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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 June 30, 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 ¨ 
 

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  þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at July 25, 2018 was 172,093,888.

1




ASSOCIATED BANC-CORP
Table of Contents
 
 
Page
 
 
 
 
 
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
 
55
 
 
 
 
82
 
 
 
 
82
 
 
 
 
 
 
 
 
83
 
 
 
 
83
 
 
 
 
83
 
 
 
 
84
 
 
 
 
85

2




PART I - FINANCIAL INFORMATION
 
 
ITEM 1.
Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
 
June 30, 2018
 
December 31, 2017
 
(Unaudited)
 
(Audited)
 
(In Thousands, except share and per share data)
Assets
 
 
 
Cash and due from banks
$
396,761

 
$
483,666

Interest-bearing deposits in other financial institutions
71,462

 
199,702

Federal funds sold and securities purchased under agreements to resell
3,150

 
32,650

Investment securities held to maturity, at amortized cost
2,602,247

 
2,282,853

Investment securities available for sale, at fair value
4,261,651

 
4,043,446

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost
249,040

 
165,331

Residential loans held for sale
143,022

 
85,544

Loans
22,976,786

 
20,784,991

Allowance for loan losses
(252,601
)
 
(265,880
)
Loans, net
22,724,184

 
20,519,111

Bank and corporate owned life insurance
659,592

 
591,057

Tax credit and other investments
137,051

 
147,099

Trading assets
132,919

 
69,675

Premises and equipment, net
361,385

 
330,963

Goodwill
1,166,665

 
976,239

Mortgage servicing rights, net
66,980

 
58,384

Other intangible assets, net
80,346

 
15,580

Other assets
596,190

 
482,294

Total assets
$
33,652,647

 
$
30,483,594

Liabilities and Stockholders' Equity
 
 
 
Noninterest-bearing demand deposits
$
5,341,361

 
$
5,478,416

Interest-bearing deposits
18,474,953

 
17,307,546

Total deposits
23,816,314

 
22,785,962

Federal funds purchased and securities sold under agreements to repurchase
203,733

 
324,815

Commercial paper
52,791

 
67,467

FHLB advances
4,797,857

 
3,184,168

Other long-term funding
497,619

 
497,282

Trading liabilities
131,612

 
67,660

Accrued expenses and other liabilities
382,476

 
318,797

Total liabilities
29,882,403

 
27,246,151

Stockholders’ Equity
 
 
 
Preferred equity
159,401

 
159,929

Common equity
 
 
 
Common stock
1,751

 
1,618

Surplus
1,828,965

 
1,454,188

Retained earnings
1,920,579

 
1,819,230

Accumulated other comprehensive income (loss)
(119,888
)
 
(62,758
)
Treasury stock, at cost
(20,564
)
 
(134,764
)
Total common equity
3,610,843

 
3,077,514

Total stockholders’ equity
3,770,244

 
3,237,443

Total liabilities and stockholders’ equity
$
33,652,647

 
$
30,483,594

Preferred shares issued
164,570

 
165,000

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

 
750,000

Common shares issued
175,133,157

 
161,751,975

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

 
250,000,000

Treasury shares of common stock
1,606,672

 
8,908,448

Numbers may not sum 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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands, except per share data)
Interest Income
 
Interest and fees on loans
$
246,646

 
$
184,246

 
$
466,680

 
$
357,895

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
30,623

 
23,658

 
60,727

 
47,133

Tax-exempt
10,783

 
8,143

 
20,000

 
16,272

Other interest
3,153

 
1,553

 
5,330

 
3,089

Total interest income
291,205

 
217,600

 
552,737

 
424,389

Interest Expense
 
 
 
 
 
 
 
Interest on deposits
38,431

 
21,180

 
71,843

 
38,104

Interest on Federal funds purchased and securities sold under agreements to repurchase
538

 
824

 
1,060

 
1,339

Interest on other short-term funding
51

 
84

 
111

 
169

Interest on FHLB advances
21,279

 
7,149

 
34,402

 
11,596

Interest on long-term funding
4,544

 
4,544

 
9,088

 
9,088

Total interest expense
64,843

 
33,781

 
116,504

 
60,296

Net Interest Income
226,362

 
183,819

 
436,233

 
364,093

Provision for credit losses
4,000

 
12,000

 
4,000

 
21,000

Net interest income after provision for credit losses
222,362

 
171,819

 
432,233

 
343,093

Noninterest Income
 
 
 
 
 
 
 
Insurance commissions and fees
23,996

 
20,853

 
46,644

 
42,473

Service charges on deposit account fees
16,390

 
16,030

 
32,810

 
32,386

Card-based and loan fees
14,387

 
13,764

 
27,809

 
26,229

Trust and asset management fees
13,437

 
12,346

 
26,806

 
24,281

Brokerage commission and fees
6,896

 
4,346

 
14,169

 
8,679

Mortgage banking, net
6,258

 
5,027

 
12,628

 
9,606

Capital markets, net
4,783

 
4,042

 
10,089

 
7,925

Bank and corporate owned life insurance
3,978

 
3,899

 
7,165

 
6,514

Asset gains (losses), net 
2,497

 
(466
)
 
2,390

 
(700
)
Investment securities gains (losses), net
(2,015
)
 
356

 
(2,015
)
 
356

Other
2,235

 
2,213

 
4,727

 
4,492

Total noninterest income
92,842

 
82,410

 
183,222

 
162,241

Noninterest Expense
 
 
 
 
 
 
 
Personnel
123,980

 
107,066

 
241,665

 
213,848

Occupancy
15,071

 
12,832

 
30,428

 
28,051

Technology
19,452

 
15,473

 
37,167

 
29,893

Equipment
5,953

 
5,234

 
11,509

 
10,719

Business development and advertising
7,067

 
7,152

 
13,760

 
12,987

Legal and professional
6,284

 
5,711

 
11,697

 
9,877

Card issuance and loan costs
3,173

 
2,974

 
6,477

 
5,594

Foreclosure / OREO expense, net
1,021

 
1,182

 
1,744

 
2,687

FDIC assessment
8,250

 
8,000

 
16,500

 
16,000

Other intangible amortization
2,168

 
496

 
3,693

 
1,009

Acquisition related costs(a)
7,107

 

 
27,712

 

Other
11,732

 
10,196

 
21,873

 
19,342

Total noninterest expense
211,258

 
176,316

 
424,223

 
350,007

Income before income taxes
103,947

 
77,913

 
191,232

 
155,327

Income tax expense
14,754

 
19,930

 
32,583

 
41,074

Net Income
89,192

 
57,983

 
158,648

 
114,253

Preferred stock dividends
2,329

 
2,339

 
4,668

 
4,669

Net income available to common equity
$
86,863

 
$
55,644

 
$
153,980

 
$
109,584

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.51

 
$
0.36

 
$
0.92

 
$
0.72

Diluted
$
0.50

 
$
0.36

 
$
0.90

 
$
0.71

Average common shares outstanding:
 
 
 
 
 
 
 
Basic
170,633

 
151,573

 
167,096

 
151,196

Diluted
173,409

 
154,302

 
169,920

 
154,147

Numbers may not sum due to rounding.
(a)
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 June 30,
Six Months Ended June 30,
 
2018
2017
2018
2017
 
($ in Thousands)
Net income
$
89,192

$
57,983

$
158,648

$
114,253

Other comprehensive income, net of tax
 
 
 
 
Investment securities available for sale
 
 
 
 
Net unrealized gains (losses)
(18,919
)
15,218

(60,754
)
18,370

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

(9,474
)

(14,738
)
Amortization of net unrealized gain (loss) on available for sale securities transferred to held to maturity securities
(335
)
(1,548
)
(632
)
(2,575
)
Reclassification adjustment for net losses (gains) realized in net income(1)
2,015


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
4,705

(1,601
)
15,340

(406
)
Other comprehensive income (loss) on investment securities available for sale
(12,533
)
2,595

(52,533
)
651

Defined benefit pension and postretirement obligations
 
 
 
 
Amortization of prior service cost
(38
)
(37
)
(76
)
(75
)
Amortization of actuarial loss (gains)
465

487

929

975

Reclassification of certain tax effects from OCI


(5,235
)

Income tax (expense) benefit
(109
)
(171
)
(216
)
(342
)
Other comprehensive income (loss) on pension and postretirement obligations
318

279

(4,597
)
558

Total other comprehensive income (loss)
(12,215
)
2,874

(57,130
)
1,209

Comprehensive income
$
76,977

$
60,857

$
101,518

$
115,462

Numbers may not sum due to rounding.
(1) Includes only available for sale securities.

See accompanying notes to consolidated financial statements.


5



Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
 
Preferred Equity
Common Stock
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Total
 
(In Thousands, except per share data)
Balance, December 31, 2016
$
159,929

$
1,630

$
1,459,498

$
1,695,764

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

Comprehensive income
 
 
 
 
 
 
 
Net income



114,253



114,253

Other comprehensive income




1,209


1,209

Comprehensive income
 
 
 
 
 
 
115,462

Common stock issued
 
 
 
 
 
 
 
Stock-based compensation plans, net


1,102

(20,912
)

40,755

20,945

Purchase of treasury stock





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



(36,804
)


(36,804
)
Preferred stock



(4,669
)


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


12,667




12,667

Other


1,034




1,034

Balance, June 30, 2017
$
159,929

$
1,630

$
1,474,301

$
1,747,632

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

 
 
 
 
 
 
 
 
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



158,648



158,648

Other comprehensive income




(43,392
)

(43,392
)
Adoption of new accounting standards




(13,738
)

(13,738
)
Comprehensive income
 
 
 
 
 
 
101,518

Common stock issued
 
 
 
 
 
 
 
Stock-based compensation plans, net


2,702

(15,176
)

28,621

16,147

Acquisitions

137

396,975



91,296

488,408

Purchase of common stock returned to authorized but unissued


(14
)
(33,061
)



(33,075
)
Purchase of treasury stock





(5,717
)
(5,717
)
Cash dividends
 
 
 
 
 
 
 
Common stock, $0.30 per share



(51,817
)


(51,817
)
Preferred stock



(4,668
)


(4,668
)
Redemption of preferred stock
(528
)


(118
)


(646
)
Common stock warrants exercised

10

(10
)




Stock-based compensation expense, net


8,172




8,172

Tax Act reclassification



13,654




13,654

Change in accounting principle



84




84

Other



742



742

Balance, June 30, 2018
$
159,401

$
1,751

$
1,828,965

$
1,920,579

$
(119,888
)
$
(20,564
)
$
3,770,244

Numbers may not sum 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)
 
Six Months Ended June 30,
 
2018
 
2017
 
($ in Thousands)
Cash Flow From Operating Activities
 
 
 
Net income
$
158,648

 
$
114,253

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
    Provision for credit losses
4,000

 
21,000

    Depreciation and amortization
24,249

 
23,241

    Addition to (recovery of) valuation allowance on mortgage servicing rights, net
(607
)
 
275

    Amortization of mortgage servicing rights
4,649

 
5,084

    Amortization of other intangible assets
3,693

 
1,009

    Amortization and accretion on earning assets, funding, and other, net
423

 
17,889

    Net amortization of tax credit investments
9,770

 
5,165

    Gain on sales of investment securities, net
2,015

 
(356
)
    Asset (gains) losses, net
(2,390
)
 
700

    (Gain) loss on mortgage banking activities, net
261

 
4,287

    Mortgage loans originated and acquired for sale
(516,285
)
 
(220,284
)
    Proceeds from sales of mortgage loans held for sale
482,080

 
364,128

    Pension Contribution
(31,371
)
 

    (Increase) decrease in interest receivable
(14,569
)
 
(757
)
    Increase (decrease) in interest payable
3,775

 
2,653

    Net change in other assets and other liabilities
(11,807
)
 
(18,849
)
Net cash provided by operating activities
116,534

 
319,438

Cash Flow From Investing Activities
 
 
 
Net increase in loans
(338,781
)
 
(819,198
)
Purchases of
 
 
 
  Available for sale securities
(655,949
)
 
(417,397
)
  Held to maturity securities
(429,964
)
 
(70,969
)
  Federal Home Loan Bank and Federal Reserve Bank stocks
(238,190
)
 
(166,869
)
  Premises, equipment, and software, net of disposals
(23,932
)
 
(19,289
)
Proceeds from
 
 
 
  Sales of available for sale securities
493,060

 

  Sales of held to maturity securities

 
16,059

  Sale of Federal Home Loan Bank and Federal Reserve Bank stocks
174,506

 
125,690

  Prepayments, calls, and maturities of available for sale investment securities
330,517

 
389,251

  Prepayments, calls, and maturities of held to maturity investment securities
121,612

 
80,976

  Sales, prepayments, calls, and maturities of other assets
9,640

 
5,840

Net change in tax credit investments
(18,842
)
 
(30,833
)
Net cash (paid) received in acquisition
59,472

 
(217
)
Net cash used in investing activities
(516,851
)
 
(906,956
)
Cash Flow From Financing Activities
 
 
 
Net increase (decrease) in deposits
(810,598
)
 
(270,268
)
Net increase (decrease) in short-term funding
(481,920
)
 
95,447

Net increase (decrease) in FHLB advances
1,527,966

 
714,988

Proceeds from issuance of common stock for stock-based compensation plans
16,147

 
20,945

Redemption of preferred shares
(646
)
 

Purchase of common stock returned to authorized but unissued
(33,075
)
 

Purchase of treasury stock for tax withholding
(5,717
)
 
(8,445
)
Cash dividends on common stock
(51,817
)
 
(36,804
)
Cash dividends on preferred stock
(4,668
)
 
(4,669
)
Net cash provided by financing activities
155,672

 
511,194

Net increase (decrease) in cash, cash equivalents, and restricted cash
(244,645
)
 
(76,324
)
Cash, cash equivalents, and restricted cash at beginning of period
716,018

 
642,233

Cash, cash equivalents, and restricted cash at end of period
$
471,373

 
$
565,909

Supplemental disclosures of cash flow information
 
 
 
   Cash paid for interest
$
112,392

 
$
57,306

   Cash paid for income taxes
12,674

 
27,461

   Loans and bank premises transferred to other real estate owned
21,299

 
3,267

   Capitalized mortgage servicing rights
4,502

 
3,278

   Loans transferred into held for sale from portfolio, net
12,709

 
66,181

   Unsettled trades to purchase securities
15,339

 

Acquisition
 
 
 
   Fair value of assets acquired, including cash and cash equivalents
2,569,700

 

   Fair value ascribed to goodwill and intangible assets
258,885

 
217

   Fair value of liabilities assumed
2,828,448

 

   Common stock issued in acquisition
137

 

Numbers may not sum 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.
 
Six Months Ended June 30,
 
2018
 
2017
 
($ in Thousands)
Cash and cash equivalents
$
385,957

 
$
466,996

Restricted cash
85,416

 
98,913

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
471,373

 
$
565,909


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 Associated Banc-Corp'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 Agreement and Plan of Merger dated July 20, 2017 (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 common stock of the Corporation on January 31, 2018. The Corporation completed the conversion of Bank Mutual in the second quarter of 2018. The banking subsidiary of Bank Mutual merged with and into Associated Bank, N.A. on June 24, 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 will be material.
Goodwill related to the Bank Mutual acquisition increased $6 million during the second quarter of 2018 to $173 million. Upon review of information relating to events and circumstances existing at the acquisition date, and in accordance with applicable accounting guidance, the Corporation remeasured select previously reported fair value amounts. Based on updated appraisal information, the fair value of premises and equipment decreased by $6 million and the fair value of other real estate owned increased by $1 million. Additionally, the fair value of loans was increased by less than $1 million due to an updated appraisal and other adjustments. Goodwill created by the acquisition of Bank Mutual is not tax deductible. 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.

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
(48,043
)
1,875,877

Premises and equipment, net
5,180

44,939

Bank owned life insurance
(24
)
65,390

Goodwill


173,243

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 (included in other assets on the face of the Consolidated Balance Sheet)
989

5,638

Others assets
$
6,153

$
46,257

Total assets


$
2,820,389

Liabilities
 
 
Deposits
$
2,498

$
1,840,950

Other borrowings
1,875

431,886

Other liabilities
$
4,370

$
65,864

Total liabilities


$
2,338,701

 
 
 
Total consideration paid


$
481,688


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 second quarter of 2018, the Corporation completed the acquisition of Anderson Insurance & Investment Agency, Inc. ("Anderson"), an independent insurance agency based in Minneapolis, Minnesota. Anderson adds a range of complementary services and significant expertise in workers' compensation and executive risk management services. The transaction was valued at approximately $10 million. As a result of the acquisition, the Corporation recorded goodwill of approximately $7 million and added approximately $3 million of other intangibles related to customer relationships associated with the Anderson acquisition. The other intangibles related to the acquisition are being amortized on a straight-line basis over 7 years. See Note 8 for more information on goodwill and other intangible assets.
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 ability to achieve greater scale in the Metro Milwaukee

10



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.
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 when there is a reasonable expectation about the amount and timing of such cash flows. If a reasonable expectation on the amount or timing of such cash flows can't be determined, accretion of the fair value discount for nonperforming loans will be recognized using the cost recovery method of accounting.
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.


11



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 an amendment to allow a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. 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 Tax Cut and Jobs Act of 2017 is recognized.
 
1st Quarter 2018
 
The Corporation has elected to early adopt this amendment. 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 on results of operations, financial position, or liquidity. See Consolidated Statements of Comprehensive Income and the Statement of Changes in Stockholders' Equity.
ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
 
The FASB issued an 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 amendment. No material impact on results of operations, financial position, or 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 an amendment 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 on results of operations, financial position, or 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, then 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 on results of operations, financial position, or liquidity. See Consolidated Statements of Cash Flows.

12



Standard
 
Description
 
Date of adoption
 
Effect on financial statements
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 from 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 bank owned life insurance) should be classified as cash inflows from investing, while the cash payments for the premiums may be classified as cash outflows from 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.
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.
 
1st Quarter 2018
 
The Corporation has adopted this amendment and is using the cumulative-effect adjustment as of the beginning of the fiscal year of adoption. No material impact on the result of operations, financial position or 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 June 30, 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 amendment 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 June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands, except per share data)
Net income
$
89,192

 
$
57,983

 
$
158,648

 
$
114,253

Preferred stock dividends
(2,329
)
 
(2,339
)
 
(4,668
)
 
(4,669
)
Net income available to common equity
$
86,863

 
$
55,644

 
$
153,980

 
$
109,584

Common shareholder dividends
(25,977
)
 
(18,326
)
 
(51,549
)
 
(36,577
)
Unvested share-based payment awards
(130
)
 
(110
)
 
(269
)
 
(227
)
Undistributed earnings
$
60,756

 
$
37,208

 
$
102,162

 
$
72,780

Undistributed earnings allocated to common shareholders
60,446

 
36,980

 
101,677

 
72,273

Undistributed earnings allocated to unvested share-based payment awards
310

 
228

 
485

 
507

Undistributed earnings
$
60,756

 
$
37,208

 
$
102,162

 
$
72,780

Basic
 
 
 
 
 
 
 
Distributed earnings to common shareholders
$
25,977

 
$
18,326

 
$
51,549

 
$
36,577

Undistributed earnings allocated to common shareholders
60,446

 
36,980

 
101,677

 
72,273

Total common shareholders earnings, basic
$
86,423

 
$
55,306

 
$
153,226

 
$
108,850

Diluted
 
 
 
 
 
 
 
Distributed earnings to common shareholders
$
25,977

 
$
18,326

 
$
51,549

 
$
36,577

Undistributed earnings allocated to common shareholders
60,446

 
36,980

 
101,677

 
72,273

Total common shareholders earnings, diluted
$
86,423

 
$
55,306

 
$
153,226

 
$
108,850

Weighted average common shares outstanding
170,633

 
151,573

 
167,096

 
151,196

Effect of dilutive common stock awards
2,146

 
1,958

 
2,080

 
2,155

Effect of dilutive common stock warrants
630

 
771

 
744

 
796

Diluted weighted average common shares outstanding
173,409

 
154,302

 
169,920

 
154,147

Basic earnings per common share
$
0.51

 
$
0.36

 
$
0.92

 
$
0.72

Diluted earnings per common share
$
0.50

 
$
0.36

 
$
0.90

 
$
0.71


Anti-dilutive common stock options of approximately 1.5 million and 1 million for the three months ended June 30, 2018 and 2017, respectively, and 1.4 million and 900,000 for the six months ended June 30, 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.
Performance awards are based on performance goals of earnings per share and total shareholder return with vesting ranging from a minimum of 25% 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 option

14



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 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 six months ended June 30, 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
(888,661
)
16.69

 
 
Forfeited or expired
(38,613
)
24.21

 
 
Outstanding at June 30, 2018
5,500,204

$
19.05

6.69
$
45,418

Options Exercisable at June 30, 2018
3,287,488

$
16.80

5.39
$
34,551


(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, 2018, the intrinsic value of stock options exercised was approximately $9 million. For the six months ended June 30, 2017, the intrinsic value of the stock options exercised was $11 million. The total fair value of stock options vested was $4 million for the six months ended June 30, 2018 and June 30, 2017. The Corporation recognized compensation expense for the vesting of stock options of $2 million for both the six months ended June 30, 2018 and June 30, 2017. Included in compensation expense for 2018 was less than $1 million of expense for the accelerated vesting of stock options granted to retirement eligible colleagues. At June 30, 2018, the Corporation had approximately $7 million of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend through first quarter 2022.
The following table summarizes information about the Corporation’s restricted stock activity for the six months ended June 30, 2018.
Restricted Stock
Shares
 
Weighted Average
Grant Date Fair Value
Outstanding at December 31, 2017
2,026,071

 
$
19.68

Granted
573,877

 
24.65

Vested
(537,881
)
 
18.21

Forfeited
(30,480
)
 
22.16

Outstanding at June 30, 2018
2,031,587

 
$
21.87


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. Service-based restricted stock awards granted during 2017 and 2018 will vest ratably over a four year period. Expense for restricted stock awards issued of approximately $6 million was recorded for the six months ended June 30, 2018 and $11 million was recorded for the six months ended June 30, 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 $25 million of unrecognized compensation costs related to restricted stock awards at June 30, 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

15



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 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.

16



 
June 30, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,001

 
$

 
$
(6
)
 
$
996

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
396,368

 
5,573

 
(5,232
)
 
396,709

 
GNMA
2,275,481

 
23

 
(65,315
)
 
2,210,189

 
Private-label
1,037

 

 
(5
)
 
1,031

 
GNMA commercial mortgage-related securities
1,400,680

 

 
(52,399
)
 
1,348,282

 
FFELP asset backed securities
298,263

 
1,679

 
(111
)
 
299,831

 
Other debt securities
3,000

 

 

 
3,000

 
Other equity securities
1,613






1,613

 
Total investment securities available for sale
$
4,377,443

 
$
7,275

 
$
(123,068
)
 
$
4,261,651

 
Investment securities held to maturity
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
$
1,593,147

 
$
4,851

 
$
(17,698
)
 
$
1,580,300

 
Residential mortgage-related securities
 
 
 
 
 
 
 
 
FNMA / FHLMC
97,822

 
191

 
(2,306
)
 
95,707

 
GNMA
388,174

 
1,969

 
(13,020
)
 
377,123

 
GNMA commercial mortgage-related securities
523,103

 
8,542

 
(23,832
)
 
507,813

 
Total investment securities held to maturity
$
2,602,247

 
$
15,553

 
$
(56,856
)
 
$
2,560,943

 
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 June 30, 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
$
3,001

 
$
2,996

 
$
46,938

 
$
47,269

Due after one year through five years
1,000

 
1,000

 
200,725

 
199,266

Due after five years through ten years

 

 
366,997

 
361,260

Due after ten years

 

 
978,487

 
972,504

Total debt securities
4,001

 
3,996

 
1,593,147

 
1,580,300

Residential mortgage-related securities
 
 
 
 
 
 
 
FNMA / FHLMC
396,368

 
396,709

 
97,822

 
95,707

GNMA
2,275,481

 
2,210,189

 
388,174

 
377,123

Private-label
1,037

 
1,031

 

 

GNMA commercial mortgage-related securities
1,400,680

 
1,348,282

 
523,103

 
507,813

FFELP asset backed securities
298,263

 
299,831

 

 

Equity securities
1,613

 
1,613

 

 

Total investment securities
$
4,377,443

 
$
4,261,651

 
$
2,602,247

 
$
2,560,943

Ratio of Fair Value to Amortized Cost
 
 
97.4
%
 
 
 
98.4
%


17



The proceeds from the sale of investment securities for the six months ended June 30, 2018 and 2017 are shown below.
 
Six Months Ended June 30,
 
2018
 
2017
 
($ in Thousands)
Gross gains on available for sale securities
$

 
$

Gross gains on held to maturity securities

 
361

Total gains

 
361

Gross losses on available for sale securities
(2,015
)
 

Gross losses on held to maturity securities
$

 
$
(5
)
Total losses
$
(2,015
)
 
$
(5
)
Investment securities gains (losses), net
$
(2,015
)
 
$
356

Proceeds from sales of investment securities
$
493,060

 
$
16,059


During the first six months of 2018, the Corporation sold approximately $40 million of lower yielding GNMA commercial mortgage-related securities. In addition, on the acquisition date, the Corporation sold Bank Mutual's entire $453 million securities portfolio.
During the first six months of 2017, the Corporation sold approximately $16 million of municipal securities classified as held to maturity due to credit concerns stemming from budgetary pressure and continued credit rating deterioration concerns in the State of Illinois.
Investment securities with a carrying value of approximately $3.1 billion at both June 30, 2018 and December 31, 2017 were pledged to secure certain deposits or for other purposes as required or permitted by law.
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, 2018.
 
Less than 12 months
 
12 months or more
 
Total
June 30, 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

 
$
(6
)
 
$
996

 
$
(6
)
 
$
996

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
19

 
(1,613
)
 
100,946

 
9

 
(3,620
)
 
128,509

 
(5,233
)
 
229,455

GNMA
62

 
(31,430
)
 
1,453,394

 
29

 
(33,885
)
 
756,061

 
(65,315
)
 
2,209,455

Private-label

 

 

 
1

 
(5
)
 
1,031

 
(5
)
 
1,031

GNMA commercial mortgage-related securities
22

 
(8,821
)
 
284,733

 
80

 
(43,577
)
 
1,063,701

 
(52,398
)
 
1,348,434

FFELP asset backed securities
7

 
(111
)

100,757








(111
)

100,757

Total
110

 
$
(41,975
)

$
1,939,830


120


$
(81,093
)

$
1,950,298


$
(123,068
)

$
3,890,128

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

890

 
$
(10,814
)
 
$
609,381

 
142

 
$
(6,884
)
 
$
128,244

 
$
(17,698
)
 
$
737,625

Residential mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
25

 
(1,518
)
 
76,046

 
10

 
(788
)
 
14,728

 
(2,306
)
 
90,774

GNMA
61

 
(7,062
)
 
236,008

 
20

 
(5,957
)
 
137,093

 
(13,019
)
 
373,101

GNMA commercial mortgage-related securities
1

 
(813
)
 
29,243

 
24

 
(23,019
)
 
478,570

 
(23,832
)
 
507,813

Total
977

 
$
(20,207
)
 
$
950,678

 
196

 
$
(36,648
)
 
$
758,635

 
$
(56,856
)
 
$
1,709,313



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 June 30, 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 June 30, 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 65 bp and 53 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 in an unrealized loss position before recovery of their amortized cost basis.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stocks: The Corporation is required to maintain Federal Reserve stock and FHLB stock as a member of both the Federal Reserve System and the FHLB, and in amounts as required by these institutions. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value is equal to amortized cost. At June 30, 2018, and December 31, 2017, the Corporation had FHLB stock of $173 million and $89 million, respectively. The Corporation had Federal Reserve Bank stock of $76 million at both June 30, 2018 and December 31, 2017.




19



Note 7 Loans
The period end loan composition was as follows.
 
June 30,
2018(a)
 
December 31,
2017
 
($ in Thousands)
Commercial and industrial
$
7,109,796

 
$
6,399,693

Commercial real estate — owner occupied
888,330

 
802,209

Commercial and business lending
7,998,126

 
7,201,902

Commercial real estate — investor
3,996,415

 
3,315,254

Real estate construction
1,487,159

 
1,451,684

Commercial real estate lending
5,483,574

 
4,766,938

Total commercial
13,481,700

 
11,968,840

Residential mortgage
8,207,253

 
7,546,534

Home equity
911,363

 
883,804

Other consumer
376,470

 
385,813

Total consumer
9,495,086

 
8,816,151

Total loans
$
22,976,786

 
$
20,784,991


(a) Includes $16 million of purchased credit-impaired loans

The following table presents commercial and consumer loans by credit quality indicator at June 30, 2018.
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
6,763,557

 
$
92,286

 
$
172,177

 
$
81,776

 
$
7,109,796

Commercial real estate - owner occupied
814,769

 
16,033

 
38,879

 
18,649

 
888,330

Commercial and business lending
7,578,326

 
108,319

 
211,056

 
100,425

 
7,998,126

Commercial real estate - investor
3,885,535

 
59,587

 
24,790

 
26,503

 
3,996,415

Real estate construction
1,452,888

 
29,559

 
3,168

 
1,544

 
1,487,159

Commercial real estate lending
5,338,423

 
89,146

 
27,958

 
28,047

 
5,483,574

Total commercial
12,916,749

 
197,465

 
239,014

 
128,472

 
13,481,700

Residential mortgage
8,141,803

 
199

 
2,355

 
62,896

 
8,207,253

Home equity
897,471

 
792

 
142

 
12,958

 
911,363

Other consumer
375,624

 
706

 
6

 
134

 
376,470

Total consumer
9,414,898

 
1,697

 
2,503

 
75,988

 
9,495,086

Total
$
22,331,647

 
$
199,162

 
$
241,517

 
$
204,460

 
$
22,976,786


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
3,266,389

 
24,845

 
19,291

 
4,729

 
3,315,254

Real estate construction
1,421,504

 
29,206

 

 
974

 
1,451,684

Commercial real estate lending
4,687,893

 
54,051

 
19,291

 
5,703

 
4,766,938

Total commercial
11,427,068

 
225,477

 
175,066

 
141,229

 
11,968,840

Residential mortgage
7,490,860

 
426

 
1,616

 
53,632

 
7,546,534

Home equity
868,958

 
1,137

 
195

 
13,514

 
883,804

Other consumer
384,990

 
652

 

 
171

 
385,813

Total consumer
8,744,808

 
2,215

 
1,811

 
67,317

 
8,816,151

Total
$
20,171,876

 
$
227,692

 
$
176,877

 
$
208,546

 
$
20,784,991


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 that exhibit 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 that are 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, that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Lastly, management considers a loan to be impaired when it is probable that 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 that commercial and consumer loan relationships that have nonaccrual status or have had 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.
The following table presents loans by past due status at June 30, 2018.
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
More
Past Due(a)
 
Nonaccrual(b)
 
Total
 
($ in Thousands)
Commercial and industrial
$
7,027,210

 
$
407

 
$
181

 
$
222

 
$
81,776

 
$
7,109,796

Commercial real estate - owner occupied
869,488

 
193

 

 

 
18,649

 
888,330

Commercial and business lending
7,896,698

 
600

 
181

 
222

 
100,425

 
7,998,126

Commercial real estate - investor
3,969,084

 
828

 

 

 
26,503

 
3,996,415

Real estate construction
1,465,850

 
19,765

 

 

 
1,544

 
1,487,159

Commercial real estate lending
5,434,934

 
20,593

 

 

 
28,047

 
5,483,574

Total commercial
13,331,632

 
21,193

 
181

 
222

 
128,472

 
13,481,700

Residential mortgage
8,135,016

 
9,158

 
183

 

 
62,896

 
8,207,253

Home equity
891,135

 
6,534

 
736

 

 
12,958

 
911,363

Other consumer
372,984

 
972

 
763

 
1,617

 
134

 
376,470

Total consumer
9,399,135

 
16,664

 
1,682

 
1,617

 
75,988

 
9,495,086

Total
$
22,730,767

 
$
37,857

 
$
1,863

 
$
1,839

 
$
204,460

 
$
22,976,786

(a)
The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at June 30, 2018 (the same as the reported balances for the accruing loans noted above).
(b)
Of the total nonaccrual loans, $141 million or 69% were current with respect to payment at June 30, 2018.

21



The following table presents loans by past due status at December 31, 2017.
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
More
Past Due(a)
 
Nonaccrual(b)
 
Total
 
($ in Thousands)
Commercial and industrial
$
6,286,369

 
$
170

 
$
101

 
$
267

 
$
112,786

 
$
6,399,693

Commercial real estate - owner occupied
779,421

 
48

 

 

 
22,740

 
802,209

Commercial and business lending
7,065,790

 
218

 
101

 
267

 
135,526

 
7,201,902

Commercial real estate - investor
3,310,000

 
374

 

 
151

 
4,729

 
3,315,254

Real estate construction
1,450,459

 
168

 
83

 

 
974

 
1,451,684

Commercial real estate lending
4,760,459

 
542

 
83

 
151

 
5,703

 
4,766,938

Total commercial
11,826,249

 
760

 
184

 
418

 
141,229

 
11,968,840

Residential mortgage
7,483,350

 
9,186

 
366

 

 
53,632

 
7,546,534

Home equity
863,465

 
5,688

 
1,137

 

 
13,514

 
883,804

Other consumer
382,186

 
1,227

 
780

 
1,449

 
171

 
385,813

Total consumer
8,729,001

 
16,101

 
2,283

 
1,449

 
67,317

 
8,816,151

Total
$
20,555,250

 
$
16,861

 
$
2,467

 
$
1,867

 
$
208,546

 
$
20,784,991

(a)
The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at December 31, 2017 (the same as the reported balances for the accruing loans noted above).
(b)
Of the total nonaccrual loans, $135 million or 65% were current with respect to payment at December 31, 2017.

22



The following table presents impaired loans individually evaluated under ASC Topic 310, excluding $16 million of purchased credit-impaired loans, at June 30, 2018.
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
($ in Thousands)
Loans with a related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
75,928

 
$
77,873

 
$
17,628

 
$
70,082

 
$
725

Commercial real estate — owner occupied
15,386

 
15,853

 
829

 
15,649

 
95

Commercial and business lending
91,314

 
93,726

 
18,457

 
85,731

 
820

Commercial real estate — investor
15,397

 
15,469

 
4,132

 
15,485

 
901

Real estate construction
448

 
523

 
77

 
456

 
15

Commercial real estate lending
15,845

 
15,992

 
4,209

 
15,941

 
916

Total commercial
107,159

 
109,718

 
22,666

 
101,672

 
1,736

Residential mortgage
39,926

 
44,171

 
6,208

 
39,433

 
863

Home equity
9,817

 
10,809

 
3,514

 
9,917

 
282

Other consumer
1,049

 
1,051

 
109

 
1,051

 
1

Total consumer
50,792

 
56,031

 
9,831

 
50,401

 
1,146

Total loans(a)
$
157,951

 
$
165,749

 
$
32,497

 
$
152,073

 
$
2,882

Loans with no related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
35,065

 
$
47,914

 
$

 
$
39,201

 
$
(286
)
Commercial real estate — owner occupied
4,869

 
5,920

 

 
4,179

 
24

Commercial and business lending
39,934

 
53,834

 

 
43,380

 
(262
)
Commercial real estate — investor
984

 
1,031

 

 
1,006

 

Real estate construction

 

 

 

 

Commercial real estate lending
984

 
1,031

 

 
1,006

 

Total commercial
40,918

 
54,865

 

 
44,386

 
(262
)
Residential mortgage
11,543

 
11,862

 

 
7,839

 
128

Home equity
1,275

 
1,289

 

 
785

 
12

Other consumer

 

 

 

 

Total consumer
12,818

 
13,151

 

 
8,624

 
140

Total loans(a)
$
53,736

 
$
68,016

 
$

 
$
53,010

 
$
(122
)
Total
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
110,993

 
$
125,787

 
$
17,628

 
$
109,283

 
$
439

Commercial real estate — owner occupied
20,255

 
21,773

 
829

 
19,828

 
119

Commercial and business lending
131,248

 
147,560

 
18,457

 
129,111

 
558

Commercial real estate — investor
16,381

 
16,500

 
4,132

 
16,491

 
901

Real estate construction
448

 
523

 
77

 
456

 
15

Commercial real estate lending
16,829

 
17,023

 
4,209

 
16,947

 
916

Total commercial
148,077

 
164,583

 
22,666

 
146,058

 
1,474

Residential mortgage
51,469

 
56,033

 
6,208

 
47,272

 
991

Home equity
11,092

 
12,098

 
3,514

 
10,702

 
294

Other consumer
1,049

 
1,051

 
109

 
1,051

 
1

Total consumer
63,610

 
69,182

 
9,831

 
59,025

 
1,286

Total loans(a)
$
211,687

 
$
233,765

 
$
32,497

 
$
205,083

 
$
2,760

(a)
The net recorded investment (defined as recorded investment, net of the related allowance) of the impaired loans represented 77% of the unpaid principal balance at June 30, 2018.

23



The following table presents impaired loans individually evaluated under ASC Topic 310 at December 31, 2017
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
($ in Thousands)
Loans with a related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
81,649

 
$
83,579

 
$
10,838

 
$
58,494

 
$
2,629

Commercial real estate — owner occupied
23,796

 
23,937

 
2,973

 
12,124

 
736

Commercial and business lending
105,445

 
107,516

 
13,811

 
70,618

 
3,365

Commercial real estate — investor
17,823

 
17,862

 
1,597

 
16,924

 
1,694

Real estate construction
467

 
578

 
86

 
484

 
29

Commercial real estate lending
18,290

 
18,440

 
1,683

 
17,408

 
1,723

Total commercial
123,735

 
125,956

 
15,494

 
88,026

 
5,088

Residential mortgage
40,561

 
42,922

 
6,512

 
40,411

 
1,614

Home equity
10,250

 
10,986

 
3,718

 
10,521

 
549

Other consumer
1,135

 
1,138

 
122

 
1,140

 
3

Total consumer
51,946

 
55,046

 
10,352

 
52,072

 
2,166

Total loans(a)
$
175,681

 
$
181,002

 
$
25,846

 
$
140,098

 
$
7,254

Loans with no related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
60,595

 
$
82,839

 
$

 
$
89,275

 
$
492

Commercial real estate — owner occupied
2,438

 
2,829

 

 
1,948

 
36

Commercial and business lending
63,033

 
85,668

 

 
91,223

 
528

Commercial real estate — investor
1,295

 
1,295

 

 

 
45

Real estate construction

 

 

 

 

Commercial real estate lending
1,295

 
1,295

 

 

 
45

Total commercial
64,328

 
86,963

 

 
91,223

 
573

Residential mortgage
6,925

 
7,204

 

 
4,999

 
217

Home equity
641

 
645

 

 
540

 
7

Other consumer

 

 

 

 

Total consumer
7,566

 
7,849

 

 
5,539

 
224

Total loans(a)
$
71,894

 
$
94,812

 
$

 
$
96,762

 
$
797

Total
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
142,244

 
$
166,418

 
$
10,838

 
$
147,769

 
$
3,121

Commercial real estate — owner occupied
26,234

 
26,766

 
2,973

 
14,072

 
772

Commercial and business lending
168,478

 
193,184

 
13,811

 
161,841

 
3,893

Commercial real estate — investor
19,118

 
19,157

 
1,597

 
16,924

 
1,739

Real estate construction
467

 
578

 
86

 
484

 
29

Commercial real estate lending
19,585

 
19,735

 
1,683

 
17,408

 
1,768

Total commercial
188,063

 
212,919

 
15,494

 
179,249

 
5,661

Residential mortgage
47,486

 
50,126

 
6,512

 
45,410

 
1,831

Home equity
10,891

 
11,631

 
3,718

 
11,061

 
556

Other consumer
1,135

 
1,138

 
122

 
1,140

 
3

Total consumer
59,512

 
62,895

 
10,352

 
57,611

 
2,390

Total loans(a)
$
247,575

 
$
275,814

 
$
25,846

 
$
236,860

 
$
8,051

(a)
The net recorded investment (defined as recorded investment, net of the related allowance) of the impaired loans represented 80% of the unpaid principal balance at December 31, 2017.

24



Troubled Debt Restructurings (“Restructured Loans”)
Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The following table presents nonaccrual and performing restructured loans by loan portfolio.
 
June 30, 2018
 
December 31, 2017
 
Performing
Restructured
Loans
 
Nonaccrual
Restructured
Loans(a)
 
Performing
Restructured
Loans
 
Nonaccrual
Restructured
Loans(a)
 
($ in Thousands)
Commercial and industrial
$
32,438

 
$
155

 
$
30,047

 
$
1,776

Commercial real estate — owner occupied
3,820

 

 
3,989

 

Commercial real estate — investor
372

 
14,268

 
14,389

 

Real estate construction
222

 
226

 
310

 
157

Residential mortgage
17,934

 
20,372

 
17,068

 
18,991

Home equity
7,900

 
2,972

 
7,705

 
2,537

Other consumer
1,037

 
12

 
1,110

 
25

   Total
$
63,723

 
$
38,005

 
$
74,618

 
$
23,486


(a)
Nonaccrual restructured loans have been included within nonaccrual loans.

The Corporation had a recorded investment of approximately $4 million in loans modified in troubled debt restructurings during the six months ended June 30, 2018, of which less than $1 million were in accrual status and approximately $4 million were in nonaccrual pending a sustained period of repayment.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the six months ended June 30, 2018 and 2017, respectively, and the recorded investment and unpaid principal balance as of June 30, 2018 and 2017, respectively.
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Number
of
Loans
 
Recorded
Investment(a)
 
Unpaid
Principal
Balance(b)
 
Number
of
Loans
 
Recorded
Investment(a)
 
Unpaid
Principal
Balance(b)
 
($ in Thousands)
Commercial and industrial
1

 
$
47

 
$
47

 
24

 
$
30,935

 
$
52,260

Commercial real estate — owner occupied

 

 

 
2

 
716

 
716

Commercial real estate — investor
1

 
984

 
1,031

 

 

 

Residential mortgage
10

 
2,064

 
2,064

 
36

 
2,695

 
2,805

Home equity
10

 
935

 
949

 
26

 
674

 
919

Other consumer
1

 
5

 
8

 

 

 

   Total
23

 
$
4,035

 
$
4,099

 
88

 
$
35,020

 
$
56,700


(a)
Represents post-modification outstanding recorded investment.
(b)
Represents pre-modification outstanding recorded investment.

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure (A/B Note), non-reaffirmed Chapter 7 bankruptcies, principal reduction, or some combination of these concessions. During the six months ended June 30, 2018, restructured loan modifications of commercial and industrial, commercial real estate, and real estate construction loans primarily included maturity date extensions and payment schedule modifications. Restructured loan modifications of home equity and residential mortgage loans primarily included maturity date extensions, interest rate concessions, non-reaffirmed Chapter 7 bankruptcies, or a combination of these concessions for the six months ended June 30, 2018.

25



The following table provides the number of loans modified in a troubled debt restructuring during the previous twelve months which subsequently defaulted during the six months ended June 30, 2018 and 2017, respectively, as well as the recorded investment in these restructured loans as of June 30, 2018 and 2017, respectively.
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Number of
Loans
 
Recorded
Investment
 
Number of
Loans
 
Recorded
Investment
 
($ in Thousands)
Commercial and industrial
3

 
$

 

 
$

Residential mortgage
8

 
2,219

 
17

 
941

Home equity
21

 
1,409

 
9

 
271

   Total
32

 
$
3,628

 
26

 
$
1,212


All loans modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a subsequent payment default, is considered in the determination of an appropriate level of the allowance for loan losses.
Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for loan losses and the allowance for unfunded commitments. The level of the allowance for loan losses represents management’s estimate of an amount appropriate to provide for probable credit losses in the loan portfolio at the balance sheet date. The allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit) and is included in accrued expenses and other liabilities on the consolidated balance sheets. See Note 12 for additional information on the allowance for unfunded commitments.
The following table presents a summary of the changes in the allowance for loan losses by portfolio segment for the six months ended June 30, 2018.
($ in Thousands)
Commercial and
industrial
Commercial real estate
- owner
occupied
Commercial real estate - 
investor
Real estate
construction
Residential
mortgage
Home
equity
Other
consumer
Total
December 31, 2017
$
123,068

$
10,352

$
41,059

$
34,370

$
29,607

$
22,126

$
5,298

$
265,880

Charge offs
(19,611
)
(1,042
)
(1,202
)
(53
)
(956
)
(1,729
)
(2,488
)
(27,081
)
Recoveries
6,406

287

21

290

690

1,192

416

9,302

Net Charge offs
(13,205
)
(755
)
(1,181
)
237

(266
)
(537
)
(2,072
)
(17,779
)
Provision for loan losses
750

1,213

4,272

(5,455
)
1,796

(301
)
2,225

4,500

June 30, 2018
$
110,613

$
10,810

$
44,150

$
29,152

$
31,137

$
21,288

$
5,451

$
252,601

Allowance for loan losses
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
17,628

$
829

$
4,132

$
77

$
6,208

$
3,514

$
109

$
32,497

Collectively evaluated for impairment
92,985

9,981

40,018

29,075

24,929

17,774

5,342

220,104

Acquired and accounted for under ASC 310-30(a)








Total allowance for loan losses
$
110,613

$
10,810

$
44,150

$
29,152

$
31,137

$
21,288

$
5,451

$
252,601

Loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
110,993

$
20,255

$
16,381

$
448

$
51,469

$
11,092

$
1,049

$
211,687

Collectively evaluated for impairment
6,996,038

866,356

3,969,829

1,486,464

8,154,904

900,187

375,421

22,749,199

Acquired and accounted for under ASC 310-30(a)
2,765

1,719

10,205

247

880

84


15,900

Total loans
$
7,109,796

$
888,330

$
3,996,415

$
1,487,159

$
8,207,253

$
911,363

$
376,470

$
22,976,786

(a)
Loans acquired in business combinations and accounted for under ASC Subtopic 310-30 "Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality."


26



For comparison purposes, a summary of the changes in the allowance for loan losses by portfolio segment for the year ended December 31, 2017, was as follows.
($ in Thousands)
Commercial and
industrial
Commercial real estate
- owner
occupied
Commercial real estate - 
investor
Real estate
construction
Residential
mortgage
Home
equity
Other
consumer
Total
December 31, 2016
$
140,126

$
14,034

$
45,285

$
26,932

$
27,046

$
20,364

$
4,548

$
278,335

Charge offs
(44,533
)
(344
)
(991
)
(604
)
(2,611
)
(2,724
)
(4,439
)
(56,246
)
Recoveries
11,465

173

242

74

927

3,194

716

16,791

Net Charge offs
(33,068
)
(171
)
(749
)
(530
)
(1,684
)
470

(3,723
)
(39,455
)
Provision for loan losses
16,010

(3,511
)
(3,477
)
7,968

4,245

1,292

4,473

27,000

December 31, 2017
$
123,068

$
10,352

$
41,059

$
34,370

$
29,607

$
22,126

$
5,298

$
265,880

Allowance for loan losses
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
10,838

$
2,973

$
1,597

$
86

$
6,512

$
3,718

$
122

$
25,846

Collectively evaluated for impairment
112,230

7,379

39,462

34,284

23,095

18,408

5,176

240,034

Total allowance for loan losses
$
123,068

$
10,352

$
41,059

$
34,370

$
29,607

$
22,126

$
5,298

$
265,880

Loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
142,244

$
26,234

$
19,118

$
467

$
47,486

$
10,891

$
1,135

$
247,575

Collectively evaluated for impairment
6,257,449

775,975

3,296,136

1,451,217

7,499,048

872,913

384,678

20,537,416

Total loans
$
6,399,693

$
802,209

$
3,315,254

$
1,451,684

$
7,546,534

$
883,804

$
385,813

$
20,784,991


The allowance related to the oil and gas portfolio was $17 million at June 30, 2018 and represented 2.5% of total oil and gas loans.
($ in Millions)
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
Balance at beginning of period
$
27

 
$
38

Charge offs
(14
)
 
(25
)
Recoveries
3

 

Net Charge offs
(11
)
 
(25
)
Provision for loan losses
1

 
14

Balance at end of period
$
17

 
$
27

Allowance for loan losses
 
 
 
Individually evaluated for impairment
$
9

 
$
5

Collectively evaluated for impairment
8

 
22

Total allowance for loan losses
$
17

 
$
27

Loans
 
 
 
Individually evaluated for impairment
$
45

 
$
77

Collectively evaluated for impairment
637

 
523

Total loans
$
682

 
$
600


The following table presents a summary of the changes in the allowance for unfunded commitments.
 
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
 
($ in Thousands)
Allowance for Unfunded Commitments
 
 
 
Balance at beginning of period
$
24,400

 
$
25,400

Provision for unfunded commitments
(500
)
 
(1,000
)
Amount recorded at acquisition
2,436

 

Balance at end of period
$
26,336

 
$
24,400




27



Loans Acquired in Acquisition
Loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan and lease losses. Acquired loans are segregated into two types:
Performing loans are accounted for in accordance with ASC Topic 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
Nonperforming loans are accounted for in accordance with ASC Topic 310-30 as they display significant credit deterioration since origination.
For performing loans the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.
In accordance with ASC 310-30, purchased credit-impaired loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows. If a reasonable expectation on the amount or timing of such cash flows cannot be determined, accretion of the fair value discount for nonperforming loans will be recognized using the cost recovery method of accounting.
Changes in the accretable yield for loans acquired and accounted for under ASC Topic 310-30 were as follows for the six months ended June 30, 2018 and for the year ended December 31, 2017
 
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
 
($ in Thousands)
Changes in Accretable Yield
 
 
 
Balance at beginning of period
$

 
$

Purchases
4,881

 

Accretion
(119
)
 

Balance at end of period
$
4,762

 
$


For loans acquired, the fair value of purchased credit-impaired loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral. The fair value of loans that were non-impaired was determined based on estimates of losses on defaults and other market factors.
At June 30, 2018, the Corporation had a total of approximately $32 million in net unaccreted purchase discount, of which approximately $26 million was related to performing loans and approximately $7 million was related to nonperforming loans.

Note 8 Goodwill and Other Intangible Assets
Goodwill
Goodwill is not amortized but is instead subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Corporation conducted its most recent annual impairment testing in May 2018, utilizing a qualitative assessment. Factors that management considered in this assessment included macroeconomic conditions, industry and market considerations, overall financial performance of the Corporation and each reporting unit (both current and projected), changes in management strategy, and changes in the composition or carrying amount of net assets. In addition, management considered the changes in both the Corporation’s common stock price and in the overall bank common stock index (based on the S&P 400 Regional Bank Sub-Industry Index), as well as the Corporation’s earnings per common share trend over the past year. Based on these assessments, management concluded that the 2018 annual qualitative impairment assessment indicated that it is more likely than not that the estimated fair value exceeded the carrying value (including goodwill) for each reporting unit. Therefore, a step one quantitative analysis was not required. There have been no events since the May 2018 impairment testing that have changed the Corporation's impairment assessment conclusion. There were no impairment charges recorded in 2017 or the first six months of 2018.
At June 30, 2018, the Corporation had goodwill of $1.2 billion, compared to $976 million at December 31, 2017. Goodwill increased $173 million related to the Bank Mutual acquisition, $10 million related to the acquisition of Diversified, and $7 million related to the acquisition of Anderson. See Note 2 for additional information on the Corporation's acquisitions.

28



Other Intangible Assets
The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, other intangibles (primarily related to customer relationships acquired in connection with the Corporation’s insurance agency acquisitions), and mortgage servicing rights. During the first quarter of 2018, the Corporation added approximately $58 million of core deposit intangibles as a result of the Bank Mutual acquisition. In addition, the Corporation added approximately $8 million of other intangibles relating to customer relationships associated with the Diversified acquisition. During the second quarter of 2018, the Corporation added approximately $3 million of other intangibles related to customer relationships associated with the Anderson acquisition. See Note 2 for additional information on the Corporation's acquisitions. For core deposit intangibles and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows.
 
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
 
($ in Thousands)
Core deposit intangibles
 
 
 
Gross carrying amount
$
58,100

 
$
4,385

Accumulated amortization
(2,421
)
 
(4,385
)
Net book value
$
55,679

 
$

Additions during the periods
$
58,100

 
$

Amortization during the year
$
2,421

 
$
112

Other intangibles
 
 
 
Gross carrying amount
$
44,931

 
$
34,572

Accumulated amortization
(20,262
)
 
(18,992
)
Net book value
$
24,668

 
$
15,580

Additions during the period
$
10,359

 
$
2,162

Amortization during the year
$
1,270

 
$
1,847


The Corporation sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income and assessed for impairment at each reporting date.
The Corporation evaluates its mortgage servicing rights asset for impairment at minimum on a quarterly basis. Impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the mortgage servicing rights asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the mortgage servicing rights asset generally increases, requiring less valuation reserve. A valuation allowance is established, through a charge to earnings, to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings. An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan pay off activity) is recognized as a write-down of the mortgage servicing rights asset and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings. A direct write-down permanently reduces the carrying value of the mortgage servicing rights asset and valuation allowance, precluding subsequent recoveries. See Note 12 for a discussion of the recourse provisions on sold residential mortgage loans. See Note 13 which further discusses fair value measurement relative to the mortgage servicing rights asset.

29



A summary of changes in the balance of the mortgage servicing rights asset and the mortgage servicing rights valuation allowance was as follows.
 
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
 
($ in Thousands)
Mortgage servicing rights
Mortgage servicing rights at beginning of period
$
59,168

 
$
62,085

Additions from acquisition
8,136

 

Additions
4,502

 
7,167

Amortization
(4,649
)
 
(10,084
)
Mortgage servicing rights at end of period
$
67,157

 
$
59,168

Valuation allowance at beginning of period
(784
)
 
(609
)
(Additions) recoveries, net
607

 
(175
)
Valuation allowance at end of period
(177
)
 
(784
)
Mortgage servicing rights, net
$
66,980

 
$
58,384

Fair value of mortgage servicing rights
$
84,585

 
$
64,387

Portfolio of residential mortgage loans serviced for others (“servicing portfolio”)
$
8,500,578

 
$
7,646,846

Mortgage servicing rights, net to servicing portfolio
0.79
%
 
0.76
%
Mortgage servicing rights expense (a)
$
4,042

 
$
10,259


(a)
Includes the amortization of mortgage servicing rights and additions / recoveries to the valuation allowance of mortgage servicing rights, and is a component of mortgage banking, net in the consolidated statements of income.

The following table shows the estimated future amortization expense for amortizing intangible assets. The projections of amortization expense are based on existing asset balances, the current interest rate environment, and prepayment speeds as of June 30, 2018. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
Estimated Amortization Expense
Core Deposit Intangibles
 
Other Intangibles
 
Mortgage Servicing Rights
 
($ in Thousands)
Six Months Ending December 31, 2018
$
2,905

 
$
1,563

 
$
4,725

2019
5,810

 
2,828

 
9,150

2020
5,810

 
2,711

 
7,963

2021
5,810

 
2,687

 
6,906

2022
5,810

 
2,663

 
6,000

2023
5,810

 
2,644

 
5,228

Beyond 2023
23,724

 
9,571

 
27,185

Total Estimated Amortization Expense
$
55,679

 
$
24,668

 
$
67,157



30



Note 9 Short and Long-Term Funding
The following table presents the components of short-term funding (funding with original contractual maturities of one year or less), long-term funding (funding with original contractual maturities greater than one year), and FHLB advances (funding based on original contractual maturities).
 
June 30, 2018
 
December 31, 2017
 
($ in Thousands)
Short-Term Funding
 
 
 
Federal funds purchased
$
20,720

 
$
141,950

Securities sold under agreements to repurchase
183,013

 
182,865

Federal funds purchased and securities sold under agreements to repurchase
203,733

 
324,815

Commercial paper
52,791

 
67,467

Total short-term funding
$
256,525

 
$
392,282

Long-Term Funding
 
 
 
Senior notes, at par
$
250,000

 
$
250,000

Subordinated notes, at par
250,000

 
250,000

Other long-term funding and capitalized costs
(2,381
)
 
(2,718
)
Total long-term funding
497,619

 
497,282

Total short and long-term funding, excluding FHLB advances
$
754,144

 
$
889,564

FHLB Advances
 
 
 
Short-term FHLB advances
$
370,000

 
$
284,000

Long-term FHLB advances
4,427,857

 
2,900,168

Total FHLB advances
$
4,797,857

 
$
3,184,168

 
 
 
 
Total short and long-term funding
$
5,552,001

 
$
4,073,732


Securities Sold Under Agreements to Repurchase ("Repurchase Agreements")
The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. The obligation to repurchase the securities is reflected as a liability on the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts (i.e., there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities). See Note 11 for additional disclosures on balance sheet offsetting.
The Corporation utilizes securities sold under agreements to repurchase to facilitate the needs of its customers. As of June 30, 2018, the Corporation pledged agency mortgage-related securities with a fair value of $279 million as collateral for the repurchase agreements. Securities pledged as collateral under repurchase agreements are maintained with the Corporation's safekeeping agents and are monitored on a daily basis due to the market risk of fair value changes in the underlying securities. The Corporation generally pledges excess securities to ensure there is sufficient collateral to satisfy short-term fluctuations in both the repurchase agreement balances and the fair value of the underlying securities.

The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of June 30, 2018 and December 31, 2017 are presented in the following table.
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 days
 
30-90 days
 
Greater than 90 days
 
Total
June 30, 2018
 
 
 
 
($ in Thousands)
 
 
 
 
Repurchase agreements
 
 
 
 
 
 
 
 
 
Agency mortgage-related securities
$
183,013

 
$

 
$

 
$

 
$
183,013

Total
$
183,013

 
$

 
$

 
$

 
$
183,013

December 31, 2017
 
 
 
 
 
 
 
 
 
Repurchase agreements
 
 
 
 
 
 
 
 
 
Agency mortgage-related securities
$
182,865

 
$

 
$

 
$

 
$
182,865

Total
$
182,865

 
$

 
$

 
$

 
$
182,865




31



Long-Term Funding
Senior notes: In November 2014, the Corporation issued $250 million of senior notes, due November 2019, and callable October 2019. The senior notes have a fixed coupon interest rate of 2.75% and were issued at a discount.
Subordinated notes: In November 2014, the Corporation issued $250 million of 10-year subordinated notes, due January 2025, and callable October 2024. The subordinated notes have a fixed coupon interest rate of 4.25% and were issued at a discount.
FHLB Advances
At June 30, 2018, the Corporation had $4.8 billion of FHLB advances, up $1.6 billion from December 31, 2017. The increase in FHLB borrowing is primarily a result of reduced reliance on network transaction deposits over the year.
At June 30, 2018, FHLB advances had maturity or put dates (callable by the FHLB) primarily ranging from 2018 through 2020, and had a weighted average interest rate of 1.97%, compared to 1.26% at December 31, 2017. A portion of the FHLB advances are indexed to the FHLB discount note and re-price at varying intervals. The advances offer flexible, market rate, long-term funding that improves the Corporation’s liquidity profile.
As of June 30, 2018, the Corporation had $2.6 billion of putable FHLB advances with a one-time option where the FHLB can call the advance prior to the contractual maturity. The contractual weighted average life to the put date of these advances was 1.4 years with a weighted average life to contractual maturity of 6.6 years . As of June 30, 2018, it is anticipated that all of these advances will be called by the FHLB on their put date.
The original contractual maturity or next put date of the Corporation's FHLB advances as of June 30, 2018 and December 31, 2017 are presented in the following table.
 
June 30, 2018
 
December 31, 2017
 
Amount
 
Weighted Average Contractual Coupon Rate
 
Amount
 
Weighted Average Contractual Coupon Rate
 
($ in Thousands)
Maturity or put date within 1 year
$
2,632,613

 
1.70
%
 
$
2,434,000

 
1.26
%
After 1 but within 2
1,861,040

 
2.25
%
 
750,013

 
1.23
%
After 2 but within 3
291,606

 
2.60
%
 
155

 
4.91
%
After 3 years
12,598

 
4.55
%
 

 
%
FHLB advances and overall rate
$
4,797,857

 
1.97
%
 
$
3,184,168

 
1.26
%

Note 10 Derivative and Hedging Activities
The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation's known or expected cash receipts and its known or expected cash payments principally related to the Corporation's assets.
The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, interest rate and commodity-related instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain mutually agreed upon threshold limits. The Corporation pledged $35 million of investment securities as collateral at June 30, 2018, and pledged $24 million of investment securities as collateral at December 31, 2017. Federal regulations require the Corporation to clear all LIBOR interest rate swaps through a clearing house if it can be cleared. As such, the Corporation is required to pledge cash collateral for the margin. At June 30, 2018 the Corporation posted $48 million of cash collateral for the margin compared to $22 million at December 31, 2017.
Fair Value Hedges of Interest Rate Risk
The Corporation is exposed to changes in the fair value of certain of its pools of prepayable fixed-rate assets due to changes in benchmark interest rates. The Corporation uses interest rate swaps to manage its exposure to changes in fair value on these

32



instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Corporation receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
Derivatives to Accommodate Customer Needs
The Corporation also facilitates customer borrowing activity by entering into various derivative contracts which are designated as free standing derivative contracts. Free standing derivative products are entered into primarily for the benefit of commercial customers seeking to manage their exposures to interest rate risk, foreign currency, and commodity prices. These derivative contracts are not designated against specific assets and liabilities on the balance sheet or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value on the consolidated balance sheets with changes in the fair value recorded as a component of Capital markets, net, and typically include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, and commodity contracts. See Note 11 for additional information and disclosures on balance sheet offsetting.
Interest rate-related instruments: The Corporation provides interest rate risk management services to commercial customers, primarily forward interest rate swaps and caps. The Corporation’s market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms and indices.
Foreign currency exchange forwards: The Corporation provides foreign currency exchange services to customers, primarily forward contracts. The Corporation's customers enter into a foreign currency exchange forward with the Corporation as a means for them to mitigate exchange rate risk. The Corporation mitigates its risk by then entering into an offsetting foreign currency exchange derivative contract.
Commodity contracts: Commodity contracts are entered into primarily for the benefit of commercial customers seeking to manage their exposure to fluctuating commodity prices. The Corporation mitigates its risk by then entering into an offsetting commodity derivative contract.
Mortgage Derivatives
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net.
Written and Purchased Options (Time Deposit)
Historically, the Corporation had entered into written and purchased option derivative instruments to facilitate an equity linked time deposit product (the “Power CD”), which the Corporation ceased offering in September 2013. The Power CD was a time deposit that provided the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation received a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments, which are carried at fair value on the consolidated balance sheets.

33



The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments.
 
June 30, 2018
 
December 31, 2017
($ in Thousands)
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
 
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate-related instruments — customer and mirror
$
2,668,542

 
$
62,708

 
Trading assets
 
$
2,183,687

 
$
28,494

 
Trading assets
Interest rate-related instruments — customer and mirror
2,668,542

 
(62,141
)
 
Trading liabilities
 
2,183,687

 
(28,035
)
 
Trading liabilities
Foreign currency exchange forwards
143,551

 
3,317

 
Trading assets
 
124,851

 
2,495

 
Trading assets
Foreign currency exchange forwards
136,177

 
(3,091
)
 
Trading liabilities
 
118,094

 
(2,339
)
 
Trading liabilities
Commodity contracts
419,459

 
66,894

 
Trading assets
 
457,868

 
38,686

 
Trading assets
Commodity contracts
419,458

 
(66,380
)
 
Trading liabilities
 
457,108

 
(37,286
)
 
Trading liabilities
Interest rate lock commitments (mortgage)
335,070

 
3,287

 
Other assets
 
222,736

 
1,538

 
Other assets
Forward commitments (mortgage)
312,003

 
(919
)
 
Other liabilities
 
164,567

 
(313
)
 
Other liabilities
Purchased options (time deposit)
25,511

 
1,027

 
Other assets
 
31,063

 
1,175

 
Other assets
Written options (time deposit)
25,511

 
(1,027
)
 
Other liabilities
 
31,063

 
(1,175
)
 
Other liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Products
500,000

 
2,396

 
Other assets
 

 

 
Other assets

The following table presents amounts that were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges.
 
Line Item in the Statement of Financial Position in Which the Hedged Item is Included
 
Carrying Amount of the Hedged Assets/(Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
($ in Thousands)
June 30, 2018
Loans and investment securities receivables (a)
497,591

 
(2,409
)
Total
$
497,591

 
$
(2,409
)
(a)
These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2018, the amortized cost basis of the closed portfolios used in these hedging relationships was $1.2 billion; the negative cumulative basis adjustments associated with these hedging relationships was $2.4 million; and the amounts of the designated hedged items were $500 million.
The table below identifies the effect of fair value hedge accounting on the Corporation's statement of performance during the six months ended June 30, 2018.
 
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
 
Six Months Ended June 30, 2018
Year Ended December 31, 2017
($ in Thousands)
Interest Income
Other Income (Expense)
Interest Income
Other Income (Expense)
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded
(13
)



The effects of fair value and cash flow hedging: Gain or (loss) on fair value hedging relationships in Subtopic 815-20
 
 
 
 
Interest contracts
 
 
 
 
Hedged items
(2,409
)



Derivatives designated as hedging instruments
2,396






34



The table below identifies the effect of derivatives not designated as hedging instruments on the Corporation's statement of performance during the six months ended June 30, 2018.
 
Income Statement Category of
Gain / (Loss) Recognized in Income
For the Six Months Ended June 30,
($ in Thousands)
 
2018
 
2017
Derivative Instruments
 
 
 
 
Interest rate-related instruments — customer and mirror, net
Capital markets, net
$
108

 
$
(69
)
Interest rate lock commitments (mortgage)
Mortgage banking, net
1,749

 
2,474

Forward commitments (mortgage)
Mortgage banking, net
(606
)
 
(2,749
)
Foreign currency exchange forwards
Capital markets, net
70

 
9

Commodity contracts
Capital markets, net
(886
)
 
198






35



Note 11 Balance Sheet Offsetting
Interest Rate-Related Instruments and Commodity Contracts (“Interest and Commodity Agreements”)
The Corporation enters into interest rate-related instruments to facilitate the interest rate risk management strategies of commercial customers. The Corporation also enters into commodity contracts to manage commercial customers' exposure to fluctuating commodity prices. The Corporation mitigates these risks by entering into equal and offsetting interest and commodity agreements with highly rated third party financial institutions. The Corporation is party to master netting arrangements with its financial institution counterparties that creates a single net settlement of all legal claims or obligations to pay or receive the net amount of settlement of the individual interest and commodity agreements. Collateral, usually in the form of investment securities and cash, is posted by the counterparty with net liability positions in accordance with contract thresholds. The Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. See Note 10 for additional information on the Corporation’s derivative and hedging activities.
Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)
The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. These repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities (i.e., there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities). The right of set-off for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). In addition, the Corporation does not enter into reverse repurchase agreements; therefore, there is no such offsetting to be done with the repurchase agreements. See Note 9 for additional disclosures on repurchase agreements.
The following table presents the assets and liabilities subject to an enforceable master netting arrangement. The interest and commodity agreements the Corporation has with its commercial customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.
 
Gross
amounts of
recognized assets
 
 
 
Gross amounts not offset
in the balance sheet
 
 
 ($ in Thousands)
Gross amounts
offset in the
balance sheet
 
Net amounts
presented in
the balance sheet
 
Derivative liability available for offset
 
Collateral received
 
Net amount
Derivative assets: (a)
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
$
68,065

 
$

 
$
68,065

 
$
(27,040
)
 
$
(38,601
)
 
$
2,424

December 31, 2017
29,503

 

 
29,503

 
(16,140
)
 
(13,234
)
 
129

 
 
Gross
amounts of
recognized liabilities
 
 
 
Gross amounts not offset
in the balance sheet
 
 
 ($ in Thousands)
Gross amounts
offset in the
balance sheet
 
Net amounts
presented in
the balance sheet
 
Derivative asset available for offset
 
Collateral pledged
 
Net amount
Derivative liabilities (b)
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
$
63,363

 
$

 
$
63,363

 
$
(27,040
)
 
$
(35,513
)
 
$
810

December 31, 2017
37,164

 

 
37,164

 
(16,140
)
 
(20,662
)
 
362

(a) Includes interest and commodity instrument assets.
(b) Includes interest and commodity instrument liabilities.


36



Note 12 Commitments, Off-Balance Sheet Arrangements, Legal Proceedings and Regulatory Matters
The Corporation utilizes a variety of financial instruments in the normal course of business to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include lending-related and other commitments (see below) as well as derivative instruments (see Note 10). The following is a summary of lending-related commitments.
 
June 30, 2018
December 31, 2017
 
($ in Thousands)
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale(a)(b)
$
8,552,601

$
8,027,187

Commercial letters of credit(a)
13,167

11,886

Standby letters of credit(c)
255,858

235,361


(a)
These off-balance sheet financial instruments are exercisable at the market rate prevailing at the date the underlying transaction will be completed and, thus, are deemed to have no current fair value, or the fair value is based on fees currently charged to enter into similar agreements and is not material at June 30, 2018 or December 31, 2017.
(b)
Interest rate lock commitments to originate residential mortgage loans held for sale are considered derivative instruments and are disclosed in Note 10.
(c)
The Corporation has established a liability of $3 million at June 30, 2018 and $2 million at December 31, 2017, as an estimate of the fair value of these financial instruments.
Lending-related Commitments
As a financial services provider, the Corporation routinely enters into commitments to extend credit. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Corporation, with each customer’s creditworthiness evaluated on a case-by-case basis. The commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of those instruments. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the customer. Since a significant portion of commitments to extend credit are subject to specific restrictive loan covenants or may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. An allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded commitments (including unfunded loan commitments and letters of credit). The allowance for unfunded commitments totaled $26 million at June 30, 2018 and $24 million at December 31, 2017, and is included in accrued expenses and other liabilities on the consolidated balance sheets.
Lending-related commitments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to customers at predetermined interest rates, as long as there is no violation of any condition established in the contracts. Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. The Corporation’s derivative and hedging activity is further described in Note 10. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.
Other Commitments
The Corporation invests in unconsolidated projects including low-income housing, new market tax credit projects, and historic tax credit projects to promote the revitalization of primarily low-to-moderate-income neighborhoods throughout the local communities of its bank subsidiary. As a limited partner in these unconsolidated projects, the Corporation is allocated tax credits and deductions associated with the underlying projects. The aggregate carrying value of these investments at June 30, 2018 was $137 million, compared to $147 million at December 31, 2017.
The Corporation has principal investment commitments to provide capital-based financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such principal investment commitments is generally dependent on the investment cycle, whereby privately held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, which can vary based on overall market conditions, as well as the nature and type of industry in which the companies operate. The Corporation also invests in loan pools that support CRA loans. The timing of future cash requirements to fund these pools is dependent upon loan demand, which can vary over time. The aggregate carrying value of these investments at June 30, 2018 was $25 million, compared to $23 million at December 31, 2017, included in other assets on the consolidated balance sheets.
Related to these investments, the Corporation had remaining commitments to fund $99 million at June 30, 2018, and $119 million at December 31, 2017.

37



Legal Proceedings
The Corporation is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which involve claims for substantial amounts. Although there can be no assurance as to the ultimate outcomes, the Corporation believes it has meritorious defenses to the claims asserted against it in its currently outstanding matters, including the matters described below, and with respect to such legal proceedings, intends to continue to defend itself vigorously. The Corporation will consider settlement of cases when, in management’s judgment, it is in the best interests of both the Corporation and its shareholders.
On at least a quarterly basis, the Corporation assesses its liabilities and contingencies in connection with all pending or threatened claims and litigation, utilizing the most recent information available. On a matter by matter basis, an accrual for loss is established for those matters which the Corporation believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments. Accordingly, management’s estimate will change from time to time, and actual losses may be more or less than the current estimate. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established.
Resolution of legal claims is inherently unpredictable, and in many legal proceedings various factors exacerbate this inherent unpredictability, including where the damages sought are unsubstantiated or indeterminate, it is unclear whether a case brought as a class action will be allowed to proceed on that basis, discovery is not complete, the proceeding is not yet in its final stages, the matters present legal uncertainties, there are significant facts in dispute, there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants), or there is a wide range of potential results.
A lawsuit, R.J. ZAYED v. Associated Bank, N.A., was filed in the United States District Court for the District of Minnesota on January 29, 2013. The lawsuit relates to a Ponzi scheme perpetrated by Oxford Global Partners and related entities (“Oxford”) and individuals and was brought by the receiver for Oxford. Oxford was a depository customer of Associated Bank (the "Bank"). The lawsuit claims that the Bank is liable for failing to uncover the Oxford Ponzi scheme, and specifically alleges the Bank aided and abetted (1) the fraudulent scheme; (2) a breach of fiduciary duty; (3) conversion; and (4) false representations and omissions. The lawsuit seeks unspecified consequential and punitive damages. The District Court granted the Bank’s motion to dismiss the complaint on September 30, 2013. On March 2, 2015, the U.S. Court of Appeals for the Eighth Circuit reversed the District Court and remanded the case back to the District Court for further proceedings. On January 31, 2017, the District Court granted the Bank’s motion for summary judgment. The receiver has appealed the District Court’s summary judgment decision to the Eighth Circuit Court of Appeals. On January 23, 2018, the District Court approved a settlement agreement between the parties.  Based on the terms of the settlement agreement, the Bank expects that the litigation will not have a material adverse impact on the Bank regardless of the outcome of the appeal to the Eighth Circuit Court of Appeals. A lawsuit by investors in the same Ponzi scheme, Herman Grad, et al v. Associated Bank, N.A., brought in Brown County, Wisconsin in October 2009 was dismissed by the circuit court, and the dismissal was affirmed by the Wisconsin Court of Appeals in June 2011 in an unpublished opinion.
Subsequent to the announcement on July 20, 2017, of the Merger Agreement between the Corporation and Bank Mutual, several lawsuits were filed in connection with the proposed merger. On July 28, 2017, two substantially identical purported class action complaints, each by various individual plaintiffs, were filed with the Wisconsin Circuit Court for Milwaukee County on behalf of the respective named plaintiffs and other Bank Mutual shareholders against Bank Mutual, the members of the Bank Mutual board, and the Corporation. The lawsuits are captioned Schumel et al v. Bank Mutual Corporation et al. and Paquin et al. v. Bank Mutual Corporation et al. Both complaints allege state law breach of fiduciary duty claims against the Bank Mutual board for, among other things, seeking to sell Bank Mutual through an allegedly defective process, for an allegedly unfair price and on allegedly unfair terms. On August 30, 2017, a third purported class action complaint, captioned Wollenburg et al. v. Bank Mutual Corporation et al., was filed in the Wisconsin Circuit Court for Milwaukee County, on behalf of the same class of shareholders and against the same defendants as the prior two complaints. The Wollenburg complaint asserts similar allegations as the prior two complaints, and further alleges that the preliminary proxy statement/prospectus filed with the SEC contains various alleged misstatements or omissions under federal securities law. The Paquin, Schumel and Wollenburg complaints allege that the Corporation aided and abetted Bank Mutual's directors' alleged breaches of fiduciary duty. The parties have entered into a stipulation seeking to consolidate the three actions. On September 13, 2017, the Corporation filed a notice of removal of the Paquin, Schumel and Wollenburg actions to the United States District Court for the Eastern District of Wisconsin. On September 15, 2017, the plaintiffs in the Paquin, Schumel and Wollenburg actions filed identical motions to remand the three cases back to state court, and on September 27, 2017, the defendants filed oppositions to the motions to remand. On October 3, 2017, the defendants filed motions to dismiss the three actions. On September 6, 2017, a fourth purported class action complaint, captioned Parshall et al., v. Bank Mutual Corporation et al., was filed in the U.S. District Court for the Eastern District of Wisconsin, on behalf of the same class of shareholders and against the same defendants as the prior complaints. The Parshall complaint criticizes the adequacy of the merger consideration and alleges that Bank Mutual, the members of the Bank Mutual board and the Corporation allegedly omitted and/or misrepresented certain information in the registration statement on Form S-4 filed in connection with the proposed merger in violation of the federal securities laws. The lawsuits seek, among other things, to enjoin the consummation of the transaction and damages. The

38



Corporation believes the allegations are without merit. On October 13, 2017, Bank Mutual and the Corporation reached agreement with the plaintiffs in each of the four cases whereby Bank Mutual issued certain additional disclosures in a Form 8-K, and each of the plaintiffs have agreed to dismiss their actions with prejudice as to the named plaintiffs and without prejudice as to the rest of the purported class members.
Regulatory Matters
On May 22, 2015, the Bank entered into a Conciliation Agreement ("Conciliation Agreement") with the U.S. Department of Housing and Urban Development ("HUD") which resolved the HUD investigation into the Bank's lending practices during the years 2008-2010. The Bank's commitments under the Conciliation Agreement are spread over 3 years and include commitments to do the following in minority communities: make mortgage loans of approximately $196 million; open one branch and four loan production offices; establish special financing programs; make affordable home repair grants; engage in affirmative marketing outreach; provide financial education programs; and make grants to support community reinvestment training and education. The cost of these commitments will be spread over four calendar years and is not expected to have a material impact on the Corporation's financial condition or results of operation.
A variety of consumer products, including mortgage and deposit products, and certain fees and charges related to such products, have come under increased regulatory scrutiny. It is possible that regulatory authorities could bring enforcement actions, including civil money penalties, or take other actions against the Corporation and the Bank in regard to these consumer products. The Bank could also determine of its own accord, or be required by regulators, to refund or otherwise make remediation payments to customers in connection with these products. It is not possible at this time for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss related to such matters.
Mortgage Repurchase Reserve
The Corporation sells residential mortgage loans to investors in the normal course of business. Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under the Corporation's usual underwriting procedures, and are most often sold on a nonrecourse basis, primarily to the GSEs. The Corporation’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability. Subsequent to being sold, if a material underwriting deficiency or documentation defect is discovered, the Corporation may be obligated to repurchase the loan or reimburse the GSEs for losses incurred (collectively, “make whole requests”). The make whole requests and any related risk of loss under the representations and warranties are largely driven by borrower performance.
As a result of make whole requests, the Corporation has repurchased loans with principal balances of approximately $1 million during both the six months ended June 30, 2018 and the year ended December 31, 2017. The loss reimbursement and settlement claims paid for the six months ended June 30, 2018 were zero and negligible for the year ended December 31, 2017. Make whole requests during 2017 and the first six months of 2018 generally arose from loans sold during the period of January 1, 2012 to December 31, 2017. Since January 1, 2012, loans sold totaled $10.5 billion at the time of sale, and consisted primarily of loans sold to GSEs. As of June 30, 2018, approximately $6.2 billion of these sold loans remain outstanding.

The balance in the mortgage repurchase reserve at the balance sheet date reflects the estimated amount of potential loss the Corporation could incur from repurchasing a loan, as well as loss reimbursements, indemnifications, and other settlement resolutions. The following summarizes the changes in the mortgage repurchase reserve.
 
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
 
($ in Thousands)
Balance at beginning of period
$
987

 
$
900

Repurchase provision expense
150

 
246

Charge offs, net
(90
)
 
(159
)
Amount recorded at acquisition
88

 

Balance at end of period
$
1,135

 
$
987


The Corporation may also sell residential mortgage loans with limited recourse (limited in that the recourse period ends prior to the loan’s maturity, usually after certain time and / or loan paydown criteria have been met), whereby repurchase could be required if the loan had defined delinquency issues during the limited recourse periods. At June 30, 2018, and December 31, 2017, there were approximately $39 million and $44 million, respectively, of residential mortgage loans sold with such recourse risk. There have been limited instances and immaterial historical losses on repurchases for recourse under the limited recourse criteria.

39



The Corporation has a subordinate position to the FHLB in the credit risk on residential mortgage loans it sold to the FHLB in exchange for a monthly credit enhancement fee. The Corporation has not sold loans to the FHLB with such credit risk retention since February 2005. At June 30, 2018 and December 31, 2017, there were $64 million and $73 million, respectively, of such residential mortgage loans with credit risk recourse, upon which there have been negligible historical losses to the Corporation.
Note 13 Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept).
Following is a description of the valuation methodologies used for the Corporation’s more significant instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment Securities Available for Sale: Where quoted prices are available in an active market, investment securities are classified in Level 1 of the fair value hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate, and are classified in Level 2 of the fair value hierarchy. Lastly, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, securities are classified within Level 3 of the fair value hierarchy. To validate the fair value estimates, assumptions, and controls, the Corporation looks to transactions for similar instruments and utilizes independent pricing provided by third party vendors or brokers and relevant market indices. While none of these sources are solely indicative of fair value, they serve as directional indicators for the appropriateness of the Corporation’s fair value estimates. The Corporation has determined that the fair value measures of its investment securities are classified predominantly within Level 1 or 2 of the fair value hierarchy. See Note 6 for additional disclosure regarding the Corporation’s investment securities.
Residential Loans Held for Sale: Loans held for sale, which consist generally of current production of certain fixed-rate, first-lien residential mortgage loans, are carried at estimated fair value. Management has elected the fair value option to account for all newly originated mortgage loans held for sale, which results in the financial impact of changing market conditions being reflected currently in earnings as opposed to being dependent upon the timing of sales. Therefore, the continually adjusted values better reflect the price the Corporation expects to receive from the sale of such loans. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics, which the Corporation classifies as a Level 2 fair value measurement.
Derivative Financial Instruments (Interest Rate-Related Instruments): The Corporation utilizes interest rate swaps to hedge exposure to interest rate risk and variability of fair value related to changes in the underlying interest rate of the hedged item. These hedged interest rate swaps are classified as fair value hedges. See Note 10 for additional disclosure regarding the Corporation’s fair value hedges.
In addition, the Corporation offers interest rate-related instruments (swaps and caps) to service its customers’ needs, for which the Corporation simultaneously enters into offsetting derivative financial instruments (i.e., mirror interest rate-related instruments) with third parties to manage its interest rate risk associated with these financial instruments. The valuation of the Corporation’s derivative financial instruments is determined using discounted cash flow analysis on the expected cash flows of each derivative and also includes a nonperformance / credit risk component (credit valuation adjustment). See Note 10 for additional disclosure regarding the Corporation’s interest rate-related instruments.
The discounted cash flow analysis component in the fair value measurement reflects the contractual terms of the derivative financial instruments, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. More specifically, the fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) with the variable cash payments (or receipts) based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Likewise, the fair values of interest rate options (i.e., interest rate caps) are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (or rise above) the strike rate of the floors (or caps), with the variable interest rates used in the calculation of projected receipts on the floor (or cap) based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative financial instruments for the effect of nonperformance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

40



While the Corporation has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions as of June 30, 2018, and December 31, 2017, and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. Therefore, the Corporation has determined that the fair value measures of its derivative financial instruments in their entirety are classified within Level 2 of the fair value hierarchy.
Derivative Financial Instruments (Foreign Currency Exchange Forwards): The Corporation provides foreign currency exchange services to customers. In addition, the Corporation may enter into a foreign currency exchange forward to mitigate the exchange rate risk attached to the cash flows of a loan or as an offsetting contract to a forward entered into as a service to its customer. The valuation of the Corporation’s foreign currency exchange forwards is determined using quoted prices of foreign currency exchange forwards with similar characteristics, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate, and are classified in Level 2 of the fair value hierarchy. See Note 10 for additional disclosures regarding the Corporation’s foreign currency exchange forwards.
Derivative Financial Instruments (Commodity Contracts): The Corporation enters into commodity contracts to manage commercial customers' exposure to fluctuating commodity prices, for which the Corporation simultaneously enters into offsetting derivative financial instruments (i.e., mirror commodity contracts) with third parties to manage its risk associated with these financial instruments. The valuation of the Corporation’s commodity contracts is determined using quoted prices of the underlying instruments, and are classified in Level 2 of the fair value hierarchy. See Note 10 for additional disclosures regarding the Corporation’s commodity contracts.
The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative financial instruments for the effect of nonperformance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings.
While the Corporation has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions as of June 30, 2018, and December 31, 2017, and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. Therefore, the Corporation has determined that the fair value measures of its derivative financial instruments in their entirety are classified within Level 2 of the fair value hierarchy.

41



The table below presents the Corporation’s financial instruments measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
Fair Value Hierarchy
 
June 30, 2018
 
December 31, 2017
 
 
 
($ in Thousands)
Assets
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
U.S. Treasury securities
 Level 1
 
$
996

 
$
996

Residential mortgage-related securities
 
 
 
 
 
FNMA / FHLMC
 Level 2
 
396,709

 
464,768

GNMA
 Level 2
 
2,210,189

 
1,913,350

Private-label
 Level 2
 
1,031

 
1,059

GNMA commercial mortgage-related securities
 Level 2
 
1,348,282

 
1,513,277

FFELP asset backed securities
 Level 2
 
299,831

 
145,176

Other equity securities
 Level 1
 
1,613

 
1,632

Other debt securities
 Level 2
 
3,000

 
3,188

Total investment securities available for sale
 Level 1
 
2,609

 
2,628

Total investment securities available for sale
 Level 2
 
4,259,042

 
4,040,818

Residential loans held for sale
 Level 2
 
143,022

 
85,544

Interest rate-related instruments
 Level 2
 
62,708

 
28,494

Foreign currency exchange forwards
 Level 2
 
3,317

 
2,495

Interest rate products (designated as hedging instruments)
Level 2
 
2,396

 

Interest rate lock commitments to originate residential mortgage loans held for sale
 Level 3
 
3,287

 
1,538

Commodity contracts
 Level 2
 
66,894

 
38,686

Purchased options (time deposit)
 Level 2
 
1,027

 
1,175

Liabilities
 
 
 
 
 
Interest rate-related instruments
 Level 2
 
$
62,141

 
$
28,035

Foreign currency exchange forwards
 Level 2
 
3,091

 
2,339

Forward commitments to sell residential mortgage loans
 Level 3
 
919

 
313

Commodity contracts
 Level 2
 
66,380

 
37,286

Written options (time deposit)
 Level 2
 
1,027

 
1,175




42



The table below presents a rollforward of the balance sheet amounts for the six months ended June 30, 2018 and the year ended December 31, 2017, for financial instruments measured on a recurring basis and classified within Level 3 of the fair value hierarchy.
 
Investment Securities
Available for Sale
 
Derivative Financial
Instruments
 
($ in Thousands)
Balance December 31, 2016
$
200

 
$
3,114

Total net gains (losses) included in income
 
 
 
Mortgage derivative gain (loss)

 
(1,889
)
Transfer out of level 3 securities (a)
(200
)
 

Balance December 31, 2017
$

 
$
1,225

Total net gains (losses) included in income
 
 
 
Mortgage derivative gain (loss)

 
1,147

Balance June 30, 2018
$

 
$
2,372



(a) During the first quarter of 2017, the $200,000 level 3 investment security was transferred to level 2 based upon new pricing information.

For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2018, the Corporation utilized the following valuation techniques and significant unobservable inputs.
Derivative Financial Instruments (Mortgage Derivative — Interest Rate Lock Commitments to Originate Residential Mortgage Loans Held for Sale):  The fair value is determined by the change in value from each loan’s rate lock date to the expected rate lock expiration date based on the underlying loan attributes, estimated closing ratios, and investor price matrix determined to be reasonably applicable to each loan commitment. The closing ratio calculation takes into consideration historical experience and loan-level attributes, particularly the change in the current interest rates from the time of initial rate lock. The closing ratio is periodically reviewed for reasonableness and reported to the Associated Mortgage Risk Management Committee. At June 30, 2018, the closing ratio was 85%.
Derivative Financial Instruments (Mortgage Derivative — Forward Commitments to Sell Mortgage Loans): Mortgage derivatives include forward commitments to deliver closed end residential mortgage loans into conforming Agency Mortgage Backed Securities (To be Announced, "TBA") or conforming Cash Forward sales. The fair value of such instruments is determined by the difference of current market prices for such traded instruments or available from forward cash delivery commitments and the original traded price for such commitments.     

The Corporation also relies on an internal valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Corporation would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Corporation has determined that the majority of the inputs significant in the valuation of both of the mortgage derivatives fall within Level 3 of the fair value hierarchy. See Note 10 for additional disclosure regarding the Corporation’s mortgage derivatives.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Following is a description of the valuation methodologies used for the Corporation’s more significant instruments measured on a nonrecurring basis at the lower of amortized cost or estimated fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Commercial Loans Held for Sale: Loans held for sale are carried at the lower of cost or estimated fair value. The estimated fair value is based on a discounted cash flow analysis, which the Corporation classifies as a Level 2 nonrecurring fair value measurement.

Other Real Estate Owned: Certain other real estate owned, upon initial recognition, was re-measured and reported at fair value through a charge off to the allowance for loan losses based upon the estimated fair value of the other real estate owned, less estimated selling costs. The fair value of other real estate owned, upon initial recognition or subsequent impairment, was estimated using appraised values, which the Corporation classifies as a Level 2 nonrecurring fair value measurement.

43



For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2018, the Corporation utilized the following valuation techniques and significant unobservable inputs.
Impaired Loans: The Corporation considers a loan impaired when it is probable that 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 that commercial and consumer loan relationships that have nonaccrual status or have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. See Note 7 for additional information regarding the Corporation’s impaired loans.
Mortgage Servicing Rights: Mortgage servicing rights do not trade in an active, open market with readily observable prices. While sales of mortgage servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its mortgage servicing rights. The valuation model incorporates prepayment assumptions to project mortgage servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The valuation model considers portfolio characteristics of the underlying mortgages, contractually specified servicing fees, prepayment assumptions, discount rate assumptions, delinquency rates, late charges, other ancillary revenue, costs to service, and other economic factors. The Corporation periodically reviews and assesses the underlying inputs and assumptions used in the model. In addition, the Corporation compares its fair value estimates and assumptions to observable market data for mortgage servicing rights, where available, and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. The Corporation uses the amortization method (i.e., lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, for its mortgage servicing rights assets.
The discounted cash flow analyses that generate expected market prices utilize the observable characteristics of the mortgage servicing rights portfolio, as well as certain unobservable valuation parameters. The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are the weighted average constant prepayment rate and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
These parameter assumptions fall within a range that the Corporation, in consultation with an independent third party, believes purchasers of servicing would apply to such portfolios sold into the current secondary servicing market. Discussions are held with members from Treasury and the Community, Consumer, and Business segment to reconcile the fair value estimates and the key assumptions used by the respective parties in arriving at those estimates. The Associated Mortgage Risk Management Committee is responsible for providing control over the valuation methodology and key assumptions. To assess the reasonableness of the fair value measurement, the Corporation also compares the fair value and constant prepayment rate to a value calculated by an independent third party on an annual basis. See Note 8 for additional disclosure regarding the Corporation’s mortgage servicing rights.
The table below presents the Corporation’s assets measured at fair value on a nonrecurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 
Income Statement Category of
Adjustment Recognized in Income
 
Adjustment Recognized in Income
($ in Thousands)
Fair Value Hierarchy
 
Fair Value
June 30, 2018
 
 
 
 
 
 
Assets
 
 
 
 
Impaired loans(a)
Level 3
 
$
52,972

Provision for credit losses(b)
 
$
(12,431
)
Other real estate owned(c)
Level 2
 
1,954

Foreclosure / OREO expense, net
 
(808
)
Mortgage servicing rights
Level 3
 
84,585

Mortgage banking, net
 
607

 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Impaired loans(a)
Level 3
 
$
92,534

Provision for credit losses(b)
 
$
(32,159
)
Other real estate owned(c)
Level 2
 
2,604

Foreclosure / OREO expense, net
 
(939
)
Mortgage servicing rights
Level 3
 
64,387

Mortgage banking, net
 
(175
)

(a)
Represents individually evaluated impaired loans, net of the related allowance for loan losses.
(b)
Represents provision for credit losses on individually evaluated impaired loans.
(c)
If the fair value of the collateral exceeds the carrying amount of the asset, no charge-off or adjustment is necessary, the asset is not considered to be carried at fair value, and is therefore not included in the table.

44




Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis include the fair value analysis in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.
The Corporation's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to mortgage servicing rights and impaired loans.
The table below presents information about these inputs and further discussion is found above.
 
Valuation Technique
 
Significant Unobservable Input
 
Weighted Average Input Applied
June 30, 2018
Mortgage servicing rights
Discounted cash flow
 
Discount rate
 
11%
Mortgage servicing rights
Discounted cash flow
 
Constant prepayment rate
 
9%
Impaired Loans
Appraisals / Discounted cash flow
 
Collateral / Discount factor
 
24%

Fair Value of Financial Instruments
The Corporation is required to disclose estimated fair values for its financial instruments.
Fair value estimates are set forth below for the Corporation’s financial instruments.
 
 
 
June 30, 2018
 
December 31, 2017
 
Fair Value Hierarchy Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
 
 
 
 
($ in Thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
 Level 1
 
$
396,761

 
$
396,761

 
$
483,666

 
$
483,666

Interest-bearing deposits in other financial institutions
 Level 1
 
71,462

 
71,462

 
199,702

 
199,702

Federal funds sold and securities purchased under agreements to resell
 Level 1
 
3,150

 
3,150

 
32,650

 
32,650

Investment securities held to maturity
Level 2
 
2,602,247

 
2,560,943

 
2,282,853

 
2,283,574

Investment securities available for sale
 Level 1
 
2,609

 
2,609

 
2,628

 
2,628

Investment securities available for sale
Level 2
 
4,259,042

 
4,259,042

 
4,040,818

 
4,040,818

FHLB and Federal Reserve Bank stocks
Level 2
 
249,040

 
249,040

 
165,331

 
165,331

Residential loans held for sale
Level 2
 
143,022

 
143,022

 
85,544

 
85,544

Loans, net
Level 3
 
22,724,184

 
22,282,282

 
20,519,111

 
20,314,984

Bank and corporate owned life insurance
Level 2
 
659,592

 
659,592

 
591,057

 
591,057

Derivatives (trading and other assets)
Level 2
 
136,342

 
136,342

 
70,850

 
70,850

Derivatives (trading and other assets)
Level 3
 
3,287

 
3,287

 
1,538

 
1,538

Financial liabilities
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand, savings, interest-bearing demand, and money market accounts
Level 3
 
$
21,088,538

 
$
21,088,538

 
$
20,436,893

 
$
20,436,893

Brokered CDs and other time deposits
Level 2
 
2,727,776

 
2,727,776

 
2,349,069

 
2,349,069

Short-term funding
Level 2
 
626,525

 
626,525

 
676,282

 
676,282

Long-term funding
Level 2
 
4,925,476

 
4,921,348

 
3,397,450

 
3,411,368

Standby letters of credit(a)
Level 2
 
2,549

 
2,549

 
2,402

 
2,402

Derivatives (trading and other liabilities)
Level 2
 
132,639

 
132,639

 
68,835

 
68,835

Derivatives (trading and other liabilities)
 Level 3
 
919

 
919

 
313

 
313

(a)
The commitment on standby letters of credit was $256 million and $235 million at June 30, 2018 and December 31, 2017, respectively. See Note 12 for additional information on the standby letters of credit and for information on the fair value of lending-related commitments.

45



Note 14 Retirement Plans
The Corporation has a noncontributory defined benefit retirement plan (the Retirement Account Plan (“RAP”)) covering substantially all employees who meet participation requirements. The benefits are based primarily on years of service and the employee’s compensation paid. Employees of acquired entities generally participate in the RAP after consummation of the business combinations. Any retirement plans of acquired entities are typically merged into the RAP after completion of the mergers, and credit is usually given to employees for years of service at the acquired institution for vesting and eligibility purposes.
The Corporation also provides legacy healthcare access to a limited group of retired employees from a previous acquisition in the Postretirement Plan.  There are no other active retiree healthcare plans.
Bank Mutual was acquired on February 1, 2018. The Bank Mutual Pension Plan has not yet been merged into the Corporation's Retirement Account Plan. However, Bank Mutual's Postretirement Plan was merged into the Corporation's Postretirement Plan during the first quarter of 2018.
The components of net periodic benefit cost for the RAP, Bank Mutual Pension Plan, and Postretirement Plan for three and six months ended June 30, 2018 and 2017 were as follows.
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2018
 
2017
2018
 
2017
 
($ in Thousands)
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
RAP
 
 
 
 
 
 
Service cost
$
1,893

 
$
1,782

$
3,785

 
$
3,563

Interest cost
1,660

 
1,756

3,320

 
3,512

Expected return on plan assets
(4,755
)
 
(4,882
)
(9,510
)
 
(9,763
)
Amortization of prior service cost
(19
)
 
(18
)
(38
)
 
(37
)
Amortization of actuarial loss
463

 
487

925

 
975

Total net pension cost
$
(759
)
 
$
(875
)
$
(1,518
)
 
$
(1,750
)
Bank Mutual Pension Plan(a)
 
 
 
 
 
 
Interest cost
$
650

 
N/A

$
1,083

 
N/A

Expected return on plan assets
(1,060
)
 
N/A

(1,592
)
 
N/A

Total net pension cost
$
(410
)
 
N/A

$
(509
)
 
N/A

Postretirement Plan(b)
 
 
 
 
 
 
Interest cost
$
27

 
$
24

$
53

 
$
48

Amortization of prior service cost
(19
)
 
(19
)
(38
)
 
(38
)
Amortization of actuarial loss
2

 

4

 

Total net periodic benefit cost
$
10

 
$
5

$
19

 
$
10


(a)  
The reported figures only include five months of expense due to the timing of the Bank Mutual acquisition. See Note 2 for additional information on the Bank Mutual acquisition.
(b)
The portion of the Postretirement Plan attributed to Bank Mutual's Postretirement Plan only includes five months of expense due to the timing of the Bank Mutual acquisition. See Note 2 for additional information on the Bank Mutual acquisition.

The components of net periodic benefit cost, other than the service cost component, are included in the line item "other" of noninterest expense in the Consolidated Statements of Income.
The Corporation’s funding policy is to pay at least the minimum amount required by federal law and regulations, with consideration given to the maximum funding amounts allowed. The Corporation regularly reviews the funding of its pension plans. The Corporation made a $31 million contribution to the Bank Mutual Pension Plan during the second quarter of 2018.
Note 15 Segment Reporting
The Corporation utilizes a risk-based internal profitability measurement system to provide strategic business unit reporting. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the units. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The three reportable segments are Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services. The financial information of the Corporation’s segments has been compiled utilizing the accounting policies described in the Corporation’s 2017 Annual Report on Form 10-K, with certain exceptions. The more significant of these exceptions are described herein.

46



The Corporation allocates net interest income using an internal funds transfer pricing ("FTP") methodology that charges users of funds (assets) and credits providers of funds (liabilities, primarily deposits) based on the maturity, prepayment and / or repricing characteristics of the assets and liabilities. The net effect of this allocation is recorded in the Risk Management and Shared Services segment.
A credit provision is allocated to segments based on the expected long-term annual net charge off rates attributable to the credit risk of loans managed by the segment during the period. In contrast, the level of the consolidated provision for credit losses is determined based on an incurred loss model using the methodologies described in the Corporation’s 2017 Annual Report on Form 10-K to assess the overall appropriateness of the allowance for loan losses. The net effect of the credit provision is recorded in Risk Management and Shared Services. Indirect expenses incurred by certain centralized support areas are allocated to segments based on actual usage (for example, volume measurements) and other criteria. Certain types of administrative expense and bank-wide expense accruals (including amortization of core deposit and other intangible assets associated with acquisitions) are generally not allocated to segments. Income taxes are allocated to segments based on the Corporation’s estimated effective tax rate, with certain segments adjusted for any tax-exempt income or non-deductible expenses. Equity is allocated to the segments based on regulatory capital requirements and in proportion to an assessment of the inherent risks associated with the business of the segment (including interest, credit and operating risk).
The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to U.S. generally accepted accounting principles. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in previously reported segment financial data.
A brief description of each business segment is presented below. A more in-depth discussion of these segments can be found in the Segment Reporting footnote in the Corporation’s 2017 Annual Report on Form 10-K.
The Corporate and Commercial Specialty segment serves a wide range of customers including larger businesses, developers, not-for-profits, municipalities, and financial institutions. The Community, Consumer, and Business segment serves individuals, as well as small and mid-sized businesses. The Risk Management and Shared Services segment includes key shared operational functions and also includes residual revenue and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments, including interest rate risk residuals (FTP mismatches) and credit risk and provision residuals (long-term credit charge mismatches). In addition, the Risk Management and Shared Services segment includes certain unallocated expenses related to Bank Mutual's shared services and operations prior to system conversion in late June 2018.
Information about the Corporation’s segments is presented below.

47



Segment Income Statement Data
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
Net interest income
$
203,287

 
$
218,163

 
$
14,783

 
$
436,233

Noninterest income
26,876

 
150,286

 
6,059

 
183,222

Total revenue
230,163

 
368,449

 
20,842

 
619,455

Credit provision(a)
21,723

 
9,846

 
(27,569
)
 
4,000

Noninterest expense
81,025

 
265,700

 
77,498

 
424,223

Income (loss) before income taxes
127,415

 
92,904

 
(29,087
)
 
191,232

Income tax expense (benefit)
24,880

 
19,510

 
(11,806
)
 
32,583

Net income
$
102,535

 
$
73,394

 
$
(17,280
)
 
$
158,648

Return on average allocated capital (ROCET1)(b)
17.2
%
 
22.8
%
 
(7.5
)%
 
12.7
%
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
Net interest income
$
179,259

 
$
179,059

 
$
5,775

 
$
364,093

Noninterest income
24,490

 
130,679

 
7,072

 
162,241

Total revenue
203,749

 
309,738

 
12,847

 
526,334

Credit provision(a)
23,050

 
10,271

 
(12,321
)
 
21,000

Noninterest expense
76,897

 
241,339

 
31,771

 
350,007

Income (loss) before income taxes
103,802

 
58,128

 
(6,603
)
 
155,327

Income tax expense (benefit)
34,012

 
20,345

 
(13,283
)
 
41,074

Net income
$
69,790

 
$
37,783

 
$
6,680

 
$
114,253

Return on average allocated capital (ROCET1)(b)
12.6
%
 
13.1
%
 
1.1
 %
 
10.6
%
Segment Balance Sheet Data
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Average balances for YTD June 2018
 
 
 
 
 
 
 
Average earning assets
$
11,729,745

 
$
10,271,021

 
$
7,849,775

 
$
29,850,541

Average loans
11,718,236

 
10,267,066

 
559,238

 
22,544,539

Average deposits
7,838,409

 
13,418,283

 
2,391,868

 
23,648,560

Average allocated capital (CET1)(b)
$
1,204,160

 
$
648,032

 
$
587,297

 
$
2,439,489

Average balances for YTD June 2017
 
 
 
 
 
 
 
Average earning assets
$
10,807,106

 
$
9,321,564

 
$
6,414,384

 
$
26,543,054

Average loans
10,797,831

 
9,319,719

 
181,049

 
20,298,599

Average deposits
6,433,870

 
11,456,200

 
3,604,524

 
21,494,594

Average allocated capital (CET1)(b)
$
1,120,082

 
$
582,706

 
$
378,104

 
$
2,080,892

(a)
The consolidated credit provision is equal to the actual reported provision for credit losses.
(b)
The Federal Reserve establishes capital adequacy requirements for the Corporation, including common equity Tier 1. For segment reporting purposes, the return on common equity Tier 1 ("ROCET1") reflects return on average allocated common equity Tier 1. The ROCET1 for the Risk Management and Shared Services segment and the Consolidated Total is inclusive of the annualized effect of the preferred stock dividends.

48



Segment Income Statement Data
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
Net interest income
$
107,330

 
$
114,620

 
$
4,413

 
$
226,362

Noninterest income
14,194

 
76,250

 
2,399

 
92,842

Total revenue
121,524

 
190,870

 
6,812

 
319,204

Credit provision(a)
11,126

 
4,880

 
(12,006
)
 
4,000

Noninterest expense
41,775

 
138,553

 
30,929

 
211,258

Income (loss) before income taxes
68,623

 
47,437

 
(12,111
)
 
103,947

Income tax expense (benefit)
13,454

 
9,962

 
(8,661
)
 
14,754

Net income (loss)
$
55,169

 
$
37,475

 
$
(3,450
)
 
$
89,192

Return on average allocated capital (ROCET1)(b)
17.9
%
 
22.7
%
 
(3.9
)%
 
14.0
%
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
Net interest income
$
89,871

 
$
90,131

 
$
3,817

 
$
183,819

Noninterest income
12,497

 
65,809

 
4,104

 
82,410

Total revenue
102,368

 
155,940

 
7,921

 
266,229

Credit provision(a)
11,470

 
5,764

 
(5,234
)
 
12,000

Noninterest expense
39,418

 
125,242

 
11,656

 
176,316

Income (loss) before income taxes
51,480

 
24,934

 
1,499

 
77,913

Income tax expense (benefit)
16,363

 
8,727

 
(5,160
)
 
19,930

Net income
$
35,117

 
$
16,207

 
$
6,659

 
$
57,983

Return on average allocated capital (ROCET1)(b)
12.5
%
 
11.0
%
 
4.5
 %
 
10.6
%
Segment Balance Sheet Data
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
Average earning assets
$
12,066,538

 
$
10,402,680

 
$
7,943,487

 
$
30,412,705

Average loans
12,054,347

 
10,399,458

 
551,624

 
23,005,428

Average deposits
7,621,977

 
13,736,251

 
2,288,021

 
23,646,250

Average allocated capital (CET1)(b)
$
1,236,918

 
$
663,172

 
$
588,411

 
$
2,488,501

Three Months Ended June 30, 2017
 
 
 
 
 
 
 
Average earning assets
$
10,853,881

 
$
9,510,571

 
$
6,380,103

 
$
26,744,555

Average loans
10,841,858

 
9,508,683

 
171,449

 
20,521,990

Average deposits
6,447,190

 
11,574,028

 
3,501,931

 
21,523,149

Average allocated capital (CET1)(b)
$
1,125,494

 
$
588,880

 
$
385,451

 
$
2,099,825

(a)
The consolidated credit provision is equal to the actual reported provision for credit losses.
(b)
The Federal Reserve establishes capital adequacy requirements for the Corporation, including common equity Tier 1. For segment reporting purposes, the ROCET1 reflects return on average allocated common equity Tier 1. The ROCET1 for the Risk Management and Shared Services segment and the Consolidated Total is inclusive of the annualized effect of the preferred stock dividends.


49



Note 16 Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) at June 30, 2018 and 2017 respectively, including changes during the preceding six and three month periods as well as any reclassifications out of accumulated other comprehensive income (loss).
($ in Thousands)
Investment
Securities
Available
For Sale
 
Defined Benefit
Pension and
Post Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance January 1, 2018
$
(38,453
)
 
$
(24,305
)
 
$
(62,758
)
Other comprehensive income (loss) before reclassifications
(60,754
)
 

 
(60,754
)
Amounts reclassified from accumulated other comprehensive income (loss)


 
 
 

Investment securities losses (gains), net
2,015

 

 
2,015

Personnel expense

 
(76
)
 
(76
)
Other expense

 
929

 
929

Adjustment for adoption of ASU 2016-01
(84
)
 

 
(84
)
Adjustment for adoption of ASU 2018-02
(8,419
)
 
(5,235
)
 
(13,654
)
Interest income (amortization of net unrealized losses (gains) on available for sale securities transferred to held to maturity securities)
(632
)
 

 
(632
)
Income tax (expense) benefit
15,340

 
(216
)
 
15,124

Net other comprehensive income (loss) during period
(52,533
)
 
(4,597
)
 
(57,130
)
Balance June 30, 2018
$
(90,986
)
 
$
(28,902
)
 
$
(119,888
)
 
 
 
 
 
 
Balance January 1, 2017
$
(20,079
)
 
$
(34,600
)
 
$
(54,679
)
Other comprehensive income (loss) before reclassifications
3,632

 

 
3,632

Amounts reclassified from accumulated other comprehensive income (loss)
 
 


 

Personnel expense

 
(75
)
 
(75
)
Other expense

 
975

 
975

Interest income (amortization of net unrealized losses (gains) on available for sale securities transferred to held to maturity securities)
(2,575
)
 

 
(2,575
)
Income tax (expense) benefit
(406
)
 
(342
)
 
(748
)
Net other comprehensive income (loss) during period
651

 
558

 
1,209

Balance June 30, 2017
$
(19,428
)
 
$
(34,042
)
 
$
(53,470
)


50



 
Investments
Securities
Available
For Sale
 
Defined Benefit
Pension and
Post Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance April 1, 2018
$
(78,453
)
 
$
(29,220
)
 
$
(107,673
)
Other comprehensive income (loss) before reclassifications
(18,919
)
 

 
(18,919
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 
 
 
Investment securities losses (gains), net
2,015

 

 
2,015

Personnel expense

 
(38
)
 
(38
)
Other expense

 
465

 
465

Interest income (amortization of net unrealized losses (gains) on available for sale securities transferred to held to maturity securities)
(335
)
 

 
(335
)
Income tax (expense) benefit
4,705

 
(109
)
 
4,596

Net other comprehensive income (loss) during period
(12,533
)
 
318

 
(12,215
)
Balance June 30, 2018
$
(90,986
)
 
$
(28,902
)
 
$
(119,888
)
 
 
 
 
 
 
Balance April 1, 2017
$
(22,023
)
 
$
(34,321
)
 
$
(56,344
)
Other comprehensive income (loss) before reclassifications
5,744

 

 
5,744

Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 
 
 
Personnel expense

 
(37
)
 
(37
)
Other expense

 
487

 
487

Interest income (Amortization of net unrealized losses (gains)on available for sale securities transferred to held to maturity securities)
(1,548
)
 

 
(1,548
)
Income tax (expense) benefit
(1,601
)
 
(171
)
 
(1,772
)
Net other comprehensive income (loss) during period
2,595

 
279

 
2,874

Balance June 30, 2017
$
(19,428
)
 
$
(34,042
)
 
$
(53,470
)


51



Note 17 Revenues
On January 1, 2018, the Corporation adopted Topic 606 using the modified retrospective method. As stated in Note 3, the implementation of the new standard had an immaterial impact to the Corporation. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606.
Revenue is recognized when obligations under the terms of a contract with the Corporation's customer are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We do not have any material significant payment terms as payment is received at or shortly after the satisfaction of the performance obligation.
The following table disaggregates the Corporation's revenue by major source for the three and six months ended June 30, 2018 and June 30, 2017.
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Insurance commissions and fees
$

 
$
46,612

 
$
32

 
46,644

Service charges and deposit account fees
8,011

 
24,773

 
25

 
32,810

Card-based and loan fees(a)
674

 
19,691

 
67

 
20,432

Trust and asset management fees

 
26,806

 

 
26,806

Brokerage commissions and fees

 
13,902

 
267

 
14,169

Other revenue
(170
)
 
4,763

 
98

 
4,692

Noninterest Income (in-scope of Topic 606)
8,515

 
136,547

 
490

 
145,553

Noninterest Income (out-of-scope of Topic 606)
18,361

 
13,739

 
5,570

 
37,670

Total Noninterest Income
26,876

 
150,286

 
6,059

 
183,222

(a) Loan fees are out-of-scope of Topic 606.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Insurance commissions and fees
$

 
$
42,473

 
$

 
$
42,473

Service charges and deposit account fees
8,511

 
23,826

 
49

 
32,386

Card-based and loan fees(a)
592

 
16,973

 
11

 
17,575

Trust and asset management fees

 
24,281

 

 
24,281

Brokerage commissions and fees

 
8,679

 

 
8,679

Other revenue
82

 
4,315

 
105

 
4,502

Noninterest Income (in-scope of Topic 606)
9,184

 
120,547

 
165

 
129,896

Noninterest Income (out-of-scope of Topic 606)
15,306

 
10,132

 
6,906

 
32,344

Total Noninterest Income
24,490

 
130,679

 
7,072

 
162,241

(a) Loan fees are out-of-scope of Topic 606.
 
 
 
 
 
 
 

52



Three Months Ended June 30, 2018
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Insurance commissions and fees
$

 
$
23,988

 
$
7

 
$
23,996

Service charges and deposit account fees
3,786

 
12,590

 
13

 
16,390

Card-based and loan fees(a)
358

 
10,162

 
42

 
10,562

Trust and asset management fees

 
13,437

 

 
13,437

Brokerage commissions and fees

 
6,870

 
26

 
6,896

Other revenue
(825
)
 
2,302

 
68

 
1,545

Noninterest Income (in-scope of Topic 606)
3,320

 
69,349

 
156


72,825

Noninterest Income (out-of-scope of Topic 606)
10,874

 
6,901

 
2,242

 
20,017

Total Noninterest Income
14,194

 
76,250

 
2,399

 
92,842

(a) Loan fees are out-of-scope of Topic 606.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Insurance commissions and fees
$

 
$
20,853

 
$

 
$
20,853

Service charges and deposit account fees
4,070

 
11,938

 
23

 
16,030

Card-based and loan fees(a)
320

 
8,829

 
5

 
9,154

Trust and asset management fees

 
12,346

 

 
12,346

Brokerage commissions and fees

 
4,346

 

 
4,346

Other revenue
37

 
2,196

 
53

 
2,286

Noninterest Income (in-scope of Topic 606)
4,426

 
60,507

 
81

 
65,014

Noninterest Income (out-of-scope of Topic 606)
8,071

 
5,302

 
4,022

 
17,395

Total Noninterest Income
12,497

 
65,809

 
4,104

 
82,410

(a) Loan fees are out-of-scope of Topic 606.
 
 
 
 
 
 
 

During the first quarter of 2018, the Corporation acquired Bank Mutual. This acquisition resulted in increased service charges and deposit account fees and card-based and loan fees. In addition, the Corporation acquired Whitnell & Co., Diversified, and Anderson since the second quarter of 2017 which resulted in increased insurance commissions and fees, trust and asset management fees, and brokerage commissions.


53



Below is a listing of performance obligations for the Corporation's main revenue streams.
Revenue Stream
 
Noninterest income in-scope of Topic 606
Insurance commissions and fees
 
The Corporation's insurance revenue has two distinct performance obligations. The first performance obligation is the selling of the policy as an agent for the carrier. This performance obligation is satisfied upon binding of the policy. The second performance obligation is the ongoing servicing of the policy which is satisfied over the life of the policy. For employee benefits, the payment is typically received monthly. For property and casualty, payments can vary, but are typically received at, or in advance, of the policy period.
Service charges and deposit account fees
 
Service charges on deposit accounts consist of monthly service fees (i.e. business analysis fees and consumer service charges) and other deposit account related fees. The Corporation's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Corporation's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Card-based and loan fees(a)
 
Card-based and loan fees are primarily comprised of debit and credit card income, ATM fees, and merchant services income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation's debit and credit cards are processed through card payment networks. ATM and merchant fees are largely transactional based, and therefore, the Corporation's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment is typically received immediately or in the following month.
Trust and asset management fees
 
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Corporation's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Corporation's performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Brokerage commissions and fees
 
Brokerage commissions and fees primarily consists of investment advisory, brokerage, retirement services, and annuities. The Corporation's performance obligation for investment advisory services and retirement services is generally satisfied, and the related revenue recognized, over the period in which the services are provided. The performance obligation for annuities is satisfied upon sale of the annuity, and therefore, the related revenue is primarily recognized at the time of sale. Payment for these services are typically received immediately or in advance of the service.
(a) Loan fees are out-of-scope of Topic 606.
 
Arrangements with Multiple Performance Obligations
The Corporation's contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the expected cost plus margin.
Practical Expedients
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Using the practical expedient, for contracts with a term of one year or less, the Corporation recognizes incremental costs of obtaining those contracts as an expense when incurred.

54



ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
This report contains statements that may constitute forward-looking statements within the meaning of the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference into this report. These forward-looking statements include statements with respect to the Corporation’s financial condition, results of operations, plans, objectives, future performance and business, including statements preceded by, followed by or that include the words “believes,” “expects,” or “anticipates,” references to estimates or similar expressions. Future filings by the Corporation with the Securities and Exchange Commission ("SEC"), and future statements other than historical facts contained in written material, press releases and oral statements issued by, or on behalf of the Corporation may also constitute forward-looking statements.
All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf of the Corporation are based upon information available at the time the statement is made and the Corporation assumes no obligation to update any forward-looking statements, except as required by federal securities law. Forward-looking statements are subject to significant risks and uncertainties, and the Corporation’s actual results may differ materially from the expected results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the risk factors in Item 1A, Risk Factors, in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, in the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, and as may be described from time to time in the Corporation’s subsequent SEC filings.
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporation’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction therewith. Management continually evaluates strategic acquisition opportunities and other various strategic alternatives that could involve the sale or acquisition of branches or other assets, or the consolidation or creation of subsidiaries. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes.
Recent Legislative Developments
On May 24, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“Economic Growth Act”), which repealed or modified several important provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) that have impacted us. Key aspects of the Economic Growth Act that have the potential to affect our business and the results of our operations include:
Raising the total asset threshold from $10 billion to $250 billion at which bank holding companies are required to conduct annual company-run stress tests mandated by the Dodd-Frank Act;
Raising the total asset threshold from $10 billion to $50 billion at which publicly traded bank holding companies are required to establish risk committees for the oversight of the enterprise-wide risk management practices of the institution;
Raising the total asset threshold from $50 billion to $250 billion at which bank holding companies would be subject to annual supervisory stress tests;
Raising the total asset threshold for enhanced prudential supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) from $50 billion to $250 billion, which had resulted in enhanced prudential standards in the areas of risk-based capital and leverage limits, liquidity requirements, and resolution planning (preparation of so-called “living wills”). Under the amended provisions, the Federal Reserve Board retains discretion to subject bank holding companies with more than $100 billion in assets to enhanced supervision.
To the extent we grow our balance sheet organically or through strategic opportunities, the Corporation expects to benefit significantly from the amendments which raised the above asset thresholds. In addition, although the Corporation will continue to monitor and stress test its capital consistent with the safety and soundness expectations of the federal regulators, the Corporation will no longer conduct company-run stress testing as a result of the legislative amendments.

55



The Economic Growth Act also enacted several important changes in some technical compliance areas that we believe will help reduce our regulatory burden, including:
Prohibiting federal banking regulators from imposing higher capital standards on High Volatility Commercial Real Estate (“HVCRE”) exposures unless they are for acquisition, development or construction (“ADC”), and clarifying ADC status;
Requiring the federal banking agencies to amend the Liquidity Coverage Ratio Rule such that all qualifying investment-grade, liquid and readily-marketable municipal securities are treated as level 2B liquid assets, making them more attractive investment alternatives;
Exempting from appraisal requirements certain transactions involving real property in rural areas and valued at less than $400,000; and
Directing the Bureau of Consumer Financial Protection to provide guidance on the applicability of the TILA-RESPA Integrated Disclosure rule to mortgage assumption transactions and construction-to-permanent home loans, as well the extent to which lenders can rely on model disclosures that do not reflect recent regulatory changes.
Despite the improvements for mid-size financial institutions such as the Corporation that has resulted from the Economic Growth Act, many provisions of the Dodd-Frank Act and its implementing regulations remain in place and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operation. In addition, the Economic Growth Act requires the enactment of a number of implementing regulations, the details of which may have a material effect on the ultimate impact of the law.

56



Performance Summary
Average loans of $22.5 billion increased $2.2 billion, or 11%, from the first six months of 2017. Average deposits of $23.6 billion increased $2.2 billion, or 10%, from the first six months of 2017. For the remainder of 2018, the Corporation expects 1% to 2% quarterly loan growth and to maintain the loan to deposit ratio under 100%.
Net interest income of $436 million increased $72 million, or 20%, from the first six months of 2017. Net interest margin was 2.97%, compared to 2.83% for the first six months of 2017. For the remainder of 2018, the Corporation expects an improving year over year net interest margin.
Provision for credit losses was $4 million, down from $21 million the first six months of 2017. For the remainder of 2018, the Corporation expects the provision for credit losses will change based on changes in risk grade or other indicators of credit quality, and loan volume.
Noninterest income of $183 million was up $21 million, or 13% from the first six months of 2017. For 2018, the Corporation expects noninterest income of approximately $365 million to $370 million.
Noninterest expense of $424 million including $28 million of acquisition related costs pertaining to Bank Mutual, was up $74 million, or 21% compared to the first six months 2017. For 2018, the Corporation expects noninterest expense to be approximately $825 million, which includes the Diversified and Anderson acquisitions and all costs related to Bank Mutual.
The effective tax rate for the first six months of 2018 was 17.04%, compared to 26.44% for the first six months of 2017. The Corporation expects the effective tax rate to be approximately 22% for the remainder of the year, and approximately 20% for the full year 2018.
Table 1 Summary Results of Operations: Trends
 
YTD Jun 2018
 
YTD Jun 2017
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
($ in Thousands, except per share data)
Net income
$
158,648

 
$
114,253

 
$
89,192

 
$
69,456

 
$
50,010

 
$
65,001

 
$
57,983

Net income available to common equity
153,980

 
109,584

 
86,863

 
67,117

 
47,671

 
62,662

 
55,644

Earnings per common share - basic
0.92

 
0.72

 
0.51

 
0.41

 
0.31

 
0.41

 
0.36

Earnings per common share - diluted
0.90

 
0.71

 
0.50

 
0.40

 
0.31

 
0.41

 
0.36

Effective tax rate
17.04
%
 
26.44
%
 
14.19
%
 
20.43
%
 
44.34
%
 
30.55
%
 
25.58
%

57



Income Statement Analysis

Net Interest Income

Table 2 Net Interest Income Analysis
 
Six Months Ended June 30,
 
2018
 
2017
 
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
 
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
 
($ in Thousands)
Assets
 
 
 
 
 
 
 
Earning assets
 
 
 
 
 
 
 
Loans(a)(b)(c)
 
 
 
 
 
 
 
Commercial and business lending
$
7,506,399

$
161,476

4.34
%
 
$
7,260,839

$
126,187

3.50
%
Commercial real estate lending
5,553,469

133,554

4.85
%
 
4,982,027

92,697

3.75
%
Total commercial
13,059,868

295,030

4.55
%
 
12,242,866

218,884

3.60
%
Residential mortgage
8,124,546

135,432

3.34
%
 
6,762,319

109,404

3.24
%
Retail
1,360,125

37,061

5.46
%
 
1,293,414

31,497

4.88
%
Total loans
22,544,539

467,523

4.17
%
 
20,298,599

359,785

3.56
%
Investment securities
 
 
 
 
 
 
 
Taxable
5,547,289

60,727

2.19
%
 
4,805,819

47,133

1.96
%
Tax-exempt(a)
1,405,561

25,200

3.59
%
 
1,140,889

24,897

4.36
%
Other short-term investments
353,152

5,330

3.04
%
 
297,747

3,089

2.09
%
Investments and other
7,306,003

91,257

2.50
%
 
6,244,455

75,119

2.41
%
Total earning assets
29,850,541

$
558,780

3.76
%
 
26,543,054

$
434,904

3.29
%
Other assets, net
2,953,835

 
 
 
2,447,719

 
 
Total assets
$
32,804,377

 
 
 
$
28,990,773

 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
Savings
$
1,808,207

$
412

0.05
%
 
$
1,503,678

$
389

0.05
%
Interest-bearing demand
4,620,383

17,736

0.77
%
 
3,822,996

8,001

0.42
%
Money market
7,202,684

21,830

0.61
%
 
6,070,492

8,748

0.29
%
Network transaction deposits
2,269,000

18,281

1.62
%
 
3,485,279

14,119

0.82
%
Time
2,639,731

13,585

1.04
%
 
1,683,177

6,849

0.82
%
Total interest-bearing deposits
18,540,005

71,843

0.78
%
 
16,565,621

38,104

0.46
%
Federal funds purchased and securities sold under agreements to repurchase
267,602

1,060

0.80
%
 
492,425

1,339

0.55
%
Other short-term funding
69,654

111

0.32
%
 
107,035

169

0.32
%
FHLB advances
4,275,753

34,402

1.62
%
 
3,007,025

11,596

0.78
%
Long-term funding
497,433

9,088

3.65
%
 
496,755

9,088

3.66
%
Total short and long-term funding
5,110,442

44,661

1.76
%
 
4,103,240

22,192

1.09
%
Total interest-bearing liabilities
23,650,448

$
116,504

0.99
%
 
20,668,861

$
60,296

0.59
%
Noninterest-bearing demand deposits
5,108,554

 
 
 
4,928,973

 
 
Other liabilities
415,683

 
 
 
248,559

 
 
Stockholders’ equity
3,629,692

 
 
 
3,144,380

 
 
Total liabilities and stockholders’ equity
$
32,804,377

 
 
 
$
28,990,773

 
 
Interest rate spread
 
 
2.77
%
 
 
 
2.70
%
Net free funds
 
 
0.20
%
 
 
 
0.13
%
Fully tax-equivalent net interest income and net interest margin
 
$
442,277

2.97
%
 
 
$
374,608

2.83
%
Fully tax-equivalent adjustment
 
6,043

 
 
 
10,515

 
Net interest income
 
$
436,233

 
 
 
$
364,093

 
(a)
Beginning in 2018, the yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 21% and is net of the effects of certain disallowed interest deductions. Prior to 2018, the yield on tax-exempt loans and securities was computed on a fully tax-equivalent basis using a tax rate of 35% and was net of the effects of certain disallowed interest deductions.
(b)
Nonaccrual loans and loans held for sale have been included in the average balances.
(c)
Interest income includes net deferred loan origination costs and net accreted purchase loan discount.


58



Table 2 Net Interest Income Analysis (continued)
 
Quarter ended
 
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
 
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
 
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
 
($ in Thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Loans(a)(b)(c)
 
 
 
 
 
 
 
 
 
 
 
Commercial and business lending
$
7,697,057

$
86,771

4.52
%
 
$
7,313,621

$
74,706

4.14
%
 
$
7,321,523

$
65,507

3.59
%
Commercial real estate lending
5,705,817

72,049

5.06
%
 
5,399,429

61,504

4.62
%
 
4,964,257

47,562

3.84
%
Total commercial
13,402,874

158,820

4.75
%
 
12,713,050

136,210

4.34
%
 
12,285,780

113,069

3.69
%
Residential mortgage
8,237,457

69,030

3.35
%
 
8,010,381

66,402

3.32
%
 
6,957,865

56,097

3.23
%
Retail
1,365,097

19,210

5.63
%
 
1,355,098

17,852

5.29
%
 
1,278,345

16,048

5.03
%
Total loans
23,005,428

247,060

4.30
%
 
22,078,529

220,464

4.03
%
 
20,521,990

185,214

3.62
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
Taxable
5,518,077

30,623

2.22
%
 
5,576,826

30,104

2.16
%
 
4,781,488

23,658

1.98
%
Tax-exempt(a)
1,497,192

13,587

3.63
%
 
1,312,913

11,613

3.54
%
 
1,143,736

12,459

4.36
%
Other short-term investments
392,009

3,153

3.22
%
 
313,864

2,177

2.80
%
 
297,341

1,553

2.09
%
Investments and other
7,407,277

47,363

2.56
%
 
7,203,603

43,894

2.44
%
 
6,222,565

37,670

2.42
%
Total earning assets
30,412,705

$
294,423

3.88
%
 
29,282,132

$
264,358

3.64
%
 
26,744,555

$
222,884

3.34
%
Other assets, net
3,022,659

 
 
 
2,884,248

 
 
 
2,454,351

 
 
Total assets
$
33,435,364

 
 
 
$
32,166,380

 
 
 
$
29,198,906

 
 
Liabilities and Stockholders' equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
Savings
$
1,892,808

$
210

0.04
%
 
$
1,722,665

$
202

0.05
%
 
$
1,541,129

$
201

0.05
%
Interest-bearing demand
4,735,514

9,918

0.84
%
 
4,503,974

7,818

0.70
%
 
3,824,759

4,401

0.46
%
Money market
7,190,178

12,045

0.67
%
 
7,215,329

9,785

0.55
%
 
6,135,222

4,851

0.32
%
Network transaction deposits
2,130,854

9,503

1.79
%
 
2,408,681

8,778

1.48
%
 
3,377,513

8,017

0.95
%
Time deposits
2,565,001

6,755

1.06
%
 
2,715,292

6,830

1.02
%
 
1,752,255

3,710

0.85
%
Total interest-bearing deposits
18,514,355

38,431

0.83
%
 
18,565,941

33,412

0.73
%
 
16,630,878

21,180

0.51
%
Federal funds purchased and securities sold under agreements to repurchase
259,713

538

0.83
%
 
275,578

522

0.77
%
 
489,571

824

0.67
%
Other short-term funding
65,631

51

0.31
%
 
73,722

60

0.33
%
 
105,558

84

0.32
%
FHLB advances
4,809,071

21,279

1.77
%
 
3,736,510

13,123

1.42
%
 
3,172,254

7,149

0.90
%
Long-term funding
497,517

4,544

3.65
%
 
497,348

4,544

3.66
%
 
496,841

4,544

3.66
%
Total short and long-term funding
5,631,932

26,412

1.88
%
 
4,583,158

18,249

1.61
%
 
4,264,224

12,601

1.18
%
Total interest-bearing liabilities
24,146,287

$
64,843

1.08
%
 
23,149,099

$
51,661

0.90
%
 
20,895,102

$
33,781

0.65
%
Noninterest-bearing demand deposits
5,131,894

 
 
 
5,084,957

 
 
 
4,892,271

 
 
Other liabilities
436,130

 
 
 
395,008

 
 
 
246,395

 
 
Stockholders’ equity
3,721,053

 
 
 
3,537,316

 
 
 
3,165,138

 
 
Total liabilities and stockholders’ equity
$
33,435,364

 
 
 
$
32,166,380

 
 
 
$
29,198,906

 
 
Interest rate spread
 
 
2.80
%
 
 
 
2.74
%
 
 
 
2.69
%
Net free funds
 
 
0.22
%
 
 
 
0.18
%
 
 
 
0.14
%
Fully tax-equivalent net interest income and net interest margin
 
$
229,580

3.02
%
 
 
$
212,697

2.92
%
 
 
$
189,103

2.83
%
Fully tax-equivalent adjustment
 
3,217

 
 
 
2,826

 
 
 
5,284

 
Net interest income
 
$
226,362

 
 
 
$
209,871

 
 
 
$
183,819

 
(a)
Beginning in 2018, the yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 21% and is net of the effects of certain disallowed interest deductions. Prior to 2018, the yield on tax-exempt loans and securities was computed on a fully tax-equivalent basis using a tax rate of 35% and was net of the effects of certain disallowed interest deductions.
(b)
Nonaccrual loans and loans held for sale have been included in the average balances.
(c)
Interest income includes amortization of net deferred loan origination costs and net accreted purchase loan discount.

59



Notable Contributions to the Change in Net Interest Income

Net interest income in the consolidated statements of income (which excludes the fully tax-equivalent adjustment) was $436 million for the first six months of 2018 compared to $364 million for the first six months of 2017. The primary reason for increased net interest income and earning assets from last year was the acquisition of Bank Mutual in February 2018. See sections Interest Rate Risk and Quantitative and Qualitative Disclosures about Market Risk, for a discussion of interest rate risk and market risk.

Fully tax-equivalent net interest income of $442 million for the first six months of 2018 was $68 million higher than the first six months of 2017.

Accreted income from the acquisition of the Bank Mutual loan portfolio contributed $15 million to net interest income for the first six months of 2018. Approximately $7 million of the accreted income was from prepayments.

Average earning assets of $29.9 billion for the first six months of 2018 were $3.3 billion, or 12%, higher than the first six months of 2017. Average loans of $22.5 billion for the first six months of 2018 increased $2.2 billion, or 11% primarily due to an increase of $1.4 billion, or 20% in residential mortgage loans.

Average interest-bearing liabilities of $23.7 billion for the first six months of 2018 were up $3.0 billion, or 14% versus the first six months of 2017. On average, interest-bearing deposits increased $2.0 billion and FHLB advances increased $1.3 billion from the first six months of 2017.

The net interest margin for the first six months of 2018 was 2.97%, compared to 2.83% for the first six months of 2017.

The cost of interest-bearing liabilities was 0.99% for the first six months of 2018, which was 40 bps higher than the first six months of 2017. The increase was primarily due to a 32 bp increase in the cost of average interest-bearing deposits (to 0.78%) and a 84 bp increase in the cost of FHLB advances (to 1.62%), both primarily due to increases in the Federal Reserve interest rate.
The Federal Reserve increased the targeted federal funds rate on June 13, 2018, to a range of 1.75% to 2.00% which compares to a range of 1.00% to 1.25% at the end of the second quarter of 2017. The Federal Reserve has indicated that it expects gradual increases in the Federal Funds rate. However, the timing and magnitude of any such increases are uncertain and will depend on domestic and global economic conditions.
Provision for Credit Losses
The provision for credit losses (which includes the provision for loan losses and the provision for unfunded commitments) for the six months ended June 30, 2018 was $4 million, compared to $21 million for the six months ended June 30, 2017. Net charge offs were $18 million (representing 0.16% of average loans) for the six months ended June 30, 2018, compared to $18 million (representing 0.18% of average loans) for the six months ended June 30, 2017. The ratio of the allowance for loan losses to total loans was 1.10% for June 30, 2018 and 1.35% for June 30, 2017.
The provision for credit losses is predominantly a function of the Corporation’s reserving methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the allowance for loan losses and the allowance for unfunded commitments, which focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonaccrual loans, historical losses and delinquencies in each portfolio category, the level of loans sold or transferred to held for sale, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. See additional discussion under sections, Loans, Credit Risk, Nonperforming Assets, and Allowance for Credit Losses.

60



Noninterest Income
Table 3 Noninterest Income
 
 
 

 
 
 
 
 
2Q18 Change vs
($ in Thousands)
YTD 2018
YTD 2017
% Change
2Q18
1Q18
4Q17
3Q17
2Q17
1Q18
2Q17
Insurance commissions and fees
$
46,644

$
42,473

10
 %
$
23,996

$
22,648

$
19,186

$
19,815

$
20,853

6
 %
15
 %
Service charges and deposit account fees
32,810

32,386

1
 %
16,390

16,420

15,773

16,268

16,030

 %
2
 %
Card-based and loan fees
27,809

26,229

6
 %
14,387

13,422

13,840

12,619

13,764

7
 %
5
 %
Trust and asset management fees
26,806

24,281

10
 %
13,437

13,369

13,125

12,785

12,346

1
 %
9
 %
Brokerage commissions and fees
14,169

8,679

63
 %
6,896

7,273

6,864

4,392

4,346

(5
)%
59
 %
Total core fee-based revenue
148,238

134,048

11
 %
75,106

73,132

68,788

65,879

67,339

3
 %
12
 %
Mortgage banking income
16,670

14,965

11
 %
8,451

8,219

5,507

9,147

7,692

3
 %
10
 %
Mortgage servicing rights expense
4,042

5,359

(25
)%
2,193

1,849

2,337

2,563

2,665

19
 %
(18
)%
Mortgage banking, net
12,628

9,606

31
 %
6,258

6,370

3,169

6,585

5,027

(2
)%
24
 %
Capital markets, net
10,089

7,925

27
 %
4,783

5,306

7,107

4,610

4,042

(10
)%
18
 %
Bank and corporate owned life insurance
7,165

6,514

10
 %
3,978

3,187

3,156

6,580

3,899

25
 %
2
 %
Other
4,727

4,492

5
 %
2,235

2,492

2,777

2,254

2,213

(10
)%
1
 %
Subtotal
182,847

162,585

12
 %
92,360

90,487

84,997

85,908

82,520

2
 %
12
 %
Asset gains(losses), net
2,390

(700
)
N/M

2,497

(107
)
(528
)
(16
)
(466
)
N/M

N/M

Investment securities gains(losses), net
(2,015
)
356

N/M

(2,015
)

75

3

356

N/M

N/M

Total noninterest income
183,222

162,241

13
 %
$
92,842

$
90,380

$
84,544

$
85,895

$
82,410

3
 %
13
 %
Mortgage loans originated for sale during period
$
516,285

$
220,284

134
 %
$
318,682

$
197,603

$
249,222

$
245,851

$
119,004

61
 %
168
 %
Mortgage loan settlements during period
$
482,080

$
364,128

32
 %
$
294,456

$
187,624

$
268,254

$
187,568

$
167,550

57
 %
76
 %
Assets under management, at market value(a)
$
10,776

$
8,997

20
 %
$
10,776

$
10,540

$
10,555

$
9,243

$
8,997

2%

20
 %
N/M = Not Meaningful
(a)
$ in millions. Excludes assets held in brokerage firms

    
Notable Contributions to the Change in Noninterest Income

Fee-based revenue was $148 million, an increase of $14 million (11%) compared to the first six months of 2017. Within fee based revenue, brokerage commissions and fees increased $5 million (63%), primarily due to the acquisition of Whitnell & Co. in the fourth quarter of 2017. In addition, trust and asset management fees increased $3 million (10%), primarily due to an increase in assets under management, and insurance commissions and fees increased $4 million (10%), primarily due to the acquisition of Diversified and Anderson in the first and second quarters of 2018, respectively.
Net mortgage banking income for the first six months of 2018 was $13 million, up $3 million (31%) from the first six months of 2017, primarily due to the Corporation's strategy to hold mortgages on balance sheet during 2017.
Capital markets, net increased $2 million (27%) compared to the first six months of 2017, primarily driven by higher customer hedging transactions and increased syndication activity.
During the second quarter of 2018, the Corporation had $2 million of asset gains primarily driven by a distribution from an alternative equity investment.
During the second quarter of 2018, the Corporation recorded a $2 million loss on the sale of investment securities related to the sale of two lower yielding GNMA commercial mortgage-related securities.


61



Noninterest Expense
Table 4 Noninterest Expense
 
 
 
 
 
 
 
 
 
2Q18 Change vs
($ in Thousands)
YTD 2018
YTD
2017
YTD % Change
2Q18
1Q18
4Q17
3Q17
2Q17
1Q18
2Q17
Personnel
$
241,665

$
213,848

13
 %
$
123,980

$
117,685

$
107,031

$
108,098

$
107,066

5
 %
16
 %
Occupancy
30,428

28,051

8
 %
15,071

15,357

13,497

12,294

12,832

(2
)%
17
 %
Technology
37,167

29,893

24
 %
19,452

17,715

17,878

15,233

15,473

10
 %
26
 %
Equipment
11,509

10,719

7
 %
5,953

5,556

5,250

5,232

5,234

7
 %
14
 %
Business development and advertising
13,760

12,987

6
 %
7,067

6,693

8,195

7,764

7,152

6
 %
(1
)%
Legal and professional
11,697

9,877

18
 %
6,284

5,413

6,384

6,248

5,711

16
 %
10
 %
Card Issuance and loan costs
6,477

5,594

16
 %
3,173

3,304

2,836

3,330

2,974

(4
)%
7
 %
Foreclosure / OREO expense, net
1,744

2,687

(35
)%
1,021

723

1,285

906

1,182

41
 %
(14
)%
FDIC assessment
16,500

16,000

3
 %
8,250

8,250

7,500

7,800

8,000

 %
3
 %
Other intangible amortization
3,693

1,009

N/M

2,168

1,525

500

450

496

42
 %
N/M

Acquisition related costs(a)
27,712


N/M

7,107

20,605




(66
)%
N/M

Other
21,873

19,342

13
 %
11,732

10,140

11,343

10,072

10,196

16
 %
15
 %
Total noninterest expense
$
424,223

$
350,007

21
 %
$
211,258

$
212,965

$
181,699

$
177,427

$
176,316

(1
)%
20
 %
N/M = Not Meaningful
(a)
Includes Bank Mutual acquisition-related costs only.


Notable Contributions to the Change in Noninterest Expense
Personnel expense (which includes salary-related expenses and fringe benefit expenses) was $242 million for the first six months of 2018, up $28 million (13%) from the first six months of 2017, primarily driven by the additional cost of Bank Mutual staff and an increase in the management incentive plan.
All other nonpersonnel noninterest expense on a combined basis was $183 million, up $46 million compared to the first six months of 2017. The increase was primarily driven by $28 million of acquisition related costs pertaining to Bank Mutual. In addition, technology expense increased $7 million (24%) from the first six months of 2017, driven by the additional cost of Bank Mutual operations.
Income Taxes

The Corporation recognized income tax expense of $33 million for the six months ended June 30, 2018, compared to income tax expense of $41 million for the six months ended June 30, 2017. The decrease is primarily due to the Tax Cut and Jobs Act ("TCJA") signed into law on December 22, 2017. In the second quarter, the Corporation received one-time tax benefits from implementing tax planning strategies to maximize the positive impact of the TCJA. The effective tax rate was 17.04% for the first six months of 2018, compared to an effective tax rate of 26.44% for the first six months of 2017.

Income tax expense recorded in the consolidated statements of income involves the interpretation and application of certain accounting pronouncements and federal and state tax laws and regulations, and is, therefore, considered a critical accounting policy. The Corporation is subject to examination by various taxing authorities. Examination by taxing authorities may impact the amount of tax expense and / or reserve for uncertainty in income taxes if their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See section Critical Accounting Policies, in the Corporation’s 2017 Annual Report on Form 10-K for additional information on income taxes.


62




Balance Sheet Analysis
At June 30, 2018, total assets were $33.7 billion, up $3.2 billion (10%) from December 31, 2017 and up $3.9 billion (13%) from June 30, 2017. On February 1, 2018, the Corporation added $2.8 billion of assets as a result of the Bank Mutual acquisition.
Loans of $23.0 billion at June 30, 2018 were up $2.2 billion (11%) from December 31, 2017 and were up $2.2 billion (11%) from June 30, 2017. On February 1, 2018, the Corporation added $1.9 billion of loans as a result of the Bank Mutual acquisition. See section Loans for additional information on loans.
At June 30, 2018, total deposits of $23.8 billion were up $1.0 billion (5%) from December 31, 2017 and were up $2.2 billion (10%) from June 30, 2017. On February 1, 2018, the Corporation assumed $1.8 billion of deposits as a result of the Bank Mutual acquisition. These inflows were partially offset by seasonal deposit outflows. See section Deposits and Customer Funding for additional information on deposits.
FHLB advances of $4.8 billion increased $1.6 billion (51%) from December 31, 2017 and increased $1.3 billion (39%) from June 30, 2017. The increase in FHLB advances replaced seasonal deposit outflows and provided funding for incremental asset growth. Other short and long-term funding, excluding FHLB advances, of $754 million decreased $135 million (15%) from December 31, 2017 and decreased $448 million (37%) from June 30, 2017.
Loans
Table 5 Period End Loan Composition
 
 
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
($ in Thousands)
Commercial and industrial
$
7,109,796

 
31
%
 
$
6,756,983

 
30
%
 
$
6,399,693

 
31
%
 
$
6,534,660

 
31
%
 
$
6,571,000

 
32
%
Commercial real estate — owner occupied
888,330

 
4
%
 
900,913

 
4
%
 
802,209

 
4
%
 
827,064

 
4
%
 
845,336

 
4
%
Commercial and business lending
7,998,126

 
35
%
 
7,657,896

 
34
%
 
7,201,902

 
35
%
 
7,361,724

 
35
%
 
7,416,336

 
36
%
Commercial real estate — investor
3,996,415

 
17
%
 
4,077,671

 
18
%
 
3,315,254

 
16
%
 
3,345,536

 
16
%
 
3,329,585

 
16
%
Real estate construction
1,487,159

 
6
%
 
1,579,778

 
7
%
 
1,451,684

 
7
%
 
1,552,135

 
8
%
 
1,651,805

 
8
%
Commercial real estate lending
5,483,574

 
24
%
 
5,657,449

 
25
%
 
4,766,938

 
23
%
 
4,897,671

 
24
%
 
4,981,390

 
24
%
Total commercial
13,481,700

 
59
%
 
13,315,345

 
58
%
 
11,968,840

 
58
%
 
12,259,395

 
59
%
 
12,397,726

 
60
%
Residential mortgage
8,207,253

 
36
%
 
8,197,223

 
36
%
 
7,546,534

 
36
%
 
7,408,471

 
35
%
 
7,115,457

 
34
%
Home equity
911,363

 
4
%
 
923,470

 
4
%
 
883,804

 
4
%
 
890,130

 
4
%
 
897,111

 
4
%
Other consumer
376,470

 
2
%
 
374,453

 
2
%
 
385,813

 
2
%
 
373,464

 
2
%
 
372,775

 
2
%
Total consumer
9,495,086

 
41
%
 
9,495,146

 
42
%
 
8,816,151

 
42
%
 
8,672,065

 
41
%
 
8,385,343

 
40
%
Total loans
$
22,976,786

 
100
%
 
$
22,810,491

 
100
%
 
$
20,784,991

 
100
%
 
$
20,931,460

 
100
%
 
$
20,783,069

 
100
%

The Corporation has long-term guidelines relative to the proportion of Commercial and Business, Commercial Real Estate, and Consumer loans within the overall loan portfolio, with each targeted to represent 30-40% of the overall loan portfolio. The targeted long-term guidelines were unchanged during 2017 and the first six months of 2018. Furthermore, certain sub-asset classes within the respective portfolios were further defined and dollar limitations were placed on these sub-portfolios. These guidelines and limits are reviewed quarterly and approved annually by the Enterprise Risk Committee of the Corporation’s Board of Directors. These guidelines and limits are designed to create balance and diversification within the loan portfolios.
Credit Risk
An active credit risk management process is used for commercial loans to ensure that sound and consistent credit decisions are made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of borrowers’ outstanding loans and commitments. Borrower relationships are formally reviewed and graded on an ongoing basis for early identification of potential problems. Further analysis by customer, industry, and geographic location are performed to monitor trends, financial performance, and concentrations. See Note 7 Loans, for additional information on managing overall credit quality.

63



The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within the Corporation's branch footprint. Significant loan concentrations are considered to exist when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At June 30, 2018, no significant concentrations existed in the Corporation’s portfolio in excess of 10% of total loans.
Commercial and business lending: The commercial and business lending classification primarily includes commercial loans to large corporations, middle market companies, small businesses and lease financing. At June 30, 2018, the largest industry group within the commercial and business lending category was manufacturing and wholesale trade, which represented 9% of total loans and 25% of the total commercial and business lending portfolio. The next largest industry group within the commercial and business lending category included the power and utilities portfolio, which represented 5% of total loans and represented 15% of the total commercial and business lending portfolio at June 30, 2018. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any. Currently, a higher risk segment of the commercial and business lending portfolio is loans to borrowers supporting oil and gas exploration and production, which are further discussed under oil and gas lending below.
Oil and gas lending: The Corporation provides reserve based loans to oil and gas exploration and production firms. At June 30, 2018, the oil and gas portfolio was comprised of 57 credits, totaling $682 million of outstanding balances. The Corporation's oil and gas lending team is based in Houston and focuses on serving the funding needs of small and mid-sized companies in the upstream oil and gas business. The oil and gas loans are generally first lien, reserve-based, and borrowing base dependent lines of credit. A small portion of the portfolio is in a second lien position to which the Corporation also holds the first lien position. The portfolio is diversified across all major U.S. geographic basins. The portfolio is diversified by product line with approximately 57% in oil and 43% in gas at June 30, 2018. Borrowing base re-determinations for the portfolio are completed at least twice a year and are based on detailed engineering reports and discounted cash flow analysis.
The following table summarizes information about the Corporation's oil and gas loan portfolio.
Table 6 Oil and Gas Loan Portfolio
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
($ in Millions)
Pass
$
603

 
$
548

 
$
483

 
$
446

 
$
411

Special mention

 

 

 

 
39

Potential problem
34

 
40

 
40

 
39

 
37

Nonaccrual
45

 
69

 
77

 
92

 
114

Total oil and gas related loans
$
682

 
$
657

 
$
600

 
$
577

 
$
601

Quarter net charge offs
$
7

 
$
4

 
$

 
$
8

 
$
12

Oil and gas related allowance
$
17

 
$
19

 
$
27

 
$
30

 
$
33

Oil and gas related allowance ratio
2.5
%
 
2.9
%
 
4.5
%
 
5.2
%
 
5.4
%
During 2017, the market stabilized leading to improvements across the oil and gas portfolio. At June 30, 2018, nonaccrual oil and gas related loans totaled approximately $45 million, representing 7% of the oil and gas loan portfolio, a decrease of $32 million from December 31, 2017.
Commercial real estate - investor: Commercial real estate-investor is comprised of loans secured by various non-owner occupied or investor income producing property types. At June 30, 2018, the two largest property type exposures within the commercial real estate-investor portfolio were loans secured by multi-family properties, which represented 6% of total loans and 35% of the total commercial real estate-investor portfolio, and loans secured by retail properties, which represented 4% of total loans and 24% of the total commercial real estate-investor portfolio. Credit risk is managed in a similar manner to commercial and business lending by employing sound underwriting guidelines, lending primarily to borrowers in local markets and businesses, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationship on an ongoing basis.
Real estate construction: Real estate construction loans are primarily short-term or interim loans that provide financing for the acquisition or development of commercial income properties, multi-family projects or residential development, both single family and condominium. Real estate construction loans are made to developers and project managers who are generally well known to the Corporation and have prior successful project experience. The credit risk associated with real estate construction loans is generally confined to specific geographic areas but is also influenced by general economic conditions. The Corporation controls the credit risk on these types of loans by making loans in familiar markets to developers, reviewing the merits of individual projects, controlling loan structure, and monitoring project progress and construction advances.

64



The Corporation’s current lending standards for commercial real estate and real estate construction lending are determined by property type and specifically address many criteria, including: maximum loan amounts, maximum loan-to-value (“LTV”), requirements for pre-leasing and / or presales, minimum borrower equity, and maximum loan-to-cost. Currently, the maximum standard for LTV is 80%, with lower limits established for certain higher risk types, such as raw land that has a 50% LTV maximum. The Corporation’s LTV guidelines are in compliance with regulatory supervisory limits. In most cases, for real estate construction loans, the loan amounts include interest reserves, which are built into the loans and sized to fund loan payments through construction and lease up and / or sell out.
Table 7 Commercial Loan Distribution and Interest Rate Sensitivity
June 30, 2018
Within 1 Year(a)
 
1-5 Years
 
After 5 Years
 
Total
 
% of Total
 
($ in Thousands)
Commercial and industrial
$
6,409,615

 
$
507,868

 
$
192,314

 
$
7,109,796

 
53
%
Commercial real estate — investor
3,251,035

 
640,802

 
104,578

 
3,996,415

 
30
%
Commercial real estate — owner occupied
451,573

 
287,350

 
149,406

 
888,330

 
7
%
Real estate construction
1,370,679

 
110,071

 
6,409

 
1,487,159

 
11
%
Total
$
11,482,902

 
$
1,546,091

 
$
452,707

 
$
13,481,700

 
100
%
Fixed rate
$
4,630,936

 
$
972,613

 
$
354,526

 
$
5,958,075

 
44
%
Floating or adjustable rate
6,851,966

 
573,478

 
98,181

 
7,523,625

 
56
%
Total
$
11,482,902

 
$
1,546,091

 
$
452,707

 
$
13,481,700

 
100
%
Percent repricing distribution
85
%
 
12
%
 
3
%
 
100
%
 
 
(a)
Demand loans, past due loans, and overdrafts are reported in the “Within 1 Year” category.


Residential mortgages: Residential mortgage loans are primarily first lien home mortgages with a maximum loan-to-collateral value without credit enhancement (e.g. private mortgage insurance) of 80%. At June 30, 2018, the residential mortgage portfolio was comprised of $2.7 billion of fixed-rate residential real estate mortgages and $5.4 billion of variable-rate residential real estate mortgages, compared to $2.6 billion of fixed-rate mortgages and $4.9 billion variable-rate mortgages at December 31, 2017. The residential mortgage portfolio is focused primarily in the Corporation's three-state branch footprint, with approximately 88% of the outstanding loan balances in the Corporation's branch footprint at June 30, 2018. The majority of the on balance sheet residential mortgage portfolio consists of hybrid, adjustable rate mortgage loans with initial fixed rate terms of 3, 5, 7, or 10 years.
Based upon outstanding balances at June 30, 2018, the following table presents the next contractual repricing year for the Corporation's adjustable rate mortgage portfolio.
Table 8 Adjustable Rate Mortgage Repricing (a) 
 
$ in Thousands
% to Total
2018
$
187,044

4
%
2019
669,301

13
%
2020
610,417

12
%
2021
723,320

14
%
2022
773,414

15
%
Thereafter
2,293,420

44
%
Total adjustable rate mortgages
$
5,256,916

100
%
(a)
Based on contractual loan terms for 3/1, 5/1, 7/1, and 10/1 adjustable rate mortgages; does not factor in early prepayments or amortization.

The Corporation also generally retains certain fixed-rate residential real estate mortgages in its loan portfolio, including retail and private banking jumbo mortgages and CRA-related mortgages. As part of management’s historical practice of originating and servicing residential mortgage loans, generally the Corporation’s 30 year, agency conforming, fixed-rate residential real estate mortgage loans were sold in the secondary market with servicing rights retained. Subject to management’s analysis of the current interest rate environment, among other market factors, the Corporation may choose to retain 30 year mortgage loan production on its balance sheet.
The Corporation’s underwriting and risk-based pricing guidelines for residential mortgage loans include minimum borrower FICO and maximum LTV of the property securing the loan. Residential mortgage products generally are underwritten using FHLMC and FNMA secondary marketing guidelines.

65



Home equity: Home equity consists of both home equity lines of credit and closed-end home equity loans. The Corporation’s credit risk monitoring guidelines for home equity is based on an ongoing review of loan delinquency status, as well as a quarterly review of FICO score deterioration and property devaluation. The Corporation does not routinely obtain appraisals on performing loans to update LTV ratios after origination; however, the Corporation monitors the local housing markets by reviewing the various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring process. For junior lien home equity loans, the Corporation is unable to track the performance of the first lien loan if it does not own or service the first lien loan. However, the Corporation obtains a refreshed FICO score on a quarterly basis and monitors this as part of its assessment of the home equity portfolio.
The Corporation’s underwriting and risk-based pricing guidelines for home equity lines and loans consist of a combination of both borrower FICO and the original cumulative LTV against the property securing the loan.  Currently, the Corporation's policy sets the maximum acceptable LTV at 90% and the minimum acceptable FICO at 670.  The Corporation's current home equity line of credit offering is priced based on floating rate indices and generally allows 10 years of interest-only payments followed by a 20-year amortization of the outstanding balance.  The Corporation has significantly curtailed its offerings of fixed rate, closed end home equity loans.  The loans in the Corporation's portfolio generally have an original term of 20 years with principal and interest payments required.

Based upon outstanding balances at June 30, 2018, the following table presents the periods when home equity lines of credit revolving periods are scheduled to end.
Table 9 Home Equity Line of Credit - Revolving Period End Dates
 
$ in Thousands
 
% of Total
Less than 5 years
$
68,185

 
8
%
5 to 10 years
206,893

 
25
%
Over 10 years
567,236

 
67
%
Total home equity revolving lines of credit
$
842,314

 
100
%

Other consumer: Other consumer consists of student loans, short-term and other personal installment loans and credit cards. The Corporation had $175 million and $183 million of student loans at June 30, 2018, and December 31, 2017, respectively, the majority of which are government guaranteed. Credit risk for non-government guaranteed student, short-term and personal installment loans and credit cards is influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery of these smaller consumer loans. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guarantee positions. The student loan portfolio is in run-off and no new student loans are being originated.

66



Nonperforming Assets
Management is committed to a proactive nonaccrual and problem loan identification philosophy. This philosophy is implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified quickly and the risk of loss is minimized. Table 10 provides detailed information regarding nonperforming assets, which include nonaccrual loans and other real estate owned, and other nonperforming assets.
Table 10 Nonperforming Assets
 
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
 
($ in Thousands)
Nonperforming assets
 
Commercial and industrial
$
81,776

 
$
102,667

 
$
112,786

 
$
122,284

 
$
141,475

Commercial real estate — owner occupied
18,649

 
20,636

 
22,740

 
15,598

 
15,800

Commercial and business lending
100,425

 
123,303

 
135,526

 
137,882

 
157,275

Commercial real estate — investor
26,503

 
15,574

 
4,729

 
3,543

 
7,206

Real estate construction
1,544

 
1,219

 
974

 
1,540

 
1,717

Commercial real estate lending
28,047

 
16,793

 
5,703

 
5,083

 
8,923

Total commercial
128,472

 
140,096

 
141,229

 
142,965

 
166,198

Residential mortgage
62,896

 
55,100

 
53,632

 
54,654

 
51,975

Home equity
12,958

 
13,218

 
13,514

 
12,639

 
13,482

Other consumer
134

 
139

 
171

 
259

 
233

Total consumer
75,988

 
68,456

 
67,317

 
67,552

 
65,690

Total nonaccrual loans
204,460

 
208,553

 
208,546

 
210,517

 
231,888

Commercial real estate owned
4,848

 
7,511

 
6,735

 
5,098

 
4,825

Residential real estate owned
3,715

 
5,806

 
5,873

 
3,385

 
2,957

Bank properties real estate owned
18,645

 
3,601

 

 

 

Other real estate owned (“OREO”)
27,207

 
16,919

 
12,608

 
8,483

 
7,782

Other nonperforming assets
7,059

 
7,117

 
7,418

 
7,418

 
7,418

Total nonperforming assets (“NPAs”)
$
238,726

 
$
232,589

 
$
228,572

 
$
226,418

 
$
247,088

Accruing loans past due 90 days or more
 
 
 
 
 
 
 
 
 
Commercial
$
222

 
$
505

 
$
418

 
$
308

 
$
248

Consumer
1,617

 
2,888

 
1,449

 
1,303

 
1,287

Total accruing loans past due 90 days or more
$
1,839

 
$
3,393

 
$
1,867

 
$
1,611

 
$
1,535

Restructured loans (accruing)
 
 
 
 
 
 
 
 
 
Commercial
$
36,852

 
$
47,460

 
$
48,735

 
$
51,259

 
$
50,634

Consumer
26,871

 
29,041

 
25,883

 
25,919

 
26,691

Total restructured loans (accruing)
$
63,723

 
$
76,501

 
$
74,618

 
$
77,178

 
$
77,325

Nonaccrual restructured loans (included in nonaccrual loans)
$
38,005

 
$
23,827

 
$
23,486

 
$
33,520

 
$
51,715

Ratios
 
 
 
 
 
 
 
 
 
Nonaccrual loans to total loans
0.89
%
 
0.91
%
 
1.00
%
 
1.01
%
 
1.12
%
NPAs to total loans plus OREO
1.04
%
 
1.02
%
 
1.10
%
 
1.08
%
 
1.19
%
NPAs to total assets
0.71
%
 
0.70
%
 
0.75
%
 
0.75
%
 
0.83
%
Allowance for loan losses to nonaccrual loans
123.55
%
 
123.26
%
 
127.49
%
 
131.37
%
 
121.22
%

67



Table 11 Nonperforming Assets (continued)
 
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
 
($ in Thousands)
Accruing loans 30-89 days past due
 
 
 
Commercial and industrial
$
588

 
$
880

 
$
271

 
$
1,378

 
$
1,255

Commercial real estate — owner occupied
193

 
511

 
48

 
1,522

 
1,284

Commercial and business lending
781

 
1,391

 
319

 
2,900

 
2,539

Commercial real estate — investor
828

 
240

 
374

 
1,109

 
899

Real estate construction
19,765

 
490

 
251

 
700

 
135

Commercial real estate lending
20,593

 
730

 
625

 
1,809

 
1,034

Total commercial
21,374

 
2,121

 
944

 
4,709

 
3,573

Residential mortgage
9,341

 
15,133

 
9,552

 
8,870

 
9,165

Home equity
7,270

 
5,868

 
6,825

 
7,191

 
5,924

Other consumer
1,735

 
1,811

 
2,007

 
1,686

 
1,746

Total consumer
18,346

 
22,812

 
18,384

 
17,747

 
16,835

Total accruing loans 30-89 days past due
$
39,720

 
$
24,934

 
$
19,328

 
$
22,456

 
$
20,408

Potential problem loans
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
172,177

 
$
196,766

 
$
113,778

 
$
153,779

 
$
142,607

Commercial real estate — owner occupied
38,879

 
34,410

 
41,997

 
57,468

 
60,724

Commercial and business lending
211,056

 
231,176

 
155,775

 
211,247

 
203,331

Commercial real estate — investor
24,790

 
46,970

 
19,291

 
46,770

 
48,569

Real estate construction
3,168

 
1,695

 

 
118

 
8,901

Commercial real estate lending
27,958

 
48,665

 
19,291

 
46,888

 
57,470

Total commercial
239,014

 
279,841

 
175,066

 
258,135

 
260,801

Residential mortgage
2,355

 
2,155

 
1,616

 
650

 
1,576

Home equity
142

 
188

 
195

 
124

 
208

Other consumer
6

 

 

 

 

Total consumer
2,503

 
2,343

 
1,811

 
774

 
1,784

Total potential problem loans
$
241,517

 
$
282,184

 
$
176,877

 
$
258,909

 
$
262,585

Nonaccrual loans: Nonaccrual loans are considered to be one indicator of potential future loan losses. See Note 7 Loans, of the notes to consolidated financial statements for additional nonaccrual loan disclosures. The ratio of nonaccrual loans to total loans at June 30, 2018 was 0.89%, as compared to 1.00% at December 31, 2017 and 1.12% at June 30, 2017. See also sections Credit Risk and Allowance for Credit Losses.
Accruing loans past due 90 days or more: Loans past due 90 days or more but still accruing interest are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. Accruing loans 90 days or more past due at June 30, 2018 were relatively unchanged from both December 31, 2017 and June 30, 2017.
Restructured loans: Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. See also Note 7 Loans, of the notes to consolidated financial statements for additional restructured loans disclosures.
Potential problem loans: The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the allowance for loan losses. Potential problem loans are generally defined by management to include loans rated as substandard by management but that are not considered impaired (i.e., nonaccrual loans and accruing troubled debt restructurings); however, there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Corporation expects losses to occur, but that management recognizes a higher degree of risk associated with these loans.
OREO: Management actively seeks to ensure OREO properties held are monitored to minimize the Corporation’s risk of loss. The increase in OREO during the second quarter of 2018 was primary driven by the closure of Bank Mutual properties.

68



Other nonperforming assets: The asset represents the Bank's ownership interest in a profit participation agreement in an entity created to own certain oil and gas assets obtained as a result of bankruptcy and liquidation of a borrower in partial satisfaction of their loan.
Allowance for Credit Losses
Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Credit risk management for each loan type is discussed in the section entitled Credit Risk. See Note 7 Loans, for additional disclosures on the allowance for credit losses.
To assess the appropriateness of the allowance for loan losses, an allocation methodology is applied by the Corporation which focuses on evaluation of many factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of potential problem loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Assessing these factors involves significant judgment. Because each of the criteria used is subject to change, the allowance for loan losses is not necessarily indicative of the trend of future loan losses in any particular category. Therefore, management considers the allowance for loan losses a critical accounting policy—See section Critical Accounting Policies, in the Corporation’s 2017 Annual Report on Form 10-K for additional information on the allowance for loan losses. See section, Nonperforming Assets, for a detailed discussion on asset quality. See also Note 7 Loans, of the notes to consolidated financial statements for additional allowance for loan losses disclosures. Table 5 provides information on loan growth and period end loan composition, Table 10 provides additional information regarding nonperforming assets, and Table 12 and Table 13 provide additional information regarding activity in the allowance for loan losses.
The methodology used for the allocation of the allowance for loan losses at June 30, 2018 and December 31, 2017 was generally comparable, whereby the Corporation segregated its loss factors (used for both criticized and non-criticized loans) into a component primarily based on historical loss rates and a component primarily based on other qualitative factors that are probable to affect loan collectability. The allocation methodology consists of the following components: First, a valuation allowance estimate is established for specifically identified commercial and consumer loans determined by the Corporation to be impaired, using discounted cash flows, estimated fair value of underlying collateral, and / or other data available. Second, management allocates the allowance for loan losses with loss factors, for criticized loan pools by loan type as well as for non-criticized loan pools by loan type, primarily based on historical loss rates after considering loan type, historical loss and delinquency experience, and industry statistics. Criticized loans are considered to have a higher risk of default than non-criticized loans, as circumstances were present to support the lower loan grade, warranting higher loss factors. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks. Lastly, management allocates allowance for loan losses to absorb unrecognized losses that may not be provided for by the other components due to other factors evaluated by management, such as limitations within the credit risk grading process, known current economic or business conditions that may not yet show in trends, industry or other concentrations with current issues that impose higher inherent risks than are reflected in the loss factors, and other relevant considerations. The total allowance is available to absorb losses from any segment of the loan portfolio.


69



Table 12 Allowance for Credit Losses
 
YTD
 
 
 
 
 
 
2018
2017
June 30,
2018
March 31,
2018
December 31,
2017
September 30,
2017
June 30,
2017
 
($ in Thousands)
Allowance for Loan Losses
 
 
 
 
 
 
 
Balance at beginning of period
$
265,880

$
278,335

$
257,058

$
265,880

$
276,551

$
281,101

$
282,672

Provision for loan losses
4,500

21,000

4,000

500


6,000

11,000

Charge offs
(27,081
)
(27,230
)
(14,926
)
(12,155
)
(14,289
)
(14,727
)
(15,376
)
Recoveries
9,302

8,996

6,470

2,832

3,618

4,177

2,805

Net charge offs
(17,779
)
(18,234
)
(8,456
)
(9,323
)
(10,671
)
(10,550
)
(12,571
)
Balance at end of period
$
252,601

$
281,101

$
252,601

$
257,058

$
265,880

$
276,551

$
281,101

Allowance for Unfunded Commitments
 
 
 
 
 
 
 
Balance at beginning of period
$
24,400

$
25,400

$
26,336

$
24,400

$
24,400

$
25,400

$
24,400

Provision for unfunded commitments
(500
)


(500
)

(1,000
)
1,000

Amount recorded at acquisition
2,436



2,436




Balance at end of period
$
26,336

$
25,400

$
26,336

$
26,336

$
24,400

$
24,400

$
25,400

Allowance for credit losses(a)
$
278,937

$
306,501

$
278,937

$
283,394

$
290,280

$
300,951

$
306,501

Provision for credit losses(b)
$
4,000

$
21,000

4,000



5,000

12,000

Net loan (charge offs) recoveries
 
 
 
 
 
 
 
Commercial and industrial
$
(13,205
)
$
(15,414
)
$
(6,606
)
$
(6,599
)
$
(8,212
)
$
(9,442
)
$
(11,046
)
Commercial real estate — owner occupied
(755
)
62

270

(1,025
)
(246
)
13

43

Commercial and business lending
(13,960
)
(15,352
)
(6,336
)
(7,624
)
(8,458
)
(9,429
)
(11,003
)
Commercial real estate — investor
(1,181
)
(640
)
(1,189
)
8

(164
)
55

(126
)
Real estate construction
237

(15
)
48

189

(365
)
(150
)
(26
)
Commercial real estate lending
(944
)
(655
)
(1,141
)
197

(529
)
(95
)
(152
)
Total commercial
(14,904
)
(16,007
)
(7,477
)
(7,427
)
(8,987
)
(9,524
)
(11,155
)
Residential mortgage
(266
)
(692
)
(135
)
(131
)
(966
)
(26
)
(564
)
Home equity
(537
)
227

140

(677
)
330

(87
)
54

Other consumer
(2,072
)
(1,762
)
(984
)
(1,088
)
(1,048
)
(913
)
(906
)
Total consumer
(2,875
)
(2,227
)
(979
)
(1,896
)
(1,684
)
(1,026
)
(1,416
)
Total net charge offs
$
(17,779
)
$
(18,234
)
$
(8,456
)
$
(9,323
)
$
(10,671
)
$
(10,550
)
$
(12,571
)
Ratios
 
 
 
 
 
 
 
Allowance for loan losses to total loans
1.10
%
1.35
%
1.10
%
1.13
%
1.28
%
1.32
%
1.35
%
Allowance for loan losses to net charge offs (annualized)
7.0x

7.6x

7.4x

6.8x

6.3x

6.6x

5.6x

(a)
Includes the allowance for loan losses and the allowance for unfunded commitments.
(b)
Includes the provision for loan losses and the provision for unfunded commitments.

70



Table 13 Annualized net (charge offs) recoveries(a) 
 
YTD
 
 
 
 
 
(In basis points)
2018
2017
June 30,
2018
March 31,
2018
December 31,
2017
September 30,
2017
June 30,
2017
Net loan (charge offs) recoveries
 
 
 
 
 
 
 
Commercial and industrial
(40
)
(49
)
(39
)
(41
)
(51
)
(58
)
(69
)
Commercial real estate — owner occupied
(19
)
1

12

(48
)
(12
)
1

2

Commercial and business lending
(38
)
(43
)
(33
)
(42
)
(47
)
(51
)
(60
)
Commercial real estate — investor
(6
)
(4
)
(12
)
 N/M

(2
)
1

(2
)
Real estate construction
3

 N/M

1

5

(10
)
(4
)
(1
)
Commercial real estate lending
(3
)
(3
)
(8
)
1

(4
)
(1
)
(1
)
Total commercial
(23
)
(26
)
(22
)
(24
)
(30
)
(31
)
(36
)
Residential mortgage
(1
)
(2
)
(1
)
(1
)
(5
)
 N/M

(3
)
Home equity
(11
)
5

6

(28
)
15

(4
)
2

Other consumer
(110
)
(94
)
(105
)
(115
)
(109
)
(97
)
(98
)
Total consumer
(6
)
(6
)
(4
)
(8
)
(8
)
(5
)
(7
)
Total net charge offs
(16
)
(18
)
(15
)
(17
)
(20
)
(20
)
(25
)
(a)
Annualized ratio of net charge offs to average loans by loan type.
N/M = Not Meaningful

At June 30, 2018, the allowance for credit losses was $279 million, compared to $290 million at December 31, 2017 and $307 million at June 30, 2017. At June 30, 2018, the allowance for loan losses to total loans was 1.10% and covered 123.55% of nonaccrual loans, compared to 1.28% and 127.49%, respectively, at December 31, 2017 and 1.35% and 121.22%, respectively, at June 30, 2017. Management believes the level of allowance for loan losses to be appropriate at June 30, 2018.
Notable Contributions to the Change in Allowance for Credit Losses
Total loans increased $2.2 billion (11%) for the first six months of 2018, including a $1.5 billion (13%) increase in total commercial loans primarily attributable to the Bank Mutual acquisition. Compared to June 30, 2017, total loans increased $2.2 billion (11%), including a $1.1 billion (15%) increase in total residential mortgage loans, a $502 million (10%) increase in commercial real estate lending, and a $582 million (8%) increase in commercial and business lending. See section Loans for additional information on the changes in the loan portfolio and see section Credit Risk for discussion about credit risk management for each loan type.

Total nonaccrual loans decrease $4 million (2%) for the first six months of 2018, and decreased $27 million from June 30, 2017, primarily due to migration in the oil and gas related credits. See also Note 7 Loans, of the notes to consolidated financial statements and section Nonperforming Assets for additional disclosures on the changes in asset quality.

Potential problem loans increased $65 million from December 31, 2017 primarily due to the downward migration of general commercial related credits and the addition of Bank Mutual loans. However, potential problem loans decreased $21 million from June 30, 2017, primarily due to improvements in general commercial related credits and migration in oil and gas related credits, respectively. See Table 10, for additional information on the changes in potential problem loans.

Net charge offs decreased $2 million from December 31, 2017 and decreased $4 million from June 30, 2017. See Table 12 and Table 13 for additional information regarding the activity in the allowance for loan losses.

The allowance for loan losses attributable to oil and gas related credits (included within the commercial and industrial allowance for loan losses) was $17 million at June 30, 2018, compared to $27 million at December 31, 2017 and $33 million at June 30, 2017. See also Oil and gas lending within the Credit Risk section for additional disclosure.

71



Deposits and Customer Funding
Table 14 Period End Deposit and Customer Funding Composition
($ in Thousands)
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Noninterest-bearing demand
$
5,341,361

 
22
%
 
$
5,458,473

 
23
%
 
$
5,478,416

 
24
%
 
$
5,177,734

 
23
%
 
$
5,038,162

 
23
%
Savings
1,887,777

 
8
%
 
1,883,638

 
8
%
 
1,524,992

 
7
%
 
1,544,037

 
7
%
 
1,552,820

 
7
%
Interest-bearing demand
4,650,407

 
20
%
 
4,719,566

 
20
%
 
4,603,157

 
20
%
 
4,990,891

 
22
%
 
3,858,739

 
18
%
Money market
9,208,993

 
39
%
 
9,086,553

 
38
%
 
8,830,328

 
39
%
 
8,299,512

 
37
%
 
9,228,129

 
43
%
Brokered CDs
228,029

 
1
%
 
44,503

 
%
 
18,609

 
%
 
3,554

 
%
 
131,184

 
1
%
Other time
2,499,747

 
10
%
 
2,632,869

 
11
%
 
2,330,460

 
10
%
 
2,317,723

 
11
%
 
1,809,146

 
8
%
   Total deposits
$
23,816,314

 
100
%
 
$
23,825,602

 
100
%
 
$
22,785,962

 
100
%
 
$
22,333,451

 
100
%
 
$
21,618,180

 
100
%
Customer funding(a)
235,804

 
 
 
297,289

 
 
 
250,332

 
 
 
324,042

 
 
 
360,131

 
 
Total deposits and customer funding
$
24,052,118

 
 
 
$
24,122,891

 
 
 
$
23,036,294

 
 
 
$
22,657,493

 
 
 
$
21,978,311

 
 
Network transaction deposits(b)
$
2,094,670

 
 
 
$
2,244,739

 
 
 
$
2,520,968

 
 
 
$
2,622,787

 
 
 
$
3,220,956

 
 
Net deposits and customer funding (total deposits and customer funding, excluding Brokered CDs and network transaction deposits)
$
21,729,419

 
 
 
$
21,833,649

 
 
 
$
20,496,717

 
 
 
$
20,031,152

 
 
 
$
18,626,171

 
 
Time deposits of more than $250,000
$
804,210

 
 
 
$
906,727

 
 
 
$
1,056,172

 
 
 
$
1,009,097

 
 
 
$
477,043

 
 
(a) Securities sold under agreement to repurchase and commercial paper.
(b) Included above in interest-bearing demand and money market.


Deposits are the Corporation’s largest source of funds.
Total deposits increased $1.0 billion (5%) from December 31, 2017, primarily due to the acquisition of Bank Mutual partially offset by seasonal deposit outflows, and increased $2.2 billion (10%) from June 30, 2017.
Non-maturity deposit accounts, comprised of savings, money market, and demand (both interest and noninterest-bearing) accounts accounted for 89% of the Corporation's total deposits at June 30, 2018.
Included in the above amounts were $2.1 billion of network deposits, primarily sourced from other financial institutions and intermediaries. These represented 9% of the Corporation's total deposits at June 30, 2018. Network transaction deposits have declined approximately $1.1 billion from June 30, 2017, and have primarily been replaced by FHLB advances.

72



Liquidity
The objective of liquidity risk management is to ensure that the Corporation has the ability to generate sufficient cash or cash equivalents in a timely and cost effective manner to satisfy the cash flow requirements of depositors and borrowers and to meet its other commitments as they become due. The Corporation’s liquidity risk management process is designed to identify, measure, and manage the Corporation’s funding and liquidity risk to meet its daily funding needs in the ordinary course of business, as well as to address expected and unexpected changes in its funding requirements. The Corporation engages in various activities to manage its liquidity risk, including diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity, if needed.

The Corporation performs dynamic scenario analysis in accordance with industry best practices. Measures have been established to ensure the Corporation has sufficient high quality short-term liquidity to meet cash flow requirements under stressed scenarios. In addition, the Corporation also reviews static measures such as deposit funding as a percent of total assets and liquid asset levels. Strong capital ratios, credit quality, and core earnings are also essential to maintaining cost effective access to wholesale funding markets. At June 30, 2018, the Corporation was in compliance with its internal liquidity objectives and has sufficient asset-based liquidity to meet its obligations under a stressed scenario.

The Corporation maintains diverse and readily available liquidity sources, including:

Investment securities are an important tool to the Corporation’s liquidity objective, and can be pledged or sold to enhance liquidity, if necessary. See Note 6 Investment Securities of the notes to consolidated financial statements for additional information on the Corporation's investment securities portfolio, including investment securities pledged.
The Bank pledges eligible loans to both the Federal Reserve Bank and the FHLB as collateral to establish lines of credit and borrow from these entities. Based on the amount of collateral pledged, the FHLB established a collateral value from which the Bank may draw advances against the collateral. Also, the collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Bank. As of June 30, 2018, the Bank had $1.2 billion available for future advances. The Federal Reserve Bank also establishes a collateral value of assets to support borrowings from the discount window. As of June 30, 2018, the Bank had $2.1 billion available for discount window borrowings.
The Parent Company has a $200 million commercial paper program, of which, $53 million was outstanding as of June 30, 2018.
Dividends and service fees from subsidiaries, as well as the proceeds from issuance of capital, are funding sources for the Parent Company.
The Parent Company has filed a shelf registration statement with the SEC under which the Parent Company may, from time to time, offer shares of the Corporation’s common stock in connection with acquisitions of businesses, assets or securities of other companies.
The Parent Company also has filed a universal shelf registration statement with the SEC, under which the Parent Company may offer the following securities, either separately or in units: debt securities, preferred stock, depositary shares, common stock, and warrants.
The Bank may also issue institutional certificates of deposit, network transaction deposits, and brokered certificates of deposit.

Credit ratings relate to the Corporation’s ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets but also the cost of these funds. The credit ratings of the Parent Company and Associated Bank at June 30, 2018 are displayed below.
Table 15 Credit Ratings
 
Moody’s
 
S&P(a)
Associated Bank short-term deposits
P-1
  
-
Associated Bank long-term
A1
  
BBB+
Corporation short-term
P-2
  
-
Corporation long-term
Baa1
  
BBB
Outlook
Stable
  
Stable
(a) Standard and Poor's.

73



For the six months ended June 30, 2018, net cash provided by operating activities and financing activities were $117 million and $156 million, respectively, while investing activities used net cash of $517 million, for a net decrease in cash and cash equivalents of $245 million since year-end 2017. At June 30, 2018, assets of $33.7 billion increased $3.2 billion from year-end 2017. On the funding side, deposits of $23.8 billion increased $1.0 billion from year-end 2017.
For the six months ended June 30, 2017, net cash provided by operating activities and financing activities were $319 million and $511 million, respectively, while investing activities used net cash of $907 million, for a net decrease in cash and cash equivalents of $76 million since year-end 2016. At June 30, 2017, assets of $29.8 billion increased $630 million from year-end 2016. On the funding side, deposits of $21.6 billion decreased by $270 million from year-end 2016.
Quantitative and Qualitative Disclosures about Market Risk
Market risk and interest rate risk are managed centrally. Market risk is the potential for loss arising from adverse changes in the fair value of fixed income securities, equity securities, other earning assets and derivative financial instruments as a result of changes in interest rates or other factors. Interest rate risk is the potential for reduced net interest income resulting from adverse changes in the level of interest rates. As a financial institution that engages in transactions involving an array of financial products, the Corporation is exposed to both market risk and interest rate risk. In addition to market risk, interest rate risk is measured and managed through a number of methods. The Corporation uses financial modeling simulation techniques that measure the sensitivity of future earnings due to changing rate environments to measure interest rate risk.
Policies established by the Corporation’s Asset / Liability Committee (“ALCO”) and approved by the Board of Directors are intended to limit these risks. The Board has delegated day-to-day responsibility for managing market and interest rate risk to ALCO. The primary objectives of market risk management is to minimize any adverse effect that changes in market risk factors may have on net interest income and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Risk
The primary goal of interest rate risk management is to control exposure to interest rate risk within policy limits approved by the Board of Directors. These limits and guidelines reflect the Corporation's risk appetite for interest rate risk over both short-term and long-term horizons. No limit breaches occurred during the first six months of 2018.
The major sources of the Corporation's non-trading interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, and the potential exercise of explicit or embedded options. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models which are employed by management to understand net interest income (NII) at risk, interest rate sensitive earnings at risk (EAR), and market value of equity (MVE) at risk. The Corporation’s interest rate risk profile is such that a higher or steeper yield curve adds to income while a flatter yield curve is relatively neutral, and a lower or inverted yield curve generally has a negative impact on earnings. Based on current rate expectations for a flattening yield curve, the Corporation's earnings at risk profile is slightly asset sensitive at June 30, 2018. While the modeled outcome of instantaneous and sustained parallel rate shocks of 100 bps or more indicate increased asset sensitivity, which would provide increased earnings, we see a low probability of a sustained parallel shift occurring in the near term.
For further discussion of the Corporation's interest rate risk and corresponding key assumptions, see the Interest Rate Risk section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation’s 2017 Annual Report on Form 10-K.
The sensitivity analysis included below is measured as a percentage change in NII and EAR due to instantaneous moves in benchmark interest rates from a baseline scenario. We evaluate the sensitivity using: 1) a dynamic forecast incorporating expected growth in the balance sheet, and 2) a static forecast where the current balance sheet is held constant.
Table 16 Estimated % Change in Net Interest Income Over 12 Months
 
Estimated % Change in Rate Sensitive Earnings at Risk (EAR) Over 12 Months
 
Dynamic Forecast
June 30, 2018
 
Static Forecast
June 30, 2018
 
Dynamic Forecast
December 31, 2017
 
Static Forecast
December 31, 2017
Instantaneous Rate Change
 
 
 
 
 
 
 
100 bp increase in interest rates
4.5
%
 
3.4
%
 
2.5
%
 
2.7
%
200 bp increase in interest rates
8.9
%
 
6.7
%
 
4.6
%
 
4.9
%


74



At June 30, 2018, the MVE profile indicates a decline in net balance sheet value due to instantaneous upward changes in rates.

Table 17 Market Value of Equity Sensitivity
 
June 30, 2018
 
December 31, 2017
Instantaneous Rate Change
 
 
 
100 bp increase in interest rates
(2.6
)%
 
(3.1
)%
200 bp increase in interest rates
(5.5
)%
 
(6.7
)%

While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under an extremely adverse scenario, the Corporation believes that a gradual shift in interest rates would have a much more modest impact. Since MVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in MVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, MVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

The above NII, EAR, and MVE measures do not include all actions that management may undertake to manage this risk in response to anticipated changes in interest rates.
Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities
Table 18 Contractual Obligations and Other Commitments
June 30, 2018
One Year
or Less
 
One to
Three Years
 
Three to
Five Years
 
Over
Five Years
 
Total
 
($ in Thousands)
Time deposits
$
1,950,673

 
$
646,062

 
$
128,296

 
$
2,745

 
$
2,727,776

Short-term funding
256,525

 

 

 

 
256,525

FHLB advances
1,882,613

 
352,646

 
208,876

 
2,353,722

 
4,797,857

Long-term funding

 
249,490

 

 
248,129

 
497,619

Operating leases
9,815

 
18,572

 
13,881

 
22,447

 
64,715

Commitments to extend credit
4,450,407

 
2,706,972

 
1,565,756

 
164,536

 
8,887,671

     Total
$
8,550,033

 
$
3,973,742

 
$
1,916,809

 
$
2,791,579

 
$
17,232,163

The Corporation utilizes a variety of financial instruments in the normal course of business to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include lending-related commitments and derivative instruments. A discussion of the Corporation’s derivative instruments at June 30, 2018, is included in Note 10, Derivative and Hedging Activities, of the notes to consolidated financial statements. A discussion of the Corporation’s lending-related commitments is included in Note 12, Commitments, Off-Balance Sheet Arrangements, Legal Proceedings and Regulatory Matters, of the notes to consolidated financial statements. See also Note 9, Short and Long-Term Funding, of the notes to consolidated financial statements for additional information on the Corporation’s short-term funding, FHLB advances, and long-term funding.
Table 18 summarizes significant contractual obligations and other commitments at June 30, 2018, at those amounts contractually due to the recipient, including any premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments.

75



Capital
Management actively reviews capital strategies for the Corporation and each of its subsidiaries in light of perceived business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic condition in markets served, and strength of management. At June 30, 2018, the capital ratios of the Corporation and its banking subsidiaries were in excess of regulatory minimum requirements. The Corporation’s capital ratios are summarized in Table 19.

Table 19 Capital Ratios
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
($ in Thousands)
Risk-based Capital(a)
 
 
 
 
 
 
 
 
 
Common equity Tier 1
$
2,528,002

 
$
2,473,677

 
$
2,171,508

 
$
2,144,325

 
$
2,130,238

Tier 1 capital
2,686,658

 
2,632,912

 
2,331,245

 
2,304,037

 
2,289,831

Total capital
3,213,726

 
3,164,362

 
2,848,851

 
2,823,097

 
2,808,049

Total risk-weighted assets
24,059,029

 
23,535,483

 
21,544,463

 
21,657,286

 
21,590,134

Common equity Tier 1 capital ratio
10.51
%
 
10.51
%
 
10.08
%
 
9.90
%
 
9.87
%
Tier 1 capital ratio
11.17
%
 
11.19
%
 
10.82
%
 
10.64
%
 
10.61
%
Total capital ratio
13.36
%
 
13.45
%
 
13.22
%
 
13.04
%
 
13.01
%
Tier 1 leverage ratio
8.32
%
 
8.48
%
 
8.02
%
 
7.93
%
 
8.09
%
Selected Equity and Performance Ratios
 
 
 
 
 
 
 
 
 
Total stockholders’ equity / assets
11.20
%
 
11.13
%
 
10.62
%
 
10.66
%
 
10.72
%
Dividend payout ratio(b)
29.41
%
 
36.59
%
 
45.16
%
 
29.27
%
 
33.33
%
(a)
The Federal Reserve establishes regulatory capital requirements, including well-capitalized standards for the Corporation. The Corporation follows Basel III, subject to certain transition provisions. These regulatory capital measurements are used by management, regulators, investors, and analysts to assess, monitor and compare the quality and composition of the Corporation's capital with the capital of other financial services companies. See Table 20 for a reconciliation of common equity Tier 1 and average common equity Tier 1.
(b)
Ratio is based upon basic earnings per common share.

As part of the regulatory relief provided by the Economic Growth Act, the asset threshold requiring insured depository institutions to conduct and report to their primary federal bank regulators annual company-run stress tests was raised from $10 billion to $250 billion in total consolidated assets and makes the requirement “periodic” rather than annual. The amendments also provide the Federal Reserve Board with discretion to subject bank holding companies with more than $100 billion in total assets to enhanced supervision. Notwithstanding these amendments, the federal banking agencies indicated through interagency guidance that the capital planning and risk management practices of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process. In addition, the federal banking agencies are now prohibited from requiring the Bank to assign a heightened risk weight to certain HVCRE ADC loans as previously required under the Basel III Capital Rules. Although the Corporation will continue to monitor its capital consistent with the safety and soundness expectations of the federal regulators, the Corporation will no longer conduct company-run stress testing as a result of the legislative and regulatory amendments.

76



Non-GAAP Measures
Table 20 Non-GAAP Measures
 
YTD
Quarter Ended
 
June 30,
2018
June 30,
2017
June 30,
2018
March 31,
2018
December 31,
2017
September 30,
2017
June 30,
2017
 
($ in Thousands)
Selected Equity and Performance Ratios(a)(b)
 
 
 
 
 
 
 
Tangible common equity / tangible assets
 
 
7.29
 %
7.22
 %
7.07
 %
7.08
 %
7.11
 %
Return on average equity
8.81
 %
7.33
 %
9.61
 %
7.96
 %
6.17
 %
8.10
 %
7.35
 %
Return on average tangible common equity
13.51
 %
11.06
 %
14.98
 %
11.99
 %
9.16
 %
12.20
 %
11.06
 %
Return on average Common equity Tier 1
12.73
 %
10.62
 %
14.00
 %
11.39
 %
8.77
 %
11.73
 %
10.63
 %
Return on average assets
0.98
 %
0.79
 %
1.07
 %
0.88
 %
0.66
 %
0.86
 %
0.80
 %
Average stockholders' equity / average assets
11.06
 %
10.85
 %
11.13
 %
11.00
 %
10.73
 %
10.63
 %
10.84
 %
Tangible Common Equity and Common Equity Tier 1 Reconciliation(a)(b)
 
 
 
 
 
 
 
Common equity
 
 
$
3,610,843

$
3,552,846

$
3,077,514

$
3,043,672

$
3,031,573

Goodwill and other intangible assets, net
 
 
(1,247,011
)
(1,232,870
)
(991,819
)
(986,086
)
(986,536
)
Tangible common equity
 
 
2,363,832

2,319,977

2,085,695

2,057,586

2,045,037

Less: Accumulated other comprehensive income / loss
 
 
119,888

107,673

62,758

54,288

53,470

Less: Deferred tax assets/deferred tax liabilities, net
 
 
44,282

46,027

23,055

32,451

31,731

Common equity Tier 1
 
 
$
2,528,002

$
2,473,677

$
2,171,508

$
2,144,325

$
2,130,238

Tangible Assets Reconciliation(a)
 
 
 
 
 
 
 
Total assets
 
 
$
33,652,647

$
33,366,505

$
30,483,594

$
30,064,547

$
29,769,025

Goodwill and other intangible assets, net
 
 
(1,247,011
)
(1,232,870
)
(991,819
)
(986,086
)
(986,536
)
Tangible assets
 
 
$
32,405,635

$
32,133,636

$
29,491,775

$
29,078,461

$
28,782,489

Average Tangible Common Equity and Average Common Equity Tier 1 Reconciliation(a)(b)
 
 
 
 
 
 
 
Common equity
$
3,469,861

$
2,984,451

$
3,561,319

$
3,377,388

$
3,056,077

$
3,024,918

$
3,005,209

Goodwill and other intangible assets, net
(1,171,917
)
(986,980
)
(1,235,623
)
(1,107,503
)
(991,955
)
(986,342
)
(986,826
)
Tangible common equity
2,297,945

1,997,471

2,325,696

2,269,885

2,064,121

2,038,576

2,018,383

Less: Accumulated other comprehensive income / loss
103,379

52,179

117,497

89,105

61,937

49,164

50,148

Less: Deferred tax assets/deferred tax liabilities, net
38,165

31,242

45,308

30,943

29,386

31,935

31,294

Average common equity Tier 1
$
2,439,489

$
2,080,892

$
2,488,501

$
2,389,933

$
2,155,444

$
2,119,675

$
2,099,825

Efficiency Ratio Reconciliation(c)
 
 
 
 
 
 
 
Federal Reserve efficiency ratio
68.18
 %
66.54
 %
65.77
 %
70.76
 %
66.93
 %
63.92
 %
66.69
 %
Fully tax-equivalent adjustment
(0.66
)%
(1.30
)%
(0.65
)%
(0.66
)%
(1.30
)%
(1.21
)%
(1.30
)%
Other intangible amortization
(0.59
)%
(0.19
)%
(0.68
)%
(0.51
)%
(0.18
)%
(0.16
)%
(0.18
)%
Fully tax-equivalent efficiency ratio
66.94
 %
65.05
 %
64.45
 %
69.60
 %
65.45
 %
62.55
 %
65.21
 %
(a)
The ratio tangible common equity to tangible assets excludes goodwill and other intangible assets, net, which is a non-GAAP financial measure. This financial measure has been included as it is considered to be a critical metric with which to analyze and evaluate financial condition and capital strength.
(b)
The Federal Reserve establishes regulatory capital requirements, including well-capitalized standards for the Corporation. The Corporation follows Basel III, subject to certain transition provisions. These regulatory capital measurements are used by management, regulators, investors, and analysts to assess, monitor and compare the quality and composition of the Corporation's capital with the capital of other financial services companies.
(c)
The efficiency ratio as defined by the Federal Reserve guidance is noninterest expense (which includes the provision for unfunded commitments) divided by the sum of net interest income plus noninterest income, excluding investment securities gains / losses, net. The fully tax-equivalent efficiency ratio is noninterest expense (which includes the provision for unfunded commitments), excluding other intangible amortization, divided by the sum of fully tax-equivalent net interest income plus noninterest income, excluding investment securities gains / losses, net. Management believes the fully tax-equivalent efficiency ratio, which adjusts net interest income for the tax-favored status of certain loans and investment securities, to be the preferred industry measurement as it enhances the comparability of net interest income arising from taxable and tax-exempt sources.

See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, for additional information on the shares repurchased during the second quarter of 2018.
During the second quarter of 2018, approximately 3.6 million TARP warrants ("warrants") were exercised at an exercise price of $19.77. The warrants were converted to approximately 1.0 million shares of common stock. Approximately 358,000 warrants remain outstanding. Any unexercised warrants will expire on November 21, 2018.


77



Sequential Quarter Results

The Corporation reported net income of $89 million for the second quarter of 2018, compared to net income of $69 million for the first quarter of 2018. Net income available to common equity was $87 million for the second quarter of 2018 or $0.51 for basic and $0.50 diluted earnings per common share. Comparatively, net income available to common equity for the first quarter of 2018 was $67 million, or net income of $0.41 for basic and $0.40 diluted earnings per common share, respectively (see Table 1).
Fully tax-equivalent net interest income for the second quarter of 2018 was $230 million, $17 million higher from the first quarter of 2018. The net interest margin in the second quarter of 2018 was up 10 bp to 3.02%. Average earning assets increased $1.1 billion to $30.4 billion in the second quarter of 2018, with average loans up $927 million, while average investments and other short-term investments were up $204 million. On the funding side, average interest-bearing deposits were down $52 million, while noninterest-bearing demand deposits were up $47 million. Average short and long-term funding increased $1.0 billion (see Table 2).
The provision for credit losses was $4 million for the second quarter of 2018 compared to zero for the first quarter of 2018 (see Table 12). See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses.
Noninterest income for the second quarter of 2018 increased $2 million (3%) to $93 million versus the first quarter of 2018. Fee-based revenue increased $2 million (3%) from the first quarter of 2018, primarily due to higher insurance commissions and fees. Bank and corporate owned life insurance was up $1 million (25%) from the first quarter of 2018. Asset gains increased $3 million from the first quarter of 2018, but the gains were partially offset by a $2 million loss on sale of investment securities.
Noninterest expense decreased $2 million (1%) to $211 million. Personnel expense was $124 million for the second quarter of 2018, up $6 million (5%) from the first quarter of 2018 primarily driven by an increase in performance-based payouts under the management incentive plan. Technology expense increased $2 million (10%) from the first quarter of 2018. Bank Mutual acquisition related costs were $7 million for the second quarter of 2018, down $13 million from the first quarter of 2018.
For the second quarter of 2018, the Corporation recognized income tax expense of $15 million, compared to income tax expense of $18 million for the first quarter of 2018. The effective tax rate was 14.19% and 20.43% for the second quarter of 2018 and the first quarter of 2018, respectively. See Income Taxes section for a detailed discussion on income taxes.

Comparable Quarter Results

The Corporation reported net income of $89 million for the second quarter of 2018, compared to $58 million for the second quarter of 2017. Net income available to common equity was $87 million for the second quarter of 2018, or $0.51 for basic earnings per common share and $0.50 for diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2017 was $56 million, or $0.36 for both basic and diluted earnings per common share (see Table 1).
Fully tax-equivalent net interest income for the second quarter of 2018 was $230 million, $40 million higher than the second quarter of 2017. The net interest margin between the comparable quarters was up 19 bp, to 3.02%, in the second quarter of 2018. Average earning assets increased $3.7 billion to $30.4 billion in the second quarter of 2018, with average loans increaseing $2.5 billion (predominantly due to the Bank Mutual acquisition). On the funding side, average interest-bearing deposits increased $1.9 billion, while noninterest-bearing demand deposits increased $240 million from the second quarter of 2017. Average short and long-term funding increased $1.4 billion (see Table 2).
The provision for credit losses was $4 million for the second quarter of 2018, down $8 million from the second quarter of 2017. See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses.
Noninterest income for the second quarter of 2018 of $93 million was up $10 million (13%) compared to second quarter of 2017. Brokerage commissions and fees was up $3 million (59%), primarily driven by increased investment advisory fees compared to the second quarter of 2017 driven by the Whitnell acquisition. Insurance and commission fees for the second quarter of 2018 was up $3 million (15%) from the second quarter of 2017 driven by the Diversified and Anderson acquisitions.
On a comparable quarter basis, noninterest expense increased $35 million (20%) to $211 million for the second quarter of 2018. Bank Mutual acquisition related costs were $7 million for the second quarter of 2018. Personnel expense was $124 million for the second quarter of 2018, up $17 million (16%) from the second quarter of 2017, primarily driven by the additional cost of Bank Mutual staff and an increase in the management incentive plan. Technology expense increased $4 million (26%) to $19 million in the second quarter of 2018, driven by investments in technology solutions that meet evolving customer needs and improve operational efficiency as well as the additional cost of Bank Mutual operations. Occupancy expense increased $2 million (17%) for the second quarter of 2018, primarily due to the additional expense of acquired Bank Mutual facilities.

78



The Corporation recognized income tax expense of $15 million for the second quarter of 2018, compared to income tax expense of $20 million for second quarter of 2017. The effective tax rate was 14.19% and 25.58% for the second quarter of 2018 and 2017, respectively. See Income Taxes section for a detailed discussion on income taxes.

Segment Review
As discussed in Note 15 Segment Reporting of the notes to consolidated financial statements, the Corporation’s reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Corporate and Commercial Specialty; Community, Consumer and Business; and Risk Management and Shared Services.
FTP is an important tool for managing the Corporation’s balance sheet structure and measuring risk-adjusted profitability. By appropriately allocating the cost of funding and contingent liquidity to business units, the FTP process improves product pricing, which influences the volume and terms of new business and helps to optimize the risk / reward profile of the balance sheet. This process helps align the Corporation’s funding and contingent liquidity risk with its risk appetite and complements broader liquidity and interest rate risk management programs. FTP methodologies are designed to promote more resilient, sustainable business models and centralize the management of funding and contingent liquidity risks. Through FTP, the Corporation transfers these risks to a central management function that can take advantage of natural off-sets, centralized hedging activities, and a broader view of these risks across business units.
Year to Date Segment Review
The Corporate and Commercial Specialty segment consists of lending and deposit solutions to larger businesses, developers, not-for-profits, municipalities, and financial institutions, and the support to deliver, fund, and manage such banking solutions. The Corporate and Commercial Specialty segment had net income of $103 million for the first six months of 2018, up $33 million, compared to $70 million for the first six months of 2017. Segment revenue increased $26 million to $230 million for the first six months of 2018, compared to $204 million for the first six months of 2017, primarily due to growth in average loan balances and increases in the Federal Reserve interest rate. The credit provision decreased $1 million to $22 million during the first six months of 2018. Average loan balances were $11.7 billion for the first six months of 2018, up $920 million from the first six months of 2017. Average deposit balances were $7.8 billion for the first six months of 2018, up $1.4 billion from the first six months of 2017. Average allocated capital increased $84 million to $1.2 billion for the first six months of 2018, reflecting the increase in the segment’s loan balances.
The Community, Consumer, and Business segment consists of lending and deposit solutions to individuals and small to mid-sized businesses and also provides a variety of investment and fiduciary products and services. The Community, Consumer, and Business segment had net income of $73 million for the first six months of 2018, up $36 million from the first six months of 2017. Segment revenue increased $59 million to $368 million for the first six months of 2018, primarily due to growth in average loan balances, increases in the Federal Reserve interest rate, higher brokerage commissions and fees, and increased mortgage banking income. Total expense increased $24 million to $266 million for the first six months of 2018, primarily due to the additional cost of Bank Mutual staff. Average loan balances were $10.3 billion for the first six months of 2018, up $947 million from the first six months of 2017. Average deposits were $13.4 billion for the first six months of 2018, up $2.0 billion from the first six months of 2017. Average allocated capital increased $65 million to $648 million for the first six months of 2018.
The Risk Management and Shared Services segment had a net loss of $17 million for the first six months of 2018, down $24 million compared to the first six months of 2017. Net interest income increased $9 million, primarily due to increases in the Federal Reserve interest rate, as well as an adjustment of FTP rate assumptions that increased the interest income allocated to the lines of business with an offsetting decrease in the interest income allocated to the Risk Management and Shared Services segment. The credit provision improved $15 million. Noninterest expense increased $46 million from the first six months of 2017 primarily driven by $28 million of acquisition related costs and certain unallocated expenses related to Bank Mutual shared services and operations prior to system conversion in late June 2018. Average earning asset balances were $7.8 billion for the first six months of 2018, up $1.4 billion from the first six months of 2017. Average deposits were $2.4 billion for the first six months of 2018, down $1.2 billion from the first six months of 2017 primarily driven by a decrease in network transaction deposits. Average allocated capital increased to $587 million for the first six months of 2018.


79



Comparable Quarter Segment Review
The Corporate and Commercial Specialty segment had net income of $55 million for the second quarter of 2018, up $20 million from the comparable quarter in 2017. Segment revenue increased $19 million compared to second quarter of 2017, primarily due to growth in average loan balances and increases in the Federal Reserve interest rate. Average loan balances were $12.1 billion for the second quarter of 2018, up $1.2 billion from an average balance of $10.8 billion for second quarter of 2017. Average deposit balances were $7.6 billion for the second quarter of 2018, up $1.2 billion from the comparable quarter of 2017. Average allocated capital increased $111 million to $1.2 billion for second quarter of 2018.
The Community, Consumer, and Business segment had net income of $37 million for the second quarter of 2018, up $21 million compared to second quarter of 2017. Segment revenue increased $35 million to $191 million for the second quarter of 2018, primarily due to a $24 million increase in net interest income and $10 million increase in noninterest income. The growth in net interest income was primarily due to growth in average loan balances and increases in the Federal Reserve interest rate while the growth in noninterest income was primarily driven by the acquisitions of Whitnell & Co., Diversified, and Anderson since June 30, 2017 which resulted in increased insurance and brokerage commissions. Total noninterest expense for the second quarter of 2018 was $139 million, up $13 million from the comparable quarter of 2017, primarily due to the additional cost of Bank Mutual staff. Average loan balances were $10.4 billion for the second quarter of 2018, up $891 million from the comparable quarter of 2017. Average deposits were $13.7 billion for the second quarter of 2018, up $2.2 billion from average deposits of $11.6 billion for the comparable quarter of 2017. Average allocated capital increased $74 million compared to the second quarter of 2017.
The Risk Management and Shared Services segment had a net loss of $3 million for the first quarter of 2018. Segment revenue was $7 million in the second quarter of 2018, a decrease of $1 million from the comparable quarter of 2017. The credit provision improved $7 million. Total noninterest expense for the second quarter of 2018 was $31 million, up $19 million from the comparable quarter of 2017, primarily driven by $7 million of acquisition related costs and certain unallocated expenses related to Bank Mutual shared services and operations prior to system conversion in late June 2018. Average earning asset balances were $7.9 billion for the first six months of 2018, up $1.6 billion from the first six months of 2017. Average deposits were $2.3 billion for second quarter of 2018, down $1.2 billion versus the comparable quarter of 2017 primarily driven by a decrease in network transaction deposits. Average allocated capital increased $203 million to $588 million for second quarter of 2018.
Critical Accounting Policies
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. A discussion of these policies can be found in the Critical Accounting Policies section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation’s 2017 Annual Report on Form 10-K. There have been no changes in the Corporation's application of critical accounting policies since December 31, 2017.


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Future Accounting Pronouncements
New accounting policies adopted by the Corporation are discussed in Note 3 Summary of Significant Accounting Policies, of the notes to consolidated financial statements. The expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted are displayed in the table below.
Standard
 
Description
 
Date of anticipated adoption
 
Effect on financial statements
ASU 2018-07 Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting
 
The FASB issued an amendment as part of its simplification initiative. As part of this amendment, several aspects of the accounting for nonemployee share-based payment transactions for acquiring goods and services from nonemployees are changing. The amendment expands the scope of Topic 718 to apply to nonemployee awards with the exception for specific guidance on inputs to an option pricing model and the attribution of cost.
 
1st Quarter 2019
 
The Corporation is currently evaluating the impact on its results of operations, financial position and liquidity.
ASU 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
 
The FASB issued an amendment to simplify the subsequent quantitative measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Entities should apply the amendment prospectively. Early adoption is permitted, including in an interim period, for impairment tests performed after January 1, 2017. The Corporation has not had to perform a step one quantitative analysis since 2012, which concluded no impairment was necessary.
 
2nd Quarter 2020, consistent with the Corporation's annual impairment test in May of each year.
 
The Corporation is currently evaluating the impact on its results of operations, financial position, and liquidity.
ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
The FASB issued an amendment to replace the current incurred loss impairment methodology. Under the new guidance, entities will be required to measure expected credit losses by utilizing forward-looking information to assess an entity's allowance for credit losses. The guidance also requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. This amendment is effective for fiscal years beginning after December 15, 2019, 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.
 
1st Quarter 2020
 
The Corporation is currently evaluating the impact on its results of operations, financial position, and liquidity. A cross-functional team has been established to assess and implement the standard.
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 balance sheet and disclosing key information about leasing arrangements. This amendment will require 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 is 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 may 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 is permitted. ASU 2018-01 amendment 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.
 
1st Quarter 2019
 
The Corporation is currently evaluating the impact on its results of operations, financial position, and liquidity. A cross-functional team has been established to assess and implement the standard.


81



Recent Developments
The Corporation received a favorable Minnesota tax court ruling during the second quarter of 2017, at which time, a percentage of the reserve which had been accrued for the state tax issue being litigated was reversed. On July 5, 2018, the Minnesota tax court ruling was reversed by the Minnesota Supreme Court and as a result, the Corporation expects to record additional income tax expense of $6 million in the third quarter of 2018. As discussed in the Performance Summary at the beginning of Part I, Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations, after taking this impact into consideration, the Corporation expects the effective tax rate to be approximately 22% for the remainder of the year, and approximately 20% for the full year 2018.
On July 24, 2018, the Corporation's Board of Directors declared a regular quarterly cash dividend of $0.15 per common share, payable on September 17, 2018 to shareholders of record at the close of business on September 4, 2018. The Board of Directors also declared a regular quarterly cash dividend of $0.3828125 per depositary share on the Corporation's 6.125% Series C Perpetual Preferred Stock, payable on September 17, 2018 to shareholders of record at the close of business on September 4, 2018. The Board of Directors also declared a regular quarterly cash dividend of $0.3359375 per depositary share on the Corporation's 5.375% Series D Perpetual Preferred Stock, payable on September 17, 2018 to shareholders of record at the close of business on September 4, 2018.
ITEM 3.    
Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is set forth in Item 2 under the captions Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk.
ITEM 4.    
Controls and Procedures
The Corporation maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Corporation's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2018 the Corporation’s management carried out an evaluation, under the supervision and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2018.
No changes were made to the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II - OTHER INFORMATION
ITEM 1.
Legal Proceedings

The information required by this item is set forth in Part I, Item 1 under Note 12 Commitments, Off-Balance Sheet Arrangements, Legal Proceedings and Regulatory Matters.
ITEM 1A.
Risk Factors
The recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act did not eliminate many of the aspects of the Dodd Frank Act that have increased our compliance costs, and remains subject to further rulemaking.
The Economic Growth Act represents modest reform to the regulation of the financial services industry primarily through certain amendments of the Dodd-Frank Act. However, many provisions of the Dodd-Frank Act that have increased our compliance costs, such as the Volcker Rule, the Durbin amendment restricting interchange fees, and the additional supervisory authority of the CFPB, remain in place.
Certain of the provisions amended by the Economic Growth Act took effect immediately, while others require that the agencies jointly amend their rulemakings. It is not possible to predict when any final rules would ultimately be issued through any such rulemakings, and what the specific content of such rules will be. Although we expect to benefit from many aspects of this legislative reform, the legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. In addition, the federal banking agencies indicated through interagency guidance that the capital planning and risk management practices of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process, which may offset the impact of the Economic Growth Acts changes regarding stress testing and risk management.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2018, the Corporation repurchased $6.6 million, or approximately 249,000 shares, of common stock. The repurchase details are presented in the table below.
Common Stock Purchases
 
Total Number  of
Shares Purchased
(a)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs
(b)
Period
 
 
 
 
 
 
 
April 1, 2018 - April 30, 2018
50,000

 
$
24.02

 
$
50,000

 

May 1, 2018 - May 31, 2018
198,700

 
27.14

 
198,700

 

June 1, 2018 - June 30, 2018

 

 

 

Total
248,700

 
$
26.52

 
$
248,700

 
4,314,634

(a)
During the second quarter of 2018, the Corporation repurchased 17,613 common shares for minimum tax withholding settlements on equity compensation. These purchases do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.
(b)
On April 21, 2015, the Board of Directors authorized the repurchase of up to $125 million of the Corporation's common stock, of which approximately $18 million remained available to repurchase as of June 30, 2018. On April 24, 2018, the Board of Directors authorized the repurchase of up to $100 million of the Corporation's common stock, of which all remains available for repurchase. Using the closing stock price on June 30, 2018 of $27.30, a total of approximately 4.3 million shares of common stock remained available to be repurchased under these previously approved Board authorizations as of June 30, 2018.
During the second quarter of 2018, the Corporation repurchased approximately $459,000, or 18,540 shares of preferred stock. The repurchase details are presented in the table below.
Series D Preferred Stock Depository Share Purchases

83



 
Total Number  of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs
(a)
Period
 
 
 
 
 
 
 
April 1, 2018 - April 30, 2018

 
$

 
$

 

May 1, 2018 - May 31, 2018
18,540

 
24.75

 
18,540

 

June 1, 2018 - June 30, 2018

 

 

 

Total
18,540

 
$
24.75

 
$
18,540

 
578,541

(a)
On July 25, 2017, the Board of Directors authorized the repurchase of up to $15 million of the depository shares of the Series D Preferred Stock, of which approximately $14.5 million remained available to repurchase as of June 30, 2018. Using the closing stock price on June 30, 2018 of $24.99, a total of approximately 579,000 shares of Series D Preferred stock remained available to be repurchased under the previously approved Board authorizations as of June 30, 2018.
On August 28, 2015, the Board of Directors authorized the repurchase of up to $10 million of depositary shares of the Series C Preferred Stock, of which all of such depository shares remained available to repurchase as of June 30, 2018.
The repurchase of depository shares is 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.

ITEM 6.
Exhibits
(a)    Exhibits:
Exhibit (11), Statement regarding computation of per share earnings. The information required by this item is set forth in Part I, Item 1 under Note 4 Earnings Per Common Share.
Exhibit (101), Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
ASSOCIATED BANC-CORP
 
 
(Registrant)
 
 
 
Date: July 26, 2018
 
/s/ Philip B. Flynn
 
 
Philip B. Flynn
 
 
President and Chief Executive Officer
 
 
 
Date: July 26, 2018
 
/s/ Christopher J. Del Moral-Niles
 
  
Christopher J. Del Moral-Niles
 
 
Chief Financial Officer
 
 
 
Date: July 26, 2018
 
/s/ Tammy C. Stadler
 
 
Tammy C. Stadler
 
 
Principal Accounting Officer

85
Exhibit 10.1 Associated Banc-Corp 2017 Incentive Compensation Plan Cover Page to Restricted Stock Agreement (The Restricted Stock Agreement has been delivered simultaneously herewith) Grantee Name: PARTICIPANT NAME Grant Date: GRANT DATE Grant Price: Grant Acceptance Process: Step 1: Please read the below Restricted Stock Agreement in its entirety, and print for your records. Step 2: After thoroughly reviewing the Restricted Stock Agreement, review your individual award information. Step 3: Electronically accept your grant via the Online Grant Agreement portal of Fidelity’s website. Share Information Subject to this Award: Restricted Stock Award Pursuant and subject to the Associated Banc-Corp 2017 Incentive Compensation Plan (the “Plan”) and the Restricted Stock Agreement delivered to Grantee simultaneously herewith, the Committee has awarded the Grantee named above shares of restricted Common Stock of Associated Banc-Corp (“Restricted Shares”) as follows: Restricted Stock Shares Awarded: NUMBER OF AWARDS GRANTED IN WITNESS WHEREOF, as of the Grant Date the Company hereby grants to the Grantee the Restricted Shares pursuant to the terms and conditions of the Restricted Stock Agreement delivered simultaneously herewith and the terms and conditions of the Plan. ASSOCIATED BANC-CORP Philip B. Flynn, President & CEO Please electronically accept your grant via the Online Grant Agreement portal of Fidelity’s website. Failure to do so by March 31, 2018 may result in forfeiture of the Restricted Shares. US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 ASSOCIATED BANC-CORP 2017 INCENTIVE COMPENSATION PLAN RESTRICTED STOCK AGREEMENT In accordance with and subject to the terms of the Associated Banc-Corp 2017 Incentive Compensation Plan (the “Plan”) and this Agreement, the Committee granted to the person named as grantee (the “Grantee”) on the cover page delivered simultaneously with this Restricted Stock Agreement (the “Cover Page”) an award of Restricted Shares of Associated Banc-Corp (the “Company”) (the Cover Page and this Restricted Stock Agreement hereinafter referred to as this “Agreement”). To evidence such award and to set forth its terms, the Company and the Grantee agree as follows. All capitalized terms not otherwise defined in this Agreement shall have the meaning set forth in the Plan. 1. Grant of Restricted Shares. Subject to, and upon the terms and conditions set forth in this Agreement and the Plan, the Committee granted to the Grantee the number of restricted shares set forth on the Cover Page (the “Restricted Shares”), effective as of the grant date set forth on the Cover Page (the “Grant Date”), and the Grantee hereby accepts the grant of the Restricted Shares on a restricted basis, as set forth herein. 2. Limitations on Transferability. At any time prior to vesting in accordance with Paragraph 3, 4 or 5 below, the Restricted Shares, or any interest therein, cannot be directly or indirectly transferred, sold, assigned, encumbered or otherwise disposed. 3. Dates of Vesting. Subject to the provisions of Paragraphs 4 and 5 below, the Restricted Shares shall cease to be restricted and shall become non-forfeitable (thereafter being referred to as “Vested Shares”) in accordance with the following schedule: Vesting Date Percentage of Restricted Shares To Vest February 8, 2019 25% February 8, 2020 25% February 8, 2021 25% February 8, 2022 25% Notwithstanding the foregoing, and subject to Paragraphs 4 and 5 below, in the event that the Grantee incurs a Termination of Service, any Restricted Shares that were unvested on the date of such Termination of Service shall be immediately forfeited to the Company. In addition, in the event that the Grantee has satisfied the requisite age and years of service criteria for Early Retirement or Normal Retirement prior to the vesting dates set forth herein but the Grantee has not incurred a Termination of Service, the Company shall cause a portion of the Restricted Shares to become Vested Shares on the date such age and years of service requirements are met, such portion limited to the minimum amount necessary to satisfy US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 the tax withholding obligations set forth in Paragraph 25 or otherwise required by any taxing authority. 4. Termination of Service. Subject to Paragraph 5 below, the provisions of this Paragraph 4 shall apply in the event the Grantee incurs a Termination of Service at any time prior to all the Restricted Shares becoming Vested Shares pursuant to Paragraph 3 above: (a) If the Grantee incurs a Termination of Service because of his or her death or Disability, any Restricted Shares that had not become Vested Shares prior to the date of such Termination of Service shall become Vested Shares, and the Grantee shall immediately own the Vested Shares free of all restrictions otherwise imposed by this Agreement except for Vested Shares used to satisfy the tax withholding obligations set forth in Paragraph 25 below or otherwise required by any taxing authority. (b) If the Grantee incurs a Termination of Service due to Early Retirement or Normal Retirement any Restricted Shares that had not become Vested Shares prior to the date of such Termination of Service shall become Vested Shares, and the Grantee shall immediately own the Vested Shares free of all restrictions otherwise imposed by this Agreement. (c) If the Grantee incurs a Termination of Service for any reason other than as stated in Paragraphs 4(a) or 4(b) above, then any Restricted Shares that had not become Vested Shares prior to the date of such Termination of Service shall be immediately forfeited to the Company without consideration. 5. Change in Control. Notwithstanding Paragraph 4 above, if the Grantee incurs an involuntary Termination of Service by the Company (other than due to Cause) during the two year period immediately following a Change in Control, any Restricted Shares that had not become Vested Shares prior to the date of such Termination of Service shall become Vested Shares, and the Grantee shall immediately own the Vested Shares free of all restrictions otherwise imposed by this Agreement except for Vested Shares used to satisfy the tax withholding obligations set forth in Paragraph 25 below or otherwise required by any taxing authority. In addition, upon a Change in Control, the Grantee will have such rights with respect to the Restricted Shares as are provided for in the Plan. 6. Transfer of Restricted Shares. The Company, in its sole discretion, shall credit the Restricted Shares to the Grantee in a book entry on the records kept by the Company’s transfer agent. The Restricted Shares shall be subject to restrictions on transfer until, and to the extent, such Restricted Shares become Vested Shares pursuant to Paragraph 3, 4 or 5 above. To the extent any Restricted Shares fail to become Vested Shares pursuant to Paragraph 3, 4 or 5 above, the Company shall cancel such forfeited Restricted Shares pursuant to the terms of the Plan and this Agreement without consideration. The Company shall release the restrictions in the book entry records of its transfer agent once Restricted Shares become Vested Shares. 7. Restrictive Covenants. (a) Trade Secrets. The parties hereto acknowledge that the Company has taken and will continue to take actions to protect that information which qualifies as a US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 trade secret under applicable law (a “Trade Secret”). Accordingly, the Grantee agrees that during the term of Grantee’s employment with the Company, and thereafter for so long as such information remains a Trade Secret, Grantee shall not directly or indirectly use or disclose any Trade Secret of the Company. With respect to the disclosure of a Trade Secret and in accordance with 18 U.S.C. § 1833, Grantee shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a Trade Secret that (i) is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, provided that, the information is disclosed solely for the purpose of reporting or investigating a suspected violation of law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding filed under seal so that it is not disclosed to the public. Grantee is further notified that if Grantee files a lawsuit for retaliation by the Company for reporting a suspected violation of law, Grantee may disclose the Company’s Trade Secrets to Grantee’s attorney and use the Trade Secret information in the court proceeding, provided that, Grantee files any document containing the Trade Secret under seal so that it is not disclosed to the public, and does not disclose the Trade Secret, except pursuant to court order. (b) Confidential Information. The parties hereto acknowledge that the Company has created and maintains at great expense strategic plans, sales data and sales strategy, methods, products, procedures, processes, techniques, financial information, customer and supplier lists, personal customer data, pricing policies, personnel data and other similar confidential and proprietary information, and has received from its customers certain non-Trade Secret confidential and proprietary information (collectively, the “Confidential Information”). The parties hereto further acknowledge that the Company has taken and will continue to take actions to protect the Confidential Information. Accordingly, the Grantee agrees that during the term of the Grantee’s employment with the Company, and until the sooner of (i) such time as the Confidential Information becomes generally available to the public through no fault of the Grantee or other person under the duty of confidentiality to the Company, (ii) such time as the Confidential Information no longer provides a benefit to the Company, or (iii) two (2) years after the termination of the Grantee’s employment with the Company, the Grantee will not, in any capacity, use or disclose, or cause to be used or disclosed any Confidential Information the Grantee acquired while employed by the Company. The requirements of confidentiality and the limitations on use and disclosure described in this Agreement shall not apply to Confidential Information that the Grantee can demonstrate by clear and convincing evidence, at the time of disclosure by the Company to the Grantee, was known to the Grantee as evidenced by the Grantee's contemporaneous written records. (c) Preservation of Rights. The parties hereto agree that nothing in this Agreement shall be construed to limit or negate the law of torts or trade secrets where it provides the Company with broader protection than that provided herein. (d) Return of Company Property. The parties hereto acknowledge that any material (in computerized or written form) that the Grantee obtained in the course of US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 performing the Grantee’s employment duties are the sole and exclusive property of the Company, the Grantee agrees to immediately return any and all records, files, computerized data, documents, confidential or proprietary information, or any other property owned or belonging to the Company in the Grantee’s possession or under his or her control, without any originals or copies being kept by the Grantee or conveyed to any other person, upon the Grantee’s separation from employment or upon the Company’s request. (e) Non-Interference with Customers. For a period of twelve (12) months following the termination of the Grantee’s employment with the Company for any reason, the Grantee will not, directly or indirectly, on behalf of him/herself or any other person, entity or enterprise, do any of the following: (i) solicit business from any person or entity who is an Active Customer (as defined below) and to whom the Grantee has provided products or services during the twelve (12) month period prior to the termination of the Grantee’s employment with the Company (the “Reference Period”) for the purpose of providing competitive products or services similar to those provided by the Grantee during the Reference Period; (ii) request or advise any of the Active Customers, to whom the Grantee provided products or services during his/her employment with the Company to withdraw, curtail or cancel any of their business relations with the Company. “Active Customer” shall mean any person or entity that, within the Reference Period, received any products or services supplied by or on behalf of the Company or one of its Subsidiaries. (f) Non-interference with Company Employees. For a period of twelve (12) months following the termination of the Grantee’s employment with the Company for any reason, the Grantee will not, directly or indirectly, on behalf of him/herself or any other person, entity or enterprise: directly or indirectly solicit any Restricted Person (as defined below) to provide services to any person or entity in a manner reasonably likely to pose a competitive threat to the Company. “Restricted Person” shall mean any Company employee who (1) has been entrusted with the Company’s Confidential Information or Trade Secrets in connection with his/her employment with the Company and (2) with whom Grantee directly worked at any point during the twelve (12) month period immediately preceding the end, for whatever reason, of Grantee’s employment with the Company. (g) Remedies. Notwithstanding any other provision of this Agreement, if the Grantee breaches any provision of this Paragraph 7, any Restricted Shares shall be immediately forfeited to the Company without consideration. In addition, the Company shall be entitled to injunctive and other equitable relief (without the necessity of showing actual monetary damages or of posting any bond or other security): (i) restraining and US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 enjoining any act which would constitute a breach, or (ii) compelling the performance of any obligation which, if not performed, would constitute a breach, as well as any other remedies available to the Company, including monetary damages. Upon the Company’s request, the Grantee shall provide reasonable assurances and evidence of compliance with the restrictive covenants set forth in this Paragraph 7. If any court of competent jurisdiction shall deem any provision in this Paragraph 7 too restrictive, the other provisions shall stand, and the court shall modify the unduly restrictive provision to the point of greatest restriction permissible by law. The restrictive covenants set forth in this Paragraph 7 shall survive the termination of this Agreement, the forfeiture of any Restricted Shares, and the Grantee’s termination of employment for any reason, and the Grantee shall continue to be bound by the terms of this Paragraph 7 as if this Agreement was still in effect. 8. Liability of the Company. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and transfer of any Shares pursuant to this Agreement shall relieve the Company of any liability with respect to the non-issuance or transfer of the Shares as to which such approval shall not have been obtained. However, the Company shall use commercially reasonable efforts to obtain all such approvals. 9. Adjustment in Restricted Shares. This Award of Restricted Shares is subject to adjustment as provided under Section 4.2 of the Plan. 10. Plan and Agreement Amendment. (a) No discontinuation, modification, or amendment of the Plan may, without the written consent of the Grantee, adversely affect the rights of the Grantee under this Agreement, except as otherwise provided under the Plan. (b) This Agreement may be amended as provided under the Plan, but no such amendment shall adversely affect the Grantee’s rights under this Agreement without the Grantee’s written consent, unless otherwise permitted by the Plan. 11. Shareholder Rights. The Grantee shall be entitled to receive any dividends that become payable on or after the Grant Date with respect to the Restricted Shares and Vested Shares; provided, however, that no dividends shall be payable (a) with respect to the Restricted Shares on account of record dates occurring prior to the Grant Date and (b) with respect to forfeited Restricted Shares on account of record dates occurring on or after the date of such forfeiture. The Grantee shall be entitled to vote the Restricted Shares on or after the Grant Date to the same extent as would have been applicable to the Grantee if the Restricted Shares had then been Vested Shares; provided, however, that the Grantee shall not be entitled to vote (a) the Restricted Shares on account of record dates occurring prior to the Grant Date and (b) with respect to forfeited Restricted Shares on account of record dates occurring on or after the date of such forfeiture. 12. Employment Rights. This Agreement is not a contract of employment, and the terms of employment of the Grantee or other relationship of the Grantee with an Employer shall US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 not be affected in any way by this Agreement except as specifically provided herein. The execution of this Agreement shall not be construed as conferring any legal rights upon the Grantee for a continuation of an employment or other relationship with an Employer, nor shall it interfere with the right of an Employer to discharge the Grantee and to treat him or her without regard to the effect which such treatment might have upon him or her as a Grantee. 13. Disclosure Rights. Except as required by applicable law, the Company (or any of its affiliates) shall not have any duty or obligation to disclose affirmatively to a record or beneficial holder of Common Stock, Restricted Shares or Vested Shares, and such holder shall have no right to be advised of, any material information regarding the Company at any time prior to, upon or in connection with receipt of the Shares. 14. Governing Law. This Agreement shall be governed by the internal substantive laws, but not the choice of law rules, of the State of Wisconsin. This Agreement, subject to the terms and conditions of the Plan, represents the entire agreement between the parties with respect to the grant of the Restricted Shares to the Grantee. The parties hereto each submit and consent to the jurisdiction of the courts in the State of Wisconsin, Brown County, in any action brought to enforce or otherwise relating to this Agreement. 15. Compliance with Laws and Regulations. Notwithstanding anything herein to the contrary: (a) the Company shall not be obligated to credit a book entry related to the Restricted Shares or Vested Shares to be entered on the records of the Company’s transfer agent, unless and until the Company is advised by its counsel that such book entry is in compliance with all applicable laws, regulations of governmental authority, and the requirements of any exchange upon which Shares are traded; (b) the Company may require, as a condition of such a book entry, and in order to ensure compliance with such laws, regulations and requirements, that the Grantee make whatever covenants, agreements, and representations, or execute whatever documents or instruments, the Company, in its sole discretion, considers necessary or desirable; (c) no payment or benefit under this Agreement shall be provided to the Grantee if it would violate any applicable Compensation Limitation; and (d) notwithstanding anything to the contrary in this Agreement, the Restricted Shares (including any proceeds, gains, or other economic benefit actually or constructively received by the Grantee thereof upon the receipt or vesting thereof, or resale of the Shares received pursuant hereto upon or after the Restricted Shares become Vested Shares) shall be subject to the provisions of any clawback or recoupment policy adopted by the Board and/or the Committee, including any such policy adopted to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, any rules or regulations promulgated and in effect thereunder, or any SEC or securities exchange rule. US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 16. Successors and Assigns. Except as otherwise expressly set forth in this Agreement, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the succeeding administrators, heirs and legal representatives of the Grantee and the successors and assigns of the Company. 17. No Limitation on Rights of the Company. This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. 18. Notices. Any communication or notice required or permitted to be given hereunder shall be in writing, and, if to the Company, to its principal place of business, attention: Secretary, and, if to the Grantee, to the address appearing on the records of the Company. Such communication or notice shall be delivered personally or sent by certified, registered, or express mail, postage prepaid, return receipt requested, or by a reputable overnight delivery service. Any such notice shall be deemed given when received by the intended recipient. 19. Construction. Notwithstanding any other provision of this Agreement, this Agreement is made and the Restricted Shares are granted pursuant to the Plan and are in all respects limited by and subject to the express provisions of the Plan, as amended from time to time. This Agreement does not modify or amend the terms of the Plan. To the extent any provision of this Agreement is inconsistent or in conflict with any term or provision of the Plan, the Plan shall govern. The interpretation and construction by the Committee of the Plan, this Agreement and any such rules and regulations adopted by the Committee for purposes of administering the Plan shall be final and binding upon the Grantee and all other persons. 20. Entire Agreement. This Agreement, together with the Plan, constitutes the entire obligation of the parties hereto with respect to the subject matter hereof and shall supersede any prior expressions of intent or understanding with respect to this transaction. 21. Waiver; Cumulative Rights. The failure or delay of either party to require performance by the other party of any provision hereof shall not affect its right to require performance of such provision unless and until such performance has been waived in writing. Each and every right hereunder is cumulative and may be exercised in part or in whole from time to time. 22. Counterparts. This Agreement may be signed in two counterparts, each of which shall be an original, but both of which shall constitute but one and the same instrument. 23. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 24. Severability. If any provision of this Agreement shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision were omitted. US_131388500v1_214273-00000 7/19/2018 8:55 AM


 
Exhibit 10.1 25. Tax Consequences. The Grantee acknowledges and agrees that the Grantee is responsible for all taxes and tax consequences with respect to the grant of the Restricted Shares or the lapse of restrictions otherwise imposed by this Agreement. The Grantee further acknowledges that it is the Grantee’s responsibility to obtain any advice that the Grantee deems necessary or appropriate with respect to any and all tax matters that may exist as a result of the grant of the Restricted Shares or the lapse of restrictions otherwise imposed by this Agreement. If the Grantee files a Code Section 83(b) election with respect to the Restricted Shares, he or she will immediately notify the Company of such election. Notwithstanding any other provision of this Agreement, the Restricted Shares shall not be released to the Grantee unless, as provided in Section 17 of the Plan, the Grantee shall have paid to the Company, or made arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign income or employment taxes required by law to be withheld with respect to the grant of the Restricted Shares or the lapse of restrictions otherwise imposed by this Agreement. 26. Receipt of Plan. The Grantee acknowledges receipt of a copy of the Plan, and represents that the Grantee is familiar with the terms and provisions thereof, and hereby accepts the Restricted Shares subject to all the terms and provisions of this Agreement and of the Plan. The Shares are granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Restricted Shares shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this Agreement, and its interpretation and determination shall be conclusive and binding upon the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 27. Condition to Accept Agreement. This Agreement shall be null and void unless the Grantee accepts this Agreement via the Online Grant Agreement portal of Fidelity’s website, indicating Grantee’s acceptance of these Restricted Shares pursuant to the terms and conditions of this Agreement, on or before the date listed at the end of the Cover Page. By accepting this Agreement via the Online Grant Agreement portal of Fidelity’s website, Grantee acknowledges and agrees to the terms and conditions of this Restricted Stock Agreement, Cover Page, and the Plan, including, but not limited to, the terms of the Restrictive Covenants contained in Paragraph 7 of this Agreement. US_131388500v1_214273-00000 7/19/2018 8:55 AM


 


Exhibit 31.1
CERTIFICATION UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Philip B. Flynn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated Banc-Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
Date: July 26, 2018
 
/s/ Philip B. Flynn
 
 
Philip B. Flynn
 
 
President and Chief Executive Officer




Exhibit 31.2
CERTIFICATION UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Christopher J. Del Moral-Niles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated Banc-Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
Date: July 26, 2018
 
/s/ Christopher J. Del Moral-Niles
 
 
Christopher J. Del Moral-Niles
 
 
Chief Financial Officer




Exhibit 32
Certification by the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Associated Banc-Corp, a Wisconsin corporation (the “Company”), does hereby certify that:
1. The accompanying Quarterly Report of the Company on Form 10-Q for the quarter ended June 30, 2018 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
/s/ Philip B. Flynn
 
Philip B. Flynn
 
Chief Executive Officer
 
July 26, 2018
 
 
 
 
/s/ Christopher J. Del Moral-Niles
 
Christopher J. Del Moral-Niles
 
Chief Financial Officer
 
July 26, 2018