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ASSOCIATED BANC-CORP - Quarter Report: 2019 June (Form 10-Q)

Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2019
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)
(not applicable)
(Former name, former address and former fiscal year, if changed since last report)

Securities Registered Pursuant to Section 12(b) of the act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, par value $0.01 per share
ASB
New York Stock Exchange
Depositary Shrs, each representing 1/40th intrst in a shr of 6.125% Non-Cum. Perp Pref Stock, Srs C
ASB PrC
New York Stock Exchange
Depositary Shrs, each representing 1/40th intrst in a shr of 5.375% Non-Cum. Perp Pref Stock, Srs D
ASB PrD
New York Stock Exchange
Depositary Shrs, each representing 1/40th intrst in a shr of 5.875% Non-Cum. Perp Pref Stock, Srs E
ASB PrE
New York Stock Exchange

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          No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes          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
 
Accelerated filer 
 
 
Non-accelerated filer  
 
Smaller reporting company  
 
 
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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes          No  
APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at July 26, 2019 was 162,166,503.

1


ASSOCIATED BANC-CORP
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Commonly Used Acronyms and Abbreviations
The following listing provides a reference of common acronyms and abbreviations used throughout the document:
ABS
Asset-Backed Securities
ALCO
Asset / Liability Committee
Anderson
Anderson Insurance and Investment Agency, Inc.
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
the Bank
Associated Bank, National Association
Bank Mutual
Bank Mutual Corporation
Basel III
International framework established by the Basel Committee on Banking Supervision for the regulation of capital and liquidity
bp
basis point(s)
CD
Certificate of Deposit
CDI
Core Deposit Intangibles
CET1
Common Equity Tier 1
CMBS
Commercial Mortgage-Backed Securities
CMO
Collateralized Mortgage Obligations
CRA
Community Reinvestment Act
Diversified
Diversified Insurance Solutions
EAR
Earnings at Risk
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFELP
Federal Family Education Loan Program
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FNMA
Federal National Mortgage Association
FTP
Funds Transfer Pricing
GAAP
Generally Accepted Accounting Principles
GNMA
Government National Mortgage Association
GSEs
Government-Sponsored Enterprises
Huntington
The Huntington National Bank, a subsidiary of Huntington Bancshares Incorporated
LIBOR
London Interbank Offered Rate
LTV
Loan-to-Value
MBS
Mortgage-Backed Securities
MSR
Mortgage Servicing Rights
MVE
Market Value of Equity
NII
Net Interest Income
NPAs
Nonperforming Assets
OCI
Other Comprehensive Income
OREO
Other Real Estate Owned
RAP
Retirement Account Plan - the Corporation's noncontributory defined benefit retirement plan
restricted stock awards
Restricted common stock and restricted common stock units to certain key employees
S&P
Standard & Poor's
SEC
U.S. Securities and Exchange Commission
Tax Act
U.S. Tax Cuts and Jobs Act of 2017


3

Table of Contents

PART I - FINANCIAL INFORMATION
 
 
ITEM 1.
Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
(Audited)
 
(In Thousands, except share and per share data)
Assets
 
 
 
Cash and due from banks
$
382,985

 
$
507,187

Interest-bearing deposits in other financial institutions
172,708

 
221,226

Federal funds sold and securities purchased under agreements to resell
1,385

 
148,285

Investment securities held to maturity, at amortized cost
2,806,064

 
2,740,511

Investment securities available for sale, at fair value
3,283,456

 
3,946,941

Equity securities
15,066

 
1,568

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost
202,758

 
250,534

Residential loans held for sale
129,303

 
64,321

Commercial loans held for sale
11,000

 
14,943

Loans
23,249,967

 
22,940,429

Allowance for loan losses
(233,659
)
 
(238,023
)
Loans, net
23,016,308

 
22,702,406

Bank and corporate owned life insurance
668,638

 
663,203

Investment in unconsolidated subsidiaries
222,812

 
161,181

Premises and equipment, net(a)
432,058

 
363,225

Goodwill
1,176,019

 
1,169,023

Mortgage servicing rights, net
66,175

 
68,193

Other intangible assets, net
93,915

 
75,836

Other assets(a)
591,976

 
549,274

Total assets
$
33,272,628

 
$
33,647,859

Liabilities and Stockholders' Equity
 
 
 
Noninterest-bearing demand deposits
$
5,354,987

 
$
5,698,530

Interest-bearing deposits
19,919,235

 
19,198,863

Total deposits
25,274,222

 
24,897,393

Federal funds purchased and securities sold under agreements to repurchase
83,195

 
111,651

Commercial paper
28,787

 
45,423

FHLB advances
2,742,941

 
3,574,371

Other long-term funding
796,403

 
795,611

Accrued expenses and other liabilities
447,286

 
442,522

Total liabilities
29,372,835

 
29,866,971

Stockholders’ Equity
 
 
 
Preferred equity
256,716

 
256,716

Common equity
 
 
 
Common stock
1,752

 
1,752

Surplus
1,695,715

 
1,712,615

Retained earnings
2,288,909

 
2,181,414

Accumulated other comprehensive income (loss)
(59,063
)
 
(124,972
)
Treasury stock, at cost
(284,235
)
 
(246,638
)
Total common equity
3,643,077

 
3,524,171

Total stockholders’ equity
3,899,794

 
3,780,888

Total liabilities and stockholders’ equity
$
33,272,628

 
$
33,647,859

Preferred shares issued
264,458

 
264,458

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

 
750,000

Common shares issued
175,216,409

 
175,216,409

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

 
250,000,000

Treasury shares of common stock
12,554,448

 
10,775,938

Numbers may not sum due to rounding.
(a) During the second quarter of 2019, the Corporation reclassified operating leases from Other Assets to Premises and Equipment.



See accompanying notes to consolidated financial statements.

4

Table of Contents

Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands, except per share data)
Interest income
 
Interest and fees on loans
$
260,784

 
$
246,646

 
$
519,637

 
$
466,680

Interest and dividends on investment securities
 
 
 
 
 
 
 
Taxable
26,710

 
30,623

 
55,764

 
60,727

Tax-exempt
14,643

 
10,783

 
28,459

 
20,000

Other interest
3,995

 
3,153

 
8,221

 
5,330

Total interest income
306,133

 
291,205

 
612,081

 
552,737

Interest expense
 
 
 
 
 
 
 
Interest on deposits
67,050

 
38,431

 
129,823

 
71,843

Interest on federal funds purchased and securities sold under agreements to repurchase
286

 
538

 
913

 
1,060

Interest on other short-term funding
37

 
51

 
88

 
111

Interest on FHLB advances
17,744

 
21,279

 
37,298

 
34,402

Interest on long-term funding
7,396

 
4,544

 
14,792

 
9,088

Total interest expense
92,513

 
64,843

 
182,914

 
116,504

Net interest income
213,619

 
226,362

 
429,167

 
436,233

Provision for credit losses
8,000

 
4,000

 
14,000

 
4,000

Net interest income after provision for credit losses
205,619

 
222,362

 
415,167

 
432,233

Noninterest income
 
 
 
 
 
 
 
Insurance commissions and fees
22,985

 
23,996

 
48,449

 
46,644

Wealth management fees(a)
20,691

 
20,333

 
40,870

 
40,975

Service charges on deposit account fees
15,426

 
16,390

 
30,542

 
32,810

Card-based fees
10,131

 
10,115

 
19,392

 
19,557

Other fee-based revenue
5,178

 
4,272

 
9,161

 
8,252

Capital markets, net
4,726

 
4,783

 
7,916

 
10,089

Mortgage banking, net
9,466

 
6,258

 
14,178

 
12,628

Bank and corporate owned life insurance
3,352

 
3,978

 
7,144

 
7,165

Asset gains (losses), net(b)
871

 
2,497

 
1,438

 
2,390

Investment securities gains (losses), net
463

 
(2,015
)
 
2,143

 
(2,015
)
Other
2,547

 
2,235

 
5,807

 
4,727

Total noninterest income
95,837

 
92,842

 
187,040

 
183,222

Noninterest expense
 
 
 
 
 
 
 
Personnel
123,228

 
123,980

 
243,279

 
241,665

Technology
20,114

 
19,452

 
39,126

 
37,167

Occupancy
13,830

 
15,071

 
30,302

 
30,428

Business development and advertising
6,658

 
7,067

 
13,293

 
13,760

Equipment
5,577

 
5,953

 
11,245

 
11,509

Legal and professional
4,668

 
6,284

 
8,619

 
11,697

Card issuance costs
1,290

 
2,412

 
2,266

 
4,744

Loan costs
952

 
761

 
2,316

 
1,733

Foreclosure / OREO expense, net
924

 
1,021

 
1,491

 
1,744

FDIC assessment
4,500

 
8,250

 
8,250

 
16,500

Other intangible amortization
2,324

 
2,168

 
4,551

 
3,693

Acquisition related costs(c)
3,734

 
7,107

 
4,366

 
27,712

Other
9,979

 
11,732

 
20,346

 
21,873

Total noninterest expense
197,779

 
211,258

 
389,450

 
424,223

Income before income taxes
103,678

 
103,947

 
212,756

 
191,232

Income tax expense
19,017

 
14,754

 
41,409

 
32,583

Net income
84,661

 
89,192

 
171,347

 
158,648

Preferred stock dividends
3,801

 
2,329

 
7,601

 
4,668

Net income available to common equity
$
80,860

 
$
86,863

 
$
163,746

 
$
153,980

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.51

 
$
1.00

 
$
0.92

Diluted
$
0.49

 
$
0.50

 
$
0.99

 
$
0.90

Average common shares outstanding
 
 
 
 
 
 
 
Basic
162,180

 
170,633

 
163,049

 
167,096

Diluted
163,672

 
173,409

 
164,518

 
169,920

Numbers may not sum due to rounding.
(a) Includes trust, asset management, brokerage, and annuity fees.
(b) Both the three and six months ended June 30, 2019 include less than $1 million of Huntington related asset losses; Both the three and six months ended June 30, 2018 include approximately $1 million of Bank Mutual acquisition related asset losses net of asset gains.
(c) Includes Bank Mutual and Huntington branch acquisition related costs only.
See accompanying notes to consolidated financial statements.

5

Table of Contents

Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
2018
 
2019
2018
 
($ in Thousands)
Net income
$
84,661

$
89,192

 
$
171,347

$
158,648

Other comprehensive income, net of tax
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
Net unrealized gains (losses)
59,476

(18,919
)
 
89,966

(60,754
)
Amortization of net unrealized (gains) losses on available for sale securities transferred to held to maturity securities
218

(335
)
 
288

(632
)
Reclassification adjustment for net losses (gains) realized in net income
(463
)
2,015

 
(2,143
)
2,015

Reclassification from OCI due to change in accounting principle


 

(84
)
Reclassification of certain tax effects from OCI


 

(8,419
)
Income tax (expense) benefit
(14,940
)
4,705

 
(22,242
)
15,340

Other comprehensive income (loss) on investment securities available for sale
44,292

(12,533
)
 
65,869

(52,533
)
Defined benefit pension and postretirement obligations
 
 
 
 
 
Amortization of prior service cost
(38
)
(38
)
 
(75
)
(76
)
Amortization of actuarial loss (gain)
64

465

 
128

929

Reclassification of certain tax effects from OCI


 

(5,235
)
Income tax (expense) benefit
(7
)
(109
)
 
(13
)
(216
)
Other comprehensive income (loss) on pension and postretirement obligations
20

318

 
40

(4,597
)
Total other comprehensive income (loss)
44,311

(12,215
)
 
65,909

(57,130
)
Comprehensive income
$
128,972

$
76,977

 
$
237,256

$
101,518

Numbers may not sum due to rounding.

See accompanying notes to consolidated financial statements.


6

Table of Contents

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, 2018
$
256,716

$
1,752

$
1,712,615

$
2,181,414

$
(124,972
)
$
(246,638
)
$
3,780,888

Comprehensive income
 
 
 
 
 
 
 
Net income



86,686



86,686

Other comprehensive income (loss)




21,597


21,597

Comprehensive income
 
 
 
 
 
 
108,283

Common stock issued
 
 
 
 
 
 
 
Stock-based compensation plans, net


(32,220
)


39,265

7,045

Purchase of treasury stock





(37,467
)
(37,467
)
Cash dividends
 
 
 
 
 
 
 
Common stock, $0.17 per share



(28,183
)


(28,183
)
Preferred stock (a)



(3,801
)


(3,801
)
Stock-based compensation expense, net


9,397




9,397

Other



(293
)


(293
)
Balance, March 31, 2019
$
256,716

$
1,752

$
1,689,792

$
2,235,824

$
(103,375
)
$
(244,840
)
$
3,835,870

 
 
 
 
 
 
 
 
Comprehensive income:







Net income



84,661



84,661

Other comprehensive income (loss)




44,311


44,311

Comprehensive income






128,972

Common stock issued:







Stock-based compensation plans, net


(211
)


1,038

827

Purchase of treasury stock





(40,433
)
(40,433
)
Cash dividends:







Common stock, $0.17 per share



(27,776
)


(27,776
)
Preferred stock (a)



(3,801
)


(3,801
)
Stock-based compensation expense, net


6,134




6,134

Balance, June 30, 2019
$
256,716

$
1,752

$
1,695,715

$
2,288,909

$
(59,063
)
$
(284,235
)
$
3,899,794

Numbers may not sum due to rounding.
(a) Series C, $0.3828125 per share; Series D, $0.3359375 per share; and Series E, $0.3671875 per share.

See accompanying notes to consolidated financial statements.





7

Table of Contents

Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Changes in Stockholders’ Equity continued (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, 2017
$
159,929

$
1,618

$
1,338,722

$
1,934,696

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

Comprehensive income
 
 
 
 
 
 
 
Net income



69,456



69,456

Other comprehensive income (loss)




(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


(7,665
)
20,136


(1,780
)
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 (b)



(2,339
)


(2,339
)
Purchase 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

$
1,698,521

$
2,010,746

$
(107,673
)
$
(50,488
)
$
3,712,699

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income



89,192



89,192

Other comprehensive income (loss)




(12,215
)

(12,215
)
Comprehensive income
 
 
 
 
 
 
76,977

Common stock issued:
 
 
 
 
 
 
 
Stock-based compensation plans, net(a)


1,455

(485
)

4,486

5,456

Acquisition of Bank Mutual

3

6,717




6,720

Purchase of common stock returned to authorized but unissued

(3
)
(6,592
)



(6,595
)
Purchase of treasury stock





(477
)
(477
)
Cash dividends:







Common stock, $0.15 per share



(26,107
)


(26,107
)
Preferred stock (b)



(2,329
)


(2,329
)
Common stock warrants exercised

10

(10
)




Purchase of preferred stock
(452
)


(6
)


(459
)
Stock-based compensation expense, net


4,497




4,497

Other



(139
)


(139
)
Balance, June 30, 2018
$
159,401

$
1,751

$
1,704,587

$
2,070,872

$
(119,888
)
$
(46,479
)
$
3,770,244

Numbers may not sum due to rounding.
(a) As previously disclosed in Associated Banc-Corp's 2018 Annual Report on Form 10-K, an adjustment was made to the June 30, 2018 stockholders' equity balances related to the
grant and vesting of options, restricted stock awards, and restricted stock units awarded. This adjustment increased Surplus by $901 thousand, decreased Retained Earnings $1 million, and increased Treasury Stock $484 thousand. The reclassification had no impact on earnings, expenses, or total stockholders' equity.
(b) Series C, $0.3828125 per share and Series D, $0.3359375 per share.


See accompanying notes to consolidated financial statements.


8

Table of Contents

Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended June 30,
 ($ in Thousands)
2019
 
2018
Cash Flow From Operating Activities
 
 
 
Net income
$
171,347

 
$
158,648

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
    Provision for credit losses
14,000

 
4,000

    Depreciation and amortization
28,810

 
24,249

    Addition to (recovery of) valuation allowance on mortgage servicing rights, net
146

 
(607
)
    Amortization of mortgage servicing rights
5,448

 
4,649

    Amortization of other intangible assets
4,551

 
3,693

    Amortization and accretion on earning assets, funding, and other, net
14,495

 
423

    Net amortization of tax credit investments
11,180

 
9,770

    Losses (gains) on sales of investment securities, net
(2,143
)
 
2,015

    Asset (gains) losses, net
(1,438
)
 
(2,390
)
    (Gain) loss on mortgage banking activities, net
(11,172
)
 
261

    Mortgage loans originated and acquired for sale
(459,181
)
 
(516,285
)
    Proceeds from sales of mortgage loans held for sale
432,099

 
482,080

    Pension Contribution

 
(31,371
)
Changes in certain assets and liabilities
 
 
 
    (Increase) decrease in interest receivable
(11,738
)
 
(14,569
)
    Increase (decrease) in interest payable
3,572

 
3,775

    Increase (decrease) in expense payable
(35,516
)
 
20,631

    Increase (decrease) in cash collateral
(38,777
)
 
(63,929
)
    Increase (decrease) in net derivative position
(61,656
)
 
(34,214
)
    Net change in other assets and other liabilities
6,444

 
65,705

Net cash provided by (used in) operating activities
70,470

 
116,534

Cash Flow From Investing Activities
 
 
 
Net increase in loans
(244,230
)
 
(338,781
)
Purchases of
 
 
 
  Available for sale securities
(460,124
)
 
(655,949
)
  Held to maturity securities
(169,775
)
 
(429,964
)
  Federal Home Loan Bank and Federal Reserve Bank stocks
(178,363
)
 
(238,190
)
  Premises, equipment, and software, net of disposals
(30,608
)
 
(23,932
)
Proceeds from
 
 
 
  Sales of available for sale securities
934,228

 
493,060

  Sale of Federal Home Loan Bank and Federal Reserve Bank stocks
226,139

 
174,506

  Prepayments, calls, and maturities of available for sale investment securities
262,872

 
330,517

  Prepayments, calls, and maturities of held to maturity investment securities
100,603

 
121,612

  Sales, prepayments, calls, and maturities of other assets
7,064

 
9,640

Net change in tax credit and alternative investments
(30,814
)
 
(18,842
)
Net cash (paid) received in acquisition
551,250

 
59,472

Net cash provided by (used in) investing activities
968,242

 
(516,851
)
Cash Flow From Financing Activities
 
 
 
Net increase (decrease) in deposits
(348,344
)
 
(810,598
)
Net increase (decrease) in short-term funding
(45,091
)
 
(135,757
)
Net increase (decrease) in short-term FHLB advances
(820,000
)
 
(260,162
)
Repayment of long-term FHLB advances
(762,880
)
 
(400,000
)
Proceeds from long-term FHLB advances
751,573

 
1,841,965

Proceeds from issuance of common stock for stock-based compensation plans
7,872

 
16,147

Purchase of preferred shares

 
(646
)
Purchase of common stock returned to authorized but unissued

 
(33,075
)
Purchase of treasury stock
(77,900
)
 
(5,717
)
Cash dividends on common stock
(55,959
)
 
(51,817
)
Cash dividends on preferred stock
(7,601
)
 
(4,668
)
Net cash provided by (used in) financing activities
(1,358,331
)
 
155,672

Net increase (decrease) in cash, cash equivalents, and restricted cash
(319,619
)
 
(244,645
)
Cash, cash equivalents, and restricted cash at beginning of period
876,698

 
716,018

Cash, cash equivalents, and restricted cash at end of period
$
557,078

 
$
471,373

Supplemental disclosures of cash flow information
 
 
 
   Cash paid for interest
$
178,550

 
$
112,392

   Cash paid for (received from) income and franchise taxes
21,909

 
12,674

   Loans and bank premises transferred to other real estate owned
5,406

 
21,299

   Capitalized mortgage servicing rights
3,575

 
4,502

   Loans transferred into held for sale from portfolio, net
30,597

 
12,709

   Unsettled trades to purchase securities
136

 
15,339

Acquisition
 
 
 
   Fair value of assets acquired, including cash and cash equivalents
696,013

 
2,569,700

   Fair value ascribed to goodwill and intangible assets
29,626

 
258,885

   Fair value of liabilities assumed
725,719

 
2,828,448

   Equity issued in (adjustments related to) acquisition
(79
)
 
137

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

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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:
 
Six Months Ended June 30,
 
2019
 
2018
 
($ in Thousands)
Cash and cash equivalents
$
403,693

 
$
385,957

Restricted cash
153,385

 
85,416

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
557,078

 
$
471,373


Amounts included in restricted cash represent required reserve balances with the Federal Reserve Bank, which is included in interest-bearing deposits in other financial institutions on the face of the consolidated balance sheets. In addition, the six months ended June 30, 2018 included cash collateral for public fund customers, which is included in interest-bearing deposits in other financial institutions on the face of the consolidated balance sheets.

10

Table of Contents

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 SEC and, therefore, certain information and footnote disclosures normally presented in accordance with GAAP have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in Associated Banc-Corp's 2018 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 consolidated balance sheets 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
Huntington Wisconsin Branch Acquisition
On February 15, 2019, the Corporation received regulatory approval for the acquisition of the Wisconsin branches of Huntington. This all cash transaction closed on June 14, 2019. The conversion of the branches happened simultaneously with the close of the transaction and the acquisition expanded the Bank's presence into 13 new Wisconsin communities. As a result of the acquisition and other consolidations, a net of 14 branch locations were added.
The Huntington branch acquisition constituted a business combination. The acquisition 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 will be material.
The Corporation recorded approximately $7 million in goodwill related to the Huntington branch acquisition. Goodwill created by the acquisition is tax deductible. See Note 8 for additional information on goodwill, as well as the carrying amount and amortization of core deposit intangible assets related to the Huntington branch acquisition.

11

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The following table presents the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date related to Huntington branch acquisition:
 
Purchase Accounting Adjustments
June 14, 2019
 
($ in Thousands)
Assets
 
 
Cash and cash equivalents
$

$
551,250

Loans
(1,552
)
116,344

Premises and equipment, net
4,967

22,597

Goodwill
 
7,075

Core deposit intangibles (included in other intangible assets, net on the face of the Consolidated Balance Sheets)
22,630

22,630

Other real estate owned (included in other assets on the face of the Consolidated Balance Sheets)
(2,561
)
5,263

Others assets

559

Total assets
 
$
725,719

Liabilities
 
 
Deposits
$
156

$
725,173

Other liabilities
70

546

Total liabilities
 
$
725,719


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.
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 included in the Corporation’s 2018 Annual Report on Form 10-K. There has been one change to the Corporation's significant accounting policies since December 31, 2018, which is described below.
Leases
The Corporation determines if a lease is present at the inception of an agreement. Operating leases are capitalized at commencement and are discounted using the Corporation’s FHLB borrowing rate for a similar term borrowing unless the lease defines an implicit rate within the contract. Leases with original terms of less than 12 months are not capitalized. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

Right-of-use assets represent the Corporation’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and operating lease liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Corporation’s operating lease liabilities largely represent future rental expenses associated with operating leases and the borrowing rates are based on publicly available interest rates.

The lease term includes options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis and adjustments are made to the right-of-use asset and lease liability if the Corporation is reasonably certain that an option will be exercised and will be expensed on a straight-line basis.


12

Table of Contents

New Accounting Pronouncements Adopted
Standard
 
Description
 
Date of adoption
 
Effect on financial statements
ASU-2018-15 Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
 
The FASB issued an amendment which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this Update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendment was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Entities were required to apply the amendment either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption was permitted.
 
1st Quarter 2019
 
The Corporation elected to early adopt this amendment using the prospective approach. No material impact on results of operation, financial position or liquidity.

ASU 2018-09 Codification Improvements
 
The FASB issued an amendment which affects a wide variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. The amendments in this Update represent changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this Update did not require transition guidance and were effective upon issuance of this Update. However, many of the amendments in this Update did have transition guidance with effective dates for annual periods beginning after December 15, 2018. There are some conforming amendments in this Update that have been made to recently issued guidance that is not yet effective that may require application of the transition and effective date guidance in the original Accounting Standards Update.
 
1st Quarter 2019
 
No material impact on results of operations, financial position and liquidity.
ASU 2016-02 Leases (Topic 842)
 
The FASB issued an amendment to provide transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated balance sheets and disclosing key information about leasing arrangements. This amendment required lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. This amendment was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities could elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. Early adoption was permitted. ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity's adoption of Topic 842. ASU 2018-10 was issued as improvements and clarifications of ASU 2016-02 were identified. This Update provides clarification on narrow aspects of the previously issued Updates. ASU 2018-11 was issued to provide entities with an additional (and optional) transition method to adopt the new leases standard under ASU 2016-02. ASU 2019-01 was issued to assist in determining the fair value of underlying asset by lessors, address the presentation to the statements of cash flows, and clarify transition disclosures related to Topic 250.
 
1st Quarter 2019
 
The Corporation has adopted this amendment utilizing a modified retrospective approach. At adoption, a right-of-use asset and corresponding lease liability were recognized on the consolidated balance sheets for $52 million and $56 million, respectively. See Note 18 for expanded disclosure requirements.

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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,
 
2019
 
2018
2019
 
2018
 
(In Thousands, except per share data)
Net income
$
84,661

 
$
89,192

$
171,347

 
$
158,648

Preferred stock dividends
(3,801
)
 
(2,329
)
(7,601
)
 
(4,668
)
Net income available to common equity
$
80,860

 
$
86,863

$
163,746

 
$
153,980

Common shareholder dividends
(27,571
)
 
(25,977
)
(55,650
)
 
(51,549
)
Unvested share-based payment awards
(205
)
 
(130
)
(308
)
 
(269
)
Undistributed earnings
$
53,085

 
$
60,756

$
107,787

 
$
102,162

Undistributed earnings allocated to common shareholders
52,690

 
60,446

107,098

 
101,677

Undistributed earnings allocated to unvested share-based payment awards
395

 
310

689

 
485

Undistributed earnings
$
53,085

 
$
60,756

$
107,787

 
$
102,162

Basic
 
 
 

 

Distributed earnings to common shareholders
$
27,571

 
$
25,977

$
55,650

 
$
51,549

Undistributed earnings allocated to common shareholders
52,690

 
60,446

107,098

 
101,677

Total common shareholders earnings, basic
$
80,261

 
$
86,423

$
162,748

 
$
153,226

Diluted
 
 
 

 

Distributed earnings to common shareholders
$
27,571

 
$
25,977

$
55,650

 
$
51,549

Undistributed earnings allocated to common shareholders
52,690

 
60,446

107,098

 
101,677

Total common shareholders earnings, diluted
$
80,261

 
$
86,423

$
162,748

 
$
153,226

Weighted average common shares outstanding
162,180

 
170,633

163,049

 
167,096

Effect of dilutive common stock awards
1,492

 
2,146

1,469

 
2,080

Effect of dilutive common stock warrants

 
630


 
744

Diluted weighted average common shares outstanding
163,672

 
173,409

164,518

 
169,920

Basic earnings per common share
$
0.49

 
$
0.51

$
1.00

 
$
0.92

Diluted earnings per common share
$
0.49

 
$
0.50

$
0.99

 
$
0.90


Anti-dilutive common stock options of approximately 4 million and 2 million for the three months ended June 30, 2019 and 2018, respectively, and 3 million and 1 million for the six months ended June 30, 2019 and 2018, 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, whose employment meets the definitions under the 2017 Incentive Compensation Plan, 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.
Performance awards are based on performance goals of earnings per share and total shareholder return with vesting ranging from a minimum of 0% to a maximum of 150% of the target award. Performance awards are valued utilizing a Monte Carlo simulation model to estimate fair value of the awards at the grant date.
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

14

Table of Contents

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.
The following assumptions were used in estimating the fair value for options granted in the first six months of 2019 and full year 2018:
 
2019
 
2018
Dividend yield
3.30
%
 
2.50
%
Risk-free interest rate
2.60
%
 
2.60
%
Weighted average expected volatility
24.00
%
 
22.00
%
Weighted average expected life
5.75 years

 
5.75 years

Weighted average per share fair value of options
$4.00
 
$4.47

A summary of the Corporation’s stock option activity for the six months ended June 30, 2019 is presented below:
Stock Options
Shares(a)
Weighted Average
Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value(a)
Outstanding at December 31, 2018
5,281

$
19.09

6.18
$
12,392

Granted
1,050

22.77

 
 
Exercised
(418
)
15.68

 
 
Forfeited or expired
(85
)
23.96

 
 
Outstanding at June 30, 2019
5,828

$
19.94

6.61
$
14,870

Options Exercisable at June 30, 2019
3,631

$
18.04

5.32
$
14,016


(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 six months ended June 30, 2019, the intrinsic value of stock options exercised was approximately $3 million, compared to $9 million for the six months ended June 30, 2018. The total fair value of stock options vested was $4 million for the six months ended June 30, 2019 and June 30, 2018.
The Corporation recognized compensation expense for the vesting of stock options of $3 million for the six months ended June 30, 2019 and $2 million for the six months ended June 30, 2018. Included in compensation expense for 2019 was $1 million of expense for the accelerated vesting of stock options granted to retirement eligible colleagues. At June 30, 2019, the Corporation had approximately $6 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 2023.
The Corporation also issues restricted stock awards under the 2017 Incentive Compensation Plan. The following table summarizes information about the Corporation’s restricted stock awards activity for the six months ended June 30, 2019:
Restricted Stock Awards
Shares(a)
 
Weighted Average
Grant Date Fair Value
Outstanding at December 31, 2018
1,993

 
$
21.92

Granted
1,164

 
22.21

Vested
(673
)
 
20.49

Forfeited
(38
)
 
24.14

Outstanding at June 30, 2019
2,446

 
$
22.42


(a) In thousands
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 2018 and 2019 will vest ratably over a period of three years. Service-based restricted stock awards granted during 2018 and 2019 will vest ratably over a period of four years. Expense for restricted stock awards issued of approximately $13 million was recorded for the six months ended June 30, 2019 and $6 million was recorded for the six months ended June 30, 2018. Included in compensation expense for 2019 was approximately $3 million of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $28 million of unrecognized compensation costs related to restricted stock awards at June 30, 2019, that is expected to be recognized over the remaining requisite service periods that extend through first quarter 2023.

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Table of Contents

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.
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 GNMA or GSEs such as FNMA and FHLMC. Obligations of state and political subdivisions (municipal securities) make up a large percentage of the portfolio as well.
The amortized cost and fair values of securities available for sale and held to maturity at June 30, 2019 were as follows:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale
 
 
 
 
 
 
 
 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
$
182,893

 
$
1,646

 
$
(817
)
 
$
183,722

 
GNMA
1,325,739

 
7,942

 
(2,048
)
 
1,331,633

 
Private-label
805

 
9

 

 
814

 
Commercial mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
20,244

 
858

 

 
21,102

 
GNMA
1,483,392

 
6,217

 
(19,562
)
 
1,470,048

 
FFELP asset backed securities
274,520

 
152

 
(1,535
)
 
273,137

 
Other debt securities
3,000

 

 

 
3,000

 
Total investment securities available for sale
$
3,290,593

 
$
16,825

 
$
(23,962
)
 
$
3,283,456

 
Investment securities held to maturity
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
999

 
$
20

 
$

 
$
1,019

 
Obligations of state and political subdivisions (municipal securities)
1,913,737

 
68,372

 
(152
)
 
1,981,957

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
89,078

 
1,143

 
(145
)
 
90,076

 
GNMA
321,046

 
3,430

 
(292
)
 
324,184

 
GNMA commercial mortgage-related securities
481,205

 
7,264

 
(10,948
)
 
477,521

 
Total investment securities held to maturity
$
2,806,064

 
$
80,230

 
$
(11,537
)
 
$
2,874,758



16

Table of Contents

The amortized cost and fair values of securities available for sale and held to maturity at December 31, 2018 were as follows:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,000

 
$

 
$
(1
)
 
$
999

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
296,296

 
2,466

 
(3,510
)
 
295,252

 
GNMA
2,169,943

 
473

 
(41,885
)
 
2,128,531

 
Private-label
1,007

 

 
(4
)
 
1,003

 
GNMA commercial mortgage-related securities
1,273,309

 

 
(52,512
)
 
1,220,797

 
FFELP asset backed securities
297,347

 
711

 
(698
)
 
297,360

 
Other debt securities
3,000

 

 

 
3,000

 
Total investment securities available for sale
$
4,041,902

 
$
3,649

 
$
(98,610
)
 
$
3,946,941

 
Investment securities held to maturity
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
$
1,790,683

 
$
8,255

 
$
(15,279
)
 
$
1,783,659

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
92,788

 
169

 
(1,795
)
 
91,162

 
GNMA
351,606

 
1,611

 
(8,181
)
 
345,035

 
GNMA commercial mortgage-related securities
505,434

 
7,559

 
(22,579
)
 
490,414

 
Total investment securities held to maturity
$
2,740,511

 
$
17,593

 
$
(47,835
)
 
$
2,710,271

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. The expected maturities of investment securities available for sale and held to maturity at June 30, 2019 are shown below:
 
Available for Sale
 
Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
($ in Thousands)
Due in one year or less
$
1,000

 
$
1,000

 
$
48,235

 
$
48,393

Due after one year through five years
2,000

 
2,000

 
184,581

 
185,909

Due after five years through ten years

 

 
479,215

 
491,122

Due after ten years

 

 
1,202,705

 
1,257,552

Total debt securities
3,000

 
3,000

 
1,914,735

 
1,982,976

Residential mortgage-related securities
 
 
 
 
 
 
 
FNMA / FHLMC
182,893

 
183,722

 
89,078

 
90,076

GNMA
1,325,739

 
1,331,633

 
321,046

 
324,184

Private-label
805

 
814

 

 

Commercial mortgage-related securities
 
 
 
 
 
 
 
FNMA / FHLMC
20,244

 
21,102

 

 

GNMA
1,483,392

 
1,470,048

 
481,205

 
477,521

FFELP asset backed securities
274,520

 
273,137

 

 

Total investment securities
$
3,290,593

 
$
3,283,456

 
$
2,806,064

 
$
2,874,758

Ratio of fair value to amortized cost
 
 
99.8
%
 
 
 
102.4
%


17

Table of Contents

Investment securities gains (losses), net includes proceeds from the sale of investment securities as well as any applicable write-ups or write-downs of investment securities. The proceeds from the sale and write-up of investment securities for the six months ended June 30, 2019 and 2018 are shown below:
 
Six Months Ended June 30,
 
2019
 
2018
 
($ in Thousands)
Gross gains on available for sale securities
$
2,334

 
$

Gross gains on held to maturity securities

 

Total gains
2,334

 

Gross losses on available for sale securities
(13,636
)
 
(2,015
)
Gross losses on held to maturity securities

 

Total losses
(13,636
)
 
(2,015
)
Write-up of equity securities without readily determinable fair values
13,444

 

Investment securities gains (losses), net
$
2,143

 
$
(2,015
)
Proceeds from sales of investment securities
$
934,228

 
$
493,060


During the first six months of 2019, the Corporation sold $934 million of taxable, floating rate ABS and shorter duration MBS, CMBS, and CMO Agency securities, with the proceeds utilized to pay down borrowings and to reinvest into higher yielding Agency related mortgage securities with slightly longer durations, repositioning the portfolio for a stable to declining rate environment. The Corporation also donated 42,039 shares of Visa Class B restricted shares to the Corporation's Charitable Remainder Trust during the second quarter of 2019, and the subsequent sale of those shares by the Trust resulted in an observable market price. As a result, the Corporation wrote up its remaining 77,000 Visa Class B restricted shares to fair value. Based on the existing transfer restriction and the uncertainty of covered litigation, the shares were previously carried at a zero cost basis.
During the first six months of 2018, the Corporation sold approximately $40 million of lower yielding GNMA commercial mortgage-related securities. In addition, on February 1, 2018, the date the Bank Mutual acquisition was completed, the Corporation sold Bank Mutual's entire $453 million securities portfolio. The Corporation originally reinvested the proceeds from the Bank Mutual securities portfolio into GNMA residential mortgage-related securities with the goal of reinvesting future cash flows into municipal securities. That strategy was completed during August 2018.
Investment securities with a carrying value of approximately $3.3 billion and $3.0 billion at June 30, 2019, and December 31, 2018, respectively, were required to be pledged to secure certain deposits or for other purposes as required or permitted by law.

18

Table of Contents

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, 2019:
 
Less than 12 months
 
12 months or more
 
Total
 
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
3

 
$

 
$
781

 
14

 
$
(817
)
 
$
121,661

 
$
(817
)
 
$
122,441

GNMA
2

 
(602
)
 
53,013

 
13

 
(1,446
)
 
316,714

 
(2,048
)
 
369,727

GNMA commercial mortgage-related securities

 

 

 
70

 
(19,562
)
 
1,002,980

 
(19,562
)
 
1,002,980

FFELP asset backed securities
16

 
(1,380
)
 
205,710

 
1

 
(155
)
 
5,839

 
(1,535
)
 
211,550

Other debt securities
3

 

 
3,000

 

 

 

 

 
3,000

Total
24

 
$
(1,982
)
 
$
262,504

 
98

 
$
(21,979
)
 
$
1,447,194

 
$
(23,962
)
 
$
1,709,698

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
8

 
$
(12
)
 
$
3,962

 
50

 
$
(140
)
 
$
25,109

 
$
(152
)
 
$
29,071

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC

 

 

 
10

 
(145
)
 
18,474

 
(145
)
 
18,474

GNMA
1

 
(51
)
 
6,956

 
27

 
(241
)
 
35,339

 
(292
)
 
42,295

GNMA commercial mortgage-related securities

 

 

 
22

 
(10,948
)
 
404,790

 
(10,948
)
 
404,790

Total
9

 
$
(63
)
 
$
10,918

 
109

 
$
(11,474
)
 
$
483,712

 
$
(11,537
)
 
$
494,630


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, 2018:
 
Less than 12 months
 
12 months or more
 
Total
 
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

 
$
(1
)
 
$
999

 
$
(1
)
 
$
999

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
15

 
(31
)
 
17,993

 
17

 
(3,479
)
 
189,405

 
(3,510
)
 
207,398

GNMA
12

 
(4,529
)
 
452,183

 
79

 
(37,355
)
 
1,598,159

 
(41,885
)
 
2,050,342

Private-label
1

 
(4
)
 
1,003

 

 

 

 
(4
)
 
1,003

GNMA commercial mortgage-related securities

 

 

 
93

 
(52,512
)
 
1,220,854

 
(52,512
)
 
1,220,854

FFELP asset backed securities
13

 
(698
)
 
142,432

 

 

 

 
(698
)
 
142,432

Total
41

 
$
(5,262
)
 
$
613,612

 
190

 
$
(93,347
)
 
$
3,009,417

 
$
(98,610
)
 
$
3,623,028

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
272

 
$
(2,860
)
 
$
313,212

 
752

 
$
(12,419
)
 
$
509,374

 
$
(15,279
)
 
$
822,586

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
13

 
(780
)
 
57,896

 
22

 
(1,015
)
 
28,888

 
(1,795
)
 
86,784

GNMA
13

 
(414
)
 
19,822

 
66

 
(7,767
)
 
320,387

 
(8,181
)
 
340,209

GNMA commercial mortgage-related securities

 

 

 
25

 
(22,579
)
 
490,414

 
(22,579
)
 
490,414

Total
298

 
$
(4,053
)
 
$
390,929

 
865

 
$
(43,780
)
 
$
1,349,063

 
$
(47,835
)
 
$
1,739,992



19

Table of Contents

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 June 30, 2019 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 June 30, 2019 for mortgage-related securities have declined due to the decrease in overall interest rates. The U.S. Treasury 3 year and 5 year rates both decreased by 75 bp from December 31, 2018. The Corporation does not intend to sell nor does it believe that it will be required to sell the securities in an unrealized loss position before recovery of their amortized cost basis.
FHLB and Federal Reserve Bank stocks: The Corporation is required to maintain Federal Reserve Bank 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, 2019 and December 31, 2018, the Corporation had FHLB stock of $125 million and $173 million, respectively. The Corporation had Federal Reserve Bank stock of $78 million at June 30, 2019 and $77 million at December 31, 2018.
Equity Securities
Equity securities with readily determinable fair values: The Corporation's portfolio of equity securities with readily determinable fair values is primarily comprised of CRA Qualified Investment mutual funds. At both June 30, 2019 and December 31, 2018, the Corporation had equity securities with readily determinable fair values of $2 million.
Equity securities without readily determinable fair values: The Corporation's portfolio of equity securities without readily determinable fair values consists of Visa Class B restricted shares that the Corporation received in 2008 as part of Visa's initial public offering. During the second quarter of 2019, the Corporation donated 42,039 shares of Visa Class B restricted shares to the Corporation's Charitable Remainder Trust, and the subsequent sale of those shares by the Trust resulted in an observable market price. As a result, the Corporation wrote up their remaining 77,000 Visa Class B restricted shares to fair value. Based on the existing transfer restriction and the uncertainty of the covered litigation, the Visa Class B restricted shares were previously carried at a zero cost basis. Thus, the Corporation had equity securities without readily determinable fair values of $13 million at June 30, 2019 and $0 at December 31, 2018.
Note 7 Loans
The period end loan composition was as follows:
 
June 30, 2019
 
December 31, 2018
 
($ in Thousands)
Commercial and industrial
$
7,579,384

 
$
7,398,044

Commercial real estate — owner occupied
942,811

 
920,443

Commercial and business lending
8,522,194

 
8,318,487

Commercial real estate — investor
3,779,201

 
3,751,554

Real estate construction
1,394,815

 
1,335,031

Commercial real estate lending
5,174,016

 
5,086,585

Total commercial
13,696,210

 
13,405,072

Residential mortgage
8,277,479

 
8,277,712

Home equity
916,213

 
894,473

Other consumer
360,065

 
363,171

Total consumer
9,553,757

 
9,535,357

Total loans(a)
$
23,249,967

 
$
22,940,429


(a) Includes $2 million and $5 million of purchased credit-impaired loans at June 30, 2019 and December 31, 2018, respectively.


20

Table of Contents

The following table presents commercial and consumer loans by credit quality indicator at June 30, 2019:
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
7,387,549

 
$
49,026

 
$
58,658

 
$
84,151

 
$
7,579,384

Commercial real estate - owner occupied
909,641

 
8,362

 
24,237

 
571

 
942,811

Commercial and business lending
8,297,189

 
57,388

 
82,895

 
84,722

 
8,522,194

Commercial real estate - investor
3,628,197

 
71,753

 
77,766

 
1,485

 
3,779,201

Real estate construction
1,382,502

 
8,720

 
3,166

 
427

 
1,394,815

Commercial real estate lending
5,010,699

 
80,473

 
80,932

 
1,912

 
5,174,016

Total commercial
13,307,888

 
137,860

 
163,828

 
86,634

 
13,696,210

Residential mortgage
8,206,689

 
641

 
1,983

 
68,166

 
8,277,479

Home equity
903,694

 
652

 
32

 
11,835

 
916,213

Other consumer
359,487

 
506

 

 
72

 
360,065

Total consumer
9,469,870

 
1,799

 
2,014

 
80,073

 
9,553,757

Total loans
$
22,777,758

 
$
139,660

 
$
165,842

 
$
166,707

 
$
23,249,967

The following table presents commercial and consumer loans by credit quality indicator at December 31, 2018:
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
7,162,370

 
$
78,075

 
$
116,578

 
$
41,021

 
$
7,398,044

Commercial real estate - owner occupied
854,265

 
6,257

 
55,964

 
3,957

 
920,443

Commercial and business lending
8,016,635

 
84,332

 
172,542

 
44,978

 
8,318,487

Commercial real estate - investor
3,653,642

 
28,479

 
67,481

 
1,952

 
3,751,554

Real estate construction
1,321,447

 
8,771

 
3,834

 
979

 
1,335,031

Commercial real estate lending
4,975,089

 
37,249

 
71,315

 
2,931

 
5,086,585

Total commercial
12,991,724

 
121,582

 
243,856

 
47,909

 
13,405,072

Residential mortgage
8,203,729

 
434

 
5,975

 
67,574

 
8,277,712

Home equity
880,808

 
1,223

 
103

 
12,339

 
894,473

Other consumer
362,343

 
749

 

 
79

 
363,171

Total consumer
9,446,881

 
2,406

 
6,078

 
79,992

 
9,535,357

Total loans
$
22,438,605

 
$
123,988

 
$
249,935

 
$
127,901

 
$
22,940,429


Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, and appropriate allowance for loan losses, allowance for unfunded commitments, nonaccrual, and charge off policies.
For commercial loans, management has determined the pass credit quality indicator to include credits exhibiting acceptable financial statements, cash flow, and leverage. If any risk exists, it is mitigated by the loan structure, collateral, monitoring, or control. For consumer loans, performing loans include credits performing in accordance with the original contractual terms. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Special mention credits have potential weaknesses that deserve management’s attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Potential problem loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness, or weaknesses, which may jeopardize liquidation of the debt, and are characterized by the distinct possibility the Corporation will sustain some loss if the deficiencies are not corrected. Lastly, management considers a loan to be impaired when it is probable the Corporation will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined commercial and consumer loan relationships in nonaccrual status or those with their terms restructured in a troubled debt restructuring meet this impaired loan definition. Commercial loans classified as special mention, potential problem, and nonaccrual are reviewed at a minimum on a quarterly basis, while pass and performing rated credits are reviewed on an annual basis or more frequently if the loan renewal is less than one year or if otherwise warranted.

21

Table of Contents

The following table presents loans by past due status at June 30, 2019:
 
Accruing
 
 
 
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
More
Past Due
 
Nonaccrual(a)
 
Total
 
($ in Thousands)
Commercial and industrial
$
7,490,030

 
$
4,769

 
$
139

 
$
293

 
$
84,151

 
$
7,579,384

Commercial real estate - owner occupied
940,222

 
2,018

 

 

 
571

 
942,811

Commercial and business lending
8,430,252

 
6,787

 
139

 
293

 
84,722

 
8,522,194

Commercial real estate - investor
3,776,334

 
1,382

 

 

 
1,485

 
3,779,201

Real estate construction
1,394,237

 
131

 
19

 

 
427

 
1,394,815

Commercial real estate lending
5,170,572

 
1,513

 
19

 

 
1,912

 
5,174,016

Total commercial
13,600,824

 
8,300

 
159

 
293

 
86,634

 
13,696,210

Residential mortgage
8,199,557

 
9,199

 
558

 

 
68,166

 
8,277,479

Home equity
898,550

 
5,176

 
652

 

 
11,835

 
916,213

Other consumer
356,360

 
1,150

 
688

 
1,795

 
72

 
360,065

Total consumer
9,454,467

 
15,524

 
1,898

 
1,795

 
80,073

 
9,553,757

Total loans
$
23,055,291

 
$
23,824

 
$
2,057

 
$
2,088

 
$
166,707

 
$
23,249,967


(a) Of the total nonaccrual loans, $90 million, or 54%, were current with respect to payment at June 30, 2019.

The following table presents loans by past due status at December 31, 2018:
 
Accruing
 
 
 
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
More
Past Due
 
Nonaccrual(a)
 
Total
 
($ in Thousands)
Commercial and industrial
$
7,356,187

 
$
187

 
$
338

 
$
311

 
$
41,021

 
$
7,398,044

Commercial real estate - owner occupied
913,787

 
2,580

 
119

 

 
3,957

 
920,443

Commercial and business lending
8,269,974

 
2,767

 
457

 
311

 
44,978

 
8,318,487

Commercial real estate - investor
3,745,835

 
2,954

 
813

 

 
1,952

 
3,751,554

Real estate construction
1,333,722

 
330

 

 

 
979

 
1,335,031

Commercial real estate lending
5,079,557

 
3,284

 
813

 

 
2,931

 
5,086,585

Total commercial
13,349,531

 
6,051

 
1,270

 
311

 
47,909

 
13,405,072

Residential mortgage
8,200,432

 
9,272

 
434

 

 
67,574

 
8,277,712

Home equity
876,085

 
4,826

 
1,223

 

 
12,339

 
894,473

Other consumer
358,970

 
1,401

 
868

 
1,853

 
79

 
363,171

Total consumer
9,435,487

 
15,499

 
2,525

 
1,853

 
79,992

 
9,535,357

Total loans
$
22,785,019

 
$
21,550

 
$
3,795

 
$
2,165

 
$
127,901

 
$
22,940,429

(a) Of the total nonaccrual loans, $74 million, or 58%, were current with respect to payment at December 31, 2018.

22

Table of Contents

The following table presents impaired loans individually evaluated under ASC Topic 310, excluding $2 million of purchased credit-impaired loans, at June 30, 2019:
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
($ in Thousands)
Loans with a related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
83,561

 
$
94,759

 
$
22,890

 
$
48,118

 
$
1,104