognized as a write-down of the mortgage servicing rights asset and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings. A direct write-down permanently reduces the carrying value of the mortgage servicing rights asset and valuation allowance, precluding subsequent recoveries. The Corporation recorded an other-than-temporary impairment of $15 million on mortgage servicing rights by reducing the capitalized costs and the valuation allowance on mortgage servicing rights during 2012 due to the uncertainty of the recoverability of the valuation allowance on mortgage servicing rights associated with the long-term, consistently low rate environment. See Note 11, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities, for a discussion of the recourse provisions on serviced residential mortgage loans. See Note 12, Fair Value Measurements, which further discusses fair value measurement relative to the mortgage servicing rights asset.
A summary of changes in the balance of the mortgage servicing rights asset and the mortgage servicing rights valuation allowance was as follows.
Nine Months Ended September 30, 2012 |
Year Ended December 31, 2011 |
|||||||
($ in Thousands) | ||||||||
Mortgage servicing rights: |
||||||||
Mortgage servicing rights at beginning of period |
$ | 75,855 | $ | 84,209 | ||||
Additions |
18,669 | 17,476 | ||||||
Amortization |
(17,326 | ) | (25,830 | ) | ||||
Other-than-temporary impairment |
(14,610 | ) | | |||||
|
|
|
|
|||||
Mortgage servicing rights at end of period |
$ | 62,588 | $ | 75,855 | ||||
|
|
|
|
|||||
Valuation allowance at beginning of period |
(27,703 | ) | (20,300 | ) | ||||
Additions, net |
(4,477 | ) | (7,403 | ) | ||||
Other-than-temporary impairment |
14,610 | | ||||||
|
|
|
|
|||||
Valuation allowance at end of period |
(17,570 | ) | (27,703 | ) | ||||
|
|
|
|
|||||
Mortgage servicing rights, net |
$ | 45,018 | $ | 48,152 | ||||
|
|
|
|
|||||
Fair value of mortgage servicing rights |
$ | 45,018 | $ | 48,152 | ||||
Portfolio of residential mortgage loans serviced for others (servicing portfolio) |
7,547,000 | 7,321,000 | ||||||
Mortgage servicing rights, net to servicing portfolio |
0.60 | % | 0.66 | % | ||||
Mortgage servicing rights expense(1) |
$ | 21,803 | $ | 33,233 |
(1) | Includes the amortization of mortgage servicing rights and additions/recoveries to the valuation allowance of mortgage servicing rights, and is a component of mortgage banking, net in the consolidated statements of income. |
The following table shows the estimated future amortization expense for amortizing intangible assets. The projections of amortization expense for the next five years are based on existing asset balances, the current interest rate environment, and prepayment speeds as of September 30, 2012. 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, prepayment speeds, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
Estimated amortization expense: |
Core Deposit Intangibles |
Other Intangibles |
Mortgage Servicing Rights |
|||||||||
($ in Thousands) | ||||||||||||
Three months ending December 31, 2012 |
$ | 800 | $ | 200 | $ | 4,500 | ||||||
Year ending December 31, 2013 |
3,100 | 900 | 14,200 | |||||||||
Year ending December 31, 2014 |
2,900 | 900 | 10,200 | |||||||||
Year ending December 31, 2015 |
1,400 | 800 | 7,700 | |||||||||
Year ending December 31, 2016 |
300 | 800 | 5,900 | |||||||||
Year ending December 31, 2017 |
100 | 800 | 4,500 | |||||||||
|
|
|
|
|
|
28
NOTE 8: Short and Long-Term Funding
The components of short-term funding (funding with original contractual maturities less than one year) and long-term funding (funding with original contractual maturities greater than one year) was as follows.
September 30, 2012 |
December 31, 2011 |
|||||||
($ in Thousands) | ||||||||
Short-Term Funding |
||||||||
Federal funds purchased |
$ | 89,020 | $ | 154,730 | ||||
Securities sold under agreements to repurchase |
1,049,007 | 1,359,755 | ||||||
Federal Home Loan Bank (FHLB) advances |
600,000 | 1,000,000 | ||||||
Commercial paper |
15,258 | | ||||||
|
|
|
|
|||||
Total short-term funding |
$ | 1,753,285 | $ | 2,514,485 | ||||
|
|
|
|
|||||
Long-Term Funding |
||||||||
FHLB advances |
$ | 500,387 | $ | 500,476 | ||||
Senior notes, at par |
585,000 | 430,000 | ||||||
Subordinated debt, at par |
25,821 | 25,821 | ||||||
Junior subordinated debentures, at par |
185,567 | 211,340 | ||||||
Other long-term funding and capitalized costs |
8,647 | 9,434 | ||||||
|
|
|
|
|||||
Total long-term funding |
$ | 1,305,422 | $ | 1,177,071 | ||||
|
|
|
|
|||||
Total short and long-term funding |
$ | 3,058,707 | $ | 3,691,556 | ||||
|
|
|
|
Short-term funding:
The FHLB advances included in short-term funding are those with original contractual maturities of less than one year. The securities sold under agreements to repurchase represent short-term funding which is collateralized by securities of the U.S. Government or its agencies and mature daily. During the third quarter of 2012, the Corporation began issuing commercial paper to facilitate a new customer investment product.
Long-term funding:
FHLB advances: At both September 30, 2012, and December 31, 2011, long-term advances from the FHLB had maturities through 2020 and had weighted-average interest rates of 1.79%. These advances all had fixed interest rates at both September 30, 2012, and December 31, 2011.
Senior notes: In March 2011, the Corporation issued $300 million of senior notes at a discount. In September 2011, the Corporation issued an additional $130 million of senior notes at a premium. The 2011 senior note issuances mature on March 28, 2016 and have a fixed coupon interest rate of 5.125%. In September 2012, the Corporation issued $155 million of senior notes at a discount. The 2012 senior note issuance matures on March 12, 2014 and has a fixed coupon interest rate of 1.875%.
Subordinated debt: In September 2008, the Corporation issued $26 million of 10-year subordinated debt with a 5-year no-call provision. The subordinated debt was issued at a discount, and has a fixed coupon interest rate of 9.25%. Subordinated debt qualifies under the risk-based capital guidelines as Tier 2 supplementary capital for regulatory purposes, and is discounted in accordance with regulations when the debt has five years or less remaining to maturity.
Junior subordinated debentures: As of September 30, 2012, the Corporation owned 100% of the common securities of three trusts: ASBC Capital I, SFSC Capital I, and SFSC Capital II (the Trusts). The Trusts were formed for purposes of issuing trust preferred securities to third-party investors and investing the proceeds from the issuance of the trust preferred securities and common securities solely in junior subordinated debentures issued by the Corporation (or assumed by the Corporation in connection with an acquisition). The junior subordinated debentures are the sole assets of the Trusts. In the consolidated balance sheets, the junior subordinated debentures issued by the Corporation to the Trusts are reported as long-term funding and the common securities of the Trusts, all of which are owned by the Corporation, are included in other assets.
29
The following table provides a summary of the Corporations junior subordinated debentures as of September 30, 2012 and December 31, 2011. The Corporation redeemed $26 million of the ASBC Capital I junior subordinated debentures during the second quarter of 2012 and intends to redeem the remaining outstanding junior subordinated debentures during the fourth quarter of 2012.
($ in Thousands) | Related Trust Common Securities |
Trust Preferred Securities |
Junior Subordinated Debentures, at par |
Rate Structure |
Contractual Rate |
Maturity Date |
||||||||||||||||||
September 30, 2012: |
||||||||||||||||||||||||
ASBC Capital I |
$ | 4,639 | $ | 150,000 | $ | 154,639 | Fixed | 7.625 | % | 06/2032 | ||||||||||||||
SFSC Capital I |
464 | 15,000 | 15,464 | L+3.45 | 3.880 | % | 11/2032 | |||||||||||||||||
SFSC Capital II |
464 | 15,000 | 15,464 | L+2.80 | 3.250 | % | 04/2034 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 5,567 | $ | 180,000 | $ | 185,567 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
December 31, 2011: |
||||||||||||||||||||||||
ASBC Capital I |
$ | 5,412 | $ | 175,000 | $ | 180,412 | Fixed | 7.625 | % | 06/2032 | ||||||||||||||
SFSC Capital I |
464 | 15,000 | 15,464 | L+3.45 | 3.910 | % | 11/2032 | |||||||||||||||||
SFSC Capital II |
464 | 15,000 | 15,464 | L+2.80 | 3.230 | % | 04/2034 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 6,340 | $ | 205,000 | $ | 211,340 | ||||||||||||||||||
|
|
|
|
|
|
NOTE 9: Income Taxes
For the first nine months of 2012, the Corporation recognized income tax expense of $62 million, compared to income tax expense of $35 million for the first nine months of 2011. The effective tax rate was 31.93% for the first nine months of 2012, compared to an effective tax rate of 26.10% for the first nine months of 2011. The change in income tax expense and the effective tax rate was primarily due to the increased level of pretax income between the comparable nine-month periods. Income tax expense is also impacted by ongoing federal and state income tax audits and changes in tax law.
30
NOTE 10: Derivative and Hedging Activities
The Corporation uses derivative instruments primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheet from changes in interest rates. The predominant derivative and hedging activities include interest rate-related instruments (swaps, caps, collars, and corridors), foreign currency exchange forwards, and certain mortgage banking activities. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, interest rate-related instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined from the credit ratings of each counterparty. The Corporation was required to pledge $72 million of investment securities as collateral at September 30, 2012, and pledged $85 million of investment securities as collateral at December 31, 2011.
The Corporations derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 12, Fair Value Measurements, for additional fair value information and disclosures.
The table below identifies the balance sheet category and fair values of the Corporations derivative instruments designated as cash flow hedges.
Weighted Average | ||||||||||||||||||||||||
Notional Amount |
Fair Value |
Balance Sheet Category |
Receive Rate |
Pay Rate |
Maturity | |||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||
December 31, 2011 |
||||||||||||||||||||||||
Interest rate swap Federal funds purchased and securities sold under agreements to repurchase |
$ | 100,000 | $ | (2,011 | ) | Other liabilities | 0.07 | % | 3.04 | % | 8 months |
The table below identifies the gains and losses recognized on the Corporations derivative instruments designated as cash flow hedges.
($ in Thousands)
|
Amount of Gain / (Loss) Recognized in OCI on Derivatives (Effective Portion) |
Category of (Gain) / Loss Reclassified from AOCI into Income (Effective Portion) |
Amount of (Gain) / Loss Reclassified from AOCI into Income (Effective Portion) |
Category of Gain / (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
Gross Amount of Gain / (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
|||||||||||
Nine Months Ended September 30, 2012 |
Interest Expense | Interest Expense | ||||||||||||||
Interest rate swap - Federal funds purchased and securities sold under agreements to repurchase |
$ | 6 | Federal funds purchased and securities sold under agreements to repurchase |
$ | 1,954 | Federal funds purchased and securities sold under agreements to repurchase |
$ | 33 | ||||||||
Nine Months Ended September 30, 2011 |
Interest Expense | Interest Expense | ||||||||||||||
Interest rate swap - Federal funds purchased and securities sold under agreements to repurchase |
$ | (528 | ) | Federal funds purchased and securities sold under agreements to repurchase |
$ | 3,969 | Federal funds purchased and securities sold under agreements to repurchase |
$ | 18 |
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Cash flow hedges
The Corporation has variable-rate short-term funding which exposes the Corporation to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of these interest payments, the Corporation has entered into various interest rate swap agreements.
During the third quarter of 2008, the Corporation entered into two interest rate swap agreements which hedge the interest rate risk in the cash flows of certain short-term, variable-rate funding. In the third quarter of 2011, one interest rate swap agreement for $100 million matured. In the third quarter of 2012, the remaining interest rate swap agreement for $100 million matured. Hedge effectiveness is determined using regression analysis. No components of the derivatives change in fair value were excluded from the assessment of hedge effectiveness. Derivative gains and losses reclassified from accumulated other comprehensive income to current period earnings are included in interest expense on Federal funds purchased and securities sold under agreements to repurchase (i.e., the line item in which the hedged cash flows are recorded). At December 31, 2011, accumulated other comprehensive income included a deferred after-tax net loss of $1 million related to these derivatives.
The table below identifies the balance sheet category and fair values of the Corporations derivative instruments not designated as hedging instruments.
Weighted Average | ||||||||||||||||||||||
($ in Thousands) | Notional Amount |
Fair Value |
Balance Sheet Category |
Receive Rate(1) |
Pay Rate(1) |
Maturity | ||||||||||||||||
September 30, 2012 |
||||||||||||||||||||||
Interest rate-related instruments customer and mirror |
$ | 1,700,367 | $ | 75,065 | Other assets | 1.34 | % | 1.34 | % | 45 months | ||||||||||||
Interest rate-related instruments customer and mirror |
1,700,367 | (81,884 | ) | Other liabilities | 1.34 | 1.34 | 45 months | |||||||||||||||
Interest rate lock commitments (mortgage) |
425,557 | 17,566 | Other assets | | | | ||||||||||||||||
Forward commitments (mortgage) |
463,500 | (8,167 | ) | Other liabilities | | | | |||||||||||||||
Foreign currency exchange forwards |
47,445 | 1,094 | Other assets | | | | ||||||||||||||||
Foreign currency exchange forwards |
45,130 | (977 | ) | Other liabilities | | | | |||||||||||||||
Purchased options (time deposit) |
106,921 | 5,032 | Other assets | | | | ||||||||||||||||
Written options (time deposit) |
106,921 | (5,032 | ) | Other liabilities | | | | |||||||||||||||
December 31, 2011 |
||||||||||||||||||||||
Interest rate-related instruments customer and mirror |
$ | 1,563,831 | $ | 71,143 | Other assets | 1.66 | % | 1.66 | % | 45 months | ||||||||||||
Interest rate-related instruments customer and mirror |
1,563,831 | (78,064 | ) | Other liabilities | 1.66 | 1.66 | 45 months | |||||||||||||||
Interest rate lock commitments (mortgage) |
235,375 | 4,571 | Other assets | | | | ||||||||||||||||
Forward commitments (mortgage) |
437,500 | (4,771 | ) | Other liabilities | | | | |||||||||||||||
Foreign currency exchange forwards |
52,973 | 2,079 | Other assets | | | | ||||||||||||||||
Foreign currency exchange forwards |
44,107 | (1,891 | ) | Other liabilities | | | | |||||||||||||||
Purchased options (time deposit) |
54,780 | 2,854 | Other assets | | | | ||||||||||||||||
Written options (time deposit) |
54,780 | (2,854 | ) | Other liabilities | | | |
(1) | Reflects the weighted average receive rate and pay rate for the interest rate-related instruments only. |
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The table below identifies the income statement category of the gains and losses recognized in income on the Corporations derivative instruments not designated as hedging instruments.
Income Statement Category of Gain / (Loss) Recognized in Income |
Gain / (Loss) Recognized in Income |
|||||
($ in Thousands) | ||||||
Nine Months Ended September 30, 2012 |
||||||
Interest rate-related instruments customer and mirror, net |
Capital market fees, net | $ | 102 | |||
Interest rate lock commitments (mortgage) |
Mortgage banking, net | 12,995 | ||||
Forward commitments (mortgage) |
Mortgage banking, net | (3,396 | ) | |||
Foreign currency exchange forwards |
Capital market fees, net | (71 | ) | |||
Covered call options |
Interest on investment securities | 469 | ||||
Nine Months Ended September 30, 2011 |
||||||
Interest rate-related instruments customer and mirror, net |
Capital market fees, net | $ | (3,379 | ) | ||
Interest rate lock commitments (mortgage) |
Mortgage banking, net | 10,935 | ||||
Forward commitments (mortgage) |
Mortgage banking, net | (11,386 | ) | |||
Foreign currency exchange forwards |
Capital market fees, net | 345 |
Free standing derivatives
The Corporation enters into various derivative contracts which are designated as free standing derivative contracts. These derivative contracts are not designated against specific assets and liabilities on the balance sheet or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value on the consolidated balance sheet with changes in the fair value recorded as a component of Capital market fees, net, and typically include interest rate-related instruments (swaps, caps, collars, and corridors).
Free standing derivatives are entered into primarily for the benefit of commercial customers through providing derivative products which enable the customer to manage their exposures to interest rate risk. The Corporations market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms and indices.
Mortgage derivatives
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net.
Foreign currency derivatives
The Corporation provides foreign exchange services to customers. The Corporation may enter into a foreign currency forward to mitigate the exchange rate risk attached to the cash flows of a loan or as an offsetting contract to a forward entered into as a service to our customer.
Written and purchased option derivatives (time deposit)
The Corporation periodically enters into written and purchased option derivative instruments to facilitate an equity linked time deposit product (the Power CD). The Power CD is a time deposit that provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation receives a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments which are carried at fair value on the consolidated balance sheets.
Other derivatives
During the second quarter of 2012, the Corporation began entering into covered call options. Under covered call options, the Corporation will sell options to a bank or dealer for the right to purchase certain securities held within the Corporations investment securities portfolio. These option transactions are designed primarily to increase the total return associated with the investment securities portfolio. These options do not qualify as hedges, and, accordingly, the changes in fair value of these contracts are recognized in interest income. There were no covered call options outstanding as of September 30, 2012.
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NOTE 11: Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities
The Corporation utilizes a variety of financial instruments in the normal course of business to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include lending-related and other commitments (see below) and derivative instruments (see Note 10). The following is a summary of lending-related commitments.
September 30, 2012 |
December 31, 2011 |
|||||||
($ in Thousands) | ||||||||
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale(1)(2) |
$ | 5,138,435 | $ | 4,561,210 | ||||
Commercial letters of credit (1) |
67,153 | 47,699 | ||||||
Standby letters of credit (3) |
305,230 | 320,375 |
(1) | These off-balance sheet financial instruments are exercisable at the market rate prevailing at the date the underlying transaction will be completed and, thus, are deemed to have no current fair value, or the fair value is based on fees currently charged to enter into similar agreements and is not material at September 30, 2012 or December 31, 2011. |
(2) | Interest rate lock commitments to originate residential mortgage loans held for sale are considered derivative instruments and are disclosed in Note 10. |
(3) | The Corporation has established a liability of $4 million at both September 30, 2012 and December 31, 2011, as an estimate of the fair value of these financial instruments. |
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, with each customers creditworthiness evaluated on a case-by-case basis. The commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Corporations 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 amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on managements credit evaluation of the customer. Since a significant portion of commitments to extend credit are subject to specific restrictive loan covenants or may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. As of September 30, 2012 and December 31, 2011, the Corporation had a reserve for losses on unfunded commitments totaling $20 million and $15 million, respectively, included in other liabilities on the consolidated balance sheets.
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. Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. The Corporations derivative and hedging activity is further described in Note 10. 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.
Other Commitments
The Corporation has principal investment commitments to provide capital-based financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle, whereby privately held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, which can vary based on overall market conditions, as well as the nature and type of industry in which the companies operate. The Corporation also invests in low-income housing, small-business commercial real estate, new market tax credit projects, and historic tax credit projects to promote the revitalization of low-to-moderate-income neighborhoods throughout the local communities of its bank subsidiary. As a limited partner in these unconsolidated projects, the Corporation is allocated tax credits and deductions associated with the underlying projects. The aggregate carrying value of these investments at September 30, 2012 was $34 million, included in other assets on the consolidated balance sheets, compared to $36 million at December 31, 2011. Related to these investments, the Corporation had remaining commitments to fund of $18 million at September 30, 2012 and $15 million at December 31, 2011.
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Contingent Liabilities
The Corporation is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which involve claims for substantial amounts. Although there can be no assurance as to the ultimate outcomes, the Corporation believes it has meritorious defenses to the claims asserted against it in its currently outstanding matters, including the matter described below, and with respect to such legal proceedings, intends to continue to defend itself vigorously. The Corporation will consider settlement of cases when, in managements judgment, it is in the best interests of both the Corporation and its shareholders.
On a quarterly basis, the Corporation assesses its liabilities and contingencies in connection with all pending or threatened claims and litigation, utilizing the most recent information available. On a matter by matter basis, an accrual for loss is established for those matters which the Corporation believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments. Accordingly, managements estimate will change from time to time, and actual losses may be more or less than the current estimate. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established.
Resolution of legal claims are inherently unpredictable, and in many legal proceedings various factors exacerbate this inherent unpredictability, including where the damages sought are unsubstantiated or indeterminate, it is unclear whether a case brought as a class action will be allowed to proceed on that basis, discovery is not complete, the proceeding is not yet in its final stages, the matters present legal uncertainties, there are significant facts in dispute, there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants), or there is a wide range of potential results.
A putative class action lawsuit, Harris v. Associated Bank, N.A. (the Bank), was filed in the United States District Court for the Western District of Wisconsin in April 2010, alleging that the Bank unfairly assessed and collected overdraft fees and seeking restitution of the overdraft fees, compensatory, consequential and punitive damages, and costs. The case was subsequently consolidated into the Multi District Litigation (MDL), In re: Checking Account Overdraft Litigation MDL No. 2036 in the United States District Court for the Southern District of Florida. A settlement agreement which requires payment by the Bank of $13 million for a full and complete release of all claims brought against the Bank received preliminary approval from the court on July 26, 2012. In the second quarter of 2012, the Bank settled with an insurer for $2.5 million as contribution to the settlement amount and received approximately $1.5 million as partial reimbursement for defense costs. By entering into such an agreement, the Bank has not admitted any liability with respect to the lawsuit. The settlement amount was previously accrued for in the financial statements.
The Corporation, as a member bank of Visa, Inc. (Visa) prior to Visas completion of their initial public offering (IPO) in March 2008, had certain indemnification obligations pursuant to Visas certificate of incorporation and bylaws and in accordance with their membership agreements. In accordance with Visas bylaws prior to the IPO, the Corporation could have been required to indemnify Visa for the Corporations proportional share of losses based on the pre-IPO membership interests. In contemplation of the IPO, Visa announced that it had completed restructuring transactions during the fourth quarter of 2007. As part of this restructuring, the Corporations indemnification obligation was modified to include only certain known litigation as of the date of the restructuring. Based upon Visas revised liability estimate for litigation, including the current funding of litigation settlements, the Corporation has a Visa indemnification liability (included in other liabilities on the consolidated balance sheets) totaling $2 million at both September 30, 2012 and December 31, 2011. In connection with the IPO in 2008, Visa retained a portion of the proceeds to fund an escrow account in order to resolve existing litigation settlements as well as to fund potential future litigation settlements. The Corporations interest in this escrow account (included in other assets on the consolidation balance sheets) was $2 million at both September 30, 2012 and December 31, 2011.
Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are most often sold on a nonrecourse basis. The Corporations agreements to sell residential mortgage loans in the normal course of business usually require general representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability, which if subsequently are untrue or breached, could require the Corporation to repurchase certain loans affected. There have been insignificant instances of repurchase under representations and warranties. To a much lesser degree, the Corporation may sell residential mortgage loans with limited recourse (limited in that the recourse period ends prior to the loans maturity, usually after certain time and/or loan paydown criteria have been met), whereby repurchase could be required if the loan had defined delinquency issues during the limited recourse periods. At September 30, 2012, and December 31, 2011, there were approximately $77 million and $56 million, respectively, of residential mortgage loans sold with such recourse risk upon which there have been insignificant instances of repurchase. Given that the underlying loans delivered to buyers are predominantly conventional residential first lien mortgages originated or purchased under our usual underwriting
procedures, and that historical experience shows negligible losses and insignificant repurchase activity, management believes that losses and repurchases under the limited recourse provisions will continue to be insignificant.
35
In October 2004, the Corporation acquired a thrift. Prior to the acquisition, this thrift retained a subordinate position to the FHLB in the credit risk on the underlying residential mortgage loans it sold to the FHLB in exchange for a monthly credit enhancement fee. The Corporation has not sold loans to the FHLB with such credit risk retention since February 2005. At September 30, 2012 and December 31, 2011, there were $349 million and $475 million, respectively, of such residential mortgage loans with credit risk recourse, upon which there have been insignificant historical losses to the Corporation.
For certain mortgage loans originated by the Corporation, borrowers may be required to obtain Private Mortgage Insurance (PMI) provided by third-party insurers. The Corporation entered into reinsurance treaties with certain PMI carriers which provided, among other things, for a sharing of losses within a specified range of the total PMI coverage in exchange for a portion of the PMI premiums. The Corporations reinsurance treaties typically provide that the Corporation will assume liability for losses once they exceed 5% of the aggregate risk exposure up to a maximum of 10% of the aggregate risk exposure. As of January 1, 2009, the Corporation discontinued providing reinsurance coverage for new loans in exchange for a portion of the PMI premium. At September 30, 2012, the Corporations potential risk exposure was approximately $19 million. The Corporations estimated liability for reinsurance losses, including estimated losses incurred but not yet reported, was $9 million and $8 million at September 30, 2012 and December 31, 2011, respectively.
Regulatory Matters
During the first quarter of 2012, the Bank entered into a Consent Order with the OCC regarding its BSA compliance. The Consent Order required the Bank to create a BSA-focused action plan, supplement existing customer due diligence policies and procedures, perform a BSA risk assessment and complete independent testing. The Bank has not been informed that this action includes the assessment of a civil money penalty. The Bank has been working cooperatively with the OCC to address the OCCs BSA concerns.
36
NOTE 12: Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept). As there is no active market for many of the Corporations financial instruments, estimates are made using discounted cash flow or other valuation techniques. Inputs into the valuation methods are subjective in nature, involve uncertainties, and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented herein are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. Assets and liabilities are categorized into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy in which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporations assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Below is a brief description of each fair value level.
Level 1 inputs |
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access. | |
Level 2 inputs |
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. | |
Level 3 inputs |
Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entitys own assumptions, as there is little, if any, related market activity. |
During 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 clarified the Boards intent about the application of existing fair value measurement and disclosure requirements. As a result, certain prior period reclassifications and disclosures have been made to conform to the new requirements. The Corporation now classifies impaired loans as a Level 3 fair value measurement, compared to a Level 2 fair value measurement in prior periods and non-maturity deposits (i.e., noninterest-bearing demand, savings, interest-bearing demand, and money market deposits) are now classified as a Level 3 fair value measurement, compared to a Level 1 fair value measurement in prior periods. The prior periods have been reclassified to reflect these changes. These reclassifications had no impact on the Corporations consolidated results of operations, financial position, or liquidity.
Following is a description of the valuation methodologies used for the Corporations more significant instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Investment securities available for sale: Where quoted prices are available in an active market, investment securities are classified in Level 1 of the fair value hierarchy. Level 1 investment securities primarily include U.S. Treasury, certain Federal agency, and exchange-traded debt and equity securities. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate, and are classified in Level 2 of the fair value hierarchy. Examples of these investment securities include certain Federal agency securities, obligations of state and political subdivisions, mortgage-related securities, asset-backed securities, and other debt securities. Lastly, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, securities are classified within Level 3 of the fair value hierarchy. Level 3 securities primarily include pooled trust preferred debt securities. To validate the fair value estimates, assumptions, and controls, the Corporation looks to transactions for similar instruments and utilizes independent pricing provided by third party vendors or brokers and relevant market indices. While none of these sources are solely indicative of fair value, they serve as directional indicators for the appropriateness of the Corporations fair value estimates. The Corporation has determined that the fair value measures of its investment securities are classified predominantly within Level 1 or 2 of the fair value hierarchy. See Note 5, Investment Securities, for additional disclosure regarding the Corporations investment securities.
Derivative financial instruments (interest rate-related instruments): The Corporation uses interest rate swaps to manage its interest rate risk. In addition, the Corporation offers customer interest rate swaps, caps, collars, and corridors to service our customers needs,
37
for which the Corporation simultaneously enters into offsetting derivative financial instruments (i.e., mirror interest rate swaps, caps, collars, and corridors) with third parties to manage its interest rate risk associated with these financial instruments. The valuation of the Corporations derivative financial instruments is determined using discounted cash flow analysis on the expected cash flows of each derivative and, also includes a nonperformance / credit risk component (credit valuation adjustment). See Note 10, Derivative and Hedging Activities, for additional disclosure regarding the Corporations derivative financial instruments.
The discounted cash flow analysis component in the fair value measurements reflects the contractual terms of the derivative financial instruments, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. More specifically, the fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments), with the variable cash payments (or receipts) based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Likewise, the fair values of interest rate options (i.e., interest rate caps, collars, and corridors) are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (or rise above) the strike rate of the floors (or caps), with the variable interest rates used in the calculation of projected receipts on the floor (or cap) based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative financial instruments for the effect of nonperformance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASBs fair value measurement guidance, the Corporation made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
While the Corporation has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions as of September 30, 2012, and December 31, 2011, and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. Therefore, the Corporation has determined that the fair value measures of its derivative financial instruments in their entirety are classified within Level 2 of the fair value hierarchy.
Derivative financial instruments (foreign currency exchange forwards): The Corporation provides foreign currency exchange services to customers. In addition, the Corporation may enter into a foreign currency exchange forward to mitigate the exchange rate risk attached to the cash flows of a loan or as an offsetting contract to a forward entered into as a service to our customer. The valuation of the Corporations foreign currency exchange forwards is determined using quoted prices of foreign currency exchange forwards with similar characteristics, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate, and are classified in Level 2 of the fair value hierarchy.
Derivative financial instruments (mortgage derivatives): Mortgage derivatives include interest rate lock commitments to originate residential mortgage loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Corporation relies on an internal valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups.
The Corporation also relies on an internal valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Corporation would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Corporation has determined that the majority of the inputs significant in the valuation of both of the mortgage derivatives fall within Level 3 of the fair value hierarchy. See Note 10, Derivative and Hedging Activities, for additional disclosure regarding the Corporations mortgage derivatives.
Following is a description of the valuation methodologies used for the Corporations more significant instruments measured on a nonrecurring basis at the lower of amortized cost or estimated fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
38
Loans Held for Sale: Loans held for sale, which consist generally of current production of certain fixed-rate, first-lien residential mortgage loans, are carried at the lower of cost or estimated fair value. The estimated fair value of the residential mortgage loans held for sale was based on what secondary markets are currently offering for portfolios with similar characteristics, which the Corporation classifies as a Level 2 nonrecurring fair value measurement.
Impaired Loans: The Corporation considers a loan 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. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loans effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note.
Mortgage servicing rights: Mortgage servicing rights do not trade in an active, open market with readily observable prices. While sales of mortgage servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a quoted price for similar assets comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its mortgage servicing rights. The valuation model incorporates prepayment assumptions to project mortgage servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The valuation model considers portfolio characteristics of the underlying mortgages, contractually specified servicing fees, prepayment assumptions, discount rate assumptions, delinquency rates, late charges, other ancillary revenue, costs to service, and other economic factors. The Corporation periodically reviews and assesses the underlying inputs and assumptions used in the model. In addition, the Corporation compares its fair value estimates and assumptions to observable market data for mortgage servicing rights, where available, and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. The Corporation uses the amortization method (i.e., lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, for its mortgage servicing rights assets. See Note 7, Goodwill and Other Intangible Assets, for additional disclosure regarding the Corporations mortgage servicing rights.
The table below presents the Corporations investment securities available for sale and derivative financial instruments measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair Value Measurements Using | ||||||||||||||||
September 30, 2012 |
Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 1,005 | $ | 1,005 | $ | | $ | | ||||||||
Federal agency securities |
6 | 6 | | | ||||||||||||
Obligations of state and political subdivisions (municipal securities) |
827,171 | | 827,171 | | ||||||||||||
Residential mortgage-related securities |
3,490,520 | | 3,490,520 | | ||||||||||||
Commercial mortgage-related securities |
74,725 | | 74,725 | | ||||||||||||
Other securities (debt and equity) |
102,771 | 2,918 | 99,446 | 407 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available for sale |
$ | 4,496,198 | $ | 3,929 | $ | 4,491,862 | $ | 407 | ||||||||
Derivatives (trading and other assets) |
$ | 98,757 | $ | | $ | 81,191 | $ | 17,566 | ||||||||
Liabilities: |
||||||||||||||||
Derivatives (trading and other liabilities) |
$ | 96,060 | $ | | $ | 87,893 | $ | 8,167 |
39
Fair Value Measurements Using | ||||||||||||||||
December 31, 2011 |
Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 1,001 | $ | 1,001 | $ | | $ | | ||||||||
Federal agency securities |
24,049 | 41 | 24,008 | | ||||||||||||
Obligations of state and political subdivisions (municipal securities) |
847,246 | | 847,246 | | ||||||||||||
Residential mortgage-related securities |
3,785,590 | | 3,785,590 | | ||||||||||||
Commercial mortgage-related securities |
18,543 | | 18,543 | | ||||||||||||
Asset-backed securities |
187,732 | | 187,732 | | ||||||||||||
Other securities (debt and equity) |
73,322 | 11,659 | 60,807 | 856 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available for sale |
$ | 4,937,483 | $ | 12,701 | $ | 4,923,926 | $ | 856 | ||||||||
Derivatives (trading and other assets) |
$ | 80,647 | $ | | $ | 76,076 | $ | 4,571 | ||||||||
Liabilities: |
||||||||||||||||
Derivatives (trading and other liabilities) |
$ | 89,591 | $ | | $ | 84,820 | $ | 4,771 |
The table below presents a rollforward of the balance sheet amounts for the year ended December 31, 2011 and the nine months ended September 30, 2012, for financial instruments measured on a recurring basis and classified within Level 3 of the fair value hierarchy.
Assets and Liabilities Measured at Fair Value
Using Significant Unobservable Inputs (Level 3)
($ in Thousands) |
Investment Securities Available for Sale |
Derivative Financial Instruments |
||||||
Balance December 31, 2010 |
$ | 1,672 | $ | 5,539 | ||||
Total net losses included in income: |
||||||||
Impairment losses on investment securities |
(816 | ) | | |||||
Mortgage derivative loss |
| (5,739 | ) | |||||
|
|
|
|
|||||
Balance December 31, 2011 |
$ | 856 | $ | (200 | ) | |||
|
|
|
|
|||||
Total net gains included in income: |
||||||||
Mortgage derivative gain |
| 9,599 | ||||||
Total net losses included in other comprehensive income: |
||||||||
Unrealized investment securities losses |
(24 | ) | | |||||
Sales of investment securities |
(425 | ) | | |||||
|
|
|
|
|||||
Balance September 30, 2012 |
$ | 407 | $ | 9,399 | ||||
|
|
|
|
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2012, the Corporation utilized the following valuation techniques and significant unobservable inputs.
Investment securities available for sale other securities (debt and equity): In valuing the investment securities available for sale classified within Level 3, the Corporation utilized a discounted cash flow model and incorporated its own assumptions about future cash flows and discount rates adjusting for credit and liquidity factors. The Corporation also reviewed the underlying collateral and other relevant data in developing the assumptions for these investment securities. The significant unobservable input used within the discounted cash flow analysis was the discount rate, which was based on the 3 month LIBOR forward curve (the 3 month LIBOR forward ranged from 0.35% to 3.07%) plus the investment security spread, at September 30, 2012.
40
Derivative financial instruments (mortgage derivative interest rate lock commitments to originate residential mortgage loans held for sale): The significant unobservable input used in the fair value measurement of the Corporations mortgage derivative interest rate lock commitments (IRLC) is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Typically the higher the closing ratio on the IRLCs will result in an increase in the fair value if in a gain position or a decrease in fair value if in a loss position. The closing ratio is calculated by our secondary marketing system taking into consideration historical data and loan-level data, (particularly the change in the current interest rates from the time of initial rate lock). The closing ratio is periodically reviewed in the Corporations Mortgage Secondary Marketing Department for reasonableness and reported to Mortgage Risk Management Committee. At September 30, 2012, the closing ratio was 77%.
Impaired loans: For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loans effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note, resulting in discounts of 0% to 50%.
Mortgage servicing rights: The discounted cash flow analyses that generate expected market prices utilize the observable characteristics of the mortgage servicing rights portfolio, as well as certain unobservable valuation parameters. The significant unobservable inputs used in the fair value measurement of the Corporations mortgage servicing rights are the weighted average constant prepayment rate and weighted average discount rate, which were 24.4% and 9.7% at September 30, 2012, respectively. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they will generally move in opposite directions.
These parameter assumptions fall within a range that the Corporation, in consultation with an independent third party, believes purchasers of servicing would apply to such portfolios sold into the current secondary servicing market. Discussions are held with members from Treasury and Consumer Banking to reconcile the fair value estimates and the key assumptions used by the respective parties in arriving at those estimates. The Associated Mortgage Group Risk Committee is responsible for providing control over the valuation methodology and key assumptions. To assess the reasonableness of the fair value measurement, the Corporation also compares the fair value and constant prepayment rate to a value calculated by an independent third party on an annual basis.
The table below presents the Corporations loans held for sale, impaired loans, and mortgage servicing rights measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair Value Measurements Using | ||||||||||||||||
September 30, 2012 |
Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Loans held for sale |
$ | 157,093 | $ | | $ | 157,093 | $ | | ||||||||
Impaired loans (1) |
129,386 | | | 129,386 | ||||||||||||
Mortgage servicing rights |
45,018 | | | 45,018 | ||||||||||||
Fair Value Measurements Using | ||||||||||||||||
December 31, 2011 |
Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Loans held for sale |
$ | 249,195 | $ | | $ | 249,195 | $ | | ||||||||
Impaired loans (1) |
178,669 | | | 178,669 | ||||||||||||
Mortgage servicing rights |
48,152 | | | 48,152 |
(1) | Represents individually evaluated impaired loans, net of the related allowance for loan losses. |
Certain nonfinancial assets measured at fair value on a nonrecurring basis include other real estate owned (upon initial recognition or subsequent impairment), nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.
41
During the first nine months of 2012 and the full year 2011, certain other real estate owned, upon initial recognition, was re-measured and reported at fair value through a charge off to the allowance for loan losses based upon the estimated fair value of the other real estate owned, less estimated selling costs. The fair value of other real estate owned, upon initial recognition or subsequent impairment, was estimated using appraised values, which the Corporation classifies as a Level 2 nonrecurring fair value measurement. Other real estate owned measured at fair value upon initial recognition totaled approximately $34 million for the first nine months of 2012 and $54 million for the year ended December 31, 2011, respectively. In addition to other real estate owned measured at fair value upon initial recognition, the Corporation also recorded write-downs to the balance of other real estate owned for subsequent impairment of $8 million, $7 million, and $9 million to asset losses, net for the nine months ended September 30, 2012 and 2011, and the year ended December 31, 2011, respectively.
Fair Value of Financial Instruments:
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporations financial instruments.
The estimated fair values of the Corporations financial instruments at September 30, 2012 and December 31, 2011, were as follows.
September 30, 2012 | ||||||||||||||||||||
Carrying Amount |
Fair Value | Fair Value Measurements Using | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 419,529 | $ | 419,529 | $ | 419,529 | $ | | $ | | ||||||||||
Interest-bearing deposits in other financial institutions |
531,303 | 531,303 | 531,303 | | | |||||||||||||||
Federal funds sold and securities purchased under agreements to resell |
2,460 | 2,460 | 2,460 | | | |||||||||||||||
Investment securities held to maturity |
21,852 | 21,723 | | 21,723 | | |||||||||||||||
Investment securities available for sale |
4,496,198 | 4,496,198 | 3,929 | 4,491,862 | 407 | |||||||||||||||
FHLB and Federal Reserve Bank stocks |
166,100 | 166,100 | | 166,100 | | |||||||||||||||
Loans held for sale |
157,093 | 162,818 | | 162,818 | | |||||||||||||||
Loans, net |
14,651,064 | 14,379,108 | | | 14,379,108 | |||||||||||||||
Bank owned life insurance |
553,348 | 553,348 | | 553,348 | | |||||||||||||||
Accrued interest receivable |
65,584 | 65,584 | 65,584 | | | |||||||||||||||
Interest rate-related agreements (1) |
75,065 | 75,065 | | 75,065 | | |||||||||||||||
Foreign currency exchange forwards |
1,094 | 1,094 | | 1,094 | | |||||||||||||||
Interest rate lock commitments to originate residential mortgage loans held for sale |
17,566 | 17,566 | | | 17,566 | |||||||||||||||
Purchased options (time deposit) |
5,032 | 5,032 | | 5,032 | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Noninterest-bearing demand, savings, interest-bearing demand, and money market deposits |
$ | 14,349,600 | $ | 14,349,600 | $ | | $ | | $ | 14,349,600 | ||||||||||
Brokered CDs and other time deposits |
2,100,992 | 2,100,992 | | 2,100,992 | | |||||||||||||||
Short-term funding |
1,753,285 | 1,753,285 | | 1,753,285 | | |||||||||||||||
Long-term funding |
1,305,422 | 1,362,806 | | 1,362,806 | | |||||||||||||||
Accrued interest payable |
4,485 | 4,485 | 4,485 | | | |||||||||||||||
Interest rate-related agreements (1) |
81,884 | 81,884 | | 81,884 | | |||||||||||||||
Foreign currency exchange forwards |
977 | 977 | | 977 | | |||||||||||||||
Standby letters of credit (2) |
3,705 | 3,705 | | 3,705 | | |||||||||||||||
Forward commitments to sell residential mortgage loans |
8,167 | 8,167 | | | 8,167 | |||||||||||||||
Written options (time deposit) |
5,032 | 5,032 | | 5,032 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
42
December 31, 2011 | ||||||||||||||||||||
Carrying Amount |
Fair Value | Fair Value Measurements Using | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 454,958 | $ | 454,958 | $ | 454,958 | $ | | $ | | ||||||||||
Interest-bearing deposits in other financial institutions |
154,562 | 154,562 | 154,562 | | | |||||||||||||||
Federal funds sold and securities purchased under agreements to resell |
7,075 | 7,075 | 7,075 | | | |||||||||||||||
Investment securities available for sale |
4,937,483 | 4,937,483 | 12,701 | 4,923,926 | 856 | |||||||||||||||
FHLB and Federal Reserve Bank stocks |
191,188 | 191,188 | | 191,188 | | |||||||||||||||
Loans held for sale |
249,195 | 255,201 | | 255,201 | | |||||||||||||||
Loans, net |
13,652,920 | 12,751,626 | | | 12,751,626 | |||||||||||||||
Bank owned life insurance |
544,764 | 544,764 | | 544,764 | | |||||||||||||||
Accrued interest receivable |
68,920 | 68,920 | 68,920 | | | |||||||||||||||
Interest rate-related agreements (1) |
71,143 | 71,143 | | 71,143 | | |||||||||||||||
Foreign currency exchange forwards |
2,079 | 2,079 | | 2,079 | | |||||||||||||||
Interest rate lock commitments to originate residential mortgage loans held for sale |
4,571 | 4,571 | | | 4,571 | |||||||||||||||
Purchased options (time deposit) |
2,854 | 2,854 | | 2,854 | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Noninterest-bearing demand, savings, interest-bearing demand, and money market deposits |
$ | 12,363,287 | $ | 12,363,287 | $ | | $ | | $ | 12,363,287 | ||||||||||
Brokered CDs and other time deposits |
2,727,368 | 2,727,368 | | 2,727,368 | | |||||||||||||||
Short-term funding |
2,514,485 | 2,514,485 | | 2,514,485 | | |||||||||||||||
Long-term funding |
1,177,071 | 1,309,687 | | 1,309,687 | | |||||||||||||||
Accrued interest payable |
15,931 | 15,931 | 15,931 | | | |||||||||||||||
Interest rate-related agreements (1) |
80,075 | 80,075 | | 80,075 | | |||||||||||||||
Foreign currency exchange forwards |
1,891 | 1,891 | | 1,891 | | |||||||||||||||
Standby letters of credit (2) |
3,648 | 3,648 | | 3,648 | | |||||||||||||||
Forward commitments to sell residential mortgage loans |
4,771 | 4,771 | | | 4,771 | |||||||||||||||
Written options (time deposit) |
2,854 | 2,854 | | 2,854 | | |||||||||||||||
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|
|
|
|
|
|
|
|
|
(1) | At September 30, 2012 and December 31, 2011, the notional amount of cash flow hedge interest rate swap agreements was $0 and $100 million, respectively. See Note 10 for information on the fair value of derivative financial instruments. |
(2) | At both September 30, 2012 and December 31, 2011, the commitment on standby letters of credit was $0.3 billion. See Note 11 for additional information on the standby letters of credit and for information on the fair value of lending-related commitments. |
Cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and securities purchased under agreements to resell, and accrued interest receivable For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investment securities (held to maturity and available for sale) The fair value of investment securities is based on quoted prices in active markets, or if quoted prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
Federal Home Loan Bank and Federal Reserve Bank stocks The carrying amount is a reasonable fair value estimate for the Federal Reserve Bank and Federal Home Loan Bank stocks given their restricted nature (i.e., the stock can only be sold back to the respective institutions (Federal Home Loan Bank or Federal Reserve Bank) or another member institution at par).
Loans held for sale The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value of the residential mortgage loans held for sale was based on what secondary markets are currently offering for portfolios with similar characteristics.
43
Loans, net The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Corporation believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and industrial, real estate construction, commercial real estate (owner occupied and investor), lease financing, residential mortgage, home equity, and other installment. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also included other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate. In addition, as part of the annual goodwill impairment assessment, the Corporation may consult with an independent party as to the assumptions used and to determine that the Corporations valuation is consistent with the third party valuation.
Bank owned life insurance The fair value of bank owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Corporation would receive the cash surrender value which equals the carrying amount.
Deposits The fair value of deposits with no stated maturity such as noninterest-bearing demand deposits, savings, interest-bearing demand deposits, and money market accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of Brokered CDs and other time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. However, if the estimated fair value of Brokered CDs and other time deposits is less than the carrying value, the carrying value is reported as the fair value.
Accrued interest payable and short-term funding For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Long-term funding Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing long-term funding.
Interest rate-related agreements The fair value of interest rate swap, cap, collar, and corridor agreements is determined using discounted cash flow analysis on the expected cash flows of each derivative. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements.
Foreign currency exchange forwards The fair value of the Corporations foreign currency exchange forwards is determined using quoted prices of foreign currency exchange forwards with similar characteristics, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate.
Standby letters of credit The fair value of standby letters of credit represent deferred fees arising from the related off-balance sheet financial instruments. These deferred fees approximate the fair value of these instruments and are based on several factors, including the remaining terms of the agreement and the credit standing of the customer.
Interest rate lock commitments to originate residential mortgage loans held for sale The Corporation relies on an internal valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups.
Forward commitments to sell residential mortgage loans The Corporation relies on an internal valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Corporation would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available.
Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporations entire holdings of a particular financial instrument. Because no market exists for a significant portion of the
44
Corporations financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NOTE 13: Retirement Plans
The Corporation has a noncontributory defined benefit retirement plan (the Retirement Account Plan (RAP)) covering substantially all full-time employees. The benefits are based primarily on years of service and the employees compensation paid. Employees of acquired entities generally participate in the RAP after consummation of the business combinations. The plans of acquired entities are typically merged into the RAP after completion of the mergers, and credit is usually given to employees for years of service at the acquired institution for vesting and eligibility purposes. The RAP and a smaller acquired plan that was frozen in December 31, 2004, are collectively referred to below as the Pension Plan.
The Corporation also provides healthcare access for eligible retired employees in its Postretirement Plan (the Postretirement Plan). Retirees who are at least 55 years of age with 5 years of service are eligible to participate in the plan. The Corporation has no plan assets attributable to the plan. The Corporation reserves the right to terminate or make changes to the plan at any time.
The components of net periodic benefit cost for the Pension and Postretirement Plans for the three and nine months ended September 30, 2012 and 2011, and for the full year 2011 were as follows.
Three Months Ended September 30, |
Nine Months Ended September 30, |
Year Ended December 31, |
||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2011 | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Components of Net Periodic Benefit Cost |
||||||||||||||||||||
Pension Plan: |
||||||||||||||||||||
Service cost |
$ | 2,613 | $ | 2,613 | $ | 7,838 | $ | 7,838 | $ | 9,898 | ||||||||||
Interest cost |
1,613 | 1,589 | 4,838 | 4,769 | 6,414 | |||||||||||||||
Expected return on plan assets |
(3,558 | ) | (3,220 | ) | (10,673 | ) | (9,660 | ) | (12,896 | ) | ||||||||||
Amortization of prior service cost |
17 | 18 | 52 | 53 | 72 | |||||||||||||||
Amortization of actuarial loss |
640 | 451 | 1,920 | 1,354 | 2,024 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total net periodic benefit cost |
$ | 1,325 | $ | 1,451 | $ | 3,975 | $ | 4,354 | $ | 5,512 | ||||||||||
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|
|
|
|
|
|||||||||||
Postretirement Plan: |
||||||||||||||||||||
Interest cost |
$ | 47 | $ | 50 | $ | 142 | $ | 150 | $ | 198 | ||||||||||
Amortization of prior service cost |
43 | 98 | 128 | 296 | 395 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total net periodic benefit cost |
$ | 90 | $ | 148 | $ | 270 | $ | 446 | $ | 593 | ||||||||||
|
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|
|
The Corporations funding policy is to pay at least the minimum amount required by the funding requirements of federal law and regulations, with consideration given to the maximum funding amounts allowed. The Corporation regularly reviews the funding of its Pension Plan. The Corporation made a contribution of $32 million to its Pension Plan during the first nine months of 2012.
NOTE 14: Segment Reporting
During the first quarter of 2012, the Corporation implemented a new risk-based internal profitability measurement system which provides strategic business unit reporting. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the units. As a result of these changes, we have re-organized our business segments to provide enhanced transparency given our new system capabilities. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reorganization resulted in three reportable segments, in contrast to the two previously reported, with no segment representing more than half of the assets, liabilities or Tier 1 Common Equity of the Corporation as a whole. The three reportable segments are Commercial Banking, Consumer Banking, and Risk Management and Shared Services.
45
The financial information of the Corporations segments has been compiled utilizing the accounting policies described in the Corporations 2011 annual report on Form 10-K with certain exceptions. The more significant of these exceptions are described herein. The Corporation allocates interest income or interest expense using a funds transfer pricing methodology that charges users of funds (assets) interest expense and credits providers of funds (liabilities, primarily deposits) with income based on the maturity, prepayment and/or repricing characteristics of the assets and liabilities. The net effect of this allocation is recorded in the Risk Management and Shared Services segment. A credit provision is allocated to segments based on long-term annual net charge off rates attributable to the credit risk of loans managed by the segment during the period. In contrast, the level of the consolidated provision for loan losses is determined using the methodologies described in the Corporations 2011 annual report on Form 10-K to assess the overall appropriateness of the allowance for loan losses. The net effect of the credit provision is recorded in Risk Management and Shared Services. Indirect expenses incurred by certain centralized support areas are allocated to segments based on actual usage (for example, volume measurements) and other criteria. Certain types of administrative expense and bank-wide expense accruals (including amortization of core deposit and other intangible assets associated with acquisitions) are generally not allocated to segments. Income taxes are allocated to segments based on the Corporations estimated effective tax rate adjusted for any tax-exempt income or non-deductible expenses. Equity is allocated to the segments based on regulatory capital requirements and in proportion to an assessment of the inherent risks associated with the business of the segment (including interest, credit and operating risk).
The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to U.S. generally accepted accounting principles. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in previously reported segment financial data. During 2012, certain organization and methodology changes were made and, accordingly, 2011 results have been restated and presented on a comparable basis.
A description of each business segment is presented below.
Commercial Banking The Commercial Banking segment offers loans, deposits, and related banking services to businesses (including regional middle market and larger commercial businesses, governments/municipalities, metro or niche markets, and companies with specialized borrowing needs such as financial institutions, or asset-based borrowers), which primarily include, but are not limited to: business checking and other business deposit products, business loans, lines of credit, commercial real estate financing, construction loans, letters of credit, revolving credit arrangements, and to a lesser degree, insurance related products and services, business credit cards, equipment and machinery leases, and the support to deliver, fund and manage such banking services. To further support business customers and correspondent financial institutions, the Corporation provides safe deposit and night depository services, cash management, risk management, international banking, as well as check clearing, safekeeping, and other banking-based services. The segment competes on the basis of relationship manager performance, commitment to local markets and market competitive pricing. This segment focuses on optimizing the go to market approach with emphasis on market alignment, relationship banking and sales excellence.
Consumer Banking The Consumer Banking segment consists of lending and deposit gathering to individuals and small businesses and also provides a variety of fiduciary, investment management, advisory and corporate agency services to assist customers in building, investing or protecting their wealth, including securities brokerage, and trust/asset management. The segment offers a variety of loan and deposit products to retail customers, including but not limited to: home equity loans and lines of credit, residential mortgage loans and mortgage refinancing, personal and installment loans, checking, savings, money market deposit accounts, IRA accounts, certificates of deposit, and safe deposit boxes; small business checking and deposit products, loans, lines of credit; fixed and variable annuities, full-service, discount and on-line investment brokerage; and trust/asset management, investment management, administration of pension, profit-sharing and other employee benefit plans, personal trusts, and estate planning. The segment competes by offering an extensive breadth and depth of products, an extensive branch network and competitive pricing. The Consumer Banking segment strives toward optimization of value propositions and relationship banking.
Risk Management and Shared Services The Risk Management and Shared Services segment includes Corporate Risk Management, Finance, Treasury, Operations and Technology functions, which are key shared functions. The segment also includes parent company activity, intersegment eliminations and residual revenue and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments, including interest rate risk residuals (ALM mismatches) and credit risk and provision residuals (long term credit mismatches). The earning assets within this segment include the companys investment portfolio and capital includes both allocated as well as any remaining unallocated capital.
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Information about the Corporations segments is presented below.
Segment Income Statement Data
($ in Thousands) | Commercial Banking |
Consumer Banking |
Risk Management and Shared Services |
Consolidated Total |
||||||||||||
Nine Months Ended September 30, 2012 |
|
|||||||||||||||
Net interest income |
$ | 211,855 | $ | 231,183 | $ | 21,499 | $ | 464,537 | ||||||||
Noninterest income |
65,060 | 159,951 | 10,374 | 235,385 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
276,915 | 391,134 | 31,873 | 699,922 | ||||||||||||
Credit provision * |
34,251 | 14,629 | (48,880 | ) | | |||||||||||
Noninterest expense |
159,781 | 317,994 | 27,720 | 505,495 | ||||||||||||
Income before income taxes |
82,883 | 58,511 | 53,033 | 194,427 | ||||||||||||
Income tax expense |
29,009 | 20,479 | 12,594 | 62,082 | ||||||||||||
Net income |
$ | 53,874 | $ | 38,032 | $ | 40,439 | $ | 132,345 | ||||||||
Return on average allocated capital (ROT1CE) ** |
9.5 | % | 8.7 | % | 10.2 | % | 9.4 | % | ||||||||
Nine Months Ended September 30, 2011 |
||||||||||||||||
Net interest income |
$ | 190,510 | $ | 243,298 | $ | 27,198 | $ | 461,006 | ||||||||
Noninterest income |
68,085 | 133,030 | 472 | 201,587 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
258,595 | 376,328 | 27,670 | 662,593 | ||||||||||||
Credit provision * |
29,537 | 13,310 | 8,153 | 51,000 | ||||||||||||
Noninterest expense |
143,270 | 327,109 | 7,817 | 478,196 | ||||||||||||
Income before income taxes |
85,788 | 35,909 | 11,700 | 133,397 | ||||||||||||
Income tax expense (benefit) |
30,026 | 12,568 | (7,771 | ) | 34,823 | |||||||||||
Net income |
$ | 55,762 | $ | 23,341 | $ | 19,471 | $ | 98,574 | ||||||||
Return on average allocated capital (ROT1CE) ** |
10.2 | % | 5.7 | % | (1.3 | )% | 5.9 | % |
Segment Balance Sheet Data
($ in Thousands) | Commercial Banking |
Consumer Banking |
Risk Management and Shared Services |
Consolidated Total |
||||||||||||
Average Balances for YTD 3Q 2012 |
||||||||||||||||
Average earning assets |
$ | 7,410,958 | $ | 7,181,048 | $ | 4,881,201 | $ | 19,473,207 | ||||||||
Average loans |
7,404,668 | 7,181,048 | 25,349 | 14,611,065 | ||||||||||||
Average deposits |
4,422,944 | 9,437,407 | 1,363,454 | 15,223,805 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 759,913 | $ | 585,906 | $ | 480,451 | $ | 1,826,270 | ||||||||
Average Balances for YTD 3Q 2011 |
||||||||||||||||
Average earning assets |
$ | 6,244,881 | $ | 6,758,489 | $ | 6,417,202 | $ | 19,420,572 | ||||||||
Average loans |
6,241,125 | 6,758,489 | 21,520 | 13,021,134 | ||||||||||||
Average deposits |
3,429,213 | 9,531,142 | 1,274,768 | 14,235,123 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 729,741 | $ | 545,580 | $ | 417,670 | $ | 1,692,991 |
* | The consolidated credit provision is equal to the actual reported provision for loan losses. |
** | ROT1CE reflects return on average allocated Tier 1 common equity (T1CE). The ROT1CE for the Risk Management and Shared Services segment and the Consolidated Total is inclusive of the annualized effect of the preferred stock dividends and discount accretion. |
47
Segment Income Statement Data
($ in Thousands) | Commercial Banking |
Consumer Banking |
Risk Management and Shared Services |
Consolidated Total |
||||||||||||
Three Months Ended September 30, 2012 |
|
|||||||||||||||
Net interest income |
$ | 72,201 | $ | 73,497 | $ | 9,904 | $ | 155,602 | ||||||||
Noninterest income |
23,669 | 51,511 | 5,808 | 80,988 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
95,870 | 125,008 | 15,712 | 236,590 | ||||||||||||
Credit provision * |
11,942 | 4,845 | (16,787 | ) | | |||||||||||
Noninterest expense |
53,419 | 105,181 | 11,103 | 169,703 | ||||||||||||
Income before income taxes |
30,509 | 14,982 | 21,396 | 66,887 | ||||||||||||
Income tax expense |
10,678 | 5,244 | 4,570 | 20,492 | ||||||||||||
Net income |
$ | 19,831 | $ | 9,738 | $ | 16,826 | $ | 46,395 | ||||||||
Return on average allocated capital (ROT1CE) ** |
10.2 | % | 6.7 | % | 12.3 | % | 9.7 | % | ||||||||
Three Months Ended September 30, 2011 |
||||||||||||||||
Net interest income |
$ | 64,914 | $ | 79,192 | $ | 9,054 | $ | 153,160 | ||||||||
Noninterest income |
20,147 | 48,406 | 443 | 68,996 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
85,061 | 127,598 | 9,497 | 222,156 | ||||||||||||
Credit provision * |
10,062 | 4,599 | (10,661 | ) | 4,000 | |||||||||||
Noninterest expense |
48,032 | 110,417 | 1,031 | 159,480 | ||||||||||||
Income before income taxes |
26,967 | 12,582 | 19,127 | 58,676 | ||||||||||||
Income tax expense |
9,438 | 4,404 | 3,495 | 17,337 | ||||||||||||
Net income |
$ | 17,529 | $ | 8,178 | $ | 15,632 | $ | 41,339 | ||||||||
Return on average allocated capital (ROT1CE) ** |
9.6 | % | 5.8 | % | 7.4 | % | 7.8 | % |
Segment Balance Sheet Data
($ in Thousands) | Commercial Banking |
Consumer Banking |
Risk Management and Shared Services |
Consolidated Total |
||||||||||||
Average Balances for 3Q 2012 |
||||||||||||||||
Average earning assets |
$ | 7,757,046 | $ | 7,147,934 | $ | 4,754,816 | $ | 19,659,796 | ||||||||
Average loans |
7,747,238 | 7,147,934 | 21,621 | 14,916,793 | ||||||||||||
Average deposits |
4,639,340 | 9,426,653 | 1,549,863 | 15,615,856 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 770,718 | $ | 579,108 | $ | 500,784 | $ | 1,850,610 | ||||||||
Average Balances for 3Q 2011 |
||||||||||||||||
Average earning assets |
$ | 6,434,887 | $ | 6,918,760 | $ | 6,176,360 | $ | 19,530,007 | ||||||||
Average loans |
6,431,575 | 6,918,760 | 26,593 | 13,376,928 | ||||||||||||
Average deposits |
3,731,983 | 9,558,565 | 1,114,763 | 14,405,311 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 723,896 | $ | 555,499 | $ | 444,559 | $ | 1,723,954 |
* | The consolidated credit provision is equal to the actual reported provision for loan losses. |
** | ROT1CE reflects return on average allocated Tier 1 common equity (T1CE). The ROT1CE for the Risk Management and Shared Services segment and the Consolidated Total is inclusive of the annualized effect of the preferred stock dividends and discount accretion. |
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ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Special Note Regarding Forward-Looking Statements
This report contains statements that may constitute forward-looking statements within the meaning of the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference into this report. These forward-looking statements include statements with respect to the Corporations financial condition, results of operations, plans, objectives, future performance and business, including statements preceded by, followed by or that include the words believes, expects, or anticipates, references to estimates or similar expressions. Future filings by the Corporation with the Securities and Exchange Commission, and future statements other than historical facts contained in written material, press releases and oral statements issued by, or on behalf of the Corporation may also constitute forward-looking statements.
All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf of the Corporation are based upon information available at the time the statement is made and the Corporation assumes no obligation to update any forward-looking statements, except as required by federal securities law. Forward-looking statements are subject to significant risks and uncertainties, and the Corporations actual results may differ materially from the expected results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the risk factors in Item 1A, Risk Factors, in the Corporations Annual Report on Form 10-K for the year ended December 31, 2011, and as may be described from time to time in the Corporations subsequent SEC filings.
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporations 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.
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, goodwill impairment assessment, 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 Corporations financial condition and results of operations 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 Corporations Board of Directors.
Allowance for Loan Losses: Managements evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgments. The evaluation process combines many factors: managements ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, 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 appropriateness of the allowance for loan losses, 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 additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments
49
about information available to them at the time of their examination. The Corporation believes the level of the allowance for loan losses is appropriate as recorded in the consolidated financial statements. See Note 6, Loans, Allowance for Loan Losses, and Credit Quality, of the notes to consolidated financial statements and section Allowance for Loan Losses.
Goodwill Impairment Assessment: Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis. In addition, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. The fair value of each reporting unit is compared to the recorded book value, step one. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and step two is not considered necessary. If the carrying value of a reporting unit exceeds its fair value, the impairment test continues (step two) by comparing the carrying value of the reporting units goodwill to the implied fair value of goodwill. The implied fair value is computed by adjusting all assets and liabilities of the reporting unit to current fair value with the offset adjustment to goodwill. The adjusted goodwill balance is the implied fair value of the goodwill. An impairment charge is recognized if the carrying fair value of goodwill exceeds the implied fair value of goodwill.
The Corporation conducted its annual impairment testing in May 2012. In addition, management assessed and determined during the fourth quarter of 2011 that an extended decline in the Corporations stock price qualified as a triggering event and as such, performed an interim impairment test. Both the annual impairment test and the interim impairment test during 2011 indicated that the estimated fair value exceeded the carrying value (including goodwill) for each reporting unit. Therefore, a step two analysis was not required.
The Corporation engaged an independent valuation firm to assist in the computation of the fair value estimates of each reporting unit as part of its impairment assessment. The valuation utilized market and income approach methodologies and applied a weighted average to each in order to determine the fair value of each reporting unit. Goodwill impairment testing is considered a critical accounting estimate as estimates and assumptions are made about future performance and cash flows, as well as other prevailing market factors. In the event that we conclude that all or a portion of our goodwill may be impaired, a noncash charge for the amount of such impairment would be recorded in earnings. Such a charge would have no impact on tangible capital. A decline in our stock price or occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, cause us to re-perform a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release.
In connection with obtaining an independent third party valuation, management provides certain information and assumptions that is utilized in the implied fair value calculation. Assumptions critical to the process include discount rates, asset and liability growth rates, and other income and expense estimates. The Corporation provided the best information currently available to estimate future performance for each reporting unit; however, future adjustments to these projections may be necessary if conditions differ substantially from the assumptions utilized in making these assumptions. See also, Note 7 Goodwill and Other Intangible Assets, of the notes to the consolidated financial statements.
Mortgage Servicing Rights Valuation: The fair value of the Corporations 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 independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its mortgage servicing rights. The use of a 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 interest 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. While the Corporation believes that the values produced by the discounted cash flow 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. 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.
Mortgage servicing rights are carried at the lower of amortized cost or estimated fair value and are assessed for impairment at each reporting date. Impairment is assessed based on the fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the mortgage
50
servicing rights asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the mortgage servicing rights asset generally increases, requiring less valuation reserve. However, the extent to which interest rates impact the value of the mortgage servicing rights asset depends, in part, on the magnitude of the changes in market interest rates and the differential between the then current market interest rates for mortgage loans and the mortgage interest rates included in the mortgage servicing portfolio. Management recognizes that the volatility in the valuation of the mortgage servicing rights asset will continue. To better understand the sensitivity of the impact of prepayment speeds and refinance rates on the value of the mortgage servicing rights asset at September 30, 2012 (holding all other factors unchanged), if refinance rates were to decrease 50 bp, the estimated value of the mortgage servicing rights asset would have been approximately $5 million (or 11%) lower. Conversely, if refinance rates were to increase 50 bp, the estimated value of the mortgage servicing rights asset would have been approximately $7 million (or 16%) higher. The Corporation believes the mortgage servicing rights asset is properly recorded in the consolidated financial statements. See Note 7, Goodwill and Other Intangible Assets, and Note 12, Fair Value Measurements, of the notes to consolidated financial statements and section Noninterest Income.
Derivative Financial Instruments and Hedging Activities: 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 hedges 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. See also Note 10, Derivative and Hedging Activities, and Note 12 Fair Value Measurements, of the notes to consolidated financial statements and section Interest Rate Risk.
Income Taxes: 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 managements current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. Quarterly assessments are performed to determine if valuation allowances are necessary. Assessing the need for, or sufficiency of, a valuation allowance requires management to evaluate all available evidence, both positive and negative, including the recent trend of quarterly earnings. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the tax law, including the use of tax planning strategies. When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carryforwards expiring unused) exists, more positive evidence than negative evidence will be necessary. The Corporation has concluded that based on the level of positive evidence, it is more likely than not that the deferred tax asset will be realized. However, there is no guarantee that the tax benefits associated with the remaining deferred tax assets will be fully realized. The Corporation believes the tax assets and liabilities are properly recorded in the consolidated financial statements. See also Note 9, Income Taxes, of the notes to consolidated financial statements and section Income Taxes.
Segment Review
As discussed in Note 14 of the notes to consolidated financial statements, the Corporation implemented a new risk-based internal profitability measurement system during the first quarter of 2012. As a result, we have reorganized our business segments to provide enhanced transparency given our new system capabilities. The Corporations reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Consumer Banking and Risk Management and Shared Services.
The financial information of the Corporations segments was compiled utilizing the accounting policies described in Note 14 of the notes to consolidated financial statements. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and unlike financial accounting, are not based on authoritative guidance similar to U.S. generally accepted accounting principles. As a result, reported segments and the financial information of the reported segments are
51
not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in previously reported segment financial data. During 2012, certain organization and methodology changes were made and, accordingly, 2011 results have been restated and presented on a comparable basis.
Year to Date Segment Review
The Commercial Banking segment consists of lending and deposit gathering to businesses and governmental units and the support to deliver, fund and manage such banking services. The Commercial Banking segment had net income of $54 million during the first nine months of 2012, down $2 million compared to $56 million for the comparable period in 2011. The Corporation committed resources during the past year to grow this segment, including investments to expand into new markets (Houston, Cincinnati, Indianapolis, and Detroit) and new industry lending segments (power, oil and gas). As a result of these investments, segment revenue grew $18 million to $277 million during the first nine months of 2012 compared to $259 million for the first nine months of 2011. The credit provision for loans increased to $34 million during the first nine months of 2012 due to the growth in the segments loan balances, partially offset by improvement in credit quality as compared to the first nine months of 2011. Total noninterest expense for the first nine months of 2012 was $160 million, up $17 million from $143 million in the comparable period in 2011 as the segment hired additional commercial bankers to support these new markets and to enhance its presence in existing markets. Average loan balances were $7.4 billion for the first nine months of 2012, up $1.2 billion from an average balance of $6.2 billion for the first nine months of 2011, and average deposit balances were $4.4 billion for the first nine months of 2012, up $1.0 billion from average deposits of $3.4 billion in the first nine months of 2011, reflecting our investments and strategy to expand and grow the Commercial Banking segment. Average allocated capital increased $30 million to $760 million for the first nine months of 2012 reflecting the increase in the segments loan balances offset by an improvement in credit quality as compared to the first nine months of 2011.
The Consumer Banking segment consists of lending and deposit gathering to individuals and small businesses and also provides a variety of other wealth management products and services. The Consumer Banking segment had net income of $38 million in the first nine months of 2012, up $15 million compared to $23 million in the first nine months of 2011. Earnings increased as segment revenue grew $15 million to $391 million for the first nine months of 2012 compared to $376 million for the first nine months of 2011, primarily due to much higher mortgage banking income (up $47 million), offset by lower net interest income as a result of the lower rate environment and lower service charge and card-based fee income. The credit provision for loans increased $2 million to $15 million for the first nine months of 2012 due to the growth in the segments loan balances, partially offset by an improvement in credit quality as compared to the first nine months of 2011. Total noninterest expense for the first nine months of 2012 was $318 million, down $9 million from $327 million in the comparable period in 2011 primarily due to a $15 million reduction in FDIC insurance costs, partially offset by increases in personnel expense of $6 million. Average deposits were $9.4 billion for the first nine months of 2012, down $94 million from $9.5 billion in the first nine months of 2011. Average loan balances were $7.2 billion during the first nine months of 2012, up $423 million from $6.8 billion in the first nine months of 2011. The segments loan growth was primarily in the residential mortgage portfolio as the Corporation continued to retain much of its mortgage production throughout 2011 and into 2012. Average allocated capital increased $40 million to $586 million for the first nine months of 2012 reflecting the increase in the segments loan balances.
The Risk Management and Shared Services segment includes Corporate Risk Management, Finance, Treasury, Operations and Technology functions. Risk Management and Shared Services had net income of $40 million in the first nine months of 2012, up $21 million compared to $19 million for the comparable period in 2011. The primary components of the increase was a $57 million lower credit provision, reflecting the much lower provision at the consolidated total level, offset by a $20 million increase in direct expenses due to costs incurred to address certain BSA regulatory compliance issues, personnel expense, and other corporate expense items. Average earning asset balances were $4.9 billion for the first nine months of 2012, down $1.5 billion from an average balance of $6.4 billion during the first nine months of 2011, reflecting the reduction in the Corporations investment portfolio.
Comparable Quarter Segment Review
The Commercial Banking segment had net income of $20 million in the third quarter of 2012, up $2 million compared to $18 million for the comparable quarter in 2011. The Corporation committed resources during the past year to grow this segment, including investments to expand into new markets (Houston, Cincinnati, Indianapolis, and Detroit) and new industry lending segments (power, oil and gas). As a result of these investments, segment revenue, grew $11 million to $96 million for the third quarter of 2012 compared to $85 million for the third quarter of 2011. The credit provision for loans increased $2 million to $12 million for the quarter due to the growth in the segments loan balances, offset by improvement in credit quality as compared to the third quarter of 2011. Total noninterest expense for the third quarter of 2012 was $53 million, up $5 million from $48 million in the comparable
52
quarter in 2011 as the segment hired additional commercial bankers to support these new markets and to enhance its presence in existing markets. Average loan balances were $7.8 billion for the third quarter of 2012, up $1.4 billion from an average balance of $6.4 billion during the third quarter of 2011, and average deposit balances were $4.6 billion for the third quarter of 2012, up $907 million from average deposits of $3.7 billion during the third quarter of 2011, reflecting our investments and strategy to expand and grow the Commercial Banking segment. Average allocated capital increased $47 million to $771 million for the third quarter of 2012 reflecting the increase in the segments loan balances offset by an improvement in credit quality as compared to the third quarter of 2011.
The Consumer Banking segment had net income of $10 million in the third quarter of 2012, up $2 million compared to $8 million in the third quarter of 2011. Revenue declined marginally ($3 million) to $125 million for the third quarter of 2012 compared to $128 million for the third quarter of 2011, primarily due to higher mortgage banking income (up $10 million), partially offset by smaller deposit service charge and card-based fee income, as well as decreases in net interest income as a result of the lower interest rate environment in 2012. The credit provision for loans for the third quarter of 2012 was $5 million, relatively flat compared to the third quarter of 2011. Total noninterest expense for the third quarter of 2012 was $105 million, down $5 million from $110 million in the comparable quarter in 2011 primarily due to a $5 million reduction in FDIC insurance costs. Average deposits were $9.4 billion for the third quarter of 2012, down $132 million compared to $9.6 billion in the third quarter of 2011. Average loan balances were $7.1 billion during the third quarter of 2012, up $229 million compared to $6.9 billion in the third quarter of 2011. The segments loan growth was primarily in the residential mortgage portfolio as the Corporation continued to retain much of its mortgage production throughout 2011 and into 2012. Average allocated capital increased $24 million to $579 million for the third quarter of 2012 reflecting the increase in the segments loan balances.
Risk Management and Shared Services had net income of $17 million in the third quarter of 2012, up $1 million compared to $16 million for the comparable quarter in 2011. Average earning asset balances were $4.8 billion for the third quarter of 2012, down $1.4 billion from an average balance of $6.2 billion during the third quarter of 2011, reflecting the reduction in the Corporations investment portfolio.
Results of Operations Summary
The Corporation recorded net income of $132 million for the nine months ended September 30, 2012, compared to net income of $99 million for the nine months ended September 30, 2011. Net income available to common equity was $128 million for the nine months ended September 30, 2012, or net income of $0.74 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the nine months ended September 30, 2011, was $75 million, or a net income of $0.43 for both basic and diluted earnings per common share. The net interest margin for the first nine months of 2012 was 3.29% compared to 3.28% for the first nine months of 2011.
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TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)
3rd Qtr 2012 |
2nd Qtr 2012 |
1st Qtr 2012 |
4th Qtr 2011 |
3rd Qtr 2011 |
||||||||||||||||
Net income (Quarter) |
$ | 46,395 | $ | 43,317 | $ | 42,633 | $ | 41,125 | $ | 41,339 | ||||||||||
Net income (Year-to-date) |
132,345 | 85,950 | 42,633 | 139,699 | 98,574 | |||||||||||||||
Net income available to common equity (Quarter) |
$ | 45,095 | $ | 42,017 | $ | 41,333 | $ | 39,825 | $ | 34,034 | ||||||||||
Net income available to common equity (Year-to-date) |
128,445 | 83,350 | 41,333 | 114,869 | 75,044 | |||||||||||||||
Earnings per common share basic (Quarter) |
$ | 0.26 | $ | 0.24 | $ | 0.24 | $ | 0.23 | $ | 0.20 | ||||||||||
Earnings per common share basic (Year-to-date) |
0.74 | 0.48 | 0.24 | 0.66 | 0.43 | |||||||||||||||
Earnings per common share diluted (Quarter) |
$ | 0.26 | $ | 0.24 | $ | 0.24 | $ | 0.23 | $ | 0.20 | ||||||||||
Earnings per common share diluted (Year-to-date) |
0.74 | 0.48 | 0.24 | 0.66 | 0.43 | |||||||||||||||
Return on average assets (Quarter) |
0.84 | % | 0.80 | % | 0.79 | % | 0.75 | % | 0.75 | % | ||||||||||
Return on average assets (Year-to-date) |
0.81 | 0.80 | 0.79 | 0.65 | 0.61 | |||||||||||||||
Return on average equity (Quarter) |
6.29 | % | 5.98 | % | 5.93 | % | 5.71 | % | 5.49 | % | ||||||||||
Return on average equity (Year-to-date) |
6.07 | 5.95 | 5.93 | 4.66 | 4.33 | |||||||||||||||
Return on average common equity (Quarter) |
6.25 | % | 5.93 | % | 5.88 | % | 5.66 | % | 4.88 | % | ||||||||||
Return on average common equity (Year-to-date) |
6.02 | 5.90 | 5.88 | 4.21 | 3.70 | |||||||||||||||
Return on average Tier 1 common equity (Quarter) (1) |
9.69 | % | 9.26 | % | 9.23 | % | 8.96 | % | 7.83 | % | ||||||||||
Return on average Tier 1 common equity (Year-to-date) (1) |
9.39 | 9.25 | 9.23 | 6.71 | 5.92 | |||||||||||||||
Efficiency ratio (Quarter) (2) |
72.81 | % | 72.30 | % | 72.84 | % | 77.05 | % | 71.55 | % | ||||||||||
Efficiency ratio (Year-to-date)(2) |
72.65 | 72.57 | 72.84 | 73.33 | 72.08 | |||||||||||||||
Efficiency ratio, fully taxable equivalent (Quarter)(2) |
70.22 | % | 69.21 | % | 70.16 | % | 74.67 | % | 68.73 | % | ||||||||||
Efficiency ratio, fully taxable equivalent (Year-to-date) (2) |
69.87 | 69.69 | 70.16 | 70.66 | 69.32 | |||||||||||||||
Net interest margin (Quarter) |
3.26 | % | 3.30 | % | 3.31 | % | 3.21 | % | 3.23 | % | ||||||||||
Net interest margin (Year-to-date) |
3.29 | 3.31 | 3.31 | 3.26 | 3.28 |
(1) | Return on average Tier 1 common equity = Net income available to common equity divided by average Tier 1 capital excluding qualifying perpetual preferred stock and qualifying trust preferred securities. This is a non-GAAP financial measure. |
(2) | See Table 1A for a reconciliation of this non-GAAP measure. |
54
TABLE 1A
Reconciliation of Non-GAAP Measure
3rd Qtr 2012 |
2nd Qtr 2012 |
1st Qtr 2012 |
4th Qtr 2011 |
3rd Qtr 2011 |
||||||||||||||||
Efficiency ratio (Quarter) (a) |
72.81 | % | 72.30 | % | 72.84 | % | 77.05 | % | 71.55 | % | ||||||||||
Taxable equivalent adjustment (Quarter) |
(1.61 | ) | (1.62 | ) | (1.62 | ) | (1.79 | ) | (1.66 | ) | ||||||||||
Asset losses, net (Quarter) |
(0.98 | ) | (1.47 | ) | (1.06 | ) | (0.59 | ) | (1.16 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Efficiency ratio, fully taxable equivalent (Quarter) (b) |
70.22 | % | 69.21 | % | 70.16 | % | 74.67 | % | 68.73 | % | ||||||||||
Efficiency ratio (Year-to-date)(a) |
72.65 | % | 72.57 | % | 72.84 | % | 73.33 | % | 72.08 | % | ||||||||||
Taxable equivalent adjustment (Year-to-date) |
(1.62 | ) | (1.62 | ) | (1.62 | ) | (1.72 | ) | (1.70 | ) | ||||||||||
Asset losses, net (Year-to-date) |
(1.16 | ) | (1.26 | ) | (1.06 | ) | (0.95 | ) | (1.06 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Efficiency ratio, fully taxable equivalent (Year-to-date) (b) |
69.87 | % | 69.69 | % | 70.16 | % | 70.66 | % | 69.32 | % |
(a) | Efficiency ratio is defined by the Federal Reserve guidance as noninterest expense divided by the sum of net interest income plus noninterest income, excluding investment securities gains/losses, net. |
(b) | Efficiency ratio, fully taxable equivalent, is noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income, excluding investment securities gains/losses, net and asset gains/losses, net. This efficiency ratio is presented on a taxable equivalent basis, which adjusts net interest income for the tax-favored status of certain loan and investment securities. Management believes this measure to be the preferred industry measurement of net interest income as it enhances the comparability of net interest income arising from taxable and tax-exempt sources and it excludes certain specific revenue items (such as investment securities gains/losses, net and asset gains/losses, net). |
Net Interest Income and Net Interest Margin
Net interest income on a taxable equivalent basis for the nine months ended September 30, 2012, was $480 million, which was an increase of $3 million to the comparable period last year as favorable volume variances (changes in the balances and mix of earning assets and interest-bearing liabilities increased taxable equivalent net interest income by $29 million) were offset by unfavorable rate variances (the impact of changes in the interest rate environment and product pricing reduced taxable equivalent net interest income by $26 million).
The net interest margin for the first nine months of 2012 was 3.29%, 1 bp higher than 3.28% for the same period in 2011. This comparable period increase was comprised of a 5 bp improvement in interest rate spread and a 4 bp lower contribution from net free funds. The 5 bp improvement in interest rate spread was the net result of a 22 bp decrease in the cost of interest-bearing liabilities and a 17 bp decrease in the yield on earning assets.
The Federal Reserve left interest rates unchanged during 2011 and the first nine months of 2012. For the remainder of 2012, the Corporation anticipates modest pressure on the net interest margin from the continued low rate environment.
The yield on earning assets was 3.79% for the first nine months of 2012, 17 bp lower than the comparable period last year. Loan yields were down 37 bp, (to 4.10%), due to the repricing of adjustable rate loans and competitive pricing pressures in a low interest rate environment. The yield on investment securities and other short-term investments decreased 6 bp (to 2.88%), also impacted by the low interest rate environment and prepayment speeds of mortgage-related securities purchased at a premium.
The rate on interest-bearing liabilities of 0.66% for the first nine months of 2012 was 22 bp lower than the same period in 2011. Rates on interest-bearing deposits were down 24 bp (to 0.38%, reflecting the low rate environment and a targeted reduction of higher cost deposit products). The cost of short and long-term funding increased 2 bp (to 1.57%).
Average earning assets were $19.5 billion for the first nine months of 2012, an increase of $53 million (less than 1%) from the comparable period last year. On average, loan balances increased $1.6 billion, including increases in commercial loans (up $1.2 billion) and residential mortgage loans (up $592 million), while retail loans decreased (down $238 million). Average investment securities and other short-term investments decreased $1.5 billion, reflecting the Corporations strategy of funding loan growth primarily through investment securities run-off.
55
Average interest-bearing liabilities of $14.9 billion for the first nine months of 2012 were down $202 million (1%) from the first nine months of 2011. On average, interest-bearing deposits grew $496 million (primarily attributable to a $838 million increase in money market accounts and a $240 million increase in interest-bearing demand deposits, partially offset by a $690 million decrease in time deposits), while noninterest-bearing demand deposits (a principal component of net free funds) were up $492 million. Average short and long-term funding decreased $698 million between the comparable nine-month periods, primarily attributable to a decrease in securities sold under agreements to repurchase (customer funding) (driven by pricing strategies to shift funds away from customer funding and into more traditional deposit products).
56
TABLE 2
Net Interest Income Analysis
($ in Thousands)
Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | |||||||||||||||||||||||
Average Balance |
Interest Income/ Expense |
Average Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Average Yield/ Rate |
|||||||||||||||||||
Earning assets: |
||||||||||||||||||||||||
Loans: (1)(2)(3) |
||||||||||||||||||||||||
Commercial and business lending |
$ | 5,041,098 | $ | 149,001 | 3.95 | % | $ | 4,187,882 | $ | 134,119 | 4.28 | % | ||||||||||||
Commercial real estate lending |
3,316,306 | 105,259 | 4.24 | 2,933,824 | 98,608 | 4.49 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial |
8,357,404 | 254,260 | 4.06 | 7,121,706 | 232,727 | 4.37 | ||||||||||||||||||
Residential mortgage |
3,277,879 | 91,273 | 3.71 | 2,685,994 | 84,564 | 4.20 | ||||||||||||||||||
Retail |
2,975,782 | 103,230 | 4.63 | 3,213,434 | 118,127 | 4.91 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
14,611,065 | 448,763 | 4.10 | 13,021,134 | 435,418 | 4.47 | ||||||||||||||||||
Investment securities |
4,444,144 | 101,033 | 3.03 | 5,658,000 | 136,665 | 3.22 | ||||||||||||||||||
Other short-term investments |
417,998 | 3,843 | 1.23 | 741,438 | 4,324 | 0.78 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Investments and other (1) |
4,862,142 | 104,876 | 2.88 | 6,399,438 | 140,989 | 2.94 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total earning assets |
19,473,207 | 553,639 | 3.79 | 19,420,572 | 576,407 | 3.96 | ||||||||||||||||||
Other assets, net |
2,314,461 | 2,111,598 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 21,787,668 | $ | 21,532,170 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
Savings deposits |
$ | 1,085,514 | $ | 626 | 0.08 | % | $ | 977,064 | $ | 861 | 0.12 | % | ||||||||||||
Interest-bearing demand deposits |
2,118,789 | 2,788 | 0.18 | 1,878,417 | 2,314 | 0.16 | ||||||||||||||||||
Money market deposits |
5,930,870 | 11,233 | 0.25 | 5,093,270 | 12,736 | 0.33 | ||||||||||||||||||
Time deposits |
2,307,642 | 17,693 | 1.02 | 2,997,635 | 34,883 | 1.56 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
11,442,815 | 32,340 | 0.38 | 10,946,386 | 50,794 | 0.62 | ||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
1,241,652 | 2,129 | 0.23 | 1,960,670 | 4,919 | 0.34 | ||||||||||||||||||
Other short-term funding |
1,066,063 | 3,068 | 0.38 | 792,595 | 5,336 | 0.90 | ||||||||||||||||||
Total long-term funding |
1,177,223 | 35,740 | 4.05 | 1,429,643 | 38,285 | 3.57 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total short and long-term funding |
3,484,938 | 40,937 | 1.57 | 4,182,908 | 48,540 | 1.55 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
14,927,753 | 73,277 | 0.66 | 15,129,294 | 99,334 | 0.88 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Noninterest-bearing demand deposits |
3,780,990 | 3,288,737 | ||||||||||||||||||||||
Other liabilities |
165,777 | 69,267 | ||||||||||||||||||||||
Stockholders equity |
2,913,148 | 3,044,872 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and equity |
$ | 21,787,668 | $ | 21,532,170 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.13 | % | 3.08 | % | ||||||||||||||||||||
Net free funds |
0.16 | 0.20 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income, taxable equivalent, and net interest margin |
$ | 480,362 | 3.29 | % | $ | 477,073 | 3.28 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Taxable equivalent adjustment |
15,825 | 16,067 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 464,537 | $ | 461,006 | ||||||||||||||||||||
|
|
|
|
(1) | The yield on tax exempt loans and securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions. |
(2) | Nonaccrual loans and loans held for sale have been included in the average balances. |
(3) | Interest income includes net loan fees. |
57
TABLE 2
Net Interest Income Analysis
($ in Thousands)
Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | |||||||||||||||||||||||
Average Balance |
Interest Income/ Expense |
Average Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Average Yield/ Rate |
|||||||||||||||||||
Earning assets: |
||||||||||||||||||||||||
Loans: (1)(2)(3) |
||||||||||||||||||||||||
Commercial and business lending |
$ | 5,275,069 | $ | 51,432 | 3.88 | % | $ | 4,329,916 | $ | 45,302 | 4.15 | % | ||||||||||||
Commercial real estate lending |
3,440,220 | 35,913 | 4.16 | 3,007,611 | 33,859 | 4.47 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial |
8,715,289 | 87,345 | 3.99 | 7,337,527 | 79,161 | 4.28 | ||||||||||||||||||
Residential mortgage |
3,320,212 | 30,044 | 3.62 | 2,869,445 | 29,385 | 4.09 | ||||||||||||||||||
Retail |
2,881,292 | 33,251 | 4.60 | 3,169,956 | 38,102 | 4.78 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
14,916,793 | 150,640 | 4.02 | 13,376,928 | 146,648 | 4.36 | ||||||||||||||||||
Investment securities |
4,319,404 | 31,950 | 2.96 | 5,430,677 | 42,314 | 3.12 | ||||||||||||||||||
Other short-term investments |
423,599 | 1,334 | 1.26 | 722,402 | 1,428 | 0.79 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Investments and other (1) |
4,743,003 | 33,284 | 2.81 | 6,153,079 | 43,742 | 2.84 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total earning assets |
19,659,796 | 183,924 | 3.73 | 19,530,007 | 190,390 | 3.88 | ||||||||||||||||||
Other assets, net |
2,356,952 | 2,199,180 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 22,016,748 | $ | 21,729,187 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
Savings deposits |
$ | 1,117,194 | $ | 229 | 0.08 | % | $ | 1,013,333 | 289 | 0.11 | % | |||||||||||||
Interest-bearing demand deposits |
2,136,280 | 926 | 0.17 | 2,056,082 | 945 | 0.18 | ||||||||||||||||||
Money market deposits |
6,240,596 | 3,932 | 0.25 | 5,092,120 | 3,841 | 0.30 | ||||||||||||||||||
Time deposits |
2,159,684 | 4,664 | 0.86 | 2,826,663 | 10,569 | 1.48 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
11,653,754 | 9,751 | 0.33 | 10,988,198 | 15,644 | 0.56 | ||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
1,266,995 | 750 | 0.24 | 2,245,946 | 1,810 | 0.32 | ||||||||||||||||||
Other short-term funding |
837,316 | 815 | 0.39 | 543,271 | 1,229 | 0.90 | ||||||||||||||||||
Total long-term funding |
1,182,632 | 11,738 | 3.97 | 1,438,102 | 13,252 | 3.68 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total short and long-term funding |
3,286,943 | 13,303 | 1.62 | 4,227,319 | 16,291 | 1.54 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
14,940,697 | 23,054 | 0.62 | 15,215,517 | 31,935 | 0.83 | ||||||||||||||||||
Noninterest-bearing demand deposits |
3,962,102 | 3,417,113 | ||||||||||||||||||||||
Other liabilities |
180,239 | 109,379 | ||||||||||||||||||||||
Stockholders equity |
2,933,710 | 2,987,178 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and equity |
$ | 22,016,748 | $ | 21,729,187 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.11 | % | 3.05 | % | ||||||||||||||||||||
Net free funds |
0.15 | 0.18 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income, taxable equivalent, and net interest margin |
$ | 160,870 | 3.26 | % | $ | 158,455 | 3.23 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Taxable equivalent adjustment |
5,268 | 5,295 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 155,602 | $ | 153,160 | ||||||||||||||||||||
|
|
|
|
(1) | The yield on tax exempt loans and securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions. |
(2) | Nonaccrual loans and loans held for sale have been included in the average balances. |
(3) | Interest income includes net loan fees. |
58
Provision for Loan Losses
The provision for loan losses for the first nine months of 2012 was $0, compared to $51 million for the first nine months of 2011 and $52 million for the full year of 2011. Net charge offs were $63 million for first nine months of 2012, compared to $128 million for the first nine months of 2011 and $151 million for the full year of 2011. Annualized net charge offs as a percent of average loans for the first nine months of 2012 were 0.58%, compared to 1.32% for the first nine months of 2011 and 1.13% for the full year of 2011. At September 30, 2012, the allowance for loan losses was $315 million, down from $400 million at September 30, 2011 and $378 million at December 31, 2011. The ratio of the allowance for loan losses to total loans was 2.11%, compared to 2.96% at September 30, 2011 and 2.70% at December 31, 2011. Nonaccrual loans at September 30, 2012, were $278 million, compared to $403 million at September 30, 2011, and $357 million at December 31, 2011. See Tables 7 and 8.
The provision for loan losses is predominantly a function of the Corporations reserving methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the allowance for loan losses which focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonaccrual loans, historical losses and delinquencies on each portfolio category, the level of loans sold or transferred to held for sale, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. See additional discussion under sections Allowance for Loan Losses, and Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned.
Noninterest Income
Noninterest income for the first nine months of 2012 was $235 million, up $34 million (17%) from the first nine months of 2011. Core fee-based revenue (as defined in Table 3 below) was down $17 million, while mortgage banking, net, was up $47 million. All other noninterest income categories combined were $20 million, up $3 million versus the comparable period last year. For the remainder of 2012, the Corporation expects modest improvement in core fee-based revenues.
TABLE 3
Noninterest Income
($ in Thousands)
3rd Qtr. 2012 |
3rd Qtr. 2011 |
Dollar Change |
Percent Change |
YTD 2012 | YTD 2011 | Dollar Change |
Percent Change |
|||||||||||||||||||||||||
Trust service fees |
$ | 10,396 | $ | 9,791 | $ | 605 | 6.2 | % | $ | 30,308 | $ | 29,634 | $ | 674 | 2.3 | % | ||||||||||||||||
Service charges on deposit accounts |
17,290 | 19,949 | (2,659 | ) | (13.3 | ) | 52,100 | 58,125 | (6,025 | ) | (10.4 | ) | ||||||||||||||||||||
Card-based and other nondeposit fees |
12,209 | 15,291 | (3,082 | ) | (20.2 | ) | 35,172 | 46,636 | (11,464 | ) | (24.6 | ) | ||||||||||||||||||||
Insurance commissions |
11,650 | 11,020 | 630 | 5.7 | 36,152 | 34,338 | 1,814 | 5.3 | ||||||||||||||||||||||||
Brokerage and annuity commissions |
3,632 | 4,027 | (395 | ) | (9.8 | ) | 11,965 | 13,565 | (1,600 | ) | (11.8 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Core fee-based revenue |
55,177 | 60,078 | (4,901 | ) | (8.2 | ) | 165,697 | 182,298 | (16,601 | ) | (9.1 | ) | ||||||||||||||||||||
Mortgage banking income |
23,573 | 13,467 | 10,106 | 75.0 | 71,773 | 29,392 | 42,381 | 144.2 | ||||||||||||||||||||||||
Mortgage servicing rights expense |
7,992 | 8,946 | (954 | ) | (10.7 | ) | 21,803 | 26,346 | (4,543 | ) | (17.2 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Mortgage banking, net |
15,581 | 4,521 | 11,060 | N/M | 49,970 | 3,046 | 46,924 | N/M | ||||||||||||||||||||||||
Capital market fees, net |
3,609 | 3,273 | 336 | 10.3 | 9,998 | 4,761 | 5,237 | 110.0 | ||||||||||||||||||||||||
Bank owned life insurance (BOLI) income |
3,290 | 3,990 | (700 | ) | (17.5 | ) | 10,746 | 11,076 | (330 | ) | (3.0 | ) | ||||||||||||||||||||
Other |
3,134 | 1,737 | 1,397 | 80.4 | 6,752 | 11,608 | (4,856 | ) | (41.8 | ) | ||||||||||||||||||||||
|
|
|
|
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Subtotal |
80,791 | 73,599 | 7,192 | 9.8 | 243,163 | 212,789 | 30,374 | 14.3 | ||||||||||||||||||||||||
Asset losses, net |
(3,309 | ) | (3,859 | ) | 550 | (14.3 | ) | (11,887 | ) | (10,400 | ) | (1,487 | ) | 14.3 | ||||||||||||||||||
Investment securities gains (losses), net |
3,506 | (744 | ) | 4,250 | N/M | 4,109 | (802 | ) | 4,911 | N/M | ||||||||||||||||||||||
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Total noninterest income |
$ | 80,988 | $ | 68,996 | $ | 11,992 | 17.4 | % | $ | 235,385 | $ | 201,587 | $ | 33,798 | 16.8 | % | ||||||||||||||||
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N/M Not meaningful.
59
Trust service fees were level at $30 million for the comparable nine month periods in 2012 and 2011. The market value of average assets under management for the nine months ended September 30, 2012 and 2011 was $5.9 billion and $5.7 billion, respectively.
Service charges on deposit accounts were $52 million for the first nine months of 2012, down $6 million (10%) from the comparable nine month period in 2011. The decrease was primarily attributable to lower nonsufficient funds / overdraft fees (down $6 million to $23 million) due to changes in customer behavior, recent regulatory changes, and changes in deposit account products.
Card-based and other nondeposit fees were $35 million for the first nine months of 2012, down $11 million (25%) from the first nine months of 2011, primarily due to lower interchange fees. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included a provision, the Durbin Amendment, which governs the amount banks can charge as interchange fees. The Durbin Amendment negatively impacted the amount the bank charged in interchange fees beginning in the fourth quarter of 2011. Insurance commissions were $36 million for the first nine months of 2012, up $2 million (5%) from the first nine months of 2011, primarily due to higher benefit insurance premiums. Brokerage and annuity commissions were $12 million for the first nine months of 2012, down $2 million (12%) from the first nine months of 2011, attributable to lower fixed annuity commissions.
Net mortgage banking income was $50 million for the first nine months of 2012, up $47 million from the comparable nine month period in 2011. Net mortgage banking consists of gross mortgage banking income less mortgage servicing rights expense. Gross mortgage banking income (which includes servicing fees and the gain or loss on sales of mortgage loans to the secondary market, related fees and fair value marks on derivatives (collectively gains on sales and related income)) was $72 million for the first nine months of 2012, an increase of $42 million compared to the first nine months of 2011. This increase was primarily attributable to higher volume of loans sold to the secondary market, resulting in higher gains on sales and related income. Secondary mortgage production was $2.0 billion for the first nine months of 2012, compared to $1.0 billion for the first nine months of 2011.
Mortgage servicing rights expense includes both the amortization of the mortgage servicing rights asset and changes to the valuation allowance associated with the mortgage servicing rights asset. Mortgage servicing rights expense is affected by the size of the servicing portfolio, as well as the changes in the estimated fair value of the mortgage servicing rights asset. Mortgage servicing rights expense was $22 million for the first nine months of 2012, compared to $26 million for the comparable nine month period in 2011, with a $5 million decrease to the valuation reserve (comprised of a $4 million addition to the valuation reserve for the first nine months of 2012 compared to a $9 million addition to the valuation reserve for the first nine months of 2011). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the mortgage servicing rights asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the mortgage servicing rights asset generally increases, requiring less valuation reserve. Mortgage servicing rights, net of any valuation allowance, are carried in other intangible assets, net, on the consolidated balance sheets at the lower of amortized cost or estimated fair value. At September 30, 2012, the mortgage servicing rights asset, net of its valuation allowance, was $45 million, representing 60 bp of the $7.5 billion servicing portfolio, compared to a net mortgage servicing rights asset of $47 million, representing 65 bp of the $7.3 billion servicing portfolio at September 30, 2011. Mortgage servicing rights are considered a critical accounting policy given that estimating their fair value involves a discounted cash flow model and assumptions that involve judgment, particularly of estimated prepayment speeds of the underlying mortgages serviced and the overall level of interest rates. See section Critical Accounting Policies, as well as Note 7, Goodwill and Other Intangible Assets, and Note 12, Fair Value Measurements, of the notes to consolidated financial statements for additional disclosure.
Capital market fees, net (which include fee income from foreign currency and interest rate risk related services provided to our customers) were $10 million for the first nine months of 2012, compared to $5 million for the comparable nine month period in 2011, primarily due to a favorable change in the credit valuation adjustment from improvements in credit quality. Other income of $7 million was $5 million lower than the first nine months of 2011, primarily due to a decrease in limited partnership income. Net asset losses of $12 million for 2012 were primarily attributable to a $6 million write-down on software placed into production during the second quarter of 2012, $9 million of losses on sales and other write-downs on other real estate owned, and a $3 million impairment charge on certain limited partnership investments, partially offset by a $6 million gain on the sale of three retail branches in rural western Illinois. Net asset losses of $10 million for 2011 were primarily attributable to losses on sales and other write-downs of other real estate owned. Investment securities gains of $4 million for 2012 were primarily attributable to gains on sales of equity, mortgage-related, and trust preferred debt securities; while investment securities losses of $1 million for 2011 were due to credit-related other-than-temporary write-downs on a pooled trust preferred debt security.
60
Noninterest Expense
Noninterest expense was $505 million for the first nine months of 2012, up $27 million (6%) over the comparable nine month period in 2011. Personnel expense was up $13 million (5%), while nonpersonnel noninterest expenses were up $14 million (7%) on a combined basis. For the remainder of 2012, the Corporation expects noninterest expense growth in the low-single-digit range, including the costs of continuing BSA enhancements and retail facilities upgrades.
TABLE 4
Noninterest Expense
($ in Thousands)
3rd Qtr. 2012 |
3rd Qtr. 2011 |
Dollar Change |
Percent Change |
YTD 2012 | YTD 2011 | Dollar Change |
Percent Change |
|||||||||||||||||||||||||
Personnel expense |
$ | 95,231 | $ | 91,084 | $ | 4,147 | 4.6 | % | $ | 283,331 | $ | 269,838 | $ | 13,493 | 5.0 | % | ||||||||||||||||
Occupancy |
14,334 | 14,205 | 129 | 0.9 | 43,521 | 42,143 | 1,378 | 3.3 | ||||||||||||||||||||||||
Equipment |
5,935 | 4,851 | 1,084 | 22.3 | 17,122 | 14,587 | 2,535 | 17.4 | ||||||||||||||||||||||||
Data processing |
11,022 | 7,887 | 3,135 | 39.7 | 31,842 | 23,395 | 8,447 | 36.1 | ||||||||||||||||||||||||
Business development and advertising |
5,059 | 5,539 | (480 | ) | (8.7 | ) | 15,908 | 16,134 | (226 | ) | (1.4 | ) | ||||||||||||||||||||
Other intangible asset amortization |
1,048 | 1,179 | (131 | ) | (11.1 | ) | 3,146 | 3,535 | (389 | ) | (11.0 | ) | ||||||||||||||||||||
Loan expense |
3,297 | 2,600 | 697 | 26.8 | 9,155 | 8,539 | 616 | 7.2 | ||||||||||||||||||||||||
Legal and professional fees |
7,686 | 4,289 | 3,397 | 79.2 | 23,058 | 13,554 | 9,504 | 70.1 | ||||||||||||||||||||||||
Losses other than loans |
3,577 | 1,659 | 1,918 | 115.6 | 9,187 | 6,031 | 3,156 | 52.3 | ||||||||||||||||||||||||
Foreclosure / OREO expense |
4,071 | 4,982 | (911 | ) | (18.3 | ) | 11,776 | 16,224 | (4,448 | ) | (27.4 | ) | ||||||||||||||||||||
FDIC expense |
5,017 | 6,906 | (1,889 | ) | (27.4 | ) | 14,665 | 22,348 | (7,683 | ) | (34.4 | ) | ||||||||||||||||||||
Other |
13,426 | 14,299 | (873 | ) | (6.1 | ) | 42,784 | 41,868 | 916 | 2.2 | ||||||||||||||||||||||
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Total noninterest expense |
$ | 169,703 | $ | 159,480 | $ | 10,223 | 6.4 | % | $ | 505,495 | $ | 478,196 | $ | 27,299 | 5.7 | % | ||||||||||||||||
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Personnel expense (which includes salary-related expenses and fringe benefit expenses) was $283 million for the first nine months of 2012, up $13 million (5%) versus the first nine months of 2011. Average full-time equivalent employees were 4,987 for the first nine months of 2012, up 1% from 4,961 for the comparable nine month period of 2011. Salary-related expenses increased $11 million (5%). This increase was primarily the result of higher compensation and commissions (up $3 million or 1%, including increases in full-time equivalent employees, merit increases between the years, and higher compensation related to the vesting of stock options and restricted stock grants), and higher performance based incentives (up $8 million or 65%). Fringe benefit expenses were up $2 million (5%) versus the first nine months of 2011, primarily due to higher employment taxes and benefit plan expenses related to the increased compensation.
Nonpersonnel noninterest expenses on a combined basis were $222 million, up $14 million (7%) compared to the comparable nine month period in 2011. Occupancy, equipment and data processing were up $12 million (15%), due to strategic investments in our branch network, systems and infrastructure. Legal and professional fees increased $10 million due to other professional consultant costs related to certain BSA regulatory compliance issues, partially offset by a $1.5 million partial reimbursement for defense costs on the Overdraft litigation (see Note 11, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities, of the notes to consolidated financial statements for additional information concerning this litigation). Losses other than loans increased $3 million, primarily due to an increase to the reserve for losses on unfunded commitments (from a reduction to the reserve of $2 million in 2011 to an addition to the reserve of $5 million in 2012), partially offset by a $2.5 million settlement with the Corporations insurance carrier towards the Overdraft litigation as well as a year-over-year decrease in the level of litigation expenses related to the Overdraft litigation. Foreclosure / OREO expenses of $12 million decreased $4 million, primarily attributable to a decline in legal and collection expenses related to the improvement in credit quality. FDIC expense decreased $8 million (34%) due to a change in the FDIC expense calculation (from a deposit based calculation to a net asset / risk-based assessment) and an improvement in the Corporations overall risk profile. All remaining noninterest expense categories on a combined basis were up $1 million (1%) compared to the first nine months of 2011.
61
Income Taxes
For the first nine months of 2012, the Corporation recognized income tax expense of $62 million, compared to income tax expense of $35 million for the first nine months of 2011. The effective tax rate was 31.93% for the first nine months of 2012, compared to an effective tax rate of 26.10% for the first nine months of 2011. The change in income tax expense and the effective tax rate was primarily due to the increased level of pretax income between the comparable nine-month periods. Income tax expense is also impacted by ongoing federal and state income tax audits and changes in tax law.
Income tax expense recorded in the consolidated statements of income involves the interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy. The Corporation undergoes examination by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See Note 9, Income Taxes, of the notes to consolidated financial statements and section Critical Accounting Policies.
Balance Sheet
At September 30, 2012, total assets were $22.7 billion, up $814 million from December 31, 2011. Loans of $15.0 billion at September 30, 2012, were up $935 million from December 31, 2011, with increases in commercial and business lending (up $654 million), commercial real estate lending (up $250 million), and residential mortgage loans (up $254 million), offset by a $223 million decrease in retail loans. Investment securities available for sale were $4.5 billion, down $441 million from year end 2011 (primarily due to calls and maturities of mortgage-related and Federal agency securities, as well as the sale of all asset-backed securities during the first nine months of 2012), as the Corporation continued the strategy of funding loan growth with run-off from the investment securities portfolio.
At September 30, 2012, total deposits of $16.5 billion were up $1.4 million from December 31, 2011. Since December 31, 2011, money market deposits increased $1.5 billion, while other time deposits declined $457 million and brokered CDs decreased $169 million. Noninterest-bearing demand deposits increased to $4.3 billion and represented 26% of total deposits, unchanged from December 31, 2011. Short and long-term funding of $3.1 billion was down $633 million since year-end 2011, with a decrease of $761 million in short-term funding and the repayment of $26 million of junior subordinated debentures partially offset by the issuance of $155 million of senior notes.
Since September 30, 2011, loans increased $1.5 billion, with commercial loans up $1.4 billion and residential mortgage loans up $364 million, offset by a $304 million decline in retail loans. Since September 30, 2011, deposits increased $1.7 billion, primarily attributable to a $1.5 billion increase in money market deposits and a $609 million increase in noninterest-bearing demand deposits, partially offset by a $509 million decrease in other time deposits and a $170 million decrease in brokered CDs. Given the increase in deposit balances, short and long-term funding declined $950 million, including a $964 million decrease in customer funding, a $111 million decrease in federal funds purchased, and the repayment of $26 million of junior subordinated debentures, partially offset by the issuance of $155 million of senior notes.
62
TABLE 5
Period End Loan Composition
($ in Thousands)
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | ||||||||||||||||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % of Total |
Amount | % of Total |
Amount | % of Total |
|||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 4,265,356 | 29 | % | $ | 4,076,370 | 28 | % | $ | 3,719,016 | 26 | % | $ | 3,724,736 | 27 | % | $ | 3,360,502 | 25 | % | ||||||||||||||||||||
Commercial real estate - owner occupied |
1,197,517 | 8 | 1,116,815 | 8 | 1,074,755 | 8 | 1,086,829 | 8 | 1,068,616 | 8 | ||||||||||||||||||||||||||||||
Lease financing |
60,818 | | 62,750 | | 61,208 | | 58,194 | | 54,849 | 1 | ||||||||||||||||||||||||||||||
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Commercial and business lending |
5,523,691 | 37 | 5,255,935 | 36 | 4,854,979 | 34 | 4,869,759 | 35 | 4,483,967 | 34 | ||||||||||||||||||||||||||||||
Commercial real estate - investor |
2,787,158 | 19 | 2,810,521 | 19 | 2,664,251 | 19 | 2,563,767 | 18 | 2,481,411 | 18 | ||||||||||||||||||||||||||||||
Real estate construction |
611,186 | 4 | 612,556 | 4 | 565,953 | 4 | 584,046 | 4 | 554,024 | 4 | ||||||||||||||||||||||||||||||
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Commercial real estate lending |
3,398,344 | 23 | 3,423,077 | 23 | 3,230,204 | 23 | 3,147,813 | 22 | 3,035,435 | 22 | ||||||||||||||||||||||||||||||
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Total commercial |
8,922,035 | 60 | 8,679,012 | 59 | 8,085,183 | 57 | 8,017,572 | 57 | 7,519,402 | 56 | ||||||||||||||||||||||||||||||
Home equity |
2,356,900 | 16 | 2,429,594 | 17 | 2,501,770 | 17 | 2,504,704 | 18 | 2,571,404 | 19 | ||||||||||||||||||||||||||||||
Installment |
482,451 | 3 | 510,831 | 3 | 537,628 | 4 | 557,782 | 4 | 572,243 | 4 | ||||||||||||||||||||||||||||||
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Total retail |
2,839,351 | 19 | 2,940,425 | 20 | 3,039,398 | 21 | 3,062,486 | 22 | 3,143,647 | 23 | ||||||||||||||||||||||||||||||
Residential mortgage |
3,204,828 | 21 | 3,079,465 | 21 | 3,129,144 | 22 | 2,951,013 | 21 | 2,840,458 | 21 | ||||||||||||||||||||||||||||||
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Total consumer |
6,044,179 | 40 | 6,019,890 | 41 | 6,168,542 | 43 | 6,013,499 | 43 | 5,984,105 | 44 | ||||||||||||||||||||||||||||||
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Total loans |
$ | 14,966,214 | 100 | % | $ | 14,698,902 | 100 | % | $ | 14,253,725 | 100 | % | $ | 14,031,071 | 100 | % | $ | 13,503,507 | 100 | % | ||||||||||||||||||||
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Farmland |
$ | 18,471 | 1 | % | $ | 23,814 | 1 | % | $ | 25,031 | 1 | % | $ | 26,221 | 1 | % | $ | 27,871 | 1 | % | ||||||||||||||||||||
Multi-family |
827,096 | 30 | 802,212 | 28 | 756,737 | 28 | 694,056 | 27 | 663,284 | 27 | ||||||||||||||||||||||||||||||
Non-owner occupied |
1,941,591 | 69 | 1,984,495 | 71 | 1,882,483 | 71 | 1,843,490 | 72 | 1,790,256 | 72 | ||||||||||||||||||||||||||||||
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Commercial real estate - investor |
$ | 2,787,158 | 100 | % | $ | 2,810,521 | 100 | % | $ | 2,664,251 | 100 | % | $ | 2,563,767 | 100 | % | $ | 2,481,411 | 100 | % | ||||||||||||||||||||
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1-4 family construction |
$ | 139,431 | 23 | % | $ | 138,160 | 23 | % | $ | 114,724 | 20 | % | $ | 120,170 | 21 | % | $ | 94,442 | 17 | % | ||||||||||||||||||||
All other construction |
471,755 | 77 | 474,396 | 77 | 451,229 | 80 | 463,876 | 79 | 459,582 | 83 | ||||||||||||||||||||||||||||||
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Real estate construction |
$ | 611,186 | 100 | % | $ | 612,556 | 100 | % | $ | 565,953 | 100 | % | $ | 584,046 | 100 | % | $ | 554,024 | 100 | % | ||||||||||||||||||||
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63
TABLE 6
Period End Deposit and Customer Funding Composition
($ in Thousands)
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | ||||||||||||||||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % of Total |
Amount | % of Total |
Amount | % of Total |
|||||||||||||||||||||||||||||||
Noninterest-bearing demand |
$ | 4,320,437 | 26 | % | $ | 3,874,429 | 26 | % | $ | 3,989,156 | 26 | % | $ | 3,928,792 | 26 | % | $ | 3,711,570 | 25 | % | ||||||||||||||||||||
Savings |
1,115,783 | 7 | 1,117,593 | 7 | 1,098,975 | 7 | 986,766 | 7 | 1,013,195 | 7 | ||||||||||||||||||||||||||||||
Interest-bearing demand |
2,230,740 | 14 | 2,078,037 | 14 | 2,040,900 | 13 | 2,297,454 | 15 | 2,071,627 | 14 | ||||||||||||||||||||||||||||||
Money market |
6,682,640 | 41 | 5,822,449 | 39 | 6,176,981 | 39 | 5,150,275 | 34 | 5,205,401 | 35 | ||||||||||||||||||||||||||||||
Brokered CDs |
33,612 | | 41,104 | | 46,493 | | 202,948 | 1 | 203,827 | 1 | ||||||||||||||||||||||||||||||
Other time |
2,067,380 | 12 | 2,173,259 | 14 | 2,300,871 | 15 | 2,524,420 | 17 | 2,576,790 | 18 | ||||||||||||||||||||||||||||||
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Total deposits |
$ | 16,450,592 | 100 | % | $ | 15,106,871 | 100 | % | $ | 15,653,376 | 100 | % | $ | 15,090,655 | 100 | % | $ | 14,782,410 | 100 | % | ||||||||||||||||||||
Customer repo sweeps |
600,225 | 592,203 | 635,697 | 664,624 | 871,619 | |||||||||||||||||||||||||||||||||||
Customer repo term |
448,782 | 619,897 | 509,332 | 695,131 | 1,141,450 | |||||||||||||||||||||||||||||||||||
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Total customer funding |
1,049,007 | 1,212,100 | 1,145,029 | 1,359,755 | 2,013,069 | |||||||||||||||||||||||||||||||||||
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Total deposits and customer funding |
$ | 17,499,599 | $ | 16,318,971 | $ | 16,798,405 | $ | 16,450,410 | $ | 16,795,479 | ||||||||||||||||||||||||||||||
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Network transaction deposits included above in interest-bearing demand and money market |
$ | 1,740,434 | $ | 1,234,010 | $ | 1,171,679 | $ | 875,052 | $ | 875,630 | ||||||||||||||||||||||||||||||
Total network transaction deposits and Brokered CDs |
1,774,046 | 1,275,114 | 1,218,172 | 1,078,000 | 1,079,457 | |||||||||||||||||||||||||||||||||||
Total deposits and customer funding, excluding Brokered CDs and network transaction deposits |
$ | 15,725,553 | $ | 15,043,857 | $ | 15,580,233 | $ | 15,372,410 | $ | 15,716,022 |
Allowance for Loan Losses
Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses.
The level of the allowance for loan losses represents managements 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 (see Table 5), net charge offs (see Table 7) and nonperforming assets (see Table 8). The Corporations process, designed to assess the appropriateness of the allowance for loan losses, includes an allocation methodology, as well as managements ongoing review and grading of the loan portfolio into criticized and non-criticized categories. The allocation methodology focuses on evaluation of facts and issues related to specific loans, managements ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of potential problem loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses 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. Management considers the allowance for loan losses a critical accounting policy (see section Critical Accounting Policies), as assessing these numerous factors involves significant judgment.
64
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 allocation methodology used at September 30, 2012 and December 31, 2011 was generally comparable.
The allocation methodology consists of the following components: First, a valuation allowance estimate is established for specifically identified commercial and consumer loans determined to be impaired by the Corporation, using discounted cash flows, estimated fair value of underlying collateral, and / or other data available. Second, management allocates the allowance for loan losses with loss factors, for criticized loan pools by loan type as well as for non-criticized loan pools by loan type, primarily based on historical loss rates after considering loan type, historical loss and delinquency experience, and industry statistics. Loans that have been criticized are considered to have a higher risk of default than non-criticized loans, as circumstances were present to support the lower loan grade, warranting higher loss factors. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks. Lastly, management allocates the allowance for loan losses to absorb unrecognized losses that may not be provided for by the other components due to other factors evaluated by management, such as limitations within the credit risk grading process, known current economic or business conditions that may not yet show in trends, industry or other concentrations with current issues that impose higher inherent risks than are reflected in the loss factors, and other relevant considerations.
At September 30, 2012, the allowance for loan losses was $315 million compared to $400 million at September 30, 2011, and $378 million at December 31, 2011. At September 30, 2012, the allowance for loan losses to total loans was 2.11% and covered 113% of nonaccrual loans, compared to 2.96% and 99%, respectively, at September 30, 2011, and 2.70% and 106%, respectively, at December 31, 2011. The provision for loan losses for the first nine months of 2012 was $0, compared to $51 million for the first nine months of 2011, and $52 million for the full year 2011. Net charge offs were $63 million for the first nine months of 2012, $128 million for the comparable period ended September 30, 2011, and $151 million for the full year 2011. The ratio of net charge offs to average loans on an annualized basis was 0.58%, 1.32%, and 1.13% for the nine months ended September 30, 2012, and 2011, and the full year 2011, respectively. Net charge offs for the first nine months of 2011 included $10 million of write-downs related to installment loans transferred to held for sale. Tables 7 and 8 provide additional information regarding activity in the allowance for loan losses, impaired loans, and nonperforming assets. See Note 6, Loans, Allowance for Loan Losses, and Credit Quality, of the notes to consolidated financial statements for additional allowance for loan losses disclosures.
Credit quality continued to improve during the first nine months of 2012. Nonaccrual loans declined to $278 million (representing 1.86% of total loans), down 31% from September 30, 2011 and down 22% from December 31, 2011, due to organic portfolio improvements, including a lower level of loans moving into the nonaccrual and potential problem loan categories. Loans past due 30-89 days totaled $42 million at September 30, 2012, a decrease of 71% from September 30, 2011 and a decrease of 4% from December 31, 2011, while potential problem loans declined to $404 million, a reduction from both the third quarter of 2011 and year-end 2011. For the remainder of 2012, the Corporation anticipates continuing improvement in credit trends and a modest provision for loan losses.
Management believes the level of allowance for loan losses to be appropriate at September 30, 2012 and December 31, 2011.
Consolidated net income and stockholders equity could be affected if managements estimate of the allowance for loan losses is subsequently materially different, requiring additional or less provision for loan losses to be recorded. Management carefully considers numerous detailed and general factors, its assumptions, and the likelihood of materially different conditions that could alter its assumptions. While management uses currently available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect our customers. Additionally, larger credit relationships (defined by management as over $25 million) do not inherently create more risk, but can create wider fluctuations in net charge offs and asset quality measures. As an integral part of their examination process, various federal and state regulatory agencies also review the allowance for loan losses. These agencies may require additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.
65
TABLE 7
Allowance for Loan Losses
($ in Thousands)
At and For the Nine Months Ended September 30, |
At and For the Year Ended December 31, |
|||||||||||||||||||||||
2012 | 2011 | 2011 | ||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||
Balance at beginning of period |
$378,151 | $476,813 | $476,813 | |||||||||||||||||||||
Provision for loan losses |
| 51,000 | 52,000 | |||||||||||||||||||||
Charge offs (1) |
(86,629) | (155,676) | (189,732) | |||||||||||||||||||||
Recoveries |
23,628 | 27,586 | 39,070 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Net charge offs (1) |
(63,001) | (128,090) | (150,662) | |||||||||||||||||||||
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|
|
|
|
|||||||||||||||||||
Balance at end of period |
$315,150 | $399,723 | $378,151 | |||||||||||||||||||||
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|
|
|
|||||||||||||||||||
Net loan charge offs(1): |
(A | ) | (A | ) | (A | ) | ||||||||||||||||||
Commercial and industrial |
$ | 22,247 | 76 | $ | 22,081 | 95 | $ | 22,312 | 70 | |||||||||||||||
Commercial real estate - owner occupied |
1,571 | 19 | 6,437 | 83 | 6,976 | 67 | ||||||||||||||||||
Lease financing |
(1,856 | ) | N/M | (1,801 | ) | N/M | (1,782 | ) | N/M | |||||||||||||||
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Commercial and business lending |
21,962 | 58 | 26,717 | 85 | 27,506 | 64 | ||||||||||||||||||
Commercial real estate - investor |
9,436 | 46 | 21,419 | 120 | 23,813 | 98 | ||||||||||||||||||
Real estate construction |
601 | 14 | 23,613 | N/M | 30,701 | N/M | ||||||||||||||||||
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Commercial real estate lending |
10,037 | 40 | 45,032 | 205 | 54,514 | 183 | ||||||||||||||||||
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Total commercial |
31,999 | 51 | 71,749 | 135 | 82,020 | 113 | ||||||||||||||||||
Home equity |
22,156 | 121 | 31,309 | 162 | 39,422 | 153 | ||||||||||||||||||
Installment |
796 | 20 | 14,098 | 299 | 14,550 | 237 | ||||||||||||||||||
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|
|
|||||||||||||
Total retail |
22,952 | 103 | 45,407 | 189 | 53,972 | 169 | ||||||||||||||||||
Residential mortgage |
8,050 | 33 | 10,934 | 54 | 14,670 | 52 | ||||||||||||||||||
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|
|
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|
|||||||||||||
Total net charge offs |
$ | 63,001 | 58 | $ | 128,090 | 132 | $ | 150,662 | 113 | |||||||||||||||
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CRE & Construction Net Charge Off Detail: |
(A | ) | (A | ) | (A | ) | ||||||||||||||||||
Farmland |
$ | (47 | ) | (27 | ) | $ | 714 | 291 | $ | 704 | 225 | |||||||||||||
Multi-family |
4 | | 2,966 | 71 | 4,531 | 77 | ||||||||||||||||||
Non-owner occupied |
9,479 | 65 | 17,739 | 132 | 18,578 | 103 | ||||||||||||||||||
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Commercial real estate - investor |
$ | 9,436 | 46 | $ | 21,419 | 120 | $ | 23,813 | 98 | |||||||||||||||
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1-4 family construction |
$ | (1,246 | ) | (130 | ) | $ | 9,220 | N/M | $ | 11,888 | N/M | |||||||||||||
All other construction |
1,847 | 55 | 14,393 | N/M | 18,813 | N/M | ||||||||||||||||||
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Real estate construction |
$ | 601 | 14 | $ | 23,613 | N/M | $ | 30,701 | N/M | |||||||||||||||
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(A) Annualized ratio of net charge offs to average loans by loan type in basis points. |
| |||||||||||||||||||||||
N/M - Not meaningful. |
||||||||||||||||||||||||
Ratios: |
||||||||||||||||||||||||
Allowance for loan losses to total loans |
2.11% | 2.96% | 2.70% | |||||||||||||||||||||
Allowance for loan losses to net charge offs (annualized) |
3.7x | 2.3x | 2.5x |
(1) Charge offs for the nine months ended September 30, 2011, and the year ended December 31, 2011, include $10 million of write-downs related to installment loans transferred to held for sale.
66
TABLE 7 (continued)
Allowance for Loan Losses
($ in Thousands)
Quarterly Trends: |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
|||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||||||
Balance at beginning of period |
$332,658 | $356,298 | $378,151 | $399,723 | $425,961 | |||||||||||||||||||||||||||||||||||
Provision for loan losses |
| | | 1,000 | 4,000 | |||||||||||||||||||||||||||||||||||
Charge offs |
(25,030) | (30,340) | (31,259) | (34,056) | (38,155) | |||||||||||||||||||||||||||||||||||
Recoveries |
7,522 | 6,700 | 9,406 | 11,484 | 7,917 | |||||||||||||||||||||||||||||||||||
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Net charge offs |
(17,508) | (23,640) | (21,853) | (22,572) | (30,238) | |||||||||||||||||||||||||||||||||||
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Balance at end of period |
$315,150 | $332,658 | $356,298 | $378,151 | $399,723 | |||||||||||||||||||||||||||||||||||
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Net loan charge offs: |
(A | ) | (A | ) | (A | ) | (A | ) | (A | ) | ||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 3,831 | 37 | $ | 14,544 | 151 | $ | 3,872 | 42 | $ | 231 | 3 | $ | 3,741 | 46 | |||||||||||||||||||||||||
Commercial real estate - owner occupied |
(8 | ) | (0 | ) | 1,164 | 43 | 415 | 16 | 539 | 20 | 134 | 5 | ||||||||||||||||||||||||||||
Lease financing |
(20 | ) | (13 | ) | | | (1,836 | ) | N/M | 19 | 14 | (1,889 | ) | N/M | ||||||||||||||||||||||||||
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Commercial and business lending |
3,803 | 29 | 15,708 | 126 | 2,451 | 20 | 789 | 7 | 1,986 | 18 | ||||||||||||||||||||||||||||||
Commercial real estate - investor |
1,905 | 27 | 177 | 3 | 7,354 | 113 | 2,394 | 38 | 10,472 | 169 | ||||||||||||||||||||||||||||||
Real estate construction |
(187 | ) | (12 | ) | 558 | 40 | 230 | 16 | 7,088 | N/M | 5,646 | N/M | ||||||||||||||||||||||||||||
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Commercial real estate lending |
1,718 | 20 | 735 | 9 | 7,584 | 96 | 9,482 | 122 | 16,118 | 213 | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||
Total commercial |
5,521 | 25 | 16,443 | 79 | 10,035 | 50 | 10,271 | 53 | 18,104 | 98 | ||||||||||||||||||||||||||||||
Home equity |
7,922 | 132 | 5,284 | 86 | 8,950 | 144 | 8,113 | 127 | 8,736 | 134 | ||||||||||||||||||||||||||||||
Installment |
324 | 26 | 371 | 28 | 101 | 7 | 452 | 32 | 764 | 52 | ||||||||||||||||||||||||||||||
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Total retail |
8,246 | 114 | 5,655 | 76 | 9,051 | 119 | 8,565 | 110 | 9,500 | 119 | ||||||||||||||||||||||||||||||
Residential mortgage |
3,741 | 45 | 1,542 | 19 | 2,767 | 34 | 3,736 | 46 | 2,634 | 36 | ||||||||||||||||||||||||||||||
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Total net charge offs |
$ | 17,508 | 47 | $ | 23,640 | 65 | $ | 21,853 | 61 | $ | 22,572 | 64 | $ | 30,238 | 90 | |||||||||||||||||||||||||
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CRE & Construction Net Charge Off Detail: |
|
(A | ) | (A | ) | (A | ) | (A | ) | (A | ) | |||||||||||||||||||||||||||||
Farmland |
$ | (100 | ) | (195 | ) | $ | | | $ | 53 | 83 | $ | (10 | ) | (15 | ) | $ | 758 | N/M | |||||||||||||||||||||
Multi-family |
55 | 3 | 15 | 1 | (66 | ) | (4 | ) | 1,565 | 91 | 490 | 31 | ||||||||||||||||||||||||||||
Non-owner occupied |
1,950 | 39 | 162 | 3 | 7,367 | 160 | 839 | 18 | 9,224 | 202 | ||||||||||||||||||||||||||||||
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Commercial real estate - investor |
$ | 1,905 | 27 | $ | 177 | 3 | $ | 7,354 | 113 | $ | 2,394 | 38 | $ | 10,472 | 169 | |||||||||||||||||||||||||
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1-4 family construction |
$ | (530 | ) | (145 | ) | $ | (111 | ) | (35 | ) | $ | (605 | ) | (225 | ) | $ | 2,668 | N/M | $ | 2,627 | N/M | |||||||||||||||||||
All other construction |
343 | 30 | 669 | 62 | 835 | 73 | 4,420 | N/M | 3,019 | N/M | ||||||||||||||||||||||||||||||
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Real estate construction |
$ | (187 | ) | (12 | ) | $ | 558 | 40 | $ | 230 | 16 | $ | 7,088 | N/M | $ | 5,646 | N/M | |||||||||||||||||||||||
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(A) Annualized ratio of net charge offs to average loans by loan type in basis points.
N/M Not meaningful.
67
TABLE 8
Nonperforming Assets
($ in Thousands)
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
||||||||||||||||||||||||||||||||||||
Nonperforming assets: |
||||||||||||||||||||||||||||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 177,988 | $ | 212,997 | $ | 217,070 | $ | 243,595 | $ | 290,116 | ||||||||||||||||||||||||||||||
Residential mortgage |
58,824 | 60,292 | 62,760 | 63,555 | 63,962 | |||||||||||||||||||||||||||||||||||
Retail |
41,360 | 44,583 | 47,255 | 49,622 | 49,314 | |||||||||||||||||||||||||||||||||||
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Total nonaccrual loans (NALs) |
278,172 | 317,872 | 327,085 | 356,772 | 403,392 | |||||||||||||||||||||||||||||||||||
Other real estate owned (OREO) |
36,053 | 40,029 | 34,425 | 41,571 | 42,076 | |||||||||||||||||||||||||||||||||||
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Total nonperforming assets (NPAs) |
$ | 314,225 | $ | 357,901 | $ | 361,510 | $ | 398,343 | $ | 445,468 | ||||||||||||||||||||||||||||||
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Accruing loans past due 90 days or more: |
||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 1,667 | $ | 4,563 | $ | 1,874 | $ | 4,236 | $ | 598 | ||||||||||||||||||||||||||||||
Retail |
667 | 661 | 623 | 689 | 622 | |||||||||||||||||||||||||||||||||||
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Total accruing loans past due 90 days or more |
$ | 2,334 | $ | 5,224 | $ | 2,497 | $ | 4,925 | $ | 1,220 | ||||||||||||||||||||||||||||||
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Restructured loans (accruing): |
||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 103,531 | $ | 90,677 | $ | 90,163 | $ | 85,084 | $ | 82,619 | ||||||||||||||||||||||||||||||
Residential mortgage |
22,121 | 21,302 | 20,465 | 18,115 | 18,943 | |||||||||||||||||||||||||||||||||||
Retail |
10,139 | 10,250 | 10,091 | 9,965 | 11,521 | |||||||||||||||||||||||||||||||||||
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Total restructured loans (accruing) |
$ | 135,791 | $ | 122,229 | $ | 120,719 | $ | 113,164 | $ | 113,083 | ||||||||||||||||||||||||||||||
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Nonaccrual restructured loans (included in nonaccrual loans) |
$ | 74,251 | $ | 86,395 | $ | 79,946 | $ | 87,493 | $ | 80,063 | ||||||||||||||||||||||||||||||
Ratios: |
||||||||||||||||||||||||||||||||||||||||
Nonaccrual loans to total loans |
1.86 | % | 2.16 | % | 2.29 | % | 2.54 | % | 2.99 | % | ||||||||||||||||||||||||||||||
NPAs to total loans plus OREO |
2.09 | % | 2.43 | % | 2.53 | % | 2.83 | % | 3.29 | % | ||||||||||||||||||||||||||||||
NPAs to total assets |
1.38 | % | 1.62 | % | 1.65 | % | 1.82 | % | 2.03 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses to NALs |
113.29 | % | 104.65 | % | 108.93 | % | 105.99 | % | 99.09 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses to total loans |
2.11 | % | 2.26 | % | 2.50 | % | 2.70 | % | 2.96 | % | ||||||||||||||||||||||||||||||
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Nonperforming assets by type: |
(A) | (A) | (A) | (A) | (A) | |||||||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 41,694 | 1 | % | $ | 46,111 | 1 | % | $ | 50,641 | 1 | % | $ | 56,075 | 2 | % | $ | 61,256 | 2 | % | ||||||||||||||||||||
Commercial real estate - owner occupied |
27,161 | 2 | % | 33,417 | 3 | % | 31,888 | 3 | % | 35,718 | 3 | % | 47,202 | 4 | % | |||||||||||||||||||||||||
Lease financing |
5,927 | 10 | % | 8,260 | 13 | % | 9,040 | 15 | % | 10,644 | 18 | % | 11,667 | 21 | % | |||||||||||||||||||||||||
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Commercial and business lending |
74,782 | 1 | % | 87,788 | 2 | % | 91,569 | 2 | % | 102,437 | 2 | % | 120,125 | 3 | % | |||||||||||||||||||||||||
Commercial real estate - investor |
71,522 | 3 | % | 88,806 | 3 | % | 89,030 | 3 | % | 99,352 | 4 | % | 97,691 | 4 | % | |||||||||||||||||||||||||
Real estate construction |
31,684 | 5 | % | 36,403 | 6 | % | 36,471 | 6 | % | 41,806 | 7 | % | 72,300 | 13 | % | |||||||||||||||||||||||||
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Commercial real estate lending |
103,206 | 3 | % | 125,209 | 4 | % | 125,501 | 4 | % | 141,158 | 4 | % | 169,991 | 6 | % | |||||||||||||||||||||||||
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|||||||||||||||||||||
Total commercial |
177,988 | 2 | % | 212,997 | 2 | % | 217,070 | 3 | % | 243,595 | 3 | % | 290,116 | 4 | % | |||||||||||||||||||||||||
Home equity |
38,467 | 2 | % | 41,536 | 2 | % | 44,628 | 2 | % | 46,907 | 2 | % | 46,119 | 2 | % | |||||||||||||||||||||||||
Installment |
2,893 | 1 | % | 3,047 | 1 | % | 2,627 | | % | 2,715 | | % | 3,195 | 1 | % | |||||||||||||||||||||||||
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Total retail |
41,360 | 1 | % | 44,583 | 2 | % | 47,255 | 2 | % | 49,622 | 2 | % | 49,314 | 2 | % | |||||||||||||||||||||||||
Residential mortgage |
58,824 | 2 | % | 60,292 | 2 | % | 62,760 | 2 | % | 63,555 | 2 | % | 63,962 | 2 | % | |||||||||||||||||||||||||
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Total consumer |
100,184 | 2 | % | 104,875 | 2 | % | 110,015 | 2 | % | 113,177 | 2 | % | 113,276 | 2 | % | |||||||||||||||||||||||||
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Total nonaccrual loans |
278,172 | 2 | % | 317,872 | 2 | % | 327,085 | 2 | % | 356,772 | 3 | % | 403,392 | 3 | % | |||||||||||||||||||||||||
Commercial real estate owned |
15,984 | 18,670 | 20,119 | 24,795 | 27,886 | |||||||||||||||||||||||||||||||||||
Residential real estate owned |
11,219 | 11,309 | 10,971 | 13,285 | 10,659 | |||||||||||||||||||||||||||||||||||
Bank properties real estate owned |
8,850 | 10,050 | 3,335 | 3,491 | 3,531 | |||||||||||||||||||||||||||||||||||
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Other real estate owned |
36,053 | 40,029 | 34,425 | 41,571 | 42,076 | |||||||||||||||||||||||||||||||||||
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Total nonperforming assets |
$ | 314,225 | $ | 357,901 | $ | 361,510 | $ | 398,343 | $ | 445,468 | ||||||||||||||||||||||||||||||
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Commercial real estate & Real estate construction NALs Detail: |
||||||||||||||||||||||||||||||||||||||||
Farmland |
$ | 1,132 | 6 | % | $ | 1,327 | 6 | % | $ | 1,337 | 5 | % | $ | 1,907 | 7 | % | $ | 1,971 | 7 | % | ||||||||||||||||||||
Multi-family |
11,448 | 1 | % | 8,194 | 1 | % | 6,920 | 1 | % | 7,909 | 1 | % | 9,905 | 1 | % | |||||||||||||||||||||||||
Non-owner occupied |
58,942 | 3 | % | 79,285 | 4 | % | 80,773 | 4 | % | 89,536 | 5 | % | 85,815 | 5 | % | |||||||||||||||||||||||||
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Commercial real estate - investor |
$ | 71,522 | 3 | % | $ | 88,806 | 3 | % | $ | 89,030 | 3 | % | $ | 99,352 | 4 | % | $ | 97,691 | 4 | % | ||||||||||||||||||||
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1-4 family construction |
$ | 16,725 | 12 | % | $ | 19,049 | 14 | % | $ | 20,487 | 18 | % | $ | 21,717 | 18 | % | $ | 25,439 | 27 | % | ||||||||||||||||||||
All other construction |
14,959 | 3 | % | 17,354 | 4 | % | 15,984 | 4 | % | 20,089 | 4 | % | 46,861 | 10 | % | |||||||||||||||||||||||||
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Real estate construction |
$ | 31,684 | 5 | % | $ | 36,403 | 6 | % | $ | 36,471 | 6 | % | $ | 41,806 | 7 | % | $ | 72,300 | 13 | % | ||||||||||||||||||||
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(A) | Ratio of nonperforming loans by type to total loans by type. |
68
TABLE 8 (continued)
Nonperforming Assets
($ in Thousands)
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
||||||||||||||||
Loans 30-89 days past due by type: |
|
|||||||||||||||||||
Commercial and industrial |
$ | 3,795 | $ | 4,465 | $ | 12,643 | $ | 8,743 | $ | 6,255 | ||||||||||
Commercial real estate - owner occupied |
4,843 | 2,125 | 7,532 | 7,092 | 29,409 | |||||||||||||||
Leasing |
17 | 39 | 40 | 104 | 507 | |||||||||||||||
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|
|
|||||||||||
Commercial and business lending |
8,655 | 6,629 | 20,215 | 15,939 | 36,171 | |||||||||||||||
Commercial real estate - investor |
8,809 | 12,854 | 8,313 | 4,970 | 70,136 | |||||||||||||||
Real estate construction |
1,254 | 1,618 | 1,736 | 996 | 5,493 | |||||||||||||||
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Commercial real estate lending |
10,063 | 14,472 | 10,049 | 5,966 | 75,629 | |||||||||||||||
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Total commercial |
18,718 | 21,101 | 30,264 | 21,905 | 111,800 | |||||||||||||||
Home equity |
14,823 | 15,302 | 18,007 | 12,189 | 18,165 | |||||||||||||||
Installment |
1,693 | 1,558 | 2,813 | 2,592 | 1,956 | |||||||||||||||
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Total retail |
16,516 | 16,860 | 20,820 | 14,781 | 20,121 | |||||||||||||||
Residential mortgage |
6,878 | 9,836 | 10,114 | 7,224 | 12,114 | |||||||||||||||
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Total consumer |
23,394 | 26,696 | 30,934 | 22,005 | 32,235 | |||||||||||||||
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Total loans past due 30-89 days |
$ | 42,112 | $ | 47,797 | $ | 61,198 | $ | 43,910 | $ | 144,035 | ||||||||||
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Commercial real estate & Real estate construction loans 30-89 days past due detail: |
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Farmland |
$ | 15 | $ | | $ | | $ | | $ | 164 | ||||||||||
Multi-family |
469 | 3,713 | 4,130 | 407 | 978 | |||||||||||||||
Non-owner occupied |
8,325 | 9,141 | 4,183 | 4,563 | 68,994 | |||||||||||||||
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Commercial real estate - investor |
$ | 8,809 | $ | 12,854 | $ | 8,313 | $ | 4,970 | $ | 70,136 | ||||||||||
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1-4 family construction |
$ | 809 | $ | 1,191 | $ | 676 | $ | 475 | $ | 658 | ||||||||||
All other construction |
445 | 427 | 1,060 | 521 | 4,835 | |||||||||||||||
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Real estate construction |
$ | 1,254 | $ | 1,618 | $ | 1,736 | $ | 996 | $ | 5,493 | ||||||||||
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Potential problem loans by type: |
||||||||||||||||||||
Commercial and industrial |
$ | 120,888 | $ | 121,764 | $ | 157,778 | $ | 153,306 | $ | 207,351 | ||||||||||
Commercial real estate - owner occupied |
120,034 | 108,508 | 112,673 | 136,366 | 140,406 | |||||||||||||||
Leasing |
214 | 324 | 487 | 158 | 507 | |||||||||||||||
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Commercial and business lending |
241,136 | 230,596 | 270,938 | 289,830 | 348,264 | |||||||||||||||
Commercial real estate - investor |
133,046 | 142,453 | 167,339 | 230,206 | 252,331 | |||||||||||||||
Real estate construction |
18,477 | 23,905 | 27,654 | 27,649 | 37,155 | |||||||||||||||
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Commercial real estate lending |
151,523 | 166,358 | 194,993 | 257,855 | 289,486 | |||||||||||||||
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|||||||||||
Total commercial |
392,659 | 396,954 | 465,931 | 547,685 | 637,750 | |||||||||||||||
Home equity |
3,343 | 4,173 | 4,441 | 5,451 | 4,975 | |||||||||||||||
Installment |
131 | 127 | 142 | 233 | 272 | |||||||||||||||
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Total retail |
3,474 | 4,300 | 4,583 | 5,684 | 5,247 | |||||||||||||||
Residential mortgage |
8,197 | 8,658 | 9,580 | 13,037 | 16,550 | |||||||||||||||
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|
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Total consumer |
11,671 | 12,958 | 14,163 | 18,721 | 21,797 | |||||||||||||||
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|
|
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Total potential problem loans |
$ | 404,330 | $ | 409,912 | $ | 480,094 | $ | 566,406 | $ | 659,547 | ||||||||||
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69
Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned
Management is committed to a proactive nonaccrual and problem loan identification philosophy. This philosophy is implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified quickly and the risk of loss is minimized. Table 8 provides detailed information regarding nonperforming assets, which include nonaccrual loans and other real estate owned.
Nonaccrual Loans: Nonaccrual loans are considered one indicator of potential future loan losses. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments, unless the loan is well secured and in the process of collection. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is managements practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, amortization of related deferred loan fees or costs is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectability of the principal and interest is in doubt, payments received are applied to loan principal.
Nonaccrual loans were $278 million at September 30, 2012, compared to $403 million at September 30, 2011 and $357 million at December 31, 2011. As shown in Table 8, total nonaccrual loans were down $125 million since September 30, 2011, with commercial nonaccrual loans down $112 million while consumer-related nonaccrual loans were down $13 million. Since December 31, 2011, total nonaccrual loans decreased $79 million, with commercial nonaccrual loans down $66 million and consumer nonaccrual loans down $13 million. The ratio of nonaccrual loans to total loans was 1.86% at September 30, 2012, compared to 2.99% at September 30, 2011 and 2.54% at December 31, 2011. The Corporations allowance for loan losses to nonaccrual loans was 113% at September 30, 2012, up from 99% at September 30, 2011 and 106% at December 31, 2011, respectively.
Accruing Loans Past Due 90 Days or More: Loans past due 90 days or more but still accruing interest are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. At September 30, 2012, accruing loans 90 days or more past due totaled $2 million compared to $1 million at September 30, 2011 and $5 million at December 31, 2011, respectively.
Troubled Debt Restructurings (Restructured Loans): Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment structure or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are being reported as troubled debt restructurings, which are considered and accounted for as impaired loans. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status. If the borrowers ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual.
At September 30, 2012, the Corporation had total restructured loans of $210 million (including $74 million classified as nonaccrual and $136 million performing in accordance with the modified terms), compared to $193 million at September 30, 2011 (including $80 million classified as nonaccrual and $113 million performing in accordance with the modified terms) and $200 million at December 31, 2011 (including $87 million classified as nonaccrual and $113 million performing in accordance with the modified terms).
Potential Problem Loans: The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the allowance for loan losses. Potential problem loans are generally defined by management to include loans rated as substandard by management but that are not considered impaired (i.e., nonaccrual loans and accruing troubled debt restructurings); however, there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Corporation expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial loans covering a diverse range of businesses and real estate property types. At September 30, 2012, potential problem loans totaled $404 million, compared to $660 million at September 30, 2011 and $566 million at December 31, 2011, respectively.
70
Other Real Estate Owned: Other real estate owned decreased to $36 million at September 30, 2012, compared to $42 million at September 30, 2011 and $41 million at December 31, 2011, respectively. Write-downs on other real estate owned were $8 million and $7 million for the first nine months of 2012 and 2011, respectively, and $9 million for the full year 2011. Management actively seeks to ensure properties held are monitored to minimize the Corporations risk of loss.
Liquidity
The objective of liquidity management is to ensure that the Corporation has the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to satisfy the cash flow requirements of depositors and borrowers and to meet its other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries or acquisitions, and satisfy other operating requirements. In addition to satisfying cash flow requirements in the ordinary course of business, the Corporation actively monitors and manages its liquidity position to insure sufficient resources are available to meet cash flow requirements in adverse situations.
The Corporations internal liquidity management framework includes measurement of several key elements, such as deposit funding as a percent of total assets and liquid asset levels. Strong capital ratios, credit quality, and core earnings are essential to maintaining cost-effective access to wholesale funding markets. A downgrade or loss in credit ratings could have an impact on the Corporations ability to access wholesale funding at favorable interest rates. In addition to static liquidity measures, the Corporation performs dynamic scenario analysis in accordance with industry best practices. Measures have been established to ensure the Corporation has sufficient high quality short-term liquidity to meet cash flow requirements under stressed scenarios. At September 30, 2012, the Corporation was in compliance with its internal liquidity objectives.
While core deposits and loan and investment securities repayments are principal sources of liquidity, funding diversification is another key element of liquidity management. Diversity is achieved by strategically varying depositor type, term, funding market, and instrument. The Parent Company and its subsidiary bank are rated by Moodys, Standard and Poors (S&P), Fitch Investors (Fitch), and Dominion Bond Rating Service (DBRS). Credit ratings by these nationally recognized statistical rating agencies are an important component of the Corporations liquidity profile. Credit ratings relate to the Corporations ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and the Corporations ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets but also the cost of these funds. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently. The senior credit ratings of the Parent Company and its subsidiary bank are displayed below.
September 30, 2012 | ||||||||
Moodys | S&P | Fitch | DBRS | |||||
Bank short-term |
P2 | | F2 | R2H | ||||
Bank long-term |
A3 | BBB+ | BBB- | BBBH | ||||
Corporation short-term |
P2 | | F3 | R2M | ||||
Corporation long-term |
Baa1 | BBB | BBB- | BBB | ||||
Outlook |
Stable | Stable | Stable | Stable |
The Corporation also has multiple funding sources that could be used to increase liquidity and provide additional financial flexibility. The Parent Company filed a shelf registration in December 2008, which was subsequently renewed in January 2012, under which the Parent Company may offer any combination of the following securities, either separately or in units: debt securities, preferred stock, depositary shares, common stock, and warrants. The Corporation issued $430 million of senior notes in 2011. These senior notes are due in 2016 and bear a 5.125% fixed coupon. In September 2011, the Corporation issued $65 million of depositary shares of 8% Series B perpetual preferred stock. In September 2012, the Corporation issued $155 million of senior notes due in March 2014 which bear a 1.875% fixed coupon. The Parent Company also has a $200 million commercial paper program, of which, $15 million was outstanding at September 30, 2012. While dividends and service fees from subsidiaries and proceeds from issuance of capital are
71
primary funding sources for the Parent Company, these sources could be limited or costly (such as by regulation or subject to the capital needs of its subsidiaries or by market appetite for bank holding company stock).
The Bank has established federal funds lines with counterparty banks and the ability to borrow from the Federal Home Loan Bank ($1.1 billion of Federal Home Loan Bank advances were outstanding at September 30, 2012). The Bank also has significant excess loan and investment securities collateral which could be pledged to secure additional deposits or to counterparty banks, the Federal Home Loan Bank or other parties as necessary. Associated Bank may also issue institutional certificates of deposit, network transaction deposits, and brokered certificates of deposit.
Investment securities are an important tool to the Corporations liquidity objective. As of September 30, 2012, the majority of investment securities are classified as available for sale, with a very small portion of municipal securities (less than 1%) held to maturity. Of the $4.5 billion investment securities portfolio at September 30, 2012, a portion of these securities were pledged to secure $1.6 billion of collateralized deposits and $1.0 billion of repurchase agreements and for other purposes as required or permitted by law. The majority of the remaining investment securities of $1.3 billion could be pledged or sold to enhance liquidity, if necessary.
For the nine months ended September 30, 2012, net cash provided by operating and financing activities was $318 million and $672 million, respectively, while net cash used in investing activities was $653 million, for a net increase in cash and cash equivalents of $337 million since year-end 2011. During the first nine months of 2012, loans increased $935 million while investment securities decreased $419 million, as run-off from the investment securities portfolio was utilized to fund loan growth. On the funding side, deposits increased $1.4 billion and long-term funding increased $128 million, while short-term funding declined by $761 million.
For the nine months ended September 30, 2011, net cash provided by operating activities was $243 million, while investing activities and financing activities used net cash of $369 million and $77 million, respectively, for a net decrease in cash and cash equivalents of $203 million since year-end 2010. During the first nine months of 2011, assets increased $117 million, with loans up $887 million and investment securities down $648 million. On the funding side, deposits decreased $443 million (reflecting the Corporations strategy for reducing its utilization of network transaction deposits and brokered deposits), while short-term funding and long-term funding increased $784 million and $64 million, respectively.
Quantitative and Qualitative Disclosures about Market Risk
Market risk arises from exposure to changes in interest rates, exchange rates, commodity prices, and other relevant market rate or price risk. The Corporation faces market risk in the form of interest rate risk through other than trading activities. Market risk from other than trading activities in the form of interest rate risk is measured and managed through a number of methods. The Corporation uses financial modeling techniques that measure the sensitivity of future earnings due to changing rate environments to measure interest rate risk. Policies established by the Corporations Asset/Liability Committee and approved by the Board of Directors are intended to limit exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Corporation believes it has no primary exposure to a specific point on the yield curve. These limits are based on the Corporations exposure to a 100 bp and 200 bp immediate and sustained parallel rate move, either upward or downward.
Interest Rate Risk
In order to measure earnings sensitivity to changing rates, the Corporation uses a simulation model designed to measure the impact of interest rate shocks and various other yield curve scenarios on earnings and economic value of the financial assets and liabilities of the Corporation. The risk measurement framework presents different views which take into account changes in management strategies and market conditions, among other factors, to varying degrees. Comparisons between a static balance sheet and balance sheets with projected growth scenarios can help provide clarity on potential impacts on earnings and economic value.
Simulation of earnings: Determining the sensitivity of short-term future earnings to a hypothetical instantaneous interest rate shock of up to 400 bp is accomplished through the use of simulation modeling. The earnings simulations model the balance sheet as an ongoing entity. Future business assumptions involving projected balance sheet growth assumptions, administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are
72
then modeled to project net interest income based on hypothetical changes in interest rates. The resulting net interest income for the next 12 to 24-month period is compared to the net interest income amount calculated using static constant rates. This difference represents the Corporations earnings sensitivity to an instantaneous plus or minus parallel rate shock.
The resulting simulations for September 30, 2012, projected that net interest income would increase by approximately 4.2% if rates rose by an instantaneous 100 bp shock. Accordingly, this suggests the Corporation was in an asset sensitive position at September 30, 2012. At December 31, 2011, the 100 bp instantaneous shock up was projected to increase net interest income by approximately 2.2%. As of September 30, 2012, the simulation of earnings results were within the Corporations interest rate risk policy.
Economic value of equity: Economic value of equity is another measure to quantify the impact of interest rates on the present value of assets, liabilities, and off-balance sheet financial instruments. This measurement is a longer-term analysis of interest rate risk as it evaluates every cash flow produced by the current balance sheet.
These results are based on multiple path simulations using an interest rate simulation model calibrated to market traded instruments. Sensitivities are measured assuming an immediate and sustained parallel change in market rates and do not reflect the earnings or balance sensitivity that may arise from other factors. These factors may include changes in the shape of the yield curve, the change in spread between key market rates, or accounting recognition of the impairment of certain intangibles. The results are also considered to be conservative estimates due to the fact that no management action to mitigate potential income variances is included within the simulation process. This action could include, but would not be limited to, delaying an increase in deposit rates, extending liabilities, using financial derivative products to hedge interest rate risk, changing the pricing characteristics of loans, or changing the growth rate of certain assets and liabilities. As of September 30, 2012, the projected changes for the economic value of equity were within the Corporations interest rate risk policy.
Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities
The Corporation utilizes a variety of financial instruments in the normal course of business to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include lending-related commitments and derivative instruments. A discussion of the Corporations derivative instruments at September 30, 2012, is included in Note 10, Derivative and Hedging Activities, of the notes to consolidated financial statements. A discussion of the Corporations lending-related commitments is included in Note 11, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities, of the notes to consolidated financial statements. See also Note 8, Short and Long-Term Funding, of the notes to consolidated financial statements for additional information on the Corporations short-term and long-term funding.
Table 9 summarizes significant contractual obligations and other commitments at September 30, 2012, at those amounts contractually due to the recipient, including any premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments.
TABLE 9: Contractual Obligations and Other Commitments
One Year or Less |
One to Three Years |
Three to Five Years |
Over Five Years |
Total | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Time deposits |
$ | 1,434,908 | $ | 409,174 | $ | 206,746 | $ | 50,164 | $ | 2,100,992 | ||||||||||
Short-term funding |
1,753,285 | | | | 1,753,285 | |||||||||||||||
Long-term funding |
500,045 | 154,983 | 434,767 | 215,627 | 1,305,422 | |||||||||||||||
Operating leases |
13,400 | 23,583 | 20,578 | 45,748 | 103,309 | |||||||||||||||
Commitments to extend credit |
3,160,166 | 1,154,943 | 1,116,441 | 132,442 | 5,563,992 | |||||||||||||||
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Total |
$ | 6,861,804 | $ | 1,742,683 | $ | 1,778,532 | $ | 443,981 | $ | 10,827,000 | ||||||||||
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Capital
Stockholders equity at September 30, 2012 was $3.0 billion, up $85 million from December 31, 2011. At September 30, 2012, stockholders equity included $67 million of accumulated other comprehensive income compared to $66 million of accumulated other comprehensive income at December 31, 2011. Cash dividends of $0.15 per share were paid in the first nine months of 2012 and $0.03 per share were paid in the first nine months of 2011. Total stockholders equity to assets was 12.98% and 13.07% at September 30, 2012 and December 31, 2011, respectively.
73
On April 6, 2010, the Corporation entered into a Memorandum of Understanding (Memorandum) with the Federal Reserve Bank of Chicago (Reserve Bank). The Memorandum, which was entered into following the 2008-2009 supervisory cycle, was an informal agreement between the Corporation and the Reserve Bank. The Memorandum was terminated in March 2012.
The Board of Directors has authorized management to repurchase shares of the Corporations common stock to be made available for reissuance in connection with the Corporations employee incentive plans and/or for other corporate purposes. During 2011, no shares were repurchased under these authorizations. In the second quarter of 2012, the Corporation repurchased 2.3 million shares for $30 million. The Corporation also repurchased shares for minimum tax withholding settlements on equity compensation during 2011 and the first nine months of 2012. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, for additional information on the shares repurchased during the third quarter of 2012. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, regulatory constraints, and other investment opportunities.
On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the federal register three related notices of proposed rulemaking (the NPRs) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as the Basel III international capital standards. Among other things, the NPRs, if adopted as proposed, would establish a new capital standard consisting of common equity tier 1 capital; would increase the capital ratios required for certain existing capital categories and would add a requirement for a capital conservation buffer. In addition, proposed changes in regulatory capital standards would phase-out trust preferred securities as a component of tier 1 capital commencing January 1, 2013. The NPRs contemplate the deduction of more assets from regulatory capital and propose revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or nonaccrual loans. The NPRs provide for various phase-in periods over the next several years. Management believes both the Corporation and the Bank would be well capitalized if the NPRs were currently effective. However, the NPRs may be changed before they are adopted, and the actual impact of the final rules cannot be predicted with any certainty.
Management actively reviews capital strategies for the Corporation and each of its subsidiaries in light of perceived business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic condition in markets served, and strength of management. The capital ratios of the Corporation and its banking affiliate were in excess of regulatory minimum requirements. The Corporations capital ratios are summarized in Table 10.
74
TABLE 10
Capital Ratios
(In Thousands, except per share data)
Quarter Ended | ||||||||||||||||||||
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
||||||||||||||||
Total stockholders equity |
$ | 2,950,452 | $ | 2,909,621 | $ | 2,900,873 | $ | 2,865,794 | $ | 2,850,619 | ||||||||||
Tier 1 capital |
2,113,203 | 2,071,801 | 2,088,054 | 2,051,787 | 2,011,800 | |||||||||||||||
Tier 1 common equity |
1,869,931 | 1,828,529 | 1,819,782 | 1,783,515 | 1,743,528 | |||||||||||||||
Tangible common equity |
1,941,736 | 1,899,857 | 1,890,060 | 1,853,932 | 1,837,579 | |||||||||||||||
Total risk-based capital |
2,335,451 | 2,290,491 | 2,299,239 | 2,263,065 | 2,216,594 | |||||||||||||||
Market capitalization |
2,259,006 | 2,263,549 | 2,427,965 | 1,938,833 | 1,613,308 | |||||||||||||||
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|
|
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|
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|
|
|||||||||||
Book value per common share |
$ | 16.82 | $ | 16.59 | $ | 16.32 | $ | 16.15 | $ | 16.07 | ||||||||||
Tangible book value per common share |
11.31 | 11.07 | 10.87 | 10.68 | 10.59 | |||||||||||||||
Cash dividend per common share |
0.05 | 0.05 | 0.05 | 0.01 | 0.01 | |||||||||||||||
Stock price at end of period |
13.16 | 13.19 | 13.96 | 11.17 | 9.30 | |||||||||||||||
Low closing price for the period |
12.04 | 11.76 | 11.43 | 9.15 | 8.95 | |||||||||||||||
High closing price for the period |
13.79 | 13.97 | 14.63 | 11.78 | 14.17 | |||||||||||||||
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|||||||||||
Total stockholders equity / assets |
12.98 | % | 13.18 | % | 13.24 | % | 13.07 | % | 13.01 | % | ||||||||||
Tangible common equity / tangible assets (1) |
8.91 | 8.99 | 9.01 | 8.84 | 8.77 | |||||||||||||||
Tangible stockholders equity / tangible assets (2) |
9.20 | 9.29 | 9.32 | 9.14 | 9.07 | |||||||||||||||
Tier 1 common equity / risk-weighted assets (3) |
12.01 | 12.04 | 12.49 | 12.24 | 12.44 | |||||||||||||||
Tier 1 leverage ratio |
9.99 | 9.95 | 10.03 | 9.81 | 9.62 | |||||||||||||||
Tier 1 risk-based capital ratio |
13.57 | 13.64 | 14.33 | 14.08 | 14.35 | |||||||||||||||
Total risk-based capital ratio |
15.00 | 15.08 | 15.78 | 15.53 | 15.81 | |||||||||||||||
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|
|||||||||||
Common shares outstanding (period end) |
171,657 | 171,611 | 173,923 | 173,575 | 173,474 | |||||||||||||||
Basic common shares outstanding (average) |
171,650 | 172,839 | 173,846 | 173,523 | 173,418 | |||||||||||||||
Diluted common shares outstanding (average) |
171,780 | 172,841 | 173,848 | 173,523 | 173,418 |
(1) | Tangible common equity to tangible assets = Common stockholders equity excluding goodwill and other intangible assets divided by assets excluding goodwill and other intangible assets. This is a non-GAAP financial measure. |
(2) | Tangible stockholders equity to tangible assets = Total stockholders equity excluding goodwill and other intangible assets divided by assets excluding goodwill and other intangible assets. This is a non-GAAP financial measure. |
(3) | Tier 1 common equity to risk-weighted assets = Tier 1 capital excluding qualifying perpetual preferred stock and qualifying trust preferred securities divided by risk-weighted assets. This is a non-GAAP financial measure. |
Comparable Third Quarter Results
The Corporation recorded net income of $46 million for the three months ended September 30, 2012, compared to net income of $41 million for the three months ended September 30, 2011. Net income available to common equity was $45 million for the three months ended September 30, 2012, or net income of $0.26 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the three months ended September 30, 2011, was $34 million, or net income of $0.20 for both basic and diluted earnings per common share (see Table 1).
Taxable equivalent net interest income for the third quarter of 2012 was $161 million, $2 million higher than the third quarter of 2011 (see Table 2). Changes in the balance sheet volume and mix increased taxable equivalent net interest income by $10 million, while changes in the rate environment and product pricing lowered net interest income by $8 million. The Federal funds target rate was unchanged for both the third quarter of 2012 and the third quarter of 2011. The net interest margin between the comparable quarters was up 3 bp, to 3.26% in the third quarter of 2012. Average earning assets increased $130 million to $19.7 billion in the third quarter of 2012, with average loans up $1.5 billion (predominantly in commercial loans) and investments down $1.4 billion. On the funding side, average interest-bearing deposits were up $666 million, while average demand deposits increased $545 million. On average, short and long-term funding was down $940 million, primarily attributable to a $951 million decrease in repurchase agreements.
75
Credit metrics continued to improve with nonaccrual loans declining to $278 million (1.86% of total loans) at September 30, 2012, compared to $403 million (2.99% of total loans) at September 30, 2011 (see Table 8). Compared to the third quarter of 2011, potential problem loans were down 39% to $404 million. As a result of these improving credit metrics, the provision for loan losses for the third quarter of 2012 was zero (or $18 million less than net charge offs), compared to $4 million (or $26 million less than net charge offs) in the third quarter of 2011 (see Table 7). Annualized net charge offs represented 0.47% of average loans for the third quarter of 2012 compared to 0.90% for the third quarter of 2011. The allowance for loan losses to loans at September 30, 2012 was 2.11%, compared to 2.96% at September 30, 2011. See discussion under sections, Provision for Loan Losses, Allowance for Loan Losses, and Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned.
Noninterest income for the third quarter of 2012 increased $12 million (17%) to $81 million versus the third quarter of 2011. Core fee-based revenues of $55 million were down $5 million (8%) versus the comparable quarter in 2011. Net mortgage banking increased $11 million from the third quarter of 2011, predominantly due to higher gain on sales and related income attributable to the higher volume of loans sold to the secondary market (secondary mortgage production was $715 million for the third quarter of 2012 compared to secondary mortgage production of $471 million for the third quarter of 2011). Net investment securities gains of $4 million for the third quarter of 2012 were primarily attributable to gains on sales of equity, mortgage-related, and trust preferred debt securities; while net investment securities losses of $1 million for the third quarter of 2011 were primarily attributable to credit-related other-than-temporary write-downs on a pooled trust preferred debt security. Other income increased $1 million to $3 million in the third quarter of 2012 predominantly due to an increase in limited partnership income.
On a comparable quarter basis, noninterest expense increased $10 million (6%) to $170 million in the third quarter of 2012. Legal and professional fees increased to $8 million due to other professional consultant costs related to certain BSA regulatory compliance issues. Personnel expense increased $4 million (5%) from the third quarter of 2011, primarily in salary-related expenses (reflecting merit increases between the years and higher compensation related to the vesting of stock options and restricted stock grants). Data processing expense was up $3 million (40%) from the third quarter of 2011, reflecting strategic investments in our systems and infrastructure. Losses other than loans increased $2 million from the third quarter of 2011 due to an increase to the reserve for losses on unfunded commitments. FDIC expense decreased $2 million (27%) due to the change in the FDIC expense calculation (from a deposit based calculation to a net asset / risk-based assessment).
For the third quarter of 2012, the Corporation recognized income tax expense of $20 million, compared to income tax expense of $17 million for the third quarter of 2011. The effective tax rate was 30.64% and 29.55% for the third quarter of 2012 and the third quarter of 2011, respectively. The change in income tax expense and the effective tax rate was primarily due to the increased level of pretax income between the comparable quarters.
76
TABLE 11
Selected Quarterly Information
($ in Thousands)
Quarter Ended | ||||||||||||||||||||
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net interest income |
$ | 155,602 | $ | 154,267 | $ | 154,668 | $ | 151,825 | $ | 153,160 | ||||||||||
Provision for loan losses |
| | | 1,000 | 4,000 | |||||||||||||||
Noninterest income |
||||||||||||||||||||
Trust service fees |
10,396 | 10,125 | 9,787 | 9,511 | 9,791 | |||||||||||||||
Service charges on deposit accounts |
17,290 | 16,768 | 18,042 | 17,783 | 19,949 | |||||||||||||||
Card-based and other nondeposit fees |
12,209 | 12,084 | 10,879 | 11,269 | 15,291 | |||||||||||||||
Insurance commissions |
11,650 | 12,912 | 11,590 | 11,216 | 11,020 | |||||||||||||||
Brokerage and annuity commissions |
3,632 | 4,206 | 4,127 | 3,665 | 4,027 | |||||||||||||||
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|
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|
|
|
|
|
|||||||||||
Core fee-based revenue |
55,177 | 56,095 | 54,425 | 53,444 | 60,078 | |||||||||||||||
Mortgage banking, net |
15,581 | 16,735 | 17,654 | 9,677 | 4,521 | |||||||||||||||
Capital market fees, net |
3,609 | 2,673 | 3,716 | 3,950 | 3,273 | |||||||||||||||
BOLI income |
3,290 | 3,164 | 4,292 | 3,820 | 3,990 | |||||||||||||||
Asset losses, net |
(3,309 | ) | (4,984 | ) | (3,594 | ) | (1,799 | ) | (3,859 | ) | ||||||||||
Investment securities gains (losses), net |
3,506 | 563 | 40 | (310 | ) | (744 | ) | |||||||||||||
Other |
3,134 | 1,705 | 1,913 | 2,750 | 1,737 | |||||||||||||||
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|
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|
|||||||||||
Total noninterest income |
80,988 | 75,951 | 78,446 | 71,532 | 68,996 | |||||||||||||||
Noninterest expense |
||||||||||||||||||||
Personnel expense |
95,231 | 93,819 | 94,281 | 90,306 | 91,084 | |||||||||||||||
Occupancy |
14,334 | 14,008 | 15,179 | 13,796 | 14,205 | |||||||||||||||
Equipment |
5,935 | 5,719 | 5,468 | 5,286 | 4,851 | |||||||||||||||
Data processing |
11,022 | 11,304 | 9,516 | 9,080 | 7,887 | |||||||||||||||
Business development and advertising |
5,059 | 5,468 | 5,381 | 6,904 | 5,539 | |||||||||||||||
Other intangible asset amortization |
1,048 | 1,049 | 1,049 | 1,179 | 1,179 | |||||||||||||||
Loan expense |
3,297 | 2,948 | 2,910 | 3,469 | 2,600 | |||||||||||||||
Legal and professional fees |
7,686 | 5,657 | 9,715 | 4,651 | 4,289 | |||||||||||||||
Losses other than loans |
3,577 | 2,060 | 3,550 | 11,890 | 1,659 | |||||||||||||||
Foreclosure / OREO expense |
4,071 | 4,343 | 3,362 | 5,169 | 4,982 | |||||||||||||||
FDIC expense |
5,017 | 4,778 | 4,870 | 6,136 | 6,906 | |||||||||||||||
Other |
13,426 | 14,877 | 14,481 | 14,461 | 14,299 | |||||||||||||||
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|
|||||||||||
Total noninterest expense |
169,703 | 166,030 | 169,762 | 172,327 | 159,480 | |||||||||||||||
Income tax expense |
20,492 | 20,871 | 20,719 | 8,905 | 17,337 | |||||||||||||||
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|||||||||||
Net income |
46,395 | 43,317 | 42,633 | 41,125 | 41,339 | |||||||||||||||
Preferred stock dividends and discount accretion |
1,300 | 1,300 | 1,300 | 1,300 | 7,305 | |||||||||||||||
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Net income available to common equity |
$ | 45,095 | $ | 42,017 | $ | 41,333 | $ | 39,825 | $ | 34,034 | ||||||||||
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Taxable equivalent net interest income |
$ | 160,870 | $ | 159,521 | $ | 159,971 | $ | 157,132 | $ | 158,455 | ||||||||||
Net interest margin |
3.26 | % | 3.30 | % | 3.31 | % | 3.21 | % | 3.23 | % | ||||||||||
Effective tax rate |
30.64 | % | 32.52 | % | 32.70 | % | 17.80 | % | 29.55 | % | ||||||||||
Average Balances: |
||||||||||||||||||||
Assets |
$ | 22,016,748 | $ | 21,684,600 | $ | 21,659,139 | $ | 21,755,870 | $ | 21,729,187 | ||||||||||
Earning assets |
19,659,796 | 19,386,046 | 19,371,729 | 19,506,627 | 19,530,007 | |||||||||||||||
Interest-bearing liabilities |
14,940,697 | 14,922,006 | 14,920,413 | 15,095,689 | 15,215,517 | |||||||||||||||
Loans |
14,916,793 | 14,602,602 | 14,310,441 | 14,043,585 | 13,376,928 | |||||||||||||||
Deposits |
15,615,856 | 15,050,684 | 15,000,567 | 14,893,469 | 14,405,311 | |||||||||||||||
Short and long-term funding |
3,286,943 | 3,566,346 | 3,603,700 | 3,857,252 | 4,227,319 | |||||||||||||||
Stockholders equity |
$ | 2,933,710 | $ | 2,915,322 | $ | 2,890,185 | $ | 2,856,095 | $ | 2,987,178 |
77
Sequential Quarter Results
The Corporation recorded net income of $46 million for the third quarter of 2012, compared to net income of $43 million for the second quarter of 2012. Net income available to common equity was $45 million for the third quarter of 2012, or net income of $0.26 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2012, was $42 million, or net income of $0.24 for both basic and diluted earnings per common share (see Table 1).
Taxable equivalent net interest income for the third quarter of 2012 was $161 million, $1 million higher than the second quarter of 2012. Changes in the rate environment and product pricing decreased net interest income by $3 million; while changes in balance sheet volume and mix increased taxable equivalent net interest income by $3 million and one extra day in the third quarter increased net interest income by $1 million. The Federal funds target rate was unchanged for both quarters. The net interest margin between the sequential quarters was down 4 bp, to 3.26% in the third quarter of 2012. Average earning assets increased $274 million to $19.7 billion in the third quarter of 2012, with average investments and other short-term investments down $40 million, while average loans increased $314 million (predominantly in commercial loans). On the funding side, average short and long-term funding was down $279 million (primarily due to a decline in short-term FHLB advances); while average interest-bearing deposits were up $298 million and noninterest-bearing demand deposits were up $267 million.
The Corporation reported another quarter of improving credit metrics with nonaccrual loans of $278 million (1.86% of total loans) at September 30, 2012, down from $318 million (2.16% of total loans) at June 30, 2012 (see Table 8). Potential problem loans declined to $404 million, down $6 million from the second quarter of 2012. As a result of these improving credit metrics, the provision for loan losses for the second and third quarters of 2012 were constant at $0. Annualized net charge offs represented 0.47% of average loans for the third quarter of 2012, compared to 0.65% for the second quarter of 2012. The allowance for loan losses to loans at September 30, 2012 was 2.11%, compared to 2.26% at June 30, 2012 (see Table 7). See discussion under sections, Provision for Loan Losses, Allowance for Loan Losses, and Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned.
Noninterest income for the third quarter of 2012 increased $5 million (7%) to $81 million versus the second quarter of 2012. Net investment securities gains of $4 million for the third quarter of 2012 were primarily attributable to gains on sales of equity, mortgage-related, and trust preferred debt securities. Net asset losses of $3 million for the third quarter of 2012 were due to losses on sales and other write-downs on other real estate owned. Net asset losses of $5 million for the second quarter of 2012 were primarily attributable to a $6 million write-down on software placed into production during the second quarter of 2012, $3 million of losses on sales and other write-downs on other real estate owned, and a $3 million impairment charge on certain limited partnership investments, partially offset by a $6 million gain on the sale of three retail branches in rural western Illinois. Other income increased $1 million to $3 million in the third quarter of 2012 predominantly due to an increase in limited partnership income. Net mortgage banking income was $16 million, down from net mortgage banking income of $17 million in the second quarter 2012, predominantly due to a $3 million decline in gains on sales and related income from secondary mortgage production, partially offset by a $2 million decrease in mortgage servicing rights expense.
On a sequential quarter basis, noninterest expense increased $4 million (2%) to $170 million in the third quarter of 2012. Legal and professional fees increased $2 million due to other professional consultant costs related to certain BSA regulatory compliance issues. Losses other than loans was up $2 million due to an increase in the reserve for losses on unfunded commitments.
For the third quarter of 2012, the Corporation recognized income tax expense of $20 million, compared to income tax expense of $21 million for the second quarter of 2012. The effective tax rate was 30.64% and 32.52% for the third quarter of 2012 and the second quarter of 2012, respectively.
Future Accounting Pronouncements
New accounting policies adopted by the Corporation are discussed in Note 2, New Accounting Pronouncements Adopted, of the notes to consolidated financial statements. The expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted are discussed below. To the extent the adoption of new accounting standards materially affects the Corporations financial condition, results of operations, or liquidity, the impacts are discussed in the applicable sections of this financial review and the notes to consolidated financial statements.
In July 2012, the FASB issued amendments intended to simplify how entities test the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments permit an organization to make a qualitative evaluation about the likelihood of impairment of an indefinite-lived intangible asset to determine whether it should apply the quantitative test and calculate the fair value of the indefinite-lived intangible asset. The amendments do not change how an organization measures an
78
impairment loss. Therefore, it is not expected to affect the information reported to users of the financial statements. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Corporation will adopt the accounting standard during 2013, as required.
In December 2011, the FASB issued amendments to require an entity to disclose information about offsetting and related arrangements to enable users of it financial statements to understand the effect of those arrangements on its financial position. This information will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements with certain financial instruments and derivative instruments. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, with retrospective application to the disclosures of all comparative periods presented. The Corporation will adopt the accounting standard during 2013, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
Recent Developments
The analysis of branch locations, transaction trends and strategic fit is an ongoing process at Associated and throughout the banking industry. Accordingly, the Corporation recently completed an evaluation of its retail footprint to ensure the branch network is ideally positioned for future success, especially as it pertains to evolving customer banking preferences and the changing regulatory and competitive environment. As a result of this analysis, on October 17, 2012, the Corporation announced its decision to consolidate 12 branch locations located throughout its three-state footprint.
During October 2012, the Corporation redeemed $155 million of the ASBC Capital I junior subordinated debentures and $15 million of the SFSC Capital II junior subordinated debentures. The Corporation also intends to redeem the remaining $15 million of junior subordinated debentures at SFSC Capital I prior to the end of 2012.
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
Information required by this item is set forth in Item 2 under the captions Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk.
ITEM 4. | Controls and Procedures |
The Corporation maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Corporations management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2012, the Corporations management carried out an evaluation, under the supervision and with the participation of the Corporations Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls and procedures were effective as of September 30, 2012. No changes were made to the Corporations internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.
79
ITEM 1. | Legal Proceedings |
The following is a description of the Corporations material pending legal proceedings.
A putative class action lawsuit, Harris v. Associated Bank, N.A. (the Bank), was filed in the United States District Court for the Western District of Wisconsin in April 2010, alleging that the Bank unfairly assessed and collected overdraft fees and seeking restitution of the overdraft fees, compensatory, consequential and punitive damages, and costs. The case was subsequently consolidated into the Multi District Litigation (MDL), In re: Checking Account Overdraft Litigation MDL No. 2036 in the United States District Court for the Southern District of Florida. A settlement agreement which requires payment by the Bank of $13 million for a full and complete release of all claims brought against the Bank received preliminary approval from the court on July 26, 2012. In the second quarter of 2012, the Bank settled with an insurer for $2.5 million as contribution to the settlement amount and received approximately $1.5 million as partial reimbursement for defense costs. By entering into such an agreement, we have not admitted any liability with respect to the lawsuit. The settlement amount was previously accrued for in the financial statements.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Following are the Corporations monthly common stock purchases during the third quarter of 2012. For a discussion of the common stock repurchase authorizations and repurchases during the period, see section Capital included under Part I Item 2 of this document.
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans |
Maximum Number of Shares that May Yet Be Purchased Under the Plan |
||||||||||||
July 1, 2012 - July 31, 2012 |
18,665 | $ | 13.16 | | | |||||||||||
August 1, 2012 - August 31, 2012 |
1,183 | 12.49 | | | ||||||||||||
September 1, 2012 - September 30, 2012 |
6,041 | 13.37 | | | ||||||||||||
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|
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|
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|
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Total |
25,889 | $ | 13.18 | | | |||||||||||
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|
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|
|
|
During the third quarter of 2012, the Corporation repurchased shares for minimum tax withholding settlements on equity compensation. The effect to the Corporation of these transactions was an increase in treasury stock and a decrease in cash of approximately $341,000 in the third quarter of 2012.
80
ITEM 6. | Exhibits |
(a) | Exhibits: | |
Exhibit (4.1), Global Note dated as of September 12, 2012 representing $155,000,000 1.875% Senior Notes due 2014, incorporated by reference to Exhibit 4.1 of the Corporations Current Report on Form 8-K dated September 12, 2012. | ||
Exhibit (11), Statement regarding computation of per-share earnings. See Note 3 of the notes to consolidated financial statements in Part I Item 1. | ||
Exhibit (31.1), Certification Under Section 302 of Sarbanes-Oxley by Philip B. Flynn, Chief Executive Officer, is attached hereto. | ||
Exhibit (31.2), Certification Under Section 302 of Sarbanes-Oxley by Christopher Del Moral-Niles, Chief Financial Officer, is attached hereto. | ||
Exhibit (32), Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley, is attached hereto. | ||
Exhibit (101), Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Other Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. * |
* | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
81
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP | ||||||
(Registrant) |
Date: November 5, 2012 | /s/ Philip B. Flynn | |||||
Philip B. Flynn | ||||||
President and Chief Executive Officer |
Date: November 5, 2012 | /s/ Christopher Del Moral-Niles | |||||
Christopher Del Moral-Niles | ||||||
Chief Financial Officer |
Date: November 5, 2012 | /s/ Bryan R. McKeag | |||||
Bryan R. McKeag | ||||||
Principal Accounting Officer |
82
EXHIBIT 31.1
CERTIFICATION UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Philip B. Flynn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated Banc-Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 5, 2012 | /s/ Philip B. Flynn | |||||
Philip B. Flynn | ||||||
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Christopher Del Moral-Niles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated Banc-Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 5, 2012 | /s/ Christopher Del Moral-Niles | |||||
Christopher Del Moral-Niles | ||||||
Chief Financial Officer |
EXHIBIT 32
Certification by the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Associated Banc-Corp, a Wisconsin corporation (the Company), does hereby certify that:
1. The accompanying Quarterly Report of the Company on Form 10-Q for the quarter ended September 30, 2012 (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Philip B. Flynn |
Philip B. Flynn |
Chief Executive Officer |
November 5, 2012 |
/s/ Christopher Del Moral-Niles |
Christopher Del Moral-Niles |
Chief Financial Officer |
November 5, 2012 |
Stock Based Compensation (Details 2) (Restricted Stock Award [Member], USD $)
|
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2012
|
Dec. 31, 2011
|
|
Restricted Stock Award [Member]
|
||
Summary of Restricted Stock Awards Activity (Excluding Salary Shares) | ||
Outstanding Shares, Beginning balance | 1,013,765 | 772,262 |
Granted, Shares | 500,127 | 593,437 |
Vested, Shares | (522,784) | (169,499) |
Forfeited, Shares | (53,264) | (182,435) |
Outstanding Shares, Ending balance | 937,844 | 1,013,765 |
Outstanding, Weighted Average Grant Date Fair Value, Beginning balance | $ 13.79 | $ 13.94 |
Granted, Weighted Average Grant Date Fair Value | $ 13.00 | $ 14.27 |
Vested, Weighted Average Grant Date Fair Value | $ 13.41 | $ 17.74 |
Forfeited, Weighted Average Grant Date Fair Value | $ 13.73 | $ 13.86 |
Outstanding Weighted Average Grant Date Fair Value, Ending balance | $ 13.59 | $ 13.79 |
Loans, Allowance for Loan Losses, and Credit Quality (Details) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Loan composition | ||
Commercial and industrial | $ 4,265,356 | $ 3,724,736 |
Commercial real estate - owner occupied | 1,197,517 | 1,086,829 |
Lease financing | 60,818 | 58,194 |
Commercial and business lending | 5,523,691 | 4,869,759 |
Commercial real estate - investor | 2,787,158 | 2,563,767 |
Real estate construction | 611,186 | 584,046 |
Commercial real estate lending | 3,398,344 | 3,147,813 |
Total commercial | 8,922,035 | 8,017,572 |
Home equity | 2,356,900 | 2,504,704 |
Installment | 482,451 | 557,782 |
Total retail | 2,839,351 | 3,062,486 |
Residential mortgage | 3,204,828 | 2,951,013 |
Total consumer | 6,044,179 | 6,013,499 |
Total loans | $ 14,966,214 | $ 14,031,071 |
Derivative and Hedging Activities (Details Textuals) (USD $)
|
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Dec. 31, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
Capital Market Fees [Member]
Interest Rate Related Instruments Customer and Mirror [Member]
|
Sep. 30, 2011
Capital Market Fees [Member]
Interest Rate Related Instruments Customer and Mirror [Member]
|
|
Derivative Instruments, Gain (Loss) [Line Items] | |||||
Gain (Loss) on free standing derivatives | $ 102,000 | $ (3,379,000) | |||
Interest rate swap maturity | 100,000,000 | 100,000,000 | |||
Derivative and Hedging Activities (Textuals) [Abstract] | |||||
Investment securities and cash equivalents pledged as collateral | 85,000,000 | 72,000,000 | |||
Deferred After Tax Loss | 1,000,000 | ||||
Covered call options outstanding | $ 0 |
Retirement Plans (Details) (USD $)
|
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Sep. 30, 2012
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Sep. 30, 2011
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Sep. 30, 2012
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Sep. 30, 2011
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Dec. 31, 2011
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Retirement Plans (Textuals) [Abstract] | |||||
Retirement eligible age for participation | 55 | 55 | |||
Contribution made by the Corporation to pension plan | $ 32,000,000 | ||||
Pension Plans, Defined Benefit [Member]
|
|||||
Net period benefit cost for the pension and postretirement plans | |||||
Service cost | 2,613,000 | 2,613,000 | 7,838,000 | 7,838,000 | 9,898,000 |
Interest cost | 1,613,000 | 1,589,000 | 4,838,000 | 4,769,000 | 6,414,000 |
Expected return on plan assets | (3,558,000) | (3,220,000) | (10,673,000) | (9,660,000) | (12,896,000) |
Amortization of prior service cost | 17,000 | 18,000 | 52,000 | 53,000 | 72,000 |
Amortization of actuarial loss | 640,000 | 451,000 | 1,920,000 | 1,354,000 | 2,024,000 |
Total net periodic benefit cost | 1,325,000 | 1,451,000 | 3,975,000 | 4,354,000 | 5,512,000 |
Other Postretirement Benefit Plans, Defined Benefit [Member]
|
|||||
Net period benefit cost for the pension and postretirement plans | |||||
Interest cost | 47,000 | 50,000 | 142,000 | 150,000 | 198,000 |
Amortization of prior service cost | 43,000 | 98,000 | 128,000 | 296,000 | 395,000 |
Total net periodic benefit cost | $ 90,000 | $ 148,000 | $ 270,000 | $ 446,000 | $ 593,000 |
Investment Securities (Details 5) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | 12 Months Ended | |
---|---|---|---|
Sep. 30, 2012
|
Dec. 31, 2011
|
Dec. 31, 2010
|
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Credit loss portion of other than temporary impairment | |||
Credit-related other-than-temporary impairment | $ (6,868) | $ (28,393) | $ (27,575) |
Credit losses on newly identified impairment | (818) | ||
Reduction due to credit impaired securities sold | 21,525 | ||
Collateralized Mortgage Backed Securities [Member]
|
|||
Credit loss portion of other than temporary impairment | |||
Credit-related other-than-temporary impairment | (532) | (17,558) | (17,556) |
Credit losses on newly identified impairment | (2) | ||
Reduction due to credit impaired securities sold | 17,026 | ||
Trust Preferred Debt Securities [Member]
|
|||
Credit loss portion of other than temporary impairment | |||
Credit-related other-than-temporary impairment | (6,336) | (10,835) | (10,019) |
Credit losses on newly identified impairment | (816) | ||
Reduction due to credit impaired securities sold | $ 4,499 |
Fair Value Measurements (Tables)
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Sep. 30, 2012
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Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) |
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Assets and Liabilities Measured on Nonrecurring Basis at Fair Value |
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Estimated fair values of financial instruments |
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Fair Value, Measurements, Recurring [Member]
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Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets and Liabilities Measured on Recurring Basis at Fair Value |
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Segment Reporting (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Segment Income Statement Data Abstract | ||||
Net interest income | $ 155,602 | $ 153,160 | $ 464,537 | $ 461,006 |
Noninterest income | 80,988 | 68,996 | 235,385 | 201,587 |
Total revenue | 236,590 | 222,156 | 699,922 | 662,593 |
Credit provision | 0 | 4,000 | 0 | 51,000 |
Noninterest expense | 169,703 | 159,480 | 505,495 | 478,196 |
Income before income taxes | 66,887 | 58,676 | 194,427 | 133,397 |
Income tax expense | 20,492 | 17,337 | 62,082 | 34,823 |
Net income | 46,395 | 41,339 | 132,345 | 98,574 |
Return on average allocated capital | 9.69% | 7.75% | 9.40% | 5.93% |
Segment Balance Sheet Data | ||||
Average earning assets | 19,659,796 | 19,530,007 | 19,473,207 | 19,420,572 |
Average loans | 14,916,793 | 13,376,928 | 14,611,065 | 13,021,134 |
Average deposits | 15,615,856 | 14,405,311 | 15,223,805 | 14,235,123 |
Average allocated capital | 1,850,610 | 1,723,954 | 1,826,270 | 1,692,991 |
Commercial Banking Segment [Member]
|
||||
Segment Income Statement Data Abstract | ||||
Net interest income | 72,201 | 64,914 | 211,855 | 190,510 |
Noninterest income | 23,669 | 20,147 | 65,060 | 68,085 |
Total revenue | 95,870 | 85,061 | 276,915 | 258,595 |
Credit provision | 11,942 | 10,062 | 34,251 | 29,537 |
Noninterest expense | 53,419 | 48,032 | 159,781 | 143,270 |
Income before income taxes | 30,509 | 26,967 | 82,883 | 85,788 |
Income tax expense | 10,678 | 9,438 | 29,009 | 30,026 |
Net income | 19,831 | 17,529 | 53,874 | 55,762 |
Return on average allocated capital | 10.24% | 9.63% | 9.48% | 10.22% |
Segment Balance Sheet Data | ||||
Average earning assets | 7,757,046 | 6,434,887 | 7,410,958 | 6,244,881 |
Average loans | 7,747,238 | 6,431,575 | 7,404,668 | 6,241,125 |
Average deposits | 4,639,340 | 3,731,983 | 4,422,944 | 3,429,213 |
Average allocated capital | 770,718 | 723,896 | 759,913 | 729,741 |
Consumer Banking Segment [Member]
|
||||
Segment Income Statement Data Abstract | ||||
Net interest income | 73,497 | 79,192 | 231,183 | 243,298 |
Noninterest income | 51,511 | 48,406 | 159,951 | 133,030 |
Total revenue | 125,008 | 127,598 | 391,134 | 376,328 |
Credit provision | 4,845 | 4,599 | 14,629 | 13,310 |
Noninterest expense | 105,181 | 110,417 | 317,994 | 327,109 |
Income before income taxes | 14,982 | 12,582 | 58,511 | 35,909 |
Income tax expense | 5,244 | 4,404 | 20,479 | 12,568 |
Net income | 9,738 | 8,178 | 38,032 | 23,341 |
Return on average allocated capital | 6.69% | 5.76% | 8.68% | 5.72% |
Segment Balance Sheet Data | ||||
Average earning assets | 7,147,934 | 6,918,760 | 7,181,048 | 6,758,489 |
Average loans | 7,147,934 | 6,918,760 | 7,181,048 | 6,758,489 |
Average deposits | 9,426,653 | 9,558,565 | 9,437,407 | 9,531,142 |
Average allocated capital | 579,108 | 555,499 | 585,906 | 545,580 |
Other Segment [Member]
|
||||
Segment Income Statement Data Abstract | ||||
Net interest income | 9,904 | 9,054 | 21,499 | 27,198 |
Noninterest income | 5,808 | 443 | 10,374 | 472 |
Total revenue | 15,712 | 9,497 | 31,873 | 27,670 |
Credit provision | (16,787) | (10,661) | (48,880) | 8,153 |
Noninterest expense | 11,103 | 1,031 | 27,720 | 7,817 |
Income before income taxes | 21,396 | 19,127 | 53,033 | 11,700 |
Income tax expense | 4,570 | 3,495 | 12,594 | (7,771) |
Net income | 16,826 | 15,632 | 40,439 | 19,471 |
Return on average allocated capital | 12.33% | 7.35% | 10.17% | (1.30%) |
Segment Balance Sheet Data | ||||
Average earning assets | 4,754,816 | 6,176,360 | 4,881,201 | 6,417,202 |
Average loans | 21,621 | 26,593 | 25,349 | 21,520 |
Average deposits | 1,549,863 | 1,114,763 | 1,363,454 | 1,274,768 |
Average allocated capital | $ 500,784 | $ 444,559 | $ 480,451 | $ 417,670 |
Fair Value Measurements (Details) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Investment securities available for sale: | ||
Total investment securities available for sale | $ 4,496,198 | $ 4,937,483 |
Trading Assets | 76,159 | 73,253 |
Fair Value, Inputs, Level 1 [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 3,929 | 12,701 |
Fair Value, Inputs, Level 2 [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 4,491,862 | 4,923,926 |
Fair Value, Inputs, Level 3 [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 407 | 856 |
Fair Value, Measurements, Recurring [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 4,496,198 | 4,937,483 |
Trading Assets | 98,757 | 80,647 |
Liabilities, Fair Value Disclosure [Abstract] | ||
Derivatives (other liabilities) | 96,060 | 89,591 |
Fair Value, Measurements, Recurring [Member] | US Treasury Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 1,005 | 1,001 |
Fair Value, Measurements, Recurring [Member] | Federal agency securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 6 | 24,049 |
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions (municipal securities) [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 827,171 | 847,246 |
Fair Value, Measurements, Recurring [Member] | Residential mortgage-related securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 3,490,520 | 3,785,590 |
Fair Value, Measurements, Recurring [Member] | Commercial Mortgage Backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 74,725 | 18,543 |
Fair Value, Measurements, Recurring [Member] | Asset-backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 187,732 | |
Fair Value, Measurements, Recurring [Member] | Other Debt And Other Equity Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 102,771 | 73,322 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 3,929 | 12,701 |
Trading Assets | 0 | 0 |
Liabilities, Fair Value Disclosure [Abstract] | ||
Derivatives (other liabilities) | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | US Treasury Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 1,005 | 1,001 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Federal agency securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 6 | 41 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Obligations of state and political subdivisions (municipal securities) [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Residential mortgage-related securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Commercial Mortgage Backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Asset-backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Other Debt And Other Equity Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 2,918 | 11,659 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 4,491,862 | 4,923,926 |
Trading Assets | 81,191 | 76,076 |
Liabilities, Fair Value Disclosure [Abstract] | ||
Derivatives (other liabilities) | 87,893 | 84,820 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | US Treasury Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Federal agency securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 24,008 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Obligations of state and political subdivisions (municipal securities) [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 827,171 | 847,246 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Residential mortgage-related securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 3,490,520 | 3,785,590 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Commercial Mortgage Backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 74,725 | 18,543 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Asset-backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 187,732 | |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Other Debt And Other Equity Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 99,446 | 60,807 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 407 | 856 |
Trading Assets | 17,566 | 4,571 |
Liabilities, Fair Value Disclosure [Abstract] | ||
Derivatives (other liabilities) | 8,167 | 4,771 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | US Treasury Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Federal agency securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Obligations of state and political subdivisions (municipal securities) [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Residential mortgage-related securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Commercial Mortgage Backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | 0 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Asset-backed Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | 0 | |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Other Debt And Other Equity Securities [Member]
|
||
Investment securities available for sale: | ||
Total investment securities available for sale | $ 407 | $ 856 |
Fair Value Measurements (Details Textuals) (USD $)
|
3 Months Ended | ||
---|---|---|---|
Sep. 30, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
|
Fair Value Measurements (Textuals) [Abstract] | |||
Other real estate owned measured at fair value | $ 34,000,000 | $ 54,000,000 | |
Write down of Other Real Estate Owned | 8,000,000 | 9,000,000 | 7,000,000 |
Notional amount of cash flow hedge interest rate swap agreements | 0 | 100,000,000 | |
Commitment on standby letters of credit | $ 300,000,000 | $ 300,000,000 | |
Weighted average constant prepayment rate | 24.40% | ||
Fair Value, Option, Quantitative Disclosures [Line Items] | |||
Closing ratio | 77.00% | ||
Weighted average discount rate | 9.70% | ||
MaximumMember
|
|||
Fair Value, Option, Quantitative Disclosures [Line Items] | |||
3 month LIBOR forward range | 3.07% | ||
Weighted average discount rate | 50.00% | ||
MinimumMember
|
|||
Fair Value, Option, Quantitative Disclosures [Line Items] | |||
3 month LIBOR forward range | 0.35% | ||
Weighted average discount rate | 0.00% |
Commitments, Off-Balance Sheet Arrangements and Contingent Liabilities (Details) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Commitments to Extend Credit [Member]
|
||||||||||
Summary of lending-related and other commitments | ||||||||||
Lending related commitments | $ 5,138,435 | [1],[2] | $ 4,561,210 | [1],[2] | ||||||
Commercial Letters Of Credit [Member]
|
||||||||||
Summary of lending-related and other commitments | ||||||||||
Lending related commitments | 67,153 | [1] | 47,699 | [1] | ||||||
Standby Letters of Credit [Member]
|
||||||||||
Summary of lending-related and other commitments | ||||||||||
Lending related commitments | $ 305,230 | [3] | $ 320,375 | [3] | ||||||
|
Stock-Based Compensation (Tables)
|
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
|
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Stock-Based Compensation [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value assumptions of stock options |
|
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Summary of Company's Stock Option Activities |
|
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Summary of Company's Nonvested Stock Option Activities |
|
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Summary of Restricted Stock Awards Activity (Excluding Salary Shares) |
|
Investment Securities (Details 1) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Investment securities held to maturity: | ||
Investment securities held to maturity at amortized cost | $ 21,852 | $ 0 |
Investment securities held to maturity, gross unrealized gains | 36 | |
Investment securities held to maturity, gross unrealized losses | (165) | |
Investment securities held to maturity, fair value | 21,723 | |
Obligations of state and political subdivisions (municipal securities) [Member]
|
||
Investment securities held to maturity: | ||
Investment securities held to maturity at amortized cost | 21,852 | |
Investment securities held to maturity, gross unrealized gains | 36 | |
Investment securities held to maturity, gross unrealized losses | (165) | |
Investment securities held to maturity, fair value | $ 21,723 |
Fair Value Measurement (Details 2) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
||||
---|---|---|---|---|---|---|
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | $ 162,818 | $ 255,201 | ||||
Mortgage servicing rights | 45,018 | 48,152 | ||||
Fair Value, Inputs, Level 1 [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 0 | 0 | ||||
Fair Value, Inputs, Level 2 [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 162,818 | 255,201 | ||||
Fair Value, Inputs, Level 3 [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 0 | 0 | ||||
Fair Value, Measurements, Nonrecurring [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 157,093 | 249,195 | ||||
Loans | 129,386 | [1] | 178,669 | [1] | ||
Mortgage servicing rights | 45,018 | 48,152 | ||||
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 1 [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 0 | 0 | ||||
Loans | 0 | [1] | 0 | [1] | ||
Mortgage servicing rights | 0 | 0 | ||||
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 2 [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 157,093 | 249,195 | ||||
Loans | 0 | [1] | 0 | [1] | ||
Mortgage servicing rights | 0 | 0 | ||||
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member]
|
||||||
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis | ||||||
Loans held for sale | 0 | 0 | ||||
Loans | 129,386 | [1] | 178,669 | [1] | ||
Mortgage servicing rights | $ 45,018 | $ 48,152 | ||||
|
Loans, Allowance for Loan Losses, and Credit Quality (Details 5) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Consumer Loans By Credit Quality Indicator [Abstract] | ||
Home equity | $ 2,356,900 | $ 2,504,704 |
Installment | 482,451 | 557,782 |
Total retail | 2,839,351 | 3,062,486 |
Residential mortgage | 3,204,828 | 2,951,013 |
Total consumer | 6,044,179 | 6,013,499 |
Performing Financing Receivable [Member]
|
||
Consumer Loans By Credit Quality Indicator [Abstract] | ||
Home equity | 2,290,800 | 2,431,207 |
Installment | 477,062 | 551,227 |
Total retail | 2,767,862 | 2,982,434 |
Residential mortgage | 3,108,808 | 2,849,082 |
Total consumer | 5,876,670 | 5,831,516 |
Thirty To Eighty Nine Days Past Due [Member]
|
||
Consumer Loans By Credit Quality Indicator [Abstract] | ||
Home equity | 14,823 | 12,189 |
Installment | 1,693 | 2,592 |
Total retail | 16,516 | 14,781 |
Residential mortgage | 6,878 | 7,224 |
Total consumer | 23,394 | 22,005 |
Potential Problem [Member]
|
||
Consumer Loans By Credit Quality Indicator [Abstract] | ||
Home equity | 3,343 | 5,451 |
Installment | 131 | 233 |
Total retail | 3,474 | 5,684 |
Residential mortgage | 8,197 | 13,037 |
Total consumer | 11,671 | 18,721 |
Impaired [Member]
|
||
Consumer Loans By Credit Quality Indicator [Abstract] | ||
Home equity | 47,934 | 55,857 |
Installment | 3,565 | 3,730 |
Total retail | 51,499 | 59,587 |
Residential mortgage | 80,945 | 81,670 |
Total consumer | $ 132,444 | $ 141,257 |
Derivative And Hedging Activities (Details 1) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | |
---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Gains and losses recognized on the Corporation's derivative instruments designated as cash flow hedges | ||
Amount of Gain /(Loss) Recognized in OCI on Derivatives (Effective Portion) | $ 6 | $ (528) |
Amount of (Gain)/ Loss Reclassified from AOCI into Income (Effective Portion) | 1,954 | 3,969 |
Amount of Gain /(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) | $ 33 | $ 18 |
Goodwill and Other Intangible Assets (Details 2) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
---|---|
Core Deposits Member
|
|
Estimated future amortization expense | |
Three months ending December 31, 2012 | $ 800 |
Year ending December 31, 2013 | 3,100 |
Year ending December 31, 2014 | 2,900 |
Year ending December 31, 2015 | 1,400 |
Year ending December 31, 2016 | 300 |
Year ending December 31, 2017 | 100 |
Other Intangible Assets [Member]
|
|
Estimated future amortization expense | |
Three months ending December 31, 2012 | 200 |
Year ending December 31, 2013 | 900 |
Year ending December 31, 2014 | 900 |
Year ending December 31, 2015 | 800 |
Year ending December 31, 2016 | 800 |
Year ending December 31, 2017 | 800 |
Mortgage Service Rights [Member]
|
|
Estimated future amortization expense | |
Three months ending December 31, 2012 | 4,500 |
Year ending December 31, 2013 | 14,200 |
Year ending December 31, 2014 | 10,200 |
Year ending December 31, 2015 | 7,700 |
Year ending December 31, 2016 | 5,900 |
Year ending December 31, 2017 | $ 4,500 |
Investment Securities (Details 6) (USD $)
|
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Schedule of Available-for-sale Securities [Line Items] | ||
Unrealized loss position on other securities | $ (667,000) | $ (3,663,000) |
Investment Securities (Textuals) [Abstract] | ||
Federal Home Loan Bank Stock | 96,000,000 | 121,000,000 |
Federal Reserve Bank Stock | 70,000,000 | 70,000,000 |
Change in Federal Home Loan Bank Stock | (25,000,000) | |
Obligations of state and political subdivisions (municipal securities) [Member]
|
||
Schedule of Available-for-sale Securities [Line Items] | ||
Unrealized loss position on other securities | (105,000) | (28,000) |
Residential mortgage-related securities [Member]
|
||
Schedule of Available-for-sale Securities [Line Items] | ||
Unrealized loss position on other securities | (485,000) | (1,463,000) |
Asset-backed Securities [Member]
|
||
Schedule of Available-for-sale Securities [Line Items] | ||
Unrealized loss position on other securities | $ 0 | $ (707,000) |
Basis of Presenation
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Basis of Presentation [Abstract] | |
Basis of Presentation | 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 and comprehensive income, 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.
|
Goodwill and Other Intangible Assets (Details Textuals) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Goodwill [Line Items] | ||
Goodwill | $ 929,168 | $ 929,168 |