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EX-32 - EXHIBIT 32 - ASSOCIATED BANC-CORPasb06302017ex32.htm
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED BANC-CORPasb06302017ex312.htm
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED BANC-CORPasb06302017ex311.htm
EX-10.2 - EXHIBIT 10.2 - ASSOCIATED BANC-CORPasb06302017ex102.htm
EX-10.1 - EXHIBIT 10.1 - ASSOCIATED BANC-CORPasb06302017ex101.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended June 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to 
 

Commission file number: 001-31343
Associated Banc-Corp
(Exact name of registrant as specified in its charter)

Wisconsin
  
39-1098068
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
 
 
433 Main Street
Green Bay, Wisconsin
  
54301
(Address of principal executive offices)
  
(Zip Code)

(920) 491-7500
(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  ¨
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 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 Exchange Act).
Yes  ¨        No  þ

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at July 27, 2017, was 151,342,987.

1




ASSOCIATED BANC-CORP
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
 
June 30, 2017
 
December 31, 2016
 
 (Unaudited)
 
 (Audited)
 
(In Thousands, except share and per share data)
ASSETS
 
 
 
Cash and due from banks
$
396,677

 
$
446,558

Interest-bearing deposits in other financial institutions
126,232

 
149,175

Federal funds sold and securities purchased under agreements to resell
43,000

 
46,500

Investment securities held to maturity, at amortized cost
2,255,395

 
1,273,536

Investment securities available for sale, at fair value
3,687,470

 
4,680,226

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost
181,180

 
140,001

Residential loans held for sale(1)
41,620

 
108,010

Commercial loans held for sale
4,772

 
12,474

Loans
20,783,069

 
20,054,716

Allowance for loan losses
(281,101
)
 
(278,335
)
Loans, net
20,501,968

 
19,776,381

Premises and equipment, net
328,404

 
330,315

Goodwill
972,006

 
971,951

Mortgage servicing rights, net
59,395

 
61,476

Other intangible assets
14,530

 
15,377

Trading assets
48,576

 
52,398

Other assets
1,107,800

 
1,074,937

Total assets
$
29,769,025

 
$
29,139,315

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Noninterest-bearing demand deposits
$
5,038,162

 
$
5,392,208

Interest-bearing deposits
16,580,018

 
16,496,240

Total deposits
21,618,180

 
21,888,448

Federal funds purchased and securities sold under agreements to repurchase
607,669

 
508,347

Other short-term funding
794,813

 
583,688

Long-term funding
3,262,120

 
2,761,795

Trading liabilities
47,143

 
51,103

Accrued expenses and other liabilities
247,598

 
254,622

Total liabilities
26,577,523

 
26,048,003

Stockholders’ equity
 
 
 
Preferred equity
159,929

 
159,929

Common equity:
 
 
 
Common stock
1,630

 
1,630

Surplus
1,474,301

 
1,459,498

Retained earnings
1,747,632

 
1,695,764

Accumulated other comprehensive income (loss)
(53,470
)
 
(54,679
)
Treasury stock, at cost
(138,520
)
 
(170,830
)
Total common equity
3,031,573

 
2,931,383

Total stockholders’ equity
3,191,502

 
3,091,312

Total liabilities and stockholders’ equity
$
29,769,025

 
$
29,139,315

Preferred shares issued
165,000

 
165,000

Preferred shares authorized (par value $1.00 per share)
750,000

 
750,000

Common shares issued
163,030,209

 
163,030,209

Common shares authorized (par value $0.01 per share)
250,000,000

 
250,000,000

Treasury shares of common stock
9,181,834

 
10,909,362

(1)
Effective January 1, 2017, residential loans originated for sale are accounted for under the fair value option. Prior periods have not been restated. For more information on this accounting policy change, please refer to Note 3 to the Notes to the Consolidated Financial Statements.

See accompanying notes to consolidated financial statements.

3



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income (Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands, except per share data)
INTEREST INCOME
 
Interest and fees on loans
$
184,246

 
$
163,059

 
$
357,895

 
$
322,715

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
23,658

 
24,270

 
47,133

 
49,786

Tax-exempt
8,143

 
7,894

 
16,272

 
15,724

Other interest
1,553

 
1,318

 
3,089

 
2,385

Total interest income
217,600

 
196,541

 
424,389

 
390,610

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
21,180

 
11,678

 
38,104

 
23,444

Interest on Federal funds purchased and securities sold under agreements to repurchase
824

 
378

 
1,339

 
674

Interest on other short-term funding
1,827

 
845

 
2,907

 
1,360

Interest on long-term funding
9,950

 
6,923

 
17,946

 
16,428

Total interest expense
33,781

 
19,824

 
60,296

 
41,906

NET INTEREST INCOME
183,819

 
176,717

 
364,093

 
348,704

Provision for credit losses
12,000

 
14,000

 
21,000

 
34,000

Net interest income after provision for credit losses
171,819

 
162,717

 
343,093

 
314,704

NONINTEREST INCOME
 
 
 
 
 
 
 
Trust service fees
12,346

 
11,509

 
24,281

 
22,956

Service charges on deposit accounts
16,030

 
16,444

 
32,386

 
32,717

Card-based and other nondeposit fees
13,764

 
12,717

 
26,229

 
24,708

Insurance commissions
20,853

 
22,005

 
42,473

 
43,387

Brokerage and annuity commissions
4,346

 
4,098

 
8,679

 
7,892

Mortgage banking, net
5,027

 
4,067

 
9,606

 
8,271

Capital market fees, net
4,042

 
3,793

 
7,925

 
7,331

Bank owned life insurance income
3,899

 
2,973

 
6,514

 
7,743

Asset gains (losses), net 
(466
)
 
(343
)
 
(700
)
 
181

Investment securities gains, net
356

 
3,116

 
356

 
6,214

Other
2,213

 
1,789

 
4,492

 
3,960

Total noninterest income
82,410

 
82,168

 
162,241

 
165,360

NONINTEREST EXPENSE
 
 
 
 
 
 
 
Personnel expense
104,683

 
102,129

 
209,102

 
203,527

Occupancy
12,832

 
13,215

 
28,051

 
27,017

Equipment
5,234

 
5,396

 
10,719

 
10,842

Technology
15,473

 
14,450

 
29,893

 
28,714

Business development and advertising
7,152

 
6,591

 
12,987

 
14,802

Other intangible amortization
496

 
539

 
1,009

 
1,043

Loan expense
2,974

 
3,442

 
5,594

 
6,663

Legal and professional fees
5,711

 
4,856

 
9,877

 
9,881

Foreclosure / OREO expense, net 
1,182

 
1,330

 
2,687

 
3,207

FDIC expense
8,000

 
8,750

 
16,000

 
16,500

Other
12,579

 
13,662

 
24,088

 
26,135

Total noninterest expense
176,316

 
174,360

 
350,007

 
348,331

Income before income taxes
77,913

 
70,525

 
155,327

 
131,733

Income tax expense
19,930

 
21,434

 
41,074

 
40,108

Net income
57,983

 
49,091

 
114,253

 
91,625

Preferred stock dividends
2,339

 
2,169

 
4,669

 
4,367

Net income available to common equity
$
55,644

 
$
46,922

 
$
109,584

 
$
87,258

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.31

 
$
0.72

 
$
0.58

Diluted
$
0.36

 
$
0.31

 
$
0.71

 
$
0.58

Average common shares outstanding:
 
 
 
 
 
 
 
Basic
151,573

 
148,511

 
151,196

 
148,556

Diluted
154,302

 
149,530

 
154,147

 
149,518

 
See accompanying notes to consolidated financial statements.

4



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
2016
2017
2016
 
($ in Thousands)
Net income
$
57,983

$
49,091

$
114,253

$
91,625

Other comprehensive income, net of tax:
 
 
 
 
Investment securities available for sale:
 
 
 
 
Net unrealized gains
15,218

22,321

18,370

82,743

Net unrealized loss on available for sale securities transferred to held to maturity securities
(9,474
)

(14,738
)

Amortization of net unrealized gains on available for sale securities transferred to held to maturity securities
(1,548
)
(1,452
)
(2,575
)
(3,024
)
Reclassification adjustment for net gains realized in net income (1)

(3,116
)

(6,214
)
Income tax expense
(1,601
)
(6,773
)
(406
)
(28,048
)
Other comprehensive income on investment securities available for sale
2,595

10,980

651

45,457

Defined benefit pension and postretirement obligations:
 
 
 
 
Amortization of prior service cost
(37
)
12

(75
)
25

Amortization of actuarial loss
487

483

975

965

Income tax expense
(171
)
(189
)
(342
)
(378
)
Other comprehensive income on pension and postretirement obligations
279

306

558

612

Total other comprehensive income
2,874

11,286

1,209

46,069

Comprehensive income
$
60,857

$
60,377

$
115,462

$
137,694

(1)
Includes only available for sale securities.

See accompanying notes to consolidated financial statements.


5



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
 
Preferred Equity
 
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
 
(In Thousands, except per share data)
Balance, December 31, 2015
$
121,379

 
$
1,642

 
$
1,458,522

 
$
1,593,239

 
$
(32,616
)
 
$
(204,920
)
 
$
2,937,246

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
91,625

 

 

 
91,625

Other comprehensive income

 

 

 

 
46,069

 

 
46,069

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
137,694

Common stock issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation plans, net

 

 
1,153

 
(17,478
)
 

 
20,601

 
4,276

Purchase of common stock returned to authorized but unissued

 
(12
)
 
(19,995
)
 

 

 

 
(20,007
)
Purchase of treasury stock

 

 

 

 

 
(4,018
)
 
(4,018
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.22 per share

 

 

 
(33,034
)
 

 

 
(33,034
)
Preferred stock

 

 

 
(4,367
)
 

 

 
(4,367
)
Purchase of preferred stock
(1,178
)
 

 

 
(70
)
 

 

 
(1,248
)
Stock-based compensation expense, net

 

 
13,210

 

 

 

 
13,210

Tax impact of stock-based compensation

 

 
395

 

 

 

 
395

Balance, June 30, 2016
$
120,201

 
$
1,630

 
$
1,453,285

 
$
1,629,915

 
$
13,453

 
$
(188,337
)
 
$
3,030,147

Balance, December 31, 2016
$
159,929

 
$
1,630

 
$
1,459,498

 
$
1,695,764

 
$
(54,679
)
 
$
(170,830
)
 
$
3,091,312

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
114,253

 

 

 
114,253

Other comprehensive income

 

 

 

 
1,209

 

 
1,209

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
115,462

Common stock issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation plans, net

 

 
1,102

 
(20,912
)
 

 
40,755

 
20,945

Purchase of treasury stock

 

 

 

 

 
(8,445
)
 
(8,445
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.24 per share

 

 

 
(36,804
)
 

 

 
(36,804
)
Preferred stock

 

 

 
(4,669
)
 

 

 
(4,669
)
Stock-based compensation expense, net

 

 
12,667

 

 

 

 
12,667

Other

 

 
1,034

 

 

 

 
1,034

Balance, June 30, 2017
$
159,929

 
$
1,630

 
$
1,474,301

 
$
1,747,632

 
$
(53,470
)
 
$
(138,520
)
 
$
3,191,502

See accompanying notes to consolidated financial statements.

6



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
 
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
114,253

 
$
91,625

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
    Provision for credit losses
21,000

 
34,000

    Depreciation and amortization
23,241

 
22,914

    Addition to valuation allowance on mortgage servicing rights, net
275

 
2,120

    Amortization of mortgage servicing rights
5,084

 
5,896

    Amortization of other intangible assets
1,009

 
1,043

    Amortization and accretion on earning assets, funding, and other, net
17,889

 
22,045

    Tax impact of stock based compensation
4,035

 
395

    Gain on sales of investment securities, net
(356
)
 
(6,214
)
    Asset (gains) losses, net
700

 
(181
)
    (Gain) loss on mortgage banking activities, net
4,287

 
(7,058
)
    Mortgage loans originated and acquired for sale
(220,284
)
 
(517,838
)
    Proceeds from sales of mortgage loans held for sale
364,128

 
491,980

    Increase in interest receivable
(757
)
 
(4,875
)
    Increase (decrease) in interest payable
2,653

 
(4,739
)
    Net change in other assets and other liabilities
(38,650
)
 
(25,836
)
Net cash provided by operating activities
298,507

 
105,277

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans
(819,198
)
 
(1,281,291
)
Purchases of:
 
 
 
  Available for sale securities
(417,397
)
 
(495,453
)
  Held to maturity securities
(70,969
)
 
(112,226
)
  Federal Home Loan Bank and Federal Reserve Bank stocks
(166,869
)
 
(67,261
)
  Premises, equipment, and software, net of disposals
(19,289
)
 
(81,461
)
  Other assets
(6,498
)
 
(3,073
)
Proceeds from:
 
 
 
  Sales of available for sale securities

 
359,484

  Sales of held to maturity securities
16,059

 

  Sale of Federal Home Loan Bank and Federal Reserve Bank stocks
125,690

 
20,000

  Prepayments, calls, and maturities of available for sale investment securities
389,251

 
371,440

  Prepayments, calls, and maturities of held to maturity investment securities
80,976

 
37,172

  Sales, prepayments, calls, and maturities of other assets
6,353

 
13,362

  Net cash paid in acquisition
(217
)
 
(685
)
Net cash used in investing activities
(882,108
)
 
(1,239,992
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in deposits
(270,268
)
 
(714,815
)
Net increase in short-term funding
310,447

 
1,077,141

Repayment of long-term funding
(12
)
 
(430,018
)
Proceeds from issuance of long-term funding
500,000

 
1,265,000

Proceeds from issuance of common stock for stock-based compensation plans
20,945

 
4,276

Purchase of preferred stock

 
(1,248
)
Purchase of common stock returned to authorized but unissued

 
(20,007
)
Purchase of treasury stock for tax withholding
(8,445
)
 
(4,018
)
Cash dividends on common stock
(36,804
)
 
(33,034
)
Cash dividends on preferred stock
(4,669
)
 
(4,367
)
Net cash provided (used) by financing activities
511,194

 
1,138,910

Net increase (decrease) in cash and cash equivalents
(72,407
)
 
4,195

Cash and cash equivalents at beginning of period
642,233

 
473,685

Cash and cash equivalents at end of period
$
569,826

 
$
477,880

Supplemental disclosures of cash flow information:
 
 
 
   Cash paid for interest
$
57,306

 
$
46,316

   Cash paid for income taxes
27,461

 
27,852

   Loans and bank premises transferred to other real estate owned
3,267

 
4,704

   Capitalized mortgage servicing rights
3,278

 
4,149

   Loans transferred into held for sale from portfolio, net
62,264

 
130,694

Acquisition:
 
 
 
   Fair value of assets acquired, including cash and cash equivalents

 
522

   Fair value ascribed to goodwill and intangible assets
217

 
4,119

   Fair value of liabilities assumed

 
1,423

See accompanying notes to consolidated financial statements.

7



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with U.S. generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in the Corporation's 2016 Annual Report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements.
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and comprehensive income, changes in stockholders’ equity, and cash flows of Associated Banc-Corp (individually referred to herein as the “Parent Company,” and together with all of its subsidiaries and affiliates, collectively referred to herein as the “Corporation”) for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, goodwill impairment assessment, mortgage servicing rights valuation, and income taxes. Management has evaluated subsequent events for potential recognition or disclosure.
Note 2 Acquisitions
During the first quarter of 2017, the Corporation completed a small insurance acquisition to complement its existing insurance and benefits related products and services provided by Associated Benefits and Risk Consulting ("ABRC"). The Corporation recorded goodwill of $55,000 and other intangibles of $162,000 related to the insurance acquisition.
During the first quarter of 2016, the Corporation completed two small insurance acquisitions to complement its existing insurance and benefits related products and services provided by ABRC. The Corporation recorded goodwill of $3 million and other intangibles of $1 million related to these insurance acquisitions.
See Note 8 for additional information on goodwill and other intangible assets.

8



Note 3 Summary of Significant Accounting Policies
Accounting Policy Elections
Effective January 1, 2017, residential mortgage loans that are classified as held for sale are accounted using the fair value option method of accounting. The Corporation has elected the fair value option to mitigate accounting mismatches between held for sale loan valuations and corresponding derivative commitments. Prior to January 1, 2017, residential mortgage loans that were classified as held for sale were accounted for at the lower of cost or market method (“LOCOM”) of accounting.

New Accounting Pronouncements Adopted
Standard
 
Description
 
Date of adoption
 
Effect on financial statements
ASU 2017-08 Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities
 
The amendments of the new standard require that certain purchased callable debt securities held at a premium be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to be amortized to maturity.
 
1st Quarter 2017
 
The Corporation early adopted with no material impact on results of operations, financial position, or liquidity.
ASU 2017-03 Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)
 
The standard states that for ASUs which have not been adopted yet, the registrant needs to determine the potential effects (if material) of those ASUs on the financial statements when adopted and include the appropriate disclosures in the financial statements. If the impact of adoption is unknown or cannot be estimated, the registrant should include a statement noting this and consider adding qualitative disclosures to the financial statements to assist the reader in evaluating the impact of the ASUs, when adopted, on the financial statements.
 
1st Quarter 2017
 
No material impact on results of operations, financial position, or liquidity.
ASU 2016-17 Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
 
The FASB issued an amendment to address how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity.
 
1st Quarter 2017
 
No material impact on results of operations, financial position, or liquidity.
ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
 
The FASB issued an amendment involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Entities should apply the amendment related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Entities should apply the amendment related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement retrospectively. The amendment requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively.

 
4th Quarter 2016
 
The Corporation early adopted the accounting standard and recognized a $1 million reduction in income taxes for the excess tax benefits on stock-based compensation. The remaining provisions of this accounting standard did not have a material impact.
ASU 2016-07 Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
 
The FASB issued an amendment to eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. Entities should apply the amendment prospectively to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.
 
1st Quarter 2017
 
No material impact on results of operations, financial position, or liquidity.

9



Note 4 Earnings Per Common Share
Earnings per common share are calculated utilizing the two-class method. Basic earnings per common 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 common share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock awards) and common stock warrants. Presented below are the calculations for basic and diluted earnings per common share.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Net income
$
57,983

 
$
49,091

 
$
114,253

 
$
91,625

Preferred stock dividends
(2,339
)
 
(2,169
)
 
(4,669
)
 
(4,367
)
Net income available to common equity
$
55,644

 
$
46,922

 
$
109,584

 
$
87,258

Common shareholder dividends
(18,326
)
 
(16,443
)
 
(36,577
)
 
(32,646
)
Unvested share-based payment awards
(110
)
 
(182
)
 
(227
)
 
(388
)
Undistributed earnings
$
37,208

 
$
30,297

 
$
72,780

 
$
54,224

Undistributed earnings allocated to common shareholders
36,980

 
29,963

 
72,273

 
53,649

Undistributed earnings allocated to unvested share-based payment awards
228

 
334

 
507

 
575

Undistributed earnings
$
37,208

 
$
30,297

 
$
72,780

 
$
54,224

Basic
 
 
 
 
 
 
 
Distributed earnings to common shareholders
$
18,326

 
$
16,443

 
$
36,577

 
$
32,646

Undistributed earnings allocated to common shareholders
36,980

 
29,963

 
72,273

 
53,649

Total common shareholders earnings, basic
$
55,306

 
$
46,406

 
$
108,850

 
$
86,295

Diluted
 
 
 
 
 
 
 
Distributed earnings to common shareholders
$
18,326

 
$
16,443

 
$
36,577

 
$
32,646

Undistributed earnings allocated to common shareholders
36,980

 
29,963

 
72,273

 
53,649

Total common shareholders earnings, diluted
$
55,306

 
$
46,406

 
$
108,850

 
$
86,295

Weighted average common shares outstanding
151,573

 
148,511

 
151,196

 
148,556

Effect of dilutive common stock awards
1,958

 
1,019

 
2,155

 
962

Effect of dilutive common stock warrants
771

 

 
796

 

Diluted weighted average common shares outstanding
154,302

 
149,530

 
154,147

 
149,518

Basic earnings per common share
$
0.36

 
$
0.31

 
$
0.72

 
$
0.58

Diluted earnings per common share
$
0.36

 
$
0.31

 
$
0.71

 
$
0.58

Anti-dilutive common stock options of approximately 1 million and 4 million for the three months ended June 30, 2017 and 2016, respectively, and 900,000 and 4 million for the six months ended June 30, 2017 and 2016, respectively, were excluded from the earnings per common share calculation. Warrants to purchase approximately 4 million shares were outstanding for the three and six months ended June 30, 2016, but excluded from the calculation of diluted earnings per common shares as the effect would have been anti-dilutive.
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 awards is their fair market value on the date of grant. The fair values of stock options and restricted stock awards are amortized as compensation expense on a straight-line basis over the vesting period of the grants. For retirement eligible colleagues, expenses related to stock options and restricted stock awards are fully recognized on the date the colleague meets the definition of normal or early retirement. 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 implied volatility of the Corporation’s stock.

10



The following assumptions were used in estimating the fair value for options granted in the first six months of 2017 and full year 2016.
 
2017
 
2016
Dividend yield
2.00
%
 
2.50
%
Risk-free interest rate
2.00
%
 
2.00
%
Weighted average expected volatility
25.00
%
 
25.00
%
Weighted average expected life
5.5 years

 
5.5 years

Weighted average per share fair value of options
$5.30
 
$3.36
A summary of the Corporation’s stock option activity for the six months ended June 30, 2017 is presented below.
Stock Options
Shares
 
Weighted Average
Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value (000s)
Outstanding at December 31, 2016
6,357,843

 
$
17.67

 
6.10
 
$
47,902

Granted
799,558

 
$
25.61

 
 
 
 
Exercised
(1,217,640
)
 
16.27

 
 
 
 
Forfeited or expired
(447,751
)
 
33.58

 
 
 
 
Outstanding at June 30, 2017
5,492,010

 
$
18.10

 
6.80
 
$
39,339

Options Exercisable at June 30, 2017
3,120,596

 
$
16.53

 
5.47
 
$
27,075

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock option. For the six months ended June 30, 2017, the intrinsic value of stock options exercised was approximately $11 million. For the six months ended June 30, 2016, the intrinsic value of the stock options exercised was $1 million. The total fair value of stock options vested was $4 million and $3 million, respectively, for the six months ended June 30, 2017 and June 30, 2016. The Corporation recognized compensation expense for the vesting of stock options of $2 million for both the six months ended June 30, 2017 and June 30, 2016. Included in compensation expense for 2017 was approximately $570,000 of expense for the accelerated vesting of stock options granted to retirement eligible colleagues. At June 30, 2017, the Corporation had approximately $7 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 the first quarter 2021.
The following table summarizes information about the Corporation’s restricted stock activity for the six months ended June 30, 2017.
Restricted Stock
Shares
 
Weighted Average
Grant Date Fair Value
Outstanding at December 31, 2016
2,377,380

 
$
17.40

Granted
737,080

 
25.58

Vested
(851,381
)
 
17.88

Forfeited
(61,616
)
 
18.41

Outstanding at June 30, 2017
2,201,463

 
$
19.94

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period specified in the grant. Performance-based restricted stock awards granted during 2016 and 2017 will vest ratably over a three year period, while service-based restricted stock awards granted during 2016 and 2017 will vest ratably over a four year period. Expense for restricted stock awards of approximately $11 million were recorded for both the six months ended June 30, 2017 and June 30, 2016. Included in compensation expense for 2017 was approximately $2 million of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $26 million of unrecognized compensation costs related to restricted stock awards at June 30, 2017, that is expected to be recognized over the remaining requisite service periods that extend predominantly through the first quarter 2021.
The Corporation has the ability to issue shares from treasury or new shares upon the exercise of stock options or the granting of restricted stock awards. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock 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 and investment opportunities, capital levels, growth prospects, and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.

11



Note 6 Investment Securities
Investment securities are generally classified as available for sale or held to maturity at the time of purchase. The majority of the Corporation's investment securities are mortgage-related securities issued by the Government National Mortgage Association (“GNMA”) or government-sponsored enterprises ("GSE") such as the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). The amortized cost and fair values of securities available for sale and held to maturity were as follows.
 
June 30, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,004

 
$

 
$
(2
)
 
$
1,002

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
534,058

 
13,873

 
(1,406
)
 
546,525

 
GNMA
1,729,386

 
1,894

 
(17,102
)
 
1,714,178

 
Private-label
1,102

 

 
(16
)
 
1,086

 
GNMA commercial mortgage-related securities
1,443,501

 
74

 
(23,703
)
 
1,419,872

 
Other securities (debt and equity)
4,718

 
116

 
(27
)
 
4,807

 
Total investment securities available for sale
$
3,713,769

 
$
15,957

 
$
(42,256
)
 
$
3,687,470

 
Investment securities held to maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
$
1,162,920

 
$
13,766

 
$
(4,320
)
 
$
1,172,366

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
43,575

 
430

 
(566
)
 
43,439

 
GNMA
473,517

 
4,048

 
(3,214
)
 
474,351

 
GNMA commercial mortgage-related securities
575,383

 
8,964

 
(11,181
)
 
573,166

 
Total investment securities held to maturity
$
2,255,395

 
$
27,208

 
$
(19,281
)
 
$
2,263,322

 
December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,000

 
$

 
$

 
$
1,000

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
625,234

 
17,298

 
(2,602
)
 
639,930

 
GNMA
2,028,301

 
1,372

 
(25,198
)
 
2,004,475

 
Private-label
1,134

 
1

 
(14
)
 
1,121

 
GNMA commercial mortgage-related securities
2,064,508

 
356

 
(35,966
)
 
2,028,898

 
Other securities (debt and equity)
4,718

 
105

 
(21
)
 
4,802

 
Total investment securities available for sale
$
4,724,895

 
$
19,132

 
$
(63,801
)
 
$
4,680,226

 
Investment securities held to maturity:
 
 
 
 
 
 
 
 
Municipal securities
$
1,145,843

 
$
3,868

 
$
(12,036
)
 
$
1,137,675

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
37,697

 
439

 
(693
)
 
37,443

 
GNMA
89,996

 
216

 
(656
)
 
89,556

 
Total investment securities held to maturity
$
1,273,536

 
$
4,523

 
$
(13,385
)
 
$
1,264,674


12



The amortized cost and fair values of investment securities available for sale and held to maturity at June 30, 2017, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Available for Sale
 
Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
($ in Thousands)
Due in one year or less
$
1,500

 
$
1,506

 
$
41,085

 
$
33,447

Due after one year through five years
4,204

 
4,175

 
239,986

 
246,760

Due after five years through ten years

 

 
261,149

 
265,255

Due after ten years

 

 
620,700

 
626,904

Total debt securities
5,704

 
5,681

 
1,162,920

 
1,172,366

Residential mortgage-related securities:
 
 
 
 
 
 
 
FNMA / FHLMC
534,058

 
546,525

 
43,575

 
43,439

GNMA
1,729,386

 
1,714,178

 
473,517

 
474,351

Private-label
1,102

 
1,086

 

 

GNMA commercial mortgage-related securities
1,443,501

 
1,419,872

 
575,383

 
573,166

Equity securities
18

 
128

 

 

Total investment securities
$
3,713,769

 
$
3,687,470

 
$
2,255,395

 
$
2,263,322

Ratio of Fair Value to Amortized Cost
 
 
99.3
%
 
 
 
100.4
%
During the first six months of 2017, the Corporation reclassified approximately $1 billion of GNMA residential mortgage-related securities and GNMA commercial mortgage-related securities from available for sale to held to maturity. The GNMA residential and commercial mortgage-related securities are principally securities with a CRA component in the underlying collateral. The reclassification of these investment securities was accounted for at fair value. Management elected to transfer these investment securities as the Corporation has the positive intent and ability to hold these investment securities to maturity.
The proceeds from the sale of investment securities for the first six months ended June 30, 2017 and 2016 are shown below.
 
Six Months Ended June 30,
 
2017
 
2016
 
($ in Thousands)
Gross gains on available for sale securities
$

 
$
6,403

Gross gains on held to maturity securities
361

 

Total gains
361

 
6,403

Gross losses on available for sale securities

 
(189
)
Gross losses on held to maturity securities
$
(5
)
 
$

Total losses
$
(5
)
 
$
(189
)
Investment securities gains, net
$
356

 
$
6,214

Proceeds from sales of investment securities
$
16,059

 
$
359,484

During the first six months of 2017, the Corporation sold approximately $16 million of municipal securities classified as held to maturity due to credit concerns stemming from budgetary pressure and continued credit rating deterioration concerns in the State of Illinois. These sales resulted in a net gain of approximately $356,000.
Investment securities with a carrying value of approximately $2 billion and $1.8 billion at June 30, 2017, and December 31, 2016, respectively, were pledged to secure certain deposits or for other purposes as required or permitted by law.

13



The following represents gross unrealized losses and the related fair value of investment securities available for sale and held to maturity, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at June 30, 2017.
 
Less than 12 months
 
12 months or more
 
Total
June 30, 2017
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
($ in Thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
1

 
$
(2
)
 
$
1,002

 

 
$

 
$

 
$
(2
)
 
$
1,002

Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
18

 
(1,406
)
 
223,326

 

 

 

 
(1,406
)
 
223,326

GNMA
42

 
(16,220
)
 
1,186,468

 
1

 
(882
)
 
35,695

 
(17,102
)
 
1,222,163

Private-label

 

 

 
1

 
(16
)
 
1,084

 
(16
)
 
1,084

GNMA commercial mortgage-related securities
54

 
(8,627
)
 
850,180

 
31

 
(15,076
)
 
496,698

 
(23,703
)
 
1,346,878

Other securities (debt and equity)
3

 
(27
)
 
2,173

 

 

 

 
(27
)
 
2,173

Total
118

 
$
(26,282
)
 
$
2,263,149

 
33

 
$
(15,974
)
 
$
533,477

 
$
(42,256
)
 
$
2,796,626

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
301

 
$
(4,186
)
 
$
222,642

 
9

 
$
(134
)
 
$
4,814

 
$
(4,320
)
 
$
227,456

Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
18

 
(377
)
 
25,507

 
1

 
(189
)
 
5,657

 
(566
)
 
31,164

GNMA
45

 
(3,192
)
 
358,551

 
1

 
(22
)
 
1,246

 
(3,214
)
 
359,797

GNMA commercial mortgage-related securities
14

 
(3,683
)
 
301,594

 
10

 
(7,498
)
 
241,385

 
(11,181
)
 
542,979

Total
378

 
$
(11,438
)
 
$
908,294

 
21

 
$
(7,843
)
 
$
253,102

 
$
(19,281
)
 
$
1,161,396

For comparative purposes, the following represents gross unrealized losses and the related fair value of investment securities available for sale and held to maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2016.
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
($ in Thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
14

 
$
(2,602
)
 
$
244,252

 

 
$

 
$

 
$
(2,602
)
 
$
244,252

GNMA
54

 
(25,198
)
 
1,723,523

 

 

 

 
(25,198
)
 
1,723,523

Private-label

 

 

 
1

 
(14
)
 
1,119

 
(14
)
 
1,119

GNMA commercial mortgage-related securities
74

 
(16,445
)
 
1,427,889

 
21

 
(19,521
)
 
429,258

 
(35,966
)
 
1,857,147

Other securities (debt and equity)
3

 
(21
)
 
1,479

 

 

 

 
(21
)
 
1,479

Total
145

 
$
(44,266
)
 
$
3,397,143

 
22

 
$
(19,535
)
 
$
430,377

 
$
(63,801
)
 
$
3,827,520

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
700

 
$
(11,937
)
 
$
414,186

 
4

 
$
(99
)
 
$
1,752

 
$
(12,036
)
 
$
415,938

Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
14

 
(441
)
 
17,477

 
1

 
(252
)
 
6,031

 
(693
)
 
23,508

GNMA
39

 
(656
)
 
64,633

 

 

 

 
(656
)
 
64,633

Total
753

 
$
(13,034
)
 
$
496,296

 
5

 
$
(351
)
 
$
7,783

 
$
(13,385
)
 
$
504,079

The Corporation reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Corporation may consider in the other-than-temporary impairment analysis include, the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

14



Based on the Corporation’s evaluation, management does not believe any unrealized loss at June 30, 2017, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and the current market conditions, and not credit deterioration. The unrealized losses reported for municipal securities relate to various state and local political subdivisions and school districts. 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.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stocks: The Corporation is required to maintain Federal Reserve stock and FHLB stock as a member of both the Federal Reserve System and the FHLB, and in amounts as required by these institutions. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value is equal to amortized cost. At June 30, 2017, and December 31, 2016, the Corporation had FHLB stock of $106 million and $65 million, respectively. The Corporation had Federal Reserve Bank stock of $76 million and $75 million at June 30, 2017 and December 31, 2016, respectively.
Note 7 Loans
The period end loan composition was as follows.
 
June 30,
2017
 
December 31,
2016
 
($ in Thousands)
Commercial and industrial
$
6,571,000

 
$
6,489,014

Commercial real estate — owner occupied
845,336

 
897,724

Commercial and business lending
7,416,336

 
7,386,738

Commercial real estate — investor
3,329,585

 
3,574,732

Real estate construction
1,651,805

 
1,432,497