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, 2013
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.) |
433 Main Street, Green Bay, Wisconsin |
54301 | |
(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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrants common stock, par value $0.01 per share, at October 22, 2013, was 162,529,064.
ASSOCIATED BANC-CORP
2
PART I FINANCIAL INFORMATION
ASSOCIATED BANC-CORP
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | (Audited) | |||||||
(In Thousands, except share and per share data) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 526,009 | $ | 563,304 | ||||
Interest-bearing deposits in other financial institutions |
277,761 | 147,434 | ||||||
Federal funds sold and securities purchased under agreements to resell |
25,400 | 27,135 | ||||||
Investment securities held to maturity, at amortized cost |
125,095 | 39,877 | ||||||
Investment securities available for sale, at fair value |
4,840,035 | 4,926,758 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stocks, at cost |
181,129 | 166,774 | ||||||
Loans held for sale |
102,052 | 261,410 | ||||||
Loans |
15,585,854 | 15,411,022 | ||||||
Allowance for loan losses |
(271,724 | ) | (297,409 | ) | ||||
|
|
|
|
|||||
Loans, net |
15,314,130 | 15,113,613 | ||||||
Premises and equipment, net |
265,636 | 253,958 | ||||||
Goodwill |
929,168 | 929,168 | ||||||
Other intangible assets, net |
75,730 | 61,176 | ||||||
Trading assets |
49,402 | 70,711 | ||||||
Other assets |
977,128 | 926,417 | ||||||
|
|
|
|
|||||
Total assets |
$ | 23,688,675 | $ | 23,487,735 | ||||
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|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Noninterest-bearing demand deposits |
$ | 4,453,663 | $ | 4,759,556 | ||||
Interest-bearing deposits |
13,884,245 | 12,180,309 | ||||||
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|
|
|
|||||
Total deposits |
18,337,908 | 16,939,865 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
580,479 | 750,455 | ||||||
Other short-term funding |
1,046,401 | 1,576,484 | ||||||
Long-term funding |
614,568 | 1,015,346 | ||||||
Trading liabilities |
52,430 | 76,343 | ||||||
Accrued expenses and other liabilities |
184,607 | 192,843 | ||||||
|
|
|
|
|||||
Total liabilities |
20,816,393 | 20,551,336 | ||||||
Stockholders equity |
||||||||
Preferred equity |
62,737 | 63,272 | ||||||
Common stock |
1,750 | 1,750 | ||||||
Surplus |
1,614,516 | 1,602,136 | ||||||
Retained earnings |
1,361,498 | 1,281,811 | ||||||
Accumulated other comprehensive income (loss) |
(37,120 | ) | 48,603 | |||||
Treasury stock, at cost |
(131,099 | ) | (61,173 | ) | ||||
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|
|
|||||
Total stockholders equity |
2,872,282 | 2,936,399 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 23,688,675 | $ | 23,487,735 | ||||
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|
|
|
|||||
Preferred shares issued |
64,450 | 65,000 | ||||||
Preferred shares authorized (par value $1.00 per share) |
750,000 | 750,000 | ||||||
Common shares issued |
175,012,686 | 175,012,686 | ||||||
Common shares authorized (par value $0.01 per share) |
250,000,000 | 250,000,000 | ||||||
Treasury shares of common stock |
9,175,725 | 4,773,146 |
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, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(In Thousands, except per share data) | ||||||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | 146,219 | $ | 149,647 | $ | 438,642 | $ | 445,858 | ||||||||
Interest and dividends on investment securities |
||||||||||||||||
Taxable |
21,544 | 20,548 | 64,603 | 66,577 | ||||||||||||
Tax exempt |
6,711 | 7,127 | 20,461 | 21,536 | ||||||||||||
Other interest |
1,260 | 1,334 | 3,740 | 3,843 | ||||||||||||
|
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|
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|
|||||||||
Total interest income |
175,734 | 178,656 | 527,446 | 537,814 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on deposits |
7,617 | 9,751 | 23,927 | 32,340 | ||||||||||||
Interest on Federal funds purchased and securities sold under agreements to repurchase |
308 | 750 | 1,051 | 2,129 | ||||||||||||
Interest on other short-term funding |
434 | 815 | 1,291 | 3,068 | ||||||||||||
Interest on long-term funding |
6,866 | 11,738 | 22,833 | 35,740 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
15,225 | 23,054 | 49,102 | 73,277 | ||||||||||||
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|
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|
|
|||||||||
NET INTEREST INCOME |
160,509 | 155,602 | 478,344 | 464,537 | ||||||||||||
Provision for loan losses |
| | 8,000 | | ||||||||||||
|
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|
|
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|
|||||||||
Net interest income after provision for loan losses |
160,509 | 155,602 | 470,344 | 464,537 | ||||||||||||
NONINTEREST INCOME |
||||||||||||||||
Trust service fees |
11,380 | 10,396 | 33,695 | 30,308 | ||||||||||||
Service charges on deposit accounts |
18,407 | 17,290 | 52,679 | 52,100 | ||||||||||||
Card-based and other nondeposit fees |
12,688 | 12,209 | 37,229 | 35,172 | ||||||||||||
Insurance commissions |
11,356 | 11,650 | 32,750 | 36,152 | ||||||||||||
Brokerage and annuity commissions |
3,792 | 3,632 | 10,996 | 11,965 | ||||||||||||
Mortgage banking, net |
3,542 | 15,581 | 40,570 | 49,970 | ||||||||||||
Capital market fees, net |
2,652 | 3,609 | 10,309 | 9,998 | ||||||||||||
Bank owned life insurance income |
2,817 | 3,290 | 9,068 | 10,746 | ||||||||||||
Asset gains (losses), net |
1,934 | (3,309 | ) | 2,726 | (11,887 | ) | ||||||||||
Investment securities gains, net: |
||||||||||||||||
Realized gains, net |
248 | 3,506 | 582 | 4,109 | ||||||||||||
Other-than-temporary impairments |
| (59 | ) | | (59 | ) | ||||||||||
Less: Non-credit portion recognized in other comprehensive income (before taxes) |
| 59 | | 59 | ||||||||||||
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|
|
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|
|
|
|||||||||
Total investment securities gains, net |
248 | 3,506 | 582 | 4,109 | ||||||||||||
Other |
2,100 | 3,134 | 6,622 | 6,752 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Total noninterest income |
70,916 | 80,988 | 237,226 | 235,385 | ||||||||||||
NONINTEREST EXPENSE |
||||||||||||||||
Personnel expense |
98,102 | 95,231 | 295,800 | 283,331 | ||||||||||||
Occupancy |
14,758 | 14,334 | 44,725 | 43,521 | ||||||||||||
Equipment |
6,213 | 5,935 | 18,842 | 17,122 | ||||||||||||
Data processing |
12,323 | 11,022 | 36,482 | 31,842 | ||||||||||||
Business development and advertising |
5,947 | 5,059 | 15,512 | 15,908 | ||||||||||||
Other intangible asset amortization |
1,010 | 1,048 | 3,032 | 3,146 | ||||||||||||
Loan expense |
3,157 | 3,297 | 9,485 | 9,155 | ||||||||||||
Legal and professional fees |
3,482 | 7,686 | 14,310 | 23,058 | ||||||||||||
Losses other than loans |
(1,400 | ) | 3,577 | 83 | 9,187 | |||||||||||
Foreclosure / OREO expense |
2,515 | 4,071 | 7,239 | 11,776 | ||||||||||||
FDIC expense |
4,755 | 5,017 | 14,582 | 14,665 | ||||||||||||
Other |
13,509 | 13,426 | 41,190 | 42,784 | ||||||||||||
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|
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Total noninterest expense |
164,371 | 169,703 | 501,282 | 505,495 | ||||||||||||
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|
|||||||||
Income before income taxes |
67,054 | 66,887 | 206,288 | 194,427 | ||||||||||||
Income tax expense |
21,396 | 20,492 | 65,354 | 62,082 | ||||||||||||
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Net income |
45,658 | 46,395 | 140,934 | 132,345 | ||||||||||||
Preferred stock dividends |
1,285 | 1,300 | 3,885 | 3,900 | ||||||||||||
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Net income available to common equity |
$ | 44,373 | $ | 45,095 | $ | 137,049 | $ | 128,445 | ||||||||
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Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.27 | $ | 0.26 | $ | 0.82 | $ | 0.74 | ||||||||
Diluted |
$ | 0.27 | $ | 0.26 | $ | 0.82 | $ | 0.74 | ||||||||
Average common shares outstanding: |
||||||||||||||||
Basic |
164,954 | 171,650 | 166,586 | 172,774 | ||||||||||||
Diluted |
165,443 | 171,780 | 166,760 | 172,848 |
See accompanying notes to consolidated financial statements.
4
ITEM 1: Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Net income |
$ | 45,658 | $ | 46,395 | $ | 140,934 | $ | 132,345 | ||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
Net unrealized gains (losses) |
(20,558 | ) | 3,479 | (142,318 | ) | 2,870 | ||||||||||
Reclassification adjustment for net gains realized in net income |
(248 | ) | (3,506 | ) | (582 | ) | (4,109 | ) | ||||||||
Income tax benefit |
8,031 | 11 | 55,169 | 483 | ||||||||||||
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|
|||||||||
Other comprehensive loss on investment securities available for sale |
(12,775 | ) | (16 | ) | (87,731 | ) | (756 | ) | ||||||||
Defined benefit pension and postretirement obligations: |
||||||||||||||||
Amortization of prior service cost |
17 | 60 | 52 | 180 | ||||||||||||
Amortization of actuarial losses |
1,073 | 640 | 3,218 | 1,920 | ||||||||||||
Income tax expense |
(420 | ) | (273 | ) | (1,262 | ) | (819 | ) | ||||||||
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|
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Other comprehensive income on pension and postretirement obligations |
670 | 427 | 2,008 | 1,281 | ||||||||||||
Derivatives used in cash flow hedging relationships: |
||||||||||||||||
Net unrealized gains |
| 20 | | 6 | ||||||||||||
Reclassification adjustment for net losses and interest expense for interest differential on derivatives realized in net income |
| 496 | | 1,954 | ||||||||||||
Income tax expense |
| (203 | ) | | (784 | ) | ||||||||||
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Other comprehensive income on cash flow hedging relationships |
| 313 | | 1,176 | ||||||||||||
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Total other comprehensive income (loss) |
(12,105 | ) | 724 | (85,723 | ) | 1,701 | ||||||||||
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|
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Comprehensive income |
$ | 33,553 | $ | 47,119 | $ | 55,211 | $ | 134,046 | ||||||||
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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 (Loss) |
Treasury
Stock |
Total | ||||||||||||||||||||||
($ in Thousands, except per share data) | ||||||||||||||||||||||||||||
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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Balance, December 31, 2012 |
$ | 63,272 | $ | 1,750 | $ | 1,602,136 | $ | 1,281,811 | $ | 48,603 | $ | (61,173 | ) | $ | 2,936,399 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
| | | 140,934 | | | 140,934 | |||||||||||||||||||||
Other comprehensive loss |
| | | | (85,723 | ) | | (85,723 | ) | |||||||||||||||||||
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|
|||||||||||||||||||||||||||
Comprehensive income |
55,211 | |||||||||||||||||||||||||||
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|
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Common stock issued: |
||||||||||||||||||||||||||||
Stock-based compensation plans, net |
| | 564 | (17,057 | ) | | 23,368 | 6,875 | ||||||||||||||||||||
Purchase of treasury stock |
| | | | | (93,294 | ) | (93,294 | ) | |||||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||
Common stock, $0.24 per share |
| | | (40,223 | ) | | | (40,223 | ) | |||||||||||||||||||
Preferred stock |
| | | (3,885 | ) | | | (3,885 | ) | |||||||||||||||||||
Purchase of preferred stock |
(535 | ) | (82 | ) | (617 | ) | ||||||||||||||||||||||
Stock-based compensation expense, net |
| | 11,368 | | | | 11,368 | |||||||||||||||||||||
Tax benefit of stock options |
| | 448 | | | | 448 | |||||||||||||||||||||
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Balance, September 30, 2013 |
$ | 62,737 | $ | 1,750 | $ | 1,614,516 | $ | 1,361,498 | $ | (37,120 | ) | $ | (131,099 | ) | $ | 2,872,282 | ||||||||||||
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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, | ||||||||
2013 | 2012 | |||||||
($ in Thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 140,934 | $ | 132,345 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
8,000 | | ||||||
Depreciation and amortization |
36,738 | 31,737 | ||||||
(Recovery of) addition to valuation allowance on mortgage servicing rights, net |
(14,097 | ) | 4,477 | |||||
Amortization of mortgage servicing rights |
12,479 | 17,326 | ||||||
Amortization of other intangible assets |
3,032 | 3,146 | ||||||
Amortization and accretion on earning assets, funding, and other, net |
36,973 | 45,400 | ||||||
Tax impact of stock based compensation |
448 | 5 | ||||||
Gain on sales of investment securities, net and impairment write-downs |
(582 | ) | (4,109 | ) | ||||
Gain (loss) on sales of assets and impairment write-downs, net |
(2,726 | ) | 11,887 | |||||
Gain on mortgage banking activities, net |
(31,539 | ) | (46,655 | ) | ||||
Mortgage loans originated and acquired for sale |
(1,977,357 | ) | (2,016,963 | ) | ||||
Proceeds from sales of mortgage loans held for sale |
2,152,286 | 2,137,051 | ||||||
Pension Contributions |
(28,000 | ) | (32,000 | ) | ||||
Increase in interest receivable |
739 | 3,336 | ||||||
Decrease in interest payable |
(8,293 | ) | (11,446 | ) | ||||
Net change in other assets and other liabilities |
42,521 | 42,441 | ||||||
|
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|
|||||
Net cash provided by operating activities |
371,556 | 317,978 | ||||||
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|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Net increase in loans |
(233,755 | ) | (1,151,440 | ) | ||||
Purchases of: |
||||||||
Investment securities |
(1,390,729 | ) | (1,175,405 | ) | ||||
Premises, equipment, and software, net of disposals |
(49,139 | ) | (58,865 | ) | ||||
FHLB stock |
(28,399 | ) | | |||||
Other assets |
(1,401 | ) | (3,846 | ) | ||||
Proceeds from: |
||||||||
Sales of investment securities |
135,809 | 286,336 | ||||||
Sale of FHLB stock |
14,399 | 25,381 | ||||||
Prepayments, calls, and maturities of investment securities |
1,082,290 | 1,271,031 | ||||||
Sales, prepayments, calls, and maturities of other assets |
30,857 | 28,366 | ||||||
Sales of loans originated for investment |
| 124,903 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(440,068 | ) | (653,539 | ) | ||||
|
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|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase in deposits |
1,398,043 | 1,479,782 | ||||||
Net decrease in deposits due to branch sales |
| (113,622 | ) | |||||
Net decrease in short-term funding |
(700,059 | ) | (761,200 | ) | ||||
Repayment of long-term funding |
(400,156 | ) | (25,979 | ) | ||||
Proceeds from issuance of long-term funding |
| 154,738 | ||||||
Purchase of preferred stock |
(617 | ) | | |||||
Cash dividends on common stock |
(40,223 | ) | (26,009 | ) | ||||
Cash dividends on preferred stock |
(3,885 | ) | (3,900 | ) | ||||
Purchase of treasury stock |
(93,294 | ) | (31,552 | ) | ||||
|
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|
|||||
Net cash provided by financing activities |
159,809 | 672,258 | ||||||
|
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|
|||||
Net increase in cash and cash equivalents |
91,297 | 336,697 | ||||||
Cash and cash equivalents at beginning of period |
737,873 | 616,595 | ||||||
|
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|
|||||
Cash and cash equivalents at end of period |
$ | 829,170 | $ | 953,292 | ||||
|
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Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 57,310 | $ | 84,699 | ||||
Cash paid (received) for income taxes |
29,700 | (32,050 | ) | |||||
Loans and bank premises transferred to other real estate owned |
21,962 | 29,957 | ||||||
Capitalized mortgage servicing rights |
15,968 | 18,669 | ||||||
|
|
|
|
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 2012 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 July 2013, the FASB issued an amendment to permit an entity to designate the Fed Funds Effective Swap Rate, also referred to as the overnight index swap rate (OIS), as a benchmark interest rate. The OIS will be included as a U.S. benchmark interest rate for hedge accounting purposes. Prior to this amendment, only interest rates on direct treasury obligations of the U.S. government and the London Interbank Offered Rate (LIBOR) swap rate were considered benchmark interest rates. In addition, the amendment removes the restriction on using different benchmark rates for similar hedges. This amendment can be applied on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Corporation adopted the accounting standard during the third quarter of 2013, as required, with no material impact on its results of operations, financial position, or liquidity.
In February 2013, the FASB issued an amendment requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. These disclosures may be presented on the face of the income statement or in the notes to consolidated financial statements, depending upon the specific accounting guidance for the reclassification out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012 with early adoption permitted. The Corporation adopted the accounting standard during the first quarter of 2013, as required, with no material impact on its results of operations, financial position, or liquidity. See Note 16 for the required new disclosures on accumulated other comprehensive income.
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 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. The Corporation adopted the accounting standard during the first quarter of 2013, as required, with no material impact on its results of operations, financial position, or liquidity.
8
In December 2011, the FASB issued amendments to require an entity to disclose information about offsetting and related arrangements to enable users of its 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 adopted the accounting standard during the first quarter of 2013, as required, with no material impact on its results of operations, financial position, or liquidity. See Note 11 for the required new disclosures on balance sheet offsetting.
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, or liquidity. See Note 7 for required disclosures on goodwill.
9
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 common shares outstanding 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 | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(In Thousands, except per share data) | ||||||||||||||||
Net income |
$ | 45,658 | $ | 46,395 | $ | 140,934 | $ | 132,345 | ||||||||
Preferred stock dividends |
1,285 | 1,300 | 3,885 | 3,900 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common equity |
$ | 44,373 | $ | 45,095 | $ | 137,049 | $ | 128,445 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Common shareholder dividends |
(13,167 | ) | (8,594 | ) | (39,849 | ) | (25,893 | ) | ||||||||
Unvested share-based payment awards |
(100 | ) | (36 | ) | (374 | ) | (116 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Undistributed earnings |
$ | 31,106 | $ | 36,465 | $ | 96,826 | $ | 102,436 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Undistributed earnings allocated to common shareholders |
30,873 | 36,311 | 96,112 | 101,975 | ||||||||||||
Undistributed earnings allocated to unvested share-based payment awards |
233 | 154 | 714 | 461 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Undistributed earnings |
$ | 31,106 | $ | 36,465 | $ | 96,826 | $ | 102,436 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic |
||||||||||||||||
Distributed earnings to common shareholders |
$ | 13,167 | $ | 8,594 | $ | 39,849 | $ | 25,893 | ||||||||
Undistributed earnings allocated to common shareholders |
30,873 | 36,311 | 96,112 | 101,975 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total common shareholders earnings, basic |
$ | 44,040 | $ | 44,905 | $ | 135,961 | $ | 127,868 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
||||||||||||||||
Distributed earnings to common shareholders |
$ | 13,167 | $ | 8,594 | $ | 39,849 | $ | 25,893 | ||||||||
Undistributed earnings allocated to common shareholders |
30,873 | 36,311 | 96,112 | 101,975 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total common shareholders earnings, diluted |
$ | 44,040 | $ | 44,905 | $ | 135,961 | $ | 127,868 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares outstanding |
164,954 | 171,650 | 166,586 | 172,774 | ||||||||||||
Effect of dilutive common stock awards |
489 | 130 | 174 | 74 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted weighted average common shares outstanding |
165,443 | 171,780 | 166,760 | 172,848 | ||||||||||||
Basic earnings per common share |
$ | 0.27 | $ | 0.26 | $ | 0.82 | $ | 0.74 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per common share |
$ | 0.27 | $ | 0.26 | $ | 0.82 | $ | 0.74 | ||||||||
|
|
|
|
|
|
|
|
Options to purchase approximately 3 million shares were outstanding for both the three and nine months ended September 30, 2013, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive. 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.
10
NOTE 4: Stock-Based Compensation
At September 30, 2013, the Corporation had one stock-based compensation plan. All stock awards granted under this plan have an exercise price that is equal to the closing price of the Corporations stock on the date the awards were granted.
The Corporation may issue restricted common stock and restricted common stock units to certain key employees (collectively referred to as restricted stock awards). The shares of restricted stock are restricted as to transfer, but are not restricted as to dividend payment or voting rights. Restricted stock units receive dividend equivalents but do not have voting rights. The transfer restrictions lapse over one, two, three, or four years, depending upon whether the awards are service-based or performance-based. Service-based awards are contingent upon continued employment or meeting the requirements for retirement, and performance-based awards are based on earnings per share performance goals and continued employment or meeting the requirements for retirement.
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 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. 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 option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical 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 2013 and full year 2012.
2013 | 2012 | |||||||
Dividend yield |
2.00 | % | 2.00 | % | ||||
Risk-free interest rate |
0.99 | % | 1.20 | % | ||||
Weighted average expected volatility |
34.35 | % | 48.94 | % | ||||
Weighted average expected life |
6 years | 6 years | ||||||
Weighted average per share fair value of options |
$ | 3.80 | $ | 5.03 |
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.
A summary of the Corporations stock option activity for the year ended December 31, 2012 and for the nine months ended September 30, 2013, is presented below.
Weighted Average | Aggregate Intrinsic | |||||||||||||||
Weighted Average | Remaining | Value | ||||||||||||||
Stock Options |
Shares | Exercise Price | Contractual Term | (000s) | ||||||||||||
Outstanding at December 31, 2011 |
7,055,274 | $ | 21.99 | |||||||||||||
Granted |
3,060,519 | 12.97 | ||||||||||||||
Exercised |
(11,120 | ) | 13.16 | |||||||||||||
Forfeited or expired |
(1,464,115 | ) | 21.56 | |||||||||||||
|
|
|
|
|||||||||||||
Outstanding at December 31, 2012 |
8,640,558 | $ | 18.88 | 6.40 | $ | 570 | ||||||||||
|
|
|
|
|||||||||||||
Options exercisable at December 31, 2012 |
4,603,963 | $ | 23.80 | 4.37 | 43 | |||||||||||
|
|
|
|
|||||||||||||
Outstanding at December 31, 2012 |
8,640,558 | $ | 18.88 | |||||||||||||
Granted |
1,020,979 | 14.02 | ||||||||||||||
Exercised |
(461,840 | ) | 13.42 | |||||||||||||
Forfeited or expired |
(838,213 | ) | 21.92 | |||||||||||||
|
|
|
|
|||||||||||||
Outstanding at September 30, 2013 |
8,361,484 | $ | 18.28 | 6.31 | $ | 11,236 | ||||||||||
|
|
|
|
|||||||||||||
Options exercisable at September 30, 2013 |
5,139,583 | $ | 21.30 | 4.92 | 4,690 | |||||||||||
|
|
|
|
11
The following table summarizes information about the Corporations nonvested stock option activity for the year ended December 31, 2012, and for the nine months ended September 30, 2013.
Weighted Average | ||||||||
Stock Options |
Shares | Grant Date Fair Value | ||||||
Nonvested at December 31, 2011 |
2,431,339 | $ | 5.11 | |||||
Granted |
3,060,519 | 5.03 | ||||||
Vested |
(1,097,571 | ) | 4.88 | |||||
Forfeited |
(357,692 | ) | 5.12 | |||||
|
|
|||||||
Nonvested at December 31, 2012 |
4,036,595 | $ | 5.11 | |||||
|
|
|||||||
Granted |
1,020,979 | 3.80 | ||||||
Vested |
(1,649,614 | ) | 5.12 | |||||
Forfeited |
(186,059 | ) | 5.18 | |||||
|
|
|||||||
Nonvested at September 30, 2013 |
3,221,901 | $ | 4.69 | |||||
|
|
For the nine months ended September 30, 2013 the intrinsic value of stock options exercised was $1 million. For the year ended December 31, 2012, 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 $8 million for the first nine months of 2013 and $5 million for the year ended December 31, 2012. For the nine months ended September 30, 2013 and 2012, the Corporation recognized compensation expense of $6 million and $7 million, respectively, for the vesting of stock options. For the full year 2012, the Corporation recognized compensation expense of $9 million for the vesting of stock options. At September 30, 2013, the Corporation had $10 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 2015.
The following table summarizes information about the Corporations restricted stock awards activity for the year ended December 31, 2012, and for the nine months ended September 30, 2013.
Weighted Average | ||||||||
Restricted Stock |
Shares | Grant Date Fair Value | ||||||
Outstanding at December 31, 2011 |
1,013,765 | $ | 13.79 | |||||
Granted |
506,258 | 13.00 | ||||||
Vested |
(533,014 | ) | 13.38 | |||||
Forfeited |
(54,584 | ) | 13.73 | |||||
|
|
|||||||
Outstanding at December 31, 2012 |
932,425 | $ | 13.60 | |||||
|
|
|||||||
Granted |
1,254,648 | 14.05 | ||||||
Vested |
(615,968 | ) | 13.70 | |||||
Forfeited |
(40,301 | ) | 13.97 | |||||
|
|
|||||||
Outstanding at September 30, 2013 |
1,530,804 | $ | 13.92 | |||||
|
|
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 2013 and 2012 to executive officers will vest ratably over a three year period. Restricted stock awards granted to non-executives during 2013 will vest ratably over a four year period, while restricted stock awards granted to non-executives during 2012 will vest ratably over a three year period. Expense for restricted stock awards of approximately $6 million and $5 million was recognized for the nine months ended September 30, 2013 and 2012, respectively. The Corporation recognized approximately $7 million of expense for restricted stock awards for the full year 2012. The Corporation had $15 million of unrecognized compensation costs related to restricted stock awards at September 30, 2013 that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2015.
12
The Corporation issues shares from treasury, when available, or new shares upon the exercise of stock options or the granting of restricted stock awards. The Board of Directors has authorized management to repurchase shares of the Corporations common stock each quarter in the market, to be made available for issuance in connection with the Corporations employee incentive plans and for other corporate purposes. The repurchase of shares will be based on market and investment opportunities, capital levels, growth prospects, and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.
NOTE 5: Investment Securities
The amortized cost and fair values of investment securities available for sale and held to maturity were as follows.
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | ||||||||||||||
September 30, 2013: |
cost | gains | losses | Fair value | ||||||||||||
($ in Thousands) | ||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 1,002 | $ | 1 | $ | | $ | 1,003 | ||||||||
Obligations of state and political subdivisions (municipal securities) |
678,130 | 25,747 | (1,150 | ) | 702,727 | |||||||||||
Residential mortgage-related securities: |
||||||||||||||||
Government-sponsored enterprise (GSE) |
3,631,288 | 64,987 | (79,195 | ) | 3,617,080 | |||||||||||
Private-label |
3,175 | 20 | (36 | ) | 3,159 | |||||||||||
GSE commercial mortgage-related securities |
444,534 | 1,611 | (17,037 | ) | 429,108 | |||||||||||
Asset-backed securities (1) |
24,913 | 11 | | 24,924 | ||||||||||||
Other securities (debt and equity) |
61,113 | 993 | (72 | ) | 62,034 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available for sale |
$ | 4,844,155 | $ | 93,370 | $ | (97,490 | ) | $ | 4,840,035 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Investment securities held to maturity: |
||||||||||||||||
Obligations of state and political subdivisions (municipal securities) |
$ | 125,095 | $ | 645 | $ | (4,251 | ) | $ | 121,489 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities held to maturity |
$ | 125,095 | $ | 645 | $ | (4,251 | ) | $ | 121,489 | |||||||
|
|
|
|
|
|
|
|
(1) | The asset-backed securities position is largely comprised of senior, floating rate, tranches of student loan securities issued by SLM Corp and guaranteed under the Federal Family Education Loan Program. |
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | ||||||||||||||
December 31, 2012: |
cost | gains | losses | Fair value | ||||||||||||
($ in Thousands) | ||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 1,003 | $ | 1 | $ | | $ | 1,004 | ||||||||
Obligations of state and political subdivisions (municipal securities) |
755,644 | 45,599 | (55 | ) | 801,188 | |||||||||||
Residential mortgage-related securities: |
||||||||||||||||
GSE |
3,708,287 | 93,595 | (3,727 | ) | 3,798,155 | |||||||||||
Private-label |
6,002 | 147 | | 6,149 | ||||||||||||
GSE commercial mortgage-related securities |
226,420 | 2,809 | (1,063 | ) | 228,166 | |||||||||||
Other securities (debt and equity) |
90,622 | 1,549 | (75 | ) | 92,096 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available for sale |
$ | 4,787,978 | $ | 143,700 | $ | (4,920 | ) | $ | 4,926,758 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Investment securities held to maturity: |
||||||||||||||||
Obligations of state and political subdivisions (municipal securities) |
$ | 39,877 | $ | 98 | $ | (296 | ) | $ | 39,679 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities held to maturity |
$ | 39,877 | $ | 98 | $ | (296 | ) | $ | 39,679 | |||||||
|
|
|
|
|
|
|
|
13
The amortized cost and fair values of investment securities available for sale and held to maturity at September 30, 2013, 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.
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, 2013.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||
Number of | Unrealized | Fair | Number of | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||||||||
September 30, 2013: |
Securities | Losses | Value | Securities | Losses | Value | Losses | Value | ||||||||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||||||||||
Investment securities available for sale: |
||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions (municipal securities) |
104 | $ | (1,139 | ) | $ | 41,004 | 1 | $ | (11 | ) | $ | 348 | $ | (1,150 | ) | $ | 41,352 | |||||||||||||||
Residential mortgage-related securities: |
||||||||||||||||||||||||||||||||
GSE |
88 | (73,511 | ) | 1,769,200 | 3 | (5,684 | ) | 89,503 | (79,195 | ) | 1,858,703 | |||||||||||||||||||||
Private-label |
2 | (36 | ) | 2,129 | 1 | | 38 | (36 | ) | 2,167 | ||||||||||||||||||||||
GSE commercial mortgage-related securities |
15 | (17,037 | ) | 408,495 | | | | (17,037 | ) | 408,495 | ||||||||||||||||||||||
Other debt securities |
5 | (32 | ) | 6,463 | 1 | (40 | ) | 146 | (72 | ) | 6,609 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | (91,755 | ) | $ | 2,227,291 | $ | (5,735 | ) | $ | 90,035 | $ | (97,490 | ) | $ | 2,317,326 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Investment securities held to maturity: |
||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions (municipal securities) |
184 | $ | (4,169 | ) | $ | 79,830 | 3 | $ | (82 | ) | $ | 1,029 | $ | (4,251 | ) | $ | 80,859 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | (4,169 | ) | $ | 79,830 | $ | (82 | ) | $ | 1,029 | $ | (4,251 | ) | $ | 80,859 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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
14
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, 2013 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 private-label 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). The unrealized losses reported for commercial mortgage-related securities relate to government agency mortgage-related securities. At September 30, 2013, the unrealized loss position of 12 months or more 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 2012 and the nine months ended September 30, 2013, respectively.
Private-label
Mortgage- Related Securities |
Trust Preferred
Debt Securities |
Total | ||||||||||
($ in Thousands) | ||||||||||||
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 | |||||||||
|
|
|
|
|
|
|||||||
Balance of credit-related other-than-temporary impairment at December 31, 2012 |
$ | (532 | ) | $ | (6,336 | ) | $ | (6,868 | ) | |||
Reduction due to credit impaired securities sold |
532 | | 532 | |||||||||
|
|
|
|
|
|
|||||||
Balance of credit-related other-than-temporary impairment at September 30, 2013 |
$ | | $ | (6,336 | ) | $ | (6,336 | ) | ||||
|
|
|
|
|
|
15
For comparative purposes, 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 December 31, 2012.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||
December 31, 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: |
||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions (municipal securities) |
15 | $ | (42 | ) | $ | 5,065 | 1 | $ | (13 | ) | $ | 348 | $ | (55 | ) | $ | 5,413 | |||||||||||||||
Residential mortgage-related securities: |
||||||||||||||||||||||||||||||||
GSE |
30 | (3,727 | ) | 892,964 | | | | (3,727 | ) | 892,964 | ||||||||||||||||||||||
Private label |
| | | 1 | | 50 | | 50 | ||||||||||||||||||||||||
GSE commercial mortgage-related securities |
2 | (1,063 | ) | 102,474 | | | | (1,063 | ) | 102,474 | ||||||||||||||||||||||
Other debt securities |
| | | 1 | (75 | ) | 111 | (75 | ) | 111 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | (4,832 | ) | $ | 1,000,503 | $ | (88 | ) | $ | 509 | $ | (4,920 | ) | $ | 1,001,012 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Investment securities held to maturity: |
||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions (municipal securities) |
56 | $ | (296 | ) | $ | 28,265 | | $ | | $ | | $ | (296 | ) | $ | 28,265 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | (296 | ) | $ | 28,265 | $ | | $ | | $ | (296 | ) | $ | 28,265 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013 and December 31, 2012, the Corporation had FHLB stock of $110 million and $96 million, respectively. The Corporation had Federal Reserve Bank stock of $71 million at both September 30, 2013 and December 31, 2012.
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 2012 or the first nine months of 2013. The FHLB of Chicago initiated tender offers for certain of its shares during the first quarter of 2013, 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 $14 million during the first quarter of 2013. Based on the Corporations periodic review of FHLB stock required member holdings (which is based on asset size and other criteria), the Corporation purchased $28 million of additional equity holdings in the FHLB of Chicago during the second quarter of 2013.
16
NOTE 6: Loans, Allowance for Loan Losses, and Credit Quality
The period end loan composition was as follows.
September 30,
2013 |
December 31,
2012 |
|||||||
($ in Thousands) | ||||||||
Commercial and industrial |
$ | 4,703,056 | $ | 4,502,021 | ||||
Commercial real estateowner occupied |
1,147,352 | 1,219,747 | ||||||
Lease financing |
51,727 | 64,196 | ||||||
|
|
|
|
|||||
Commercial and business lending |
5,902,135 | 5,785,964 | ||||||
Commercial real estateinvestor |
2,847,152 | 2,906,759 | ||||||
Real estate construction |
834,744 | 655,381 | ||||||
|
|
|
|
|||||
Commercial real estate lending |
3,681,896 | 3,562,140 | ||||||
|
|
|
|
|||||
Total commercial |
9,584,031 | 9,348,104 | ||||||
Home equity |
1,891,378 | 2,219,494 | ||||||
Installment |
420,268 | 466,727 | ||||||
Residential mortgage |
3,690,177 | 3,376,697 | ||||||
|
|
|
|
|||||
Total consumer |
6,001,823 | 6,062,918 | ||||||
|
|
|
|
|||||
Total loans |
$ | 15,585,854 | $ | 15,411,022 | ||||
|
|
|
|
A summary of the changes in the allowance for loan losses was as follows.
September 30,
2013 |
December 31,
2012 |
|||||||
($ in Thousands) | ||||||||
Balance at beginning of period |
$ | 297,409 | $ | 378,151 | ||||
Provision for loan losses |
8,000 | 3,000 | ||||||
Charge offs |
(69,320 | ) | (117,046 | ) | ||||
Recoveries |
35,635 | 33,304 | ||||||
|
|
|
|
|||||
Net charge offs |
(33,685 | ) | (83,742 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 271,724 | $ | 297,409 | ||||
|
|
|
|
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.
17
A summary of the changes in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2013, 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, 2012 |
$ | 97,852 | $ | 27,389 | $ | 3,024 | $ | 63,181 | $ | 20,741 | $ | 56,826 | $ | 4,299 | $ | 24,097 | $ | 297,409 | ||||||||||||||||||
Provision for loan losses |
5,765 | (381 | ) | (1,507 | ) | 671 | 4,079 | (10,325 | ) | (1,383 | ) | 11,081 | 8,000 | |||||||||||||||||||||||
Charge offs |
(25,091 | ) | (5,384 | ) | (206 | ) | (7,376 | ) | (3,147 | ) | (17,251 | ) | (1,065 | ) | (9,800 | ) | (69,320 | ) | ||||||||||||||||||
Recoveries |
23,365 | 216 | 202 | 4,628 | 2,153 | 3,283 | 698 | 1,090 | 35,635 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at Sep 30, 2013 |
$ | 101,891 | $ | 21,840 | $ | 1,513 | $ | 61,104 | $ | 23,826 | $ | 32,533 | $ | 2,549 | $ | 26,468 | $ | 271,724 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Ending balance impaired loans individually evaluated for impairment |
$ | 2,986 | $ | 992 | $ | | $ | 4,031 | $ | 265 | $ | 130 | $ | | $ | 165 | $ | 8,569 | ||||||||||||||||||
Ending balance impaired loans collectively evaluated for impairment |
$ | 5,146 | $ | 2,700 | $ | 41 | $ | 4,297 | $ | 2,642 | $ | 13,689 | $ | 557 | $ | 11,786 | $ | 40,858 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total impaired loans |
$ | 8,132 | $ | 3,692 | $ | 41 | $ | 8,328 | $ | 2,907 | $ | 13,819 | $ | 557 | $ | 11,951 | $ | 49,427 | ||||||||||||||||||
Ending balance all other loans collectively evaluated for impairment |
$ | 93,759 | $ | 18,148 | $ | 1,472 | $ | 52,776 | $ | 20,919 | $ | 18,714 | $ | 1,992 | $ | 14,517 | $ | 222,297 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 101,891 | $ | 21,840 | $ | 1,513 | $ | 61,104 | $ | 23,826 | $ | 32,533 | $ | 2,549 | $ | 26,468 | $ | 271,724 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Ending balance impaired loans individually evaluated for impairment |
$ | 24,931 | $ | 21,160 | $ | | $ | 43,513 | $ | 15,152 | $ | 990 | $ | | $ | 9,619 | $ | 115,365 | ||||||||||||||||||
Ending balance impaired loans collectively evaluated for impairment |
$ | 43,319 | $ | 21,566 | $ | 99 | $ | 41,401 | $ | 8,343 | $ | 34,312 | $ | 1,685 | $ | 58,547 | $ | 209,272 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total impaired loans |
$ | 68,250 | $ | 42,726 | $ | 99 | $ | 84,914 | $ | 23,495 | $ | 35,302 | $ | 1,685 | $ | 68,166 | $ | 324,637 | ||||||||||||||||||
Ending balance all other loans collectively evaluated for impairment |
$ | 4,634,806 | $ | 1,104,626 | $ | 51,628 | $ | 2,762,238 | $ | 811,249 | $ | 1,856,076 | $ | 418,583 | $ | 3,622,011 | $ | 15,261,217 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 4,703,056 | $ | 1,147,352 | $ | 51,727 | $ | 2,847,152 | $ | 834,744 | $ | 1,891,378 | $ | 420,268 | $ | 3,690,177 | $ | 15,585,854 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
18
For comparison purposes, a summary of the changes in the allowance for loan losses by portfolio segment for the year ended December 31, 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 |
(1,645 | ) | (5,184 | ) | (645 | ) | (14,304 | ) | 873 | 16,909 | (501 | ) | 7,497 | 3,000 | ||||||||||||||||||||||
Charge offs |
(43,240 | ) | (4,080 | ) | (797 | ) | (14,000 | ) | (3,588 | ) | (34,125 | ) | (3,057 | ) | (14,159 | ) | (117,046 | ) | ||||||||||||||||||
Recoveries |
18,363 | 453 | 1,899 | 4,796 | 2,129 | 3,898 | 1,234 | 532 | 33,304 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at Dec 31, 2012 |
$ | 97,852 | $ | 27,389 | $ | 3,024 | $ | 63,181 | $ | 20,741 | $ | 56,826 | $ | 4,299 | $ | 24,097 | $ | 297,409 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Ending balance impaired loans individually evaluated for impairment |
$ | 8,790 | $ | 654 | $ | | $ | 5,241 | $ | 1,079 | $ | 868 | $ | | $ | 155 | $ | 16,787 | ||||||||||||||||||
Ending balance impaired loans collectively evaluated for impairment |
$ | 4,951 | $ | 3,157 | $ | | $ | 4,446 | $ | 2,332 | $ | 23,712 | $ | 1,155 | $ | 12,751 | $ | 52,504 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total impaired loans |
$ | 13,741 | $ | 3,811 | $ | | $ | 9,687 | $ | 3,411 | $ | 24,580 | $ | 1,155 | $ | 12,906 | $ | 69,291 | ||||||||||||||||||
Ending balance all other loans collectively evaluated for impairment |
$ | 84,111 | $ | 23,578 | $ | 3,024 | $ | 53,494 | $ | 17,330 | $ | 32,246 | $ | 3,144 | $ | 11,191 | $ | 228,118 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 97,852 | $ | 27,389 | $ | 3,024 | $ | 63,181 | $ | 20,741 | $ | 56,826 | $ | 4,299 | $ | 24,097 | $ | 297,409 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Ending balance impaired loans individually evaluated for impairment |
$ | 27,213 | $ | 16,602 | $ | 3,024 | $ | 48,894 | $ | 20,794 | $ | 4,671 | $ | | $ | 11,330 | $ | 132,528 | ||||||||||||||||||
Ending balance impaired loans collectively evaluated for impairment |
$ | 40,109 | $ | 21,504 | $ | 7 | $ | 51,453 | $ | 11,038 | $ | 44,512 | $ | 2,491 | $ | 70,313 | $ | 241,427 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total impaired loans |
$ | 67,322 | $ | 38,106 | $ | 3,031 | $ | 100,347 | $ | 31,832 | $ | 49,183 | $ | 2,491 | $ | 81,643 | $ | 373,955 | ||||||||||||||||||
Ending balance all other loans collectively evaluated for impairment |
$ | 4,434,699 | $ | 1,181,641 | $ | 61,165 | $ | 2,806,412 | $ | 623,549 | $ | 2,170,311 | $ | 464,236 | $ | 3,295,054 | $ | 15,037,067 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 4,502,021 | $ | 1,219,747 | $ | 64,196 | $ | 2,906,759 | $ | 655,381 | $ | 2,219,494 | $ | 466,727 | $ | 3,376,697 | $ | 15,411,022 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The following table presents commercial loans by credit quality indicator at September 30, 2013.
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, and appropriate allowance for loan losses, nonaccrual and charge off policies.
For commercial loans, management has determined the pass credit quality indicator to include credits that exhibit acceptable financial statements, cash flow, and leverage. Any remaining risk 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
20
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.
21
The following table presents loans by past due status at September 30, 2013.
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 |
$ | 3,327 | $ | 3,191 | $ | | $ | 6,518 | $ | 4,660,433 | $ | 4,666,951 | ||||||||||||
Commercial real estateowner occupied |
5,231 | 3,274 | 727 | 9,232 | 1,109,819 | 1,119,051 | ||||||||||||||||||
Lease financing |
1,000 | | | 1,000 | 50,628 | 51,628 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
9,558 | 6,465 | 727 | 16,750 | 5,820,880 | 5,837,630 | ||||||||||||||||||
Commercial real estateinvestor |
21,667 | 80 | | 21,747 | 2,775,564 | 2,797,311 | ||||||||||||||||||
Real estate construction |
617 | 203 | 471 | 1,291 | 814,783 | 816,074 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
22,284 | 283 | 471 | 23,038 | 3,590,347 | 3,613,385 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
31,842 | 6,748 | 1,198 | 39,788 | 9,411,227 | 9,451,015 | ||||||||||||||||||
Home equity |
7,170 | 2,730 | 32 | 9,932 | 1,856,003 | 1,865,935 | ||||||||||||||||||
Installment |
831 | 339 | 723 | 1,893 | 417,106 | 418,999 | ||||||||||||||||||
Residential mortgage |
5,906 | 816 | 110 | 6,832 | 3,635,479 | 3,642,311 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
13,907 | 3,885 | 865 | 18,657 | 5,908,588 | 5,927,245 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total accruing loans |
$ | 45,749 | $ | 10,633 | $ | 2,063 | $ | 58,445 | $ | 15,319,815 | $ | 15,378,260 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nonaccrual loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 510 | $ | 2,510 | $ | 12,264 | $ | 15,284 | $ | 20,821 | $ | 36,105 | ||||||||||||
Commercial real estateowner occupied |
1,515 | 962 | 11,028 | 13,505 | 14,796 | 28,301 | ||||||||||||||||||
Lease financing |
| | 99 | 99 | | 99 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
2,025 | 3,472 | 23,391 | 28,888 | 35,617 | 64,505 | ||||||||||||||||||
Commercial real estateinvestor |
2,571 | 151 | 36,503 | 39,225 | 10,616 | 49,841 | ||||||||||||||||||
Real estate construction |
9,006 | 94 | 2,379 | 11,479 | 7,191 | 18,670 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
11,577 | 245 | 38,882 | 50,704 | 17,807 | 68,511 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
13,602 | 3,717 | 62,273 | 79,592 | 53,424 | 133,016 | ||||||||||||||||||
Home equity |
1,588 | 1,977 | 13,988 | 17,553 | 7,890 | 25,443 | ||||||||||||||||||
Installment |
182 | 118 | 291 | 591 | 678 | 1,269 | ||||||||||||||||||
Residential mortgage |
2,771 | 3,409 | 27,123 | 33,303 | 14,563 | 47,866 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
4,541 | 5,504 | 41,402 | 51,447 | 23,131 | 74,578 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total nonaccrual loans |
$ | 18,143 | $ | 9,221 | $ | 103,675 | $ | 131,039 | $ | 76,555 | $ | 207,594 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 3,837 | $ | 5,701 | $ | 12,264 | $ | 21,802 | $ | 4,681,254 | $ | 4,703,056 | ||||||||||||
Commercial real estateowner occupied |
6,746 | 4,236 | 11,755 | 22,737 | 1,124,615 | 1,147,352 | ||||||||||||||||||
Lease financing |
1,000 | | 99 | 1,099 | 50,628 | 51,727 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
11,583 | 9,937 | 24,118 | 45,638 | 5,856,497 | 5,902,135 | ||||||||||||||||||
Commercial real estateinvestor |
24,238 | 231 | 36,503 | 60,972 | 2,786,180 | 2,847,152 | ||||||||||||||||||
Real estate construction |
9,623 | 297 | 2,850 | 12,770 | 821,974 | 834,744 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
33,861 | 528 | 39,353 | 73,742 | 3,608,154 | 3,681,896 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
45,444 | 10,465 | 63,471 | 119,380 | 9,464,651 | 9,584,031 | ||||||||||||||||||
Home equity |
8,758 | 4,707 | 14,020 | 27,485 | 1,863,893 | 1,891,378 | ||||||||||||||||||
Installment |
1,013 | 457 | 1,014 | 2,484 | 417,784 | 420,268 | ||||||||||||||||||
Residential mortgage |
8,677 | 4,225 | 27,233 | 40,135 | 3,650,042 | 3,690,177 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
18,448 | 9,389 | 42,267 | 70,104 | 5,931,719 | 6,001,823 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 63,892 | $ | 19,854 | $ | 105,738 | $ | 189,484 | $ | 15,396,370 | $ | 15,585,854 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
* | The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at September 30, 2013 (the same as the reported balances for the accruing loans noted above). |
22
The following table presents loans by past due status at December 31, 2012.
30-59 Days
Past Due |
60-89 Days
Past Due |
90 Days or More
Past Due * |
Total Past Due | Current | Total | |||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||
Accruing loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 9,557 | $ | 1,782 | $ | 79 | $ | 11,418 | $ | 4,451,421 | $ | 4,462,839 | ||||||||||||
Commercial real estateowner occupied |
10,420 | 633 | 308 | 11,361 | 1,184,132 | 1,195,493 | ||||||||||||||||||
Lease financing |
| 12 | | 12 | 61,153 | 61,165 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
19,977 | 2,427 | 387 | 22,791 | 5,696,706 | 5,719,497 | ||||||||||||||||||
Commercial real estateinvestor |
8,424 | 5,048 | 366 | 13,838 | 2,834,234 | 2,848,072 | ||||||||||||||||||
Real estate construction |
1,628 | 1,527 | 283 | 3,438 | 624,641 | 628,079 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
10,052 | 6,575 | 649 | 17,276 | 3,458,875 | 3,476,151 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
30,029 | 9,002 | 1,036 | 40,067 | 9,155,581 | 9,195,648 | ||||||||||||||||||
Home equity |
10,151 | 3,387 | 96 | 13,634 | 2,166,645 | 2,180,279 | ||||||||||||||||||
Installment |
1,300 | 809 | 1,013 | 3,122 | 461,767 | 464,889 | ||||||||||||||||||
Residential mortgage |
8,473 | 930 | 144 | 9,547 | 3,307,791 | 3,317,338 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
19,924 | 5,126 | 1,253 | 26,303 | 5,936,203 | 5,962,506 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total accruing loans |
$ | 49,953 | $ | 14,128 | $ | 2,289 | $ | 66,370 | $ | 15,091,784 | $ | 15,158,154 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nonaccrual loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 8,559 | $ | 791 | $ | 11,962 | $ | 21,312 | $ | 17,870 | $ | 39,182 | ||||||||||||
Commercial real estateowner occupied |
1,489 | 1,749 | 11,819 | 15,057 | 9,197 | 24,254 | ||||||||||||||||||
Lease financing |
15 | | 9 | 24 | 3,007 | 3,031 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
10,063 | 2,540 | 23,790 | 36,393 | 30,074 | 66,467 | ||||||||||||||||||
Commercial real estateinvestor |
197 | 3,072 | 30,928 | 34,197 | 24,490 | 58,687 | ||||||||||||||||||
Real estate construction |
16 | | 9,639 | 9,655 | 17,647 | 27,302 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
213 | 3,072 | 40,567 | 43,852 | 42,137 | 85,989 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
10,276 | 5,612 | 64,357 | 80,245 | 72,211 | 152,456 | ||||||||||||||||||
Home equity |
1,456 | 2,518 | 28,474 | 32,448 | 6,767 | 39,215 | ||||||||||||||||||
Installment |
153 | 141 | 586 | 880 | 958 | 1,838 | ||||||||||||||||||
Residential mortgage |
2,135 | 4,321 | 38,739 | 45,195 | 14,164 | 59,359 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
3,744 | 6,980 | 67,799 | 78,523 | 21,889 | 100,412 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total nonaccrual loans |
$ | 14,020 | $ | 12,592 | $ | 132,156 | $ | 158,768 | $ | 94,100 | $ | 252,868 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
||||||||||||||||||||||||
Commercial and industrial |
$ | 18,116 | $ | 2,573 | $ | 12,041 | $ | 32,730 | $ | 4,469,291 | $ | 4,502,021 | ||||||||||||
Commercial real estateowner occupied |
11,909 | 2,382 | 12,127 | 26,418 | 1,193,329 | 1,219,747 | ||||||||||||||||||
Lease financing |
15 | 12 | 9 | 36 | 64,160 | 64,196 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and business lending |
30,040 | 4,967 | 24,177 | 59,184 | 5,726,780 | 5,785,964 | ||||||||||||||||||
Commercial real estateinvestor |
8,621 | 8,120 | 31,294 | 48,035 | 2,858,724 | 2,906,759 | ||||||||||||||||||
Real estate construction |
1,644 | 1,527 | 9,922 | 13,093 | 642,288 | 655,381 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate lending |
10,265 | 9,647 | 41,216 | 61,128 | 3,501,012 | 3,562,140 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
40,305 | 14,614 | 65,393 | 120,312 | 9,227,792 | 9,348,104 | ||||||||||||||||||
Home equity |
11,607 | 5,905 | 28,570 | 46,082 | 2,173,412 | 2,219,494 | ||||||||||||||||||
Installment |
1,453 | 950 | 1,599 | 4,002 | 462,725 | 466,727 | ||||||||||||||||||
Residential mortgage |
10,608 | 5,251 | 38,883 | 54,742 | 3,321,955 | 3,376,697 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
23,668 | 12,106 | 69,052 | 104,826 | 5,958,092 | 6,062,918 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 63,973 | $ | 26,720 | $ | 134,445 | $ | 225,138 | $ | 15,185,884 | $ | 15,411,022 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
* | The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at December 31, 2012 (the same as the reported balances for the accruing loans noted above). |
23
The following table presents impaired loans at September 30, 2013.
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
YTD
Average Recorded Investment |
YTD
Interest Income Recognized* |
||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Loans with a related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 48,117 | $ | 56,577 | $ | 8,132 | $ | 51,752 | $ | 1,215 | ||||||||||
Commercial real estateowner occupied |
24,639 | 26,548 | 3,692 | 25,947 | 741 | |||||||||||||||
Lease financing |
99 | 99 | 41 | 141 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
72,855 | 83,224 | 11,865 | 77,840 | 1,956 | |||||||||||||||
Commercial real estateinvestor |
57,611 | 69,331 | 8,328 | 60,358 | 1,717 | |||||||||||||||
Real estate construction |
10,685 | 15,350 | 2,907 | 11,872 | 221 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
68,296 | 84,681 | 11,235 | 72,230 | 1,938 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
141,151 | 167,905 | 23,100 | 150,070 | 3,894 | |||||||||||||||
Home equity |
35,044 | 41,052 | 13,819 | 36,665 | 1,067 | |||||||||||||||
Installment |
1,685 | 2,064 | 557 | 1,935 | 77 | |||||||||||||||
Residential mortgage |
60,037 | 69,327 | 11,951 | 61,807 | 1,337 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
96,766 | 112,443 | 26,327 | 100,407 | 2,481 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 237,917 | $ | 280,348 | $ | 49,427 | $ | 250,477 | $ | 6,375 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans with no related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 20,133 | $ | 32,474 | $ | | $ | 25,558 | $ | 591 | ||||||||||
Commercial real estateowner occupied |
18,087 | 20,762 | | 18,508 | 237 | |||||||||||||||
Lease financing |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
38,220 | 53,236 | | 44,066 | 828 | |||||||||||||||
Commercial real estateinvestor |
27,303 | 38,512 | | 29,256 | 139 | |||||||||||||||
Real estate construction |
12,810 | 18,426 | | 13,447 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
40,113 | 56,938 | | 42,703 | 139 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
78,333 | 110,174 | | 86,769 | 967 | |||||||||||||||
Home equity |
258 | 333 | | 305 | 4 | |||||||||||||||
Installment |
| | | | | |||||||||||||||
Residential mortgage |
8,129 | 9,712 | | 8,111 | 153 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
8,387 | 10,045 | | 8,416 | 157 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 86,720 | $ | 120,219 | $ | | $ | 95,185 | $ | 1,124 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
||||||||||||||||||||
Commercial and industrial |
$ | 68,250 | $ | 89,051 | $ | 8,132 | $ | 77,310 | $ | 1,806 | ||||||||||
Commercial real estateowner occupied |
42,726 | 47,310 | 3,692 | 44,455 | 978 | |||||||||||||||
Lease financing |
99 | 99 | 41 | 141 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
111,075 | 136,460 | 11,865 | 121,906 | 2,784 | |||||||||||||||
Commercial real estateinvestor |
84,914 | 107,843 | 8,328 | 89,614 | 1,856 | |||||||||||||||
Real estate construction |
23,495 | 33,776 | 2,907 | 25,319 | 221 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
108,409 | 141,619 | 11,235 | 114,933 | 2,077 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
219,484 | 278,079 | 23,100 | 236,839 | 4,861 | |||||||||||||||
Home equity |
35,302 | 41,385 | 13,819 | 36,970 | 1,071 | |||||||||||||||
Installment |
1,685 | 2,064 | 557 | 1,935 | 77 | |||||||||||||||
Residential mortgage |
68,166 | 79,039 | 11,951 | 69,918 | 1,490 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
105,153 | 122,488 | 26,327 | 108,823 | 2,638 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 324,637 | $ | 400,567 | $ | 49,427 | $ | 345,662 | $ | 7,499 | ||||||||||
|
|
|
|
|
|
|
|
|
|
* | Interest income recognized included $4 million of interest income recognized on accruing restructured loans for the nine months ended September 30, 2013. |
24
The following table presents impaired loans at December 31, 2012.
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
YTD
Average Recorded Investment |
YTD
Interest Income Recognized* |
||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Loans with a related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 57,985 | $ | 65,521 | $ | 13,741 | $ | 56,508 | $ | 2,187 | ||||||||||
Commercial real estateowner occupied |
24,600 | 27,700 | 3,811 | 26,531 | 1,043 | |||||||||||||||
Lease financing |
7 | 7 | | 120 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
82,592 | 93,228 | 17,552 | 83,159 | 3,230 | |||||||||||||||
Commercial real estateinvestor |
80,766 | 96,581 | 9,687 | 85,642 | 2,891 | |||||||||||||||
Real estate construction |
16,299 | 22,311 | 3,411 | 19,122 | 437 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
97,065 | 118,892 | 13,098 | 104,764 | 3,328 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
179,657 | 212,120 | 30,650 | 187,923 | 6,558 | |||||||||||||||
Home equity |
47,113 | 54,456 | 24,580 | 50,334 | 1,962 | |||||||||||||||
Installment |
2,491 | 2,847 | 1,155 | 2,773 | 172 | |||||||||||||||
Residential mortgage |
72,408 | 81,959 | 12,906 | 76,989 | 2,211 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
122,012 | 139,262 | 38,641 | 130,096 | 4,345 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 301,669 | $ | 351,382 | $ | 69,291 | $ | 318,019 | $ | 10,903 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans with no related allowance |
||||||||||||||||||||
Commercial and industrial |
$ | 9,337 | $ | 16,339 | $ | | $ | 10,883 | $ | 229 | ||||||||||
Commercial real estateowner occupied |
13,506 | 16,582 | | 14,425 | 68 | |||||||||||||||
Lease financing |
3,024 | 3,024 | | 3,896 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
25,867 | 35,945 | | 29,204 | 297 | |||||||||||||||
Commercial real estateinvestor |
19,581 | 28,531 | | 20,490 | 173 | |||||||||||||||
Real estate construction |
15,533 | 24,724 | | 18,350 | 109 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
35,114 | 53,255 | | 38,840 | 282 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
60,981 | 89,200 | | 68,044 | 579 | |||||||||||||||
Home equity |
2,070 | 2,269 | | 2,164 | 36 | |||||||||||||||
Installment |
| | | | | |||||||||||||||
Residential mortgage |
9,235 | 12,246 | | 11,566 | 208 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
11,305 | 14,515 | | 13,730 | 244 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 72,286 | $ | 103,715 | $ | | $ | 81,774 | $ | 823 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
||||||||||||||||||||
Commercial and industrial |
$ | 67,322 | $ | 81,860 | $ | 13,741 | $ | 67,391 | $ | 2,416 | ||||||||||
Commercial real estateowner occupied |
38,106 | 44,282 | 3,811 | 40,956 | 1,111 | |||||||||||||||
Lease financing |
3,031 | 3,031 | | 4,016 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial and business lending |
108,459 | 129,173 | 17,552 | 112,363 | 3,527 | |||||||||||||||
Commercial real estateinvestor |
100,347 | 125,112 | 9,687 | 106,132 | 3,064 | |||||||||||||||
Real estate construction |
31,832 | 47,035 | 3,411 | 37,472 | 546 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate lending |
132,179 | 172,147 | 13,098 | 143,604 | 3,610 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
240,638 | 301,320 | 30,650 | 255,967 | 7,137 | |||||||||||||||
Home equity |
49,183 | 56,725 | 24,580 | 52,498 | 1,998 | |||||||||||||||
Installment |
2,491 | 2,847 | 1,155 | 2,773 | 172 | |||||||||||||||
Residential mortgage |
81,643 | 94,205 | 12,906 | 88,555 | 2,419 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
133,317 | 153,777 | 38,641 | 143,826 | 4,589 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 373,955 | $ | 455,097 | $ | 69,291 | $ | 399,793 | $ | 11,726 | ||||||||||
|
|
|
|
|
|
|
|
|
|
* | Interest income recognized included $6 million of interest income recognized on accruing restructured loans for the year ended December 31, 2012. |
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
25
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 $39 million recorded investment in loans modified in a troubled debt restructuring for the nine months ended September 30, 2013, of which, $20 million were in accrual status and $19 million were in nonaccrual pending a sustained period of repayment.
As of September 30, 2013 and December 31, 2012, there were $69 million and $81 million, respectively, of nonaccrual restructured loans, and $117 million and $121 million, respectively, of performing restructured loans, included within impaired loans. All restructured loans are considered impaired in the calendar year of restructuring. In subsequent years, a restructured loan may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain classified as a restructured loan. The following table presents nonaccrual and performing restructured loans by loan portfolio.
September 30, 2013 | December 31, 2012 | |||||||||||||||
Performing
Restructured Loans |
Nonaccrual
Restructured Loans * |
Performing
Restructured Loans |
Nonaccrual
Restructured Loans * |
|||||||||||||
($ in Thousands) | ||||||||||||||||
Commercial and industrial |
$ | 32,145 | $ | 12,078 | $ | 28,140 | $ | 12,496 | ||||||||
Commercial real estateowner occupied |
14,425 | 14,004 | 13,852 | 11,514 | ||||||||||||
Commercial real estateinvestor |
35,073 | 17,249 | 41,660 | 25,221 | ||||||||||||
Real estate construction |
4,825 | 4,912 | 4,530 | 6,798 | ||||||||||||
Home equity |
9,859 | 5,930 | 9,968 | 6,698 | ||||||||||||
Installment |
416 | 523 | 653 | 674 | ||||||||||||
Residential mortgage |
20,300 | 14,615 | 22,284 | 17,189 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 117,043 | $ | 69,311 | $ | 121,087 | $ | 80,590 | ||||||||
|
|
|
|
|
|
|
|
* | Nonaccrual restructured loans have been included with nonaccrual loans. |
26
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, 2013, and the recorded investment and unpaid principal balance as of September 30, 2013.
(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), non-reaffirmed Chapter 7 bankruptcies, principal reduction, or some combination of these concessions. During the three and nine months ended September 30, 2013, 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, non-reaffirmed Chapter 7 bankruptcies, or a combination of these concessions for the three and nine months ended September 30, 2013.
27
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, 2013, as well as the recorded investment in these restructured loans as of September 30, 2013.
Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||
Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||
($ in Thousands) | ||||||||||||||||
Commercial and industrial |
8 | $ | 506 | 18 | $ | 1,626 | ||||||||||
Commercial real estateowner occupied |
2 | 464 | 4 | 578 | ||||||||||||
Commercial real estateinvestor |
1 | 405 | 5 | 1,992 | ||||||||||||
Real estate construction |
1 | 118 | 2 | 158 | ||||||||||||
Home equity |
4 | 147 | 12 | 699 | ||||||||||||
Residential mortgage |
8 | 1,150 | 15 | 2,385 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
24 | $ | 2,790 | 56 | $ | 7,438 | ||||||||||
|
|
|
|
|
|
|
|
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 estateowner occupied |
4 | 572 | 8 | 2,734 | ||||||||||||
Commercial real estateinvestor |
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.
28
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, and more frequently 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. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value, step one. If the calculated 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 calculated 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 2013, utilizing a qualitative assessment as permitted by recent accounting pronouncements (see Note 2 for additional information on this new accounting pronouncement). Factors that management considered in this assessment included macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management strategy, and changes in the composition or carrying amount of net assets. In addition, management considered the significant increases in both the Corporations common stock price and in the overall bank common stock index (based on the Nasdaq bank index), as well as the Corporations improving earnings per common share trend over the past year. Based on these assessments, management concluded that the 2013 annual qualitative impairment assessment indicated that it is more likely than not that the estimated fair value exceeded the carrying value (including goodwill) for each reporting unit. Therefore, a step one quantitative analysis was not required. The annual impairment testing in prior years was based upon a quantitative measurement of the fair value of the reporting units. There were no impairment charges recorded in 2012 or through September 30, 2013. 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.
At September 30, 2013, the Corporation had goodwill of $929 million, including goodwill of $428 million assigned to the Commercial Banking reporting unit and goodwill of $501 million assigned to the Consumer Banking reporting unit. There was no change in the carrying amount of goodwill for the nine months ended September 30, 2013, and the year ended December 31, 2012.
Other Intangible Assets: The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, other intangibles (primarily related to customer relationships acquired in connection with the Corporations insurance agency acquisitions), and mortgage servicing rights. For core deposit intangibles and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows.
Nine Months Ended
September 30, 2013 |
Year Ended
December 31, 2012 |
|||||||
($ in Thousands) | ||||||||
Core deposit intangibles: |
||||||||
Gross carrying amount |
$ | 36,231 | $ | 41,831 | ||||
Accumulated amortization |
(30,785 | ) | (34,044 | ) | ||||
|
|
|
|
|||||
Net book value |
$ | 5,446 | $ | 7,787 | ||||
|
|
|
|
|||||
Amortization during the period |
$ | 2,341 | $ | 3,229 | ||||
Other intangibles: |
||||||||
Gross carrying amount |
$ | 19,283 | $ | 19,283 | ||||
Accumulated amortization |
(12,534 | ) | (11,843 | ) | ||||
|
|
|
|
|||||
Net book value |
$ | 6,749 | $ | 7,440 | ||||
|
|
|
|
|||||
Amortization during the period |
$ | 691 | $ | 966 |
29
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 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 $15 million on mortgage servicing rights by reducing the capitalized costs and the valuation allowance on mortgage servicing rights during 2012 due to the uncertainty of the recoverability of the valuation allowance on mortgage servicing rights associated with the long-term, consistently low rate environment. See Note 12, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities, for a discussion of the recourse provisions on serviced residential mortgage loans. See Note 13, Fair Value Measurements, which further discusses fair value measurement relative to the mortgage servicing rights asset.
A summary of changes in the balance of the mortgage servicing rights asset and the mortgage servicing rights valuation allowance was as follows.
Nine Months Ended
September 30, 2013 |
Year Ended
December 31, 2012 |
|||||||
($ in Thousands) | ||||||||
Mortgage servicing rights: |
||||||||
Mortgage servicing rights at beginning of period |
$ | 61,425 | $ | 75,855 | ||||
Additions |
15,968 | 23,528 | ||||||
Amortization |
(12,479 | ) | (23,348 | ) | ||||
Other-than-temporary impairment |
| (14,610 | ) | |||||
|
|
|
|
|||||
Mortgage servicing rights at end of period |
$ | 64,914 | $ | 61,425 | ||||
|
|
|
|
|||||
Valuation allowance at beginning of period |
(15,476 | ) | (27,703 | ) | ||||
(Additions) / Recoveries, net |
14,097 | (2,383 | ) | |||||
Other-than-temporary impairment |
| 14,610 | ||||||
|
|
|
|
|||||
Valuation allowance at end of period |
(1,379 | ) | (15,476 | ) | ||||
|
|
|
|
|||||
Mortgage servicing rights, net |
$ | 63,535 | $ | 45,949 | ||||
|
|
|
|
|||||
Fair value of mortgage servicing rights |
$ | 69,214 | $ | 45,949 | ||||
Portfolio of residential mortgage loans serviced for others (servicing portfolio) |
8,014,000 | 7,453,000 | ||||||
Mortgage servicing rights, net to servicing portfolio |
0.79 | % | 0.62 | % | ||||
Mortgage servicing rights expense (1) |
$ | (1,618 | ) | $ | 25,731 |
(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. |
30
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, 2013. 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, 2013 |
$ | 780 | $ | 231 | $ | 2,884 | ||||||
Year ending December 31, 2014 |
2,868 | 879 | 10,412 | |||||||||
Year ending December 31, 2015 |
1,405 | 839 | 8,554 | |||||||||
Year ending December 31, 2016 |
281 | 803 | 7,090 | |||||||||
Year ending December 31, 2017 |
112 | 770 | 5,900 | |||||||||
Year ending December 31, 2018 |
| 740 | 4,930 | |||||||||
Beyond 2018 |
| 2,487 | 25,144 | |||||||||
|
|
|
|
|
|
|||||||
Total Estimated Amortization Expense |
5,446 | 6,749 | 64,914 | |||||||||
|
|
|
|
|
|
NOTE 8: Short and Long-Term Funding
The components of short-term funding (funding with original contractual maturities of one year or less) and long-term funding (funding with original contractual maturities greater than one year) were as follows.
September 30,
2013 |
December 31,
2012 |
|||||||
($ in Thousands) | ||||||||
Short-Term Funding |
||||||||
Federal funds purchased |
$ | 64,924 | $ | 71,385 | ||||
Securities sold under agreements to repurchase |
515,555 | 679,070 | ||||||
|
|
|
|
|||||
Federal funds purchased and securities sold under agreements to repurchase |
580,479 | 750,455 | ||||||
Federal Home Loan Bank (FHLB) advances |
1,000,000 | 1,525,000 | ||||||
Commercial paper |
46,401 | 51,484 | ||||||
|
|
|
|
|||||
Other short-term funding |
1,046,401 | 1,576,484 | ||||||
|
|
|
|
|||||
Total short-term funding |
$ | 1,626,880 | $ | 2,326,939 | ||||
|
|
|
|
|||||
Long-Term Funding |
||||||||
FHLB advances |
$ | 306 | $ | 400,375 | ||||
Senior notes, at par |
585,000 | 585,000 | ||||||
Subordinated debt, at par |
25,821 | 25,821 | ||||||
Other long-term funding and capitalized costs |
3,441 | 4,150 | ||||||
|
|
|
|
|||||
Total long-term funding |
$ | 614,568 | $ | 1,015,346 | ||||
|
|
|
|
|||||
Total short and long-term funding |
$ | 2,241,448 | $ | 3,342,285 | ||||
|
|
|
|
Short-term funding:
The FHLB advances included in short-term funding are those with original contractual maturities of one year or less. 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.
31
Long-term funding:
FHLB advances: At September 30, 2013, the long-term FHLB advances had a weighted-average interest rate of 5.22%, compared to 1.79% at December 31, 2012. These advances all had fixed interest rates at both September 30, 2013 and December 31, 2012. During the first nine months of 2013, $400 million of long-term FHLB advances matured.
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, has a fixed coupon interest rate of 9.25%, and is callable beginning in September 2013. The Corporation redeemed the outstanding subordinated debt effective October 15, 2013.
NOTE 9: Income Taxes
For the first nine months of 2013, the Corporation recognized income tax expense of $65 million, compared to income tax expense of $62 million for the first nine months of 2012. The effective tax rate was 31.68% for the first nine months of 2013, compared to an effective tax rate of 31.93% for the first nine months of 2012.
NOTE 10: Derivative and Hedging Activities
The Corporation facilitates customer borrowing activity by providing various interest rate risk management solutions through its capital markets area. To date, all of the notional amounts of customer transactions have been matched with a mirror swap with another counterparty. The Corporation may also use derivative instruments 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, written options, purchased options, 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 $47 million of investment securities as collateral at September 30, 2013, and pledged $70 million of investment securities as collateral at December 31, 2012.
The Corporations derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. The fair value of the Corporations interest rate-related instruments is determined using discounted cash flow analysis on the expected cash flows of each derivative and also includes a nonperformance / credit risk component (credit valuation adjustment). See Note 13, Fair Value Measurements, for additional fair value information and disclosures.
32
The table below identifies the balance sheet category and fair values of the Corporations derivative instruments not designated as hedging instruments.
Weighted Average | ||||||||||||||||||||||
($ in Thousands) |
Notional
Amount |
Fair
Value |
Balance Sheet Category |
Receive
Rate (1) |
Pay
Rate (1) |
Maturity | ||||||||||||||||
September 30, 2013 |
|
|||||||||||||||||||||
Interest rate-related instrumentscustomer and mirror |
$ | 1,827,810 | $ | 48,390 | Trading assets | 1.56 | % | 1.56 | % | 45 months | ||||||||||||
Interest rate-related instrumentscustomer and mirror |
1,827,810 | (51,551 | ) | Trading liabilities | 1.56 | 1.56 | 45 months | |||||||||||||||
Interest rate lock commitments (mortgage) |
147,232 | 3,560 | Other assets | | | | ||||||||||||||||
Forward commitments (mortgage) |
243,050 | (4,553 | ) | Other liabilities | | | | |||||||||||||||
Foreign currency exchange forwards |
40,064 | 1,012 | Trading assets | | | | ||||||||||||||||
Foreign currency exchange forwards |
36,715 | (879 | ) | Trading liabilities | | | | |||||||||||||||
Purchased options (time deposit) |
116,158 | 5,578 | Other assets | | | | ||||||||||||||||
Written options (time deposit) |
116,158 | (5,578 | ) | Other liabilities | | | | |||||||||||||||
December 31, 2012 |
||||||||||||||||||||||
Interest rate-related instrumentscustomer and mirror |
$ | 1,728,545 | $ | 69,370 | Trading assets | 1.30 | % | 1.30 | % | 47 months | ||||||||||||
Interest rate-related instrumentscustomer and mirror |
1,728,545 | (75,131 | ) | Trading liabilities | 1.30 | 1.30 | 47 months | |||||||||||||||
Interest rate lock commitments (mortgage) |
351,786 | 7,794 | Other assets | | | | ||||||||||||||||
Forward commitments (mortgage) |
520,000 | (147 | ) | Other liabilities | | | | |||||||||||||||
Foreign currency exchange forwards |
39,763 | 1,341 | Trading assets | | | | ||||||||||||||||
Foreign currency exchange forwards |
35,745 | (1,212 | ) | Trading liabilities | | | | |||||||||||||||
Purchased options (time deposit) |
111,262 | 3,620 | Other assets | | | | ||||||||||||||||
Written options (time deposit) |
111,262 | (3,620 | ) | Other liabilities | | | |
(1) | Reflects the weighted average receive rate and pay rate for the interest rate-related instruments only. |
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, 2013 |
||||||
Interest rate-related instrumentscustomer and mirror, net |
Capital market fees, net | $ | 2,600 | |||
Interest rate lock commitments (mortgage) |
Mortgage banking, net | (4,234 | ) | |||
Forward commitments (mortgage) |
Mortgage banking, net | (4,406 | ) | |||
Foreign currency exchange forwards |
Capital market fees, net | 4 | ||||
Nine Months Ended September 30, 2012 |
||||||
Interest rate-related instrumentscustomer 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 |
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).
33
Free standing derivatives are entered into primarily for the benefit of commercial customers through providing derivative products which enables 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. During September 2013, the Corporation terminated its Power CD product.
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, 2013 or December 31, 2012.
NOTE 11: Balance Sheet Offsetting
Interest Rate-Related Instruments (Interest Agreements)
The Corporation enters into interest rate-related instruments to facilitate the interest rate risk management strategies of commercial customers. The Corporation mitigates this risk by entering into equal and offsetting interest rate-related instruments with highly rated third party financial institutions. The interest agreements are free-standing derivatives and are recorded at fair value in the Corporations consolidated balance sheet. The Corporation is party to master netting arrangements with its financial institution counterparties; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all interest agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. See Note 10 for additional information on the Corporations derivative and hedging activities.
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporations consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts (i.e., there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities). The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). In addition, the Corporation does not enter into reverse repurchase agreements; therefore, there is no such offsetting to be done with the repurchase agreements.
34
The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of September 30, 2013 and December 31, 2012. The swap agreements we have with our commercial customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.
September 30, 2013 | Gross amounts not offset | |||||||||||||||||||||||
Gross | Gross amounts | Net amounts | in the balance sheet | |||||||||||||||||||||
amounts | offset in the | presented in | Financial | |||||||||||||||||||||
recognized | balance sheet | the balance sheet | instruments | Collateral | Net amount | |||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||
Interest rate-related instruments |
$ | 1,583 | $ | | $ | 1,583 | $ | (1,580 | ) | $ | | $ | 3 | |||||||||||
Derivative liabilities: |
||||||||||||||||||||||||
Interest rate-related instruments |
$ | 49,082 | $ | | $ | 49,082 | $ | (1,580 | ) | $ | (41,585 | ) | $ | 5,917 | ||||||||||
December 31, 2012 | Gross amounts not offset | |||||||||||||||||||||||
Gross | Gross amounts | Net amounts | in the balance sheet | |||||||||||||||||||||
amounts | offset in the | presented in | Financial | |||||||||||||||||||||
recognized | balance sheet | the balance sheet | instruments | Collateral | Net amount | |||||||||||||||||||
($ in Thousands) | ||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||
Interest rate-related instruments |
$ | 66 | $ | | $ | 66 | $ | (66 | ) | $ | | $ | | |||||||||||
Derivative liabilities: |
||||||||||||||||||||||||
Interest rate-related instruments |
$ | 73,067 | $ | | $ | 73,067 | $ | (66 | ) | $ | (67,331 | ) | $ | 5,670 |
35
NOTE 12: 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, 2013 | December 31, 2012 | |||||||
($ in Thousands) | ||||||||
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale (1)(2) |
$ | 6,125,756 | $ | 5,526,326 | ||||
Commercial letters of credit (1) |
129,258 | 85,689 | ||||||
Standby letters of credit (3) |
271,627 | 303,705 |
(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, 2013 or December 31, 2012. |
(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, 2013 and December 31, 2012, 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. For both September 30, 2013 and December 31, 2012, the Corporation had a reserve for losses on unfunded commitments totaling $22 million 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, 2013 was $34 million, included in other assets on the consolidated balance sheets, compared to $35 million at December 31, 2012. Related to these investments, the Corporation had remaining commitments to fund of $16 million at September 30, 2013 and $18 million at December 31, 2012, respectively.
36
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 matters 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 at least 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 is 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 final approval from the court on August 1, 2013. 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. In the second quarter of 2012, the Bank settled with an insurer for a $2.5 million contribution to the settlement amount and partial reimbursement of defense costs of up to $2.1 million.
A lawsuit, R.J. ZAYED v. Associated Bank, N.A., was filed in the United States District Court for the District of Minnesota on January 29, 2013. The lawsuit relates to a Ponzi scheme perpetrated by Oxford Global Partners and related entities (Oxford) and individuals and was brought by the receiver for Oxford. Oxford was a depository customer of the Bank. The lawsuit claims that the Bank is liable for failing to uncover the Oxford Ponzi scheme, and specifically alleges the Bank aided and abetted (1) the fraudulent scheme; (2) a breach of fiduciary duty; (3) conversion; and (4) false representations and omissions. The lawsuit seeks unspecified consequential and punitive damages. At this early stage of the lawsuit, it is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss at this time. The Bank intends to vigorously defend this lawsuit. The court granted the Banks motion to dismiss the complaint on September 30, 2013. A lawsuit by investors in the same Ponzi scheme, Herman Grad, et al v. Associated Bank, N.A. , brought in Brown County, Wisconsin in October 2009 was dismissed by the circuit court, and the dismissal was affirmed by the Wisconsin Court of Appeals in June 2011 in an unpublished opinion.
The Bank is currently subject to a Consent Order with the OCC relating to its Bank Secrecy Act of 1970 (BSA) compliance. The OCC has issued a written notice to the Bank related to the Banks past BSA deficiencies. After the OCCs review of the Banks response, the OCC may impose a civil money penalty related to these deficiencies. The Corporation is currently not able to estimate a reasonable range of losses relating to that possibility.
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, primarily to the government-sponsored enterprises (GSEs). The Corporations agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability. Subsequent to being sold, if a material underwriting deficiency or documentation defect is discovered, the Corporation may be obligated to repurchase the loan or reimburse the GSEs for losses incurred (collectively, make whole requests). The make whole requests and any related risk of loss under the representations and warranties are largely driven by borrower performance. As a result of make whole requests, the Corporation has repurchased loans with principal balances of $3 million and $5 million during the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, and paid loss reimbursement claims of
37
$3 million and $4 million during the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively. Make whole requests and claims had been relatively modest prior to 2012; however, similar to other banks, this activity steadily increased during the second half of 2012 and into the first nine months of 2013, and therefore, the Corporation had a repurchase reserve for potential claims on loans previously sold of $6 million at September 30, 2013, compared to $3 million at December 31, 2012. Make whole requests during 2012 and the first nine months of 2013 generally arose from loans sold during the period January 1, 2006 to September 30, 2013, which totaled $17.3 billion at the time of sale, and consisted primarily of loans sold to GSEs. As of September 30, 2013, approximately $7.4 billion of these sold loans remain outstanding. Management will continue to monitor this activity and its impact on the reserve. The following summarizes the changes in the mortgage repurchase reserve.
For the Nine | ||||||||
Months Ended | For the Year Ended | |||||||
September 30, 2013 | December 31, 2012 | |||||||
($ in Thousands) | ||||||||
Balance at beginning of period |
$ | 3,300 | $ | | ||||
Repurchase provision expense |
5,729 | 7,109 | ||||||
Charge offs |
(2,829 | ) | (3,809 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 6,200 | $ | 3,300 | ||||
|
|
|
|
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, 2013, and December 31, 2012, there were approximately $57 million and $79 million, respectively, of residential mortgage loans sold with such recourse risk. There have been limited instances and immaterial historical losses on repurchases for recourse under the limited recourse criteria.
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, 2013 and December 31, 2012, there were $249 million and $321 million, respectively, of such residential mortgage loans with credit risk recourse, upon which there have been negligible 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 was previously a party to 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 reinsurance treaties typically provided that the Corporation would assume liability for losses once they exceeded 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. During the first half of 2013, the Corporation terminated its reinsurance treaties with all third party PMI mortgage reinsurance carriers. As a result, the Corporations estimated liability for reinsurance losses was $0 as of September 30, 2013, compared to $8 million at December 31, 2012.
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 been working cooperatively with the OCC, and management believes it is in compliance with the Consent Order. The OCC has issued a written notice to the Bank related to the Banks past BSA deficiencies. After the OCCs review of the Banks response, the OCC may impose a civil money penalty related to these deficiencies. The Corporation is currently not able to estimate a reasonable range of losses relating to that possibility.
38
NOTE 13: 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. |
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 securities, certain Federal agency securities, 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 (municipal securities), 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-related instruments (swaps, caps, collars, and corridors) to service our customers needs, for which the Corporation simultaneously enters into offsetting derivative financial instruments (i.e., mirror interest rate-related instruments) 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 measurement 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
39
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.
As of January 1, 2013, the Corporation changed its valuation methodology for interest-rate related derivative financial instruments to discount cash flows based on Overnight Index Swap (OIS) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Under-collateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. The Corporation is making the changes to better align its inputs, assumptions, and pricing methodologies with those used in its principal market by most dealers and major market participants. The changes in valuation methodology are immaterial to the Corporations results of operations, financial position, and liquidity.
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, 2013, and December 31, 2012, 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.
40
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, 2013 and December 31, 2012, 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, 2013 | Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 1,003 | $ | 1,003 | $ | | $ | | ||||||||
Obligations of state and political subdivisions (municipal securities) |
702,727 | | 702,727 | | ||||||||||||
Residential mortgage-related securities: |
||||||||||||||||
Government-sponsored enterprise (GSE) |
3,617,080 | | 3,617,080 | | ||||||||||||
Private-label |
3,159 | | 3,159 | | ||||||||||||
GSE commercial mortgage-related securities |
429,108 | | 429,108 | | ||||||||||||
Asset-backed securities |
24,924 | | 24,924 | | ||||||||||||
Other securities (debt and equity) |
62,034 | 3,425 | 58,093 | 516 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available for sale |
$ | 4,840,035 | $ | 4,428 | $ | 4,835,091 | $ | 516 | ||||||||
Derivatives (trading and other assets) |
$ | 58,540 | $ | | $ | 54,980 | $ | 3,560 | ||||||||
Liabilities: |
||||||||||||||||
Derivatives (trading and other liabilities) |
$ | 62,561 | $ | | $ | 58,008 | $ | 4,553 |
41
Fair Value Measurements Using | ||||||||||||||||
December 31, 2012 | Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 1,004 | $ | 1,004 | $ | | $ | | ||||||||
Obligations of state and political subdivisions (municipal securities) |
801,188 | | 801,188 | | ||||||||||||
Residential mortgage-related securities: |
||||||||||||||||
GSE |
3,798,155 | | 3,798,155 | | ||||||||||||
Private-label |
6,149 | | 6,149 | | ||||||||||||
GSE commercial mortgage-related securities |
228,166 | | 228,166 | | ||||||||||||
Other securities (debt and equity) |
92,096 | 2,841 | 88,775 | 480 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available for sale |
$ | 4,926,758 | $ | 3,845 | $ | 4,922,433 | $ | 480 | ||||||||
Derivatives (trading and other assets) |
$ | 82,125 | $ | | $ | 74,331 | $ | 7,794 | ||||||||
Liabilities: |
||||||||||||||||
Derivatives (trading and other liabilities) |
$ | 80,110 | $ | | $ | 79,963 | $ | 147 |
The table below presents a rollforward of the balance sheet amounts for the year ended December 31, 2012 and the nine months ended September 30, 2013, 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, 2011 |
$ | 856 | $ | (200 | ) | |||
Total net gains included in income: |
||||||||
Mortgage derivative gain |
| 7,847 | ||||||
Total net gains included in other comprehensive income: |
||||||||
Unrealized investment securities gains |
49 | | ||||||
Sales of investment securities |
(425 | ) | | |||||
|
|
|
|
|||||
Balance December 31, 2012 |
$ | 480 | $ | 7,647 | ||||
|
|
|
|
|||||
Total net losses included in income: |
||||||||
Mortgage derivative loss |
| (8,640 | ) | |||||
Total net gains included in other comprehensive income: |
||||||||
Unrealized investment securities gains |
36 | | ||||||
|
|
|
|
|||||
Balance September 30, 2013 |
$ | 516 | $ | (993 | ) | |||
|
|
|
|
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2013, 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.
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
42
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 calculation takes 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 for reasonableness and reported to Mortgage Risk Management Committee. At September 30, 2013, the closing ratio was 82%.
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 40%.
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 15.0% and 10.1% at September 30, 2013, 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, 2013 and December 31, 2012, 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, 2013 | Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Loans held for sale |
$ | 102,052 | $ | | $ | 102,052 | $ | | ||||||||
Impaired loans (1) |
106,796 | | | 106,796 | ||||||||||||
Mortgage servicing rights |
69,214 | | | 69,214 | ||||||||||||
Fair Value Measurements Using | ||||||||||||||||
December 31, 2012 | Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Loans held for sale |
$ | 261,410 | $ | | $ | 261,410 | $ | | ||||||||
Impaired loans (1) |
115,741 | | | 115,741 | ||||||||||||
Mortgage servicing rights |
45,949 | | | 45,949 |
(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, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.
43
During the first nine months of 2013 and the full year 2012, 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 $25 million for the first nine months of 2013 and $47 million for the year ended December 31, 2012, 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 $2 million, $8 million, and $8 million to asset losses, net for the nine months ended September 30, 2013 and 2012, and the year ended December 31, 2012, respectively.
Fair Value of Financial Instruments:
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporations financial instruments.
The estimated fair values of the Corporations financial instruments at September 30, 2013 and December 31, 2012, were as follows.
September 30, 2013 | ||||||||||||||||||||
Carrying | Fair Value Measurements Using | |||||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 526,009 | $ | 526,009 | $ | 526,009 | $ | | $ | | ||||||||||
Interest-bearing deposits in other financial institutions |
277,761 | 277,761 | 277,761 | | | |||||||||||||||
Federal funds sold and securities purchased under agreements to resell |
25,400 | 25,400 | 25,400 | | | |||||||||||||||
Investment securities held to maturity |
125,095 | 121,489 | | 121,489 | | |||||||||||||||
Investment securities available for sale |
4,840,035 | 4,840,035 | 4,428 | 4,835,091 | 516 | |||||||||||||||
FHLB and Federal Reserve Bank stocks |
181,129 | 181,129 | | 181,129 | | |||||||||||||||
Loans held for sale |
102,052 | 104,060 | | 104,060 | | |||||||||||||||
Loans, net |
15,314,130 | 15,515,381 | | | 15,515,381 | |||||||||||||||
Bank owned life insurance |
565,623 | 565,623 | | 565,623 | | |||||||||||||||
Accrued interest receivable |
67,647 | 67,647 | 67,647 | | | |||||||||||||||
Interest rate-related agreements |
48,390 | 48,390 | | 48,390 | | |||||||||||||||
Foreign currency exchange forwards |
1,012 | 1,012 | | 1,012 | | |||||||||||||||
Interest rate lock commitments to originate residential mortgage loans held for sale |
3,560 | 3,560 | | | 3,560 | |||||||||||||||
Purchased options (time deposit) |
5,578 | 5,578 | | 5,578 | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Noninterest-bearing demand, savings, interest-bearing demand, and money market deposits |
$ | 16,584,417 | $ | 16,584,417 | $ | | $ | | $ | 16,584,417 | ||||||||||
Brokered CDs and other time deposits |
1,753,491 | 1,757,843 | | 1,757,843 | | |||||||||||||||
Short-term funding |
1,626,880 | 1,626,880 | | 1,626,880 | | |||||||||||||||
Long-term funding |
614,568 | 631,958 | | 631,958 | | |||||||||||||||
Accrued interest payable |
1,915 | 1,915 | 1,915 | | | |||||||||||||||
Interest rate-related agreements |
51,551 | 51,551 | | 51,551 | | |||||||||||||||
Foreign currency exchange forwards |
879 | 879 | | 879 | | |||||||||||||||
Standby letters of credit (1) |
3,934 | 3,934 | | 3,934 | | |||||||||||||||
Forward commitments to sell residential mortgage loans |
4,553 | 4,553 | | | 4,553 | |||||||||||||||
Written options (time deposit) |
5,578 | 5,578 | | 5,578 | |
44
December 31, 2012 | ||||||||||||||||||||
Carrying | Fair Value Measurements Using | |||||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 563,304 | $ | 563,304 | $ | 563,304 | $ | | $ | | ||||||||||
Interest-bearing deposits in other financial institutions |
147,434 | 147,434 | 147,434 | | | |||||||||||||||
Federal funds sold and securities purchased under agreements to resell |
27,135 | 27,135 | 27,135 | | | |||||||||||||||
Investment securities held to maturity |
39,877 | 39,679 | | 39,679 | | |||||||||||||||
Investment securities available for sale |
4,926,758 | 4,926,758 | 3,845 | 4,922,433 | 480 | |||||||||||||||
FHLB and Federal Reserve Bank stocks |
166,774 | 166,774 | | 166,774 | | |||||||||||||||
Loans held for sale |
261,410 | 265,914 | | 265,914 | | |||||||||||||||
Loans, net |
15,113,613 | 14,873,851 | | | 14,873,851 | |||||||||||||||
Bank owned life insurance |
556,556 | 556,556 | | 556,556 | | |||||||||||||||
Accrued interest receivable |
68,386 | 68,386 | 68,386 | | | |||||||||||||||
Interest rate-related agreements |
69,370 | 69,370 | | 69,370 | | |||||||||||||||
Foreign currency exchange forwards |
1,341 | 1,341 | | 1,341 | | |||||||||||||||
Interest rate lock commitments to originate residential mortgage loans held for sale |
7,794 | 7,794 | | | 7,794 | |||||||||||||||
Purchased options (time deposit) |
3,620 | 3,620 | | 3,620 | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Noninterest-bearing demand, savings, interest-bearing demand, and money market deposits |
$ | 14,941,971 | $ | 14,941,971 | $ | | $ | | $ | 14,941,971 | ||||||||||
Brokered CDs and other time deposits |
1,997,894 | 1,997,894 | | 1,997,894 | | |||||||||||||||
Short-term funding |
2,326,939 | 2,326,939 | | 2,326,939 | | |||||||||||||||
Long-term funding |
1,015,346 | 1,041,550 | | 1,041,550 | | |||||||||||||||
Accrued interest payable |
10,208 | 10,208 | 10,208 | | | |||||||||||||||
Interest rate-related agreements |
75,131 | 75,131 | | 75,131 | | |||||||||||||||
Foreign currency exchange forwards |
1,212 | 1,212 | | 1,212 | | |||||||||||||||
Standby letters of credit (1) |
3,811 | 3,811 | | 3,811 | | |||||||||||||||
Forward commitments to sell residential mortgage loans |
147 | 147 | | | 147 | |||||||||||||||
Written options (time deposit) |
3,620 | 3,620 | | 3,620 | |
(1) | The commitment on standby letters of credit was $272 million and $304 million at September 30, 2013 and December 31, 2012, respectively. See Note 12 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.
FHLB 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 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.
45
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-related instruments (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.
Purchased and written options The fair value of the Corporations purchased and written options is determined using quoted prices of the underlying stocks.
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
46
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 14: 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. Any retirement 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 Postretirement Plan. The Corporation has no plan assets attributable to the Postretirement Plan. The Corporation reserves the right to terminate or make changes to the Postretirement 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, 2013 and 2012, and for the full year 2012 were as follows.
Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||||||
September 30, | September 30, | December 31, | ||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2012 | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Components of Net Periodic Benefit Cost |
||||||||||||||||||||
Pension Plan: |
||||||||||||||||||||
Service cost |
$ | 2,975 | $ | 2,613 | $ | 8,925 | $ | 7,838 | $ | 10,287 | ||||||||||
Interest cost |
1,548 | 1,613 | 4,643 | 4,838 | 6,547 | |||||||||||||||
Expected return on plan assets |
(4,305 | ) | (3,558 | ) | (12,915 | ) | (10,673 | ) | (14,713 | ) | ||||||||||
Amortization of prior service cost |
17 | 17 | 52 | 52 | 72 | |||||||||||||||
Amortization of actuarial loss |
1,073 | 640 | 3,218 | 1,920 | 2,708 | |||||||||||||||
Settlement Charge |
| | | | 408 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total net periodic benefit cost |
$ | 1,308 | $ | 1,325 | $ | 3,923 | $ | 3,975 | $ | 5,309 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Postretirement Plan: |
||||||||||||||||||||
Interest cost |
$ | 40 | $ | 47 | $ | 120 | $ | 142 | $ | 182 | ||||||||||
Amortization of prior service cost |
| 43 | | 128 | 170 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total net periodic benefit cost |
$ | 40 | $ | 90 | $ | 120 | $ | 270 | $ | 352 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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 contributions of $28 million and $32 million to its Pension Plan in the first nine months of 2013 and 2012, respectively.
NOTE 15: Segment Reporting
The Corporation utilizes a risk-based internal profitability measurement system to provide 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. 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 three reportable segments are Commercial Banking, Consumer Banking, and Risk Management and Shared Services, with no segment representing more than half of the assets, liabilities or Tier 1 common equity of the Corporation as a whole.
47
The financial information of the Corporations segments has been compiled utilizing the accounting policies described in the Corporations 2012 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 the expected 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 2012 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 2013, certain organization and methodology changes were made and, accordingly, 2012 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 serves a wide range of customers including, businesses, non-profits, municipalities, and financial institutions. Business customers in this segment include companies with a sales size from $10 million to over $500 million and delivery of services is provided through our regional and middle market units, our commercial real estate unit, as well as our specialized industries and commercial financial services area. The financial solutions provided to our customers include but are not limited to: (1) Lending solutions, such as business loans and lines of credit, business credit cards, commercial real estate financing, construction loans, letters of credit, leasing, and asset based lending. For our largest clients we also offer syndications to meet their lending needs (2) Deposit and cash management solutions such as business checking and interest-bearing deposit products, safe deposit and night depository services, liquidity solutions, payables and receivables solutions, and information services (3) Specialized financial services such as insurance and benefits related products and services, risk management, and international banking solutions. In serving the commercial banking segment we compete based on an in-depth understanding of our customers financial needs, the ability to match market competitive solutions to those needs, and the highest standards of relationship and service excellence in the delivery of these services.
Consumer Banking The Consumer Banking segment serves individuals and small businesses (up to $10 million in sales size) through our various Retail Banking and Private Client offices, and provides companies of varying sizes with fiduciary services such as administration of pension, profit-sharing and other employee benefit plans, fiduciary and corporate agency services, and institutional asset management. The services provided to our individual and small business customers include but are not limited to: (1) Transactional solutions such as checking, debit and pre-paid cards, online banking and bill pay, and money transfer services (2) Lending solutions such as residential mortgages, home equity loans and lines of credit, business loans and lines, and personal and installment loans (3) Investable funds solutions such as savings, money market deposit accounts, IRA accounts, certificates of deposit, market linked certificates of deposit, fixed and variable annuities, full-service, discount and on-line investment brokerage; as well as trust and investment management accounts. In serving the consumer banking segment we compete based on providing a broad range of solutions to meet the needs of our customers in their entire financial lifecycle, convenient access to our services through multiple channels such as branches, phone based services, online and mobile banking, and a relationship based business model which assists our customers in navigating any changes and challenges in their financial circumstances.
48
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 (funds transfer pricing mismatches) and credit risk and provision residuals (long term credit charge mismatches). The earning assets within this segment include the Corporations investment portfolio and capital includes both allocated as well as any remaining unallocated capital.
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, 2013 |
|
|||||||||||||||
Net interest income |
$ | 237,071 | $ | 239,338 | $ | 1,935 | $ | 478,344 | ||||||||
Noninterest income |
70,665 | 152,746 | 13,815 | 237,226 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
307,736 | 392,084 | 15,750 | 715,570 | ||||||||||||
Credit provision * |
41,105 | 15,085 | (48,190 | ) | 8,000 | |||||||||||
Noninterest expense |
139,007 | 317,595 | 44,680 | 501,282 | ||||||||||||
Income before income taxes |
127,624 | 59,404 | 19,260 | 206,288 | ||||||||||||
Income tax expense (benefit) |
44,668 | 20,792 | (106 | ) | 65,354 | |||||||||||
Net income |
$ | 82,956 | $ | 38,612 | $ | 19,366 | $ | 140,934 | ||||||||
Return on average allocated capital (ROT1CE) ** |
14.4 | % | 9.6 | % | 3.7 | % | 9.8 | % | ||||||||
Nine Months Ended September 30, 2012 |
||||||||||||||||
Net interest income |
$ | 214,298 | $ | 229,955 | $ | 20,284 | $ | 464,537 | ||||||||
Noninterest income |
62,509 | 158,597 | 14,279 | 235,385 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
276,807 | 388,552 | 34,563 | 699,922 | ||||||||||||
Credit provision * |
34,298 | 14,539 | (48,837 | ) | | |||||||||||
Noninterest expense |
143,856 | 324,795 | 36,844 | 505,495 | ||||||||||||
Income before income taxes |
98,653 | 49,218 | 46,556 | 194,427 | ||||||||||||
Income tax expense |
34,529 | 17,226 | 10,327 | 62,082 | ||||||||||||
Net income |
$ | 64,124 | $ | 31,992 | $ | 36,229 | $ | 132,345 | ||||||||
Return on average allocated capital (ROT1CE) ** |
11.8 | % | 7.6 | % | 8.0 | % | 9.4 | % | ||||||||
Segment Balance Sheet Data |
||||||||||||||||
($ in Thousands) |
Commercial
Banking |
Consumer
Banking |
Risk Management
and Shared Services |
Consolidated
Total |
||||||||||||
Average Balances for YTD 3Q 2013 |
||||||||||||||||
Average earning assets |
$ | 8,411,966 | $ | 7,227,350 | $ | 5,252,541 | $ | 20,891,857 | ||||||||
Average loans |
8,403,176 | 7,227,350 | 3,927 | 15,634,453 | ||||||||||||
Average deposits |
5,376,970 | 9,637,856 | 2,273,966 | 17,288,792 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 770,005 | $ | 539,531 | $ | 566,473 | $ | 1,876,009 | ||||||||
Average Balances for YTD 3Q 2012 |
||||||||||||||||
Average earning assets |
$ | 7,416,060 | $ | 7,175,895 | $ | 4,881,252 | $ | 19,473,207 | ||||||||
Average loans |
7,409,822 | 7,175,895 | 25,348 | 14,611,065 | ||||||||||||
Average deposits |
4,405,655 | 9,397,577 | 1,420,573 | 15,223,805 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 725,564 | $ | 560,405 | $ | 540,301 | $ | 1,826,270 |
* | 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. |
49
Segment Income Statement Data
($ in Thousands) |
Commercial
Banking |
Consumer
Banking |
Risk Management
and Shared Services |
Consolidated
Total |
||||||||||||
Three Months Ended September 30, 2013 |
||||||||||||||||
Net interest income |
$ | 80,561 | $ | 80,590 | $ | (642 | ) | $ | 160,509 | |||||||
Noninterest income |
23,458 | 43,050 | 4,408 | 70,916 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
104,019 | 123,640 | 3,766 | 231,425 | ||||||||||||
Credit provision * |
14,100 | 5,038 | (19,138 | ) | | |||||||||||
Noninterest expense |
47,016 | 107,026 | 10,329 | 164,371 | ||||||||||||
Income before income taxes |
42,903 | 11,576 | 12,575 | 67,054 | ||||||||||||
Income tax expense |
15,016 | 4,052 | 2,328 | 21,396 | ||||||||||||
Net income |
$ | 27,887 | $ | 7,524 | $ | 10,247 | $ | 45,658 | ||||||||
Return on average allocated capital (ROT1CE) ** |
14.2 | % | 5.6 | % | 6.1 | % | 9.3 | % | ||||||||
Three Months Ended September 30, 2012 |
||||||||||||||||
Net interest income |
$ | 72,939 | $ | 73,171 | $ | 9,492 | $ | 155,602 | ||||||||
Noninterest income |
23,600 | 51,398 | 5,990 | 80,988 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
96,539 | 124,569 | 15,482 | 236,590 | ||||||||||||
Credit provision * |
11,946 | 4,828 | (16,774 | ) | | |||||||||||
Noninterest expense |
48,531 | 108,963 | 12,209 | 169,703 | ||||||||||||
Income before income taxes |
36,062 | 10,778 | 20,047 | 66,887 | ||||||||||||
Income tax expense |
12,622 | 3,772 | 4,098 | 20,492 | ||||||||||||
Net income |
$ | 23,440 | $ | 7,006 | $ | 15,949 | $ | 46,395 | ||||||||
Return on average allocated capital (ROT1CE) ** |
12.6 | % | 5.0 | % | 10.6 | % | 9.7 | % | ||||||||
Segment Balance Sheet Data |
||||||||||||||||
($ in Thousands) |
Commercial
Banking |
Consumer
Banking |
Risk Management
and Shared Services |
Consolidated
Total |
||||||||||||
Average Balances for 3Q 2013 |
||||||||||||||||
Average earning assets |
$ | 8,561,628 | $ | 7,166,154 | $ | 5,311,685 | $ | 21,039,467 | ||||||||
Average loans |
8,555,028 | 7,166,154 | 3,183 | 15,724,365 | ||||||||||||
Average deposits |
5,547,603 | 9,643,630 | 2,418,586 | 17,609,819 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 778,470 | $ | 530,368 | $ | 581,560 | $ | 1,890,398 | ||||||||
Average Balances for 3Q 2012 |
||||||||||||||||
Average earning assets |
$ | 7,752,013 | $ | 7,152,997 | $ | 4,754,786 | $ | 19,659,796 | ||||||||
Average loans |
7,742,175 | 7,152,997 | 21,621 | 14,916,793 | ||||||||||||
Average deposits |
4,622,499 | 9,346,068 | 1,647,289 | 15,615,856 | ||||||||||||
Average allocated capital (T1CE) ** |
$ | 740,400 | $ | 559,226 | $ | 550,984 | $ | 1,850,610 |
* | 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. |
Note 16: Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of accumulated other comprehensive income (loss) at September 30, 2013 and 2012, changes during the nine and three month periods then ended, and reclassifications out of accumulated other comprehensive income during the nine and three month periods ended September 30, 2013 and 2012, respectively. The amounts reclassified from accumulated other comprehensive income for the investment securities available for sale are included in investment securities gains, net on the consolidated statements of income, while the amounts reclassified from accumulated other comprehensive income for the defined benefit pension and post retirement obligations are a component of personnel expense on the consolidated statements of income.
50
Investments
Securities Available For Sale |
Defined Benefit
Pension and Post Retirement Obligations |
Cash Flow
Hedging Relationships |
Accumulated
Other Comprehensive Income (Loss) |
|||||||||||||
Balance January 1, 2013 |
$ | 86,109 | $ | (37,506 | ) | | $ | 48,603 | ||||||||
Other comprehensive loss before reclassifications |
(142,318 | ) | | | (142,318 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(582 | ) | 3,270 | | 2,688 | |||||||||||
Income tax (expense) benefit |
55,169 | (1,262 | ) | | 53,907 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other comprehensive income (loss) during period |
(87,731 | ) | 2,008 | | (85,723 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance September 30, 2013 |
$ | (1,622 | ) | $ | (35,498 | ) | $ | | $ | (37,120 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Balance January 1, 2012 |
$ | 99,761 | $ | (33,173 | ) | $ | (986 | ) | $ | 65,602 | ||||||
Other comprehensive income before reclassifications |
2,870 | | 6 | 2,876 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(4,109 | ) | 2,100 | 1,954 | (55 | ) | ||||||||||
Income tax (expense) benefit |
483 | (819 | ) | (784 | ) | (1,120 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other comprehensive income (loss) during period |
(756 | ) | 1,281 | 1,176 | 1,701 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance September 30, 2012 |
$ | 99,005 | $ | (31,892 | ) | $ | 190 | $ | 67,303 | |||||||
|
|
|
|
|
|
|
|
51
Investments
Securities Available For Sale |
Defined Benefit
Pension and Post Retirement Obligations |
Cash Flow
Hedging Relationships |
Accumulated
Other Comprehensive Income (Loss) |
|||||||||||||
Balance July 1, 2013 |
$ | 11,153 | $ | (36,168 | ) | | $ | (25,015 | ) | |||||||
Other comprehensive loss before reclassifications |
(20,558 | ) | | | (20,558 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(248 | ) | 1,090 | | 842 | |||||||||||
Income tax (expense) benefit |
8,031 | (420 | ) | | 7,611 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other comprehensive income (loss) during period |
(12,775 | ) | 670 | | (12,105 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance September 30, 2013 |
$ | (1,622 | ) | $ | (35,498 | ) | | $ | (37,120 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Balance July 1, 2012 |
$ | 99,021 | $ | (32,319 | ) | $ | (123 | ) | $ | 66,579 | ||||||
Other comprehensive income before reclassifications |
3,479 | | 20 | 3,499 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(3,506 | ) | 700 | 496 | (2,310 | ) | ||||||||||
Income tax (expense) benefit |
11 | (273 | ) | (203 | ) | (465 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other comprehensive income (loss) during period |
(16 | ) | 427 | 313 | 724 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance September 30, 2012 |
$ | 99,005 | $ | (31,892 | ) | $ | 190 | $ | 67,303 | |||||||
|
|
|
|
|
|
|
|
52
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, 2012, 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
53
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, and more frequently 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. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value, step one. If the calculated 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 calculated 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 2013, utilizing the qualitative assessment as permitted by recent accounting pronouncements (see Note 2, New Accounting Pronouncements Adopted of the notes to consolidated financial statements for additional information on this new accounting pronouncement). Factors that management considered in this assessment included macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management strategy, and changes in the composition or carrying amount of net assets. In addition, management considered the significant increases in both the Corporations common stock price and in the overall bank common stock index (based on the Nasdaq bank index), as well as the Corporations improving earnings per common share trend over the past year. Based on these assessments, management concluded that the 2013 annual qualitative impairment assessment indicated that it is more likely than not that the estimated fair value exceeded the carrying value (including goodwill) for each reporting unit. Therefore, a step one quantitative analysis was not required. The annual impairment testing in prior years was based upon a quantitative measurement of the fair value of the reporting units.
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 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, 2013 (holding all other factors unchanged), if refinance interest rates were to decrease 50 bp, the estimated value of the mortgage servicing rights asset would have been
54
approximately $8 million (or 12%) lower. Conversely, if refinance interest rates were to increase 50 bp, the estimated value of the mortgage servicing rights asset would have been approximately $8 million (or 11%) higher. However, the Corporations potential recovery recognition due to valuation improvement is limited to the balance of the mortgage servicing rights valuation reserve, which was $1 million at September 30, 2013. 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 13, 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 13 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 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 15, Segment Reporting, of the notes to consolidated financial statements, 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 15, Segment Reporting, 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 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 the first nine months of 2013, certain organization and methodology changes were made and, accordingly, 2012 results have been restated and presented on a comparable basis.
55
Year to Date Segment Review
The Commercial Banking segment consists of lending and deposit solutions to businesses, non-profits, municipalities, and financial institutions, and the support to deliver, fund and manage such banking solutions. The Commercial Banking segment had net income of $83 million for the first nine months of 2013, up $19 million compared to $64 million for the comparable period in 2012. The Corporation began providing resources in late 2011 to grow this segment, including investments to expand into new markets (Cincinnati, Indianapolis, and Michigan) and new industry lending segments (power, oil and gas). Primarily as a result of these investments, segment revenue increased by $31 million to $308 million for the first nine months of 2013 compared to $277 million for the first nine months of 2012. The credit provision for loans increased $7 million to $41 million during the first nine months of 2013 due to the growth in the segments loan balances, partially offset by improvement in credit quality as compared to the first nine months of 2012. Total noninterest expense for the first nine months of 2013 was $139 million, down $5 million from $144 million in the comparable period in 2012 as higher direct costs were more than offset by lower Corporate overhead charges. Average loan balances were $8.4 billion for the first nine months of 2013, up $1.0 billion from an average balance of $7.4 billion for the first nine months of 2012, and average deposit balances were $5.4 billion for the first nine months of 2013, up $1.0 billion from average deposits of $4.4 billion in the first nine months of 2012, reflecting our investments and strategy to expand and grow the Commercial Banking segment. Average allocated capital increased $44 million to $770 million for the first nine months of 2013 reflecting the increase in the segments loan balances offset by an improvement in credit quality as compared to the first nine months of 2012.
The Consumer Banking segment consists of lending and deposit solutions to individuals and small businesses and also provides a variety of investment and fiduciary products and services. The Consumer Banking segment had net income of $39 million in the first nine months of 2013, up $7 million compared to $32 million in the first nine months of 2012. Segment revenue grew $3 million to $392 million for the first nine months of 2013, primarily due to higher net interest income as increases in long-term funding rates favorably impacted the credits provided to the Consumer Banking segment on growth in deposit funding sources. The credit provision for loans was level at $15 million for the first nine months of 2013 and 2012. Total noninterest expense decreased $7 million to $318 million for the first nine months of 2013, as slightly higher direct costs were more than offset by lower allocated occupancy costs, reflecting a reduction in our branch network from branch closures. Average loan balances were level at $7.2 billion for both the first nine months of 2013 and 2012. Average deposits were $9.6 billion for the first nine months of 2013, up $240 million from $9.4 billion in the first nine months of 2012. Average allocated capital decreased $20 million to $540 million for the first nine months of 2013.
Risk Management and Shared Services had net income of $19 million in the first nine months of 2013, down $17 million compared to $36 million for the comparable period in 2012. The primary components of the decrease were an $18 million decrease in net interest income due to market changes in the long-term funding rates utilized in the funds transfer pricing methodology for allocating the net interest income and an $8 million increase in noninterest expense primarily due to higher unallocated occupancy costs for unused and vacant space as a result of retail branch closures. Average earning asset balances were $5.3 billion for the first nine months of 2013, up $371 million from an average balance of $4.9 billion during the first nine months of 2012, reflecting the growth in the Corporations investment portfolio.
Comparable Quarter Segment Review
The Commercial Banking segment had net income of $28 million for the third quarter of 2013, up $5 million compared to $23 million for the comparable quarter in 2012. The Corporation began providing resources to grow this segment in late 2011, including investments to expand into new markets (Cincinnati, Indianapolis, and Michigan) and new industry lending segments (power, oil and gas). Primarily as a result of these investments, segment revenue increased by $7 million to $104 million during the third quarter of 2013 compared to $97 million for the third quarter of 2012. The credit provision for loans increased $2 million to $14 million during the third quarter of 2013 due to the growth in the segments loan balances. Average loan balances were $8.6 billion for the third quarter of 2013, up $813 million from an average balance of $7.7 billion for the third quarter of 2012, and average deposit balances were $5.5 billion for the third quarter of 2013, up $925 million from average deposits of $4.6 billion in the third quarter of 2012, reflecting our investments and strategy to expand and grow the Commercial Banking segment. Average allocated capital increased $38 million to $778 million for the third quarter of 2013 reflecting the increase in the segments loan balances offset by an improvement in credit quality as compared to the third quarter of 2012.
The Consumer Banking segment had net income of $8 million in the third quarter of 2013, up $1 million compared to $7 million in the third quarter of 2012. Segment revenue decreased $1 million to $124 million for the third quarter of 2013, primarily due to lower mortgage banking income, partially offset by higher net interest income as increases in long-term funding rates favorably impacted the credits provided to the Consumer Banking segment on growth in deposit funding sources. The credit provision for loans was level for the third quarter of 2013 and 2012 at $5 million. Total noninterest expense was down $2 million primarily due to a reduction in allocated occupancy costs due to the reduction in our branch network from branch closures. Average loan balances were level at $7.2 billion for the comparable third quarter periods. Average deposits were $9.6 billion for the third quarter of 2013, up $298 million from $9.3 billion in the third quarter of 2012. Average allocated capital decreased $29 million to $530 million for the third quarter of 2013.
56
Risk Management and Shared Services had net income of $10 million in the third quarter of 2013, down $6 million compared to $16 million for the comparable quarter in 2012. Primary components of the decrease were a $12 million decrease in total revenue and a $2 million higher credit provision partially offset by a $2 million decrease in income tax expense. Average deposit balances were $2.4 billion for the third quarter of 2013, up $771 million from an average balance of $1.6 billion during the third quarter of 2012, primarily from funding loan growth.
Results of Operations Summary
The Corporation recorded net income of $141 million for the nine months ended September 30, 2013, compared to net income of $132 million for the nine months ended September 30, 2012. Net income available to common equity was $137 million for the nine months ended September 30, 2013, or net income of $0.82 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the nine months ended September 30, 2012, was $128 million, or net income of $0.74 for both basic and diluted earnings per common share. The net interest margin for the nine months ended September 30, 2013 was 3.15% compared to 3.29% for the nine months ended September 30, 2012.
TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)
3rd Qtr
2013 |
2nd Qtr
2013 |
1st Qtr
2013 |
4th Qtr
2012 |
3rd Qtr
2012 |
||||||||||||||||
Net income (Quarter) |
$ | 45,658 | $ | 47,888 | $ | 47,388 | $ | 46,628 | $ | 46,395 | ||||||||||
Net income (Year-to-date) |
140,934 | 95,276 | 47,388 | 178,973 | 132,345 | |||||||||||||||
Net income available to common equity (Quarter) |
$ | 44,373 | $ | 46,588 | $ | 46,088 | $ | 45,328 | $ | 45,095 | ||||||||||
Net income available to common equity (Year-to-date) |
137,049 | 92,676 | 46,088 | 173,773 | 128,445 | |||||||||||||||
Earnings per common share basic (Quarter) |
$ | 0.27 | $ | 0.28 | $ | 0.27 | $ | 0.26 | $ | 0.26 | ||||||||||
Earnings per common share basic (Year-to-date) |
0.82 | 0.55 | 0.27 | 1.00 | 0.74 | |||||||||||||||
Earnings per common share diluted (Quarter) |
$ | 0.27 | $ | 0.28 | $ | 0.27 | $ | 0.26 | $ | 0.26 | ||||||||||
Earnings per common share diluted (Year-to-date) |
0.82 | 0.55 | 0.27 | 1.00 | 0.74 | |||||||||||||||
Return on average assets (Quarter) |
0.78 | % | 0.82 | % | 0.83 | % | 0.83 | % | 0.84 | % | ||||||||||
Return on average assets (Year-to-date) |
0.81 | 0.83 | 0.83 | 0.81 | 0.81 | |||||||||||||||
Return on average equity (Quarter) |
6.33 | % | 6.58 | % | 6.60 | % | 6.23 | % | 6.29 | % | ||||||||||
Return on average equity (Year-to-date) |
6.50 | 6.59 | 6.60 | 6.07 | 6.07 | |||||||||||||||
Return on average tangible common equity (Quarter) |
9.48 | % | 9.76 | % | 9.81 | % | 9.15 | % | 9.32 | % | ||||||||||
Return on average tangible common equity (Year-to-date) |
9.68 | 9.78 | 9.81 | 8.96 | 9.02 | |||||||||||||||
Return on average Tier 1 common equity (Quarter) (1) |
9.31 | % | 9.94 | % | 10.07 | % | 9.61 | % | 9.69 | % | ||||||||||
Return on average Tier 1 common equity (Year-to-date) (1) |
9.77 | 10.00 | 10.07 | 9.45 | 9.39 | |||||||||||||||
Efficiency ratio (Quarter) (2) |
71.10 | % | 69.54 | % | 69.74 | % | 73.71 | % | 72.81 | % | ||||||||||
Efficiency ratio (Year-to-date) (2) |
70.11 | 69.64 | 69.74 | 72.92 | 72.65 | |||||||||||||||
Efficiency ratio, fully taxable equivalent (Quarter) (2) |
69.75 | % | 67.73 | % | 68.10 | % | 71.65 | % | 69.79 | % | ||||||||||
Efficiency ratio, fully taxable equivalent (Year-to-date) (2) |
68.51 | 67.91 | 68.10 | 69.99 | 69.43 | |||||||||||||||
Net interest margin (Quarter) |
3.13 | % | 3.16 | % | 3.17 | % | 3.32 | % | 3.26 | % | ||||||||||
Net interest margin (Year-to-date) |
3.15 | 3.17 | 3.17 | 3.30 | 3.29 |
(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. |
57
TABLE 1A
Reconciliation of Non-GAAP Measure
3rd Qtr
2013 |
2nd Qtr
2013 |
1st Qtr
2013 |
4th Qtr
2012 |
3rd Qtr
2012 |
||||||||||||||||
Efficiency ratio (Quarter) (a) |
71.10 | % | 69.54 | % | 69.74 | % | 73.71 | % | 72.81 | % | ||||||||||
Taxable equivalent adjustment (Quarter) |
(1.49 | ) | (1.39 | ) | (1.46 | ) | (1.57 | ) | (1.61 | ) | ||||||||||
Asset gains (losses), net (Quarter) |
0.58 | (0.01 | ) | 0.24 | (0.06 | ) | (0.98 | ) | ||||||||||||
Other intangible amortization (Quarter) |
(0.44 | ) | (0.41 | ) | (0.42 | ) | (0.43 | ) | (0.43 | ) | ||||||||||
Efficiency ratio, fully taxable equivalent (Quarter) (b) |
69.75 | % | 67.73 | % | 68.10 | % | 71.65 | % | 69.79 | % | ||||||||||
Efficiency ratio (Year-to-date) (a) |
70.11 | % | 69.64 | % | 69.74 | % | 72.92 | % | 72.65 | % | ||||||||||
Taxable equivalent adjustment (Year-to-date) |
(1.44 | ) | (1.43 | ) | (1.46 | ) | (1.60 | ) | (1.62 | ) | ||||||||||
Asset gains (losses), net (Year-to-date) |
0.26 | 0.12 | 0.24 | (0.90 | ) | (1.16 | ) | |||||||||||||
Other intangible amortization (Year-to-date) |
(0.42 | ) | (0.42 | ) | (0.42 | ) | (0.43 | ) | (0.44 | ) | ||||||||||
Efficiency ratio, fully taxable equivalent (Year-to-date) (b) |
68.51 | % | 67.91 | % | 68.10 | % | 69.99 | % | 69.43 | % |
(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, excluding other intangible amortization, 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 loans 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, 2013, was $493 million, an increase of $13 million (3%) versus the first nine months of 2012. The increase in taxable equivalent net interest income was attributable to favorable volume variances (as balance sheet changes in both volume and mix increased taxable equivalent net interest income by $42 million), partially offset by unfavorable rate variances (as the impact of changes in the interest rate environment and product pricing reduced taxable equivalent net interest income by $29 million).
The net interest margin for the first nine months of 2013 was 3.15%, 14 bp lower than 3.29% for the same period in 2012. This comparable period decrease was comprised of a 7 bp decrease in interest rate spread (32 bp decrease in yield on earning assets offset by a decrease in the cost of interest-bearing liabilities of 25 bp) and a 7 bp lower contribution from net free funds.
The Federal Reserve left interest rates unchanged during 2012 and the first nine months of 2013. For the remainder of 2013, the Corporation anticipates continued pressure on the net interest margin as earning asset yields will continue to compress, while the ability to manage deposit and funding costs lower will become more challenging.
The yield on earning assets was 3.47% for the first nine months of 2013, 32 bp lower than the comparable period last year. Loan yields were down 33 bp, (to 3.77%), 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 32 bp (to 2.56%), and was 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 0.41% for the first nine months of 2013 was 25 bp lower than the same period in 2012. Rates on interest-bearing deposits were down 14 bp (to 0.24%, reflecting the low rate environment and a reduction of higher cost deposit products). The cost of short and long-term funding decreased 38 bp (to 1.19%), with the cost of short-term funding down 15 bp (to 0.15%), while long-term funding decreased 14 bp (due to the early redemption of higher costing junior subordinated debentures during 2012).
58
Average earning assets were $20.9 billion for the first nine months of 2013, an increase of $1.4 billion (7%) from the comparable period last year. On average, loan balances increased $1.0 billion, including increases in commercial loans (up $1.1 billion) and residential mortgage loans (up $389 million), while retail loans decreased (down $488 million). Average investment securities and other short-term investments increased $395 million.
Average interest-bearing liabilities of $15.9 billion for the first nine months of 2013 increased $979 million from the first nine months of 2012. On average, interest-bearing deposits grew $1.6 billion (primarily attributable to a $1.2 billion increase in money market accounts and a $701 million increase in interest-bearing demand deposits, partially offset by a $417 million decrease in time deposits), while noninterest-bearing demand deposits (a principal component of net free funds) were up $433 million. Average short and long-term funding decreased $652 million between the comparable nine month periods, attributable to a $539 million 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) and a $205 million decrease in junior subordinated debentures.
59
TABLE 2
Net Interest Income Analysis
($ in Thousands)
Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
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 |
$ | 5,785,024 | $ | 156,541 | 3.62 | % | $ | 5,041,098 | $ | 149,001 | 3.95 | % | ||||||||||||
Commercial real estate lending |
3,695,150 | 109,298 | 3.95 | 3,316,306 | 105,259 | 4.24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial |
9,480,174 | 265,839 | 3.75 | 8,357,404 | 254,260 | 4.06 | ||||||||||||||||||
Residential mortgage |
3,666,556 | 91,074 | 3.31 | 3,277,879 | 91,273 | 3.71 | ||||||||||||||||||
Retail |
2,487,723 | 84,487 | 4.54 | 2,975,782 | 103,230 | 4.63 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
15,634,453 | 441,400 | 3.77 | 14,611,065 | 448,763 | 4.10 | ||||||||||||||||||
Investment securities |
4,930,195 | 97,340 | 2.63 | 4,444,144 | 101,033 | 3.03 | ||||||||||||||||||
Other short-term investments |
327,209 | 3,740 | 1.53 | 417,998 | 3,843 | 1.23 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Investments and other (1) |
5,257,404 | 101,080 | 2.56 | 4,862,142 | 104,876 | 2.88 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total earning assets |
20,891,857 | 542,480 | 3.47 | 19,473,207 | 553,639 | 3.79 | ||||||||||||||||||
Other assets, net |
2,328,652 | 2,314,461 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 23,220,509 | $ | 21,787,668 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
Savings deposits |
$ | 1,185,059 | $ | 693 | 0.08 | % | $ | 1,085,514 | $ | 626 | 0.08 | % | ||||||||||||
Interest-bearing demand deposits |
2,819,585 | 3,470 | 0.16 | 2,118,789 | 2,788 | 0.18 | ||||||||||||||||||
Money market deposits |
7,178,857 | 10,304 | 0.19 | 5,930,870 | 11,233 | 0.25 | ||||||||||||||||||
Time deposits |
1,891,026 | 9,460 | 0.67 | 2,307,642 | 17,693 | 1.02 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
13,074,527 | 23,927 | 0.24 | 11,442,815 | 32,340 | 0.38 | ||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
696,343 | 1,051 | 0.20 | 1,241,652 | 2,129 | 0.23 | ||||||||||||||||||
Other short-term funding |
1,357,230 | 1,291 | 0.13 | 1,066,063 | 3,068 | 0.38 | ||||||||||||||||||
Long-term funding |
779,079 | 22,833 | 3.91 | 1,177,223 | 35,740 | 4.05 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total short and long-term funding |
2,832,652 | 25,175 | 1.19 | 3,484,938 | 40,937 | 1.57 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
15,907,179 | 49,102 | 0.41 | 14,927,753 | 73,277 | 0.66 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Noninterest-bearing demand deposits |
4,214,265 | 3,780,990 | ||||||||||||||||||||||
Other liabilities |
200,123 | 165,777 | ||||||||||||||||||||||
Stockholders equity |
2,898,942 | 2,913,148 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and equity |
$ | 23,220,509 | $ | 21,787,668 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.06 | % | 3.13 | % | ||||||||||||||||||||
Net free funds |
0.09 | 0.16 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income, taxable equivalent, and net interest margin |
$ | 493,378 | 3.15 | % | $ | 480,362 | 3.29 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Taxable equivalent adjustment |
15,034 | 15,825 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 478,344 | $ | 464,537 | ||||||||||||||||||||
|
|
|
|
(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. |
60
TABLE 2
Net Interest Income Analysis
($ in Thousands)
Three Months Ended September 30, 2013 | Three Months Ended September 30, 2012 | |||||||||||||||||||||||
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 |
$ | 5,876,745 | $ | 52,215 | 3.53 | % | $ | 5,275,069 | $ | 51,432 | 3.88 | % | ||||||||||||
Commercial real estate lending |
3,768,895 | 37,630 | 3.96 | 3,440,220 | 35,913 | 4.16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial |
9,645,640 | 89,845 | 3.70 | 8,715,289 | 87,345 | 3.99 | ||||||||||||||||||
Residential mortgage |
3,714,459 | 30,479 | 3.28 | 3,320,212 | 30,044 | 3.62 | ||||||||||||||||||
Retail |
2,364,266 | 26,816 | 4.51 | 2,881,292 | 33,251 | 4.60 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
15,724,365 | 147,140 | 3.72 | 14,916,793 | 150,640 | 4.02 | ||||||||||||||||||
Investment securities |
4,980,228 | 32,282 | 2.59 | 4,319,404 | 31,950 | 2.96 | ||||||||||||||||||
Other short-term investments |
334,874 | 1,260 | 1.51 | 423,599 | 1,334 | 1.26 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Investments and other (1) |
5,315,102 | 33,542 | 2.52 | 4,743,003 | 33,284 | 2.81 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total earning assets |
21,039,467 | 180,682 | 3.42 | 19,659,796 | 183,924 | 3.73 | ||||||||||||||||||
Other assets, net |
2,274,110 | 2,356,952 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 23,313,577 | $ | 22,016,748 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
Savings deposits |
$ | 1,204,743 | $ | 249 | 0.08 | % | $ | 1,117,194 | 229 | 0.08 | % | |||||||||||||
Interest-bearing demand deposits |
2,810,962 | 1,101 | 0.16 | 2,136,280 | 926 | 0.17 | ||||||||||||||||||
Money market deposits |
7,556,050 | 3,449 | 0.18 | 6,240,596 | 3,932 | 0.25 | ||||||||||||||||||
Time deposits |
1,773,760 | 2,818 | 0.63 | 2,159,684 | 4,664 | 0.86 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
13,345,515 | 7,617 | 0.23 | 11,653,754 | 9,751 | 0.33 | ||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
633,594 | 308 | 0.19 | 1,266,995 | 750 | 0.24 | ||||||||||||||||||
Other short-term funding |
1,417,113 | 434 | 0.12 | 837,316 | 815 | 0.39 | ||||||||||||||||||
Long-term funding |
614,708 | 6,866 | 4.47 | 1,182,632 | 11,738 | 3.97 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total short and long-term funding |
2,665,415 | 7,608 | 1.14 | 3,286,943 | 13,303 | 1.62 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
16,010,930 | 15,225 | 0.38 | 14,940,697 | 23,054 | 0.62 | ||||||||||||||||||
Noninterest-bearing demand deposits |
4,264,304 | 3,962,102 | ||||||||||||||||||||||
Other liabilities |
175,453 | 180,239 | ||||||||||||||||||||||
Stockholders equity |
2,862,890 | 2,933,710 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and equity |
$ | 23,313,577 | $ | 22,016,748 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.04 | % | 3.11 | % | ||||||||||||||||||||
Net free funds |
0.09 | 0.15 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income, taxable equivalent, and net interest margin |
$ | 165,457 | 3.13 | % | $ | 160,870 | 3.26 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Taxable equivalent adjustment |
4,948 | 5,268 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 160,509 | $ | 155,602 | ||||||||||||||||||||
|
|
|
|
(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. |
61
Provision for Loan Losses
The provision for loan losses for the first nine months of 2013 was $8 million, compared to $0 for the first nine months of 2012 and $3 million for the full year of 2012. Net charge offs were $34 million for the first nine months of 2013, compared to $63 million for the first nine months of 2012 and $84 million for the full year of 2012. Annualized net charge offs as a percent of average loans for the first nine months of 2013 were 0.29%, compared to 0.58% for the first nine months of 2012 and 0.57% for the full year of 2012. At September 30, 2013, the allowance for loan losses was $272 million, down from $315 million at September 30, 2012 and $297 million at December 31, 2012. The ratio of the allowance for loan losses to total loans at September 30, 2013, was 1.74%, compared to 2.11% at September 30, 2012 and 1.93% at December 31, 2012. Nonaccrual loans at September 30, 2013 were $208 million, compared to $278 million at September 30, 2012, and $253 million at December 31, 2012. 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 2013 was $237 million, up $2 million (1%) from the first nine months of 2012.
TABLE 3
Noninterest Income
($ in Thousands)
3rd Qtr | 3rd Qtr | Dollar | Percent | YTD | YTD | Dollar | Percent | |||||||||||||||||||||||||
2013 | 2012 | Change | Change | 2013 | 2012 | Change | Change | |||||||||||||||||||||||||
Trust service fees |
$ | 11,380 | $ | 10,396 | $ | 984 | 9.5 | % | $ | 33,695 | $ | 30,308 | $ | 3,387 | 11.2 | % | ||||||||||||||||
Service charges on deposit accounts |
18,407 | 17,290 | 1,117 | 6.5 | 52,679 | 52,100 | 579 | 1.1 | ||||||||||||||||||||||||
Card-based and other nondeposit fees |
12,688 | 12,209 | 479 | 3.9 | 37,229 | 35,172 | 2,057 | 5.8 | ||||||||||||||||||||||||
Insurance commissions |
11,356 | 11,650 | (294 | ) | (2.5 | ) | 32,750 | 36,152 | (3,402 | ) | (9.4 | ) | ||||||||||||||||||||
Brokerage and annuity commissions |
3,792 | 3,632 | 160 | 4.4 | 10,996 | 11,965 | (969 | ) | (8.1 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Core fee-based revenue |
57,623 | 55,177 | 2,446 | 4.4 | 167,349 | 165,697 | 1,652 | 1.0 | ||||||||||||||||||||||||
Mortgage banking income |
6,015 | 23,573 | (17,558 | ) | (74.5 | ) | 38,952 | 71,773 | (32,821 | ) | (45.7 | ) | ||||||||||||||||||||
Mortgage servicing rights expense |
2,473 | 7,992 | (5,519 | ) | (69.1 | ) | (1,618 | ) | 21,803 | (23,421 | ) | (107.4 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Mortgage banking, net |
3,542 | 15,581 | (12,039 | ) | (77.3 | ) | 40,570 | 49,970 | (9,400 | ) | (18.8 | ) | ||||||||||||||||||||
Capital market fees, net |
2,652 | 3,609 | (957 | ) | (26.5 | ) | 10,309 | 9,998 | 311 | 3.1 | ||||||||||||||||||||||
Bank owned life insurance (BOLI) income |
2,817 | 3,290 | (473 | ) | (14.4 | ) | 9,068 | 10,746 | (1,678 | ) | (15.6 | ) | ||||||||||||||||||||
Other |
2,100 | 3,134 | (1,034 | ) | (33.0 | ) | 6,622 | 6,752 | (130 | ) | (1.9 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Subtotal |
68,734 | 80,791 | (12,057 | ) | (14.9 | ) | 233,918 | 243,163 | (9,245 | ) | (3.8 | ) | ||||||||||||||||||||
Asset gains (losses), net |
1,934 | (3,309 | ) | 5,243 | (158.4 | ) | 2,726 | (11,887 | ) | 14,613 | (122.9 | ) | ||||||||||||||||||||
Investment securities gains, net |
248 | 3,506 | (3,258 | ) | (92.9 | ) | 582 | 4,109 | (3,527 | ) | (85.8 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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Total noninterest income |
$ | 70,916 | $ | 80,988 | $ | (10,072 | ) | (12.4 | )% | $ | 237,226 | $ | 235,385 | $ | 1,841 | 0.8 | % | |||||||||||||||
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Trust service fees were $34 million for the first nine months of 2013, up $3 million (11%) from the comparable period in 2012. The market value of assets under management at September 30, 2013 and 2012 was $7.1 billion and $5.9 billion, respectively.
Card-based and other nondeposit fees were $37 million for the first nine months of 2013, up $2 million (6%) from the first nine months of 2012, primarily attributable to higher commercial loan service charges due to year over year growth in commercial loan balances. Insurance commissions were $33 million, down $3 million (9%) from the first nine months of 2012, due to a $3 million reserve established in 2013 related to third party insurance products sold in prior years. Brokerage and annuity commissions were down $1 million (8%) for the comparable nine month periods of 2013 and 2012, attributable to lower fixed and variable annuity commissions.
62
Net mortgage banking income was $41 million for the first nine months of 2013 and $50 million for the first nine months of 2012. 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 $39 million for the first nine months of 2013, a decrease of $33 million compared to the first nine months of 2012. This decrease was primarily attributable to lower gains on sales and related income (down $27 million) and a $6 million repurchase reserve provision for losses related to repurchases and loss reimbursements on previously sold mortgage loans in the first nine months of 2013 versus none in the first nine months of 2012 (see Note 12, Commitments, Off-Balance Sheet Arrangements and Contingent Liabilities of the notes to consolidated financial statements for additional information concerning this repurchase reserve). Secondary mortgage production was $2.0 billion for both the first nine months of 2013 and 2012.
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 $23 million lower than the comparable nine month period in 2012, with a $18 million favorable change to the valuation reserve (comprised of a $14 million recovery to the valuation reserve for the first nine months of 2013 compared to a $4 million addition to the valuation reserve for the first nine months of 2012) and a $5 million reduction in amortization. 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 and higher amortization. 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 and lower amortization. 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, 2013, the mortgage servicing rights asset, net of its valuation allowance, was $64 million, representing 79 bp of the $8.0 billion servicing portfolio, compared to a net mortgage servicing rights asset of $45 million, representing 60 bp of the $7.5 billion servicing portfolio at September 30, 2012. 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 13, Fair Value Measurements, of the notes to consolidated financial statements for additional disclosure.
Bank owned life insurance income was $9 million, down $2 million from the first nine months of 2012, primarily due to death benefits received during the first nine months of 2012, as well as the lower interest rates on the underlying assets of the BOLI investment. Net asset gains of $3 million for the first nine months of 2013 were primarily attributable to gains of $5 million on the sale of real estate and miscellaneous assets, partially offset by losses of $2 million on the sales and other write-downs of other real estate owned. Net asset losses of $12 million for the first nine months of 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.
Noninterest Expense
Noninterest expense was $501 million for the first nine months of 2013, down $4 million (1%) from the comparable period in 2012. Personnel expense was up $12 million (4%), while nonpersonnel noninterest expenses were down $16 million (8%) on a combined basis. For 2013, the Corporation expects flat year over year noninterest expense.
63
TABLE 4
Noninterest Expense
($ in Thousands)
3rd Qtr | 3rd Qtr | Dollar | Percent | YTD | YTD | Dollar | Percent | |||||||||||||||||||||||||
2013 | 2012 | Change | Change | 2013 | 2012 | Change | Change | |||||||||||||||||||||||||
Personnel expense |
$ | 98,102 | $ | 95,231 | $ | 2,871 | 3.0 | % | $ | 295,800 | $ | 283,331 | $ | 12,469 | 4.4 | % | ||||||||||||||||
Occupancy |
14,758 | 14,334 | 424 | 3.0 | 44,725 | 43,521 | 1,204 | 2.8 | ||||||||||||||||||||||||
Equipment |
6,213 | 5,935 | 278 | 4.7 | 18,842 | 17,122 | 1,720 | 10.0 | ||||||||||||||||||||||||
Data processing |
12,323 | 11,022 | 1,301 | 11.8 | 36,482 | 31,842 | 4,640 | 14.6 | ||||||||||||||||||||||||
Business development and advertising |
5,947 | 5,059 | 888 | 17.6 | 15,512 | 15,908 | (396 | ) | (2.5 | ) | ||||||||||||||||||||||
Other intangible asset amortization |
1,010 | 1,048 | (38 | ) | (3.6 | ) | 3,032 | 3,146 | (114 | ) | (3.6 | ) | ||||||||||||||||||||
Loan expense |
3,157 | 3,297 | (140 | ) | (4.2 | ) | 9,485 | 9,155 | 330 | 3.6 | ||||||||||||||||||||||
Legal and professional fees |
3,482 | 7,686 | (4,204 | ) | (54.7 | ) | 14,310 | 23,058 | (8,748 | ) | (37.9 | ) | ||||||||||||||||||||
Losses other than loans |
(1,400 | ) | 3,577 | (4,977 | ) | (139.1 | ) | 83 | 9,187 | (9,104 | ) | (99.1 | ) | |||||||||||||||||||
Foreclosure / OREO expense |
2,515 | 4,071 | (1,556 | ) | (38.2 | ) | 7,239 | 11,776 | (4,537 | ) | (38.5 | ) | ||||||||||||||||||||
FDIC expense |
4,755 | 5,017 | (262 | ) | (5.2 | ) | 14,582 | 14,665 | (83 | ) | (0.6 | ) | ||||||||||||||||||||
Other |
13,509 | 13,426 | 83 | 0.6 | 41,190 | 42,784 | (1,594 | ) | (3.7 | ) | ||||||||||||||||||||||
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Total noninterest expense |
$ | 164,371 | $ | 169,703 | $ | (5,332 | ) | (3.1 | )% | $ | 501,282 | $ | 505,495 | $ | (4,213 | ) | (0.8 | )% | ||||||||||||||
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Personnel expense (which includes salary-related expenses and fringe benefit expenses) was $296 million for the first nine months of 2013, up $12 million (4%) versus the first nine months of 2012. Average full-time equivalent employees were 4,776 for the first nine months of 2013, down 4% from 4,987 for the comparable nine month period of 2012. Salary-related expenses increased $15 million (7%). This increase was primarily the result of higher compensation (up $8 million or 5%) and higher performance based incentives (up $4 million or 6%). Fringe benefit expenses were down $3 million (5%) versus the first nine months of 2012, primarily due to a decrease in health insurance costs.
Nonpersonnel noninterest expenses on a combined basis were $205 million, down $16 million (8%) compared to the first nine months of 2012. Occupancy, equipment and data processing were up $8 million (8%), due to strategic investments in our branch network, systems and infrastructure. Legal and professional fees for the first nine months of 2013 were $14 million, down $9 million (38%) from the comparable nine month period in 2012 due to a decrease in consultant costs related to certain BSA compliance issues. Losses other than loans decreased $9 million from the first nine months of 2012 primarily due to a $5 million decrease in the provision for losses on unfunded commitments and a $3 million decrease in the provision for reinsurance losses. Foreclosure / OREO expenses of $7 million decreased $5 million, primarily attributable to a decline in legal and collection expenses related to the improvement in credit quality. All remaining noninterest expense categories on a combined basis were down $2 million (2%) compared to the first nine months of 2012.
Income Taxes
For the first nine months of 2013, the Corporation recognized income tax expense of $65 million, compared to income tax expense of $62 million for the first nine months of 2012. The effective tax rate was 31.68% for the first nine months of 2013, compared to an effective tax rate of 31.93% for the first nine months of 2012. During the fourth quarter of 2013, the Corporation expects to record a $6 million net decrease in the reserve for uncertain tax positions related to the settlement of a tax issue and the expiration of various statutes of limitations.
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.
64
Balance Sheet
At September 30, 2013, total assets were $23.7 billion, up $201 million (1%) from December 31, 2012. Loans of $15.6 billion at September 30, 2013 were up $175 million (1%) from December 31, 2012, with increases in residential mortgage loans of $313 million and commercial loans of $236 million, partially offset by a decrease of $328 million in home equity loans. See section Credit Risk for a detailed discussion of the changes in the loan portfolio and the related credit risk management for each loan type. Investment securities were $5.0 billion at September 30, 2013, unchanged from year-end 2012.
At September 30, 2013, total deposits of $18.3 billion were up $1.4 billion (8%) from December 31, 2012. Since December 31, 2012, money market deposits increased $1.7 billion and interest- bearing demand deposits increased $181 million, while other time deposits were down $274 million. Noninterest-bearing demand deposits decreased $306 million to $4.5 billion and represented 24% of total deposits, down from 28% of total deposits at December 31, 2012. Given the increase in deposit balances, short and long-term funding declined $1.1 billion (33%) since year-end 2012, including a decrease of $925 million in FHLB advances.
Since September 30, 2012, loans increased $620 million (4%), with commercial loans up $662 million and residential mortgage loans up $485 million, offset by a $466 million decline in home equity loans. Since September 30, 2012, deposits increased $1.9 billion (11%), attributable to a $1.5 billion increase in money market deposits, a $505 million increase in interest bearing demand deposits, and a $133 million increase in noninterest-bearing demand deposits, partially offset by a $370 million decrease in other time deposits. Given the increase in deposit balances, short and long-term funding declined $817 million (27%), including a $533 million decrease in customer funding, the repayment of $186 million of junior subordinated debentures, and a net decrease of $100 million in FHLB advances.
TABLE 5
Period End Loan Composition
($ in Thousands)
September 30,
2013 |
June 30,
2013 |
March 31,
2013 |
December 31,
2012 |
September 30,
2012 |
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% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 4,703,056 | 30 | % | $ | 4,752,838 | 30 | % | $ | 4,651,143 | 30 | % | $ | 4,502,021 | 29 | % | $ | 4,265,356 | 29 | % | ||||||||||||||||||||
Commercial real estateowner occupied |
1,147,352 | 8 | 1,174,866 | 8 | 1,199,513 | 8 | 1,219,747 | 8 | 1,197,517 | 8 | ||||||||||||||||||||||||||||||
Lease financing |
51,727 | | 55,084 | | 57,908 | | 64,196 | 1 | 60,818 | | ||||||||||||||||||||||||||||||
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Commercial and business lending |
5,902,135 | 38 | 5,982,788 | 38 | 5,908,564 | 38 | 5,785,964 | 38 | 5,523,691 | 37 | ||||||||||||||||||||||||||||||
Commercial real estateinvestor |
2,847,152 | 18 | 3,010,992 | 19 | 2,900,167 | 18 | 2,906,759 | 19 | 2,787,158 | 19 | ||||||||||||||||||||||||||||||
Real estate construction |
834,744 | 5 | 800,569 | 5 | 729,145 | 5 | 655,381 | 4 | 611,186 | 4 | ||||||||||||||||||||||||||||||
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Commercial real estate lending |
3,681,896 | 23 | 3,811,561 | 24 | 3,629,312 | 23 | 3,562,140 | 23 | 3,398,344 | 23 | ||||||||||||||||||||||||||||||
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Total commercial |
9,584,031 | 61 | 9,794,349 | 62 | 9,537,876 | 61 | 9,348,104 | 61 | 8,922,035 | 60 | ||||||||||||||||||||||||||||||
Home equity revolving lines of credit |
875,703 | 6 | 888,162 | 6 | 904,187 | 6 | 936,065 | 6 | 988,800 | 7 | ||||||||||||||||||||||||||||||
Home equity loans first liens |
794,912 | 5 | 863,779 | 5 | 940,017 | 6 | 1,013,757 | 6 | 1,079,075 | 7 | ||||||||||||||||||||||||||||||
Home equity loans junior liens |
220,763 | 1 | 234,292 | 2 | 254,203 | 2 | 269,672 | 2 | 289,025 | 2 | ||||||||||||||||||||||||||||||
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Home equity |
1,891,378 | 12 | 1,986,233 | 13 | 2,098,407 | 14 | 2,219,494 | 14 | 2,356,900 | 16 | ||||||||||||||||||||||||||||||
Installment |
420,268 | 3 | 434,029 | 3 | 447,445 | 3 | 466,727 | 3 | 482,451 | 3 | ||||||||||||||||||||||||||||||
Residential mortgage |
3,690,177 | 24 | 3,531,988 | 22 | 3,467,834 | 22 | 3,376,697 | 22 | 3,204,828 | 21 | ||||||||||||||||||||||||||||||
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Total consumer |
6,001,823 | 39 | 5,952,250 | 38 | 6,013,686 | 39 | 6,062,918 | 39 | 6,044,179 | 40 | ||||||||||||||||||||||||||||||
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Total loans |
$ | 15,585,854 | 100 | % | $ | 15,746,599 | 100 | % | $ | 15,551,562 | 100 | % | $ | 15,411,022 | 100 | % | $ | 14,966,214 | 100 | % | ||||||||||||||||||||
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Farmland |
$ | 14,278 | 1 | % | $ | 14,867 | 1 | % | $ | 15,761 | 1 | % | $ | 17,730 | 1 | % | $ | 18,471 | 1 | % | ||||||||||||||||||||
Multi-family |
896,819 | 31 | 965,373 | 32 | 905,268 | 31 | 905,372 | 31 | 827,096 | 30 | ||||||||||||||||||||||||||||||
Non-owner occupied |
1,936,055 | 68 | 2,030,752 | 67 | 1,979,138 | 68 | 1,983,657 | 68 | 1,941,591 | 69 | ||||||||||||||||||||||||||||||
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Commercial real estateinvestor |
$ | 2,847,152 | 100 | % | $ | 3,010,992 | 100 | % | $ | 2,900,167 | 100 | % | $ | 2,906,759 | 100 | % | $ | 2,787,158 | 100 | % | ||||||||||||||||||||
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1-4 family construction |
$ | 248,294 | 30 | % | $ | 238,336 | 30 | % | $ | 209,290 | 29 | % | $ | 176,874 | 27 | % | $ | 139,431 | 23 | % | ||||||||||||||||||||
All other construction |
586,450 | 70 | 562,233 | 70 | 519,855 | 71 | 478,507 | 73 | 471,755 | 77 | ||||||||||||||||||||||||||||||
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Real estate construction |
$ | 834,744 | 100 | % | $ | 800,569 | 100 | % | $ | 729,145 | 100 | % | $ | 655,381 | 100 | % | $ | 611,186 | 100 | % | ||||||||||||||||||||
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65
Credit Risk
Total loans were $15.6 billion at September 30, 2013, an increase of $175 million or 1% from December 31, 2012. Commercial and business loans were $5.9 billion, up $116 million (2%) from December 31, 2012, to represent 38% of total loans at September 30, 2013. Commercial real estate totaled $3.7 billion at September 30, 2013 and represented 23% of total loans, an increase of $120 million (3%) from December 31, 2012. Consumer loans were $6.0 billion, down $61 million (1%) from December 31, 2012, and represented 39% of total loans at September 30, 2013.
The Corporation has long-term guidelines relative to the proportion of Commercial and Business, Commercial Real Estate, and Consumer loans within the overall loan portfolio, with each targeted to represent 30-40% of the overall loan portfolio. The targeted long-term guidelines were unchanged during 2012 and the first nine months of 2013. Furthermore, certain sub-asset classes within the respective portfolios were further defined and dollar limitations were placed on these sub-portfolios. These guidelines and limits are reviewed quarterly and approved annually by the Enterprise Risk Committee of the Corporations Board of Directors. These guidelines and limits are designed to create balance and diversification within the loan portfolios.
The commercial and business lending portfolio, which consists of commercial and business loans and owner occupied commercial real estate loans, was $5.9 billion at September 30, 2013, up $116 million (2%) since year-end 2012. The commercial and business lending classification primarily includes commercial loans to middle market companies and small businesses. At September 30, 2013, the largest industry groups within the commercial and business loan category included the manufacturing sector which represented 8% of total loans and 21% of the total commercial and business loan portfolio. The next largest industry group within the commercial and business loan category included the wholesale trade sector, which represented 4% of total loans and 11% of the total commercial and business loan portfolio at September 30, 2013. The remaining portfolio is spread over a diverse range of industries, none of which exceeds 5% of total loans. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrowers operations or on the value of underlying collateral, if any.
The commercial real estate lending portfolio, which consists of investor commercial real estate and construction loans, totaled $3.7 billion at September 30, 2013, up $120 million (3%) from December 31, 2012. Within the commercial real estate lending portfolio, commercial real estate lending to investors totaled $2.8 billion at September 30, 2013, a decrease of $60 million (2%) from December 31, 2012. Commercial real estate primarily includes commercial-based loans to investors that are secured by commercial income properties or multifamily projects. Commercial real estate loans are typically intermediate to long-term financings. Loans of this type are mainly secured by commercial income properties or multifamily projects. Credit risk is managed in a similar manner to commercial and industrial loans and real estate construction by employing sound underwriting guidelines, lending primarily to borrowers in local markets and businesses, periodically evaluating the underlying collateral, and formally reviewing the borrowers financial soundness and relationship on an ongoing basis. Real estate construction loans were $835 million, an increase of $179 million (27%) compared to December 31, 2012. Loans in this classification are primarily short-term or interim loans that provide financing for the acquisition or development of commercial income properties, multifamily projects or residential development, both single family and condominium. Real estate construction loans are made to developers and project managers who are generally well known to the Corporation, and have prior successful project experience. The credit risk associated with real estate construction loans is generally confined to specific geographic areas but is also influenced by general economic conditions. The Corporation controls the credit risk on these types of loans by making loans in familiar markets to developers, underwriting the loans to meet the requirements of institutional investors in the secondary market, reviewing the merits of individual projects, controlling loan structure, and monitoring project progress and construction advances.
The Corporations current lending standards for commercial real estate and real estate construction lending are determined by property type and specifically address many criteria, including: maximum loan amounts, maximum loan-to-value (LTV), requirements for pre-leasing and / or presales, minimum borrower equity, and maximum loan to cost. Currently, the maximum standard for LTV is 80%, with lower limits established for certain higher risk types, such as raw land which has a 50% LTV maximum. The Corporations LTV guidelines are in compliance with regulatory supervisory limits. In most cases, for real estate construction loans, the loan amounts include interest reserves, which are built into the loans and sized to fund loan payments through construction and lease up and / or sell out.
Consumer loans totaled $6.0 billion at September 30, 2013, down $61 million (1%) compared to December 31, 2012. Loans in this classification include residential mortgage, home equity and installment loans. Residential mortgage loans totaled $3.7 billion at September 30, 2013, up $313 million (9%) from December 31, 2012. Residential mortgage loans include conventional first lien home mortgages and the Corporation generally limits the maximum loan to 80% of collateral value without credit enhancement (e.g. PMI insurance). As part of managements historical practice of originating and servicing residential mortgage loans, generally the
66
Corporations 30-year, fixed-rate residential real estate mortgage loans are sold in the secondary market with servicing rights retained. The Corporation also retains a portion of its 15-year and under, fixed-rate residential real estate mortgages in its loan portfolio. At September 30, 2013, the residential mortgage portfolio was comprised of $1.4 billion of fixed-rate residential real estate mortgages and $2.3 billion of adjustable-rate residential real estate mortgages.
The Corporations underwriting and risk-based pricing guidelines for residential mortgage loans consist of a combination of both borrower FICO and the LTV of the property securing the loan. Residential mortgage products generally are underwritten using FHLMC and FNMA secondary marketing guidelines.
Home equity totaled $1.9 billion at September 30, 2013, down $328 million (15%) compared to December 31, 2012, and consists of home equity lines, as well as home equity loans, approximately half of which are first lien positions. Loans and lines in a junior position at September 30, 2013 included approximately 36% for which the Corporation also owned or serviced the related first lien loan and approximately 64% where the Corporation did not service the related first lien loan.
The Corporations credit risk monitoring guidelines for home equity is based on an ongoing review of loan delinquency status, as well as a semi-annual review of FICO score deterioration and property devaluation. The Corporation does not routinely obtain appraisals on performing loans to update LTV ratios after origination; however, the Corporation monitors the local housing markets by reviewing the various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring process. For second lien home equity loans, the Corporation is unable to track the performance of the first lien loan if it does not own or service the first lien loan. However, the Corporation obtains a refreshed FICO score on a semi-annual basis and monitors this as part of its assessment of the home equity portfolio.
The Corporations underwriting and risk-based pricing guidelines for home equity lines and loans consist of a combination of both borrower FICO and the original LTV of the property securing the loan. Currently, for home equity products, the maximum acceptable LTV is 90% for customers with FICO scores exceeding 760. Home equity loans generally have a 20 year term and are fixed rate with principal and interest payments required. As of September 30, 2013, approximately 40% of the home equity loan first liens have a remaining maturity of more than 10 years. Home equity lines are variable rate, interest only lines of credit which do not require the payment of principal during the initial revolving period, after which principal payments are required. Based upon outstanding balances at September 30, 2013, the following table presents the periods when home equity lines of credit revolving periods are scheduled to end.
Home Equity Lines of CreditRevolving Period End Dates | $ in Thousands | |||
Less than 1 year |
$ | 4,810 | ||
1 - 3 years |
4,145 | |||
3 - 5 years |
6,678 | |||
5 - 10 years |
142,187 | |||
Over 10 years |
717,883 | |||
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Total home equity revolving lines of credit |
$ | 875,703 | ||
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Installment loans totaled $420 million at September 30, 2013 down $46 million (10%) compared to December 31, 2012, and consist of educational loans, as well as short-term and other personal installment loans. The Corporation had $339 million and $374 million of education loans at September 30, 2013 and December 31, 2012, respectively, the majority of which are government guaranteed. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery on these smaller retail loans. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guaranty positions.
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, and appropriate allowance for loan losses, nonaccrual and charge off policies.
67
An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of borrowers outstanding loans and commitments. Borrower relationships are formally reviewed and graded on an ongoing basis for early identification of potential problems. Further analyses by customer, industry, and geographic location are performed to monitor trends, financial performance, and concentrations.
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our core footprint. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At September 30, 2013, no significant concentrations existed in the Corporations portfolio in excess of 10% of total loans.
TABLE 6
Period End Deposit and Customer Funding Composition
($ in Thousands)
September 30,
2013 |
June 30,
2013 |
March 31,
2013 |
December 31,
2012 |
September 30,
2012 |
||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||||||||
Noninterest-bearing demand |
$ | 4,453,663 | 24 | % | $ | 4,259,776 | 25 | % | $ | 4,453,109 | 26 | % | $ | 4,759,556 | 28 | % | $ | 4,320,437 | 26 | % | ||||||||||||||||||||
Savings |
1,195,944 | 7 | 1,211,567 | 7 | 1,197,134 | 7 | 1,109,861 | 7 | 1,115,783 | 7 | ||||||||||||||||||||||||||||||
Interest-bearing demand |
2,735,529 | 15 | 2,802,277 | 17 | 2,966,934 | 17 | 2,554,479 | 15 | 2,230,740 | 14 | ||||||||||||||||||||||||||||||
Money market |
8,199,281 | 45 | 7,040,317 | 41 | 6,836,678 | 39 | 6,518,075 | 38 | 6,682,640 | 41 | ||||||||||||||||||||||||||||||
Brokered CDs |
56,024 | | 59,206 | | 49,919 | | 26,270 | | 33,612 | | ||||||||||||||||||||||||||||||
Other time |
1,697,467 | 9 | 1,759,293 | 10 | 1,917,520 | 11 | 1,971,624 | 12 | 2,067,380 | 12 | ||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||
Total deposits |
$ | 18,337,908 | 100 | % | $ | 17,132,436 | 100 | % | $ | 17,421,294 | 100 | % | $ | 16,939,865 | 100 | % | $ | 16,450,592 | 100 | % | ||||||||||||||||||||
Customer repo sweeps |
515,555 | 489,700 | 617,038 | 564,038 | 600,225 | |||||||||||||||||||||||||||||||||||
Customer repo term |
| | 4,882 | 115,032 | 448,782 | |||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
Total customer funding |
515,555 | 489,700 | 621,920 | 679,070 | 1,049,007 | |||||||||||||||||||||||||||||||||||
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Total deposits and customer funding |
$ | 18,853,463 | $ | 17,622,136 | $ | 18,043,214 | $ | 17,618,935 | $ | 17,499,599 | ||||||||||||||||||||||||||||||
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Network transaction deposits included above in interest-bearing demand and money market |
$ | 2,222,810 | $ | 2,135,306 | $ | 2,054,714 | $ | 1,684,745 | $ | 1,740,434 | ||||||||||||||||||||||||||||||
Total network transaction deposits and Brokered CDs |
2,278,834 | 2,194,512 | 2,104,633 | 1,711,015 | 1,774,046 | |||||||||||||||||||||||||||||||||||
Total deposits and customer funding, excluding Brokered CDs and network transaction deposits |
$ | 16,574,629 | $ | 15,427,624 | $ | 15,938,581 | $ | 15,907,920 | $ | 15,725,553 |
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. Credit risk management for each loan type is discussed briefly in the section entitled Credit Risk.
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,
68
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. Management considers the allowance for loan losses a critical accounting policy (see section Critical Accounting Policies), as assessing these numerous factors involves significant judgment.
The methodology used for the allocation of the allowance for loan losses at September 30, 2013 and December 31, 2012 was generally comparable, whereby the Corporation segregated its loss factors (used for both criticized and non-criticized loan categories) into a component primarily based on historical loss rates and a component primarily based on other qualitative factors that may affect loan collectability. Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation methodology consists of the following components: First, a valuation allowance estimate is established for specifically identified commercial and consumer loans determined by the Corporation to be impaired, 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. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses 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.
At September 30, 2013, the allowance for loan losses was $272 million compared to $315 million at September 30, 2012, and $297 million at December 31, 2012. At September 30, 2013, the allowance for loan losses to total loans was 1.74% and covered 131% of nonaccrual loans, compared to 2.11% and 113%, respectively, at September 30, 2012, and 1.93% and 118%, respectively, at December 31, 2012. The provision for loan losses for the first nine months of 2013 was $8 million, compared to $0 for the first nine months of 2012, and $3 million for the full year 2012. Net charge offs were $34 million for the first nine months of 2013, $63 million for the comparable period ended September 30, 2012, and $84 million for the full year 2012. The ratio of net charge offs to average loans on an annualized basis was 0.29%, 0.58%, and 0.57% for the nine months ended September 30, 2013, and 2012, and the full year 2012, respectively. 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 2013. Nonaccrual loans declined to $208 million (representing 1.33% of total loans), down 25% from September 30, 2012 and down 18% from December 31, 2012, due to portfolio improvements, including a lower level of loans moving into the nonaccrual and potential problem loan categories. Accruing loans past due 30-89 days totaled $56 million at September 30, 2013, an increase of 34% from September 30, 2012 and a decrease of 12% from December 31, 2012, while potential problem loans declined to $277 million, a reduction from both the first nine months of 2012 and year-end 2012. For the remainder of 2013, the Corporation expects modest improvement in credit trends and the provision for loan losses to generally be consistent with quarterly loan growth.
Management believes the level of allowance for loan losses to be appropriate at September 30, 2013 and December 31, 2012.
Consolidated net income and stockholders equity could be affected if managements estimate of the allowance for loan losses is subsequently materially different, requiring additional or less provision for loan losses to be recorded. Management carefully considers numerous detailed and general factors, its assumptions, and the likelihood of materially different conditions that could alter its assumptions. While management uses currently available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect our customers. Additionally, larger credit relationships do not inherently create more risk, but can create wider fluctuations in net charge offs and credit quality. As an integral part of their examination process, various federal and state regulatory agencies also review the allowance for loan losses. These agencies may require additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.
69
TABLE 7
Allowance for Loan Losses
($ in Thousands)
70
TABLE 7 (continued)
Allowance for Loan Losses
($ in Thousands)
Quarterly Trends: |
September 30, | June 30, | March 31, | December 31, | September 30, | |||||||||||||||||||||||||||||||||||
2013 | 2013 | 2013 | 2012 | 2012 | ||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||||||
Balance at beginning of period |
$277,218 | $286,923 | $297,409 | $315,150 | $332,658 | |||||||||||||||||||||||||||||||||||
Provision for loan losses |
| 4,000 | 4,000 | 3,000 | | |||||||||||||||||||||||||||||||||||
Charge offs |
(20,288) | (21,904) | (27,128) | (30,417) | (25,030) | |||||||||||||||||||||||||||||||||||
Recoveries |
14,794 | 8,199 | 12,642 | 9,676 | 7,522 | |||||||||||||||||||||||||||||||||||
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Net charge offs |
(5,494) | (13,705) | (14,486) | (20,741) | (17,508) | |||||||||||||||||||||||||||||||||||
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Balance at end of period |
$271,724 | $277,218 | $286,923 | $297,409 | $315,150 | |||||||||||||||||||||||||||||||||||
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Net loan charge offs: |
(A | ) | (A | ) | (A | ) | (A | ) | (A | ) | ||||||||||||||||||||||||||||||
Commercial and industrial |
$ | (447 | ) | (4 | ) | $ | 1,477 | 13 | $ | 696 | 6 | $ | 2,630 | 25 | $ | 3,831 | 37 | |||||||||||||||||||||||
Commercial real estate - owner occupied |
2,076 | 72 | 1,574 | 54 | 1,518 | 51 | 2,056 | 69 | (8 | ) | (0 | ) | ||||||||||||||||||||||||||||
Lease financing |
| | 16 | 12 | (12 | ) | (8 | ) | 754 | 480 | (20 | ) | (13 | ) | ||||||||||||||||||||||||||
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Commercial and business lending |
1,629 | 11 | 3,067 | 21 | 2,202 | 16 | 5,440 | 40 | 3,803 | 29 | ||||||||||||||||||||||||||||||
Commercial real estate - investor |
(414 | ) | (6 | ) | 2,999 | 41 | 163 | 2 | (232 | ) | (3 | ) | 1,905 | 27 | ||||||||||||||||||||||||||
Real estate construction |
(303 | ) | (15 | ) | (95 | ) | (5 | ) | 1,392 | 82 | 858 | 54 | (187 | ) | (12 | ) | ||||||||||||||||||||||||
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Commercial real estate lending |
(717 | ) | (8 | ) | 2,904 | 31 | 1,555 | 18 | 626 | 7 | 1,718 | 20 | ||||||||||||||||||||||||||||
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Total commercial |
912 | 4 | 5,971 | 25 | 3,757 | 17 | 6,066 | 27 | 5,521 | 25 | ||||||||||||||||||||||||||||||
Home equity revolving lines of credit |
767 | 34 | 2,512 | 112 | 3,615 | 159 | 3,590 | 148 | 4,180 | 167 | ||||||||||||||||||||||||||||||
Home equity loans first liens |
564 | 27 | 954 | 42 | 765 | 32 | 1,060 | 40 | 1,056 | 38 | ||||||||||||||||||||||||||||||
Home equity loans junior liens |
800 | 140 | 2,034 | 336 | 1,957 | 303 | 3,421 | 486 | 2,686 | 361 | ||||||||||||||||||||||||||||||
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Home equity |
2,131 | 44 | 5,500 | 108 | 6,337 | 119 | 8,071 | 140 | 7,922 | 132 | ||||||||||||||||||||||||||||||
Installment |
124 | 11 | 66 | 6 | 177 | 16 | 1,027 | 86 | 324 | 26 | ||||||||||||||||||||||||||||||
Residential mortgage |
2,327 | 25 | 2,168 | 24 | 4,215 | 47 | 5,577 | 64 | 3,741 | 45 | ||||||||||||||||||||||||||||||
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Total consumer |
4,582 | 30 | 7,734 | 50 | 10,729 | 70 | 14,675 | 93 | 11,987 | 77 | ||||||||||||||||||||||||||||||
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Total net charge offs |
$ | 5,494 | 14 | $ | 13,705 | 35 | $ | 14,486 | 38 | $ | 20,741 | 55 | $ | 17,508 | 47 | |||||||||||||||||||||||||
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CRE & Construction Net Charge Off Detail: |
|
(A | ) | (A | ) | (A | ) | (A | ) | (A | ) | |||||||||||||||||||||||||||||
Farmland |
$ | | | (32 | ) | (84 | ) | 398 | N/M | | | (100 | ) | (195 | ) | |||||||||||||||||||||||||
Multi-family |
127 | 5 | 942 | 40 | (533 | ) | (24 | ) | 99 | 5 | 55 | 3 | ||||||||||||||||||||||||||||
Non-owner occupied |
(541 | ) | (11 | ) | 2,089 | 42 | 298 | 6 | (331 | ) | (7 | ) | 1,950 | 39 | ||||||||||||||||||||||||||
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Commercial real estate - investor |
$ | (414 | ) | (6 | ) | 2,999 | 41 | 163 | 2 | (232 | ) | (3 | ) | 1,905 | 27 | |||||||||||||||||||||||||
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1-4 family construction |
$ | (904 | ) | (143 | ) | (349 | ) | (62 | ) | 141 | 29 | (295 | ) | (73 | ) | (530 | ) | (145 | ) | |||||||||||||||||||||
All other construction |
601 | 41 | 254 | 19 | 1,251 | 103 | 1,153 | 98 | 343 | 30 | ||||||||||||||||||||||||||||||
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Real estate construction |
$ | (303 | ) | (15 | ) | (95 | ) | (5 | ) | 1,392 | 82 | 858 | 54 | (187 | ) | (12 | ) | |||||||||||||||||||||||
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(A) Annualized ratio of net charge offs to average loans by loan type in basis points. |
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N/M Not meaningful. |
71
TABLE 8
Nonperforming Assets
($ in Thousands)
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||||||||||||||||||||||
2013 | 2013 | 2013 | 2012 | 2012 | ||||||||||||||||||||||||||||||||||||
Nonperforming assets : |
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Nonaccrual loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 133,016 | $ | 136,576 | $ | 137,548 | $ | 152,456 | $ | 177,988 | ||||||||||||||||||||||||||||||
Residential mortgage |
47,866 | 51,250 | 52,181 | 59,359 | 58,824 | |||||||||||||||||||||||||||||||||||
Retail |
26,712 | 29,667 | 35,707 | 41,053 | 41,360 | |||||||||||||||||||||||||||||||||||
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Total nonaccrual loans (NALs) |
207,594 | 217,493 | 225,436 | 252,868 | 278,172 | |||||||||||||||||||||||||||||||||||
Other real estate owned (OREO) |
25,077 | 27,407 | 35,156 | 34,900 | 36,053 | |||||||||||||||||||||||||||||||||||
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Total nonperforming assets (NPAs) |
$ | 232,671 | $ | 244,900 | $ | 260,592 | $ | 287,768 | $ | 314,225 | ||||||||||||||||||||||||||||||
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Accruing loans past due 90 days or more: |
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Commercial |
$ | 1,198 | $ | 770 | $ | 4,595 | $ | 1,036 | $ | 1,667 | ||||||||||||||||||||||||||||||
Residential mortgage |
110 | | 144 | 144 | | |||||||||||||||||||||||||||||||||||
Retail |
755 | 778 | 951 | 1,109 | 667 | |||||||||||||||||||||||||||||||||||
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Total accruing loans past due 90 days or more |
$ | 2,063 | $ | 1,548 | $ | 5,690 | $ | 2,289 | $ | 2,334 | ||||||||||||||||||||||||||||||
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Restructured loans (accruing): |
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Commercial |
$ | 86,468 | $ | 87,970 | $ | 88,932 | $ | 88,182 | $ | 103,531 | ||||||||||||||||||||||||||||||
Residential mortgage |
20,300 | 20,593 | 20,941 | 22,284 | 22,121 | |||||||||||||||||||||||||||||||||||
Retail |
10,275 | 10,503 | 10,220 | 10,621 | 10,139 | |||||||||||||||||||||||||||||||||||
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Total restructured loans (accruing) |
$ | 117,043 | $ | 119,066 | $ | 120,093 | $ | 121,087 | $ | 135,791 | ||||||||||||||||||||||||||||||
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Nonaccrual restructured loans (included in nonaccrual loans) |
$ | 69,311 | $ | 70,354 | $ | 67,811 | $ | 80,590 | $ | 74,251 | ||||||||||||||||||||||||||||||
Ratios: |
||||||||||||||||||||||||||||||||||||||||
Nonaccrual loans to total loans |
1.33 | % | 1.38 | % | 1.45 | % | 1.64 | % | 1.86 | % | ||||||||||||||||||||||||||||||
NPAs to total loans plus OREO |
1.49 | % | 1.55 | % | 1.67 | % | 1.86 | % | 2.09 | % | ||||||||||||||||||||||||||||||
NPAs to total assets |
0.98 | % | 1.04 | % | 1.12 | % | 1.23 | % | 1.38 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses to NALs |
130.89 | % | 127.46 | % | 127.27 | % | 117.61 | % | 113.29 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses to total loans |
1.74 | % | 1.76 | % | 1.84 | % | 1.93 | % | 2.11 | % | ||||||||||||||||||||||||||||||
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Nonperforming assets by type: |
(A | ) | (A | ) | (A | ) | (A | ) | (A | ) | ||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 36,105 | 1 | % | $ | 30,302 | 1 | % | $ | 33,242 | 1 | % | $ | 39,182 | 1 | % | $ | 41,694 | 1 | % | ||||||||||||||||||||
Commercial real estate - owner occupied |
28,301 | 2 | % | 24,003 | 2 | % | 23,199 | 2 | % | 24,254 | 2 | % | 27,161 | 2 | % | |||||||||||||||||||||||||
Lease financing |
99 | | % | 72 | | % | 2,165 | 4 | % | 3,031 | 5 | % | 5,927 | 10 | % | |||||||||||||||||||||||||
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Commercial and business lending |
64,505 | 1 | % | 54,377 | 1 | % | 58,606 | 1 | % | 66,467 | 1 | % | 74,782 | 1 | % | |||||||||||||||||||||||||
Commercial real estate - investor |
49,841 | 2 | % | 60,780 | 2 | % | 56,776 | 2 | % | 58,687 | 2 | % | 71,522 | 3 | % | |||||||||||||||||||||||||
Real estate construction |
18,670 | 2 | % | 21,419 | 3 | % | 22,166 | 3 | % | 27,302 | 4 | % | 31,684 | 5 | % | |||||||||||||||||||||||||
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Commercial real estate lending |
68,511 | 2 | % | 82,199 | 2 | % | 78,942 | 2 | % | 85,989 | 2 | % | 103,206 | 3 | % | |||||||||||||||||||||||||
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Total commercial |
133,016 | 1 | % | 136,576 | 1 | % | 137,548 | 1 | % | 152,456 | 2 | % | 177,988 | 2 | % | |||||||||||||||||||||||||
Home equity revolving lines of credit |
11,991 | 1 | % | 12,940 | 1 | % | 15,914 | 2 | % | 20,446 | 2 | % | 19,242 | 2 | % | |||||||||||||||||||||||||
Home equity loans first liens |
6,131 | 1 | % | 7,898 | 1 | % | 8,626 | 1 | % | 8,717 | 1 | % | 9,425 | 1 | % | |||||||||||||||||||||||||
Home equity loans junior liens |
7,321 | 3 | % | 7,296 | 3 | % | 9,405 | 4 | % | 10,052 | 4 | % | 9,800 | 3 | % | |||||||||||||||||||||||||
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|
|||||||||||||||||||||
Home equity |
25,443 | 1 | % | 28,134 | 1 | % | 33,945 | 2 | % | 39,215 | 2 | % | 38,467 | 2 | % | |||||||||||||||||||||||||
Installment |
1,269 | | % | 1,533 | | % | 1,762 | | % | 1,838 | | % | 2,893 | 1 | % | |||||||||||||||||||||||||
Residential mortgage |
47,866 | 1 | % | 51,250 | 1 | % | 52,181 | 2 | % | 59,359 | 2 | % | 58,824 | 2 | % | |||||||||||||||||||||||||
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|
|||||||||||||||||||||
Total consumer |
74,578 | 1 | % | 80,917 | 1 | % | 87,888 | 1 | % | 100,412 | 2 | % | 100,184 | 2 | % | |||||||||||||||||||||||||
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|
|||||||||||||||||||||
Total nonaccrual loans |
207,594 | 1 | % | 217,493 | 1 | % | 225,436 | 1 | % | 252,868 | 2 | % | 278,172 | 2 | % | |||||||||||||||||||||||||
Commercial real estate owned |
10,003 | 11,696 | 15,142 | 16,664 | 15,984 | |||||||||||||||||||||||||||||||||||
Residential real estate owned |
8,975 | 9,087 | 12,078 | 12,748 | 11,219 | |||||||||||||||||||||||||||||||||||
Bank properties real estate owned |
6,099 | 6,624 | 7,936 | 5,488 | 8,850 | |||||||||||||||||||||||||||||||||||
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Other real estate owned |
25,077 | 27,407 | 35,156 | 34,900 | 36,053 | |||||||||||||||||||||||||||||||||||
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|
|
|||||||||||||||||||||||||||||||
Total nonperforming assets |
$ | 232,671 | $ | 244,900 | $ | 260,592 | $ | 287,768 | $ | 314,225 | ||||||||||||||||||||||||||||||
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Commercial real estate & Real estate construction NALs Detail: |
||||||||||||||||||||||||||||||||||||||||
Farmland |
$ | 109 | 1 | % | $ | 70 | | % | $ | | | % | $ | 803 | 5 | % | $ | 1,132 | 6 | % | ||||||||||||||||||||
Multi-family |
5,260 | 1 | % | 6,726 | 1 | % | 8,306 | 1 | % | 9,328 | 1 | % | 11,448 | 1 | % | |||||||||||||||||||||||||
Non-owner occupied |
44,472 | 2 | % | 53,984 | 3 | % | 48,470 | 2 | % | 48,556 | 2 | % | 58,942 | 3 | % | |||||||||||||||||||||||||
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Commercial real estate - investor |
$ | 49,841 | 2 | % | $ | 60,780 | 2 | % | $ | 56,776 | 2 | % | $ | 58,687 | 2 | % | $ | 71,522 | 3 | % | ||||||||||||||||||||
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1-4 family construction |
$ | 12,654 | 5 | % | $ | 14,222 | 6 | % | $ | 14,538 | 7 | % | $ | 16,639 | 9 | % | $ | 16,725 | 12 | % | ||||||||||||||||||||
All other construction |
6,016 | 1 | % | 7,197 | 1 | % | 7,628 | 1 | % | 10,663 | 2 | % | 14,959 | 3 | % | |||||||||||||||||||||||||
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Real estate construction |
$ | 18,670 | 2 | % | $ | 21,419 | 3 | % | $ | 22,166 | 3 | % | $ | 27,302 | 4 | % | $ | 31,684 | 5 | % | ||||||||||||||||||||
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(A) | Ratio of nonaccrual loans by type to total loans by type. |
72
TABLE 8 (continued)
Nonperforming Assets
($ in Thousands)
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
2013 | 2013 | 2013 | 2012 | 2012 | ||||||||||||||||
Loans 30-89 days past due by type: |
||||||||||||||||||||
Commercial and industrial |
$ | 6,518 | $ | 8,516 | $ | 10,263 | $ | 11,339 | $ | 3,795 | ||||||||||
Commercial real estate owner occupied |
8,505 | 8,105 | 6,804 | 11,053 | 4,843 | |||||||||||||||
Lease financing |
1,000 | 57 | 283 | 12 | 17 | |||||||||||||||
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|
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|
|
|
|||||||||||
Commercial and business lending |
16,023 | 16,678 | 17,350 | 22,404 | 8,655 | |||||||||||||||
Commercial real estate investor |
21,747 | 18,269 | 25,201 | 13,472 | 8,809 | |||||||||||||||
Real estate construction |
820 | 797 | 2,287 | 3,155 | 1,254 | |||||||||||||||
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|
|
|
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|
|
|
|||||||||||
Commercial real estate lending |
22,567 | 19,066 | 27,488 | 16,627 | 10,063 | |||||||||||||||
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|
|
|
|
|
|
|
|||||||||||
Total commercial |
38,590 | 35,744 | 44,838 | 39,031 | 18,718 | |||||||||||||||
Home equity revolving lines of credit |
6,318 | 7,739 | 1,832 | 7,829 | 9,543 | |||||||||||||||
Home equity loans first liens |
1,376 | 1,857 | 1,869 | 1,457 | 1,535 | |||||||||||||||
Home equity loans junior liens |
2,206 | 2,709 | 2,848 | 4,252 | 3,745 | |||||||||||||||
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|
|
|||||||||||
Home equity |
9,900 | 12,305 | 6,549 | 13,538 | 14,823 | |||||||||||||||
Installment |
1,170 | 1,434 | 2,500 | 2,109 | 1,693 | |||||||||||||||
Residential mortgage |
6,722 | 9,920 | 8,793 | 9,403 | 6,878 | |||||||||||||||
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|
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|
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|
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|
|||||||||||
Total consumer |
17,792 | 23,659 | 17,842 | 25,050 | 23,394 | |||||||||||||||
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|
|
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|
|
|||||||||||
Total loans past due 30-89 days |
$ | 56,382 | $ | 59,403 | $ | 62,680 | $ | 64,081 | $ | 42,112 | ||||||||||
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Commercial real estate & Real estate construction loans 30-89 days past due detail: |
|
|||||||||||||||||||
Farmland |
$ | | $ | 455 | $ | 172 | $ | 101 | $ | 15 | ||||||||||
Multi-family |
216 | 14,533 | 15,612 | 1,901 | 469 | |||||||||||||||
Non-owner occupied |
21,531 | 3,281 | 9,417 | 11,470 | 8,325 | |||||||||||||||
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|
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|
|||||||||||
Commercial real estate investor |
$ | 21,747 | $ | 18,269 | $ | 25,201 | $ | 13,472 | $ | 8,809 | ||||||||||
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|
|||||||||||
1-4 family construction |
$ | 579 | $ | 449 | $ | 1,088 | $ | 503 | $ | 809 | ||||||||||
All other construction |
241 | 348 | 1,199 | 2,652 | 445 | |||||||||||||||
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|
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|
|||||||||||
Real estate construction |
$ | 820 | $ | 797 | $ | 2,287 | $ | 3,155 | $ | 1,254 | ||||||||||
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|
|||||||||||
Potential problem loans by type: |
||||||||||||||||||||
Commercial and industrial |
$ | 112,947 | $ | 127,382 | $ | 127,367 | $ | 128,434 | $ | 120,888 | ||||||||||
Commercial real estate owner occupied |
61,256 | 75,074 | 93,098 | 99,592 | 120,034 | |||||||||||||||
Lease financing |
207 | 279 | 251 | 264 | 214 | |||||||||||||||
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|
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|
|
|
|||||||||||
Commercial and business lending |
174,410 | 202,735 | 220,716 | 228,290 | 241,136 | |||||||||||||||
Commercial real estate investor |
87,526 | 89,342 | 101,775 | 107,068 | 133,046 | |||||||||||||||
Real estate construction |
7,540 | 9,184 | 10,040 | 13,092 | 18,477 | |||||||||||||||
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|
|
|
|||||||||||
Commercial real estate lending |
95,066 | 98,526 | 111,815 | 120,160 | 151,523 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
269,476 | 301,261 | 332,531 | 348,450 | 392,659 | |||||||||||||||
Home equity revolving lines of credit |
170 | 308 | 450 | 520 | 518 | |||||||||||||||
Home equity loans first liens |
| | | | | |||||||||||||||
Home equity loans junior liens |
2,067 | 2,307 | 2,871 | 3,150 | 2,825 | |||||||||||||||
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|||||||||||
Home equity |
2,237 | 2,615 | 3,321 | 3,670 | 3,343 | |||||||||||||||
Installment |
67 | 83 | 99 | 111 | 131 | |||||||||||||||
Residential mortgage |
5,342 | 5,917 | 7,882 | 8,762 | 8,197 | |||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
7,646 | 8,615 | 11,302 | 12,543 | 11,671 | |||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total potential problem loans |
$ | 277,122 | $ | 309,876 | $ | 343,833 | $ | 360,993 | $ | 404,330 | ||||||||||
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73
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 $208 million at September 30, 2013, compared to $278 million at September 30, 2012 and $253 million at December 31, 2012. As shown in Table 8, total nonaccrual loans were down $71 million (25%) since September 30, 2012, with commercial nonaccrual loans down $45 million while consumer-related nonaccrual loans were down $26 million. Since December 31, 2012, total nonaccrual loans decreased $45 million (18%), with commercial nonaccrual loans down $19 million and consumer nonaccrual loans down $26 million. The ratio of nonaccrual loans to total loans was 1.33% at September 30, 2013, compared to 1.86% at September 30, 2012 and 1.64% at December 31, 2012. The Corporations allowance for loan losses to nonaccrual loans was 131% at September 30, 2013, up from 113% at September 30, 2012 and 118% at December 31, 2012, 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, 2013, accruing loans 90 days or more past due totaled $2 million, relatively unchanged from both September 30, 2012 and December 31, 2012.
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 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.
At September 30, 2013, the Corporation had total restructured loans of $186 million (including $69 million classified as nonaccrual and $117 million performing in accordance with the modified terms), compared to $210 million at September 30, 2012 (including $74 million classified as nonaccrual and $136 million performing in accordance with the modified terms) and $202 million at December 31, 2012 (including $81 million classified as nonaccrual and $121 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, 2013, potential problem loans totaled $277 million, compared to $404 million at September 30, 2012 and $361 million at December 31, 2012, respectively.
74
Other Real Estate Owned: Other real estate owned was $25 million at September 30, 2013, compared to $36 million at September 30, 2012 and $35 million at December 31, 2012, respectively. Write-downs on other real estate owned were $2 million and $8 million for the first nine months of 2013 and 2012, respectively, and $8 million for the full year 2012. 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 ensure 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, 2013 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, 2013 | ||||||||
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 | POS | 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 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. In September 2012, the Parent Company 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, $46 million was outstanding at September 30, 2013.
75
While dividends and service fees from subsidiaries and proceeds from issuance of capital are 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 Parent Company received dividends of $254 million during the first nine months of 2013 from subsidiaries.
The Bank has established federal funds lines with counterparty banks and the ability to borrow from the Federal Home Loan Bank ($1.0 billion of Federal Home Loan Bank advances were outstanding at September 30, 2013). 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. The 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, 2013, the majority of investment securities are classified as available for sale, with a very small portion of municipal securities (approximately 3% of the total investment securities portfolio) classified as held to maturity. Of the $5.0 billion investment securities portfolio at September 30, 2013, a portion of these securities were pledged to secure $2.8 billion of collateralized deposits and $516 million of repurchase agreements and for other purposes as required or permitted by law. The majority of the remaining investment securities of $1.2 billion could be pledged or sold to enhance liquidity, if necessary.
For the nine months ended September 30, 2013, net cash provided by operating activities and financing activities was $371 million and $160 million, respectively, while net cash used in investing activities was $440 million, for a net increase in cash and cash equivalents of $91 million since year-end 2012. During the first nine months of 2013, loans increased $175 million and loans held for sale decreased $159 million, while investment securities were relatively flat (down $2 million). On the funding side, deposits increased $1.4 billion, while short-term funding decreased $700 million and long-term funding decreased $401 million. The net increase in funding during 2013 was used to fund $90 million of common stock repurchases and $44 million of cash dividends to the Corporations stockholders (common and preferred stock).
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.
Quantitative and Qualitative Disclosures about Market Risk
Market risk and interest rate risk are managed centrally. Market risk is the potential for loss arising from adverse changes in the fair value of fixed income securities, equity securities, other earning assets and derivative financial instruments as a result of changes in interest rates or other factors. Interest rate risk is the potential for reduced net interest income resulting from adverse changes in the level of interest rates. As a financial institution that engages in transactions involving an array of financial products, the Corporation is exposed to both market risk and interest rate risk. In addition to market risk, interest rate risk is measured and managed through a number of methods. The Corporation uses financial modeling simulation 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 (ALCO) and approved by the Board of Directors are intended to limit these risks. The Board has delegated day-to-day responsibility for managing market and interest rate risk to ALCO. The primary objectives of market risk management is to minimize any adverse effect that changes in market risk factors may have on net interest income and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Risk
In order to measure earnings sensitivity to changing market interest rates, the Corporation uses a simulation model to measure the impact of various interest rate shocks and other yield curve scenarios on earnings and the fair value of the financial assets and liabilities of the Corporation. The Corporation compares earnings between a static balance sheet scenario and balance sheets with projected growth scenarios to quantify potential impacts on such earnings of various balance sheet management and business strategies.
76
Simulation of earnings: Determining the sensitivity of short-term future earnings is accomplished through the use of simulation modeling. Assumptions involving projected balance sheet growth, market spreads, prepayments of rate-sensitive instruments, and the cash flows from maturing assets and liabilities are incorporated in these simulation analyses. These analyses are designed to project net interest income based on various interest rate scenarios, compared to a baseline scenario. The Corporation runs numerous scenarios including instantaneous and gradual changes to market interest rates as well as yield curve slope changes. It then compares such scenarios to the baseline scenario to quantify its earnings sensitivity.
The resulting simulations for September 30, 2013, and December 31, 2012 projected that net interest income would increase by approximately 0.9% and 3.4%, respectively, if rates rose by a 100 bp shock. As of September 30, 2013, the simulations of earnings results were within the Corporations interest rate risk policy.
Market value of equity: The Corporation uses the market value of equity as a measure to quantify market risk from the impact of interest rates. The market value of equity is the fair value of assets, liabilities, and off-balance sheet financial instruments derived from the present value of the future cash flows. While the net interest income simulation model highlights exposures over a short time horizon, the market value of equity incorporates all cash flows over all of the balance sheet and derivative positions.
These results are based on multiple path simulations using an interest rate simulation model calibrated to market traded instruments. Sensitivities are measured assuming several factors including immediate and sustained parallel and non-parallel changes in market rates, yield curves and rate indexes. These factors quantify yield curve risk, basis risk, options risk, repricing mismatch risk, and market spread risk. The results are considered to be conservative estimates due to the fact that no management action to mitigate potential income variances is included within the simulation assumption set. These potentially mitigating factors include future balance sheet growth, changes in yield curve relationships, and changing product spreads. As of September 30, 2013, the projected changes for the market 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, 2013, 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 12, 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, 2013, 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 | One to | Three to | Over | |||||||||||||||||
or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||
($ in Thousands) | ||||||||||||||||||||
Time deposits |
$ | 1,206,416 | $ | 362,858 | $ | 156,838 | $ | 27,379 | $ | 1,753,491 | ||||||||||
Short-term funding |
1,626,880 | | | | 1,626,880 | |||||||||||||||
Long-term funding |
154,997 | 433,640 | 71 | 25,860 | 614,568 | |||||||||||||||
Operating leases |
12,192 | 22,239 | 20,683 | 42,441 | 97,555 | |||||||||||||||
Commitments to extend credit |
3,629,869 | 1,430,543 | 1,106,407 | 106,169 | 6,272,988 | |||||||||||||||
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|||||||||||
Total |
$ | 6,630,354 | $ | 2,249,280 | $ | 1,283,999 | $ | 201,849 | $ | 10,365,482 | ||||||||||
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77
Capital
Stockholders equity at September 30, 2013 was $2.9 billion, down slightly ($64 million) from December 31, 2012. At September 30, 2013, stockholders equity included $37 million of accumulated other comprehensive loss compared to $49 million of accumulated other comprehensive income at December 31, 2012. Cash dividends of $0.24 per share were paid in the first nine months of 2013 and $0.15 per share were paid in the first nine months of 2012. The ratio of total stockholders equity to assets was 12.13% and 12.50% at September 30, 2013 and December 31, 2012, respectively.
On November 13, 2012, the Board of Directors approved the repurchase of up to an aggregate amount of $125 million of common stock to be made available for reissuance in connection with the Corporations employee incentive plans and / or for other corporate purposes, of which $5 million remained authorized for repurchase at September 30, 2013. On July 23, 2013, the Board of Directors approved the repurchase of up to $120 million of common stock. The July 2013 repurchase authorization is in addition to the $5 million remaining under the November 2012 authorization. During the first nine months of 2013, 5.8 million shares were repurchased for $90 million (or an average cost per common share of $15.41), while during 2012, 4.7 million shares were repurchased for $60 million (or an average cost per common share of $12.77). The Corporation also repurchased shares for minimum tax withholding settlements on equity compensation during 2012 and the first nine months of 2013. On October 4, 2013, the Corporation repurchased an additional 1.8 million shares under an accelerated share repurchase program. See section, Recent Developments, for additional information on the October 2013 common stock repurchase. 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 2013. The repurchase of shares will be based on market and investment opportunities, capital levels, growth prospects, and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.
Basel III Capital Rules . In July 2013, the Federal Reserve and the OCC, the primary federal regulators for the Corporation and the Bank, respectively, published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committees December 2010 framework known as Basel III for strengthening international capital standards as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Corporation and the Bank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committees 2004 Basel II capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies rules. The Basel III Capital Rules are effective for the Corporation and the Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules, among other things, (i) introduce a new capital measure called Common Equity Tier 1 (CET1), (ii) specify that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions / adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions / adjustments from capital as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Corporation and the Bank to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authoritys risk-adjusted measure for market risk).
Management believes that, as of September 30, 2013, the Corporation and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective.
78
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.
TABLE 10
Capital Ratios
(In Thousands, except per share data)
Quarter Ended | ||||||||||||||||||||
September 30,
2013 |
June 30,
2013 |
March 31,
2013 |
December 31,
2012 |
September 30,
2012 |
||||||||||||||||
Total stockholders equity |
$ | 2,872,282 | $ | 2,876,976 | $ | 2,936,265 | $ | 2,936,399 | $ | 2,950,452 | ||||||||||
Tangible stockholders equity (1) |
1,930,919 | 1,934,603 | 1,992,881 | 1,992,004 | 2,005,008 | |||||||||||||||
Tier 1 capital (2) |
1,966,797 | 1,957,146 | 1,944,682 | 1,938,806 | 2,113,203 | |||||||||||||||
Tier 1 common equity (3) |
1,904,060 | 1,893,875 | 1,881,410 | 1,875,534 | 1,869,931 | |||||||||||||||
Tangible common equity (1) |
1,868,182 | 1,871,331 | 1,929,609 | 1,928,732 | 1,941,736 | |||||||||||||||
Total risk-based capital (2) |
2,198,219 | 2,190,127 | 2,173,859 | 2,167,954 | 2,335,451 | |||||||||||||||
Tangible assets (1) |
22,747,312 | 22,674,571 | 22,334,384 | 22,543,340 | 21,792,910 | |||||||||||||||
Risk weighted assets (2) |
16,358,823 | 16,479,374 | 16,162,689 | 16,149,038 | 15,574,666 | |||||||||||||||
Market capitalization |
2,545,053 | 2,578,765 | 2,546,953 | 2,221,268 | 2,259,006 | |||||||||||||||
|
|
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|
|
|
|||||||||||
Book value per common share |
$ | 17.10 | $ | 16.97 | $ | 17.13 | $ | 16.97 | $ | 16.82 | ||||||||||
Tangible book value per common share |
11.37 | 11.28 | 11.51 | 11.39 | 11.31 | |||||||||||||||
Cash dividend per common share |
0.08 | 0.08 | 0.08 | 0.08 | 0.05 | |||||||||||||||
Stock price at end of period |
15.49 | 15.55 | 15.19 | 13.12 | 13.16 | |||||||||||||||
Low closing price for the period |
15.29 | 13.81 | 13.46 | 12.19 | 12.04 | |||||||||||||||
High closing price for the period |
17.60 | 15.69 | 15.30 | 13.54 | 13.79 | |||||||||||||||
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|
|||||||||||
Total stockholders equity / assets |
12.13 | % | 12.18 | % | 12.61 | % | 12.50 | % | 12.98 | % | ||||||||||
Tangible common equity / tangible assets (1) |
8.21 | 8.25 | 8.64 | 8.56 | 8.91 | |||||||||||||||
Tangible stockholders equity / tangible assets (1) |
8.49 | 8.53 | 8.92 | 8.84 | 9.20 | |||||||||||||||
Tier 1 common equity / risk-weighted assets (3) |
11.64 | 11.49 | 11.64 | 11.61 | 12.01 | |||||||||||||||
Tier 1 leverage ratio (2) |
8.76 | 8.73 | 8.78 | 8.98 | 9.99 | |||||||||||||||
Tier 1 risk-based capital ratio (2) |
12.02 | 11.88 | 12.03 | 12.01 | 13.57 | |||||||||||||||
Total risk-based capital ratio (2) |
13.44 | 13.29 | 13.45 | 13.42 | 15.00 | |||||||||||||||
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|||||||||||
Common shares outstanding (period end) |
164,303 | 165,837 | 167,673 | 169,304 | 171,657 | |||||||||||||||
Basic common shares outstanding (average) |
164,954 | 166,605 | 168,234 | 170,707 | 171,650 | |||||||||||||||
Diluted common shares outstanding (average) |
165,443 | 166,748 | 168,404 | 170,896 | 171,780 |
(1) | Tangible stockholders equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are non-GAAP measures. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Tangible stockholders equity is defined as stockholders equity excluding goodwill and other intangible assets. Tangible common equity is defined as common stockholders equity excluding goodwill and other intangible assets. Tangible assets is defined as total assets excluding goodwill and other intangible assets. |
(2) | The FRB establishes capital adequacy requirements, including well-capitalized standards for the Corporation. The OCC establishes similar capital adequacy requirements and standards for the Bank. Regulatory capital primarily consists of Tier 1 risk-based capital and Tier 2 risk-based capital. The sum of Tier 1 risk-based capital and Tier 2 risk-based capital equals our total risk-based capital. Risk-based capital guidelines require a minimum level of capital as a percentage of risk-weighted assets. Risk-weighted assets consist of total assets plus certain off-balance sheet and market items, subject to adjustment for predefined credit risk factors. |
(3) | Tier 1 common equity, a non-GAAP financial measure, is used by banking regulators, investors and analysts to assess and compare the quality and composition of our capital with the capital of other financial services companies. Management uses Tier 1 common equity, along with other capital measures, to assess and monitor our capital position. Tier 1 common equity is defined as Tier 1 capital excluding qualifying perpetual preferred stock and qualifying trust preferred securities. |
79
Comparable Third Quarter Results
The Corporation recorded net income of $46 million for both the three months ended September 30, 2013 and for the three months ended September 30, 2012. Net income available to common equity was $44 million for the three months ended September 30, 2013, or net income of $0.27 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the three months ended September 30, 2012, was $45 million, or net income of $0.26 for both basic and diluted earnings per common share (see Table 1).
Taxable equivalent net interest income for the third quarter of 2013 was $165 million, $5 million higher than the third quarter of 2012 (see Table 2). Changes in the balance sheet volume and mix increased taxable equivalent net interest income by $13 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 2013 and the third quarter of 2012. The net interest margin between the comparable quarters was down 13 bp, to 3.13% in the third quarter of 2013. Average earning assets increased $1.4 billion to $21.0 billion in the third quarter of 2013, with average loans up $808 million (predominantly in commercial loans) and investments up $572 million. On the funding side, average interest-bearing deposits were up $1.7 billion and average demand deposits increased $302 million, while average short and long-term funding was down $622 million (primarily attributable to a $624 million decrease in repurchase agreements).
Credit quality continued to improve with nonaccrual loans declining to $208 million (1.33% of total loans) at September 30, 2013, compared to $278 million (1.86% of total loans) at September 30, 2012 (see Table 8). Compared to the third quarter of 2012, potential problem loans were down 32% to $277 million. The provision for loan losses was $0 for both the third quarter of 2013 and the third quarter of 2012 (see Table 7). Annualized net charge offs represented 0.14% of average loans for the third quarter of 2013 compared to 0.47% for the third quarter of 2012. The allowance for loan losses to loans at September 30, 2013 was 1.74%, compared to 2.11% at September 30, 2012. 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 2013 decreased $10 million (12%) to $71 million versus the third quarter of 2012. Core fee-based revenue was up $2 million (4%) from the third quarter of 2012 with improvements in most fee categories. Net mortgage banking decreased $12 million (77%) from the third quarter of 2012, predominantly due to a decrease of $16 million in gain on sales, related to the decrease in the mortgage refinancing activity partially offset by a decrease of $5 million in mortgage servicing rights expense (including a $3 million favorable change to the valuation reserve and a $2 million reduction in amortization). Gain on sale of investment securities was down $3 million primarily due to gains on various securities (equity, mortgage-related, and trust preferred debt securities) during the third quarter of 2012. Net asset gains of $2 million for the third quarter of 2013 were primarily attributable to the sale of real estate. 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.
On a comparable quarter basis, noninterest expense decreased $5 million (3%) to $164 million in the third quarter of 2013. Personnel expense increased $3 million (3%) from the third quarter of 2012, primarily in salary-related expenses (reflecting an increase in performance based incentives and merit increases between the years). During the third quarter of 2013, losses other than loans decreased $5 million primarily due to a $2 million favorable change in the provision for losses on unfunded commitments and a $1 million favorable change to the provision for reinsurance losses. Legal and professional fees decreased $4 million during third quarter of 2013 due to a decrease in consultant costs related to certain BSA compliance issues. All remaining noninterest expense categories on a combined basis were up $1 million (less than 2%).
For the third quarter of 2013, the Corporation recognized income tax expense of $21 million, compared to income tax expense of $20 million for the third quarter of 2012. The effective tax rate was 31.91% and 30.64% for the third quarter of 2013 and the third quarter of 2012, respectively.
80
TABLE 11
Selected Quarterly Information
($ in Thousands)
Quarter Ended | ||||||||||||||||||||
September 30,
2013 |
June 30,
2013 |
March 31,
2013 |
December 31,
2012 |
September 30,
2012 |
||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net interest income |
$ | 160,509 | $ | 160,182 | $ | 157,653 | $ | 161,455 | $ | 155,602 | ||||||||||
Provision for loan losses |
| 4,000 | 4,000 | 3,000 | | |||||||||||||||
Noninterest income |
||||||||||||||||||||
Trust service fees |
11,380 | 11,405 | 10,910 | 10,429 | 10,396 | |||||||||||||||
Service charges on deposit accounts |
18,407 | 17,443 | 16,829 | 16,817 | 17,290 | |||||||||||||||
Card-based and other nondeposit fees |
12,688 | 12,591 | 11,950 | 12,690 | 12,209 | |||||||||||||||
Insurance commissions |
11,356 | 9,631 | 11,763 | 10,862 | 11,650 | |||||||||||||||
Brokerage and annuity commissions |
3,792 | 3,688 | 3,516 | 3,678 | 3,632 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total core fee-based revenue |
57,623 | 54,758 | 54,968 | 54,476 | 55,177 | |||||||||||||||
Mortgage banking, net |
3,542 | 19,263 | 17,765 | 13,530 | 15,581 | |||||||||||||||
Capital market fees, net |
2,652 | 5,074 | 2,583 | 4,243 | 3,609 | |||||||||||||||
BOLI income |
2,817 | 3,281 | 2,970 | 3,206 | 3,290 | |||||||||||||||
Asset gains (losses), net |
1,934 | (44 | ) | 836 | (209 | ) | (3,309 | ) | ||||||||||||
Investment securities gains, net |
248 | 34 | 300 | 152 | 3,506 | |||||||||||||||
Other |
2,100 | 1,944 | 2,578 | 2,507 | 3,134 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest income |
70,916 | 84,310 | 82,000 | 77,905 | 80,988 | |||||||||||||||
Noninterest expense |
||||||||||||||||||||
Personnel expense |
98,102 | 99,791 | 97,907 | 98,073 | 95,231 | |||||||||||||||
Occupancy |
14,758 | 14,305 | 15,662 | 17,273 | 14,334 | |||||||||||||||
Equipment |
6,213 | 6,462 | 6,167 | 6,444 | 5,935 | |||||||||||||||
Data processing |
12,323 | 12,651 | 11,508 | 11,706 | 11,022 | |||||||||||||||
Business development and advertising |
5,947 | 5,028 | 4,537 | 5,395 | 5,059 | |||||||||||||||
Other intangible amortization |
1,010 | 1,011 | 1,011 | 1,049 | 1,048 | |||||||||||||||
Loan expense |
3,157 | 3,044 | 3,284 | 3,130 | 3,297 | |||||||||||||||
Legal and professional fees |
3,482 | 5,483 | 5,345 | 8,174 | 7,686 | |||||||||||||||
Losses other than loans |
(1,400 | ) | 1,799 | (316 | ) | 3,071 | 3,577 | |||||||||||||
Foreclosure / OREO expense |
2,515 | 2,302 | 2,422 | 3,293 | 4,071 | |||||||||||||||
FDIC expense |
4,755 | 4,395 | 5,432 | 4,813 | 5,017 | |||||||||||||||
Other |
13,509 | 13,725 | 13,956 | 13,907 | 13,426 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest expense |
164,371 | 169,996 | 166,915 | 176,328 | 169,703 | |||||||||||||||
Income tax expense |
21,396 | 22,608 | 21,350 | 13,404 | 20,492 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
45,658 | 47,888 | 47,388 | 46,628 | 46,395 | |||||||||||||||
Preferred stock dividends |
1,285 | 1,300 | 1,300 | 1,300 | 1,300 | |||||||||||||||
|
|
|
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|
|
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|
|
|
|||||||||||
Net income available to common equity |
$ | 44,373 | $ | 46,588 | $ | 46,088 | $ | 45,328 | $ | 45,095 | ||||||||||
|
|
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|
|
|
|
|
|
|
|||||||||||
Taxable equivalent net interest income |
$ | 165,457 | $ | 165,178 | $ | 162,743 | $ | 166,676 | $ | 160,870 | ||||||||||
Net interest margin |
3.13 | % | 3.16 | % | 3.17 | % | 3.32 | % | 3.26 | % | ||||||||||
Effective tax rate |
31.91 | % | 32.07 | % | 31.06 | % | 22.33 | % | 30.64 | % | ||||||||||
Average Balances: |
||||||||||||||||||||
Assets |
$ | 23,313,577 | $ | 23,306,220 | $ | 23,038,708 | $ | 22,461,886 | $ | 22,016,748 | ||||||||||
Earning assets |
21,039,467 | 20,951,244 | 20,680,919 | 20,032,432 | 19,659,796 | |||||||||||||||
Interest-bearing liabilities |
16,010,930 | 15,988,021 | 15,719,383 | 14,840,162 | 14,940,697 | |||||||||||||||
Loans |
15,724,365 | 15,727,807 | 15,448,152 | 15,131,102 | 14,916,793 | |||||||||||||||
Deposits |
17,609,819 | 17,105,078 | 17,146,384 | 16,650,268 | 15,615,856 | |||||||||||||||
Short and long-term funding |
2,665,415 | 3,074,647 | 2,758,923 | 2,638,661 | 3,286,943 | |||||||||||||||
Stockholders equity |
$ | 2,862,890 | $ | 2,920,994 | $ | 2,913,499 | $ | 2,978,618 | $ | 2,933,710 |
81
Sequential Quarter Results
The Corporation recorded net income of $46 million for the three months ended September 30, 2013, compared to net income of $48 million for the three months ended June 30, 2013. Net income available to common equity was $44 million for the third quarter of 2013, or net income of $0.27 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2013, was $47 million, or net income of $0.28 for both basic and diluted earnings per common share (see Table 1).
Taxable equivalent net interest income for the third quarter of 2013 and for the second quarter of 2013 was $165 million. The Federal funds target rate was unchanged for both quarters. The net interest margin in the third quarter of 2013 was down 3 bp, to 3.13%. Average earning assets increased $88 million to $21.0 billion in the third quarter of 2013, with average investments and other short-term investments up $91 million and average loans down $3 million. On the funding side, average short and long-term funding was down $409 million, as growth in deposits reduced the need for other funding sources, with average interest-bearing deposits were up $432 million (primarily money market deposits).
The Corporation reported another quarter of improving credit quality with nonaccrual loans of $208 million (1.33% of total loans) at September 30, 2013, down from $217 million (1.38% of total loans) at June 30, 2013 (see Table 8). Potential problem loans declined to $277 million, down $33 million from the second quarter of 2013. The provision for loan losses for the third quarter of 2013 was $0, compared to $4 million in the second quarter of 2013 (see Table 7). Annualized net charge offs represented 0.14% of average loans for the third quarter of 2013, compared to 0.35% for the second quarter of 2013. The allowance for loan losses to loans at September 30, 2013 was 1.74%, compared to 1.76% at June 30, 2013 (see Table 8). 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 2013 decreased $13 million (16%) to $71 million versus the second quarter of 2013. Core fee-based revenue increased $3 million (5%) from the second quarter of 2013 primarily due to a $2 million increase in insurance commissions (as the second quarter of 2013 included a $3 million reserve established for third party insurance products sold in prior years). Net mortgage banking income was $4 million, down $16 million (82%) from the second quarter of 2013, predominantly due to a $9 million decrease in gain on sale of loans consistent with the decline in mortgage refinancing activity and an increase of $6 million in mortgage servicing rights expense primarily due to an unfavorable change in the valuation reserve (from a recovery of $8 million in second quarter 2013 to a recovery of $1 million in third quarter of 2013). Net capital market fees decreased $2 million primarily due to a favorable change in the credit risk of interest rate related derivative instruments during the second quarter of 2013 versus none in the current quarter. The $2 million increase in gain on assets was due to the sale of real estate.
On a sequential quarter basis, noninterest expense decreased by $6 million (3%) to $164 million in the third quarter of 2013. Personnel expense decreased $2 million due to a reduction in full-time equivalent (FTE) employees. Losses other than loans was down $3 million mainly due to a more favorable than expected resolution of a litigation matter as well as a $2 million decrease in the provision for losses on unfunded commitments. Legal and professional fees decreased by $2 million due to a decrease in BSA consultant expenses. All remaining noninterest expense categories on a combined basis were up $1 million (2%).
For the third quarter of 2013, the Corporation recognized income tax expense of $21 million, compared to income tax expense of $23 million for the second quarter of 2013. The effective tax rate was 31.91% and 32.07% for the third quarter of 2013 and the second quarter of 2013, 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 the consolidated financial statements.
In July 2013, the FASB issued an amendment to clarify the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be
82
presented in the financial statements as a liability and should not be combined with deferred tax assets. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. Early adoption and retrospective application is permitted. The Corporation will adopt the accounting standard during the first quarter of 2014, as required, with no material impact on its results of operations, financial position, or liquidity.
Recent Developments
On October 4, 2013, the Corporation repurchased 1.8 million shares of common stock for $30 million under an accelerated share repurchase program. After this common stock repurchase, the Corporation has $95 million remaining under repurchase authorizations previously approved by the Board of Directors.
On October 10, 2013, the Corporation announced its decision to consolidate eight branch locations located throughout its three-state footprint. The Corporation also announced its decision to consolidate several support functions currently located in La Crosse, Wisconsin, into other support operations within its three-state footprint. The analysis of branch locations, transaction trends and strategic fit is an ongoing process at Associated and throughout banking, especially as it pertains to evolving customer banking preferences. Associated will continue to evaluate its network of branches as part of its ongoing efforts to increase efficiency and rationalize distribution.
On October 15, 2013, the Corporation redeemed $26 million of outstanding subordinated debt.
On October 22, 2013, the Board of Directors declared a regular quarterly cash dividend of $0.09 per common share, payable on December 16, 2013, to shareholders of record at the close of business on December 2, 2013. This is an increase of $0.01 per common share from the previous quarterly cash dividend of $0.08 per common share. The Board of Directors also declared a regular quarterly cash dividend of $0.50 per depositary share on Associated Banc-Corps 8.00% Series B Perpetual Preferred Stock to shareholders of record at the close of business on December 2, 2013, with a dividend payable date of December 15, 2013, and an actual payment date of December 16, 2013. These cash dividends have not been reflected in the accompanying consolidated financial statements.
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, 2013, 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, 2013. 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.
83
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 final approval from the court on August 1, 2013. 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. In the second quarter of 2012, the Bank settled with an insurer for a $2.5 million contribution to the settlement amount and partial reimbursement of defense costs of up to $2.1 million.
A lawsuit, R.J. ZAYED v. Associated Bank, N.A., was filed in the United States District Court for the District of Minnesota on January 29, 2013. The lawsuit relates to a Ponzi scheme perpetrated by Oxford Global Partners and related entities (Oxford) and individuals and was brought by the receiver for Oxford. Oxford was a depository customer of the Bank. The lawsuit claims that the Bank is liable for failing to uncover the Oxford Ponzi scheme, and specifically alleges the Bank aided and abetted (1) the fraudulent scheme; (2) a breach of fiduciary duty; (3) conversion; and (4) false representations and omissions. The lawsuit seeks unspecified consequential and punitive damages. At this early stage of the lawsuit, it is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss at this time. The Bank intends to vigorously defend this lawsuit. The court granted the Banks motion to dismiss the complaint on September 30, 2013. A lawsuit by investors in the same Ponzi scheme, Herman Grad, et al v. Associated Bank, N.A. , brought in Brown County, Wisconsin in October 2009 was dismissed by the circuit court, and the dismissal was affirmed by the Wisconsin Court of Appeals in June 2011 in an unpublished opinion.
The Bank is currently subject to a Consent Order with the OCC relating to its Bank Secrecy Act of 1970 (BSA) compliance. The OCC has issued a written notice to the Bank related to the Banks past BSA deficiencies. After the OCCs review of the Banks response, the OCC may impose a civil money penalty related to these deficiencies. The Corporation is currently not able to estimate a reasonable range of losses relating to that possibility.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Following are the Corporations monthly common stock purchases during the third quarter of 2013. 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 (a) |
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 (b) |
||||||||||||
July 1, 2013July 31, 2013 |
| $ | | | | |||||||||||
August 1, 2013August 31, 2013 |
1,755,577 | 17.09 | 1,755,577 | | ||||||||||||
September 1, 2013September 30, 2013 |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,755,577 | $ | 17.09 | 1,755,577 | 8,069,722 | |||||||||||
|
|
|
|
|
|
|
|
(a) | During the third quarter of 2013, the Corporation repurchased 3,225 shares for minimum tax withholding settlements on equity compensation. These purchases are not included in the monthly common stock purchases table above and do not count against the maximum number of shares that may yet be purchased under the Board of Directors authorization. |
(b) | On November 13, 2012, the Board of Directors authorized the Corporation to repurchase up to an aggregate amount of $125 million of common stock, of which, $35 million remained available to repurchase as of June 30, 2013. After adjusting the common stock repurchase authorization for the $30 million repurchased during the third quarter of 2013 under this authorization, $5 million remains authorized for repurchase. On July 23, 2013, the Board of Directors also authorized the repurchase of up to an additional $120 million of common stock, which is in addition to the $5 million remaining under the November 2012 common stock repurchase authorization. Using the closing stock price on September 30, 2013 of $15.49, a total of approximately 8.1 million common shares remained available to be repurchased under both authorizations as of September 30, 2013. |
84
(a) | Exhibits: |
Exhibit (3), Amended and Restated Bylaws of Associated Banc-Corp.
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 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.
85
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 1, 2013 |
/s/ Philip B. Flynn |
|||
Philip B. Flynn | ||||
President and Chief Executive Officer | ||||
Date: November 1, 2013 |
/s/ Christopher Del Moral-Niles |
|||
Christopher Del Moral-Niles | ||||
Chief Financial Officer and Principal Accounting Officer |
86
Exhibit 3
AMENDED AND RESTATED BYLAWS
OF
ASSOCIATED BANC-CORP
(Amended October 22, 2013)
REFERENCE TABLE
BYLAWS OF
ASSOCIATED BANC-CORP
Section |
Subject Matter |
Page | ||||
ARTICLE I |
OFFICES | 1 | ||||
Section 1 |
Principal and Business Offices | 1 | ||||
Section 2 |
Registered Office | 1 | ||||
ARTICLE II |
SHAREHOLDERS | 1 | ||||
Section 1 |
Annual Meeting | 1 | ||||
Section 2 |
Special Meetings | 1 | ||||
Section 3 |
Place of Meeting | 3 | ||||
Section 4 |
Notice of Meeting | 3 | ||||
Section 5 |
Conduct of Meetings | 3 | ||||
Section 6 |
Advance Notice of Shareholder Proposed Business at Annual Meeting | 3 | ||||
Section 7 |
Nomination of Directors | 5 | ||||
Section 8 |
Record Date for Notice, Voting and Distributions | 6 | ||||
Section 9 |
Shareholders List for Meeting | 6 | ||||
Section 10 |
Quorum and Voting Requirements for Voting Groups | 7 | ||||
Section 11 |
Proxies | 7 | ||||
Section 12 |
Voting of Shares | 8 | ||||
Section 13 |
Voting Companys Shares | 8 | ||||
Section 14 |
Acceptance of Instruments Showing Shareholder Action | 8 | ||||
Section 15 |
Adjournment | 9 | ||||
Section 16 |
Waiver of Notice | 9 | ||||
ARTICLE III |
BOARD OF DIRECTORS | 10 | ||||
Section 1 |
General Powers | 10 | ||||
Section 2 |
Retirement and Nomination of Directors | 10 | ||||
Section 3 |
Organization Meeting | 10 | ||||
Section 4 |
Regular Meetings | 11 | ||||
Section 5 |
Special Meeting | 11 | ||||
Section 6 |
Notice | 11 | ||||
Section 7 |
Quorum; Required Vote and Adjournment | 11 | ||||
Section 8 |
Removal and Resignation | 11 | ||||
Section 9 |
Vacancies | 12 | ||||
Section 10 |
Chairman of the Board | 12 |
i
Section 11 |
Lead Director | 12 | ||||
Section 12 |
Compensation | 12 | ||||
Section 13 |
Presumption of Assent | 12 | ||||
Section 14 |
Committees | 13 | ||||
Section 15 |
Communications Equipment | 13 | ||||
Section 16 |
Action by Unanimous Written Consent | 13 | ||||
ARTICLE IV |
OFFICERS | 13 | ||||
Section 1 |
Number | 13 | ||||
Section 2 |
Election and Term of Office | 14 | ||||
Section 3 |
Resignation and Removal | 14 | ||||
Section 4 |
Vacancies | 14 | ||||
Section 5 |
Chief Executive Officer | 14 | ||||
Section 6 |
President | 15 | ||||
Section 7 |
Executive Vice President and Senior Vice Presidents | 15 | ||||
Section 8 |
Vice President | 15 | ||||
Section 9 |
Secretary | 15 | ||||
Section 10 |
Chief Financial Officer | 16 | ||||
Section 11 |
Other Officers, Assistant Officers and Agents | 16 | ||||
Section 12 |
Officer Inability to Act | 16 | ||||
Section 13 |
Compensation | 16 | ||||
ARTICLE V |
CONTRACTS, LOANS, CHECKS, AND DEPOSITS | 17 | ||||
Section 1 |
Contracts | 17 | ||||
Section 2 |
Loans | 17 | ||||
Section 3 |
Checks, Drafts, Etc. | 17 | ||||
Section 4 |
Deposits | 17 | ||||
ARTICLE VI |
CORPORATE STOCK | 17 | ||||
Section 1 |
Certificates for Shares and Uncertificated Shares | 17 | ||||
Section 2 |
Transfer of Shares | 18 | ||||
Section 3 |
Restrictions on Transfer | 19 | ||||
Section 4 |
Lost, Destroyed or Stolen Certificates | 19 | ||||
Section 5 |
Registered Shareholders | 19 | ||||
Section 6 |
Consideration for Shares | 19 | ||||
Section 7 |
Stock Regulations | 19 | ||||
ARTICLE VII |
FISCAL YEAR | 20 | ||||
ARTICLE VIII |
DIVIDENDS AND FINANCES | 20 | ||||
ARTICLE IX |
BOOKS AND RECORDS | 20 |
ii
ARTICLE X |
VOTING OF SECURITIES OWNED BY CORPORATION | 20 | ||||
ARTICLE XI |
INDEMNIFICATION OF DIRECTORS AND OFFICERS | 21 | ||||
Section 1 |
Definitions to Indemnification and Insurance Provisions | 21 | ||||
Section 2 |
Indemnification of Directors, Officers, Employees and Agents | 22 | ||||
Section 3 |
Determination that Indemnification is Proper | 23 | ||||
Section 4 |
Allowance of Expenses as Incurred | 23 | ||||
Section 5 |
Controlled Subsidiaries | 24 | ||||
Section 6 |
Insurance | 24 | ||||
Section 7 |
Severability | 24 | ||||
Section 8 |
Amending the Right to Indemnification | 24 | ||||
ARTICLE XII |
AMENDMENTS | 24 | ||||
Section 1 |
By Directors or Shareholders | 24 | ||||
Section 2 |
Implied Amendments | 25 | ||||
ARTICLE XIII |
SEAL | 25 | ||||
ARTICLE XIV |
NOTICE | 25 | ||||
Section 1 |
Notices Generally | 25 | ||||
Section 2 |
Notice to Shareholders | 25 | ||||
Section 3 |
Notice to Directors | 26 | ||||
ARTICLE XV |
EMERGENCY PREPAREDNESS | 26 | ||||
Section 1 |
Emergencies | 26 | ||||
Section 2 |
Officers Pro Tempore and Disaster | 26 | ||||
Section 3 |
Alternate Locations | 27 |
iii
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
Section 1Principal and Business Offices
The principal office of Associated Banc-Corp (the Corporation) in the State of Wisconsin shall be located in the City of Green Bay, County of Brown. The Corporation may have such other offices, either within or without the State of Wisconsin, as the Board of Directors may designate or as the business of the Corporation may require from time to time.
Section 2Registered Office
The registered office of the Corporation required by the Wisconsin Business Corporation Law to be maintained in the State of Wisconsin may be, but need not be, identical with the principal office in the State of Wisconsin, and the address of the registered office may be changed from time to time by the Board of Directors
ARTICLE II
SHAREHOLDERS
Section 1Annual Meeting
The annual meeting of shareholders shall be held on the fourth (4th) Wednesday in the month of April of each year at 11:00 a.m., or at such other time and date as shall be fixed by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting subject to Sections 6 and 7 below. Every election of directors shall be managed by an inspector of election. The inspector of election shall hold and conduct the election and shall, after the election has been held, notify under his, her or its hand the Secretary of the Corporation of the results thereof and the names of the directors elected. If the day fixed for the annual meeting is a legal holiday in the State of Wisconsin, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held at the annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as convenient. Failure to hold an annual meeting in one (1) or more years does not affect the validity of any corporate action.
Section 2Special Meetings
(a) |
Special meetings of the shareholders may be called for any proper purpose or purposes, and may be held at such time and place, within or without the State of Wisconsin, as shall be stated in a notice of special meeting or in a duly executed waiver of notice thereof. Such |
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special meeting may be called at any time by the Lead Director, the Chairman, the Chief Executive Officer or the Board of Directors, and shall be called by the Chief Executive Officer at the request of the holders of not less than ten percent (10%) of all the outstanding shares of the Corporation entitled to vote on any issue proposed to be considered at the special meeting. The record date for determining the shareholders entitled to request a special meeting is the date that the first shareholder signs the request. No business may be transacted at a special meeting other than the business specified in the notice to the shareholders of such meeting.
(b) | Any request by the shareholders to call a special meeting shall (i) be in writing; (ii) specify the general nature of the business proposed to be transacted at the special meeting; and (iii) be delivered personally or sent by registered mail or by facsimile transmission to the Secretary of the Corporation. Upon receipt of such a request, the Board of Directors shall determine the date, time and place of such special meeting, which must be scheduled to be held on a date that is within ninety (90) days of receipt by the Secretary of the request therefor, and the Secretary of the Corporation shall prepare a proper notice thereof. |
(c) | The Corporation shall not be required to call a special meeting upon shareholder demand unless, in addition to the documents required above by paragraph (b) of this Section 2, the Secretary of the Corporation receives a written agreement signed by each Soliciting Shareholder (as defined below), pursuant to which each Soliciting Shareholder, jointly and severally, agrees to pay the Corporations costs of holding the special meeting, including the costs of preparing and mailing proxy materials for the Corporations own solicitation, provided that if each of the resolutions introduced by a Soliciting Shareholder at such meeting is adopted, and each of the individuals nominated by or on behalf of any Soliciting Shareholder for election as director at such meeting is elected, then the Soliciting Shareholders shall not be required to pay such costs. For purposes of this paragraph (c), the following terms have the meanings set forth below: |
Affiliate has the meaning assigned to such term in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Participant shall have the meaning assigned to such term in Rule 14a-12 promulgated under the Exchange Act.
Proxy shall have the meaning assigned to such term in Rule 14a-1 promulgated under the Exchange Act.
Solicitation shall have the meaning assigned to such term in Rule 14a-1 promulgated under the Exchange Act.
Soliciting Shareholder shall mean, with respect to any special meeting requested by a shareholder or shareholders, any of the following Persons: (i) if the number of shareholders signing the request or requests for the meeting delivered to the Corporation pursuant to this Section 2 is 10 or fewer, each shareholder signing any such demand; (ii) if the number of shareholders signing the request or requests for the meeting delivered to the Corporation
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pursuant to this Section 2 is more than 10, each Person who either (A) was a Participant in any Solicitation of such demand or demands or (B) at the time of the delivery to the Corporation of the request or requests for the meeting had engaged or intended to engage in any Solicitation of Proxies for use at such special meeting (other than a Solicitation of Proxies on behalf of the Corporation); or (iii) any Affiliate of a Soliciting Shareholder, if a majority of the directors then in office determine, reasonably and in good faith, that such Affiliate should be required to sign the written agreement described in this paragraph (c) in order to prevent the purposes of this Section 2 from being evaded.
Section 3Place of Meeting
The Board of Directors may designate any place, within or without the State of Wisconsin, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the registered office of the Corporation in the State of Wisconsin, but any meeting may be adjourned to reconvene at any place designated by vote of a majority of the shares represented thereat.
Section 4Notice of Meeting
Notice stating the place, day, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered to each shareholder of record entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting, such notice to be delivered in accordance with the provisions of Article XIV below. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
Section 5Conduct of Meetings
Meetings of the shareholders shall be presided over by the Chairman of the Board, or in his or her absence, one of the following persons in the following order, if present and acting: the Lead Director, the Chief Executive Officer, the President, an Executive Vice President, a Senior Vice President, or a Vice President (in the event there be more than one Executive Vice President, Senior Vice President or Vice President, in the order designated by the Board of Directors, or in the absence of any designation, then in the order of their election) or if none of the foregoing is in office and present and acting, by a chairman chosen by the shareholders present. The Secretary of the Corporation, or in his or her absence, an Assistant Secretary, or if none be present, any person appointed by the presiding officer shall act as secretary of the meeting.
Section 6Advance Notice of Shareholder Proposed Business at Annual Meeting
At any annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, the proposal of business to be considered by the shareholders must be made (a) pursuant to the
Page 3
notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or (c) otherwise properly brought before the meeting by a shareholder who is a shareholder of record at the time of giving of notice provided for in these Bylaws and at the date of the meeting, is entitled to vote at the meeting and complies with the notice procedures set forth in this Section.
In addition to any other applicable requirements for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation at the principal offices of the Corporation and such business must be a proper matter for shareholder action under the Wisconsin Business Corporation Law. To be timely, a shareholders notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than seventy-five (75) days nor more than ninety (90) days prior to the anniversary date of the Corporations annual meeting of shareholders in the immediately preceding year; provided, however, that in the event that no annual meeting was held in the previous year or the annual meeting is called for a date that is not within thirty (30) days before or after the anniversary date of the previous years annual meeting, to be timely, notice by the shareholder must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure of the date of the meeting was made, whichever occurs first.
The Secretary of the Corporation shall determine whether a notice delivered pursuant to this Section 6 complies with the requirements of this Section 6 so as to be considered properly delivered to the Corporation. If the Secretary shall determine that such notice has not been properly delivered to the Corporation, the Secretary shall notify the shareholder in writing within five (5) days from the date such notice was received by the Corporation of such determination.
A shareholders notice to the Secretary shall be signed by the shareholder of record who intends to make the proposal (or such shareholders duly authorized proxy or other representative), shall bear the date of signature of such shareholder (or proxy or other representative) and shall set forth (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (b) the name and address of the shareholder proposing such business; (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder and any other ownership interest in the shares of the Corporation, whether economic or otherwise, including derivatives and hedges; (d) any material interest of the shareholder in such business; (e) a representation that the person sending the notice is a shareholder of record on the record date and shall remain such through the meeting date; and (f) a representation that such shareholder intends to appear in person or by proxy at such meeting to move the consideration of the business set forth in the notice.
Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 6; provided, however, that nothing in this Section 6 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting in accordance with said procedures.
Page 4
The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6, and if he or she should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.
Section 7Nomination of Directors
Only persons nominated in accordance with the following procedures in this Section 7 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at any meeting of shareholders by or at the direction of the Board of Directors or by any shareholder entitled to vote for the election of directors who complies with the procedures set forth in this Section 7. Nominations by shareholders shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, such notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than seventy-five (75) days nor more than ninety (90) days prior to the anniversary of the date of the Corporations annual meeting of shareholders in the immediately preceding year; provided, however, that in the event that no annual meeting was held in the previous year or the annual meeting is called for a date that is not within thirty (30) days before or after the anniversary date of the previous years annual meeting, to be timely, notice by the shareholder must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure of the date of the meeting was made, whichever occurs first.
The Secretary of the Corporation shall determine whether a notice delivered pursuant to this Section 7 complies with the requirements of this Section so as to be considered properly delivered to the Corporation and, if any proposed nomination is not in compliance with this Section 7, to notify such proponent that such proposed nomination shall be disregarded.
A shareholders notice to the Secretary shall set forth (a) as to each person proposed to be nominated (i) the name, age, address (business and residence), principal occupation or employment of such person (present and for the past five (5) years), (ii) the number of shares of the Corporation such person beneficially owns (as such term is defined by Section 13(d) of the Exchange Act); and any other ownership interest in the shares of the Corporation, whether economic or otherwise, including derivatives and hedges and (iii) any other information relating to such person that would be required to be disclosed in a definitive proxy statement to shareholders prepared in connection with an election of directors pursuant to Section 14(a) of the Exchange Act; and (b) as to the shareholder giving the notice (i) the name and address (business and residential) of the shareholder, and (ii) the number of shares of the Corporation the shareholder beneficially owns (as such term is defined by Section 13(d) of the Exchange Act) and any other ownership interest in the shares of the Corporation, whether economic or otherwise, including derivatives and hedges. The Corporation may require any proposed nominee to furnish additional information as may be reasonably required to determine the qualifications of such person to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 7.
Page 5
Nothing in these Bylaws shall require the Corporation to include in any notice, proxy statement or other mailing to shareholders any information regarding nominees or proposals made by shareholders except as otherwise required by law. Notwithstanding the foregoing provisions of these Sections 6 and 7, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in these Sections 6 and 7. The procedures set forth in these Sections 6 and 7 shall apply to all proposals of business to be considered by the shareholders at any annual meeting and is not limited to proposals for business brought pursuant to Rule 14a-8 of the Exchange Act. Nothing in these Sections 6 and 7 shall be deemed to limit the Corporations obligation to include shareholder proposals in its proxy statement if such inclusion is required by Rule 14a-8 under the Exchange Act. For purposes of Sections 6 and 7, public disclosure shall mean disclosure in a press release reported by PR Newswire, the Business Wire, the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Section 8Record Date for Notice, Voting and Distributions
For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof or to take any other action, the record date shall be at least thirty (30) days before such meeting or action is scheduled or at such other date fixed in advance by the Board of Directors which in no event shall be set more than seventy (70) days before the meeting or action requiring a determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 8, such determination shall be applied to any adjournment thereof unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. The record date for determining shareholders entitled to a distribution, other than a distribution involving a purchase, redemption, or other acquisition of the Corporations shares, is the date on which the Board of Directors authorizes the distribution, unless the Board of Directors fixes a different record date in advance.
Section 9Shareholders List for Meeting
Once a record date has been fixed for a meeting, the Secretary of the Corporation shall prepare a list of the names of all its shareholders who are entitled to notice of a shareholders meeting. Such list shall be arranged by class or series of shares and show the address of and number of shares held by each shareholder. The shareholders list will be available for inspection by any shareholder or his/her agent or attorney beginning two (2) business days after notice of the meeting is given for which the list was prepared and continuing up to and through the time for the meeting or any adjournment thereof at the Corporations principal offices, or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder or his/her agent or attorney may, on written demand, subject to applicable Wisconsin statutes, copy the list, during regular business hours and at his or her expense, during the period that it is available for inspection under this Section. Refusal or failure to prepare or make available the shareholders list does not affect the validity of action taken at the meeting.
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Section 10Quorum and Voting Requirements for Voting Groups
Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares, represented in person or by proxy, exists with respect to that matter. Unless the Articles of Incorporation or applicable statutes provide otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. Once a share is represented for any purpose at a meeting, other than for the purpose of objecting to holding the meeting or transacting business at the meeting, it is considered present for purposes of determining whether a quorum exists, for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. Directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting in which a quorum is present. If a quorum exists, action on a matter, other than the election of directors, by a voting group is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or applicable statutes require a greater number of affirmative votes.
Section 11Proxies
At all meetings of shareholders, a shareholder entitled to vote may vote in person or by proxy appointed, in writing, by the shareholder or by his or her duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. Any proxy is suspended when the person executing the proxy is present at a meeting of shareholders and elects to vote, except that when such proxy is coupled with an interest and the fact of the interest appears on the face of the proxy, the agent named in the proxy shall have all voting and other rights referred to in the proxy, notwithstanding the presence of the person executing the proxy. At each meeting of the shareholders, and before any voting commences, all proxies filed at or before the meeting shall be submitted to and examined by the Secretary or a person designated by the Secretary, and no shares may be represented or voted under a proxy that has been found to be invalid.
Without limiting the manner in which a shareholder may authorize another person or persons to act for such shareholder as proxy pursuant to this Section, the following shall constitute a valid means by which a shareholder may grant such authority:
(a) | A shareholder may execute a writing authorizing another person or persons to act for such shareholder as proxy. Execution may be accomplished by the shareholder or such shareholders authorized officer, director, employee or agent signing such writing or causing such persons signature to be affixed to such writing by any reasonable means including, but not limited to facsimile signature; and |
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(b) | A shareholder may authorize another person or persons to act for such shareholder as proxy by authorizing such person or persons over the Internet, by telephone or by transmitting or authorizing the transmission of a telegram, cablegram, electronic mail or email, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such authorization and/or transmission must either set forth or be submitted with information from which it can be determined that such authorization and/or transmission was authorized by the shareholder. If it is determined that such authorization and/or transmission is valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. |
Section 12Voting of Shares
Each outstanding shareholder entitled to vote shall be entitled to one (1) vote upon each matter submitted to a vote in person or by proxy at a meeting of shareholders.
Section 13Voting Companys Shares
Shares of the Corporation belonging to it shall not be voted directly or indirectly at any meeting and shall not be counted in determining the total number of outstanding shares at any given time, but shares held by the Corporation in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares at any given time. Redeemable shares are not entitled to vote after written notice, properly given, is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank named by the Board of Directors of the Corporation under an irrevocable obligation to pay the holders the redemption price on surrender of the shares.
Section 14Acceptance of Instruments Showing Shareholder Action
If the name signed on a vote, waiver or proxy appointment does not correspond to the name of a shareholder, the Corporation may accept the vote, waiver or proxy appointment and give it effect as the act of the shareholder if any of the following apply:
(a) | The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity. |
(b) | The name purports to be that of a personal representative, administrator, executor, guardian or conservator representing the shareholder and, if the Corporation requests in its sole discretion, evidence of fiduciary status acceptable to the Corporation is presented with respect to the vote, waiver or proxy appointment. |
(c) | The name signed purports to be that of a receive or trustee in bankruptcy of the shareholder and, if the Corporation requests in its sole discretion, evidence of this status acceptable to the Corporation is presented with respect to the vote, waiver or proxy appointment. |
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(d) | The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests in its sole discretion, evidence acceptable to the Corporation of the signatorys authority to sign for the shareholder is presented with respect to the vote, waiver or proxy appointment. |
(e) | Two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-tenants or fiduciaries and the person signing appears to be acting on behalf of all co-tenants or fiduciaries. |
Section 15Adjournment
An annual or special meeting of shareholders may be adjourned by a majority of shares represented, even if less than a quorum, or by the chairman of the annual or special meeting of shareholders. Upon being reconvened, the adjourned meeting shall be deemed to be a continuation of the initial meeting; a quorum will be deemed present if a quorum of shares was represented at the initial meeting, and any business that could be conducted at the initial meeting may be considered at the adjourned meeting. If a quorum was not present at the initial meeting but is present at the adjourned meeting, then any business may be transacted at the adjourned meeting. A meeting may be adjourned at any time, including after action on one (1) or more matters, and for any purpose including, but not limited to, allowing additional time to solicit votes on one (1) or more matters, to disseminate additional information to shareholders, or to count votes. No new notice need be given for an adjourned meeting if the time and place of the adjournment are announced at the initial meeting and no new record date for the adjourned meeting is required unless otherwise required by law.
Section 16Waiver of Notice
A shareholder may waive any notice required by these Bylaws, the Articles of Incorporation or under the provisions of any applicable statute, before or after the date and time stated in the notice, provided such waiver is in writing and signed by the shareholder entitled to the notice, contains the same information that would have been required in the notice under any applicable provisions under any statute, except that the time and place of the meeting need not be stated. Such waiver must be delivered to the Corporation for inclusion in the corporate records.
A shareholders attendance at a meeting, in person or by proxy, waives objection to (a) lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting; and (b) consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.
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ARTICLE III
BOARD OF DIRECTORS
Section 1General Powers
The business and affairs of the Corporation shall be governed by its Board of Directors. The term, number, qualifications and classes, if any, of the Board of Directors shall be as stated in the Corporations Articles of Incorporation.
Section 2Retirement and Nomination of Directors
(a) | Retirement of Directors A director shall retire as a director of the Corporation at the annual meeting following such directors attainment of age 72. The Board of Directors may waive the retirement age requirement on an annual basis for a director provided that such director shall retire as a director of the Corporation no later than at the annual meeting following such directors attainment of age 75. |
(b) | Nomination of Directors to the Board of Directors The Board of Directors may appoint a committee consisting solely of independent directors, as defined pursuant to NASDAQ Corporate Governance Rule 5605 and otherwise in compliance with the rules of NASDAQ or the rules of such securities exchange on which the Corporations common stock is then listed, to review candidates for membership on the Board of Directors and recommend individuals for nomination to the Board. Such candidates shall meet the criteria established for nominees to the Board of Directors as may be adopted by the Board of Directors from time to time. |
In order to be considered for renomination to an additional term on the Board of Directors, the individual should continue to meet the criteria established for nominees to the Board of Directors.
Section 3Organization Meeting
The Secretary, upon receiving the certificate of the inspector of election of the result of any election, shall notify the directors-elect of their election and the Board of Directors shall meet at the main office of the Corporation for the purpose of organizing the new Board and electing and appointing officers of the Corporation for the succeeding year. Such meeting shall be held immediately after the annual meeting of the shareholders or as soon thereafter as practicable, and, in any event, within thirty (30) days thereof. If, at the time fixed for such meeting, there shall not be a quorum present, the directors present may adjourn the meeting from time to time, until the quorum is obtained.
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Section 4Regular Meetings
A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders, and each adjourned session thereof. Additional regular meetings of the Board of Directors shall be held on the fourth (4th) Wednesday of each month of January, July, and October at 1:00 p.m. or at such other date and time as is determined by the Chairman of the Board, at the main office of the Corporation or at such other place as is designated by the Chairman of the Board.
Section 5Special Meeting
Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, Lead Director, Secretary, or by a majority of the directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place for holding any special meeting of the Board of Directors called by them.
Section 6Notice
Notice of any special meeting shall be given at least forty-eight (48) hours previously thereto, except in the case of an emergency meeting as provided under the Wisconsin Business Corporation Law by written or oral notice as provided for and in accordance with Article XIV below. Whenever any notice is required to be given to any director of the Corporation under the provisions of these Bylaws or under the provisions of the Articles of Incorporation or under the provisions of any statute, a waiver thereof in writing, signed at any time, whether before or after the time of meeting, by the director entitled to such notice, shall be deemed equivalent to the giving of such notice. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting and objects thereat to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
Section 7 Quorum; Required Vote and Adjournment
A majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. If less than a quorum is present at a meeting, a majority of the directors may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. The vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.
Section 8Removal and Resignation
Any director may be removed from office only for cause if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director at a special meeting of shareholders called for that purpose. For purposes of this Section, cause shall have the meaning set forth in the Corporations Articles of Incorporation. Any director may resign at any time upon written notice to the Corporation.
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Section 9Vacancies
Unless otherwise provided in the Articles of Incorporation, when any vacancy occurs among the directors, including a vacancy created by an increase in the number of directors, the remaining members of the Board, in accordance with the Wisconsin Business Corporation Law, may appoint a director to fill such vacancy for the unexpired portion of the term at any regular meeting of the Board or at a special meeting called for that purpose.
Section 10Chairman of the Board
The Board of Directors may appoint one (1) of its members to be Chairman of the Board (Chairman) to serve at the pleasure of the Board. The Chairman shall, when present, preside at all meetings of the shareholders and of the Board of Directors. It is the policy of the Board of Directors that the roles of Chairman and Chief Executive Officer will be separate. If no Chief Executive Officer is appointed or in the absence of the Chief Executive Officer or in the event of the Chief Executive Officers death, inability, or refusal to act, the Chairman shall perform the duties of the Chief Executive Officer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The Chairman shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him/her by the Board of Directors.
Section 11 Lead Director
The Board of Directors may appoint one (1) of its members to be Lead Director to serve at the pleasure of the Board. The Lead Director shall preside at all meetings of the shareholders and of the Board of Directors in the absence of the Chairman.
Section 12Compensation
The Board of Directors, by affirmative vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, may establish reasonable compensation of all directors for services to the Corporation as Lead Director, directors, officers, or otherwise, or may delegate such authority to an appropriate committee.
Section 13Presumption of Assent
A director of the Corporation who is present at a meeting of the Board of Directors or a committee thereof at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless he/she objects at the beginning of the meeting or promptly upon his/her arrival to holding the meeting or transacting business at the meeting or unless he/she shall file his/her written dissent to such action with the person acting as Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.
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Section 14Committees
The Board of Directors may, by resolution adopted by a majority of the Board, designate one or more committees and may appoint, from time to time, from its own members, two (2) or more persons to such committees that it deems necessary for such purposes and with such powers as the Board may determine, except as otherwise limited by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Each committee of the Board of Directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the Board of Directors designating such committee. Unless otherwise provided in such a resolution, the presence of at least a majority of the members of the committee shall be necessary to constitute a quorum.
Section 15Communications Equipment
Members of the Board of Directors or any committee thereof may participate in and act at any meeting of such Board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting pursuant to this Section shall constitute presence in person at the meeting.
Section 16Action by Unanimous Written Consent
Any action required or permitted by the Articles of Incorporation or Bylaws or any provision of law to be taken by the Board of Directors (or a committee of the Board of Directors) at a meeting or by resolution may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the directors then in office. Action taken under this Section 16 is effective when the last director signs the consent, unless the consent specifies a different effective date. A consent signed under this Section 16 has the effect of a unanimous vote taken at a meeting in which all directors were present, and may be described as such in any document.
ARTICLE IV
OFFICERS
Section 1Number
The principal officers of the Corporation shall be elected by the Board of Directors and shall consist of a Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary, and may also consist of President, one (1) or more Executive Vice Presidents, Senior Vice Presidents or Vice Presidents. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any two (2) or more offices may be held by the same person. In its discretion, the Board of Directors may choose not to fill any office for any period as it may deem advisable, except that the offices of Chief Executive Officer, President, Chief Financial Officer and Secretary shall be filled as expeditiously as possible.
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Section 2Election and Term of Office
The officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each officer shall hold his/her office until his/her successor shall have been duly elected and shall have qualified or until his/her death, or until he/she shall resign or shall have been removed in the manner hereinafter provided.
Section 3 Resignation and Removal
An officer shall hold office until he or she resigns, dies or is removed hereunder, or a different person is appointed to office. An officer may resign at any time by delivering an appropriate notice to the Corporation. The resignation is effective when the notice is delivered, unless the notice specifies a different effective date and the Corporation accepts the later effective date. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors at any time, with or without cause, but such removal shall be without prejudice to any contract or other employment rights, if any, of the person so removed. Election or appointment of an individual as an officer shall not of itself create contract or other employment rights, and any employment relationship of any officer with the Corporation or any of its affiliates may be terminated by the Corporation regardless of whether the Board of Directors acts or has acted to remove such officer.
Section 4Vacancies
A vacancy in any principal office because of death, resignation, removal, disqualification, or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term.
Section 5Chief Executive Officer
The Board of Directors shall appoint a Chief Executive Officer, who shall be the principal executive officer of the Corporation. If a Chief Executive Officer is appointed, he/she, subject to the control of the Board of Directors, shall, in general, supervise and control all of the business and affairs of the Corporation. The Chief Executive Officer shall, in the absence of the Chairman of the Board and the Lead Director, preside at all meetings of the shareholders and of the Board of Directors. He/she may sign, with the Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed; and, in general, shall perform all duties incident to the office of Chief Executive Officer and such
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other duties as may be prescribed by the Board of Directors from time to time. Except as otherwise provided by law or directed by the Board of Directors, the Chief Executive Officer may authorize the President, the Executive Vice President or any Vice President or other officer or agent of the Corporation to sign, execute and acknowledge such documents or instruments in his or her place and stead.
Section 6President
The Board of Directors may appoint a President who will report to the Chief Executive Officer of the Corporation or such other individual as designated by the Board of Directors. The President shall have responsibility for the general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect, and in the absence of the Chairman of the Board and the Chief Executive Officer or in the event of their inability or refusal to act shall preside at all meetings of the shareholders and the Board of Directors. The President may sign, with the Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors, the Chief Executive Officer or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed; and, in general, shall perform all duties incident to the office of President and such other duties as may be prescribed by the Chief Executive Officer or the Board of Directors from time to time.
Section 7Executive Vice Presidents and Senior Vice Presidents
The Board of Directors may appoint one (1) or more Executive Vice Presidents and Senior Vice Presidents who will report to the Chief Executive Officer, the President, or such other individual as designated by the Board of Directors. Any Executive Vice President or Senior Vice President may sign with the Secretary or an Assistant Secretary, certificates for shares of the Corporation, and shall perform such other duties as from time to time may be assigned to him/her by the Chief Executive Officer, the President, or the Board of Directors.
Section 8Vice President
The Board of Directors may appoint one (1) or more Vice Presidents. The Vice Presidents shall perform such other duties as from time to time may be assigned by the Chief Executive Officer, President, any Executive Vice President/Senior Vice President, or by the Board of Directors.
Section 9Secretary
The Board of Directors shall appoint a Secretary. The Secretary shall (a) keep the Minutes of the shareholders and of the Board of Directors meetings in one (1) or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents, the execution of which on
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behalf of the Corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) sign with the Chief Executive Officer, President, or an Executive Vice President or Senior Vice President, certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the Corporation; and (g) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the President or by the Board of Directors.
Section 10Chief Financial Officer
The Board of Directors shall appoint a Chief Financial Officer, who shall be the principal financial officer of the Corporation. The Chief Financial Officer or his or her designee shall serve as Treasurer of the Corporation and shall (a) have charge and custody of and be responsible for all funds and securities of the Corporation; receive and give receipts for monies due and payable to the Corporation from any source whatsoever; and deposit all such monies in the name of the Corporation in such banks, trust companies, or other depositories as shall be selected in accordance with the provisions of Article V of these Bylaws; and (b) in general, perform all of the duties incident to the office of Chief Financial Officer and such other duties as from time to time may be assigned to him or her by the Chairman of the Board, the Chief Executive Officer, President, or the Board of Directors. If required by the Board of Directors, the Chief Financial Officer shall give a bond for the faithful discharge of his/her duties in such sum and with such surety or sureties as the Board of Directors shall determine.
Section 11Other Officers, Assistant Officers and Agents
Officers, assistant officers and agents, if any, other than those whose duties are provided for in these Bylaws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the Board of Directors. Any Assistant Treasurer, if required by the Board of Directors, shall give a bond for the faithful discharge of his or her duties in such sums and with such sureties as the Board of Directors shall determine.
Section 12Officer Inability to Act
In the case of absence or inability to act of any officer of the Corporation and of any person herein authorized to act in his or her place, the Board of Directors may from time to time delegate the power or duties of such officer to any other officer or any director or any other person whom it may elect.
Section 13Compensation
Compensation of the officers shall be fixed from time to time by the Board of Directors or by any committee of the Board of Directors or officer to whom such authority has been delegated by the Board of Directors or a committee of the Board of Directors. No officer shall be prevented from receiving such compensation by reason of the fact that he/she is also a director of the Corporation.
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ARTICLE V
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
Section 1Contracts
The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authorization may be general or confined to specific instances.
Section 2Loans
The Board of Directors, without the approval of shareholders, and in accordance with existing applicable laws and regulations, may authorize and issue debt obligations whether or not subordinated. However, no loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by or under the authority of a resolution of the Board of Directors. Such authorization may be general or confined to specific instances.
Section 3Checks, Drafts, Etc.
All checks, drafts or other orders for the payment of money, notes or other evidence of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents, of the Corporation and in such manner as shall from time to time be determined by or under the authority of resolution of the Board of Directors.
Section 4Deposits
All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as may be selected by or under the authority of a resolution of the Board of Directors.
ARTICLE VI
CORPORATE STOCK
Section 1Certificates for Shares and Uncertificated Shares
The shares of the Corporations stock, or any class or series thereof, may be certificated and/or uncertificated, as provided under Wisconsin law, and shall be entered in the books of the Corporation and registered as they are issued, including in book entry form if uncertificated. Each certificate shall be signed either manually or by facsimile by (i) the Chief Executive Officer, the President or an Executive Vice President or Senior Vice President and (ii) the
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Secretary or an Assistant Secretary. Any certificates representing shares of the Corporations stock shall be consecutively numbered or otherwise identified. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors, certifying the number and class of shares of the stock of the Corporation owned by the shareholder. Any certificate issued to any shareholder shall state on its face the name of the Corporation, that the Corporation is organized under the laws of Wisconsin, the name of the person to whom the shares represented thereby are issued, with the number and class of shares and date of issue. If the person who signed a share certificate, either manually or in facsimile, no longer holds office when the certificate is issued, then the certificate is nonetheless valid.
Within a reasonable time after the issuance or transfer of any shares of uncertificated stock, the Corporation shall send to the holder thereof a written notice that shall set forth (a) the name of the Corporation, (b) that the Corporation is organized under the laws of the State of Wisconsin, (c) the name of the shareholder, (d) the number and class (and the designation of the series, if any) of the shares represented, (e) any restrictions on the transfer or registration of such shares of stock imposed by the Corporations Articles of Incorporation, these Bylaws, any agreement among shareholders, any agreement between shareholders and the Corporation or any applicable law, including, without limitation, the Securities Act of 1933 and the Exchange Act (f) any other information required by the Wisconsin Business Corporation Law.
Section 2Transfer of Shares
Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate or evidence of the issuance of uncertificated shares to the shareholder entitled thereto, cancel the old certificate and record the transaction upon the Corporations books. Upon surrender of any certificate for transfer of stock, such certificate shall at once be conspicuously marked on its face Cancelled and filed with the permanent stock records of the Corporation. Upon the receipt of proper transfer instructions from the holder of uncertificated shares, such uncertificated shares shall be cancelled, issuance of new equivalent uncertificated shares or certificated shares shall be made to the shareholder entitled thereto and the transaction shall be recorded upon the books of the Corporation. If the Corporation has a transfer agent or registrar acting on its behalf, the signature of any officer or representative thereof may be in facsimile. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. The Board of Directors may appoint a transfer agent and one or more co-transfer agents and registrar and one or more co-registrars and may make or authorize such agent to make all such rules and regulations deemed expedient concerning the issue, transfer and registration of shares of stock.
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Section 3Restrictions on Transfer
The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the Corporation on the transfer of such shares.
Section 4Lost, Destroyed or Stolen Certificates
Any person claiming a share certificate to be lost, stolen or destroyed shall make an affidavit or affirmation of the fact in such manner as the Board of Directors may require and shall, if the Board of Directors so requires, give the Corporation a bond of indemnity in form and amount, and with one or more sureties satisfactory to the Board of Directors, as the Board of Directors may require, whereupon the Corporation may issue (i) a new certificate or certificates of stock or (ii) uncertificated shares in place of any certificate or certificates previously issued by the Corporation alleged to have been lost, stolen or destroyed.
Section 5Registered Shareholders
Prior to the surrender to the Corporation of the certificate or certificates for a share or shares of stock with a request to record the transfer of such share or shares, the Corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof.
Section 6Consideration for Shares
The shares of the Corporation may be issued for such consideration as shall be fixed from time to time by the Board of Directors, provided that any shares having a par value shall not be issued for a consideration less than the par value thereof. The consideration to be paid for shares may be paid in whole or in part, in money, in other property, tangible or intangible, or in labor or services actually performed for the Corporation. The determination of the Board of Directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid and nonassessable. The Corporation may place in escrow shares issued in whole or in part for a contract for future services or benefits, a promissory note, or otherwise for property to be received in the future, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the benefits or property are received or the promissory note is paid. If the services are not performed, the benefits or property are not received or the promissory note is not paid, the Corporation may cancel, in whole or in part, the shares escrowed or restricted and the distributions credited.
Section 7Stock Regulations
The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the statutes of the State of Wisconsin as they may deem expedient concerning the issue, transfer, and registration of shares of the Corporation.
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ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall begin the first (1st) day of January and end on the thirty-first (31st) day of December in each year.
ARTICLE VIII
DIVIDENDS AND FINANCES
The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Corporations Articles of Incorporation. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Articles of Incorporation.
Before making any distribution of profits, there may be set aside out of the net profits of the Corporation such sum or sums as the directors may from time to time, in their absolute discretion, deem expedient as a reserve fund to meet contingencies or for equalizing dividends, or for maintaining any property of the Corporation, or for any other purpose, and profits of any year not distributed as dividends shall be deemed to have been thus set apart until otherwise disposed of by the Board of Directors.
ARTICLE IX
BOOKS AND RECORDS
No shareholder shall have any right to inspect any account or document of the Corporation, except as conferred by law or by resolution of the shareholders or directors; provided, that the provisions of this paragraph shall not be construed as changing in any way the duty of the Treasurer or Secretary to make proper reports to the shareholders at the annual meeting.
ARTICLE X
VOTING OF SECURITIES OWNED BY CORPORATION
Unless otherwise directed by the Board of Directors, the Chief Executive Officer or his or her delegate shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of the shareholders or members of any corporation, limited liability company or other entity in which this Corporation may hold securities, and at any such meeting shall possess and may exercise all of the rights and power incident to the ownership of such stock, and which, as the owner thereof, the Corporation might have possessed and exercised if present.
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Votes may be cast by proxy on behalf of the Corporation; however, each such proxy must be executed by the Chief Executive Officer, President or Chief Financial Officer and attested by the Secretary without further authority of the Board of Directors.
The Board of Directors may confer similar power to other corporate officers from time to time, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution.
ARTICLE XI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1Definitions to Indemnification and Insurance Provisions
(a) | Director, Officer, Employee or Agent means any of the following: |
(i) | a natural person who, is or was a director, officer, employee or agent of the Corporation; |
(ii) | a natural person who, while a director, officer, employee or agent of the Corporation, is or was serving either pursuant to the Corporations specific request or as a result of the nature of such persons duties to the Corporation as a director, officer, partner, trustee, member of any governing or decision making committee, employee or agent of another corporation or foreign corporation, partnership, joint venture, trust or other enterprise; |
(iii) | a natural person who, while a director, officer, employee or agent of the Corporation, is or was serving an employee benefit plan because his or her duties to the Corporation also impose duties on, or otherwise involve services by, the person to the plan or to participants in or beneficiaries of the plan; or (iv) unless the context requires otherwise, the estate or personal representative of a director, officer, employee or agent. |
(b) | Liability means the obligation to pay a judgment, penalty, assessment, forfeiture or fine, including an excise tax assessed with respect to an employee benefit plan, the agreement to pay any amount in settlement of a proceeding (whether or not approved by a court order), and reasonable expenses and interest related to the foregoing. |
(c) | Party means a natural person who is or was threatened to be made, a named defendant or respondent in a proceeding. |
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(d) | Proceeding means a threatened, pending or completed civil, criminal, administrative, or investigative action, suit, arbitration, or other proceeding, whether formal or informal (including but not limited to any act or failure to act alleged or determined to have been negligent; to have violated the Employee Retirement Income Security Act of 1974; or to have violated Sections 180.0833, 180.1202 and 180.0832 of the Wisconsin Statutes, or any successor thereto, regarding improper dividends, distributions of assets, or loans to directors), which involves foreign, federal, state or local law and which is brought by or in the right of the Corporation or by any other person or entity, to which the director, officer, employee or agent was a party because he or she is a director, officer, employee or agent. |
(e) | Expenses mean all reasonable fees, costs, charges, disbursements, attorneys fees and any other expenses incurred in connection with the proceeding. |
Section 2Indemnification of Officers, Directors, Employees and Agents
(a) | The Corporation shall indemnify a director, officer, employee, or agent to the extent he or she has been successful on the merits or otherwise in the defense of any proceeding, for all reasonable expenses. |
(b) | In cases not included under Subsection (a), the Corporation shall indemnify a director, officer, employee, or agent against liability and expenses incurred by such person in a proceeding unless it shall have been proven by final judicial adjudication that such person breached or failed to perform a duty owed to the Corporation which constituted: |
(i) | A willful failure to deal fairly with the Corporation or its shareholders in connection with a matter in which the director, officer, employee or agent has a material conflict of interest; |
(ii) | A violation of criminal law, unless the director, officer, employee or agent had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful; |
(iii) | A transaction from which the director, officer, employee or agent derived an improper personal profit; or |
(iv) | Willful misconduct. |
(c) | The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of no contest or its equivalent shall not, of itself, create a presumption that the director, officer, employee, or agent did not act in good faith and in a manner in which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, have reasonable cause to believe that his conduct was unlawful. |
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Section 3Determination that Indemnification is Proper
(a) | Unless provided otherwise by a written agreement between the director, officer, employee or agent and the Corporation, determination of whether indemnification is required under Section 2 shall be made by any method set forth in Section 180.0855 of the Wisconsin Statutes, or any successor thereto. |
(b) | A director, officer, employee or agent who seeks indemnification under this Section shall make a written request to the Corporation. As a further precondition to any right to receive indemnification, the writing shall contain a declaration that the Corporation shall have the right to exercise all rights and remedies available to such director, officer, employee or agent against any other person, corporation, foreign corporation, partnership, joint venture, trust, or other enterprise, arising out of, or related to, the proceeding which resulted in the liability and the expense for which such director, officer, employee, or agent is seeking indemnification, and that the director, officer, employee, or agent is hereby deemed to have assigned to the Corporation all such rights and remedies. |
(c) | Indemnification under Subsection 2(a) shall be made within ten (10) days of receipt of a written demand for indemnification. Indemnification required under Subsection 2(b) shall be made within thirty (30) days of receipt of a written demand for indemnification. |
(d) | Indemnification under this Section is not required to the extent the director, officer, employee or agent has previously received indemnification or allowance of expenses from any person or entity, including the Corporation, in connection with the same proceeding. |
Section 4Allowance of Expenses as Incurred
Upon written request by a director, officer, employee or agent who is a party to a proceeding, the Corporation shall pay or reimburse his or her reasonable expenses as incurred if the director, officer, employee or agent provides the Corporation with all of the following:
(a) | A written affirmation of his or her good faith belief that he or she is entitled to indemnification under this Article XI; and |
(b) | A written undertaking, executed personally or on his or her behalf, to repay all amounts advanced without interest to the extent that it is ultimately determined that indemnification under Section 2(b) of this Article XI is prohibited. |
The undertaking under this subsection shall be accepted without reference to the directors, officers, employees or agents ability to repay the allowance. The undertaking shall be unsecured.
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Section 5Controlled Subsidiaries
All officers, directors, agents and employees of controlled subsidiaries of the Corporation shall be deemed for purposes of this Article XI to be serving as officers, directors, agents and employees at the request of the Corporation. The right to indemnification granted to such officers, directors, agents and employees by this Article XI shall not be subject to any limitation or restriction imposed by any provisions of the Articles of Incorporation or Bylaws of a controlled subsidiary; provided, however, that any right to indemnification so granted shall be subject to and limited by the laws and regulations of any applicable regulatory authority to which any controlled subsidiary is subject. For purposes hereto, a controlled subsidiary means any corporation at least eighty percent (80%) of the outstanding voting stock of which is owned by the Corporation or another controlled subsidiary of the Corporation.
Section 6Insurance
The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is a director, officer, employee, or agent against any liability asserted against or incurred by the individual in any such capacity or arising out of his status as such, regardless of whether the Corporation is required or authorized to indemnify or allow expenses to the individual under this Section.
Section 7Severability
The provisions of this Article XI shall not apply in any circumstance where a court of competent jurisdiction determines that indemnification would be invalid as against public policy.
Section 8Amending the Right to Indemnification
The right to indemnification under this Article XI may be amended only by the shareholders by an affirmative vote of not less than a majority of the shares present or represented at any annual or special meeting of the shareholders at which a quorum is in attendance. Any reduction in the right to indemnification may only be prospective from the date of such vote.
ARTICLE XII
AMENDMENTS
Section 1By Directors or Shareholders
Alteration, amendment, or repeal of the Bylaws may be made by a majority vote of the Board of Directors at any regular or special meeting, provided notice of such alteration, amendment, or repeal has been given to each director at least three (3) days prior to the meeting, and provided the shareholders have not in any particular instance otherwise provided. Such alteration, amendment, or repeal may also be made if the votes cast in favor of amendment exceed the votes cast opposing the amendment at any annual or special meeting of the shareholders at which a quorum is in attendance.
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Section 2Implied Amendments
Any action taken or authorized by the shareholders or by the Board of Directors, which would be inconsistent with the Bylaws then in effect but is taken or authorized by a vote that would be sufficient to amend the Bylaws so that the Bylaws would be consistent with such action, shall be given the same effect as though the Bylaws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized.
ARTICLE XIII
SEAL
The Board of Directors may provide a corporate seal which may be circular in form and have inscribed thereon the name of the corporation and the state of incorporation and words Corporate Seal.
ARTICLE XIV
NOTICE
Section 1Notices Generally
Unless otherwise required by these Bylaws, the Corporations Articles of Incorporation or any applicable statute, notice required to be given under these Bylaws for any purpose may be given by written or oral notice or by notice communicated in person, by e-mail, telephone, telegraph, teletype, facsimile, or other form of wire or wireless communication, or by mail or private carrier or by any form of electronic transmission.
Section 2Notice to Shareholders
Written notice, which includes notice by any form of electronic transmission, to a shareholder shall be deemed to be effective on the earlier of: (a) the date received; (b) the date it is deposited in the United States mail when addressed to the shareholders address shown in the Corporations current record of shareholders, with postage prepaid; (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee; (d) the date sent, if transmitted by telegraph, teletype, facsimile or other form of wire or wireless communication; (e) the date delivered to a courier or deposited in a designated receptacle, if sent by private carrier, when addressed to the shareholders address shown in the Corporations current record of shareholders; or (f) when electronically transmitted to the shareholder in a manner authorized by the shareholder.
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Section 3Notice to Directors
Written notice, which includes notice by any form of electronic transmission, to a director shall be deemed to be effective on the earlier of: (a) the date received; (b) the date it is deposited in the United States mail, with postage prepaid, when addressed to the director at an address designated by him or her to receive such notice or in the absence of such designation, at his or her business or home address as they appear in the Corporations records; (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee; (d) the date sent, if transmitted by telegraph, teletype, facsimile or other form of wire or wireless communication; (e) the date delivered to a courier or deposited in a designated receptacle, if sent by private carrier, when addressed to the director at an address designated by him or her to receive such notice or in the absence of such designation, at his or her business or home address as they appear in the Corporations records; or (f) when electronically transmitted to the director.
ARTICLE XV
EMERGENCY PREPAREDNESS
Section 1Emergencies
In the event of an emergency declared by the President of the United States, or the person performing his functions, or an emergency that is potentially dangerous to corporate personnel, the officers and employees of Corporation will continue to conduct the affairs of the Corporation under such guidance from the directors as may be available, except as to matters that by statute require specific approval of the Board of Directors, and subject to conformance with any governmental directives during the emergency.
Section 2Officers Pro Tempore and Disaster
The Board of Directors shall have the power, in the absence or disability of any officer, or upon the refusal of any officer to act, to delegate and prescribe such officers powers and duties to any other officer, or to any director, for the time being. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of Corporation by its directors and officers, as contemplated by these Bylaws, any three (3) or more available directors shall constitute an interim Executive Committee responsible for the full conduct and management of the affairs and business of the Corporation in accordance with the foregoing provisions of this Section. Any provision of these Bylaws (other than this Section), and any resolutions that are contrary to the provisions of this Section, shall be suspended until it shall be determined by the interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all of the other provisions of these Bylaws.
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Section 3Alternate Locations
The offices of the Corporation at which its business shall be conducted shall be the main office thereof located at 433 Main Street, Green Bay, Wisconsin, and any other legally authorized location that may be leased or acquired by this Corporation to carry on its business. During an emergency resulting in any authorized place of business of this Corporation being unable to function, the business ordinarily conducted at such location shall be relocated elsewhere in suitable quarters, in addition to or in lieu of the locations heretofore mentioned, as may be designated by the Board of Directors or by the Executive Committee or by such persons as are then, in accordance with resolutions adopted from time to time by the Board of Directors dealing with the exercise of authority in the time of such emergency, conducting the affairs of this Corporation. Any temporarily relocated place of business of this Corporation shall be returned to its legally authorized location as soon as practicable, and such temporary place of business shall then be discontinued.
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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 1, 2013 |
/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 1, 2013 |
/s/ Christopher Del Moral-Niles |
|||||
Christopher Del Moral-Niles Chief Financial Officer and Principal Accounting 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, 2013 (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 1, 2013 |
/s/ Christopher Del Moral-Niles |
Christopher Del Moral-Niles |
Chief Financial Officer |
November 1, 2013 |