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Section 1: 10-Q (FORM 10-Q)

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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 March 31, 2018
¨
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)
 
 
 
Emerging growth 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

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 April 27, 2018 was 170,794,622.

1




ASSOCIATED BANC-CORP
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
(Audited)
 
(In Thousands, except share and per share data)
Assets
 
 
 
Cash and due from banks
$
328,260

 
$
483,666

Interest-bearing deposits in other financial institutions
94,918

 
199,702

Federal funds sold and securities purchased under agreements to resell
10,000

 
32,650

Investment securities held to maturity, at amortized cost
2,443,203

 
2,282,853

Investment securities available for sale, at fair value
4,485,875

 
4,043,446

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost
233,216

 
165,331

Residential loans held for sale
103,953

 
85,544

Commercial loans held for sale
6,091

 

Loans
22,810,491

 
20,784,991

Allowance for loan losses
(257,058
)
 
(265,880
)
Loans, net
22,553,433

 
20,519,111

Bank and corporate owned life insurance
657,841

 
591,057

Tax credit and other investments
142,368

 
147,099

Trading assets
102,890

 
69,675

Premises and equipment, net
381,327

 
330,963

Goodwill
1,153,156

 
976,239

Mortgage servicing rights, net
66,407

 
58,384

Other intangible assets, net
79,714

 
15,580

Other assets
523,855

 
482,294

Total assets
$
33,366,505

 
$
30,483,594

Liabilities and Stockholders' Equity
 
 
 
Noninterest-bearing demand deposits
$
5,458,473

 
$
5,478,416

Interest-bearing deposits
18,367,129

 
17,307,546

Total deposits
23,825,602

 
22,785,962

Federal funds purchased and securities sold under agreements to repurchase
283,954

 
324,815

Other short-term funding
1,862,420

 
351,467

Long-term funding
3,233,338

 
3,397,450

Trading liabilities
100,247

 
67,660

Accrued expenses and other liabilities
348,246

 
318,797

Total liabilities
29,653,806

 
27,246,151

Stockholders’ Equity
 
 
 
Preferred equity
159,853

 
159,929

Common equity
 
 
 
Common stock
1,741

 
1,618

Surplus
1,823,800

 
1,454,188

Retained earnings
1,859,068

 
1,819,230

Accumulated other comprehensive income (loss)
(107,673
)
 
(62,758
)
Treasury stock, at cost
(24,089
)
 
(134,764
)
Total common equity
3,552,847

 
3,077,514

Total stockholders’ equity
3,712,699

 
3,237,443

Total liabilities and stockholders’ equity
$
33,366,505

 
$
30,483,594

Preferred shares issued
165,000

 
165,000

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

 
750,000

Common shares issued
174,107,786

 
161,751,975

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

 
250,000,000

Treasury shares of common stock
1,925,673

 
8,908,448

Numbers may not add due to rounding.
See accompanying notes to consolidated financial statements.

3



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income (Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
(In Thousands, except per share data)
Interest Income
 
Interest and fees on loans
$
220,034

 
$
173,649

Interest and dividends on investment securities:
 
 
 
Taxable
30,104

 
23,475

Tax-exempt
9,217

 
8,129

Other interest
2,177

 
1,536

Total interest income
261,532

 
206,789

Interest Expense
 
 
 
Interest on deposits
33,412

 
16,924

Interest on Federal funds purchased and securities sold under agreements to repurchase
522

 
515

Interest on other short-term funding
3,005

 
1,080

Interest on long-term funding
14,722

 
7,996

Total interest expense
51,661

 
26,515

Net Interest Income
209,871

 
180,274

Provision for credit losses

 
9,000

Net interest income after provision for credit losses
209,871

 
171,274

Noninterest Income
 
 
 
Insurance commissions and fees
22,648

 
21,620

Service charges on deposit account fees
16,420

 
16,356

Card-based and loan fees
13,422

 
12,465

Trust and asset management fees
13,369

 
11,935

Brokerage commission and fees
7,273

 
4,333

Mortgage banking, net
6,370

 
4,579

Capital markets, net
5,306

 
3,883

Bank and corporate owned life insurance
3,187

 
2,615

Asset gains (losses), net 
(107
)
 
(234
)
Other
2,492

 
2,279

Total noninterest income
90,380

 
79,831

Noninterest Expense
 
 
 
Personnel (1)
117,685

 
106,782

Occupancy
15,357

 
15,219

Technology
17,715

 
14,420

Equipment
5,556

 
5,485

Business development and advertising
6,693

 
5,835

Legal and professional
5,413

 
4,166

Card issuance and loan costs
3,304

 
2,620

Foreclosure / OREO expense, net
723

 
1,505

FDIC assessment
8,250

 
8,000

Other intangible amortization
1,525

 
513

Acquisition related costs(2)
20,605

 

Other(1)
10,140

 
9,146

Total noninterest expense
212,965

 
173,691

Income before income taxes
87,285

 
77,414

Income tax expense
17,829

 
21,144

Net Income
69,456

 
56,270

Preferred stock dividends
2,339

 
2,330

Net income available to common equity
$
67,117

 
$
53,940

Earnings per common share:
 
 
 
Basic
$
0.41

 
$
0.36

Diluted
$
0.40

 
$
0.35

Average common shares outstanding:
 
 
 
Basic
163,520

 
150,815

Diluted
166,432

 
153,869

Numbers may not add due to rounding.
(1) 
During the first quarter of 2018, the Corporation adopted a new accounting standard related to the presentation of net periodic pension cost and net periodic postretirement benefit cost which required the disaggregation of the service cost component from the other components of net benefit cost and net periodic postretirement benefit cost. Under this new accounting standard, the other components of net benefit cost and net periodic postretirement benefit cost were reclassified from personnel expense to other noninterest expense. All prior periods have been adjusted to reflect this change in presentation.
(2)  
Includes Bank Mutual acquisition-related costs only.
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 March 31,
 
2018
2017
 
($ in Thousands)
Net income
$
69,456

$
56,270

Other comprehensive income, net of tax
 
 
Investment securities available for sale
 
 
Net unrealized gains (losses)
(41,834
)
3,152

Net unrealized gain (loss) on available for sale securities transferred to held to maturity securities

(5,264
)
Amortization of net unrealized gain (loss) on available for sale securities transferred to held to maturity securities
(297
)
(1,027
)
Reclassification from OCI due to change in accounting principle
(84
)

Reclassification of certain tax effects from OCI
(8,419
)

Income tax (expense) benefit
10,635

1,195

Other comprehensive income (loss) on investment securities available for sale
(40,000
)
(1,944
)
Defined benefit pension and postretirement obligations
 
 
Amortization of prior service cost
(38
)
(38
)
Amortization of actuarial loss (gains)
465

488

Reclassification of certain tax effects from OCI
(5,235
)

Income tax (expense) benefit
(107
)
(171
)
Other comprehensive income (loss) on pension and postretirement obligations
(4,915
)
279

Total other comprehensive income (loss)
(44,915
)
(1,665
)
Comprehensive income
$
24,541

$
54,605

Numbers may not add due to rounding.

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, 2016
$
159,929

$
1,630

$
1,459,498

$
1,695,764

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

Comprehensive income
 
 
 
 
 
 
 
Net income



56,270



56,270

Other comprehensive income




(1,665
)

(1,665
)
Comprehensive income
 
 
 
 
 
 
54,605

Common stock issued
 
 
 
 
 
 
 
Stock-based compensation plans, net


868

(21,822
)

38,894

17,940

Purchase of treasury stock





(7,743
)
(7,743
)
Cash dividends
 
 
 
 
 
 
 
Common stock, $0.12 per share



(18,368
)


(18,368
)
Preferred stock



(2,330
)


(2,330
)
Stock-based compensation expense, net


8,344




8,344

Other


1,034




1,034

Balance, March 31, 2017
$
159,929

$
1,630

$
1,469,744

$
1,709,514

$
(56,344
)
$
(139,679
)
$
3,144,794

 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
159,929

$
1,618

$
1,454,188

$
1,819,230

$
(62,758
)
$
(134,764
)
$
3,237,443

Comprehensive income
 
 
 
 
 
 
 
Net income



69,456



69,456

Other comprehensive income




(31,177
)

(31,177
)
Adoption of new accounting standards




(13,738
)

(13,738
)
Comprehensive income
 
 
 
 
 
 
24,541

Common stock issued
 
 
 
 
 
 
 
Stock-based compensation plans, net


2,148

(16,076
)

24,619

10,691

Acquisition of Bank Mutual

134

390,258



91,296

481,688

Purchase of common stock returned to authorized but unissued


(11
)
(26,469
)



(26,480
)
Purchase of treasury stock





(5,240
)
(5,240
)
Cash dividends
 
 
 
 
 
 
 
Common stock, $0.15 per share



(25,710
)


(25,710
)
Preferred stock



(2,339
)


(2,339
)
Redemption of preferred stock
(76
)


(2
)


(78
)
Stock-based compensation expense, net


3,675




3,675

Tax Act reclassification



13,654




13,654

Change in accounting principle



84




84

Other



771



771

Balance, March 31, 2018
$
159,853

$
1,741

$
1,823,800

$
1,859,068

$
(107,673
)
$
(24,089
)
$
3,712,699

Numbers may not add due to rounding.
See accompanying notes to consolidated financial statements.

6



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
($ in Thousands)
Cash Flow From Operating Activities
 
 
 
Net income
$
69,456

 
$
56,270

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
    Provision for credit losses

 
9,000

    Depreciation and amortization
12,208

 
11,505

    Addition to (recovery of) valuation allowance on mortgage servicing rights, net
(474
)
 
217

    Amortization of mortgage servicing rights
2,324

 
2,477

    Amortization of other intangible assets
1,525

 
513

    Amortization and accretion on earning assets, funding, and other, net
2,188

 
8,215

    Net amortization of tax credit investments
4,881

 
1,713

    Asset (gains) losses, net
107

 
234

    (Gain) loss on mortgage banking activities, net
624

 
5,171

    Mortgage loans originated and acquired for sale
(197,603
)
 
(101,280
)
    Proceeds from sales of mortgage loans held for sale
187,624

 
196,578

    (Increase) decrease in interest receivable
(12,859
)
 
(761
)
    Increase (decrease) in interest payable
1,206

 
(185
)
    Net change in other assets and other liabilities
(28,114
)
 
(27,968
)
Net cash provided by operating activities
43,093

 
161,699

Cash Flow From Investing Activities
 
 
 
Net increase in loans
(160,921
)
 
(113,051
)
Purchases of
 
 
 
  Available for sale securities
(646,444
)
 
(163,442
)
  Held to maturity securities
(208,517
)
 
(2,655
)
  Federal Home Loan Bank and Federal Reserve Bank stocks
(144,515
)
 
(58,362
)
  Premises, equipment, and software, net of disposals
(9,892
)
 
(13,586
)
Proceeds from
 
 
 
  Sales of available for sale securities
452,866

 

  Sale of Federal Home Loan Bank and Federal Reserve Bank stocks
96,656

 
59,090

  Prepayments, calls, and maturities of available for sale investment securities
158,724

 
231,019

  Prepayments, calls, and maturities of held to maturity investment securities
58,160

 
22,916

  Sales, prepayments, calls, and maturities of other assets
1,182

 
3,293

Net change in tax credit investments
(7,240
)
 
2,621

Net cash (paid) received in acquisition
59,605

 
(217
)
Net cash used in investing activities
(350,336
)
 
(32,374
)
Cash Flow From Financing Activities
 
 
 
Net increase (decrease) in deposits
(801,310
)
 
(60,413
)
Net increase (decrease) in short-term funding
1,124,869

 
(11,168
)
Repayment of long-term funding
(250,000
)
 
(8
)
Proceeds from issuance of common stock for stock-based compensation plans
10,691

 
17,940

Redemption of preferred shares
(78
)
 

Purchase of common stock returned to authorized but unissued
(26,480
)
 

Purchase of treasury stock for tax withholding
(5,240
)
 
(7,743
)
Cash dividends on common stock
(25,710
)
 
(18,368
)
Cash dividends on preferred stock
(2,339
)
 
(2,330
)
Net cash provided by financing activities
24,403

 
(82,090
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(282,840
)
 
47,235

Cash, cash equivalents, and restricted cash at beginning of period
716,018

 
642,233

Cash, cash equivalents, and restricted cash at end of period
$
433,178

 
$
689,468

Supplemental disclosures of cash flow information
 
 
 
   Cash paid for interest
$
50,286

 
$
26,531

   Cash paid for income taxes
926

 
1,052

   Loans and bank premises transferred to other real estate owned
2,129

 
921

   Capitalized mortgage servicing rights
9,873

 
1,920

   Loans transferred into held for sale from portfolio, net
3,012

 
13,905

   Unsettled trades to purchase securities
12,095

 

Acquisition
 
 
 
   Fair value of assets acquired, including cash and cash equivalents
2,567,123

 

   Fair value ascribed to goodwill and intangible assets
242,576

 
217

   Fair value of liabilities assumed
2,809,565

 

   Common stock issued in acquisition
134

 

Numbers may not add due to rounding.
See accompanying notes to consolidated financial statements.






7



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same sum amounts shown in the statement of cash flows.
 
Three Months Ended March 31,
 
2018
 
2017
 
($ in Thousands)
Cash and cash equivalents
$
350,837

 
$
618,903

Restricted cash
82,341

 
70,565

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
433,178

 
$
689,468


Amounts included in restricted cash represent required reserve balances with the Federal Reserve Bank, included in cash and due from banks on the face of the Consolidated Balance Sheet, and cash collateral for public fund customers, included in interest-bearing deposits in other financial institutions on the face of the Consolidated Balance Sheet.

8



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 2017 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.
Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes.
Note 2 Acquisitions
Bank Mutual Acquisition
On February 1, 2018, the Corporation completed its acquisition of Bank Mutual Corporation ("Bank Mutual") in a stock transaction valued at approximately $482 million. Bank Mutual was a diversified financial services company headquartered in Milwaukee, Wisconsin. The merger resulted in a combined company with a larger market presence in markets the Corporation currently operates in, as well as expansion into nearly a dozen new markets. The merger is also expected to provide significant efficiency opportunities and economies of scale associated with a larger financial institution.
Under the terms of the Merger Agreement, Bank Mutual’s shareholders received 0.422 shares of the Corporation's common stock for each share of Bank Mutual common stock. The Corporation issued approximately 19.5 million shares for a total deal value of approximately $482 million based on the closing sale price of a share of Associated common stock on January 31, 2018.
The acquisition of Bank Mutual constituted a business combination. The merger has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. The determination of estimated fair values required management to make certain estimates that are subjective in nature and may require adjustments upon the availability of new information regarding facts and circumstances which existed at the date of acquisition (i.e. appraisals) for up to a year following the acquisition. The Corporation continues to review information relating to events or circumstances existing at the acquisition date. Management anticipates that this review could result in adjustments to the acquisition date valuation amounts presented herein but does not anticipate that these adjustments would be material.

9



The following table presents the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date related to Bank Mutual.
 
Purchase Accounting Adjustments
February 1, 2018
 
($ in Thousands)
Assets
 
 
Cash and cash equivalents
$

$
78,052

Investment securities
(6,238
)
452,867

Federal Home Loan Bank stock, at cost

20,026

Loans
(48,533
)
1,875,386

Premises and equipment, net
11,172

50,930

Bank owned life insurance
(24
)
65,390

Goodwill


166,870

Core deposit intangibles (included in other intangible assets, net on the face of the Consolidated Balance Sheet)
58,100

58,100

Other real estate owned
(246
)
4,403

Others assets
$
5,098

$
37,151

Total assets


$
2,809,175

Liabilities
 
 
Deposits
$
2,498

$
1,840,950

Other borrowings
935

430,946

Other liabilities
$
2,148

$
55,591

Total liabilities


$
2,327,487

 
 
 
Total consideration paid


$
481,688

The Corporation recorded approximately $167 million of goodwill, which is not tax deductible, related to the Bank Mutual acquisition. See Note 8 for additional information on goodwill, as well as the carrying amount and amortization of core deposit and other intangible assets related to the Bank Mutual acquisition.
The following is a description of the methods used to determine the fair value of significant assets and liabilities presented on the balance sheet above.
Loans: Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, amortization status and current discount rates. Loans were grouped together according to similar characteristics when applying various valuation techniques.
Core deposit intangible ("CDI"): This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits. The CDI is being amortized on a straight-line basis over 10 years.
Time deposits: The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Federal Home Loan Bank ("FHLB") borrowings: The fair values of FHLB advances are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.
See Note 13 for additional information on fair value measurements.
Other Acquisitions
During the first quarter of 2018, the Corporation completed the acquisition of Diversified Insurance Solutions ("Diversified"). The acquisition improved Associated Benefits and Risk Consulting's ("ABRC") ability to achieve greater scale in the Metro Milwaukee market and to further expand its Wisconsin employee benefits and property and casualty market position and capabilities. The transaction was valued at approximately $19 million. As a result of the acquisition, the Corporation recorded goodwill of approximately $10 million and other intangibles of approximately $8 million. The other intangibles related to the acquisition are being amortized on a straight-line basis over 10 years. See Note 8 for more information on goodwill and other intangible assets.

10



Note 3 Summary of Significant Accounting Policies
The accounting and reporting policies of the Corporation conform to U.S. generally accepted accounting principles and to general practice within the financial services industry. A discussion of these policies can be found in Note 1 Summary of Significant Accounting Policies section included in the Corporation’s 2017 Annual Report on Form 10-K. There have been two changes to the Corporation's significant accounting policies since December 31, 2017.
Business combinations
The Corporation accounts for its acquisitions using the purchase accounting method. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the straight line method over their estimated useful lives of up to ten years.
Loans that the Corporation acquires in connection with acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require the Corporation to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the non-accretable discount which the Corporation will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.
The Corporation accounts for performing loans acquired in business combinations using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including credit, interest, and liquidity discounts. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.
Revenue Recognition
The Corporation recognizes revenue in accordance with ASC 606, "Revenue from Contracts with Customers". ASC 606 requires the Corporation to follow a five step process: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Revenue recognition under ASC 606 depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.
New Accounting Pronouncements Adopted
Standard
 
Description
 
Date of adoption
 
Effect on financial statements
ASU 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
The FASB issued the amendment to allow a reclassification from accumulated other comprehensive income to retained earnings, the stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted and should be applied in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate related to the Act is recognized.
 
1st Quarter 2018
 
The Corporation has elected to early adopt this Update. During the quarter, the Corporation reclassified approximately $14 million from accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act. No material impact to its results of operations, financial position, and liquidity. See Consolidated Statements of Comprehensive Income and the Statement of Changes in Stockholders' Equity.

11



Standard
 
Description
 
Date of adoption
 
Effect on financial statements
ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
 
The FASB issued the amendment to better align a company’s financial reporting for hedging activities with the economic objectives of those activities for both financial (e.g., interest rate) and commodity risks. The provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also contains targeted improvements to simplify the application of hedge accounting guidance. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities should apply the amendment on a modified retrospective transition method in which the cumulative effect of the change will be recognized within equity in the consolidated balance sheet as of the date of adoption. Early adoption is permitted, including in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.
 
1st Quarter 2018
 
The Corporation has elected to early adopt this Update. No material impact to its results of operations, financial position, and liquidity. See Note 10 for expanded disclosures.
ASU 2017-07 Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
 
The FASB issued the update to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost, including a requirement that employers disaggregate the service cost component from the other components of net benefit cost. In addition, the amendments provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment retrospectively to each period presented and prospectively only for the capitalization component. Early adoption is permitted, but should be within the first interim period if interim financial statements are issued.
 
1st Quarter 2018
 
No impact to its results of operations, financial position, and liquidity. The Update required retrospective restatement. For the full year 2017, the Corporation reclassified approximately $9 million from personnel expense to other noninterest expense for the non-service cost components of net periodic pension cost and net periodic postretirement benefit cost. See Note 14 for expanded disclosure.
ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business
 
The FASB issued amendments to clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The new standard narrows the definition of a business by adding three principal clarifications if: (1) substantially all the fair value of the gross assets in the asset group is concentrated in either a single identifiable asset or group of similar identifiable assets the transaction does not involve a business (2) the asset group does not include a minimum of an input and a substantive process, it does not represent a business, and (3) the integrated set of activities (including its inputs and processes) does not create, or have the ability to create, goods or services to customers, investment income (e,g. dividends or interest) or other revenues, it is not a business. The overall intention is to provide consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.

 
1st Quarter 2018
 
No material impact on results of operations, financial position, or liquidity.
ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash
 
The FASB issued an amendment to improve GAAP by providing guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, in order to reduce diversity in practice. The amendment requires that a statement of cash flow explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included in cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the statement of cash flow. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment retrospectively to each period presented. Early adoption is permitted, including in an interim period.
 
1st Quarter 2018
 
No impact to its results of operations, financial position, and liquidity. See Consolidated Statements of Cash Flows.
ASU 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
 
The FASB issued an amendment requiring an entity to recognize income tax consequences on an intra-entity transfer of an asset other than inventory at the time the transaction occurs. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early adoption is permitted for all entities in the first interim period if an entity issues interim financial statements.

 
1st Quarter 2018
 
No material impact on results of operations, financial position, or liquidity.
ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
 
The FASB issued an amendment to provide clarification on where to classify cash flows involving certain cash receipts and cash payments. Under the new guidance, cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities. The new guidance also details the specific classification of contingent consideration cash payments made after a business combination depending on the timing of payments. Lastly, cash proceeds received from corporate owned life insurance policies (including BOLI) should be classified as cash inflows from investing, while the cash payments for the premiums may be classified as cash outflows for investing, operating, or a combination of both. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment retrospectively to each period presented. Early adoption is permitted, including in an interim period; however, all of the amendments must be adopted in the same period.
 
1st Quarter 2018
 
No material impact on results of operations, financial position, or liquidity.

12



Standard
 
Description
 
Date of adoption
 
Effect on financial statements
ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
The FASB issued an amendment to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. ASC 2018-04 supersedes previous SEC guidance in the Codification in SAB Topic 5 M. Other-Than-Temporary Impairment of certain investments in equity securities and special balance sheet requirements in Reg S-X rule 3A-05 for public utility Holding companies.
 
1st Quarter 2018
 
The Corporation has adopted with Update using the cumulative-effect adjustment as of the beginning of the fiscal year of adoption. Immaterial impact to the result of operations, financial position and liquidity. In 2008, the Corporation received Visa Class B restricted shares as part of Visa’s initial public offering. Based on the existing transfer restriction and the uncertainty of the covered litigation, the approximately 119 thousand Class B shares remaining that the Corporation owned as of March 31, 2018 are carried at a zero cost basis. See Consolidated Statements of Comprehensive Income and Note 13 Fair Value Measurements.
ASU 2014-09 Revenue from Contracts with Customers (Topic 606)

 
The FASB issued an amendment to clarify the principles for recognizing revenue and to develop a common revenue standard. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The standard applies to all contracts with customers except those that are within the scope of other topics in the FASB Codification. The standard also requires significantly expanded disclosures about revenue recognition. The FASB continues to release new accounting guidance related to the adoption of this standard, which could impact the Corporation's preliminary materiality analysis and may change the conclusions reached as to the application of this new guidance. The amendment was originally to be effective for annual reporting periods beginning after December 15, 2016 (including interim reporting periods within those periods); however, in July 2015, the FASB approved a one year deferral of the effective date to December 31, 2017.

 
1st Quarter 2018

 
The Corporation chose to adopt this Update using the modified retrospective approach with no material impact on the Corporation's results of operations, financial position, or liquidity. See Note 17 for expanded disclosure requirements.


13



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 March 31,
 
2018
 
2017
 
(In Thousands, except per share data)
Net income
$
69,456

 
$
56,270

Preferred stock dividends
(2,339
)
 
(2,330
)
Net income available to common equity
$
67,117

 
$
53,940

Common shareholder dividends
(25,572
)
 
(18,251
)
Unvested share-based payment awards
(138
)
 
(117
)
Undistributed earnings
$
41,407

 
$
35,572

Undistributed earnings allocated to common shareholders
41,225

 
35,294

Undistributed earnings allocated to unvested share-based payment awards
182

 
278

Undistributed earnings
$
41,407

 
$
35,572

Basic
 
 
 
Distributed earnings to common shareholders
$
25,572

 
$
18,251

Undistributed earnings allocated to common shareholders
41,225

 
35,294

Total common shareholders earnings, basic
$
66,797

 
$
53,545

Diluted
 
 
 
Distributed earnings to common shareholders
$
25,572

 
$
18,251

Undistributed earnings allocated to common shareholders
41,225

 
35,294

Total common shareholders earnings, diluted
$
66,797

 
$
53,545

Weighted average common shares outstanding
163,520

 
150,815

Effect of dilutive common stock awards
2,038

 
2,216

Effect of dilutive common stock warrants
874

 
838

Diluted weighted average common shares outstanding
166,432

 
153,869

Basic earnings per common share
$
0.41

 
$
0.36

Diluted earnings per common share
$
0.40

 
$
0.35

Non-dilutive common stock options of approximately 1 million and 500,000 for the three months ended March 31, 2018 and 2017, respectively, were excluded from the earnings per common share calculation
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 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.



14



The following assumptions were used in estimating the fair value for options granted in the first three months of 2018 and full year 2017.
 
2018
 
2017
Dividend yield
2.50
%
 
2.00
%
Risk-free interest rate
2.60
%
 
2.00
%
Weighted average expected volatility
22.00
%
 
25.00
%
Weighted average expected life
5.75 years

 
5.5 years

Weighted average per share fair value of options
$4.47
 
$5.30
A summary of the Corporation’s stock option activity for the three months ended March 31, 2018 is presented below.
Stock Options
Shares
Weighted Average
Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value(a)
Outstanding at December 31, 2017
5,118,687

$
18.02

6.48
$
38,028

Granted
938,740

24.50

 
 
Assumed from Bank Mutual acquisition
370,051

14.35

 
 
Exercised
(529,869
)
17.37

 
 
Forfeited or expired
(24,130
)
23.35

 
 
Outstanding at March 31, 2018
5,873,479

$
18.86

6.80
$
35,879

Options Exercisable at March 31, 2018
3,659,277

$
16.72

5.55
$
30,009

(a)
$ in Thousands

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 three months ended March 31, 2018, the intrinsic value of stock options exercised was approximately $5 million. For the three months ended March 31, 2017, the intrinsic value of the stock options exercised was $10 million. The total fair value of stock options vested was $3 million for the three months ended March 31, 2018 and March 31, 2017. The Corporation recognized compensation expense for the vesting of stock options of $1 million for both the three months ended March 31, 2018 and March 31, 2017. Included in compensation expense for 2018 was approximately $450,000 of expense for the accelerated vesting of stock options granted to retirement eligible colleagues. At March 31, 2018, the Corporation had approximately $8 million of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend through first quarter 2022.
The following table summarizes information about the Corporation’s restricted stock activity for the three months ended March 31, 2018.
Restricted Stock
Shares
 
Weighted Average
Grant Date Fair Value
Outstanding at December 31, 2017
2,026,071

 
$
19.68

Granted
570,341

 
24.63

Vested
(498,988
)
 
17.97

Forfeited
(5,799
)
 
20.16

Outstanding at March 31, 2018
2,091,625

 
$
21.86

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period specified in the grant's award agreement. Performance-based restricted stock awards granted during 2017 and 2018 will vest ratably over a three year period, while service-based restricted stock awards granted during 2017 and 2018 will vest ratably over a four year period. Expense for restricted stock awards of approximately $3 million was recorded the three months ended March 31, 2018 and $7 million was recorded for the three months ended March 31, 2017. Included in compensation expense for 2018 was approximately $1 million of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $29 million of unrecognized compensation costs related to restricted stock awards at March 31, 2018, that is expected to be recognized over the remaining requisite service periods that extend through first quarter 2022.
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,

15



and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.

Note 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”). A portion of the portfolio is also comprised of asset-backed securities backed by student loans made under the Federal Family Education Loan Program ("FFELP"). The amortized cost and fair values of securities available for sale and held to maturity were as follows.
 
March 31, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,002

 
$

 
$
(7
)
 
$
995

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
427,480

 
7,331

 
(4,738
)
 
430,073

 
GNMA
2,364,339

 
21

 
(54,054
)
 
2,310,306

 
Private-label
1,051

 

 
(7
)
 
1,044

 
GNMA commercial mortgage-related securities
1,497,573

 

 
(49,204
)
 
1,448,369

 
FFELP asset backed securities
288,519

 
1,835

 
(54
)
 
290,300

 
Other debt securities
3,200

 

 
(12
)
 
3,188

 
Other equity securities
1,599






1,599

 
Total investment securities available for sale
$
4,584,763

 
$
9,186

 
$
(108,076
)
 
$
4,485,875

 
Investment securities held to maturity
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
$
1,424,925

 
$
4,110

 
$
(16,579
)
 
$
1,412,456

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
76,069

 
227

 
(1,665
)
 
74,631

 
GNMA
410,275

 
2,210

 
(11,624
)
 
400,861

 
GNMA commercial mortgage-related securities
531,934

 
9,008

 
(21,694
)
 
519,248

 
Total investment securities held to maturity
$
2,443,203

 
$
15,555

 
$
(51,561
)
 
$
2,407,197


16



 
December 31, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,003

 
$

 
$
(7
)
 
$
996

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
457,680

 
9,722

 
(2,634
)
 
464,768

 
GNMA
1,944,453

 
275

 
(31,378
)
 
1,913,350

 
Private-label
1,067

 

 
(8
)
 
1,059

 
GNMA commercial mortgage-related securities
1,547,173

 
5

 
(33,901
)
 
1,513,277

 
FFELP asset backed securities
144,322


867


(13
)

145,176

 
Other debt securities
3,200

 

 
(12
)
 
3,188

 
Other equity securities
1,519


127


(14
)

1,632

 
Total investment securities available for sale
$
4,100,417

 
$
10,996

 
$
(67,967
)
 
$
4,043,446

 
Investment securities held to maturity
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)

$
1,281,320

 
$
13,899

 
$
(3,177
)
 
$
1,292,042

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
40,995

 
398

 
(489
)
 
40,904

 
GNMA
414,440

 
2,700

 
(6,400
)
 
410,740

 
GNMA commercial mortgage-related securities
546,098


9,546


(15,756
)

539,888

 
Total investment securities held to maturity
$
2,282,853

 
$
26,543

 
$
(25,822
)
 
$
2,283,574


The expected maturities of investment securities available for sale and held to maturity at March 31, 2018, are shown below. Expected maturities may 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
$
2,002

 
$
1,995

 
$
44,019

 
$
44,261

Due after one year through five years
2,200

 
2,188

 
221,411

 
219,411

Due after five years through ten years

 

 
346,521

 
341,147

Due after ten years

 

 
812,974

 
807,638

Total debt securities
4,202

 
4,183

 
1,424,925

 
1,412,456

Residential mortgage-related securities
 
 
 
 
 
 
 
FNMA / FHLMC
427,480

 
430,073

 
76,069

 
74,631

GNMA
2,364,339

 
2,310,306

 
410,275

 
400,861

Private-label
1,051

 
1,044

 

 

GNMA commercial mortgage-related securities
1,497,573

 
1,448,369

 
531,934

 
519,248

FFELP asset backed securities
288,519

 
290,300

 

 

Equity securities
1,599

 
1,599

 

 

Total investment securities
$
4,584,763

 
$
4,485,875

 
$
2,443,203

 
$
2,407,197

Ratio of Fair Value to Amortized Cost
 
 
97.8
%
 
 
 
98.5
%
Investment securities with a carrying value of approximately $3.0 billion and $3.1 billion at March 31, 2018, and December 31, 2017, respectively, were pledged to secure certain deposits or for other purposes as required or permitted by law.
On the acquisition date, the Corporation sold Bank Mutual's entire securities portfolio.

17



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 March 31, 2018.
 
Less than 12 months
 
12 months or more
 
Total
March 31, 2018
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

 
$
(7
)
 
$
995

 

 
$

 
$

 
$
(7
)
 
$
995

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
12

 
(1,389
)
 
94,231

 
9

 
(3,349
)
 
135,316

 
(4,738
)
 
229,547

GNMA
65

 
(25,956
)
 
1,590,545

 
26

 
(28,098
)
 
718,971

 
(54,054
)
 
2,309,516

Private-label

 

 

 
1

 
(7
)
 
1,044

 
(7
)
 
1,044

GNMA commercial mortgage-related securities
28

 
(9,895
)
 
385,319

 
76

 
(39,309
)
 
1,063,082

 
(49,204
)
 
1,448,401

FFELP asset backed securities
6

 
(54
)

86,988








(54
)

86,988

Other debt securities
1

 
(12
)

188








(12
)

188

Total
113

 
$
(37,313
)

$
2,158,266


112


$
(70,763
)

$
1,918,413


$
(108,076
)

$
4,076,679

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)

821

 
$
(9,876
)
 
$
523,716

 
132

 
$
(6,703
)
 
$
122,632

 
$
(16,579
)
 
$
646,348

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
19

 
(939
)
 
54,122

 
10

 
(725
)
 
15,230

 
(1,665
)
 
69,352

GNMA
58

 
(7,239
)
 
279,707

 
18

 
(4,385
)
 
113,561

 
(11,624
)
 
393,268

GNMA commercial mortgage-related securities
2

 
(837
)
 
49,711

 
23

 
(20,857
)
 
469,538

 
(21,694
)
 
519,249

Total
900

 
$
(18,891
)
 
$
907,256

 
183

 
$
(32,670
)
 
$
720,961

 
$
(51,561
)
 
$
1,628,217


18



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, 2017.
 
Less than 12 months
 
12 months or more
 
Total
December 31, 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

 
$
(7
)
 
$
996

 

 
$

 
$

 
$
(7
)
 
$
996

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
9

 
(572
)
 
69,939

 
9

 
(2,062
)
 
142,093

 
(2,634
)
 
212,032

GNMA
44

 
(8,927
)
 
1,028,221

 
25

 
(22,451
)
 
737,198

 
(31,378
)
 
1,765,419

Private-label

 

 

 
1

 
(8
)
 
1,059

 
(8
)
 
1,059

GNMA commercial mortgage-related securities
33

 
(5,554
)
 
480,514

 
70

 
(28,347
)
 
1,026,642

 
(33,901
)
 
1,507,156

FFELP asset backed securities
1

 
(13
)
 
12,158

 



 

 
(13
)
 
12,158

Other debt securities
1

 
(12
)
 
188

 

 

 

 
(12
)
 
188

Other equity securities
3

 
(14
)
 
1,487

 

 

 

 
(14
)
 
1,487

Total
92

 
$
(15,099
)
 
$
1,593,503

 
105

 
$
(52,868
)
 
$
1,906,992

 
$
(67,967
)
 
$
3,500,495

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)

157

 
$
(746
)
 
$
122,761

 
132

 
$
(2,431
)
 
$
127,043

 
$
(3,177
)
 
$
249,804

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
8

 
(73
)
 
13,143

 
10

 
(417
)
 
16,262

 
(490
)
 
29,405

GNMA
35

 
(3,373
)
 
268,388

 
18

 
(3,026
)
 
120,892

 
(6,399
)
 
389,280

GNMA commercial mortgage-related securities
2

 
(299
)
 
52,997

 
23

 
(15,457
)
 
486,891

 
(15,756
)
 
539,888

Total
202

 
$
(4,491
)
 
$
457,289

 
183

 
$
(21,331
)
 
$
751,088

 
$
(25,822
)
 
$
1,208,377

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.
Based on the Corporation’s evaluation, management does not believe any unrealized loss at March 31, 2018 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 unrealized losses at March 31, 2018 for mortgage-related securities is due to the increase in overall interest rates. The U.S. Treasury 3 year and 5 year rates increased by 41 bp and 36 bp, respectively, from December 31, 2017. The Corporation 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 March 31, 2018, and December 31, 2017, the Corporation had FHLB stock of $157 million and $89 million, respectively. The Corporation had Federal Reserve Bank stock of $76 million at both March 31, 2018 and December 31, 2017.




19



Note 7 Loans
The period end loan composition was as follows.
 
March 31,
2018(a)
 
December 31,
2017
 
($ in Thousands)
Commercial and industrial
$
6,756,983

 
$
6,399,693

Commercial real estate — owner occupied
900,913

 
802,209

Commercial and business lending
7,657,896

 
7,201,902

Commercial real estate — investor
4,077,671

 
3,315,254

Real estate construction
1,579,778

 
1,451,684

Commercial real estate lending
5,657,449

 
4,766,938

Total commercial
13,315,345

 
11,968,840

Residential mortgage
8,197,223

 
7,546,534

Home equity
923,470

 
883,804

Other consumer
374,453

 
385,813

Total consumer
9,495,146

 
8,816,151

Total loans
$
22,810,491

 
$
20,784,991

(a) Includes $15 million of purchased credit-impaired loans
 
 
 
The following table presents commercial and consumer loans by credit quality indicator at March 31, 2018.
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
6,325,258

 
$
132,292

 
$
196,766

 
$
102,667

 
$
6,756,983

Commercial real estate - owner occupied
830,489

 
15,378

 
34,410

 
20,636

 
900,913

Commercial and business lending
7,155,747

 
147,670

 
231,176

 
123,303

 
7,657,896

Commercial real estate - investor
3,960,155

 
54,972

 
46,970

 
15,574

 
4,077,671

Real estate construction
1,547,443

 
29,421

 
1,695

 
1,219

 
1,579,778

Commercial real estate lending
5,507,598

 
84,393

 
48,665

 
16,793

 
5,657,449

Total commercial
12,663,345

 
232,063

 
279,841

 
140,096

 
13,315,345

Residential mortgage
8,134,387

 
5,580

 
2,155

 
55,100

 
8,197,223

Home equity
908,682

 
1,383

 
188

 
13,218

 
923,470

Other consumer
373,714

 
600

 

 
139

 
374,453

Total consumer
9,416,783

 
7,563

 
2,343

 
68,456

 
9,495,146

Total
$
22,080,128

 
$
239,626

 
$
282,184

 
$
208,553

 
$
22,810,491


20



The following table presents commercial and consumer loans by credit quality indicator at December 31, 2017.
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
6,015,884

 
$
157,245

 
$
113,778

 
$
112,786

 
$
6,399,693

Commercial real estate - owner occupied
723,291

 
14,181

 
41,997

 
22,740

 
802,209

Commercial and business lending
6,739,175

 
171,426

 
155,775

 
135,526

 
7,201,902

Commercial real estate - investor