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Section 1: 10-K (10-K)

10-K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934 For the fiscal year ended December 31, 2014
¨ 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)

Registrant’s telephone number, including area code: (920) 491-7500

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

 

Title of each class

  

Name of each exchange on which registered

Common stock, par value $0.01 per share

Depositary Shares, each representing a 1/40th interest

in a share of 8.00% Perpetual Preferred Stock, Series B

Warrants to purchase shares of Common Stock of

Associated Banc-Corp

  

The New York Stock Exchange

The New York Stock Exchange

 

NYSE MKT

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  þ        No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨        No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ        No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  ¨        No  þ

As of June 30, 2014, (the last business day of the registrant’s most recently completed second fiscal quarter) the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $2,852,499,000. This excludes approximately $30,908,000 of market value representing the outstanding shares of the registrant owned by all directors and officers who individually, in certain cases, or collectively, may be deemed affiliates. This includes approximately $64,814,000 of market value representing 2.25% of the outstanding shares of the registrant held in a fiduciary capacity by the trust company subsidiary of the registrant.

As of January 31, 2015, 148,694,456 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

Document:

Proxy Statement for Annual Meeting of

Shareholders on April 21, 2015

  

Part of Form 10-K Into Which

Portions of Documents are Incorporated:

Part III

 

 

 


ASSOCIATED BANC-CORP

2014 FORM 10-K TABLE OF CONTENTS

 

          Page  

PART I

     

Item 1.

   Business      1   

Item 1A.

   Risk Factors      12   

Item 1B.

   Unresolved Staff Comments      25   

Item 2.

   Properties      25   

Item 3.

   Legal Proceedings      26   

Item 4.

   Mine Safety Disclosures      26   

PART II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities      30   

Item 6.

   Selected Financial Data      33   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      34   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      73   

Item 8.

   Financial Statements and Supplementary Data      74   

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      144   

Item 9A.

   Controls and Procedures      144   

Item 9B.

   Other Information      146   

PART III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      146  

Item 11.

   Executive Compensation      146   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      146   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      146   

Item 14.

   Principal Accounting Fees and Services      146   

PART IV

     

Item 15.

   Exhibits and Financial Statement Schedules      147  

Signatures

        151   


Special Note Regarding Forward-Looking Statements

This document, including the documents that are incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act (the “Exchange Act”). You can identify forward-looking statements by words such as “may,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. Such forward-looking statements may relate to our financial condition, results of operations, plans, objectives, future performance, or business and are based upon the beliefs and assumptions of our management and the information available to our management at the time these disclosures are prepared. These forward-looking statements involve risks and uncertainties that we may not be able to accurately predict or control and our actual results may differ materially from those we described in our forward-looking statements. Shareholders should be aware that the occurrence of the events discussed under the heading “Risk Factors” in this document, and in the information incorporated by reference herein, could have an adverse effect on our business, results of operations, and financial condition. These factors, many of which are beyond our control, include the following:

 

 

credit risks, including changes in economic conditions and risk relating to our allowance for credit losses;

 

 

liquidity and interest rate risks, including the impact of capital market conditions and changes in monetary policy on our borrowings and net interest income;

 

 

operational risks, including processing, information systems, cybersecurity, vendor problems, business interruption, and fraud risks;

 

 

strategic and external risks, including economic, political, and competitive forces impacting our business;

 

 

legal, compliance, and reputational risks, including regulatory and litigation risks; and

 

 

the risk that our analyses of these risks and forces could be incorrect and / or that the strategies developed to address them could be unsuccessful.

For a discussion of these and other risks that may cause actual results to differ from expectations, please refer to the “Risk Factors” section of this document. The forward-looking statements contained or incorporated by reference in this document relate only to circumstances as of the date on which the statements are made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I

 

ITEM 1. BUSINESS

General

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,” “Associated,” “we,” “us,” or “our”) is a bank holding company registered pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Our bank subsidiary traces its history back to the founding of the Bank of Neenah in 1861. We were incorporated in Wisconsin in 1964 and were inactive until 1969 when permission was received from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to acquire three banks. At December 31, 2014, we owned one nationally chartered commercial bank headquartered in Green Bay, Wisconsin which serves local communities across the upper Midwest, one nationally chartered trust company headquartered in Wisconsin, and 15 limited purpose banking and nonbanking subsidiaries either located in or conducting business primarily in our three-state footprint that are closely related or incidental to the business of banking. Measured by total assets reported at December 31, 2014, we are the largest commercial bank holding company headquartered in Wisconsin and one of the top 50, publicly traded, bank holding companies headquartered in the U.S.

 

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Services

Through our banking subsidiary Associated Bank, National Association (“Associated Bank” or the “Bank”), and various nonbanking subsidiaries, we provide a broad array of banking and nonbanking products and services to individuals and businesses through over 200 banking offices serving more than 100 communities, primarily within our three-state branch footprint (Wisconsin, Illinois, and Minnesota). Our business is primarily relationship-driven and is organized into three reportable segments: Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services. See also Note 20, “Segment Reporting,” of the notes to consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” for additional information concerning our reportable segments.

Corporate and Commercial Specialty — The Corporate and Commercial Specialty segment serves a wide range of customers including, larger businesses, developers, non-profits, municipalities, and financial institutions. In serving this 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. Delivery of services is provided through our corporate and commercial units, our commercial real estate unit, as well as our specialized industries and commercial financial services area. Within this segment we provide the following products and services: (1) lending solutions, such as commercial loans and lines of credit, commercial real estate financing, construction loans, letters of credit, leasing, and asset based lending; for our larger clients we also provide loan syndications; (2) deposit and cash management solutions such as commercial checking and interest-bearing deposit products, cash vault and night depository services, liquidity solutions, payables and receivables solutions; and information services; and (3) specialized financial services such as swaps, capital markets, foreign exchange, and international banking solutions.

Community, Consumer, and Business — The Community, Consumer, and Business segment serves individuals, as well as small and mid-sized businesses. In serving this 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. Delivery of services is provided through our various Consumer Banking, Community Banking, and Private Client units. Within this segment we provide the following products and services: (1) lending solutions such as residential mortgages, home equity loans and lines of credit, personal and installment loans, real estate financing, business loans, and business lines of credit; (2) deposit and transactional solutions such as checking, credit, debit and pre-paid cards, online banking and bill pay, and money transfer services; (3) investable funds solutions such as savings, money market deposit accounts, IRA accounts, certificates of deposit, fixed and variable annuities, full-service, discount and on-line investment brokerage; trust and investment management accounts; (4) insurance, benefits related products and services; and (5) fiduciary services such as administration of pension, profit-sharing and other employee benefit plans, fiduciary and corporate agency services, and institutional asset management.

Risk Management and Shared Services — The Risk Management and Shared Services segment includes Corporate Risk Management, Credit Administration, Finance, Treasury, Operations, and Technology, 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 Corporation’s investment portfolio and capital includes both allocated as well as any remaining unallocated capital.

We are not dependent upon a single or a few customers, the loss of which would have a material adverse effect on us. No material portion of our business is seasonal.

 

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Employees

At December 31, 2014, we had approximately 4,300 full-time equivalent employees. None of our employees are represented by unions.

Competition

The financial services industry is highly competitive. We compete for loans, deposits, and financial services in all of our principal markets. We compete directly with other bank and nonbank institutions located within our markets, internet-based banks, out-of-market banks and bank holding companies that advertise or otherwise serve our markets, money market and other mutual funds, brokerage houses, and various other financial institutions. Additionally, we compete with insurance companies, leasing companies, regulated small loan companies, credit unions, governmental agencies, and commercial entities offering financial services products. Competition involves efforts to retain current customers and to obtain new loans and deposits, the scope and type of services offered, interest rates paid on deposits and charged on loans, as well as other aspects of banking. We also face direct competition from subsidiaries of bank holding companies that have far greater assets and resources than ours.

Supervision and Regulation

Overview

Financial institutions are highly regulated both at the federal and state levels. Numerous statutes and regulations affect the business of the Corporation.

Bank Holding Company Act Requirements

As a registered bank holding company under the BHC Act, we are regulated, supervised, and examined by the Federal Reserve. In connection with applicable requirements, bank holding companies file periodic reports and other information with the Federal Reserve. The BHC Act also governs the activities that are permissible to bank holding companies and their affiliates and permits the Federal Reserve, in certain circumstances, to issue cease and desist orders and other enforcement actions against bank holding companies and their nonbanking affiliates to correct and curtail unsafe or unsound banking practices. Under the Dodd-Frank Act and longstanding Federal Reserve Policy, bank holding companies are required to act as a source of financial strength to each of their subsidiaries pursuant to which such holding company may be required to commit financial resources to support such subsidiaries in circumstances when, absent such requirements, they might not otherwise do. The BHC Act further regulates holding company activities, including requirements and limitations relating to capital, transactions with officers, directors and affiliates, securities issuances, dividend payments, inter-affiliate liabilities, extensions of credit, and expansion through mergers and acquisitions.

The BHC Act allows certain qualifying bank holding companies that elect treatment as “financial holding companies” to engage in activities that are financial in nature and that explicitly include the underwriting and sale of insurance. The Parent Company thus far has not elected to be treated as a financial holding company. Bank holding companies that have not elected such treatment generally must limit their activities to banking activities and activities that are closely related to banking.

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in July 2010, significantly changed the bank regulatory structure and affected the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires the Federal Reserve to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to

 

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implement new leverage and capital requirements. The new leverage and capital requirements must take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives. Pursuant to the Dodd-Frank Act, the Federal Deposit Insurance Corporation (the “FDIC”) has backup enforcement authority over a depository institution holding company, such as the Parent Company, if the conduct or threatened conduct of such holding company poses a risk to the Deposit Insurance Fund (“DIF”), although such authority may not be used if the holding company is generally in sound condition and does not pose a foreseeable and material risk to the DIF. In addition, the Dodd-Frank Act contains a wide variety of provisions affecting the regulation of depository institutions, including restrictions related to mortgage originations, risk retention requirements as to securitized loans, the establishment of the Consumer Financial Protection Bureau (“CFPB”), and restrictions on proprietary trading (the “Volcker Rule”). The Dodd-Frank Act may have a material impact on the Corporation’s and the Bank’s operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations. See the “Risk Factors” section for a more extensive discussion of this topic.

Regulation of Associated Bank and Trust Company

Associated Bank and our nationally chartered trust subsidiary are regulated, supervised and examined by the Office of the Comptroller of the Currency (the “OCC”). The OCC has extensive supervisory and regulatory authority over the operations of the Corporation’s national bank subsidiaries. As part of this authority, the national bank subsidiaries are required to file periodic reports with the OCC and are subject to regulation, supervision and examination by the OCC. Associated Bank, our only subsidiary that accepts insured deposits, is also subject to examination by the FDIC. We are subject to the enforcement and rule-making authority of the CFPB regarding consumer financial products. The CFPB has authority to create and enforce consumer protection rules and regulations and has the power to examine us for compliance with such rules and regulations. The CFPB also has the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, such as Associated Bank. The Dodd-Frank Act weakens the federal preemption available for national banks and gives broader rights to state attorneys general to enforce certain federal consumer protection laws.

Banking Acquisitions

We are required to obtain prior Federal Reserve approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act.

Banking Subsidiary Dividends

The Parent Company is a legal entity separate and distinct from its banking and other subsidiaries. A substantial portion of our revenue comes from dividends paid to us by Associated Bank. The OCC’s prior approval of the payment of dividends by Associated Bank to the Parent Company is required only if the total of all dividends declared by the Bank in any calendar year exceeds the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses.

Holding Company Dividends

In addition, we and our banking subsidiary are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances

 

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relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

Capital and Stress Testing Requirements

Capital Requirements

We are subject to various regulatory capital requirements both at the Parent Company and at the Bank level administered by the Federal Reserve and the OCC, respectively. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. Our capital amounts and classification are also subject to judgments by the regulators regarding qualitative components, risk weightings, and other factors. We have consistently maintained regulatory capital ratios at or above the well capitalized standards.

The Basel Committee on Banking Supervision has drafted frameworks for the regulation of capital and liquidity of internationally active banking organizations, generally referred to as “Basel III.” In July 2013, the Federal Reserve and the OCC issued final rules establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act. The final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final rules, among other things:

 

 

revise minimum capital requirements and adjust prompt corrective action thresholds;

 

 

revise the components of regulatory capital and create a new capital measure called “Common Equity Tier 1,” which must constitute at least 4.5% of risk-weighted assets;

 

 

specify that Tier 1 capital consists only of Common Equity Tier 1 and certain “Additional Tier 1 Capital” instruments meeting specified requirements;

 

 

apply most deductions / adjustments to regulatory capital measures to Common Equity Tier 1 and not to other components of capital, potentially requiring higher levels of Common Equity Tier 1 in order to meet minimum ratio requirements;

 

 

increase the minimum Tier 1 capital ratio requirement from 4% to 6%;

 

 

retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;

 

 

permit most banking organizations, including the Parent Company, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;

 

 

implement a new capital conservation buffer of Common Equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% Common Equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016 which buffer is generally required to make capital distributions and pay executive bonuses;

 

 

increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;

 

 

require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of Common Equity Tier 1 capital in the aggregate; and

 

 

remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.

 

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The final rules require that trust preferred securities be phased out from Tier 1 capital by the end of 2015, although for a banking organization, such as the Parent Company that has greater than $15 billion in total consolidated assets but is not an “advanced approaches banking organization,” the final rules permit inclusion of trust preferred securities issued prior to May 19, 2010 in Tier 2 capital regardless of whether they would otherwise meet the qualifications for Tier 2 capital treatment.

Under the final rules, compliance is required beginning January 1, 2015, for most banking organizations including the Parent Company and Associated Bank, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. Requirements to maintain higher levels of capital could adversely impact our return on equity. We believe we will continue to exceed all estimated well-capitalized regulatory requirements under these new rules on a fully phased-in basis. For further detail on capital and capital ratios see discussion under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” sections, “Liquidity” and “Capital,” and under Part II, Item 8, Note 18, “Regulatory Matters,” of the notes to consolidated financial statements.

Capital Planning and Stress Testing Requirements

On October 12, 2012, the Federal Reserve published a final rule implementing the company-run stress test requirements mandated by the Dodd-Frank Act for U.S. bank holding companies with total consolidated assets of $10 billion to $50 billion. Under the rule, we are required to conduct annual company-run stress tests using data as of September 30 of each year and different scenarios provided by the Federal Reserve. Submissions are due to the Federal Reserve during the first quarter of each following year. On September 24, 2013, the Federal Reserve issued an interim rule providing a one-year transition period to incorporate the revised capital framework into the company-run stress test. We anticipate that our pro forma capital ratios, as reflected in the stress test calculations under the required stress test scenarios, will be an important factor considered by the Federal Reserve Board in evaluating whether proposed payments of dividends or stock repurchases are consistent with its prudential expectations. Requirements to maintain higher levels of capital or liquidity to address potential adverse stress scenarios could adversely impact our net income and our return on equity. The Corporation timely submitted its initial stress test report to the Federal Reserve before its required due date of March 31, 2014. The Corporation is not required to publically disclose its results for the March 2014 submission. The Corporation will submit its second year of stress test results by March 31, 2015. In addition, the Corporation will publically release its results of the Severely Adverse Scenario stress test between June 15, 2015 and June 30, 2015, as required by regulation.

Enforcement Powers of the Federal Banking Agencies; Prompt Corrective Action

The Federal Reserve, the OCC, and the CFPB have extensive supervisory authority over their regulated institutions, including, among other things, the power to compel higher reserves, the ability to assess civil money penalties, the ability to issue cease-and-desist or removal orders and the ability to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations or for unsafe or unsound banking practices. Other actions or inactions by the Parent Company may provide the basis for enforcement action, including misleading or untimely reports.

Federal banking regulators are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their capital requirements. The federal banking agencies have additional enforcement authority with respect to undercapitalized depository institutions.

“Well capitalized” institutions may generally operate without supervisory restriction. With respect to “adequately capitalized” institutions, such banks cannot normally pay dividends or make any capital contributions that would leave it undercapitalized; they cannot pay a management fee to a controlling person if, after paying the fee, it would be undercapitalized; and they cannot accept, renew or roll over any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.

 

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The federal banking agencies are required to take action to restrict the activities of an “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” insured depository institution. Any such bank must submit a capital restoration plan that is guaranteed by the parent holding company. Until such plan is approved, it may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. In certain situations, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with supervisory actions as if the institution were in the next lower category.

Institutions must file a capital restoration plan with the OCC within 45 days of the date it receives a notice from the OCC that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Compliance with a capital restoration plan must be guaranteed by a parent holding company. In addition, the OCC is permitted to take any one of a number of discretionary supervisory actions, including but not limited to the issuance of a capital directive and the replacement of senior executive officers and directors.

Finally, bank regulatory agencies have the ability to impose higher than normal capital requirements known as individual minimum capital requirement (“IMCR”) for institutions with a high-risk profile.

At December 31, 2014, the Bank satisfied the requirements as “well capitalized”. The imposition of any of the measures described above could have a material adverse effect on the Corporation and on its profitability and operations. The Corporation’s shareholders do not have preemptive rights and, therefore, if the Corporation is directed by the OCC or the FDIC to issue additional shares of common stock, such issuance may result in dilution in shareholders’ percentage of ownership of the Corporation.

Deposit Insurance Premiums

Associated Bank is a member of the FDIC and pays an insurance premium to the FDIC based upon its assessment rates on a quarterly basis. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government.

Under the Dodd-Frank Act, a permanent increase in deposit insurance was authorized to $250,000 per depositor, per insured depository institution for each account ownership category.

The Dodd-Frank Act also set a new minimum DIF reserve ratio at 1.35% of estimated insured deposits. The FDIC is required to attain this ratio by September 30, 2020. The Dodd-Frank Act also required the FDIC to define the deposit insurance assessment base for an insured depository institution as an amount equal to the institution’s average consolidated total assets during the assessment period minus average tangible equity. The assessment rate schedule for larger institutions like Associated Bank (i.e., institutions with at least $10 billion in assets) differentiates between such large institutions by use of a “scorecard” that combines an institution’s CAMELS ratings with certain forward-looking financial information to measure the risk to the DIF. Pursuant to this “scorecard” method, two scores (a performance score and a loss severity score) will be combined and converted to an initial base assessment rate. The performance score measures an institution’s financial performance and ability to withstand stress. The loss severity score measures the relative magnitude of potential losses to the DIF in the event of the institution’s failure. Total scores are converted pursuant to a predetermined formula into an initial base assessment rate. Assessment rates range from 2.5 basis points to 45 basis points (“bp”) for large institutions. Premiums for Associated Bank are now calculated based upon the average balance of total assets minus average tangible equity as of the close of business for each day during the calendar quarter.

The FDIC has the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted without notice and comment, if certain conditions are met.

DIF-insured institutions pay a Financing Corporation (“FICO”) assessment in order to fund the interest on bonds issued in the 1980s in connection with the failures in the thrift industry. The FICO assessment was computed on

 

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assets as required by the Dodd-Frank Act. These assessments will continue until the bonds mature in 2019. The Corporation’s combined assessment rate for FDIC and FICO assessments was approximately 11 bp for 2014.

The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance for our national bank subsidiary would have a material adverse effect on our earnings, operations and financial condition.

Standards for Safety and Soundness

The federal banking agencies have adopted the Interagency Guidelines for Establishing Standards for Safety and Soundness. The Guidelines establish certain safety and soundness standards for all depository institutions. The operational and managerial standards in the Guidelines relate to the following: (1) internal controls and information systems; (2) internal audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate exposure; (6) asset growth; (7) compensation, fees and benefits; (8) asset quality; and (9) earnings. Rather than providing specific rules, the Guidelines set forth basic compliance considerations and guidance with respect to a depository institution. Failure to meet the standards in the Guidelines, however, could result in a request by the OCC to one of the nationally chartered banks to provide a written compliance plan to demonstrate its efforts to come into compliance with such Guidelines. Failure to provide a plan or to implement a provided plan requires the appropriate federal banking agency to issue an order to the institution requiring compliance.

Transactions with Affiliates

Transactions between our national banking subsidiary and its related parties or any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is any company or entity, which controls, is controlled by or is under common control with the bank. In a holding company context, at a minimum, the parent holding company of a national bank and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a nonaffiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Certain types of covered transactions must be collateralized according to a schedule set forth in the statute based on the type of collateral.

Certain transactions with our directors, officers or controlling persons are also subject to conflicts of interest regulations. Among other things, these regulations require that loans to such persons and their related interests be made on terms substantially the same as for loans to unaffiliated individuals and must not create an abnormal risk of repayment or other unfavorable features for the financial institution. See Note 3, “Loans,” of the notes to consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” for additional information on loans to related parties.

Community Reinvestment Act Requirements

Our national bank subsidiary, Associated Bank, is subject to periodic Community Reinvestment Act (“CRA”) reviews by the OCC. The CRA does not establish specific lending requirements or programs for financial institutions and does not limit the ability of such institutions to develop products and services believed best-suited for a particular community. An institution’s CRA assessment may be used by its regulators in their evaluation of certain applications, including a merger, acquisition or the establishment of a branch office. An unsatisfactory rating may be used as the basis for denial of such an application.

 

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Associated Bank’s latest CRA examination report was dated November 20, 2006, and carried a Satisfactory rating.

Privacy

Financial institutions, such as our national bank subsidiary, are required by statute and regulation to disclose their privacy policies. In addition, such financial institutions must appropriately safeguard its customers’ nonpublic, personal information.

Bank Secrecy Act / Anti-Money Laundering

The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every national bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA. The program must, at a minimum: (1) provide for a system of internal controls to assure ongoing compliance; (2) provide for independent testing for compliance; (3) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (4) provide training for appropriate personnel. In addition, national banks are required to adopt a customer identification program as part of its BSA compliance program. National banks are also required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.

On February 23, 2012, Associated Bank entered into a Consent Order with the OCC regarding its BSA compliance, which required the Bank to take a variety of measures to ensure ongoing compliance with the BSA and related regulations. The Consent Order was terminated in March 2014. In connection with the termination, the Bank entered into a Stipulation and Consent Order for a Civil Money Penalty with the OCC dated June 26, 2014, which provided for the payment by the Bank of a civil money penalty of $500,000. The civil money penalty was paid in June 2014.

In addition to complying with the BSA, the Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”). The Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial service companies implement additional policies and procedures and take heightened measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.

Interstate Branching

Pursuant to the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other than its home state (e.g., a host state) by establishing a de novo branch at any location in such host state at which a bank chartered in such host state could establish a branch. Applications to establish such branches must still be filed with the appropriate primary federal regulator.

Volcker Rule

The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of Tier 1 Capital in private equity and hedge funds (known as the “Volcker Rule”). On December 10, 2013, five U.S. financial regulators, including the Federal Reserve and the OCC, adopted final rules (the “Final Rules”) implementing the Volcker Rule. The Final Rules prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests

 

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in and relationships with hedge funds or private equity funds, which are referred to as “covered funds.” The Final Rules are intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions. The Final Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include (for the largest entities) making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Parent Company and Associated Bank. The Final Rules were effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. In addition, the Federal Reserve recently granted an extension until July 21, 2016 of the conformance period for banking entities to conform investments in and relationships with covered funds that were in place prior to December 31, 2013, and announced its intention to further extend this aspect of the conformance period until July 21, 2017. The Corporation has evaluated the implications of the Final Rules on its investments and does not expect any material financial implications.

Incentive Compensation Policies and Restrictions

In July 2010, the federal banking agencies issued guidance that applies to all banking organizations supervised by the agencies (thereby including both the Parent Company and the Bank). Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices at the Parent Company and at the Bank to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published; however, the Corporation believes it is in compliance with the rule as currently proposed.

Ability-to-Repay and Qualified Mortgage Rule

Pursuant to the Dodd Frank Act, the CFPB issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are “higher-priced”

 

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(e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. The Corporation is predominantly an originator of compliant qualified mortgages.

Other Banking Regulations

Our banking subsidiary is also subject to a variety of other regulations with respect to the operation of its businesses, including but not limited to the Dodd-Frank Act, Truth in Lending Act, Truth in Savings Act, Equal Credit Opportunity Act, Electronic Funds Transfer Act, Fair Housing Act, Home Mortgage Disclosure Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Expedited Funds Availability (Regulation CC), Reserve Requirements (Regulation D), Insider Transactions (Regulation O), Privacy of Consumer Information (Regulation P), Margin Stock Loans (Regulation U), Right To Financial Privacy Act, Flood Disaster Protection Act, Homeowners Protection Act, Servicemembers Civil Relief Act, Real Estate Settlement Procedures Act, Telephone Consumer Protection Act, CAN-SPAM Act, Children’s Online Privacy Protection Act, and the John Warner National Defense Authorization Act.

The laws and regulations to which we are subject are constantly under review by Congress, the federal regulatory agencies, and the state authorities. These laws and regulations could be changed drastically in the future, which could affect our profitability, our ability to compete effectively, or the composition of the financial services industry in which we compete.

Government Monetary Policies and Economic Controls

Our earnings and growth, as well as the earnings and growth of the banking industry, are affected by the credit policies of monetary authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to combat recession and curb inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, changes in reserve requirements against member bank deposits, and changes in the Federal Reserve discount rate. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.

In view of changing conditions in the national economy and in money markets, as well as the effect of credit policies by monetary and fiscal authorities, including the Federal Reserve, it is difficult to predict the impact of possible future changes in interest rates, deposit levels, and loan demand, or their effect on our business and earnings or on the financial condition of our various customers.

Other Regulatory Authorities

In addition to regulation, supervision and examination by federal banking agencies, the Corporation and certain of its subsidiaries, including those that engage in securities brokerage, dealing and investment advisory activities, are subject to other federal and state securities laws and regulations, and to supervision and examination by other regulatory authorities, including the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), the New York Stock Exchange (“NYSE”), and others.

Available Information

We file annual, quarterly, and current reports, proxy statements, and other information with the SEC. These filings are available to the public on the Internet at the SEC’s web site at www.sec.gov. Shareholders may also read and copy any document that we file at the SEC’s public reference rooms located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

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Our principal internet address is www.associatedbank.com. We make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, shareholders may request a copy of any of our filings (excluding exhibits) at no cost by writing or e-mailing us using the following information: Associated Banc-Corp, Attn: Investor Relations, 433 Main Street, Green Bay, WI 54301; or e-mail to shareholders@associatedbank.com. Our Code of Business Conduct and Ethics, Corporate Governance Guidelines, and committee charters for standing committees of the Board are all available on our website, www.associatedbank.com / About Us / Investor Relations / Corporate Information / Governance Documents. We will disclose on our website amendments to or waivers from our Code of Ethics in accordance with all applicable laws and regulations. Information contained on any of our websites is not deemed to be a part of this Annual Report.

 

ITEM 1A.     RISK FACTORS

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. See also, “Special Note Regarding Forward-Looking Statements.”

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.

Credit Risks

Changes in economic and political conditions could adversely affect our earnings, as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline.    Our success depends, to a certain extent, upon local and national economic and political conditions, as well as governmental monetary policies. Conditions such as an economic recession, rising unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. Consequently, declines in the economy in our market area could have a material adverse effect on our financial condition and results of operations.

Our allowance for loan losses may be insufficient.    All borrowers have the potential to default and our remedies to recover (such as seizure and / or sale of collateral, legal actions, and guarantees) may not fully satisfy the debt owed to us. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance for loan losses, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our

 

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control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge offs, based on judgments different than those of management. An increase in the allowance for loan losses would result in a decrease in net income, and possibly risk-based capital, and could have a material adverse effect on our financial condition and results of operations.

We are subject to lending concentration risks.    As of December 31, 2014, approximately 63% of our loan portfolio consisted of commercial and industrial, real estate construction, commercial real estate loans, and lease financing (collectively, “commercial loans”). Commercial loans are generally viewed as having more inherent risk of default than residential mortgage loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential mortgage loans and other consumer loans, inferring higher potential losses on an individual loan basis. Because our loan portfolio contains a number of commercial loans with balances over $25 million, the deterioration of one or a few of these loans could cause a significant increase in nonaccrual loans. Also, at December 31, 2014, approximately 4% of our loan portfolio consisted of loans to borrowers in the oil and gas industry (“oil and gas loans”). Oil and gas are commodities that are subject to price volatility, and our borrowers would be adversely affected by a severe and prolonged downturn in oil and gas prices. A significant deterioration in our oil and gas loans could cause a significant increase in nonaccrual loans. An increase in nonaccrual loans could result in a loss of interest income from these loans, an increase in the provision for loan losses, and an increase in loan charge offs, all of which could have a material adverse effect on our financial condition and results of operations.

We depend on the accuracy and completeness of information about our customers and counterparties.    In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. We may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.

Lack of system integrity or credit quality related to funds settlement could result in a financial loss.    We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include wire transfers, debit card, credit card and electronic bill payment transactions, supporting consumers, financial institutions and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties and the facilitation of the payment. If the continuity of operations or integrity of processing were compromised this could result in a financial loss to us due to a failure in payment facilitation. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to us.

We are subject to environmental liability risk associated with lending activities.    A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses which may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

 

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Liquidity and Interest Rate Risks

Liquidity is essential to our businesses.    The Corporation requires liquidity to meet its deposit and debt obligations as they come due. Access to liquidity could be impaired by an inability to access the capital markets or unforeseen outflows of deposits. Risk factors that could impair our ability to access capital markets include a downturn in our Midwest markets, difficult credit markets, credit rating downgrades, or regulatory actions against the Corporation. The Corporation’s access to deposits can be impacted by the liquidity needs of our customers as a substantial portion of the Corporation’s liabilities are demand while a substantial portion of the Corporation’s assets are loans that cannot be sold in the same timeframe. Historically, the Corporation has been able to meet its cash flow needs as necessary. If a sufficiently large number of depositors sought to withdraw their deposits for whatever reason, the Corporation may be unable to obtain the necessary funding at terms favorable to the Bank.

We are subject to interest rate risk.    Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities; and (iii) the average duration of our mortgage portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Our most significant interest rate risk may be further declines in the absolute level of interest rates or the prolonged continuation of the current low rate environment, as this would generally lead to further compression of our net interest margin, reduced net interest income, and devaluation of our deposit base.

Although management believes it has implemented effective asset and liability management strategies, including the potential use of derivatives as hedging instruments, to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet.

The impact of interest rates on our mortgage banking business can have a significant impact on revenues.    Changes in interest rates can impact our mortgage related revenues and net revenues associated with our mortgage activities. A decline in mortgage rates generally increases the demand for mortgage loans as borrowers refinance, but also generally leads to accelerated payoffs. Conversely, in a constant or increasing rate environment, we would expect fewer loans to be refinanced and a decline in payoffs. Although we use models to assess the impact of interest rates on mortgage related revenues, the estimates of revenues produced by these models are dependent on estimates and assumptions of future loan demand, prepayment speeds and other factors which may differ from actual subsequent experience.

Changes in interest rates could reduce the value of our investment securities holdings.    The Corporation maintains an investment portfolio consisting of various high quality liquid fixed-income securities. The total book value of the securities portfolio as of December 31, 2014 was $5.8 billion and the estimated duration of the aggregate portfolio was approximately 3.5 years. The nature of fixed-income securities is such that changes in market interest rates impact the value of these assets. Based on the duration of the Corporation’s securities portfolio, a one percent decrease in market rates is projected to increase the market value of the investment securities portfolio by approximately $170 million, while a one percent increase in market rates is projected to decrease the market value of the investment securities portfolio by approximately $220 million.

 

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Changes in interest rates could also reduce the value of our residential mortgage-related securities and mortgage servicing rights, which could negatively affect our earnings.    We have a portfolio of mortgage servicing rights. A mortgage servicing right (“MSR”) is the right to service a mortgage loan (i.e., collect principal, interest, escrow amounts, etc.) for a fee. We recognize MSRs when we originate mortgage loans and keep the servicing rights after we sell or securitize the loans or when we purchase the servicing rights to mortgage loans originated by other lenders. We carry MSRs at the lower of amortized cost or estimated fair value. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.

When interest rates fall, borrowers are more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of our residential mortgage-related securities and MSRs can decrease. Each quarter we evaluate our residential mortgage-related securities and MSRs for impairment. If temporary impairment exists, we establish a valuation allowance through a charge to earnings for the amount the carrying amount exceeds fair value. We also evaluate our MSRs for other-than-temporary impairment. If we determine that other-than-temporary impairment exists, we will recognize a direct write-down of the carrying value of the MSRs.

We rely on dividends from our subsidiaries for most of our revenue.    The Parent Company is a separate and distinct legal entity from its banking and other subsidiaries. A substantial portion of the Parent Company’s revenue comes from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the Parent Company’s common and preferred stock, and to pay interest and principal on the Parent Company’s debt. Various federal and / or state laws and regulations limit the amount of dividends that our national bank subsidiary and certain nonbank subsidiaries may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event our national bank subsidiary is unable to pay dividends to us, we may not be able to service debt, pay obligations, or pay dividends on our common and preferred stock. The inability to receive dividends from our national bank subsidiary could have a material adverse effect on our business, financial condition, and results of operations.

Operational Risks

We face significant operational risks due to the high volume and the high dollar value nature of transactions we process.    We operate in many different businesses in diverse markets and rely on the ability of our employees and systems to process transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions, errors relating to transaction processing and technology, breaches of our internal control systems or failures of those of our suppliers or counterparties, compliance failures, cyber-attacks or unforeseen problems encountered while implementing new computer systems or upgrades to existing systems, business continuation and disaster recovery issues, and other external events. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. The occurrence of any of these events could cause us to suffer financial loss, face regulatory action and suffer damage to our reputation.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a cyber-attack, other breach of our computer systems or otherwise, could severely harm our business.    In the normal course of our business, we collect, process and retain sensitive and confidential client and customer information on our behalf and on behalf of other third parties. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and / or human errors, or other similar events.

 

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Information security risks for financial institutions like us have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, designed to disrupt key business services such as customer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types. Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

We also face risks related to cyber-attacks and other security breaches in connection with credit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we regularly conduct security assessments on these third parties, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.

Any cyber-attack or other security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business.

Our information systems may experience an interruption or breach in security.    We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot completely ensure that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We are dependent upon third parties for certain information system, data management and processing services and to provide key components of our business infrastructure.    We outsource certain information system and data management and processing functions to third party providers, including, among others, Fiserv, Inc. and its affiliates. These third party service providers are sources of operational and informational security risk to us, including risks associated with operational errors, information system interruptions or breaches, and unauthorized disclosures of sensitive or confidential client or customer information. If third party service providers encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our results of operations or our business.

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

 

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The potential for business interruption exists throughout our organization.    Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and the vast array of associates and key executives in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes, but is not limited to, operational or technical failures, ineffectiveness or exposure due to interruption in third party support as expected, as well as the loss of key individuals or failure on the part of key individuals to perform properly. Although management has established policies and procedures to address such failures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results.    Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.

From time to time the Financial Accounting Standards Board (FASB) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.

Our internal controls may be ineffective.    Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, and financial condition.

Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.    In assessing whether the impairment of investment securities is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.

Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. A decline in our stock price or occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release. During 2014, the annual impairment test conducted in May indicated that the estimated fair value of all of the Corporation’s reporting units exceeded the carrying value. In the event that we conclude that all or a portion of our goodwill may be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital. At December 31, 2014, we had goodwill of $929 million, representing approximately 33% of stockholders’ equity.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Assessing the need for, or the sufficiency of, a

 

17


valuation allowance requires management to evaluate all available evidence, both negative and positive, 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. At December 31, 2014, net deferred tax assets were approximately $24 million.

The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.

We may not be able to attract and retain skilled people.    Our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

Loss of key employees may disrupt relationships with certain customers.    Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships. Loss of a key employee with such customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor. While we believe our relationship with our key personnel is good, we cannot guarantee that all of our key personnel will remain with our organization. Loss of such key personnel, should they enter into an employment relationship with one of our competitors, could result in the loss of some of our customers.

Revenues from our investment management and asset servicing businesses are significant to our earnings.    Generating returns that satisfy clients in a variety of asset classes is important to maintaining existing business and attracting new business. Administering or managing assets in accordance with the terms of governing documents and applicable laws is also important to client satisfaction. Failure in either of the foregoing areas can expose us to liability, and result in a decrease in our revenues and earnings.

Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business.    Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and / or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Strategic and External Risks

Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.    The policies of the Federal Reserve impact us significantly. The Federal Reserve regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.

 

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Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.    Our business strategy includes significant growth plans. We intend to continue pursuing a profitable growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy. Also, if we grow more slowly than anticipated, our operating results could be materially adversely affected.

We operate in a highly competitive industry and market area.    We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

Our ability to compete successfully depends on a number of factors, including, among other things:

 

   

the ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;

 

   

the ability to expand our market position;

 

   

the scope, relevance, and pricing of products and services offered to meet customer needs and demands;

 

   

the rate at which we introduce new products and services relative to our competitors;

 

   

customer satisfaction with our level of service; and

 

   

industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Our profitability depends significantly on economic conditions in the states within which we do business.    Our success depends on the general economic conditions of the specific local markets in which we operate, particularly Wisconsin, Illinois and Minnesota. Local economic conditions have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, on the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general local economic conditions, caused by inflation, recession, unemployment, changes in securities markets, changes in housing market prices, or other factors could have a material adverse effect on our financial condition and results of operations.

 

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The earnings of financial services companies are significantly affected by general business and economic conditions.    Our operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, the strength of the United States economy, and uncertainty in financial markets globally relating to financial crises in the European Union and elsewhere, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values, and a decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our financial condition and results of operations.

New lines of business or new products and services may subject us to additional risk.    From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and / or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and / or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and / or a new product or service. Furthermore, any new line of business and / or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and / or new products or services could have a material adverse effect on our business, results of operations and financial condition.

Failure to keep pace with technological change could adversely affect our business.    The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

We may be adversely affected by risks associated with potential and completed acquisitions.    As part of our growth strategy, we regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services.

Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things:

 

   

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, and with integrating acquired businesses, resulting in the diversion of resources from the operating of our existing businesses;

 

   

difficulty in estimating the value of target companies or assets and in evaluating credit, operations, management, and market risks associated with those companies or assets;

 

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payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;

 

   

potential exposure to unknown or contingent liabilities of the target company, including, without limitation, liabilities for regulatory and compliance issues;

 

   

exposure to potential asset quality issues of the target company;

 

   

there may be volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts;

 

   

difficulties, inefficiencies or cost overruns associated with the integration of the operations, personnel, technologies, services, and products of acquired companies with ours;

 

   

inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and / or other projected benefits;

 

   

potential disruption to our business;

 

   

the possible loss of key employees and customers of the target company; and

 

   

potential changes in banking or tax laws or regulations that may affect the target company.

Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities with no corresponding accounting allowance, exposure to unexpected asset quality problems that require write-downs or write-offs (as well as restructuring and impairment or other charges), difficulty retaining key employees and customers and other issues that could negatively affect our business. We may not be able to realize any projected cost savings, synergies or other benefits associated with any such acquisition we complete. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Failure to successfully integrate the entities we acquire into our existing operations could increase our operating costs significantly and have a material adverse effect on our business, financial condition, and results of operations.

In addition, we face significant competition from other financial services institutions, some of which may have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive opportunities may not be available to us and there can be no assurance that we will be successful in identifying or completing future acquisitions.

Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.    Acquisitions by the Corporation, particularly those of financial institutions, are subject to approval by a variety of federal and state regulatory agencies (collectively, “regulatory approvals”). The process for obtaining these required regulatory approvals has become substantially more difficult in recent years. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues the Corporation has, or may have, with regulatory agencies, including, without limitation, issues related to AML/BSA compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, Community Reinvestment Act (CRA) issues, and other similar laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse impact on our business, and, in turn, our financial condition and results of operations.

Consumers may decide not to use banks to complete their financial transactions.    Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and / or transferring funds directly without the assistance of banks.

 

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The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Legal, Compliance and Reputational Risks

We are subject to increasingly extensive government regulation and supervision.    We, primarily through Associated Bank and certain nonbank subsidiaries, are subject to increasingly extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and / or increase the ability of nonbanks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and / or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

The Consumer Financial Protection Bureau may reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices. Compliance with any such change may impact the business operations of depository institutions offering consumer financial products or services, including the Bank.    The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is relatively new under the law. Moreover, the Bank will be supervised and examined by the CFPB for compliance with the CFPB’s regulations and policies. The costs and limitations related to this additional regulatory reporting regimen have yet to be fully determined, although they may be material and the limitations and restrictions that will be placed upon the Bank with respect to its consumer product offering and services may produce significant, material effects on the Bank’s (and the Corporation’s) profitability.

The Bank is periodically examined for mortgage-related issues, including mortgage loan and default services, fair lending, and mortgage banking.    In the wake of the mortgage crisis of the last few years, federal and state banking regulators are closely examining the mortgage and mortgage servicing activities of depository financial institutions. Should the Department of Housing and Urban Development (“HUD”), the OCC, or the Federal Reserve have serious concerns with respect to our operations in this regard, the effect of such concerns could have a material adverse effect on our growth strategy and profitability.

We may experience unanticipated losses as a result of residential mortgage loan repurchase or reimbursement obligations under agreements with secondary market purchasers.    We may be required to repurchase residential mortgage loans, or to reimburse the purchaser for losses with respect to residential mortgage loans, which have been sold to secondary market purchasers in the event there are breaches of certain representations and warranties contained within the sales agreements, such as representations and warranties related to credit information, loan documentation, collateral and insurability. Consequently, we are exposed to credit risk, and potentially funding risk, associated with sold loans. Although we had only seen a limited number of repurchase and reimbursement claims in prior years, this activity has increased and as a result we have established reserves in our consolidated financial statements for potential losses related to the residential mortgage loans we have

 

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sold. The adequacy of the reserves and the ultimate amount of losses incurred will depend on, among other things, the actual future mortgage loan performance, the actual level of future repurchase and reimbursement requests, the actual success rate of claimants, actual recoveries on the collateral and macroeconomic conditions. Due to uncertainties relating to these factors, there can be no assurance that the reserves we establish will be adequate or that the total amount of losses incurred will not have a material adverse effect on our financial condition or results of operations.

We are subject to examinations and challenges by tax authorities.    We are subject to federal and state income tax regulations. Income tax regulations are often complex and require interpretation. Changes in income tax regulations could negatively impact our results of operations. In the normal course of business, we are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we have engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our financial condition and results of operations.

We are subject to claims and litigation pertaining to fiduciary responsibility.    From time to time, customers make claims and take legal action pertaining to the performance of our fiduciary responsibilities. Whether customer claims and legal action related to the performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and / or adversely affect the market perception of us and our products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We are a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operation.    We may be involved from time to time in a variety of litigation arising out of our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operation for any period. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.

Negative publicity could damage our reputation.    Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending or foreclosure practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Because we conduct most of our business under the “Associated Bank” brand, negative public opinion about one business could affect our other businesses.

Ethics or conflict of interest issues could damage our reputation.    We have established a Code of Business Conduct and Ethics and related policies and procedures to address the ethical conduct of business and to avoid potential conflicts of interest. Any system of controls, however well designed and operated, is based, in part, on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our related controls and procedures or failure to comply with the established Code of Business Conduct and Ethics and Related Party Transaction Policies and Procedures could have a material adverse effect on our reputation, business, results of operations, and / or financial condition.

 

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Risks Related to an Investment in Our Securities

The price of our securities can be volatile.    Price volatility may make it more difficult for you to sell your securities when you want and at prices you find attractive. Our securities prices can fluctuate widely in response to a variety of factors including, among other things:

 

   

actual or anticipated variations in quarterly results of operations or financial condition;

 

   

operating results and stock price performance of other companies that investors deem comparable to us;

 

   

news reports relating to trends, concerns, and other issues in the financial services industry;

 

   

perceptions in the marketplace regarding us and / or our competitors;

 

   

new technology used or services offered by competitors;

 

   

significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;

 

   

failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

   

changes in government regulations;

 

   

geopolitical conditions such as acts or threats of terrorism or military conflicts; and

 

   

recommendations by securities analysts.

General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our securities prices to decrease regardless of our operating results.

There may be future sales or other dilution of our equity, which may adversely affect the market price of our securities.    We are not restricted from issuing additional securities, including common stock and securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The issuance of additional shares of common stock or the issuance of convertible securities would dilute the ownership interest of our existing common shareholders. The market price of our common stock could decline as a result of an equity offering, as well as other sales of a large block of shares of our common stock or similar securities in the market after an equity offering, or the perception that such sales could occur. Both we and our regulators perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.

In addition, the exercise of the common stock warrants originally issued to the U.S. Department of the Treasury (the “UST”) under TARP, which have been sold by the UST in a public offering, would dilute the ownership interest of our existing shareholders. See also Note 9, “Stockholders’ Equity,” of the notes to consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” for additional information on the common stock warrants issued to the UST.

We may eliminate dividends on our common stock.    Although we have historically paid a quarterly cash dividend to the holders of our common stock, holders of our common stock are not entitled to receive dividends. Downturns in the domestic and global economies could cause our board of directors to consider, among other things, the elimination of dividends paid on our common stock. This could adversely affect the market price of our common stock. Furthermore, as a bank holding company, our ability to pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends, and we are required to consult with the Federal Reserve before declaring or paying any dividends. Dividends also may be limited as a result of safety and soundness considerations.

Common stock is equity and is subordinate to our existing and future indebtedness and preferred stock and effectively subordinated to all the indebtedness and other non-common equity claims against our subsidiaries.    Shares of the common stock are equity interests in us and do not constitute indebtedness. As such, shares of the common stock will rank junior to all of our indebtedness and to other non-equity claims against us

 

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and our assets available to satisfy claims against us, including our liquidation. Additionally, holders of our common stock are subject to prior dividend and liquidation rights of holders of our outstanding preferred stock. Our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of the holders of our common stock, and we are permitted to incur additional debt. Upon liquidation, lenders and holders of our debt securities and preferred stock would receive distributions of our available assets prior to holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors, including holders of any preferred stock of that subsidiary.

Our articles of incorporation, bylaws, and certain banking laws may have an anti-takeover effect.    Provisions of our articles of incorporation and bylaws, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may prohibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.

An investment in our common stock is not an insured deposit.    Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.

An entity holding as little as a 5% interest in our outstanding common stock could, under certain circumstances, be subject to regulation as a “bank holding company.” An entity (including a “group” composed of natural persons) owning or controlling with the power to vote 25% or more of our outstanding common stock, or 5% or more if such holder otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in accordance with the BHC Act. In addition, (1) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve under the BHC Act to acquire or retain 5% or more of our outstanding common stock, and (2) any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve under the Change in Bank Control Act to acquire or retain 10% or more of our outstanding common stock. Becoming a bank holding company imposes certain statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder’s investment in our common stock or such nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our corporate headquarters, our largest owned facility, is located at 433 Main Street in Green Bay, Wisconsin and is approximately 118,000 square feet. The Corporation also owns two additional large facilities, principally operations centers, located in Green Bay and Stevens Point, Wisconsin with approximately 91,000 and 96,000 square feet, respectively. Our largest leased location is our downtown Milwaukee, Wisconsin office with approximately 96,000 square feet.

In 2014, noteworthy owned property activity included the sale of 17 vacant banking facilities, as well as two underutilized secondary operations centers in Stevens Point, Wisconsin and Mendota Heights, Minnesota, with approximately 56,000 and 52,000 square feet, respectively; and the reduction of one large banking and office

 

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facility in St. Paul, Minnesota from approximately 47,000 to 12,000 square feet. Noteworthy leased property activity included the transition of seven banking locations from leased to owned, and the relocation of our Minneapolis commercial banking site into an enhanced downtown location of approximately 12,000 square feet.

At December 31, 2014, our bank subsidiary occupied over 200 banking locations serving more than 100 different communities within Illinois, Minnesota and Wisconsin. The main office of Associated Bank, National Association, at 200 North Adams Street in Green Bay, Wisconsin, is owned. Most banking offices are freestanding buildings that provide adequate customer parking, including drive-through accommodations of various numbers and types for customer convenience which are mostly owned. Some banking offices are in office towers and supermarket locations which are generally leased. At December 31, 2014, we owned approximately 76% of our total property portfolio, based on square footage, and leased the remainder.

 

ITEM 3. LEGAL PROCEEDINGS

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. The District Court granted the Bank’s motion to dismiss the complaint on September 30, 2013, and the plaintiff has appealed such dismissal to the U.S. Court of Appeals for the Eighth Circuit. 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. 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 OCC and the Department of Housing and Urban Development (“HUD”) are examining the Bank’s compliance with fair housing laws, particularly from the period 2008 to 2011. The Corporation believes it has been in compliance in all material respects with all applicable laws and regulations related to fair housing. It is not possible at this time for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss related to such examinations by the OCC and HUD.

Beginning in late 2013, the Corporation began reviewing a variety of legacy products provided by third parties, including debt protection and identity protection products. In connection with this review, the Corporation has made, and plans to make, remediation payments to affected customers and former customers, and has reserved accordingly.

Debt protection and identity protection products have recently received increased regulatory scrutiny, and it is possible that regulatory authorities could bring enforcement actions, including civil money penalties, or take other actions against the Corporation in regard to these legacy products. It is not possible at this time for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss related to this matter.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

INFORMATION ABOUT THE EXECUTIVE OFFICERS

The following is a list of names and ages of executive officers of Associated indicating all positions and offices held by each such person and each such person’s principal occupation(s) or employment during the past five years. Officers are appointed annually by the Board of Directors at the meeting of directors immediately

 

26


following the annual meeting of shareholders. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. No person other than those listed below has been chosen to become an executive officer of Associated. The information presented below is as of February 1, 2015.

Philip B. Flynn - Age: 57

Philip B. Flynn has been President and Chief Executive Officer of Associated and a member of the Board of Directors since December 2009. Mr. Flynn has more than 30 years of financial services industry experience. Prior to joining Associated, he served as Vice Chairman and Chief Operating Officer of Union Bank. During his nearly 30-year career with Union Bank, he held a broad range of executive positions, including chief credit officer and head of commercial banking, specialized lending and wholesale banking. He served as a member of Union Bank’s board of directors from 2004 to 2009.

William M. Bohn - Age: 48

William M. Bohn has been Executive Vice President, Head of Private Client and Institutional Services, of Associated and Associated Bank, National Association since June 2014. Mr. Bohn joined Associated in 1997 and most recently served as President and Chief Executive Officer of Associated Financial Group since 2004.

Oliver Buechse - Age: 46

Oliver Buechse has been Executive Vice President, Chief Strategy Officer, of Associated and Associated Bank, National Association since February 2010. He is also a director of Associated Banc-Corp Foundation. From February 2004 to January 2010, he was Senior Vice President, Strategy and Special Projects at Union Bank, and from January 2009 to January 2010, he also served as Senior Vice President, Vision and Strategy, North American Strategy Office at The Bank of Tokyo — Mitsubishi UFJ. He began his career at McKinsey & Company, working in the U.S., Germany, and Austria.

Christopher J. Del Moral-Niles - Age: 44

Christopher J. Del Moral-Niles has been Executive Vice President, Chief Financial Officer, of Associated and Associated Bank, National Association since March 2012. He joined Associated in July 2010 and previously served as Associated’s Deputy Chief Financial Officer and as Associated’s Corporate Treasurer. From 2006 to 2010, he held various leadership roles for The First American Corporation and its subsidiaries, including serving as Corporate Treasurer and as divisional President of First American Trust, FSB. From 2003 to 2006, Mr. Niles held various positions with Union Bank, including serving as Senior Vice President and Director of Liability Management. Prior to his time with Union Bank, Mr. Niles spent a decade as a financial services investment banker supporting mergers and acquisitions of financial institutions, bank and thrift capital issuances, and bank funding transactions.

Patrick J. Derpinghaus - Age: 59

Patrick J. Derpinghaus has been Executive Vice President, Chief Audit Executive, of Associated and Associated Bank, National Association since April 2011. Mr. Derpinghaus has over 34 years of banking experience serving in various executive finance and audit positions. From March 2008 until March 2011, Mr. Derpinghaus served as Audit Director for U.S. Bank in Minneapolis, Minnesota. Prior to his position at U.S. Bank, Mr. Derpinghaus served as Executive Vice President and Chief Financial Officer of The Bankers Bank in Atlanta, Georgia from October 2005 to December 2007.

 

27


Judith M. Docter - Age: 53

Judith M. Docter has been Executive Vice President, Chief Human Resources Officer, of Associated and Associated Bank, National Association since November 2005. She is a director of Associated Financial Group, LLC. She was Senior Vice President, Director of Organizational Development, for Associated from May 2002 to November 2005. From March 1992 to May 2002, she served as Director of Human Resources for Associated Bank, National Association, Fox Valley Region and Wealth Management.

Randall J. Erickson - Age: 55

Randall J. Erickson has been Executive Vice President, General Counsel and Corporate Secretary of Associated and Associated Bank, National Association since April 2012. Prior to joining Associated, he served as senior vice president, chief administrative officer and general counsel of Milwaukee-based bank holding company Marshall & Ilsley Corporation from 2002 until it was acquired by BMO Financial in 2011. Upon leaving M&I, he became a member of Milwaukee law firm Godfrey & Kahn’s securities practice group. He had been a partner at Godfrey & Kahn from 1990 to 2002 prior to joining M&I as its general counsel. Mr. Erickson served as a director of Renaissance Learning, Inc., an educational software company, from 2009 until it was acquired by Permira Funds in 2011.

Breck Hanson - Age: 66

Breck Hanson has been the Executive Vice President, Head of Commercial Real Estate, of Associated and Associated Bank, National Association since September 2010. He is also a director of Associated Banc-Corp Foundation. He has more than 35 years of banking experience, including over 25 years of leadership responsibility within the CRE segment. Most recently, he was Executive Vice President, Commercial Real Estate with Bank of America, where he was responsible for all levels of business in the Midwest Commercial Real Estate Group, which included 370 employees and 7 CRE business lines. He spent over two decades in CRE leadership roles with LaSalle Bank prior to its merger with Bank of America.

Arthur G. Heise - Age: 66

Arthur G. Heise has been Executive Vice President, Chief Risk Officer, of Associated and Associated Bank, National Association since April 2011. Mr. Heise brings more than 30 years leadership experience in risk management roles. From October 2007 through March 2011, he held positions of Chief Audit Executive and Director of Enterprise Risk Services for US Bancorp. Prior to his position at US Bancorp, Mr. Heise served as Director, Business Risk and Control at CitiMortgage from 2004 to 2007.

Scott S. Hickey - Age: 59

Scott S. Hickey has been Executive Vice President, Chief Credit Officer, of Associated and Associated Bank, National Association since October 2008. He was with U.S. Bank from 1985 to 2008, and served as Chief Approval Officer from 2002 to 2008.

Timothy J. Lau - Age: 52

Timothy J. Lau has been Executive Vice President, Head of Community Markets, of Associated and Associated Bank, National Association since June 2014. Mr. Lau previously served as Executive Vice President, Head of Private Client and Institutional Services from December 2010 to June 2014. He is also a director of Associated Banc-Corp Foundation, Associated Investment Services, Inc. and Associated Financial Group, LLC. He joined Associated in 1989 and has held a number of senior management positions in Consumer and Small Business Banking, Residential Lending, and Commercial Banking.

 

28


Christopher C. Piotrowski - Age: 40

Christopher C. Piotrowski joined Associated in April 2014 and has served as Executive Vice President and Chief Marketing Officer of Associated since December 2014. Prior to joining Associated, Mr. Piotrowski was previously a Senior Director of Marketing at S.C. Johnson & Son, Inc. since 2009.

Donna N. Smith - Age: 63

Donna N. Smith has been Executive Vice President, Head of Commercial Banking, of Associated and Associated Bank, National Association since June 2011. She joined Associated in June 2010, overseeing the commercial and industrial business line for Associated’s southern region, which includes Chicago, southern Illinois, Missouri and Indiana. Prior to joining Associated, she served as a market executive at Bank of America from October 2007 to June 2010 and as a Senior Vice President at one of its predecessors, LaSalle Bank, from March 2003 to October 2007. She has more than 30 years of commercial banking experience, having previously held leadership roles at Bank of America, LaSalle Bank, Harris Bank and Fifth Third.

David L. Stein - Age: 51

David L. Stein has been Executive Vice President, Head of Consumer and Commercial Banking, of Associated and Associated Bank, National Association since June 2007. He is Chairman of Associated Investment Services, Inc. and a director of Associated Financial Group, LLC and Associated Banc-Corp Foundation. He was the President of the Southwest Region of Associated Bank, National Association, from January 2005 until June 2007. He held various positions with J.P. Morgan Chase & Co., and one of its predecessors, Bank One Corporation, from 1989 until joining Associated in 2005.

John A. Utz - Age: 46

John A. Utz has been Executive Vice President, Head of Specialized Financial Services Group, of Associated and Associated Bank, National Association since June 2011. He joined Associated in March 2010 with upwards of 20 years of banking experience, having previously served as President of Union Bank’s UnionBanCal Equities and head of its Capital Markets division from September 2007 to March 2010, and as head of the National Banking and Asset Management teams from October 2002 to September 2007.

James Yee - Age: 62

James Yee has been Executive Vice President, Chief Information and Operations Officer of Associated and Associated Bank, National Association since May 2012. Prior to joining Associated, he was a Senior Executive Vice President and Chief Information Officer at Union Bank, in San Francisco. His experience also includes serving as Chief Information Officer of Banc of America Securities and Stanford University Medical Center.

 

29


PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Information in response to this item is incorporated by reference to the discussion of dividend restrictions in Note 9, “Stockholders’ Equity,” of the notes to consolidated financial statements included under Item 8 of this report. The Corporation’s common stock is traded on the New York Stock Exchange under the symbol ASB.

The number of shareholders of record of the Corporation’s common stock, $.01 par value, as of January 26, 2015, was approximately 10,500. Certain of the Corporation’s shares are held in “nominee” or “street” name and the number of beneficial owners of such shares is approximately 16,200.

Payment of future dividends is within the discretion of the Board of Directors and will depend, among other factors, on earnings, capital requirements, and the operating and financial condition of the Corporation. The Board of Directors makes the dividend determination on a quarterly basis. The aggregate amount of the quarterly dividends was $0.37 per common share for 2014 and $0.33 per common share for 2013.

Following are the Corporation’s monthly common stock and depositary share purchases during the fourth quarter of 2014. For a detailed discussion of the common stock and depositary share purchases during 2014 and 2013, see section “Capital” included under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this document and Part II, Item 8, Note 9, “Stockholders’ Equity,” of the notes to consolidated financial statements.

 

Common Stock Purchases:   Total Number  of
Shares Purchased(a)
    Average  Price
Paid per Share
    Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
    Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs(b)
 
       
         

Period

       

October 1 — October 31, 2014

    2,757,860     $ 18.90       2,757,860        

November 1 — November 30, 2014

    2,279,710       18.51       2,279,710        

December 1 — December 31, 2014

    306,925       18.51       306,925        
 

 

 

 

Total

    5,344,495     $ 18.71       5,344,495       4,074,180  
 

 

 

 

 

(a) During the fourth quarter of 2014, the Corporation repurchased 3,759 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) The Board of Directors authorized the repurchase of up to $360 million of common stock during 2013 and 2014, of which, $76 million remained available for repurchase as of December 31, 2014. Using the closing stock price on December 31, 2014 of $18.63, a total of approximately 4.1 million shares of common stock remained available to be repurchased under the previously approved Board authorizations as of December 31, 2014.

 

Depositary Share Purchases:   Total Number  of
Shares Purchased
    Average  Price
Paid per Share
    Total Number of
Shares Purchased as
Part of  Publicly
Announced Plans

or Programs
    Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs(a)
 
       
         

Period

       

October 1 — October 31, 2014

    42,601     $ 28.02       42,601        

November 1 — November 30, 2014

    4,276       27.99       4,276        

December 1 — December 31, 2014

    6,432       27.66       6,432        
 

 

 

 

Total

    53,309     $ 27.98       53,309       211,638  
 

 

 

 

 

(a) In 2011, the Corporation issued 2,600,000 depositary shares, each representing a 1/40th interest in a share of the Corporation’s 8.00% Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”). During 2013, the Board of Directors authorized the repurchase of up to $10 million of the Series B Preferred Stock. As of December 31, 2014, approximately $6 million remained available under this repurchase authorization. Using the average price paid per depositary share in the fourth quarter of 2014, approximately 212,000 shares remained available to be repurchased under the previously approved Board authorization as of December 31, 2014.

 

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Market Information

The following represents selected market information of the Corporation’s common stock for 2014 and 2013.

 

                   Market Price Range
Closing Sales Prices
 
     Dividends Paid      Book Value      High      Low      Close  

2014

              

4th Quarter

   $ 0.10      $ 18.32      $ 19.37      $ 16.75      $ 18.63  

3rd Quarter

     0.09        18.15        18.90        17.42        17.42  

2nd Quarter

     0.09        17.99        18.39        16.82        18.08  

1st Quarter

     0.09        17.64        18.35        15.58        18.06  
  

 

 

 

2013

              

4th Quarter

   $ 0.09      $ 17.40      $ 17.56      $ 15.34      $ 17.40  

3rd Quarter

     0.08        17.10        17.60        15.29        15.49  

2nd Quarter

     0.08        16.97        15.69        13.81        15.55  

1st Quarter

     0.08        17.13        15.30        13.46        15.19  
  

 

 

 

 

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Total Shareholder Return Performance Graph

Set forth below is a line graph (and the underlying data points) comparing the yearly percentage change in the cumulative total shareholder return (change in year-end stock price plus reinvested dividends) on the Corporation’s common stock with the cumulative total return of the NASDAQ Bank Index, the S&P 500 Index, and the S&P 400 Regional Banks Sub-Industry Index for the period of five fiscal years commencing on January 1, 2010, and ending December 31, 2014. The NASDAQ Bank Index is prepared for NASDAQ by the Center for Research in Securities Prices at the University of Chicago. The S&P 400 Regional Banks Sub-Industry Index is comprised of stocks on the S&P Total Market Index that are classified in the regional banks sub-industry. The Corporation has determined to compare its performance to this stock performance index for purpose of the graph as it includes all of the peer banks we typically use for comparison purposes. The graph assumes that the value of the investment in the Corporation’s common stock and in each index was $100 on December 31, 2009. Historical stock price performance shown on the graph is not necessarily indicative of the future price performance.

5 Year Trend

 

LOGO

 

Source: Bloomberg   2009     2010     2011     2012     2013     2014  

Associated Banc-Corp

  $ 100.0      $ 138.0      $ 102.1      $ 122.0      $ 164.9      $ 180.0   

S&P 500

  $ 100.0      $ 114.8      $ 117.2      $ 135.8      $ 179.4      $ 203.6   

NASDAQ Bank Index

  $ 100.0      $ 114.0      $ 102.1      $ 121.0      $ 171.0      $ 179.2   

S&P 400 Regional Banks Sub-Industry Index

  $ 100.0      $ 113.5      $ 100.5      $ 109.0      $ 158.2      $ 160.0   

The Total Shareholder Return Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Corporation specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

 

32


ITEM 6.    SELECTED FINANCIAL DATA

TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA

(In thousands, except per share data)

 

Years Ended December 31,    2014     2013     2012     2011     2010  

Interest income

   $ 736,745     $ 708,983     $ 718,284     $ 741,622     $ 806,126  

Interest expense

     55,778       63,440       92,292       128,791       172,347  
  

 

 

 

Net interest income

     680,967       645,543       625,992       612,831       633,779  

Provision for credit losses

     16,000       10,100       10,100       49,326       393,191  
  

 

 

 

Net interest income after provision for credit losses

     664,967       635,443       615,892       563,505       240,588  

Noninterest income

     290,319       313,099       313,290       273,119       335,462  

Noninterest expense

     679,241       680,649       674,723       653,197       617,078  
  

 

 

 

Income (loss) before income taxes

     276,045       267,893       254,459       183,427       (41,028

Income tax expense (benefit)

     85,536       79,201       75,486       43,728       (40,172
  

 

 

 

Net income (loss)

     190,509       188,692       178,973       139,699       (856

Preferred stock dividends and discount accretion

     5,002       5,158       5,200       24,830       29,531  
  

 

 

 

Net income (loss) available to common equity

   $ 185,507     $ 183,534     $ 173,773     $ 114,869     $ (30,387
  

 

 

 

Earnings (loss) per common share:

          

Basic(1)

   $ 1.17     $ 1.10     $ 1.00     $ 0.66     $ (0.18

Diluted(1)

     1.16       1.10       1.00       0.66       (0.18

Cash dividends per share(1)

     0.37       0.33       0.23       0.04       0.04  

Weighted average common shares outstanding:(1):

          

Basic

     157,286       165,584       172,255       173,370       171,230  

Diluted

     158,254       165,802       172,357       173,372       171,230  

SELECTED FINANCIAL DATA

          

Year-End Balances:

          

Loans

   $ 17,593,846     $ 15,896,261     $ 15,411,022     $ 14,031,071     $ 12,616,735  

Allowance for loan losses

     266,302       268,315       297,409       378,151       476,813  

Investment securities

     5,801,267       5,425,795       4,966,635       4,937,483       6,101,341  

Total assets

     26,821,774       24,226,920       23,487,735       21,924,217       21,785,596  

Deposits

     18,763,504       17,267,167       16,939,865       15,090,655       15,225,393  

Short and long-term funding

     4,998,405       3,828,193       3,342,285       3,691,556       3,160,987  

Tier 1 common equity(2)

     1,808,332       1,913,320       1,875,534       1,783,515       1,657,505  

Stockholders’ equity

     2,800,251       2,891,290       2,936,399       2,865,794       3,158,791  

Book value per common share(1)

     18.32       17.40       16.97       16.15       15.28  

Tangible book value per common share(1)

     12.06       11.62       11.39       10.68       9.77  
  

 

 

 

Average Balances:

          

Loans

   $ 16,838,994     $ 15,663,145     $ 14,741,785     $ 13,278,848     $ 13,186,712  

Investment securities

     5,594,232       4,995,331       4,469,541       5,497,297       5,439,729  

Earning assets

     22,760,128       20,980,128       19,613,777       19,442,263       20,568,495  

Total assets

     25,111,597       23,305,758       21,976,357       21,588,620       22,625,065  

Deposits

     17,647,084       17,438,195       15,582,369       14,401,127       16,946,301  

Interest-bearing liabilities

     17,826,386       15,964,647       14,905,735       15,120,824       16,304,220  

Stockholders’ equity

     2,871,932       2,892,312       2,948,988       2,997,290       3,183,572  
  

 

 

 

Financial Ratios:

          

Return on average assets

     0.76     0.81     0.81     0.65    

Return on average tangible common equity(3)

     9.91       9.73       8.96       6.45       (1.77

Return on average tier 1 common equity(2)

     9.92       9.77       9.45       6.71       (1.95

Tangible common equity to tangible assets(3)

     6.97       8.11       8.56       8.84       8.12  

Tier 1 common equity to risk-weighted assets(2)

     9.74       11.46       11.61       12.24       12.26  

 

(1) Share and per share data adjusted retroactively for stock splits and stock dividends.

 

(2) Tier 1 common equity is Tier 1 capital excluding qualifying perpetual preferred stock and trust preferred securities.

 

(3) Tangible common equity is common equity excluding goodwill and other intangible assets. Tangible assets is assets excluding goodwill and other intangible assets.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is management’s analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Corporation. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report.

The detailed financial discussion that follows focuses on 2014 results compared to 2013. Discussion of 2013 results compared to 2012 is predominantly in section “2013 Compared to 2012.”

Overview

The Corporation is a bank holding company headquartered in Wisconsin, providing a broad array of banking and nonbanking products and services to businesses and consumers primarily within our three-state footprint. The Corporation’s primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities), and noninterest income, principally fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits.

Performance Summary

 

   

Net income available to common equity for 2014 was $186 million (compared to net income available to common equity of $184 million for 2013) or diluted earnings per common share of $1.16 (versus diluted earnings per common share of $1.10 for 2013).

 

   

Total loans increased $1.7 billion (11%) between year-end 2014 and 2013, with growth in most loan categories. On average, loans increased $1.2 billion (8%). For 2015, the Corporation expects high single digit annual average loan growth.

 

   

Total deposits increased $1.5 billion (9%) between year-end 2014 and 2013. On average, total deposits increased $209 million (1%) from 2013. For 2015, the Corporation expects to grow deposits to support loan growth and to maintain a loan to deposit ratio under 100%. At the end of the fourth quarter, this ratio was 94%.

 

   

Credit quality continued to improve during 2014 with net charge offs, nonaccrual loans, past due loans and potential problem loans all declining year over year. For 2015, the Corporation anticipates the provision for loan losses will grow based on expected loan growth, changes in risk grade, and other indicators of credit quality.

 

   

The net interest margin for 2014 was 3.08%, 9 bp lower than 3.17% in 2013, while taxable equivalent net interest income was $700 million for 2014, $35 million (5%) higher than 2013. For 2015, the Corporation anticipates modest compression of the net interest margin throughout the year.

 

   

Noninterest income was $290 million for 2014, down $23 million (7%) from 2013. Net mortgage banking was $21 million, down $28 million from $49 million in 2013. Core fee-based revenues were up slightly in 2014 as increases in trust, insurance, and retail brokerage fees (up $4 million) more than offset declines in service charges and card income (down $2 million). For additional discussion concerning noninterest income see section, “Noninterest Income.” For 2015, the Corporation expects mid to upper single digit noninterest income growth based on additional noninterest income from the pending Ahmann & Martin Co. acquisition. See section, “Recent Developments,” for additional information on the pending Ahmann & Martin Co. acquisition.

 

   

Noninterest expense of $679 million decreased $1 million from 2013. Technology was $55 million, up $6 million (12%) versus 2013, offset by reduced personnel expense of $7 million (2%) compared to 2013. The efficiency ratio was 68.95% for 2014 and 69.56% for 2013, respectively. For additional discussion regarding noninterest expense see section, “Noninterest Expense.” For 2015, the Corporation expects noninterest expense to be up in the low single digits due to the pending Ahmann & Martin Co. acquisition, with a continued focus on efficiency initiatives.

 

34


   

Income tax expense for 2014 was $86 million, compared to income tax expense of $79 million for 2013. The effective tax rate was 31.0% for 2014, compared to an effective tax rate of 29.6% for 2013. For additional discussion concerning income tax see section, “Income Taxes.”

INCOME STATEMENT ANALYSIS

Net Interest Income

TABLE 2: Average Balances and Interest Rates (interest and rates on a taxable equivalent basis)

 

    Years Ended December 31,  
    2014     2013     2012  
    Average
Balance
    Interest
Income /
Expense
    Average
Yield /
Rate
    Average
Balance
    Interest
Income /
Expense
    Average
Yield /
Rate
    Average
Balance
    Interest
Income /
Expense
    Average
Yield /
Rate
 
    ($ in Thousands)  

ASSETS

                 

Earning assets:

                 

Loans:(1)(2)(3)

                 

Commercial and business lending

  $ 6,495,338     $ 219,386       3.38   $ 5,809,578     $ 208,039       3.58   $ 5,139,155     $ 202,444       3.94

Commercial real estate lending

    3,990,675       146,802       3.68       3,705,526       149,539       4.04       3,350,190       140,881       4.21  
 

 

 

 

Total commercial

    10,486,013       366,188       3.49       9,515,104       357,578       3.76       8,489,345       343,325       4.04  

Residential mortgage

    4,202,727       137,731       3.28       3,714,544       123,275       3.32       3,330,123       121,399       3.65  

Retail

    2,150,254       98,481       4.58       2,433,497       110,338       4.53       2,922,317       135,094       4.62  
 

 

 

 

Total loans

    16,838,994       602,400       3.58       15,663,145       591,191       3.77       14,741,785       599,818       4.07  

Investment securities:

                 

Taxable

    4,726,511       102,464       2.17       4,202,478       88,919       2.12       3,676,914       86,945       2.36  

Tax-exempt(1)

    867,721       44,467       5.12       792,853       43,752       5.52       792,627       45,848       5.78  

Other short-term investments

    326,902       6,635       2.03       321,652       5,193       1.61       402,451       6,719       1.67  
 

 

 

 

Investments and other

    5,921,134       153,566       2.59       5,316,983       137,864       2.59       4,871,992       139,512       2.86  
 

 

 

 

Total earning assets

  $ 22,760,128     $ 755,966       3.32   $ 20,980,128     $ 729,055       3.47   $ 19,613,777     $ 739,330       3.77

Allowance for loan losses

    (269,409         (282,880         (342,313    

Cash and due from banks

    361,064           354,897           352,735      

Other assets

    2,259,814           2,253,613           2,352,158      
 

 

 

 

Total assets

  $ 25,111,597         $ 23,305,758         $ 21,976,357      
 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Interest-bearing liabilities:

                 

Savings deposits

  $ 1,249,452     $ 968       0.08   $ 1,188,910     $ 942       0.08   $ 1,096,692     $ 851       0.08

Interest-bearing demand deposits

    2,983,747       4,124       0.14       2,827,778       4,517       0.16       2,148,459       3,741       0.17  

Money market deposits

    7,614,042       12,452       0.16       7,322,476       13,702       0.19       6,148,663       15,336       0.25  

Time deposits

    1,587,641       8,750       0.55       1,849,718       12,106       0.65       2,239,709       21,503       0.96  
 

 

 

 

Total interest-bearing deposits

    13,434,882       26,294       0.20       13,188,882       31,267       0.24       11,633,523       41,431       0.36  

Federal funds purchased and securities sold under agreements to repurchase

    795,257       1,219       0.15       675,574       1,322       0.20       1,177,105       2,687       0.23  

Other short-term funding

    573,460       785       0.14       1,198,264       1,519       0.13       936,376       3,294       0.35  
 

 

 

 

Total short-term funding

    1,368,717       2,004       0.15       1,873,838       2,841       0.15       2,113,481       5,981       0.28  

Long-term funding

    3,022,787       27,480       0.91       901,927       29,332       3.25       1,158,731       44,880       3.87  
 

 

 

 

Total short and long-term funding

    4,391,504       29,484       0.67       2,775,765       32,173       1.16       3,272,212       50,861       1.55  
 

 

 

 

Total interest-bearing liabilities

  $ 17,826,386     $ 55,778       0.31   $ 15,964,647     $ 63,440       0.40   $ 14,905,735     $ 92,292       0.62

Noninterest-bearing demand deposits

    4,212,202           4,249,313           3,948,846      

Accrued expenses and other liabilities

    201,077           199,486           172,788      

Stockholders’ equity

    2,871,932           2,892,312           2,948,988      
 

 

 

 

Total liabilities and stockholders’ equity

  $ 25,111,597         $ 23,305,758         $ 21,976,357      
 

 

 

 

Net interest income and rate spread(1)

    $ 700,188       3.01     $ 665,615       3.07     $ 647,038       3.15
 

 

 

 

Net interest margin(1)

        3.08         3.17         3.30
 

 

 

 

Taxable equivalent adjustment

    $ 19,221         $ 20,072         $ 21,046    
 

 

 

 

 

(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.

 

35


Net interest income is the primary source of the Corporation’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, loan prepayment behavior, and the use of interest rate derivative financial instruments.

Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and stockholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

Table 2 provides average balances of earning assets and interest-bearing liabilities, the associated interest income and expense, and the corresponding interest rates earned and paid, as well as net interest income, interest rate spread, and net interest margin on a taxable equivalent basis for the three years ended December 31, 2014. Tables 3 and 4 present additional information to facilitate the review and discussion of taxable equivalent net interest income, interest rate spread, and net interest margin.

Notable contributions to the change in 2014 net interest income were:

 

   

Net interest income in the consolidated statements of income (which excludes the taxable equivalent adjustment) was $681 million in 2014 compared to $646 million in 2013. The taxable equivalent adjustments (the adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that income been subject to a taxation using a 35% tax rate) of $19 million and $20 million for 2014 and 2013, respectively, resulted in fully taxable equivalent net interest income of $700 million in 2014 and $666 million in 2013.

 

   

Taxable equivalent net interest income of $700 million for 2014 was $35 million or 5% higher than 2013. The increase in taxable equivalent net interest income was a function of favorable volume variances (as balance sheet changes in both volume and mix increased taxable equivalent net interest income by $40 million) and unfavorable interest rate changes (as the impact of changes in the interest rate environment and product pricing decreased taxable equivalent net interest income by $5 million). See sections “Interest Rate Risk” and “Quantitative and Qualitative Disclosures about Market Risk,” for a discussion of interest rate risk and market risk.

 

   

The net interest margin for 2014 was 3.08%, compared to 3.17% in 2013. The 9 bp decline in net interest margin was attributable to a 6 bp decrease in interest rate spread (the net of a 15 bp decrease in the yield on earning assets and a 9 bp decrease in the cost of interest-bearing liabilities), and a 3 bp lower contribution from net free funds (due principally to lower rates on interest-bearing liabilities reducing the value of noninterest-bearing deposits and other net free funds).

 

   

The Federal Reserve left the targeted Federal funds rate unchanged at 0.25% during 2014 and 2013. In January 2015, the Federal Reserve affirmed that it is unlikely that the short-term interest rates will increase until later in 2015.

 

   

For 2014, the yield on average earning assets of 3.32% was 15 bp lower than 2013. Loan yields decreased 19 bp (to 3.58%), due to the repricing of adjustable rate loans and competitive pricing pressures in a low interest rate environment. The yield on securities and short-term investments was level at 2.59%.

 

36


   

The cost of average interest-bearing liabilities of 0.31% in 2014 was 9 bp lower than 2013. The average cost of interest-bearing deposits was 0.20% in 2014, 4 bp lower than 2013, reflecting the low rate environment and a reduction of higher cost deposit products. The cost of short and long-term funding decreased 49 bp to 0.67% for 2014, with short-term funding level at 0.15%, while long-term funding decreased 234 bp primarily due to increased Federal Home Loan Bank (“FHLB”) advances at favorable rates.

 

   

Average earning assets of $22.8 billion in 2014 were $1.8 billion (8%) higher than 2013. Average loans increased $1.2 billion (8%), including a $971 million increase in commercial loans and a $488 million increase in residential mortgage loans, partially offset by a $283 million decrease in retail loans. Average securities and short-term investments increased $604 million, primarily in mortgage-related securities.

 

   

Average interest-bearing liabilities of $17.8 billion in 2014 were up $1.9 billion (12%) versus 2013. On average, interest-bearing deposits increased $246 million, while average noninterest-bearing demand deposits (a principal component of net free funds) decreased by $37 million. Average short and long-term funding increased $1.6 billion, consisting of a $2.1 billion increase in long-term funding offset partially by a $505 million decrease in short-term funding, reflecting a shift from short-term to long-term FHLB advances to leverage favorable interest rates.

TABLE 3: Rate/Volume Analysis(1)

 

     2014 Compared to 2013
Increase (Decrease) Due to
    2013 Compared to 2012
Increase (Decrease) Due to
 
     Volume     Rate     Net     Volume     Rate     Net  
     ($ in Thousands)  

Interest income:

            

Loans:(2)

            

Commercial and business lending

   $ 23,564     $ (12,217   $ 11,347     $ 24,994     $ (19,399   $ 5,595  

Commercial real estate lending

     11,034       (13,771     (2,737     14,506       (5,848     8,658  
  

 

 

 

Total commercial

     34,598       (25,988     8,610       39,500       (25,247     14,253  

Residential mortgage

     16,016       (1,560     14,456       13,307       (11,431     1,876  

Retail

     (12,962     1,105       (11,857     (22,208     (2,548     (24,756
  

 

 

 

Total loans

     37,652       (26,443     11,209       30,599       (39,226     (8,627

Investment securities:

            

Taxable

     11,781       1,764       13,545       14,737       (12,763     1,974  

Tax-exempt(2)

     3,964       (3,249     715       13       (2,109     (2,096

Other short-term investments

     86       1,356       1,442       (1,311     (215     (1,526
  

 

 

 

Investments and other

     15,831       (129     15,702       13,439       (15,087     (1,648
  

 

 

 

Total earning assets(2)

   $ 53,483     $ (26,572   $ 26,911     $ 44,038     $ (54,313   $ (10,275
  

 

 

 

Interest expense:

            

Savings deposits

   $ 47     $ (21   $ 26     $ 73     $ 18     $ 91  

Interest-bearing demand deposits

     240       (633     (393     1,105       (329     776  

Money market deposits

     529       (1,779     (1,250     2,611       (4,245     (1,634

Time deposits

     (1,560     (1,796     (3,356     (3,331     (6,066     (9,397
  

 

 

 

Total interest-bearing deposits

     (744     (4,229     (4,973     458       (10,622     (10,164

Federal funds purchased and securities sold under agreements to repurchase

     211       (314     (103     (1,023     (342     (1,365

Other short-term funding

     (847     113       (734     742       (2,517     (1,775
  

 

 

 

Total short-term funding

     (636     (201     (837     (281     (2,859     (3,140

Long-term funding

     14,790       (16,642     (1,852     (9,021     (6,527     (15,548
  

 

 

 

Total short and long-term funding

     14,154       (16,843     (2,689     (9,302     (9,386     (18,688
  

 

 

 

Total interest-bearing liabilities

   $ 13,410     $ (21,072   $ (7,662   $ (8,844   $ (20,008   $ (28,852
  

 

 

 

Net interest income(2)

   $ 40,073     $ (5,500   $ 34,573     $ 52,882     $ (34,305   $ 18,577  
  

 

 

 

 

37


(1) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

 

(2) The yield on tax-exempt loans and securities is computed on a fully taxable equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions.

TABLE 4: Interest Rate Spread and Interest Margin (on a taxable equivalent basis)

 

     2014 Average     2013 Average     2012 Average  
     Balance      % of
Earning
Assets
    Yield /
Rate
    Balance      % of
Earning
Assets
    Yield /
Rate
    Balance      % of
Earning
Assets
    Yield /
Rate
 
     ($ in Thousands)  

Total loans

   $ 16,838,994        74.0     3.58   $ 15,663,145        74.7     3.77   $ 14,741,785        75.2     4.07

Securities and short-term investments

     5,921,134        26.0     2.59     5,316,983        25.3     2.59     4,871,992        24.8     2.86
  

 

 

 

Earning assets

   $ 22,760,128        100.0     3.32   $ 20,980,128        100.0     3.47   $ 19,613,777        100.0     3.77
  

 

 

 

Financed by:

                     

Interest-bearing funds

   $ 17,826,386        78.3     0.31   $ 15,964,647        76.1     0.40   $ 14,905,735        76.0     0.62

Noninterest-bearing funds

     4,933,742        21.7       5,015,481        23.9       4,708,042        24.0  
  

 

 

 

Total funds sources

   $ 22,760,128        100.0     0.25   $ 20,980,128        100.0     0.30   $ 19,613,777        100.0     0.47
  

 

 

 

Interest rate spread

          3.01          3.07          3.15

Contribution from net free funds

          0.07          0.10          0.15
       

 

 

        

 

 

        

 

 

 

Net interest margin

          3.08          3.17          3.30
  

 

 

 

Average prime rate*

          3.25          3.25          3.25

Average effective federal funds rate*

          0.08          0.11          0.15

Average spread

          317 bp           314 bp           310 bp 
  

 

 

 

 

* Source: Bloomberg

Provision for Credit Losses

The provision for credit losses (which includes the provision for loan losses and the provision for unfunded commitments) in 2014 was $16 million, compared to $10 million in 2013. Net charge offs were $15 million (representing 0.09% of average loans) for 2014, compared to $39 million (representing 0.25% of average loans) for 2013. The allowance for loan losses was $266 million and $268 million at December 31, 2014 and December 31, 2013, respectively. The allowance for unfunded commitments was $25 million and $22 million at December 31, 2014 and December 31, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.51% and 1.69% at December 31, 2014, and 2013, respectively. Nonaccrual loans at December 31, 2014, were $177 million, compared to $185 million at December 31, 2013, representing 1.01% and 1.17% of total loans, respectively.

The provision for credit losses is predominantly a function of the Corporation’s reserving methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the allowance for loan losses and the allowance for unfunded commitments, 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 in 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, “Loans,” “Allowance for Credit Losses,” “Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned,” and “Credit Risk.”

 

38


Noninterest Income

TABLE 5: Noninterest Income

 

    Years Ended December 31,     Change From Prior Year  

($ in Thousands)

  2014     2013     2012     $ Change
2014
    % Change
2014
    $ Change
2013
    % Change
2013
 

Trust service fees

  $ 48,403     $ 45,633     $ 40,737     $ 2,770       6.1   $ 4,896       12.0

Service charges on deposit accounts

    68,779       70,009       68,917       (1,230     (1.8     1,092       1.6  

Card-based and other nondeposit fees

    49,512       49,913       47,862       (401     (0.8     2,051       4.3  

Insurance commissions

    44,421       44,024       47,014       397       0.9       (2,990     (6.4

Brokerage and annuity commissions

    16,089       14,877       15,643       1,212       8.1       (766     (4.9
 

 

 

 

Core fee-based revenue

    227,204       224,456        220,173        2,748       1.2       4,283       1.9  

Mortgage banking income

    32,708       49,772       89,231       (17,064     (34.3     (39,459     (44.2

Mortgage servicing rights expense

    11,388       925       25,731       10,463       N/M        (24,806     (96.4
 

 

 

 

Mortgage banking, net

    21,320       48,847       63,500       (27,527     (56.4     (14,653     (23.1

Capital market fees, net

    9,973       13,080       14,241       (3,107     (23.8     (1,161     (8.2

Bank owned life insurance income

    13,576       11,855       13,952       1,721       14.5       (2,097     (15.0

Other

    7,464       8,884       9,259       (1,420     (16.0     (375     (4.1
 

 

 

 

Subtotal (“fee income”)

    279,537       307,122        321,125        (27,585     (9.0     (14,003     (4.4

Asset gains (losses), net

    10,288       5,413       (12,096     4,875       90.1       17,509       (144.8

Investment securities gains, net

    494       564       4,261       (70     (12.4     (3,697     (86.8
 

 

 

 

Total noninterest income

  $ 290,319     $ 313,099      $ 313,290      $ (22,780     (7.3 )%    $ (191     (0.1 )% 
 

 

 

 

Fee income ratio *

    29     32     33        

N/M = Not Meaningful

 

* Fee income ratio is fee income, per the above table, divided by total revenue (defined as taxable equivalent net interest income plus fee income).

Notable contributions to the change in 2014 noninterest income were:

 

   

Core fee-based revenue was $227 million, an increase of $3 million (1%) compared to 2013. Trust service fees were $48 million for 2014, up $3 million (6%) from 2013. The market value of assets under management at December 31, 2014 and 2013 was $8.0 billion and $7.4 billion, respectively. Insurance commissions were minimally changed; however, 2014 included a $2 million increase to the reserve for legacy insurance products provided by third parties (a $5 million reserve was established in 2014 for remediation on legacy debt protection products, compared to a $3 million reserve established in 2013 related to third party insurance products sold in prior years). See Note 15, “Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities,” of the notes to consolidated financial statements for additional information concerning this reserve.

 

   

Net mortgage banking income for 2014 was $21 million, down $28 million (56%) compared to 2013. Net mortgage banking consists of gross mortgage banking income less mortgage servicing rights expense. Gross mortgage banking income includes servicing fees, the gain or loss on sales of mortgage loans to the secondary market, changes to the mortgage loan repurchase reserve, and the fair value adjustments on the mortgage derivatives. Gross mortgage banking income decreased $17 million (34%) compared to 2013. This decrease was primarily attributable to lower gains on sales and related income (down $28 million due to the decline in secondary mortgage production) partially offset by a $7 million reduction in the repurchase reserve provision for losses related to repurchases and loss reimbursements on previously sold mortgage loans (see section “Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities,” and Note 15, “Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities,” of the notes to consolidated financial statements for additional information

 

39


 

concerning this repurchase reserve) and a $4 million decrease in the fair value of the mortgage derivative. Secondary mortgage production was $1.1 billion for 2014, compared to $2.3 billion for 2013.

 

   

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 $11 million for 2014 compared to $1 million for 2013, an increase of $10 million; attributable to a $15 million lower recovery of the valuation reserve (as 2013 included a $15 million recovery of the valuation reserve versus minimal change to the valuation reserve in 2014), partially offset by a $5 million reduction in amortization due to slower prepayments. 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 1, “Summary of Significant Accounting Policies,” for the Corporation’s accounting policy for mortgage servicing rights, Note 4, “Goodwill and Intangible Assets,” and Note 17, “Fair Value Measurements,” of the notes to consolidated financial statements for additional disclosure.

 

   

Net asset gains of $10 million for 2014 were primarily attributable to gains of $11 million on the sale of real estate and miscellaneous assets, partially offset by losses of $1 million on the sales and other write-downs of other real estate owned. Net asset gains of $5 million for 2013 were primarily attributable to a $2 million gain on the sale of branches, and a $3 million net gain on the sale of real estate and miscellaneous assets.

 

   

Net capital market fees decreased $3 million (24%) primarily due to a $2 million reduction in fees on interest rate risk related services provided to our customers due to lower demand and a $3 million lower contribution from favorable changes in the credit risk of interest-rate related derivative instruments, partially offset by a $2 million increase in fee income from foreign currency transactions.

Noninterest Expense

TABLE 6: Noninterest Expense

 

     Years Ended December 31,     Change From Prior Year  
     2014     2013     2012     $ Change
2014
    % Change
2014
    $ Change
2013
    % Change
2013
 
     ($ in Thousands)  

Personnel expense

   $ 390,399     $ 397,015     $ 381,404     $ (6,616     (1.7 )%    $ 15,611       4.1

Occupancy

     57,677       59,409       60,794       (1,732     (2.9     (1,385     (2.3

Equipment

     24,784       25,351       23,566       (567     (2.2     1,785       7.6  

Technology

     55,472       49,445       43,548       6,027       12.2       5,897       13.5  

Business development and advertising

     26,144       23,346       21,303       2,798       12.0       2,043       9.6  

Other intangible amortization

     3,747       4,043       4,195       (296     (7.3     (152     (3.6

Loan expense

     13,866       13,162       12,285       704       5.3       877       7.1  

Legal and professional fees

     17,485       20,226       31,232       (2,741     (13.6     (11,006     (35.2

Foreclosure / OREO expense

     6,722       10,068       15,069       (3,346     (33.2     (5,001     (33.2

FDIC expense

     23,761       19,461       19,478       4,300       22.1       (17     (0.1

Other

     59,184       59,123       61,849       61       0.1       (2,726     (4.4
  

 

 

 

Total noninterest expense

   $ 679,241     $ 680,649     $ 674,723     $ (1,408     (0.2 )%    $ 5,926       0.9
  

 

 

 

Personnel expense to total noninterest expense

     57.5     58.3     56.5        

Average full-time equivalent employees

     4,406       4,728       4,968       (322     (6.8 )%      (240     (4.8 )% 

 

40


Notable contributions to the change in 2014 noninterest expense were:

 

   

Personnel expense (which includes salary-related expenses and fringe benefit expenses) was $390 million for 2014, down $7 million (2%) from 2013. Salary-related expenses increased $3 million (1%). This increase was primarily the result of higher compensation and performance based incentives. Fringe benefit expenses decreased $10 million (14%), primarily due to a decrease in health insurance costs reflecting changes in employee health care selections and lower pension plan expense due to a $21 million pension contribution in September.

 

   

Nonpersonnel noninterest expenses on a combined basis were $289 million, up $5 million (2%) compared to 2013. Technology was up $6 million (12%) as we continue to invest in solutions that will drive operational efficiency. FDIC expense of $24 million was $4 million (22%) higher compared to 2013 reflecting growth in risk-weighted assets. Business development and advertising expenses increased $3 million (12%) from 2013 as the Corporation increased advertising related to various campaigns during 2014. Foreclosure / OREO expenses of $7 million decreased $3 million (33%), primarily attributable to a decline in legal and collection expenses related to the improvement in credit quality. Legal and professional fees decreased $3 million (14%) due to a decrease in consultant costs related to certain BSA compliance issues. All remaining noninterest expense categories on a combined basis decreased $2 million (1%) compared to 2013.

Income Taxes

The Corporation recognized income tax expense of $86 million for 2014 compared to income tax expense of $79 million for 2013. The change in income tax expense was primarily due to the increase in the level of pretax income between the years. The effective tax rate was 31.0% for 2014, compared to an effective tax rate of 29.6% for 2013. During 2014, the Corporation recorded a $2 million net increase in the reserve for uncertain tax positions. During 2013, the Corporation recorded 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 limitation. Income tax expense is also impacted by ongoing federal and state income tax audits and changes in tax law and rates.

See Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for the Corporation’s income tax accounting policy and section “Critical Accounting Policies.” Income tax expense recorded in the consolidated statements of income involves the interpretation and application of certain accounting pronouncements and federal and state tax laws and regulations, and is, therefore, considered a critical accounting policy. The Corporation is subject to examination by various taxing authorities. Examination by taxing authorities may impact the amount of tax expense and / or the reserve for uncertain tax positions if their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See Note 12, “Income Taxes,” of the notes to consolidated financial statements for more information.

BALANCE SHEET ANALYSIS

The Corporation’s balance sheet growth historically was driven by loan growth. See section “Loans.” The Corporation has historically financed its asset growth through increased deposits and issuance of debt (see sections, “Deposits,” “Other Funding Sources,” and “Liquidity”), as well as retention of earnings and the issuance of common and preferred stock (see section “Capital”).

 

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TABLE 7: Loan Composition

 

    As of December 31,  
    2014     2013     2012     2011     2010  
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
 
    ($ in Thousands)  

Commercial and industrial

  $ 5,905,902       34   $ 4,822,680       31   $ 4,502,021       29   $ 3,724,736       27   $ 3,049,752       24

Commercial real estate — owner occupied

    1,007,937       6       1,114,715       7       1,219,747       8       1,086,829       8       1,049,798       9  

Lease financing

    51,529              55,483              64,196       1       58,194              60,254         
 

 

 

 

Commercial and business lending

    6,965,368       40       5,992,878       38       5,785,964       38       4,869,759       35       4,159,804       33  

Commercial real estate — investor

    3,056,485       17       2,939,456       18       2,906,759       19       2,563,767       18       2,339,415       18  

Real estate construction

    1,008,956       6       896,248       6       655,381       4       584,046       4       553,069       4  
 

 

 

 

Commercial real estate lending

    4,065,441       23       3,835,704       24       3,562,140       23       3,147,813       22       2,892,484       22  
 

 

 

 

Total commercial

    11,030,809       63       9,828,582       62       9,348,104       61       8,017,572       57       7,052,288       55  

Home equity revolving lines of credit

    887,779       5       874,840       5       936,065       6       1,059,865       8       1,153,406       9  

Home equity loans first liens

    584,131       3       742,120       5       1,013,757       6       1,104,674       8       956,618       8  

Home equity loans junior liens

    164,148       1       208,054       1       269,672       2       340,165       2       413,033       3  
 

 

 

 

Home equity

    1,636,058       9       1,825,014       11       2,219,494       14       2,504,704       18       2,523,057       20  

Installment and credit cards

    454,219       3       407,074       3       466,727       3       557,782       4       695,383       6  

Residential mortgage

    4,472,760       25       3,835,591       24       3,376,697       22       2,951,013       21       2,346,007       19  
 

 

 

 

Total consumer

    6,563,037       37       6,067,679       38       6,062,918       39       6,013,499       43       5,564,447       45  
 

 

 

 

Total loans

  $ 17,593,846       100   $ 15,896,261       100   $ 15,411,022       100   $ 14,031,071       100   $ 12,616,735       100
 

 

 

 

Commercial real estate and Real estate construction loan detail:

                   

Farmland

  $ 9,249         $ 8,591         $ 17,730       1   $ 26,221       1   $ 36,741       2

Multi-family

    976,956       32       951,348       33       905,372       31       694,056       27       485,977       21  

Non-owner occupied

    2,070,280       68       1,979,517       67       1,983,657       68       1,843,490       72       1,816,697       77  
 

 

 

 

Commercial real estate — investor

  $ 3,056,485       100   $ 2,939,456       100   $ 2,906,759       100   $ 2,563,767       100   $ 2,339,415       100
 

 

 

 

1-4 family construction

  $ 304,992       30   $ 259,031       29   $ 176,874       27   $ 120,170       21   $ 96,296       17

All other construction

    703,964       70       637,217       71       478,507       73       463,876       79       456,773       83  
 

 

 

 

Real estate construction

  $ 1,008,956       100   $ 896,248       100   $ 655,381       100   $ 584,046       100   $ 553,069       100
 

 

 

 

Loans

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 2013 and 2014. 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 Corporation’s Board of Directors. These guidelines and limits are designed to create balance and diversification within the loan portfolios.

Notable contributions to the change in 2014 loan balances were:

 

   

The commercial and business lending portfolio, which consists of commercial and business loans and owner occupied commercial real estate loans, was $7.0 billion at December 31, 2014 up $972 million (16%) since year-end 2013. At December 31, 2014, the largest industry groups within the commercial and business loan category included the

 

42


 

Manufacturing sector which represented 9% of total loans and 23% of the total commercial and business loan portfolio. The next largest industry groups within the commercial and business loan category included the Mining sector and the Finance and Insurance sector, which each represented 4% of total loans and 11% and 10%, respectively, of the total commercial and business loan portfolio at December 31, 2014. The remaining portfolio is spread over a diverse range of industries, none of which exceed 5% of total loans.

 

   

The commercial real estate lending portfolio, which consists of investor commercial real estate and construction loans, totaled $4.1 billion at December 31, 2014, up $230 million (6%) from December 31, 2013. Within the commercial real estate lending portfolio, commercial real estate lending to investors totaled $3.1 billion at December 31, 2014, an increase of $117 million (4%) from December 31, 2013.

 

   

Real estate construction loans were $1.0 billion, an increase of $113 million (13%) compared to December 31, 2013.

 

   

Residential mortgage loans totaled $4.5 billion at December 31, 2014, up $637 million (17%) from December 31, 2013. At December 31, 2014, the residential mortgage portfolio was comprised of $1.4 billion of fixed-rate residential real estate mortgages and $3.1 billion of variable-rate residential real estate mortgages, compared to $1.4 billion of fixed-rate mortgages and $2.4 billion variable-rate mortgages at December 31, 2013.

 

   

Home equity totaled $1.6 billion at December 31, 2014, down $189 million (10%) compared to December 31, 2013, and consists of home equity lines, as well as home equity loans, approximately half of which are first lien positions. Home equity balances declined as customers continued to deleverage and refinance into lower-priced, first lien residential mortgage loans. Loans and lines in a junior position at December 31, 2014 included approximately 34% for which the Corporation also owned or serviced the related first lien loan and approximately 66% where the Corporation did not service the related first lien loan.

 

   

As of December 31, 2014, approximately 40% of the home equity loan first liens have a remaining maturity of more than 10 years. Based upon outstanding balances at December 31, 2014, the following table presents the periods when home equity lines of credit revolving periods are scheduled to end.

Table 8: Home Equity Lines of Credit — Revolving Period End Dates

 

     $ in Thousands      % to Total  

Less than 1 year

   $ 5,116        1

1 — 3 years

     4,131        0

3 — 5 years

     19,229        2

5 — 10 years

     160,517        18

Over 10 years

     698,786        79
  

 

 

 

Total home equity revolving lines of credit

   $ 887,779        100
  

 

 

 

 

   

Installment and credit cards totaled $454 million at December 31, 2014 up $47 million (12%) compared to December 31, 2013, primarily due to the purchase of a participation in the Associated Bank branded credit card portfolio on June 30, 2014. The Corporation had $288 million and $330 million of student loans at December 31, 2014, and December 31, 2013, respectively, the majority of which are government guaranteed.

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 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 December 31, 2014, no significant concentrations existed in the Corporation’s portfolio in excess of 10% of total loans. Credit risk management for each loan type is discussed in the section entitled, “Credit Risk.”

 

43


TABLE 9: Commercial Loan Maturity Distribution and Interest Rate Sensitivity

 

      Maturity(1)  

December 31, 2014

   Within
1 Year(2)
    1-5 Years     After
5 Years
    Total     % of Total  
     ($ in Thousands)  

Commercial and industrial

   $ 4,582,184     $ 1,033,485     $ 290,233     $ 5,905,902       54

Commercial real estate — investor

     1,090,289       1,820,384       145,812       3,056,485       28

Commercial real estate — owner occupied

     334,062       526,597       147,278       1,007,937       9

Real estate construction

     605,682       360,831       42,443       1,008,956       9
  

 

 

 

Total

   $ 6,612,217     $ 3,741,297     $ 625,766     $ 10,979,280       100
  

 

 

 

Fixed rate

   $ 3,098,771     $ 1,260,557     $ 318,629     $ 4,677,957       43

Floating or adjustable rate

     3,513,446       2,480,740       307,137       6,301,323       57
  

 

 

 

Total

   $ 6,612,217     $ 3,741,297     $ 625,766     $ 10,979,280       100
  

 

 

 

Percent by maturity distribution

     60     34     6     100  

 

(1) Based upon scheduled principal repayments.

 

(2) Demand loans, past due loans, and overdrafts are reported in the “Within 1 Year” category.

The total commercial loans that were floating or adjustable rate was $6.3 billion (57%) at December 31, 2014. Including the $3.1 billion of fixed rate loans due within one year, 86% of the commercial loan portfolio noted above matures, re-prices, or resets within one year.

 

44


Allowance for Credit Losses

TABLE 10: Allowance for Credit Losses

 

    Years Ended December 31,  
    2014           2013           2012           2011           2010        
    ($ in Thousands)  

Allowance for Loan Losses:

                   

Allowance for loan losses, at beginning of year

  $ 268,315       $ 297,409       $ 378,151       $ 476,813       $ 573,533    

Provision for loan losses

    13,000         10,000         3,000         52,000         390,010    

Loans charged off:

                   

Commercial and industrial

    14,633         35,146         43,240         38,662         121,179    

Commercial real estate — owner occupied

    3,476         6,474         4,080         9,485         20,871    

Lease financing

    39         206         797         173         11,081    
 

 

 

 

Commercial and business lending

    18,148         41,826         48,117         48,320         153,131    

Commercial real estate — investor

    4,529         9,846         14,000         29,479         96,530    

Real estate construction

    1,958         3,375         3,588         38,222         204,728    
 

 

 

 

Commercial real estate lending

    6,487         13,221         17,588         67,701         301,258    
 

 

 

 

Total commercial

    24,635         55,047         65,705         116,021         454,389    

Home equity revolving lines of credit(3)

    6,980         10,855         18,736         25,679        

Home equity loans first liens(3)

    1,386         2,759         3,758         1,603        

Home equity loans junior liens(3)

    3,966         7,015         11,631         15,341        
 

 

 

 

Home equity(3)

    12,332         20,629         34,125         42,623         51,132    

Installment and credit cards

    2,876         1,389         3,057         16,134         9,787    

Residential mortgage

    4,253         10,996         14,159         14,954         13,184    
 

 

 

 

Total consumer

    19,461         33,014         51,341         73,711         74,103    
 

 

 

 

Total loans charged off(1)(2)

    44,096         88,061         117,046         189,732         528,492    

Recoveries of loans previously charged off:

                   

Commercial and industrial

    11,390         28,865         18,363         16,350         20,609    

Commercial real estate — owner occupied

    1,806         339         453         2,509         308    

Lease financing

    7         218         1,899         1,955         25    
 

 

 

 

Commercial and business lending

    13,203         29,422         20,715         20,814         20,942    

Commercial real estate — investor

    9,996         6,961         4,796         5,666         10,141    

Real estate construction

    816         5,511         2,129         7,521         6,040    
 

 

 

 

Commercial real estate lending

    10,812         12,472         6,925         13,187         16,181    
 

 

 

 

Total commercial

    24,015         41,894         27,640         34,001         37,123    

Home equity revolving lines of credit(3)

    2,226         2,995         2,725         1,867        

Home equity loans first liens(3)

    208         104         58         44        

Home equity loans junior liens(3)

    974         1,113         1,115         1,290        
 

 

 

 

Home equity(3)

    3,408         4,212         3,898         3,201         2,733    

Installment and credit cards

    616         1,633         1,234         1,584         1,669    

Residential mortgage

    1,044         1,228         532         284         237    
 

 

 

 

Total consumer

    5,068         7,073         5,664         5,069         4,639    
 

 

 

 

Total recoveries(1)(2)

    29,083         48,967         33,304         39,070         41,762    
 

 

 

 

Total net charge offs(1)(2)

    15,013         39,094         83,742         150,662         486,730    
 

 

 

 

Allowance for loan losses, at end of year

  $ 266,302       $ 268,315       $ 297,409       $ 378,151       $ 476,813    
 

 

 

 

Allowance for Unfunded Commitments:

                   

Balance at beginning of year

  $ 21,900       $ 21,800       $ 14,700       $ 17,374       $ 14,193    

Provision for unfunded commitments

    3,000         100         7,100         (2,674       3,181    
 

 

 

 

Balance at end of year

  $ 24,900       $ 21,900       $ 21,800       $ 14,700       $ 17,374    
 

 

 

 

Allowance for credit losses(A)

  $ 291,202       $ 290,215       $ 319,209       $ 392,851       $ 494,187    

Provision for credit losses(B)

  $ 16,000       $ 10,100       $ 10,100       $ 49,326       $ 393,191    

Ratios at end of year:

                   

Allowance for loan losses to total loans

    1.51       1.69       1.93       2.70       3.78  

Allowance for loan losses to net charge offs

    17.7x          6.9x          3.6x          2.5x          1.0x     
 

 

 

 

Net loan charge offs (recoveries):

      (C       (C       (C       (C       (C

Commercial and industrial

  $ 3,243       6     $ 6,281       14     $ 24,877       63     $ 22,312       70     $ 100,570       330  

Commercial real estate — owner occupied

    1,670       16       6,135       53       3,627       33       6,976       67       20,563       183  

Lease financing

    32       6       (12     (2     (1,102     N/M        (1,782     N/M        11,056       N/M   
 

 

 

 

Commercial and business lending

    4,945       8       12,404       21       27,402       53       27,506       64       132,189       310  

Commercial real estate — investor

    (5,467     (18     2,885       10       9,204       33       23,813       98       86,389       346  

Real estate construction