UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 0-5519 and 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)		(IRS employer identification No.)
1200 Hansen Road, Green Bay, Wisconsin		54304
(Address of principal executive offices)		(Zip code)

(920) 491-7000

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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 o No o

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. (Check one):

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at October 31, 2009, was 127,867,775.

 

 

ASSOCIATED BANC-CORP
TABLE OF CONTENTS

		Page No.
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets - September 30, 2009 and December 31, 2008			3
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2009 and 2008			4
Consolidated Statements of Changes in Stockholders’ Equity - Nine Months Ended September 30, 2009 and 2008			5
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2009 and 2008			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3. Quantitative and Qualitative Disclosures About Market Risk			70
Item 4. Controls and Procedures			70
PART II. Other Information
Item 1A. Risk Factors			71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			71
Item 6. Exhibits			71
Signatures			72
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements:

ASSOCIATED BANC-CORP

Consolidated Balance Sheets

		September 30,				December 31,
		2009				2008
		(Unaudited)				(Audited)
		(In Thousands, except share data)
ASSETS
Cash and due from banks		$	430,381			$	533,338
Interest-bearing deposits in other financial institutions			13,145				12,649
Federal funds sold and securities purchased under agreements to resell			17,000				24,741
Investment securities available for sale, at fair value			5,651,076				5,143,414
Federal Home Loan Bank and Federal Reserve Bank stocks, at cost			181,316				206,003
Loans held for sale			78,740				87,084
Loans			14,765,597				16,283,908
Allowance for loan losses			(412,530	)			(265,378	)
Loans, net			14,353,067				16,018,530
Premises and equipment, net			185,544				190,942
Goodwill			929,168				929,168
Other intangible assets, net			91,506				80,165
Other assets			950,584				966,033
Total assets		$	22,881,527			$	24,192,067
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing demand deposits		$	2,984,486			$	2,814,079
Interest-bearing deposits, excluding brokered certificates of deposit			12,808,533				11,551,181
Brokered certificates of deposit			653,090				789,536
Total deposits			16,446,109				15,154,796
Short-term borrowings			1,517,594				3,703,936
Long-term funding			1,761,506				1,861,647
Accrued expenses and other liabilities			231,659				595,185
Total liabilities			19,956,868				21,315,564
Stockholders’ equity
Preferred equity			510,315				508,008
Common stock			1,284				1,281
Surplus			1,080,720				1,073,218
Retained earnings			1,268,507				1,293,941
Accumulated other comprehensive income			64,919				55
Treasury stock, at cost			(1,086	)			—
Total stockholders’ equity			2,924,659				2,876,503
Total liabilities and stockholders’ equity		$	22,881,527			$	24,192,067
Preferred shares issued			525,000				525,000
Preferred shares authorized (par value $1.00 per share)			750,000				750,000
Common shares issued			128,428,814				128,116,669
Common shares authorized (par value $0.01 per share)			250,000,000				250,000,000
Treasury shares of common stock			49,976				—

          See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Income
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans		$	183,264			$	229,001			$	579,641			$	721,781
Interest and dividends on investment securities and deposits in other financial institutions:
Taxable			46,873				32,209				144,464				95,439
Tax exempt			8,498				9,887				26,811				29,922
Interest on federal funds sold and securities purchased under agreements to resell			16				279				130				698
Total interest income			238,651				271,376				751,046				847,840
INTEREST EXPENSE
Interest on deposits			37,811				61,743				129,403				206,904
Interest on short-term borrowings			2,895				23,958				13,137				76,494
Interest on long-term funding			18,709				19,158				60,854				60,076
Total interest expense			59,415				104,859				203,394				343,474
NET INTEREST INCOME			179,236				166,517				547,652				504,366
Provision for loan losses			95,410				55,011				355,856				137,014
Net interest income after provision for loan losses			83,826				111,506				191,796				367,352
NONINTEREST INCOME
Trust service fees			9,057				10,020				26,103				30,172
Service charges on deposit accounts			30,829				33,609				87,705				87,422
Card-based and other nondeposit fees			11,586				12,517				33,618				36,243
Retail commission income			15,041				14,928				45,382				47,047
Mortgage banking, net			(909	)			3,571				31,655				15,911
Treasury management fees, net			226				1,935				5,245				7,423
Bank owned life insurance income			3,789				5,235				12,722				15,093
Asset sale gains (losses), net			(126	)			573				(2,520	)			(614	)
Investment securities gains (losses), net:
Realized gains (losses), net			1,058				—				11,682				5
Other-than-temporary impairments			(2,575	)			(13,585	)			(3,988	)			(17,248	)
Less: Non-credit portion recognized in other comprehensive income (before taxes)			1,475				—				1,475				—
Total investment securities gains (losses), net			(42	)			(13,585	)			9,169				(17,243	)
Other			5,858				6,520				17,148				23,122
Total noninterest income			75,309				75,323				266,227				244,576
NONINTEREST EXPENSE
Personnel expense			73,501				78,395				231,770				232,104
Occupancy			11,949				12,037				37,171				37,327
Equipment			4,575				5,088				13,834				14,338
Data processing			7,442				7,634				23,165				23,005
Business development and advertising			3,910				5,175				13,590				15,353
Other intangible asset amortization expense			1,386				1,568				4,157				4,705
Legal and professional fees			3,349				3,538				13,176				9,255
Foreclosure/OREO expense			8,688				2,427				27,277				6,969
FDIC expense			8,451				791				32,316				1,594
Other			17,860				19,924				55,950				64,060
Total noninterest expense			141,111				136,577				452,406				408,710
Income before income taxes			18,024				50,252				5,617				203,218
Income tax expense (benefit)			2,030				12,483				(35,761	)			51,625
Net income			15,994				37,769				41,378				151,593
Preferred stock dividends and discount accretion			7,342				—				21,994				—
Net income available to common equity		$	8,652			$	37,769			$	19,384			$	151,593
Earnings per common share:
Basic		$	0.07			$	0.30			$	0.15			$	1.19
Diluted		$	0.07			$	0.30			$	0.15			$	1.18
Average common shares outstanding:
Basic			127,863				127,553				127,855				127,428
Diluted			127,863				127,622				127,859				127,799

          See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

																		Accumulated
																		Other
		Preferred				Common								Retained				Comprehensive				Treasury
		Equity				Stock				Surplus				Earnings				Income (Loss)				Stock				Total
		($ in Thousands, except per share data)
Balance, December 31, 2007		$	—			$	1,278			$	1,040,694			$	1,305,136			$	(2,498	)		$	(14,905	)		$	2,329,705
Adjustment for adoption of accounting standard related to split-dollar life insurance arrangements			—				—				—				(2,515	)			—				—				(2,515	)
Balance, January 1, 2008, as adjusted		$	—			$	1,278			$	1,040,694			$	1,302,621			$	(2,498	)		$	(14,905	)		$	2,327,190
Comprehensive income:
Net income			—				—				—				151,593				—				—				151,593
Other comprehensive income			—				—				—				—				(7,834	)			—				(7,834	)
Comprehensive income																											143,759
Cash dividends, $0.95 per share			—				—				—				(121,368	)			—				—				(121,368	)
Common stock issued:
Stock-based compensation plans, net			—				2				4,045				(11,523	)			—				14,905				7,429
Stock-based compensation, net			—				—				5,235				—				—				—				5,235
Tax benefit of stock options			—				—				2,002				—				—				—				2,002
Balance, September 30, 2008		$	—			$	1,280			$	1,051,976			$	1,321,323			$	(10,332	)		$	—			$	2,364,247
Balance, December 31, 2008		$	508,008			$	1,281			$	1,073,218			$	1,293,941			$	55			$	—			$	2,876,503
April 1, 2009 adjustment for adoption of accounting standard related to other-than-temporary impairment			—				—				—				9,745				(9,745	)			—				—
Comprehensive income:
Net income			—				—				—				41,378				—				—				41,378
Other comprehensive income			—				—				—				—				74,609				—				74,609
Comprehensive income																											115,987
Common stock issued:
Stock-based compensation plans, net			—				3				1,140				(632	)			—				(495	)			16
Purchase of treasury stock			—				—				—				—				—				(591	)			(591	)
Cash dividends:
Common stock, $0.42 per share			—				—				—				(53,931	)			—				—				(53,931	)
Preferred stock			—				—				—				(19,687	)			—				—				(19,687	)
Accretion of preferred stock discount			2,307				—				—				(2,307	)			—				—				—
Stock-based compensation, net			—				—				6,361				—				—				—				6,361
Tax benefit of stock options			—				—				1				—				—				—				1
Balance, September 30, 2009		$	510,315			$	1,284			$	1,080,720			$	1,268,507			$	64,919			$	(1,086	)		$	2,924,659

          See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Cash Flows
(Unaudited)

		For the Nine Months Ended
		September 30,
		2009				2008
		($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	41,378			$	151,593
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			355,856				137,014
Depreciation and amortization			23,075				21,094
Addition to (recovery of) valuation allowance on mortgage servicing rights, net			7,449				(410	)
Amortization of mortgage servicing rights			14,060				11,870
Amortization of other intangible assets			4,157				4,705
Amortization and accretion on earning assets, funding, and other, net			40,487				4,619
Tax benefit from exercise of stock options			1				2,002
Excess tax benefit from stock-based compensation			—				(765	)
(Gain) loss on sales of investment securities, net and impairment write-downs			(9,169	)			17,243
Loss on sales of assets, net			2,520				614
Gain on mortgage banking activities, net			(36,424	)			(12,395	)
Mortgage loans originated and acquired for sale			(3,053,135	)			(1,166,530	)
Proceeds from sales of mortgage loans held for sale			3,063,707				1,215,990
Decrease in interest receivable			6,967				11,308
Decrease in interest payable			(12,213	)			(12,226	)
Net change in other assets and other liabilities			(341,427	)			(8,001	)
Net cash provided by operating activities			107,289				377,725
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans			1,235,566				(905,742	)
Purchases of:
Investment securities			(2,996,256	)			(1,098,962	)
Premises, equipment, and software, net of disposals			(13,753	)			(23,012	)
Other assets			(5,914	)			(7,068	)
Proceeds from:
Sales of investment securities			689,689				3,550
Calls and maturities of investment securities			1,898,660				992,702
Sales of other assets			43,841				34,469
Net cash provided by (used in) investing activities			851,833				(1,004,063	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			1,291,313				271,754
Net increase (decrease) in short-term borrowings			(2,186,342	)			879,228
Repayment of long-term funding			(500,102	)			(528,365	)
Proceeds from issuance of long-term funding			400,000				225,821
Cash dividends on common stock			(53,931	)			(121,368	)
Cash dividends on preferred stock			(19,687	)			—
Proceeds from exercise of stock options, net			16				7,429
Purchase of treasury stock			(591	)			—
Excess tax benefit from stock-based compensation			—				765
Net cash provided by (used in) financing activities			(1,069,324	)			735,264
Net increase (decrease) in cash and cash equivalents			(110,202	)			108,926
Cash and cash equivalents at beginning of period			570,728				587,149
Cash and cash equivalents at end of period		$	460,526			$	696,075
Supplemental disclosures of cash flow information:
Cash paid for interest		$	215,245			$	355,699
Cash paid for income taxes			30,813				68,882
Loans and bank premises transferred to other real estate owned			49,401				39,890
Capitalized mortgage servicing rights			37,007				14,250

See accompanying notes to consolidated financial statements.

ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with U.S. generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in Associated Banc-Corp’s 2008 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements.

NOTE 1: Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in stockholders’ equity, and cash flows of Associated Banc-Corp (individually referred to herein as the “Parent Company,” and together with all of its subsidiaries and affiliates, collectively referred to herein as the “Corporation”) for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events for potential recognition or disclosure through November 9, 2009, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing rights valuation, derivative financial instruments and hedging activities, and income taxes.

NOTE 2: Reclassifications

Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform with the current period’s presentation.

NOTE 3: New Accounting Pronouncements Adopted

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which established the Codification to become the single source of authoritative accounting principles. The standard also provides the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change generally accepted accounting principles, but is expected to simplify accounting research by reorganizing current generally accepted accounting principles into specific accounting topics. The Corporation adopted this accounting standard in the third quarter of 2009. The adoption of this accounting standard, which was subsequently codified into Accounting Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting Principles,” had no impact on the Corporation’s results of operations, financial position, and liquidity.

In May 2009, the FASB issued an accounting standard intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this accounting standard requires companies to disclose the date

through which they have evaluated subsequent events and the basis for that date, as to whether it represents the date the financial statements were issued or were available to be issued. It also provides guidance regarding circumstances under which companies should and should not recognize events or transactions occurring after the balance sheet date in their financial statements. This accounting standard also includes disclosure requirements for certain events and transactions that occurred after the balance sheet date, which were not recognized in the financial statements. This accounting standard is effective for interim and annual periods ending after June 15, 2009. The Corporation adopted this accounting standard in the second quarter of 2009. The adoption of this accounting standard, which was subsequently codified into ASC Topic 855, “Subsequent Events,” had no material impact on the Corporation’s results of operations, financial position, and liquidity.

In March 2008, the FASB issued an accounting standard applicable to all derivative instruments. This standard provides financial statement users with increased qualitative, quantitative, and credit-risk disclosures related to derivative financial instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The accounting standard is to be applied prospectively for interim periods and fiscal years beginning after November 15, 2008. The Corporation adopted this accounting standard at the beginning of 2009. See Note 11, “Derivative and Hedging Activities,” for additional disclosures required under this accounting standard, which was subsequently codified into ASC Topic 815, “Derivatives and Hedging.”

In December 2007, the FASB issued an accounting standard which requires noncontrolling interests to be treated as a separate component of equity, rather than a liability or other item outside of equity. This standard also requires the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the income statement. Changes in a parent’s ownership interest, as long as the parent retains a controlling financial interest, must be accounted for as equity transactions, and should a parent cease to have a controlling financial interest, the standard requires the parent to recognize a gain or loss in net income. Expanded disclosures in the consolidated financial statements are required by this statement and must clearly identify and distinguish between the interest of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. This accounting standard is to be applied prospectively for fiscal years beginning on or after December 15, 2008, with the exception of presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Corporation adopted this accounting standard at the beginning of 2009. The adoption of this accounting standard, which was subsequently codified into ASC Topic 810, “Consolidation,” had no material impact on the Corporation’s results of operations, financial position and liquidity.

In December 2007, the FASB issued an accounting standard which requires an acquirer to recognize identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their full fair values at that date, with limited exceptions. Assets and liabilities assumed that arise from contractual contingencies as of the acquisition date must also be measured at their acquisition-date full fair values. The standard requires the acquirer to recognize goodwill as of the acquisition date, and in the case of a bargain purchase business combination, the acquirer shall recognize a gain. Acquisition-related costs are to be expensed in the periods in which the costs are incurred and the services are received. Additional presentation and disclosure requirements have also been established to enable financial statement users to evaluate and understand the nature and financial effects of business combinations. This accounting standard is to be applied prospectively for acquisition dates on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation adopted this accounting standard, which was subsequently codified into ASC Topic 805, “Business Combinations,” at the beginning of 2009. The Corporation did not have any business combination activity

for the nine months ended September 30, 2009.

In April 2009, the FASB issued an accounting standard which amended other-than-temporary impairment (“OTTI”) guidance in generally accepted accounting principles for debt securities by requiring a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not that the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. This accounting standard does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. This accounting standard also extends disclosure requirements related to debt and equity securities to interim reporting periods. The Corporation adopted this accounting standard in the second quarter of 2009, and recognized a net cumulative effect adjustment of $9.7 million to retained earnings and accumulated other comprehensive income as of April 1, 2009. See the Consolidated Statements of Changes in Stockholders’ Equity for the impact of the initial adoption and Note 6, “Investment Securities,” for additional information and disclosures concerning this accounting standard, which was subsequently codified into ASC Topic 320, “Investments — Debt and Equity Securities.”

In April 2009, the FASB issued an accounting standard related to disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The Corporation adopted this accounting standard in the second quarter of 2009. See Note 13, “Fair Value Measurements,” for additional disclosures related to this accounting standard, which was subsequently codified into ASC Topic 825, “Financial Instruments.”

In April 2009, the FASB issued an accounting standard which provided guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and in identifying transactions that are not orderly. In such instances, the accounting standard provides that management may determine that further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with generally accepted accounting principles. The Corporation adopted this accounting standard in the second quarter of 2009, with no material impact on its results of operations, financial position, and liquidity. See Note 13, “Fair Value Measurements,” for additional disclosures concerning this accounting standard, which was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.”

In June 2008, the FASB issued an accounting standard which determined that all outstanding unvested share-based payment awards with rights to nonforfeitable dividends are considered participating securities. Because they are considered participating securities, the Corporation is required to apply the two-class method in computing basic and diluted earnings per share. This accounting standard is effective for fiscal years beginning after December 15, 2008. The Corporation adopted this accounting standard at the beginning of 2009, as required, with no material impact on its results of operations, financial position and liquidity. See Note 4, “Earnings Per Share,” for additional disclosures concerning this accounting standard, which was subsequently codified into ASC Topic 260, “Earnings per Share.”

NOTE 4: Earnings Per Share

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

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In Thousands, except per share data)
Net income		$	15,994			$	37,769			$	41,378			$	151,593
Preferred dividends and discount accretion			(7,342	)			—				(21,994	)			—
Net income available to common equity		$	8,652			$	37,769			$	19,384			$	151,593
Common shareholder dividends			(6,393	)			(40,814	)			(53,708	)			(121,045	)
Unvested share-based payment awards			(26	)			(107	)			(223	)			(322	)
Undistributed earnings		$	2,233			$	(3,152	)		$	(34,547	)		$	30,226
Basic
Distributed earnings to common shareholders		$	6,393			$	40,814			$	53,708			$	121,045
Undistributed earnings to common shareholders			2,224				(3,152	)			(34,547	)			30,148
Total common shareholders earnings, basic		$	8,617			$	37,662			$	19,161			$	151,193
Diluted
Distributed earnings to common shareholders		$	6,393			$	40,814			$	53,708			$	121,045
Undistributed earnings to common shareholders			2,224				(3,152	)			(34,547	)			30,148
Total common shareholders earnings, diluted		$	8,617			$	37,662			$	19,161			$	151,193
Weighted average common shares outstanding			127,863				127,553				127,855				127,428
Effect of dilutive stock awards and unsettled share repurchases			—				69				4				371
Diluted weighted average common shares outstanding			127,863				127,622				127,859				127,799
Basic earnings per common share		$	0.07			$	0.30			$	0.15			$	1.19
Diluted earnings per common share		$	0.07			$	0.30			$	0.15			$	1.18

NOTE 5: Stock-Based Compensation

The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model, while the fair value of restricted stock shares is their fair market value on the date of grant. The fair values of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is included in personnel expense in the consolidated statements of income.

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical volatility of the Corporation’s stock. The following weighted average assumptions were used in estimating the fair value for stock options granted in the first nine months of 2009 and full year 2008.

		2009				2008
Dividend yield			4.97	%			5.12	%
Risk-free interest rate			1.85	%			2.77	%
Expected volatility			35.84	%			21.32	%
Expected life		6 yrs				6 yrs
Per share fair value of stock options		$	3.60			$	2.74

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

A summary of the Corporation’s stock option activity for the year ended December 31, 2008 and for the nine months ended September 30, 2009, is presented below.

						Weighted Average				Weighted Average Remaining				Aggregate Intrinsic Value
Stock Options		Shares				Exercise Price				Contractual Term				(000s)
Outstanding at December 31, 2007			6,319,413			$	27.43
Granted			1,256,790				24.35
Exercised			(576,685	)			18.20
Forfeited or expired			(417,816	)			30.55
Outstanding at December 31, 2008			6,581,702			$	27.45				5.87			$	(42,922	)
Options exercisable at December 31, 2008			4,770,537			$	27.44				4.77			$	(31,076	)
Outstanding at December 31, 2008			6,581,702			$	27.45
Granted			956,998				17.15
Exercised			(945	)			16.70
Forfeited or expired			(767,295	)			25.67
Outstanding at September 30, 2009			6,770,460			$	26.20				5.86			$	(100,063	)
Options exercisable at September 30, 2009			4,832,624			$	27.80				4.72			$	(79,166	)

The following table summarizes information about the Corporation’s nonvested stock option activity for the year ended December 31, 2008, and for the nine months ended September 30, 2009.

						Weighted Average
Stock Options		Shares				Grant Date Fair Value
Nonvested at December 31, 2007			1,030,125			$	6.03
Granted			1,256,790				2.74
Vested			(337,557	)			6.06
Forfeited			(138,193	)			4.66
Nonvested at December 31, 2008			1,811,165			$	3.85
Granted			956,998				3.60
Vested			(630,298	)			4.11
Forfeited			(200,029	)			4.32
Nonvested at September 30, 2009			1,937,836			$	3.59

For the nine months ended September 30, 2009, the intrinsic value of stock options exercised was immaterial (less than $0.1 million), while for the year ended December 31, 2008, the intrinsic value of stock options exercised was $3.8 million. (Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock option.) During the first nine months of 2009, less than $0.1 million was received for the exercise of stock options. The total grant date fair value of stock options that vested was $2.6 million for the first nine months of 2009 and $2.0 million for the year ended December 31, 2008. For the nine months ended September 30, 2009 and 2008, the Corporation recognized compensation expense of $2.9 million and $2.2 million, respectively, for the vesting of stock options. For the full year 2008, the Corporation recognized compensation expense of $3.0 million for the vesting of stock options. At September 30, 2009, the Corporation had $4.3 million of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2011.

The following table summarizes information about the Corporation’s restricted stock share activity for the year ended December 31, 2008, and for the nine months ended September 30, 2009.

						Weighted Average
Restricted Stock		Shares				Grant Date Fair Value
| |
Outstanding at December 31, 2007			164,840			$	33.14
Granted			265,900				24.43
Vested			(69,074	)			32.47
Forfeited			(7,339	)			32.21
Outstanding at December 31, 2008			354,327			$	26.75
Granted			351,133				16.76
Vested			(139,438	)			28.31
Forfeited			(51,519	)			21.88
Outstanding at September 30, 2009			514,503			$	20.00

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the requisite service period. Expense for restricted stock awards of approximately $3.5 million and $3.0 million was recorded for the nine months ended September 30, 2009 and 2008, respectively, while expense for restricted stock awards of approximately $4.0 million was recognized for the full year 2008. The Corporation had $6.8 million of unrecognized compensation costs related to restricted stock shares at September 30, 2009, that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2011.

The Corporation issues shares from treasury, when available, or new shares upon the exercise of stock options and vesting of restricted stock shares. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock each quarter in the market, to be made available for

issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities, and is subject to restrictions under the Capital Purchase Program (“CPP”).

NOTE 6: Investment Securities

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

						Gross				Gross
						unrealized				unrealized
		Amortized cost				gains				losses				Fair value
		($ in Thousands)
September 30, 2009:
U.S. Treasury securities		$	3,893			$	3			$	—			$	3,896
Federal agency securities			42,975				1,656				(1	)			44,630
Obligations of state and political subdivisions (municipal securities)			865,415				35,399				(208	)			900,606
Residential mortgage-related securities			4,534,217				132,885				(10,898	)			4,656,204
Other securities (debt and equity)			46,105				1,357				(1,722	)			45,740
Total investment securities available for sale		$	5,492,605			$	171,300			$	(12,829	)		$	5,651,076

						Gross				Gross
						unrealized				unrealized
		Amortized cost				gains				losses				Fair value
		($ in Thousands)
December 31, 2008:
U.S. Treasury securities		$	4,985			$	10			$	(29	)		$	4,966
Federal agency securities			75,816				1,195				(1	)			77,010
Obligations of state and political subdivisions (municipal securities)			913,216				16,581				(4,194	)			925,603
Residential mortgage-related securities			4,032,784				54,128				(9,481	)			4,077,431
Other securities (debt and equity)			58,272				639				(507	)			58,404
Total investment securities available for sale		$	5,085,073			$	72,553			$	(14,212	)		$	5,143,414

The amortized cost and fair values of investment securities available for sale at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

($ in Thousands)		Amortized Cost				Fair Value
Due in one year or less		$	169,915			$	175,206
Due after one year through five years			221,477				234,413
Due after five years through ten years			411,851				430,655
Due after ten years			147,033				145,185
Total debt securities			950,276				985,459
Residential mortgage-related securities			4,534,217				4,656,204
Equity securities			8,112				9,413
Total investment securities available for sale		$	5,492,605			$	5,651,076

The following represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009.

		Less than 12 months								12 months or more								Total
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
		($ in Thousands)
September 30, 2009:
Federal agency securities		$	(1	)		$	47			$	—			$	—			$	(1	)		$	47
Obligations of state and political subdivisions (municipal securities)			(14	)			3,284				(194	)			3,046				(208	)			6,330
Residential mortgage-related securities			(7,061	)			100,890				(3,837	)			44,708				(10,898	)			145,598
Other securities (debt and equity)			(1,722	)			4,460				—				—				(1,722	)			4,460
Total		$	(8,798	)		$	108,681			$	(4,031	)		$	47,754			$	(12,829	)		$	156,435

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

Based on the Corporation’s evaluation, management does not believe any remaining unrealized loss at September 30, 2009 represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and the current volatile market conditions, and not credit deterioration. At September 30, 2009, the number of investment securities in an unrealized loss position for less than 12 months for municipal and mortgage-related securities was 5 and 14, respectively. For investment securities in an unrealized loss position for 12 months or more, the number of individual securities in the municipal and mortgage-related categories was 4 and 33, respectively. The unrealized losses reported for mortgage-related securities relate to non-agency mortgage-related securities as well as mortgage-related securities issued by government agencies such as the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). The Corporation currently does not intend to sell nor does it believe that it will be required to sell the securities contained in the above unrealized losses table before recovery of their amortized cost basis.

The Corporation recognized net investment securities gains of $9.2 million for the first nine months of 2009. These net investment securities gains were attributable to gains of $14.6 million on the sale of mortgage-related securities, partially offset by a $2.9 million loss on the sale of a mortgage-related security and credit-related other-than-temporary write-downs of $2.5 million on the Corporation’s holding of a trust preferred debt security, a non-agency mortgage-related security, and various equity securities. At September 30, 2009, the remaining carrying values of the specific securities with other-than-temporary write-downs were $49.3 million for two non-agency mortgage-related securities, $0.2 million for the FHLMC and FNMA preferred stock securities combined, $4.1 million for the trust preferred debt securities pools, $0.1 million for the trust preferred debt security, and $0.3 million for the common equity securities.

The following is a summary of the credit loss portion of other-than-temporary impairment recognized in earnings on debt securities.

		Non-agency
		Mortgage-Related				Trust Preferred
$ in Thousands		Securities				Debt Securities				Total
Balance of credit-related other-than-temporary impairment at April 1, 2009		$	(16,445	)		$	(5,027	)		$	(21,472	)
Adjustment for change in cash flows			306				—				306
Credit losses on newly identified impairment			—				(1,000	)			(1,000	)
Balance of credit-related other-than-temporary impairment at June 30, 2009		$	(16,139	)		$	(6,027	)		$	(22,166	)
Adjustment for change in cash flows			172				—				172
Credit losses on newly identified impairment			(200	)			(900	)			(1,100	)
Balance of credit-related other-than-temporary impairment at September 30, 2009		$	(16,167	)		$	(6,927	)		$	(23,094	)

For comparative purposes, the following represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2008.

		Less than 12 months								12 months or more								Total
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
		($ in Thousands)
December 31, 2008:
U. S. Treasury securities		$	(29	)		$	3,960			$	—			$	—			$	(29	)		$	3,960
Federal agency securities			—				—				(1	)			52				(1	)			52
Obligations of state and political subdivisions (municipal securities)			(3,645	)			128,571				(549	)			21,752				(4,194	)			150,323
Residential mortgage-related securities			(2,240	)			268,626				(7,241	)			140,021				(9,481	)			408,647
Other securities (debt and equity)			(445	)			3,798				(62	)			206				(507	)			4,004
Total		$	(6,359	)		$	404,955			$	(7,853	)		$	162,031			$	(14,212	)		$	566,986

NOTE 7: Goodwill and Other Intangible Assets

Goodwill: Goodwill is not amortized, but is subject to impairment tests on at least an annual basis. Consistent with prior years, the Corporation has elected to conduct its annual impairment testing in May. Due to changes in the business climate and the resulting decline in financial services stock prices, management also completed an interim review of goodwill as of September 30, 2009. Based on this analysis, the fair value of the Corporation’s reporting units exceeded the fair value of its assets and liabilities and, therefore, no impairment loss was recorded. However, market valuations of financial services companies remain depressed relative to book values due to continuing uncertainty surrounding the timing of economic recovery as well as the impact of the government programs. As a result, management believes it may be necessary to continue to evaluate goodwill for impairment on a quarterly basis depending upon current market conditions, results of operations, and other factors. It is possible that a future conclusion could be reached that all or a portion of the Corporation’s goodwill may be impaired, in which case a non-cash charge for the amount of such impairment would be recorded in earnings. Such a charge, if any, would have no impact on tangible capital and would not affect the Corporation’s “well-capitalized” designation.

At September 30, 2009, goodwill of $907 million was assigned to the banking segment and goodwill of $22 million was assigned to the wealth management segment. There was no change in the carrying amount of goodwill for the nine months ended September 30, 2009, and the year ended December 31, 2008.

Other Intangible Assets: The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, other intangibles (primarily related to customer relationships acquired in connection with the Corporation’s insurance agency acquisitions), and mortgage servicing rights. The core deposit intangibles and mortgage servicing rights are assigned to the banking segment, while the other intangibles are assigned to the wealth management segment as of September 30, 2009.

For core deposit intangibles and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows. The $0.2 million deduction during 2008 was attributable to the write-off of unamortized customer list intangibles related to the sale of third party administration business contracts.

		At or for the				At or for the
		Nine months ended				Year ended
		September 30, 2009				December 31, 2008
		($ in Thousands)
Core deposit intangibles:
Gross carrying amount		$	47,748			$	47,748
Accumulated amortization			(28,257	)			(25,165	)
Net book value		$	19,491			$	22,583
Amortization during the period		$	3,092			$	4,585
Other intangibles:
Gross carrying amount		$	20,433			$	20,433
Accumulated amortization			(9,484	)			(8,419	)
Net book value		$	10,949			$	12,014
Deductions during the period		$	—			$	167
Amortization during the period		$	1,065			$	1,684

Mortgage servicing rights are included in other intangible assets, net in the consolidated balance sheets and are carried at the lower of amortized cost (i.e., initial capitalized amount, net of accumulated amortization) or estimated fair value. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date. Impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the mortgage servicing rights asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the mortgage servicing rights asset generally increases, requiring less valuation reserve. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings. An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan pay off activity) is recognized as a write-down of the mortgage servicing rights asset and the related valuation allowance (to the extent a valuation reserve is available) and then against earnings. A direct write-down permanently reduces the carrying value of the mortgage servicing rights asset and valuation allowance, precluding subsequent recoveries. See Note 13, “Fair Value Measurements,” which further discusses fair value measurement relative to the mortgage servicing rights asset.

A summary of changes in the balance of the mortgage servicing rights asset and the mortgage servicing rights valuation allowance follows.

		At or for the				At or for the
		Nine months ended				Year ended
		September 30, 2009				December 31, 2008
		($ in Thousands)
Mortgage servicing rights:
Mortgage servicing rights at beginning of period		$	56,025			$	54,819
Additions			37,007				17,263
Amortization			(14,060	)			(16,057	)
Mortgage servicing rights at end of period		$	78,972			$	56,025
Valuation allowance at beginning of period			(10,457	)			(3,632	)
(Additions) / Recoveries, net			(7,449	)			(6,825	)
Valuation allowance at end of period			(17,906	)			(10,457	)
Mortgage servicing rights, net		$	61,066			$	45,568
Fair value of mortgage servicing rights		$	66,130			$	52,882
Portfolio of residential mortgage loans serviced for others (“servicing portfolio”)		$	7,473,000			$	6,606,000
Mortgage servicing rights, net to servicing portfolio			0.82	%			0.69	%
Mortgage servicing rights expense (1)		$	21,509			$	22,882

The following table shows the estimated future amortization expense for amortizing intangible assets. The projections of amortization expense for the next five years are based on existing asset balances, the current interest rate environment, and prepayment speeds as of September 30, 2009. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable.

		Core Deposit				Other				Mortgage Servicing
		Intangibles				Intangibles				Rights
		($ in Thousands)
Estimated amortization expense:
Three months ending December 31, 2009		$	1,000			$	400			$	5,200
Year ending December 31, 2010			3,700				1,200				18,700
Year ending December 31, 2011			3,700				1,000				15,400
Year ending December 31, 2012			3,200				1,000				12,100
Year ending December 31, 2013			3,100				900				9,300
Year ending December 31, 2014			2,900				900				7,000

NOTE 8: Long-term Funding

Long-term funding (funding with original contractual maturities greater than one year) was as follows.

		September 30,				December 31,
		2009				2008
		($ in Thousands)
Federal Home Loan Bank advances		$	818,092			$	1,118,140
Repurchase agreements			500,000				300,000
Subordinated debt, net			225,200				225,058
Junior subordinated debentures, net			216,124				216,291
Other borrowed funds			2,090				2,158
Total long-term funding		$	1,761,506			$	1,861,647

Federal Home Loan Bank advances: Long-term advances from the Federal Home Loan Bank (“FHLB”) had maturities through 2020 and had weighted-average interest rates of 3.22% at September 30, 2009, compared to 3.53% at December 31, 2008. These advances had a combination of fixed and variable contractual rates, of which, none were variable at September 30, 2009, and 27% were variable at December 31, 2008. In September 2007, the Corporation entered into an interest rate swap to hedge the interest rate risk in the cash flows of a $200 million variable rate, long-term FHLB advance. The $200 million variable rate, long-term FHLB advance and the related interest rate swap matured in June 2009. The fair value of the derivative was a $3.2 million loss at December 31, 2008.

Repurchase agreements: The long-term repurchase agreements had maturities through 2011 and had weighted-average interest rates of 2.60% at September 30, 2009, and 3.27% at December 31, 2008. These repurchase agreements were 20% and 33% variable rate at September 30, 2009, and December 31, 2008, respectively.

Subordinated debt: In September 2008, the Corporation issued $26 million of 10-year subordinated debt with a 5-year no-call provision, and in August 2001, the Corporation issued $200 million of 10-year subordinated debt. The subordinated notes were each issued at a discount, and the September 2008 debt has a fixed coupon interest rate of 9.25%, while the August 2001 debt has a fixed coupon interest rate of 6.75%. Subordinated debt qualifies under the risk-based capital guidelines as Tier 2 supplementary capital for regulatory purposes, and is discounted in accordance with regulations when the debt has five years or less remaining to maturity.

Junior subordinated debentures: The Corporation has $180.4 million of junior subordinated debentures (“ASBC Debentures”), which carry a fixed rate of 7.625% and mature on June 15, 2032. Beginning May 30, 2007, the Corporation has had the right to redeem the ASBC Debentures, at par. The carrying value of the ASBC Debentures was $179.6 million at September 30, 2009. With its October 2005 acquisition, the Corporation acquired variable rate junior subordinated debentures at a premium (the “SFSC Debentures”), from two equal issuances (contractually $30.9 million on a combined basis), of which one pays a variable rate adjusted quarterly based on the 90-day LIBOR plus 2.80% (or 3.29% at September 30, 2009) and matures April 23, 2034, and the other which pays a variable rate adjusted quarterly based on the 90-day LIBOR plus 3.45% (or 3.89% at September 30, 2009) and matures November 7, 2032. The Corporation has the right to redeem the SFSC Debentures, at par, on a quarterly basis. The carrying value of the SFSC Debentures was $36.5 million at September 30, 2009.

NOTE 9: Other Comprehensive Income

A summary of activity in accumulated other comprehensive income follows.

		Nine Months Ended								Year Ended
		September 30,				September 30,				December 31,
		2009				2008				2008
		($ in Thousands)
Net income		$	41,378			$	151,593			$	168,452
Other comprehensive income (loss), net of tax:
Investment securities available for sale:
Net unrealized gains (losses)			119,436				(30,160	)			(8,817	)
Reclassification adjustment for net (gains)/losses realized in net income			(9,169	)			17,243				52,541
Accretion of investment securities with noncredit-related impairment losses not expected to be sold			316				—				—
Income tax (expense) benefit			(39,873	)			5,067				(16,559	)
Other comprehensive income (loss) on investment securities available for sale			70,710				(7,850	)			27,165
Defined benefit pension and postretirement obligations:
Prior service cost, net of amortization			348				356				472
Net gain (loss), net of amortization			233				225				(29,362	)
Income tax (expense) benefit			(227	)			(235	)			11,556
Other comprehensive income (loss) on pension and postretirement obligations			354				346				(17,334	)
Derivatives used in cash flow hedging relationships:
Net unrealized gains (losses)			6,236				(2,161	)			(16,679	)
Reclassification adjustment for net (gains) losses and interest expense for interest differential on derivatives realized in net income			(313	)			1,635				4,343
Income tax (expense) benefit			(2,378	)			196				5,058
Other comprehensive income (loss) on cash flow hedging relationships			3,545				(330	)			(7,278	)
Total other comprehensive income (loss)			74,609				(7,834	)			2,553
Comprehensive income		$	115,987			$	143,759			$	171,005

NOTE 10: Income Taxes

For the first nine months of 2009, the Corporation recognized income tax benefit of $35.8 million compared to income tax expense of $51.6 million for the first nine months of 2008. The reduction in income tax expense was primarily due to the level of pretax income between the comparable nine-month periods. In addition, during the first quarter of 2009 the Corporation recorded a $17.0 million net decrease in the valuation allowance on and changes to state deferred tax assets as a result of the recently enacted Wisconsin combined reporting tax legislation, while during the second quarter of 2009 the Corporation recorded a $5.0 million decrease in the valuation allowance on deferred tax assets. Also, the first quarter 2008 resolution of certain tax matters and changes in the estimated exposure of uncertain tax positions, partially offset by the increase in valuation allowance related to certain deferred tax assets, resulted in the net reduction of previously recorded tax liabilities and income tax expense of approximately $4.4 million.

NOTE 11: Derivative and Hedging Activities

The Corporation uses derivative instruments primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheet from changes in interest rates. The predominant derivative and hedging activities include interest rate swaps, interest rate caps, interest rate collars, and certain mortgage banking activities. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, interest rate swap agreements generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value changes exceed certain threshold limits which are determined from the credit ratings of each counterparty. The Corporation was required to pledge $68 million of investment securities and cash equivalents as collateral at September 30, 2009, and pledged $71 million of investment securities and cash equivalents as collateral at December 31, 2008.

The Corporation’s derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 13, “Fair Value Measurements,” for additional fair value information and disclosures.

The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments designated as cash flow hedges.

														Weighted Average
		Notional								Balance Sheet				Receive				Pay
		Amount				Fair Value				Category				Rate				Rate				Maturity
		($ in Thousands)
September 30, 2009
Interest rate swap – short-term borrowings		$	200,000			$	(8,388	)		Other liabilities					0.15	%			3.15	%		29 months
December 31, 2008
Interest rate swap – FHLB advance		$	200,000			$	(3,174	)		Other liabilities					1.38	%			4.42	%		6 months
Interest rate swap – short-term borrowings			200,000				(11,449	)		Other liabilities					0.15	%			3.15	%		38 months